<PAGE>
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON MAY 28, 1999
REGISTRATION NO. 333-75205
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
------------------------
AMENDMENT NO. 3 TO FORM S-1
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
------------------------
APPNET SYSTEMS, INC.
(Exact name of Registrant as specified in its charter)
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<S> <C> <C>
DELAWARE 7373 52-2077860
(State or other jurisdiction (Primary Standard Industrial (I.R.S. Employer
of Classification Code Number) Identification
incorporation or organization) No.)
</TABLE>
6707 DEMOCRACY BOULEVARD
BETHESDA, MD 20817
(301) 493-8900
(Address, including zip code, and telephone number, including
area code, of registrants' principal executive offices)
KEN S. BAJAJ, PRESIDENT AND CHIEF EXECUTIVE OFFICER
APPNET SYSTEMS, INC.
6707 DEMOCRACY BOULEVARD
BETHESDA, MD 20817
(301) 493-8900
(Name, address, including zip code, and telephone number, including
area code, of agent for service)
--------------------------
COPIES TO:
STEPHEN I. GLOVER, ESQ. WILLIAM J. WHELAN, III, ESQ.
FRIED, FRANK, HARRIS, SHRIVER & CRAVATH, SWAINE & MOORE
JACOBSON 825 EIGHTH AVENUE
1001 PENNSYLVANIA AVENUE, N.W. NEW YORK, NY 10019
WASHINGTON, DC 20004 (212) 474-1000
(202) 639-7000
--------------------------
APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO PUBLIC:
As soon as practicable after this registration statement becomes effective.
If any of the securities being registered on this Form are to be offered on
a delayed or continuous basis pursuant to Rule 415 under the Securities Act of
1933, check the following box. / /
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 effective registration statement
for the same offering. / /
If this is a post-effective amendment filed pursuant to Rule 462(d) under
the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. / /
If delivery of the prospectus is expected to be made pursuant to Rule 434,
please check the following box. / /
--------------------------
CALCULATION OF REGISTRATION FEE
<TABLE>
<CAPTION>
PROPOSED
MAXIMUM
TITLE OF EACH CLASS AMOUNT TO BE OFFERING PRICE PROPOSED MAXIMUM AMOUNT OF
OF SECURITIES TO BE REGISTERED REGISTERED(1) PER SHARE OFFERING PRICE(2) REGISTRATION FEE
<S> <C> <C> <C> <C>
Common Stock, par value $0.0005 per share...... 6,900,000 $14.00 $96,600,000 $26,855
</TABLE>
(1) Includes a maximum of 900,000 shares that may be purchased by the
underwriters to cover over-allotments, if any.
(2) Estimated solely for the purpose of calculating the registration fee
pursuant to Rule 457(o) under the Securities Act of 1933. The proposed
maximum offering price includes amounts attributable to shares that may be
purchased by the underwriters to cover over-allotments, if any.
THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR
DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT SHALL
FILE A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS REGISTRATION
STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(A) OF
THE SECURITIES ACT OF 1933 OR UNTIL THE REGISTRATION STATEMENT SHALL BECOME
EFFECTIVE ON SUCH DATE AS THE SECURITIES AND EXCHANGE COMMISSION, ACTING
PURSUANT TO SAID SECTION 8(A), MAY DETERMINE.
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
<PAGE>
SUBJECT TO COMPLETION, DATED MAY 28, 1999
The information in this prospectus is not complete and may be changed. We may
not sell these securities until the registration with the Securities and
Exchange Commission is effective. This prospectus is not an offer to sell these
securities and it is not soliciting an offer to buy these securities in any
state where the offer or sale is not permitted.
<PAGE>
6,000,000 Shares
[LOGO]
APPNET SYSTEMS, INC.
Common Stock
-----------
The underwriters have an option to purchase a maximum of 900,000 additional
shares to cover over-allotments of shares.
Prior to this offering, there has been no public market for our common
stock. The initial public offering price is expected to be between $12.00 and
$14.00 per share. We have applied to list our common stock on The Nasdaq Stock
Market's National Market under the symbol "APNT".
INVESTING IN OUR COMMON STOCK INVOLVES RISKS. SEE "RISK FACTORS" ON PAGE 4.
<TABLE>
<CAPTION>
UNDERWRITING PROCEEDS TO
PRICE TO DISCOUNTS AND APPNET
PUBLIC COMMISSIONS SYSTEMS, INC.
----------------- ----------------- -----------------
<S> <C> <C> <C>
Per Share............................................. $ $ $
Total................................................. $ $ $
</TABLE>
Delivery of the shares of common stock will be made on or about
, 1999.
Neither the Securities and Exchange Commission nor any state securities
commission has approved or disapproved of these securities or determined if this
prospectus is truthful or complete. Any representation to the contrary is a
criminal offense.
CREDIT SUISSE FIRST BOSTON HAMBRECHT & QUIST
BT ALEX. BROWN
THE ROBINSON-HUMPHREY COMPANY
CHARLES SCHWAB & CO., INC.
The date of this prospectus is , 1999.
<PAGE>
[Front Inside Cover]
AppNet Some of Our Clients
[Burton Snowboards logo]
Supply-Chain Integration
Burton Snowboards
Challenge: Design and implement an on-line inventory and supply-chain
management system.
Solution: We designed and implemented an on-line inventory and
supply-chain management system that Burton management uses to control changing
inventory, manage materials and track product placement. Our solution
accommodates multiple languages and currencies and is able to generate detailed
reports. Our solution is designed to improve Burton's efficiency in managing its
inventory and supply-chain and reducing production overruns and overall costs.
[Toshiba, Electronic Imaging Division logo]
Extranet Development
The Electronic Imaging Division of Toshiba America Information Systems,
Inc.
Challenge: Design and implement a restricted access dealer extranet
system.
Solution: We developed the community, Web-interface and data-base
elements of Toshiba's FYI Dealer Extranet, an on-line system for dealers that
provides a common interface in addition to customized information that meets
each individual dealer's requirements. We designed security features which
protect market-sensitive information from unauthorized users. A conditional
access system, driven by a complex database user-authorization scheme, offers
multiple read-and-write user access levels. Employees, dealers and distributors
have the opportunity to build relationships on this Dealer Extranet. This
electronic commerce and informational site is designed to simplify ordering and
shipping of more than 10,000 spare-part SKUs for fax machines and copiers.
[Multex.com logo]
Interactive ROI Marketing
Multex Systems
Challenge: Design and develop a Web-based ad campaign to increase site
traffic and trading volume and decrease the per customer acquisition cost.
Solution: We crafted a media plan which included the creation of
multiple banner ads. Using our proprietary service, AdMaximize, we served banner
ads, tracked banner ad
<PAGE>
performance and collected real-time data on click-through lead generation,
customer acquisition and sales. Based on Multex's and our collective analysis
of this data, we were able to make real-time adjustments to Multex's ad
campaign. Our solution is designed to increase overall membership for Multex,
increase its revenues per new member and decrease Multex's cost to acquire
new members via the Web.
<PAGE>
[Front Inside Cover]
COVER ARTWORK:
A dark blue foldout with red and light blue semicircles with the words: The
bottom line: We help companies do business on the Internet smarter, faster and
better. The revolution has begun. The place is AppNet. This is followed by five
columns as follows:
Strategic Consulting:
Business & Process Level Strategic Consulting
On-line Strategy
Business Model Definition
e-Commerce Implementation Planning
Return on Investment (ROI), Industry & Competitive Analysis
Interactive Media Services:
On-line Media Buying & Planning
Creative Website Design & Development
Branding, Promotional & Affinity Programs
Ad Management, Tracking & Reporting
Internet-Based Application Development:
Web-enabling of Legacy Systems
Internet-based Application Design, Development & Deployment
Intranet/Extranet Development & Design
e-Commerce Systems Integration:
Performance Testing & Quality Assurance
Rapid Installation & Integration with Existing Legacy Systems
Business-to-Consumer Application Integration
Business-to-Business Application Integration
Supply Chain Integration
e-Commerce Outsourcing:
EDI Management & Transaction Processing
e-Commerce Storefront Management
Transaction Processing & Managed Web-hosting
Ongoing Management, Technical Operation, Maintenance & Development
<PAGE>
[Back Inside Cover]
A page entitled "Partial Client List" with the following corporate logos: Burton
Snowboards, PBS Enterprises, Arrow Electronics, Inc., Cisneros Television Group,
WWF, Multex.com, American Eagle Outfitters, AdvertisingAge, Ford Motor Company
and McCann-Erickson. This page also lists the following clients of AppNet
Systems, Inc.: @rts @lliance, 3M, AAA, Acuson, Allergan Services, Baxter
Healthcare, Biztravel.com, Blue Cross and Blue Shield of Michigan, Cablevision,
Ciba Specialty Chemicals, Ciena, Computer Sciences Corp., Comshare, Dial, Ford
Motor Credit, GeoCities, Grey Interactive, Harmony House, Hertz, Hyundai,
INTELSAT, Johnson Controls, K*B Toys, Lockheed Martin Integrated Business
Solutions, McCann-Erickson, NASA, National Library of Medicine, NEC, Norrell,
Norwest, Playboy Enterprises, Sony Electronics Corporation, The Electronic
Imaging Division of Toshiba America Information Systems, Inc., Unilever,
Value America and the University of Michigan.
<PAGE>
--------------
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
-----
<S> <C>
PROSPECTUS SUMMARY............................. 1
RISK FACTORS................................... 4
CAUTIONARY NOTICE REGARDING FORWARD-LOOKING
STATEMENTS................................... 13
USE OF PROCEEDS................................ 14
DIVIDEND POLICY................................ 14
CAPITALIZATION................................. 15
DILUTION....................................... 17
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS....... 18
PRO FORMA CONSOLIDATED FINANCIAL DATA.......... 20
SELECTED FINANCIAL DATA........................ 27
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF
OPERATIONS................................... 28
<CAPTION>
PAGE
-----
<S> <C>
BUSINESS....................................... 38
MANAGEMENT..................................... 54
CERTAIN RELATIONSHIPS AND TRANSACTIONS......... 63
PRINCIPAL STOCKHOLDERS......................... 68
DESCRIPTION OF CAPITAL STOCK................... 69
SHARES ELIGIBLE FOR FUTURE SALE................ 75
U.S. FEDERAL TAX CONSIDERATIONS FOR NON-U.S.
HOLDERS...................................... 77
UNDERWRITING................................... 81
NOTICE TO CANADIAN RESIDENTS................... 83
LEGAL MATTERS.................................. 84
EXPERTS........................................ 84
WHERE YOU CAN FIND ADDITIONAL INFORMATION...... 84
INDEX TO FINANCIAL STATEMENTS.................. F-1
</TABLE>
--------------
YOU SHOULD RELY ONLY ON THE INFORMATION CONTAINED IN THIS DOCUMENT OR TO
WHICH WE HAVE REFERRED YOU. WE HAVE NOT AUTHORIZED ANYONE TO PROVIDE YOU WITH
INFORMATION THAT IS DIFFERENT. THIS DOCUMENT MAY ONLY BE USED WHERE IT IS LEGAL
TO SELL THESE SECURITIES. YOU SHOULD ASSUME THAT THE INFORMATION IN THIS
DOCUMENT IS ACCURATE ONLY AS OF THE DATE OF THIS DOCUMENT.
--------------
Unless otherwise indicated, (a) all references to "AppNet," "we," "us" and
"our" refer to AppNet Systems, Inc. and, after their respective acquisitions or
formations, its subsidiaries and (b) all references to "GTCR" refer to GTCR
Golder Rauner, L.L.C. and its affiliates, including GTCR Fund VI, L.P., GTCR VI
Executive Fund, L.P. and GTCR Associates VI.
AppNet has filed for trademark registration of "AppNet". This prospectus
also includes trademarks and tradenames of other parties.
--------------
DEALER PROSPECTUS DELIVERY OBLIGATION
UNTIL , 1999 (25 DAYS AFTER THE COMMENCEMENT OF THIS OFFERING), ALL
DEALERS THAT EFFECT TRANSACTIONS IN THESE SECURITIES, WHETHER OR NOT
PARTICIPATING IN THIS OFFERING, MAY BE REQUIRED TO DELIVER A PROSPECTUS. THIS IS
IN ADDITION TO THE DEALER'S OBLIGATION TO DELIVER A PROSPECTUS WHEN ACTING AS AN
UNDERWRITER AND WITH RESPECT TO THEIR UNSOLD ALLOTMENTS OR SUBSCRIPTIONS.
<PAGE>
(This page has been left blank intentionally.)
<PAGE>
PROSPECTUS SUMMARY
THE FOLLOWING SUMMARY MAY NOT CONTAIN ALL THE INFORMATION THAT MAY BE
IMPORTANT TO YOU. YOU SHOULD READ THE ENTIRE PROSPECTUS BEFORE DECIDING WHETHER
TO INVEST IN OUR COMMON STOCK. THE INFORMATION IN THIS PROSPECTUS HAS BEEN
ADJUSTED TO GIVE EFFECT TO A ONE-FOR-2.85 REVERSE STOCK SPLIT OF OUR COMMON
STOCK WHICH WE WILL COMPLETE PRIOR TO THIS OFFERING. EXCEPT AS OTHERWISE
INDICATED, THE INFORMATION IN THIS PROSPECTUS ASSUMES NO EXERCISE OF THE
OVER-ALLOTMENT OPTION TO PURCHASE ADDITIONAL SHARES OF COMMON STOCK GRANTED TO
THE UNDERWRITERS.
APPNET SYSTEMS, INC.
AppNet provides Internet and electronic commerce professional services and
solutions to medium-sized and large businesses. AppNet develops electronic
commerce solutions that facilitate and promote communication and commerce
between businesses and consumers as well as among businesses and their trading
partners. We focus on maximizing the opportunities presented by the Internet and
electronic commerce to enhance all aspects of our clients' operations, from the
front end of their business, creative Website design, to the back end,
back-office integration of existing systems and electronic commerce outsourcing,
creating an end-to-end solution. Our professional services include:
- strategic consulting;
- interactive media services such as creative Website design and
development, branding, which is the creation of a unique corporate
identity for a client and its products, media planning and buying;
- Internet-based application development, which is the development of
software applications that are capable of running on the Internet and are
written in languages such as Java, C++ and Visual Basic;
- electronic commerce systems integration, which is the integration of
electronic commerce systems, which are systems that automate the receipt,
processing and delivery of transaction data and other information, with
other corporate software and computer-based applications; and
- electronic commerce outsourcing, which is the performance of electronic
commerce services that would otherwise be handled by the client's internal
staff using the client's resources.
The rapid growth in the use of the Internet and electronic commerce has
transformed the way businesses operate and interact with their customers and
trading partners. Technology industry research firms predict that the market for
Internet and electronic commerce services worldwide will grow significantly over
the next few years. International Data Corporation estimates that this market
will increase from $4.6 billion in 1997 to $43.7 billion by 2002, which
represents a compound annual growth rate of 57%.
Over the past several years, we have completed more than 500 projects for
over 200 clients. Our client base is highly diverse and includes corporations
such as @rts @lliance, Baxter Healthcare, Ciena, Comshare, Dial, Ford,
GeoCities, Harmony House, Hyundai, K*B Toys, NEC, Norwest and Unilever.
AppNet was founded in late 1997 and, therefore, we have a brief operating
history upon which you can evaluate our business and prospects. We have incurred
substantial losses since AppNet was founded, and we anticipate we will continue
to incur substantial losses for the forseeable future. See "Risk Factors--Our
brief operating history makes it difficult to predict our success" and "Risk
Factors--We have an accumulated deficit of $30.7 million and anticipate future
losses."
We compete in the highly competitive markets for Internet and electronic
commerce professional services. To compete more effectively, we plan to: expand
our client relationships; increase repeat and recurring revenues; build and
enhance complementary skill sets and maintain our technological
1
<PAGE>
expertise; expand and strengthen our marketing and technology relationships with
leading technology vendors; pursue client-driven geographic expansion; expand
and develop industry-specific expertise; and attract and retain a highly
specialized workforce.
We currently have offices in 14 U.S. locations, including the metropolitan
areas of Boston, Denver, Detroit, Los Angeles, New York and Washington, DC. Our
principal executive office is located at 6707 Democracy Boulevard, Suite 1000,
Bethesda, Maryland 20817, and our telephone number is (301) 493-8900. We
maintain a site on the World Wide Web at http://www.appnet.net; however, the
information found on our Website is not part of this prospectus.
THE OFFERING
<TABLE>
<S> <C>
Common stock offered by AppNet.... 6,000,000 shares.
Common stock to be outstanding
after this offering............. 30,441,434 shares, or 31,341,434 shares if the
underwriters exercise their over-allotment option in
full. Excludes 5,972,000 shares of common stock reserved
for issuance upon the exercise of options, warrants and
convertible notes and in connection with contingent
payments payable to former owners of five of the
companies we acquired, New Media Publishing, Inc.,
Sigma6, Inc., Salzinger & Company, Inc., Internet
Outfitters, Inc. and TransForm IT, Incorporated,
assuming, where applicable, the initial public offering
price and the market price of our common stock when the
contingent payments are paid is $13.00 per share, the
mid-point of the range shown on the cover page of this
prospectus.
Use of proceeds................... Repay debt under our existing credit facilities; redeem
preferred stock; repay other debt; and fund general
corporate purposes.
Proposed Nasdaq National Market
Symbol.......................... "APNT".
</TABLE>
2
<PAGE>
SUMMARY ACTUAL AND PRO FORMA CONSOLIDATED FINANCIAL DATA
The following summary actual and pro forma consolidated financial data have
been derived from:
- the audited financial statements of AppNet for the year ended December 31,
1998;
- the unaudited financial statements of AppNet for the three months ended
March 31, 1999; and
- the unaudited pro forma consolidated financial data included elsewhere in
this prospectus.
You should read the information set forth below in conjunction with our
consolidated financial statements and the related notes, "Use of Proceeds,"
"Capitalization," "Pro Forma Consolidated Financial Data" and "Management's
Discussion and Analysis of Financial Condition and Results of Operations"
included elsewhere in this prospectus.
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
THREE MONTHS ENDED
1998 MARCH 31, 1999
----------------------- -----------------------
PRO FORMA PRO FORMA
ACTUAL AS ADJUSTED ACTUAL AS ADJUSTED
---------- ----------- ---------- -----------
(IN THOUSANDS)
<S> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:
Revenues.............................................. $ 17,674 $ 69,182 $ 19,643 $ 22,271
Cost of revenues...................................... 11,699 41,941 11,457 13,132
---------- ----------- ---------- -----------
Gross profit...................................... 5,975 27,241 8,186 9,139
Total operating expenses(a)........................... 18,779 99,361 23,166 24,233
---------- ----------- ---------- -----------
Loss from operations.................................. (12,804) (72,120) (14,980) (15,094)
Interest and other expense............................ 1,775 1,801 1,262 236
Income tax provision (benefit)........................ (200) (100) 100 100
Dividends on and accretion of preferred stock......... 873 -- 1,039 --
---------- ----------- ---------- -----------
Net loss attributable to common stockholders.......... $ (15,252) $ (73,821) $(17,381) $(15,430 )
---------- ----------- ---------- -----------
---------- ----------- ---------- -----------
</TABLE>
<TABLE>
<CAPTION>
MARCH 31, 1999
--------------------------
PRO FORMA
ACTUAL AS ADJUSTED
---------- --------------
(IN THOUSANDS)
<S> <C> <C>
BALANCE SHEET DATA:
Cash and cash equivalents............................................................. $ 5,655 $ 11,408
Total assets.......................................................................... 163,471 169,224
Total debt............................................................................ 75,885 15,067
Class A Preferred Stock............................................................... 45,115 --
Stockholders' equity.................................................................. 16,221 131,674
</TABLE>
- ------------------------
(a) Total operating expenses, on a pro forma as adjusted basis, include pro
forma stock-based and acquisition-related compensation of $16.7 million and
pro forma depreciation and amortization of $60.3 million for the year ended
December 31, 1998 and $2.6 million and $12.8 million, respectively, for the
three months ended March 31, 1999.
3
<PAGE>
RISK FACTORS
INVESTING IN OUR COMMON STOCK INVOLVES RISK. YOU SHOULD CAREFULLY CONSIDER
THE RISKS DESCRIBED BELOW AND THE OTHER INFORMATION IN THIS PROSPECTUS,
INCLUDING OUR CONSOLIDATED FINANCIAL STATEMENTS AND THE RELATED NOTES, BEFORE
YOU PURCHASE ANY OF OUR COMMON STOCK. THE RISKS AND UNCERTAINTIES DESCRIBED
BELOW ARE NOT THE ONLY ONES WE FACE. ADDITIONAL RISKS AND UNCERTAINTIES,
INCLUDING THOSE THAT WE DO NOT KNOW ABOUT NOW OR THAT WE CURRENTLY DEEM
IMMATERIAL, MAY ALSO ADVERSELY AFFECT OUR BUSINESS.
OUR BRIEF OPERATING HISTORY MAKES IT DIFFICULT TO PREDICT OUR SUCCESS.
AppNet was formed in late 1997. We have a brief operating history upon which
you can evaluate our business and prospects. Our historical results of
operations do not fully give effect to the operations of the companies we have
acquired and the pro forma financial information included in this prospectus is
based in part on the separate pre-acquisition financial information of the
acquired companies. As a result, our historical results of operations and pro
forma financial information may not give you an accurate indication of our
future results of operations or prospects. Companies like us in an early stage
of development frequently encounter risks, expenses and difficulties associated
with starting a new business, many of which may be beyond their control. These
risks and difficulties apply particularly to AppNet because our markets,
Internet and electronic commerce professional services, are new and rapidly
changing.
WE HAVE AN ACCUMULATED DEFICIT OF $30.7 MILLION AND ANTICIPATE FUTURE LOSSES.
We have incurred substantial losses since AppNet was founded, and we
anticipate we will continue to incur substantial losses for the foreseeable
future. We had an accumulated deficit of approximately $30.7 million as of March
31, 1999 and a net loss of $14.4 million and $16.3 million for the year ended
December 31, 1998 and the quarter ended March 31, 1999, respectively. We intend
to continue to invest in internal expansion, infrastructure, integration of our
acquired companies into our existing operations, acquisitions and our marketing
and sales efforts. We cannot predict when we will operate profitably, if at all.
We cannot assure you that we will have earnings or cash flow sufficient to
cover our fixed charges or to comply with the financial covenants in our credit
facilities. In connection with the acquisitions we have completed, we expect to
continue to incur through the end of the year 2000, acquisition-related
compensation charges which will fluctuate based on the market price of our
common stock and the level of achievement of agreed-upon operating targets. In
addition, our acquisitions significantly increased our intangible assets, such
as goodwill, and the charges we expect to incur in connection with the
amortization of these intangible assets will have a material adverse impact on
our net income for the foreseeable future. See "--Our intangible assets
represent a significant portion of our assets; amortization of our intangible
assets will adversely impact our net income and we may never realize the full
value of our intangible assets" for a discussion of accounting treatment issues
regarding intangible assets that will affect our future results of operations.
QUARTER-TO-QUARTER FLUCTUATIONS IN OUR REVENUES AND OPERATING RESULTS COULD
AFFECT THE MARKET PRICE OF OUR COMMON STOCK.
Our revenues and operating results may vary from quarter-to-quarter as a
result of a number of factors including:
- number, size and type of client engagements commenced or completed during
a quarter;
- effectiveness of integrating acquisitions with existing operations;
- our ability to attract, train and retain skilled management, technical and
creative personnel;
4
<PAGE>
- timing of acquisitions and related costs; and
- timing and size of acquisition-related compensation charges which
fluctuate based on the market price of our common stock.
Because a high percentage of our expenses is fixed, such as compensation and
rent, any of the factors listed above could cause significant variations in our
operating results in any given quarter. Any decline in revenues or earnings or a
greater than expected loss for any quarter could materially adversely affect the
market price of our common stock, even if not reflective of any long-term
problems with our business.
OUR FUTURE SUCCESS DEPENDS ON OUR ABILITY TO EFFECTIVELY INTEGRATE ACQUIRED
COMPANIES AND MANAGE OUR GROWTH.
Our growth has placed, and will continue to place, significant demands on
our management and operational and financial resources. We have acquired 12
companies since March 1998. Our number of employees has increased from six as of
February 1, 1998 to approximately 755 as of May 1, 1999. We are in the process
of integrating the companies we have acquired since March 1998 into our
operational, financial and managerial systems. Members of our senior management
may be required to devote considerable amounts of their time to this integration
process, which will decrease the time they will have to service current clients,
attract new clients and develop new products and services. Our business,
financial condition and results of operations could be adversely affected if any
of the companies we have acquired experienced problems in the past of which we
are not currently aware. Claims asserted against us relating to the operation of
the companies we acquired prior to acquisition could exceed the indemnification
we are entitled to or can obtain from the former owners of the acquired
companies.
As we continue to grow, we expect we will hire more employees and expand the
scope of our operating and financial systems, which will increase our operating
complexity and the level of responsibility exercised by our management
personnel. To manage our growth effectively, we must continue to develop and
improve our own operational and financial systems, including our internal
systems and controls as well as those of the companies we acquired. The failure
to manage our growth effectively could have a material adverse effect on our
business, financial condition and results of operations.
WE MUST ATTRACT AND RETAIN PROFESSIONAL STAFF IN ORDER TO COMPLETE OUR PROJECTS
AND OBTAIN NEW PROJECTS.
Our failure to attract and retain qualified employees could impair our
ability to complete existing projects and bid for or obtain new projects and, as
a result, could have a material adverse effect on our business, financial
condition and results of operations. Our ability to grow and increase our market
share largely depends on our ability to hire, train, retain and manage highly
skilled employees, including project managers and technical, creative,
consulting and marketing and sales personnel. There is a significant shortage
of, and intense competition for, personnel who are qualified to perform the
services we provide. This shortage will probably continue for the foreseeable
future. In addition, to maintain our position as a provider of Internet and
electronic commerce end-to-end solutions, we must make sure our employees
maintain their technical expertise and business skills. We cannot assure you
that we will be able to attract a sufficient number of qualified employees or
that we will successfully train and manage the employees we hire.
In addition, our employees, including key technical personnel, may leave us
to join our competitors or start new businesses which may compete with us. We
cannot assure you that we will be able to prevent the unauthorized disclosure or
use of our proprietary knowledge, practices and procedures if our employees
leave us.
5
<PAGE>
WE ARE DEPENDENT ON ADDITIONAL CAPITAL FOR FUTURE GROWTH.
Our ability to remain competitive and expand our operations through
acquisitions and internal growth largely depends on our access to capital.
Historically, we have financed capital expenditures and acquisitions primarily
by incurring debt and issuing equity securities. We may incur additional debt
and issue equity securities in the future to finance our growth strategy or
capital expenditures. We cannot assure you that additional financing will be
available to us on satisfactory terms, or at all. Additional indebtedness would
make us more vulnerable to economic downturns and may limit our ability to
withstand competitive pressures. The terms of any additional indebtedness may
include restrictive financial and operating covenants which would limit our
ability to compete and expand. Additional issuances of our common stock may
significantly dilute the equity interests of our existing stockholders. Our
failure to obtain any required additional financing, on satisfactory terms, or
at all, could have a material adverse affect on our business, financial
condition or results of operations. See "Management's Discussion and Analysis of
Financial Condition and Results of Operations" for a further discussion of our
liquidity and capital requirements over the next 18 months.
OUR REVENUES ARE DIFFICULT TO PREDICT BECAUSE THEY ARE PRIMARILY GENERATED ON A
PROJECT-BY-PROJECT BASIS AND OUR PROJECTS CAN BE TERMINATED.
If our existing agreements with clients are terminated before we complete
our engagements, or if we are unable to enter into new engagements, our
business, financial condition and results of operations could be materially
adversely affected. Our success will depend on our ability to establish
relationships with additional medium-sized and large businesses and other
corporate users of Internet and electronic commerce professional services. We
derive our revenues in large part from fees for services generated on a
project-by-project basis. These projects vary in size, scope and duration. A
client that accounts for a significant portion of our revenues in a particular
period may not account for a similar portion of our revenues in future periods.
A client may or may not engage us for further services once a project is
completed. As a result, our revenues are not recurring from period to period,
which makes them more difficult to predict.
OUR CONTRACTS CONTAIN PRICING RISKS.
Generally, we charge our clients for the time, materials and expenses
incurred. Although we have limited experience pricing and managing fixed-price
contracts, we intend to increase the percentage of our work that is billed at a
fixed price. However, if we underestimate the resources and time required to
complete our projects, we could be subject to cost overruns leading to losses on
our engagements.
LOSS OF THE SERVICES OF OUR SENIOR MANAGEMENT COULD ADVERSELY AFFECT OUR
BUSINESS.
The loss of our senior managers' services or other key members of management
could have a material adverse effect on our business, financial condition and
results of operations. Our success depends heavily on the efforts of the members
of our senior management team. We cannot assure you that we will be able to
prevent the unauthorized disclosure or use of our proprietary knowledge,
practices and procedures if our senior managers leave us. See "Management" for
additional information about our senior managers.
WE FACE INTENSE COMPETITION.
The markets for Internet and electronic commerce professional services are
relatively new, intensely competitive, quickly evolving and subject to rapid
technological change. We expect competition to continue and intensify in the
foreseeable future. Our competitors can be divided into several groups:
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- Internet professional services providers, such as Agency.com, iXL,
Proxicom, Razorfish, Scient, Think New Ideas, US Interactive, USWeb/CKS
and Viant;
- large information technology consulting services providers, such as
Andersen Consulting, Cambridge Technology Partners, CSC, EDS, IBM and
Sapient;
- interactive advertising agencies, such as Darwin Digital, Giant Step, Grey
Interactive, Modem Media . Poppe Tyson and Thunderhouse;
- electronic commerce software and service providers, such as BroadVision,
Harbinger, Open Market and Sterling Commerce; and
- Internet access and service providers, such as Abovenet, Exodus and
Frontier/Global.
Our competitors have begun to offer multiple Internet and electronic
commerce professional services, rather than specialize in one area, or have
announced their intention to do so. These companies may continue to expand their
operations so that they offer a full range of Internet and electronic commerce
professional services and products.
Many of our competitors have longer operating histories and client
relationships, greater financial, technical, marketing and public relations
resources, larger client bases and greater brand or name recognition than we
have. Our competitors may be able to respond more quickly to technological
developments and changes in clients' needs. We must promote and enhance our
reputation and brand in order to attract new clients and differentiate ourselves
from our competitors. See "Business-- Competition" for a further discussion of
competition within our industry.
THE BARRIERS TO ENTER OUR BUSINESS ARE LOW.
There are relatively low barriers to entry into our business. We do not own
any technologies that preclude or inhibit competitors from entering our markets.
Our competitors may independently develop and patent or copyright technologies
that are superior or substantially similar to our technologies. The costs to
develop and provide Internet or electronic commerce professional services are
low. Therefore, we expect to continue to face additional competition from new
entrants into our markets.
WE MUST RESPOND TO RAPID TECHNOLOGICAL ADVANCES.
Our success will depend, in part, on our ability to keep pace with:
- rapidly changing technology;
- evolving industry standards and practices;
- frequent new service and product introductions and enhancements; and
- changing user and client requirements and preferences.
Any delay or failure on our part in responding quickly, cost-effectively and
sufficiently to these developments could render our existing products and
services obsolete and have a material adverse effect on our business, financial
condition and results of operations. We may have to incur substantial
expenditures to modify or adapt our services or infrastructure to respond to the
widespread adoption of new Internet, networking or telecommunications
technologies or other technological changes. We must stay abreast of
cutting-edge technological developments and evolving service offerings to remain
competitive, increase the utility of our services and attract and retain
qualified employees. We must be able to incorporate new technologies into the
Internet and electronic commerce solutions we design and develop to address the
increasingly complex and varied needs of our customer base.
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OUR BUSINESS IS DEPENDENT ON THE CONTINUED USE AND GROWTH OF THE INTERNET AND
ELECTRONIC COMMERCE.
Our business would be adversely affected if use of the Internet and
electronic commerce does not continue to develop, or develops more slowly than
expected. Our market is relatively new and rapidly evolving. Our future success
depends on the acceptance by current and future clients of Internet and
electronic commerce professional services as an integral part of their
businesses. Demand and market acceptance for these new technological services
are subject to a high level of uncertainty.
In addition, if use of the Internet grows, the Internet infrastructure may
not be able to support the demands placed on it. The performance and reliability
of the Internet may decline as the number of users and the amount of traffic
increases. Internet sites have experienced interruptions in their service as a
result of outages and other delays occurring throughout the Internet network
infrastructure. To cope with growth in the use of the Internet, the Internet
will require a reliable network backbone with the necessary speed, data capacity
and security and the timely development of complementary products, such as
high-speed modems, for providing reliable Internet access and services. If the
necessary infrastructure, products, services or facilities are not developed or
if use of the Internet as a medium for communication and commerce does not
develop, our business, financial condition and results of operations could be
materially and adversely affected.
WE HAVE POTENTIAL LIABILITY TO CLIENTS WHO ARE DISSATISFIED WITH OUR SERVICES.
We design, develop, implement and manage Internet and electronic commerce
solutions that are crucial to the operation of our clients' businesses. Defects
in the solutions we develop could result in delayed or lost revenues, adverse
customer reaction and negative publicity about us or our services or require
expensive corrections, any of which could have a material adverse effect on our
business, financial condition or results of operations. Clients who are not
satisfied with our services could bring claims against us for substantial
damages. Any claims asserted against us could exceed the level of our insurance.
We cannot assure you that the insurance we carry will continue to be available
on economically reasonable terms, or at all. The successful assertion of one or
more large claims against us that are uninsured, exceed our insurance coverage
or result in changes to our insurance policies, including premium increases,
could have a material adverse effect on our business, financial condition or
results of operations.
OUR FAILURE TO PROTECT OUR INTELLECTUAL PROPERTY RIGHTS OR MAINTAIN OUR RIGHTS
TO USE LICENSED INTELLECTUAL PROPERTY COULD ADVERSELY AFFECT OUR BUSINESS.
We believe our success depends, in part, on protecting our proprietary
intellectual property. We have not received patent or copyright protection for
most of our intellectual property. We cannot assure you that we will be able to
prevent infringement or detect misappropriation of our intellectual property. A
failure to protect our intellectual property in a meaningful manner could have a
material adverse effect on our business, financial condition and results of
operations.
We rely on technologies licensed from third parties. We cannot assure you
that these licenses will continue to be available to us on commercially
reasonable terms. The loss of these technologies could require us to obtain
substitute technologies of lower quality or performance standards or at greater
cost, which could have a material adverse effect on our business, financial
condition or results of operations.
Third parties may assert or prosecute infringement claims against us in
connection with the services and products we offer, and we may or may not be
able to successfully defend any such claims. We generally indemnify our clients
against any third-party intellectual property claims. Any significant claim
against us or for which we have indemnified others could have a material adverse
effect on our business, financial condition and results of operations.
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In connection with our Internet and electronic commerce professional
services, we develop intellectual property for our clients. We frequently assign
ownership of such intellectual property to the client and retain only a license
for limited uses. Issues relating to ownership of and rights to use intellectual
property can be complicated. We may become involved in disputes that affect our
ability to resell or reuse this intellectual property. In addition, many of our
projects involve the use of material that is confidential or proprietary client
information. The successful assertion of one or more large claims against us by
our clients or other third parties could adversely affect us.
WE SOMETIMES AGREE NOT TO PERFORM SERVICES FOR OUR CLIENTS' COMPETITORS.
Our customer contracts may contain restrictive provisions which are in
effect during the term of the contract and may remain in effect for a limited
period, generally one year, thereafter. The scope of the restrictive provisions
varies and can include provisions restricting our employees who are engaged on a
project for a client from performing the same or substantially similar services
for a competitor of that client and provisions prohibiting us from developing
products or performing services for our clients' competitors. These restrictive
provisions may limit our ability to enter into engagements with new clients for
specified periods of time.
OUR INTERNATIONAL OPERATIONS AND EXPANSION INVOLVE FINANCIAL AND OPERATIONAL
RISKS.
We intend to expand our business into international markets. Revenues from
our existing international operations were insignificant in 1998. We may incur
significant costs in connection with our international expansion.
There are also risks inherent in doing business in foreign countries, such
as:
- changes in legal and regulatory requirements;
- export and import restrictions, tariffs and other trade barriers;
- currency fluctuations and the on-going conversion to the euro in several
member states of the European Union;
- difficulties in staffing and managing foreign offices as a result of,
among other things, distance, language and cultural differences;
- longer payment cycles and problems in collecting accounts receivable;
- political and economic instability;
- seasonal reductions in business activity; and
- potentially adverse tax consequences.
Any of these factors could have a material adverse effect on our
international and domestic business, financial condition and results of
operations.
OUR ELECTRONIC COMMERCE OUTSOURCING CENTERS COULD BE VULNERABLE TO SECURITY AND
TECHNICAL RISKS AND MAY REQUIRE ADDITIONAL INVESTMENT.
We provide electronic commerce outsourcing services to our customers. We
perform electronic commerce functions that would otherwise be handled by the
customer's internal staff using the customer's resources.
Our electronic commerce outsourcing services rely on encryption and
authentication technology licenses from third parties to provide the security
and authentication needed to safely transmit confidential information. Although
we have designed and implemented a variety of network security measures,
unauthorized access, computer viruses, accidental or intentional acts and other
disruptions
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may occur. Our electronic commerce outsourcing centers may experience delays or
service interruptions as a result of the accidental or intentional acts of
Internet users, current and former employees or others. Such acts could
potentially jeopardize the security of confidential information, such as credit
card and bank account numbers, stored in our and our clients' computer systems.
Such a breach in security could result in liability to us and in the loss of
existing clients or the deterrence of potential clients.
Although we plan to continue using industry-standard security measures, such
measures have been circumvented in the past, and ours may be circumvented in the
future. The costs required to eliminate computer viruses and alleviate other
security problems could be prohibitively expensive, and efforts to address such
problems could result in delays or interruption of service to our clients. These
could in turn have a material adverse effect on our business, financial
condition and results of operations.
In the event our hardware malfunctions and our back-up systems fail, we may
not be able to maintain our standard of service to our customers. In addition,
each of our electronic commerce outsourcing centers has been configured to
provide services that facilitate commerce and communication either between
businesses and consumers, known as business-to-consumer services, or between
businesses and their trading partners, known as business-to-business services,
but not both. If we were unable to provide outsourcing services at one of our
outsourcing centers, it would materially adversely impact our ability to
continue to provide the type of electronic commerce outsourcing services
processed through that center. We may be required to make additional investments
in our electronic commerce outsourcing centers in order to increase capacity and
respond to technological developments.
OUR INTANGIBLE ASSETS REPRESENT A SIGNIFICANT PORTION OF OUR ASSETS;
AMORTIZATION OF OUR INTANGIBLE ASSETS WILL ADVERSELY IMPACT OUR NET INCOME AND
WE MAY NEVER REALIZE THE FULL VALUE OF OUR INTANGIBLE ASSETS.
Our acquisitions have resulted in significant goodwill and other intangible
assets, which are being amortized over various periods, primarily two to three
years. At March 31, 1999, we had goodwill and other intangible assets of
approximately $133.1 million, net of accumulated amortization. Charges we would
have incurred in connection with the amortization of intangible assets during
the year ended December 31, 1998 and the three months ended March 31, 1999,
after giving pro forma effect to the acquisitions we made in 1998 and 1999,
would have decreased our net income by $49.1 million and $0.1 million,
respectively. The amount of goodwill associated with the acquisitions we made in
1998 and 1999 may increase in the future as a result of a portion of the
contingent purchase consideration that may become payable if the agreed-upon
operating targets for the following four acquired companies are fully met: LOGEX
International, L.L.C., New Media Publishing, Internet Outfitters and TransForm
IT. The actual amount of goodwill that will be recorded will depend in part on
the price per share of our common stock and such goodwill will be recorded
through the end of the year 2000. We will continue to incur non-cash charges in
connection with the amortization of our intangible assets over their respective
useful lives, and we expect such charges will have a significant adverse impact
on our net income for the foreseeable future.
We cannot assure you that we will ever realize the value of these intangible
assets. In the future, as events or changes in circumstances indicate that the
carrying amount of our intangible assets may not be recoverable, we will
evaluate the carrying value of our intangible assets and may take an additional
charge to our earnings. Any future determination requiring the write-off of a
significant portion of unamortized intangible assets could have a material
adverse effect on our business, financial condition or results of operations.
See "Management's Discussion and Analysis of Financial Condition and Results of
Operations" for a further discussion of our intangible assets.
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THE YEAR 2000 PROBLEM MAY ADVERSELY AFFECT OUR BUSINESS.
The risks posed by the Year 2000 problem could adversely affect our business
in a number of significant ways. Many of our clients and potential clients
maintain their operations on systems that could be impacted by Year 2000
problems. If our clients fail to ensure their systems are Year 2000 compliant
and Year 2000 problems materially adversely affect them, our business could be
materially adversely affected, particularly if demand for our services declines
while companies redirect their resources to upgrade their computer systems. We
also depend heavily on the availability of the Internet infrastructure to
conduct our business and provide services to our clients. Disruptions in the
Internet infrastructure arising from Year 2000 problems could materially affect
our business, financial condition and results of operations.
In addition, our business could be materially adversely affected if we
cannot obtain products, services or systems that are Year 2000 compliant when we
need them. We rely on our suppliers for hardware, software and services. We are
in the process of obtaining assurances from our suppliers that they are Year
2000 compliant. Our internal information systems may experience operations
difficulties because of undetected errors or defects in the technology used. The
expense to correct such defects could have a material adverse effect on our
business, results of operations and financial condition.
Because we provide computer-related services, the risk we will be involved
in a lawsuit relating to Year 2000 issues is likely to be greater than that of
companies in other industries. Because the solutions we deliver are sometimes
dependent upon third-party products and components, it may be difficult to
determine which component of our solution may cause a Year 2000 problem. As a
result, we may become involved in litigation concerning our services or products
and components of a third party. We sometimes provide an express warranty to
clients that our work is Year 2000 compliant. However, even absent an express
Year 2000 warranty, there is a risk that clients for whom we have provided
services will try to hold us liable for damages caused by the Year 2000 problem.
We cannot guarantee that we will be Year 2000 compliant in a timely manner.
Moreover, the costs related to Year 2000 compliance could be significant. See
"Management's Discussion and Analysis of Financial Condition and Results of
Operations" for a further discussion of the potential effects of the Year 2000
problem on our business.
GOVERNMENT REGULATION AND LEGAL UNCERTAINTIES RELATING TO THE INTERNET COULD
ADVERSELY AFFECT OUR BUSINESS.
Increased regulation of the Internet might slow the growth in use of the
Internet, which could decrease demand for our services, increase our cost of
doing business or otherwise have a material adverse effect on our business,
financial condition and results of operations. Congress has recently passed
legislation regulating certain aspects of the Internet, including on-line
content, children's protection, copyright infringement, user privacy, taxation,
access charges, liability for third-party activities, transmission of sexually
explicit material and jurisdiction. In addition, federal, state and local
governmental organizations as well as foreign governments are considering other
legislative and regulatory proposals that would regulate the Internet. Areas of
potential regulation include libel, pricing, quality of products and services
and intellectual property ownership. We do not know how courts will interpret
laws governing the Internet or the extent to which they will apply existing laws
regulating issues such as property ownership, libel and personal privacy to the
Internet. Therefore, we are not certain how new laws governing the Internet or
other existing laws will affect our business.
APPNET IS CONTROLLED BY ITS SIGNIFICANT STOCKHOLDERS.
Upon completion of this offering, Ken Bajaj, AppNet's President and Chief
Executive Officer, and GTCR will beneficially own 9.8% and 43.6%, respectively,
of our outstanding common stock. As a result, GTCR and Mr. Bajaj will be able to
exercise a controlling influence over the outcome of matters
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submitted to our stockholders for approval, including the election of directors,
appointment of new management, amendments to our certificate of incorporation
and mergers or sales of all of our assets. GTCR and Mr. Bajaj will have the
power to delay, defer or prevent a change in control of AppNet. See
"Management--Board of Directors," "Principal Stockholders" and "Certain
Relationships and Transactions" for a further discussion of Mr. Bajaj's and
GTCR's ownership of our capital stock and their respective relationships with
us.
INVESTORS IN THIS OFFERING WILL EXPERIENCE IMMEDIATE AND SUBSTANTIAL DILUTION.
If you purchase common stock in this offering, you will pay more for your
shares than the amounts paid by existing stockholders for their shares. As a
result you will experience immediate and substantial dilution of approximately
$13.05, representing the difference between our net tangible book value per
share as of March 31, 1999, after giving pro forma effect to this offering, and
the acquisitions we made in 1999, and the assumed initial public offering price
of $13.00 per share. In addition, you may experience further dilution to the
extent that shares of our common stock are issued upon the exercise of stock
options and warrants, the conversion of promissory notes and the achievement of
targets for contingent payment consideration paid in connection with four of the
following acquisitions: New Media Publishing, Sigma6, Salzinger & Company and
Internet Outfitters. These shares generally will be issued at a purchase price
less than the public offering price per share in this offering. See "Dilution"
for a more complete description of how the value of your investment in our
common stock will be diluted upon the completion of this offering.
EXTERNAL FACTORS COULD ADVERSELY AFFECT THE MARKET PRICE OF OUR COMMON STOCK.
There is currently no public market for our common stock, and we cannot
assure you that an active trading market will develop or be sustained after this
offering. The initial public offering price will be determined through
negotiation between us and representatives of the underwriters and may not be
indicative of the market price for the common stock after this offering.
The market price of our common stock could fluctuate significantly as a
result of:
- variations in our operating results which may cause us to fail to meet
analysts' or investors' expectations;
- general economic and stock market conditions;
- changes in financial estimates by securities analysts;
- earnings and other announcements by, and changes in market evaluations of,
providers of Internet and electronic commerce professional services;
- changes in business or regulatory conditions affecting us;
- announcements by us or our competitors of technological innovations or new
products or services; and
- trading of our common stock.
The securities of many companies have experienced extreme price and volume
fluctuations in recent years, often unrelated to the companies' operating
performance. For example, market prices for securities of Internet-related and
technology companies have frequently reached elevated levels, often following
these companies' initial public offerings. These levels may not be sustainable
and may not bear any relationship to these companies' operating performances. If
the market price of our common stock reaches an elevated level following this
offering, it is likely to materially decline. In the past, following periods of
volatility in the market price of a company's securities, that company's
stockholders have often instituted securities class action litigation against
the company. If we were involved in such a
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class action suit, it could have a material adverse effect on our business,
financial condition and results of operations.
THE SALE OR AVAILABILITY FOR SALE OF SUBSTANTIAL AMOUNTS OF OUR COMMON STOCK
COULD ADVERSELY AFFECT ITS MARKET PRICE.
Sales of substantial amounts of our common stock in the public market after
the completion of this offering, or the perception that such sales could occur,
could adversely affect the market price of our common stock and could materially
impair our future ability to raise capital through offerings of our common
stock.
In connection with this offering, we, our officers, our directors, most of
the former owners of all of the businesses we acquired, GTCR and Smart
Technology have agreed not to offer or transfer any shares of common stock for
180 days after completion of this offering without the underwriters' consent;
however, the underwriters may release these shares from these restrictions at
any time. We cannot predict what effect, if any, market sales of shares held by
GTCR or any other shareholder or the availability of these shares for future
sale will have on the market price of our common stock. See "Shares Eligible for
Future Sale" for a more detailed description of the restrictions on selling
shares of our common stock after this offering.
ANTI-TAKEOVER PROVISIONS OF DELAWARE'S GENERAL CORPORATION LAW AND OUR
CERTIFICATE OF INCORPORATION COULD DELAY OR DETER A CHANGE IN CONTROL.
Amendments we intend to make to our amended and restated certificate of
incorporation and our bylaws, as well as various provisions of the Delaware
General Corporation Law, may make it more difficult to effect a change in
control of our company. The existence of these provisions may adversely affect
the price of our common stock, discourage third parties from making a bid for
our company or reduce any premiums paid to our stockholders for their common
stock. For example, we intend to amend our certificate of incorporation to
authorize our Board of Directors to issue up to 4,883,379 shares of "blank
check" preferred stock and to attach special rights and preferences to such
preferred stock. The issuance of this preferred stock may make it more difficult
for a third party to acquire control of us. See "Description of Capital
Stock--Preferred stock," and "Description of Capital Stock-- Anti-takeover
effects of AppNet's certificate of incorporation and bylaws and provisions of
Delaware law" for a more complete description of our capital stock, our
Certificate of Incorporation and the effects of the Delaware General Corporation
Law which could hinder a third party's attempts to acquire control of us.
CAUTIONARY NOTICE
REGARDING FORWARD-LOOKING STATEMENTS
This prospectus includes "forward-looking statements" for purposes of the
Securities Act of 1933 and the Securities Exchange Act of 1934. All statements
other than statements of historical fact in this prospectus, including
statements regarding our competitive strengths, business strategy, expected
benefits of any acquisition, future financial position, budgets, projected costs
and plans and objectives of management are forward-looking statements. In
addition, forward-looking statements generally can be identified by the use of
forward-looking terminology such as "may," "will," "expect," "should," "intend,"
"estimate," "anticipate," "believe," "continue" or similar terminology. Although
we believe that the expectations reflected in any forward-looking statements are
reasonable, we can give no assurance that these expectations will prove to have
been correct. Important factors that could cause actual results to differ
materially from our expectations are disclosed under "Risk Factors" and
elsewhere in this prospectus and expressly qualify all written and oral
forward-looking statements attributable to us. We undertake no obligation to
update publicly or revise any forward-looking statements.
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USE OF PROCEEDS
The net proceeds to AppNet from the sale of the 6,000,000 shares of our
common stock being offered by this prospectus are estimated to be approximately
$69.5 million, or $80.4 million if the underwriters exercise their
over-allotment option in full, based upon an assumed initial public offering
price of $13.00 per share, the mid-point of the range shown on the cover page of
this prospectus, after deducting underwriting discounts and commissions and
estimated offering expenses payable by AppNet.
We expect to use the net proceeds from this offering to:
- repay approximately $61.7 million of aggregate indebtedness, including
accrued interest under our existing credit facilities, a $26 million
revolving credit facility and a $40 million revolving credit facility,
both of which are with BankBoston, N.A. and Antares Capital Corporation;
- redeem 1,641 shares of Class A Preferred Stock at an aggregate redemption
price of $1.7 million, including related accrued dividends;
- redeem 418 shares of Class B Preferred Stock at an aggregate redemption
price of $0.4 million, including related accrued dividends;
- repay $3,300 on a note to Smart Technology, L.L.C., which bears interest
at a rate of 12% per annum, is due upon consummation of this offering and
evidences indebtness incurred to fund general working capital purposes;
- repay $16,000 in interest on a note to Fairfax Management Company II,
L.L.C., which bears interest at a rate of 5% per annum, the principal
amount of which will be converted into our common stock upon consummation
of this offering and evidences indebtedness incurred to repurchase shares
of our common stock; and
- fund general corporate purposes, including working capital requirements.
To the extent we receive additional proceeds from this offering, we will use
them to fund general corporate purposes and to redeem additional shares of our
Class A and Class B Preferred Stock on a pro rata basis. As additional shares of
Class A and Class B Preferred Stock are redeemed, the number of shares of Class
A and Class B Preferred Stock that we will exchange into shares of our common
stock will be reduced accordingly.
The amounts borrowed under our existing credit facilities are due in full on
August 24, 2001. The interest rate on indebtedness under the $26 million
revolving credit facility is variable and ranges from the prime rate plus 0.25%
to the prime rate plus 1.5% or from LIBOR plus 2.25% to LIBOR plus 3.5%. The $40
million revolving credit facility carries interest at the prime rate plus 0.5%
or LIBOR plus 2.5%. We intend to terminate the $40 million revolving credit
facility following the consummation of this offering and amend the $26 million
revolving credit facility to provide for maximum aggregate revolving borrowings
of up to $20 million. We will use amounts which may be reborrowed under the $20
million revolving credit facility following the consummation of this offering
for working capital and general corporate purposes, including acquisitions. See
"Management's Discussion and Analysis of Financial Condition and Results of
Operations--Liquidity and capital resources" for a discussion of our future
liquidity.
We anticipate that, in addition to the underwriting discounts and
commissions, we will pay fees and expenses of approximately $3.0 million in
connection with this offering. The principal components of that amount will be
the fees and expenses of our accountants and attorneys, the costs of printing
this prospectus and other offering materials, The Nasdaq Stock Market listing
fees and Securities and Exchange Commission and National Association of
Securities Dealers filing fees.
DIVIDEND POLICY
We have never declared or paid any cash dividends on our common stock and do
not expect to do so in the foreseeable future. The terms of our Class A and
Class B Preferred Stock and of our credit facilities restrict our ability to pay
dividends on our common stock. We intend to retain any earnings to finance the
expansion and development of our business. Subject to the restriction on
dividends in our credit facilities, any future determination to pay dividends
will be made at the discretion of our Board of Directors and will be based upon
our earnings, financial condition and capital requirements and any other
conditions our Board of Directors deems relevant.
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CAPITALIZATION
The following table sets forth AppNet's capitalization as of March 31, 1999
on an actual basis and on a pro forma as adjusted basis to reflect:
- the sale of 6,000,000 shares of common stock in this offering at an
assumed initial public offering price of $13.00 per share, the mid-point
of the range shown on the cover page of this prospectus, net of $8.5
million of offering expenses, and the application of the net proceeds of
this offering;
- the conversion of a promissory note for approximately $406,000 to Fairfax
Management Company II, L.L.C. into shares of common stock at 80% of the
initial public offering price in this offering;
- the conversion of promissory notes for approximately $1.0 million plus
accrued interest to former owners of Century Computing, Incorporated into
123,210 shares of common stock at a conversion price of $8.55 per share;
- the exchange of 43,789 shares of Class A Preferred Stock and 11,158 shares
of Class B Preferred Stock, including related accrued dividends, for
4,334,281 shares of common stock at an exchange rate based on an assumed
initial public offering price of $13.00 per share, the mid-point of the
range shown on the cover page of this prospectus;
- a compensation charge of approximately $2.7 million that we would have
incurred at March 31, 1999 upon consummation of this offering in
connection with the termination of our right to repurchase 210,119 shares
of our common stock from Mr. Bajaj at a per share price of $0.3007; and
- an interest charge of approximately $0.9 million related to beneficial
conversion rights of convertible notes.
You should read this table in conjunction with "Use of Proceeds," "Pro Forma
Consolidated Financial Data," "Management's Discussion and Analysis of Financial
Condition and Results of Operations" and our consolidated financial statements
and the related notes included elsewhere in this prospectus.
The amount shown for stockholders' equity and common stock excludes:
- 3,646,875 shares of common stock reserved for issuance in connection with
AppNet's stock incentive plans;
- 84,795 shares of common stock reserved for issuance at an exercise price
of $0.3007 per share in connection with outstanding warrants to purchase
common stock;
- 887,473 shares of common stock reserved for issuance in connection with
outstanding promissory notes convertible into shares of our common stock
at conversion prices of $8.55 and $11.40 per share;
- 461,539 shares of common stock reserved for issuance in connection with
outstanding promissory notes convertible into shares of our common stock
at a conversion price of 80% of the initial public offering price per
share in this offering, assuming an initial public offering price of
$13.00, the mid-point of the range shown on the cover page of this
prospectus; and
- 891,318 shares of common stock reserved for issuance in connection with
contingent payments payable to the former owners of four of the companies
we acquired, New Media Publishing, Sigma6, Salzinger & Company and
Internet Outfitters, assuming that the market price of our common stock at
the time the contingent payments are made is $13.00, the mid-point of the
range shown on the cover page of this prospectus.
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<TABLE>
<CAPTION>
MARCH 31, 1999
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PRO FORMA
ACTUAL AS ADJUSTED
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(IN THOUSANDS)
<S> <C> <C>
Cash and cash equivalents............................................................. $ 5,655 $ 11,408
---------- --------------
---------- --------------
Credit facilities..................................................................... 59,400 --
Other long-term debt(a)............................................................... 1,479 1,479
Convertible notes..................................................................... 15,006 13,588
Class A Preferred Stock, $0.01 par value, actual, 96,621 shares authorized,
liquidation value of $1,000, 45,430 shares issued and outstanding; pro forma as
adjusted, no shares issued and outstanding(b) ...................................... 45,115 --
Common stock subject to put rights(c)................................................. 278 278
Stockholders' equity:
Class B Preferred Stock, $0.01 par value, 20,000 shares authorized, actual, 11,576
shares issued and outstanding, liquidation value of $1,000; pro forma as adjusted,
no shares issued and outstanding.................................................. 11,576 --
Common stock, $0.0005 par value, 75,000,000 shares authorized, actual, 19,917,545
shares issued and outstanding; pro forma as adjusted, 30,414,091 shares issued and
outstanding....................................................................... 10 15
Additional paid-in capital.......................................................... 36,518 167,085
Notes receivable.................................................................... (685) (685)
Accumulated deficit................................................................. (30,721) (34,264)
Deferred compensation............................................................... (477) (477)
---------- --------------
Total stockholders' equity........................................................ 16,221 131,674
---------- --------------
Total capitalization.............................................................. $ 137,499 $ 147,019
---------- --------------
---------- --------------
</TABLE>
- ------------------------
(a) Other long-term debt includes current and non-current debt obligations and
capital lease obligations.
(b) Class A Preferred Stock is recorded at its liquidation value, net of
issuance costs. Excludes, as of March 31, 1999, 121 shares of Class A
Preferred Stock reserved for issuance at an exercise price equal to the
liquidation value per share in connection with an outstanding warrant to
purchase Class A Preferred Stock.
(c) The holders of these shares of common stock had the right to require AppNet
to repurchase the shares for an aggregate purchase price of approximately
$278,000. This right terminated on April 11, 1999.
16
<PAGE>
DILUTION
AppNet's pro forma net tangible book value as of March 31, 1999 was a
deficit of $70.9 million or $(2.91) per share of common stock. Pro forma net
tangible book value per share of common stock represents the amount of total
tangible assets less the sum of (a) total liabilities and (b) the liquidation
preference of the Class A Preferred Stock and the Class B Preferred Stock and
the repurchase price of common stock subject to put rights and increased by the
effect of the conversion of the $406,000 promissory note into 39,055 shares of
common stock, the conversion of promissory notes of $1,012,000, plus accrued
interest, into 123,210 shares of common stock and the exchange of 43,789 and
11,158 shares of Class A and Class B Preferred Stock, plus related accrued
dividends, respectively into 4,334,281 shares of common stock, divided by the
number of shares of common stock outstanding. After giving effect to the sale of
6,000,000 shares of our common stock in this offering at an assumed initial
public offering price of $13.00 per share, the mid-point of the range shown on
the cover page of this prospectus, and the application of the estimated net
proceeds from this offering, AppNet's adjusted pro forma net tangible book value
at March 31, 1999 would have been a deficit of approximately $1.4 million or
$(0.05) per share of common stock. This represents an immediate increase in pro
forma net tangible book value of $2.86 per share of common stock to existing
stockholders and an immediate dilution in pro forma net tangible book value of
$13.05 per share of common stock to new investors purchasing shares in this
offering. Dilution is determined by subtracting pro forma net tangible book
value per share after the offering from the amount of cash paid by a new
investor for a share of common stock. The following table illustrates this per
share dilution as of March 31, 1999:
<TABLE>
<CAPTION>
PER SHARE
------------------------
<S> <C> <C>
Assumed initial public offering price....................................................... $ 13.00
Pro forma net tangible book value as of March 31, 1999.................................... $ (2.91)
Increase in pro forma net tangible book value attributable to new investors............... 2.86
-----------
Pro forma net tangible book value per share after this offering........................... (0.05)
-----------
Dilution to new investors................................................................. $ 13.05
-----------
-----------
</TABLE>
As of March 31, 1999, there were outstanding options to purchase 1,563,891
shares of common stock at a weighted average exercise price of $10.72 per share,
outstanding warrants to purchase 84,795 shares of common stock at a weighted
average exercise price of $0.3007 per share, and convertible notes, excluding
the convertible notes reflected above, to purchase 887,473 shares of common
stock at a weighted average exercise price of $11.03 per share. In addition,
$5.2 million of notes payable are convertible at 80% of the initial public
offering price. To the extent that these options and warrants are exercised, and
the convertible notes are converted, there will be further dilution to new
investors. New investors could also experience further dilution as a result of
the issuance of shares of common stock to the former owners of four of the
businesses we have acquired in connection with contingent payments payable to
them. These acquired businesses are New Media Publishing, Sigma6, Salzinger &
Company and Internet Outfitters.
The following table sets forth, as of March 31, 1999, the number of shares
of our common stock purchased from AppNet, the total consideration paid to
AppNet and the average price paid per share by existing stockholders and by new
investors at an assumed initial public offering price of $13.00 per share, the
mid-point of the range shown on the cover page of this prospectus.
<TABLE>
<CAPTION>
SHARES PURCHASED TOTAL CONSIDERATION
------------------------- --------------------------- AVERAGE PRICE
NUMBER PERCENT AMOUNT PERCENT PER SHARE
------------ ----------- -------------- ----------- -------------
<S> <C> <C> <C> <C> <C>
Existing stockholders (1)......................... 24,414,091 80.2% $ 83,797,000 51.8% $ 3.43
New investors..................................... 6,000,000 19.8 78,000,000 48.2 13.00
------------ ----- -------------- -----
Total........................................... 30,414,091 100.0% $ 161,797,000 100.0%
------------ ----- -------------- -----
------------ ----- -------------- -----
</TABLE>
- ------------------------
(1) Includes 39,055 shares resulting from the conversion of a note of
approximately $406,000 at $10.40 per share, 123,210 shares resulting from
the conversion of promissory notes of approximately $1.0 million plus
accrued interest at $8.55 per share, and 3,444,445 and 889,836 shares
resulting from the exchange of Class A Preferred Stock and Class B Preferred
Stock, respectively, plus related accrued dividends at a price of $13.00 per
share, the mid-point of the range shown on the cover page of this
prospectus.
17
<PAGE>
After the 1999 reverse common stock split discussed in Note 18 to AppNet
Systems, Inc.'s consolidated financial statements is effected, we expect to be
in a position to render the following report.
/s/ ARTHUR ANDERSEN LLP
Washington, D.C.
May 24, 1999
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To AppNet Systems, Inc.:
We have examined the pro forma and offering adjustments reflecting the
transactions described in the introduction to the pro forma consolidated
financial data contained on page 20 and in Notes (a) through (j) to this
statement and the application of those adjustments to the historical amounts in
the accompanying pro forma consolidated statement of operations of AppNet
Systems, Inc. for the year ended December 31, 1998. The historical consolidated
statement of operations is derived from the year ended December 31, 1998
historical financial statements of AppNet Systems, Inc., i33 communications
corp., Salzinger & Company, Inc. and Internet Outfitters, Inc., each of which
were audited by us, appearing elsewhere herein, the financial statements of
Arbor Intelligent Systems, Inc., Software Services Corporation, New Media
Publishing, Inc., Century Computing, Incorporated, Research & Planning, Inc. and
The Kodiak Group, Inc. acquired by AppNet Systems, Inc. during 1998 for the
period in 1998 prior to their acquisitions, each of which were also audited by
us, appearing elsewhere herein, the unaudited historical financial statements of
Logex International, L.L.C. for the period in 1998 prior to its acquisition and
the unaudited historical financial statements of Sigma6, Inc., and Transform IT,
Incorporated for the year ended December 31, 1998. Such pro forma and offering
adjustments are based upon management's assumptions described in the
introduction to the pro forma consolidated financial data contained on page 20
and in Notes (a) through (j). Our examination was made in accordance with
standards established by the American Institute of Certified Public Accountants
and, accordingly, included such procedures as we considered necessary in the
circumstances.
In addition, we have reviewed the related pro forma and offering adjustments
reflecting the transactions described in the introduction to the pro forma
consolidated financial data contained on page 20 and in Notes (a) through (j)
and the application of those adjustments to the historical amounts in the
accompanying pro forma consolidated statement of operations for the three months
ended March 31, 1999. The historical consolidated statement of operations is
derived from the historical unaudited statement of operations of AppNet Systems,
Inc., which was reviewed by us, appearing elsewhere herein, and the historical
unaudited statements of operations for i33 communications corp., Salzinger &
Company, Inc., Internet Outfitters, Inc., Sigma6, Inc. and Transform IT,
Incorporated for the period in 1999 prior to their acquisitions, each of which
were reviewed by us. Such pro forma and offering adjustments are based on
management's assumptions as described in the introduction to the pro forma
consolidated financial data contained on page 20 and in Notes (a) through (j).
Our review was made in accordance with standards established by the American
Institute of Certified Public Accountants.
The objective of this pro forma financial information is to show what the
significant effects on the historical financial information might have been had
the transactions occurred at an earlier date. However, the pro forma
consolidated statements of operations are not necessarily indicative of the
results of operations that would have been attained had the above-mentioned
transactions actually occurred earlier.
18
<PAGE>
In our opinion, management's assumptions provide a reasonable basis for
presenting the significant effects directly attributable to the above-mentioned
transactions described in the introduction to the pro forma consolidated
financial data contained on page 20 and in Notes (a) through (j), the related
pro forma and offering adjustments give appropriate effect to those assumptions,
and the pro forma as adjusted columns reflect the proper application of those
adjustments to the historical financial amounts in the pro forma consolidated
statement of operations for the year ended December 31, 1998.
A review is substantially less in scope than an examination, the objective
of which is the expression of an opinion on management's assumptions, the pro
forma and offering adjustments and the application of those adjustments to
historical financial information. Accordingly, we do not express such an opinion
on the pro forma and offering adjustments or the application of such adjustments
to the pro forma consolidated statement of operations for the three months ended
March 31, 1999. Based on our review, however, nothing came to our attention that
caused us to believe that management's assumptions do not provide a reasonable
basis for presenting the significant effects directly attributable to the
above-mentioned transaction described in the introduction to the pro forma
consolidated financial data contained on page 20 and in Notes (a) through (j),
that the related pro forma and offering adjustments do not give appropriate
effect to those assumptions, or that the pro forma as adjusted column does not
reflect the proper application of those adjustments to the historical financial
statement amounts in the pro forma consolidated statement of operations for the
three months ended March 31, 1999.
Washington, D.C.
May 24, 1999
19
<PAGE>
PRO FORMA CONSOLIDATED FINANCIAL DATA
The following tables set forth the unaudited pro forma consolidated
statements of operations of AppNet for the year ended December 31, 1998 and for
the three months ended March 31, 1999. The pro forma consolidated statements of
operations for the year ended December 31, 1998 give effect (1) on a pro forma
basis, to the acquisitions we made in 1998 and 1999 and GTCR's investment in
AppNet, as if these transactions had occurred on January 1, 1998 and (2) on a
pro forma, as adjusted, basis to reflect:
- the reduction of interest expense due to the conversion of a $406,000 note
payable which automatically converts into shares of our common stock upon
the offering;
- the reduction of interest expense due to the conversion of promissory
notes of approximately $1.0 million plus accrued interest into 123,210
shares of common stock;
- the reduction of the dividends on and accretion of preferred stock
resulting from the exchange of 43,789 and 11,158 shares of Class A and
Class B Preferred Stock, respectively, plus related accrued dividends, for
shares of common stock; and
- the reduction of interest expense and dividends on and accretion of
preferred stock resulting from the repayment of the credit facilities and
the redemption of shares of Class A and Class B Preferred Stock in
connection with the offering, as if such transactions had occurred on
January 1, 1998.
The pro forma consolidated statements of operations for the three months
ended March 31, 1999, give effect (1) on a pro forma basis, to the acquisitions
we made in 1998 and 1999, as if these acquisitions had occurred on January 1,
1998 and (2) on a pro forma, as adjusted, basis to reflect:
- the reduction of interest expense due to the conversion of a $406,000 note
payable which automatically converts into shares of our common stock upon
the offering;
- the reduction of interest expense due to the conversion of promissory
notes of approximately $1.0 million plus accrued interest into 123,210
shares of common stock;
- the reduction of the dividends on and accretion of preferred stock
resulting from the exchange of 43,789 and 11,158 shares of Class A and
Class B Preferred Stock, respectively, plus related accrued dividends, for
shares of common stock; and
- the reduction of interest expense and dividends on and accretion of
preferred stock resulting from the repayment of the credit facilities and
the redemption of shares of Class A and Class B Preferred Stock in
connection with the offering, as if such transactions had occurred on
January 1, 1998.
The information in the pro forma consolidated statement of operations for
the year ended December 31, 1998 has been derived from the audited statements of
operations for the year ended December 31, 1998 of AppNet, i33 communications
corp., Salzinger & Company, Inc. and Internet Outfitters, Inc., the unaudited
statements of operations of Sigma6, Inc. and TransForm IT, Incorporated for the
year ended December 31, 1998 and the audited statements of operations of the
companies we acquired in 1998 for the periods during 1998 prior to acquisition,
all of which, except the statements of operations for Sigma6, Inc. and TransForm
IT, Incorporated, are included elsewhere in this prospectus.
The information in the pro forma consolidated statement of operations for
the three months ended March 31, 1999 has been derived from the unaudited
statement of operations of AppNet for the three months ended March 31, 1999,
included elsewhere in this prospectus, and the unaudited statements of
operations for the companies acquired in 1999 for the periods during 1999 prior
to their acquisition.
The acquisitions we made were accounted for using the purchase method of
accounting. The purchase method of accounting allocates the aggregate purchase
price to the assets acquired and liabilities assumed based upon their respective
fair values. The excess of purchase price over the fair
20
<PAGE>
value of tangible and identifiable intangible assets acquired, net of
liabilities assumed, has been reflected as goodwill. AppNet believes that the
preliminary allocations set forth herein are reasonable; however, in some cases
the final allocations will be based upon valuations and other studies that are
not yet complete. As a result, the allocations set forth herein are subject to
revision as additional information becomes available, and such revised
allocations could differ from those set forth herein.
The unaudited pro forma consolidated statements of operations are based upon
currently available information and assumptions and estimates which management
believes are reasonable. These assumptions and estimates, however, are subject
to change, including, without limitation, adjustments for potential cost savings
or other synergies arising from the acquisitions we made in 1998 and 1999. These
statements are presented for comparative purposes only and do not purport to be
indicative of the actual results of operations that might have occurred or
expected future results. You should read the unaudited consolidated pro forma
financial data in conjunction with our consolidated financial statements and the
related notes and the audited financial statements and the related notes of the
companies we acquired included elsewhere in this prospectus.
21
<PAGE>
APPNET SYSTEMS, INC.
PRO FORMA CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE YEAR ENDED DECEMBER 31, 1998
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
CONSOLIDATED
APPNET ARBOR(A) SSC(A) CENTURY(A) NMP(A) R&P(A) KODIAK(A)
------------- ----------- --------- ----------- ----------- ----------- -----------
<S> <C> <C> <C> <C> <C> <C> <C>
Revenues........................ $ 17,674 $ 688 $ 10,788 $ 10,040 $ 3,711 $ 5,303 $ 6,289
Cost of revenues................ 11,699 471 7,392 6,192 1,542 2,667 3,221
------------- ----- --------- ----------- ----------- ----------- -----------
Gross profit.................. 5,975 217 3,396 3,848 2,169 2,636 3,068
Operating expenses:
Selling and marketing......... 964 14 567 112 227 260 66
General and administrative.... 6,507 226 1,856 2,639 1,868 644 1,691
Stock-based and other
acquisition-related
compensation................ 1,157 465 2,654 953 -- -- 250
Depreciation and
amortization................ 10,151 29 230 156 123 80 136
------------- ----- --------- ----------- ----------- ----------- -----------
Total operating expenses.... 18,779 734 5,307 3,860 2,218 984 2,143
------------- ----- --------- ----------- ----------- ----------- -----------
Income (loss) from operations... (12,804) (517) (1,911) (12) (49) 1,652 925
Interest expense (income)....... 1,052 29 28 (41) -- (11) 2
Other expense, net.............. 723 211 372 423 -- 99 8
------------- ----- --------- ----------- ----------- ----------- -----------
Income (loss) before income
taxes......................... (14,579) (757) (2,311) (394) (49) 1,564 915
Income taxes.................... (200) -- (598) (135) 13 29 5
------------- ----- --------- ----------- ----------- ----------- -----------
Net income (loss)............... $ (14,379) $ (757) $ (1,713) $ (259) $ (62) $ 1,535 $ 910
------------- ----- --------- ----------- ----------- ----------- -----------
------------- ----- --------- ----------- ----------- ----------- -----------
Dividends on and accretion of
preferred stock............... 873
-------------
Net loss attributable to common
stockholders.................. $ (15,252)
-------------
-------------
Basic and diluted net loss per
common share.................. $ (1.41)
-------------
-------------
Weighted average common shares
outstanding (h)............... 10,785,424
-------------
-------------
<CAPTION>
OTHER
INTERNET ACQUIRED PRO FORMA PRO FORMA
I33(A) SALZINGER(A) OUTFITTERS(A) COMPANIES(A) ADJUSTMENTS CONSOLIDATED
--------- ------------- ------------- --------------- ------------ ------------
<S> <C> <C>
Revenues........................ $ 4,360 $ 3,110 $ 2,343 $ 4,876 $ -- $ 69,182
Cost of revenues................ 2,251 1,738 1,287 3,481 -- 41,941
--------- ------ ------ ------ ------------ ------------
Gross profit.................. 2,109 1,372 1,056 1,395 -- 27,241
Operating expenses:
Selling and marketing......... 985 2 47 83 -- 3,327
General and administrative.... 1,343 425 859 973 -- 19,031
Stock-based and other
acquisition-related
compensation................ -- -- 57 -- 11,195(b) 16,731
Depreciation and
amortization................ 114 13 57 62 49,121(c) 60,272
--------- ------ ------ ------ ------------ ------------
Total operating expenses.... 2,442 440 1,020 1,118 60,316 99,361
--------- ------ ------ ------ ------------ ------------
Income (loss) from operations... (333) 932 36 277 (60,316) (72,120)
Interest expense (income)....... 11 (20) 47 (9) 4,774(d) 5,862
Other expense, net.............. 35 -- -- 15 (1,107) ) 779
--------- ------ ------ ------ ------------ ------------
Income (loss) before income
taxes......................... (379) 952 (11) 271 (63,983) (78,761)
Income taxes.................... (34) -- 52 (85) 853(f) (100)
--------- ------ ------ ------ ------------ ------------
Net income (loss)............... $ (345) $ 952 $ (63) $ 356 (64,836) (78,661)
--------- ------ ------ ------
--------- ------ ------ ------
Dividends on and accretion of
preferred stock............... 2,731(g) 3,604
------------ ------------
Net loss attributable to common
stockholders.................. $ (67,567) $ (82,265)
------------ ------------
------------ ------------
Basic and diluted net loss per
common share.................. $ (4.46)
------------
------------
Weighted average common shares
outstanding (h)............... 18,465,130
------------
------------
<CAPTION>
OFFERING PRO FORMA
ADJUSTMENTS AS ADJUSTED
------------- ------------
Revenues........................ $ -- $ 69,182
Cost of revenues................ -- 41,941
------------- ------------
Gross profit.................. -- 27,241
Operating expenses:
Selling and marketing......... -- 3,327
General and administrative.... -- 19,031
Stock-based and other
acquisition-related
compensation................ -- 16,731
Depreciation and
amortization................ -- 60,272
------------- ------------
Total operating expenses.... -- 99,361
------------- ------------
Income (loss) from operations... -- (72,120)
Interest expense (income)....... (4,840)(i) 1,022
Other expense, net.............. -- 779
------------- ------------
Income (loss) before income
taxes......................... 4,840 (73,921)
Income taxes.................... -- (100)
------------- ------------
Net income (loss)............... 4,840 (73,821)
Dividends on and accretion of
preferred stock............... (3,604)(j) --
------------- ------------
Net loss attributable to common
stockholders.................. $ 8,444 $ (73,821)
------------- ------------
------------- ------------
Basic and diluted net loss per
common share.................. $ (2.55)
------------
------------
Weighted average common shares
outstanding (h)............... 28,961,676
------------
------------
</TABLE>
22
<PAGE>
APPNET SYSTEMS, INC.
PRO FORMA CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE THREE MONTHS ENDED MARCH 31, 1999
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
OTHER
CONSOLIDATED INTERNET ACQUIRED PRO FORMA
APPNET I33(A) SALZINGER(A) OUTFITTERS(A) COMPANIES(A) ADJUSTMENTS
------------ ------ ------------ ------------- --------- -----------
<S> <C> <C> <C> <C> <C> <C>
Revenues........................... $ 19,643 $103 $ 417 $ 663 $1,445 $ --
Cost of revenues................... 11,457 48 214 431 982 --
------------ ------ ------------ ------ --------- -----------
Gross profit..................... 8,186 55 203 232 463 --
Operating expenses:
Selling and marketing............ 1,190 19 48 15 81 --
General and administrative....... 6,754 70 161 232 185 --
Stock-based and other
acquisition-related
compensation................... 2,487 -- 675 21 -- (552)(b)
Depreciation and amortization.... 12,735 3 3 18 8 80(c)
------------ ------ ------------ ------ --------- -----------
Total operating expenses....... 23,166 92 887 286 274 (472)
------------ ------ ------------ ------ --------- -----------
Income (loss) from operations...... (14,980) (37) (684) (54) 189 472
Interest expense (income).......... 1,262 -- (2) 17 3 196(d)
Other expense, net................. -- -- 472 -- -- (472)(e)
------------ ------ ------------ ------ --------- -----------
Income (loss) before income
taxes............................ (16,242) (37) (1,154) (71) 186 748
Income taxes....................... 100 -- -- (27) 70 (43)(f)
------------ ------ ------------ ------ --------- -----------
Net loss........................... $ (16,342) $(37) $(1,154) $ (44) $ 116 $ 791
------------ ------ ------------ ------ --------- -----------
------------ ------ ------------ ------ --------- -----------
Dividends on and accretion of
preferred stock.................. 1,039 93(g)
------------ -----------
Net loss attributable to common
stockholders..................... $ (17,381) $ 698
------------ -----------
------------ -----------
Basic and diluted net loss per
common share..................... $ (0.88)
------------
------------
Weighted average common shares
outstanding (h).................. 19,722,559
------------
------------
<CAPTION>
PRO FORMA OFFERING PRO FORMA
CONSOLIDATED ADJUSTMENTS AS ADJUSTED
------------ ----------- -----------
<S> <C> <C> <C>
Revenues........................... $ 22,271 $ -- $ 22,271
Cost of revenues................... 13,132 -- 13,132
------------ ----------- -----------
Gross profit..................... 9,139 -- 9,139
Operating expenses:
Selling and marketing............ 1,353 -- 1,353
General and administrative....... 7,402 -- 7,402
Stock-based and other
acquisition-related
compensation................... 2,631 -- 2,631
Depreciation and amortization.... 12,847 -- 12,847
------------ ----------- -----------
Total operating expenses....... 24,233 -- 24,233
------------ ----------- -----------
Income (loss) from operations...... (15,094) -- (15,094)
Interest expense (income).......... 1,476 (1,240)(i) 236
Other expense, net................. -- -- --
------------ ----------- -----------
Income (loss) before income
taxes............................ (16,570) 1,240 (15,330)
Income taxes....................... 100 -- 100
------------ ----------- -----------
Net loss........................... $ (16,670) $ 1,240 $ (15,430)
------------ ----------- -----------
------------ ----------- -----------
Dividends on and accretion of
preferred stock.................. 1,132 (1,132)(j) --
------------ ----------- -----------
Net loss attributable to common
stockholders..................... $ (17,802) $ 2,372 $ (15,430)
------------ ----------- -----------
------------ ----------- -----------
Basic and diluted net loss per
common share..................... $ (0.88) (0.50)
------------ -----------
------------ -----------
Weighted average common shares
outstanding (h).................. 20,284,523 30,781,069
------------ -----------
------------ -----------
</TABLE>
23
<PAGE>
NOTES TO PRO FORMA CONSOLIDATED STATEMENT OF OPERATIONS
FOR THE YEAR ENDED DECEMBER 31, 1998
AND FOR THE THREE MONTHS ENDED MARCH 31, 1999
(UNAUDITED)
(IN THOUSANDS)
The following adjustments were applied to AppNet's consolidated statement of
operations and the financial data of the companies we acquired in 1998 and 1999
to arrive at the unaudited pro forma consolidated statement of operations.
(a) In the pro forma consolidated statement of operations for the year ended
December 1998, these columns reflect the actual results of operations for the
acquisitions we completed in 1998 from January 1, 1998 to the date prior to
which each respective acquisition was consummated and for the companies we
acquired in 1999 for the full year ended December 31, 1998. In the pro forma
consolidated statement of operations for the three months ended March 31, 1999,
these columns reflect the actual results of operations for the acquisitions we
completed in 1999 from January 1, 1999 to the date prior to which each
respective acquisition was consummated as if they had occurred on January 1,
1998.
(b) This adjustment was made to record a full year of the estimated
compensation charge for contingent payments in connection with our acquisitions
in 1998 and 1999 and to reduce pro forma expense for stock-based and other
acquisition-related compensation expense recorded by the acquired companies
prior to their acquisition by AppNet which arose as a direct result of their
acquisition by AppNet:
<TABLE>
<CAPTION>
YEAR ENDED
DECEMBER 31, 1998
------------------
<S> <C>
Contingent payment compensation expense.................................................................... $ 15,574
Less: Acquisition-related compensation expense recorded by acquired companies.............................. (4,379)
------------------
$ 11,195
------------------
------------------
<CAPTION>
THREE MONTHS ENDED
MARCH 31, 1999
--------------------
<S> <C>
Contingent payment compensation expense.................................................................... $ 144
Less: Acquisition-related compensation expense recorded by acquired companies.............................. (696)
--------
$ (552)
--------
--------
</TABLE>
See Note 16 of AppNet's historical consolidated financial statements
included elsewhere in this prospectus which further explains the amount shown as
contingent payment compensation expense. This pro forma amount has been
calculated assuming the operating targets related to the contingent payments
payable to the former owners of five of the companies we acquired, New Media
Publishing, Sigma6, Salzinger & Company, Internet Outfitters and TransForm IT,
are fully met and a common
stock price per share of $13.00, the mid-point of the range shown on the cover
page of this prospectus. Approximately 75% of the total contingent payments
which have a fair value of approximately $31.6 million based on a per share
price of common stock of $13.00, the mid-point of the range shown on the cover
page of this prospectus, will be reflected as compensation expense over a
weighted average period of 18 months. These charges will be fully recognized by
the end of the year 2000.
(c) This adjustment was made to record amortization expense related to
acquired identifiable intangible assets and goodwill. Such amounts are being
amortized over the estimated useful life of each asset, primarily two to three
years. Six of the acquisitions, LOGEX International, New Media Publishing,
Sigma6, Salzinger & Company, Internet Outfitters and TransForm IT, provide for
additional purchase consideration, primarily cash and stock, which is payable
upon the attainment of agreed-upon operating targets. A portion of this amount
will be recorded as additional goodwill. If the operating targets are fully met,
the aggregate amount of additional goodwill will be approximately $8.5 million,
assuming a per share price of common stock at the time the contingency is
resolved of $13.00, the mid-point of the range shown on the cover page of this
prospectus. See "Risk Factors--Our intangible assets represent a significant
portion of our assets; amortization of our intangible assets will adversely
impact our net income and we may never realize the full value of our intangible
assets" for additional information on these amortization expenses.
24
<PAGE>
(d) This adjustment was made to reflect a full year of interest expense on
acquisition debt financing. The increase in the interest expense is a result of
the amounts drawn under the credit facilities to the balance outstanding on
March 31, 1999 of approximately $59.4 million at a weighted average interest
rate of 8.0%. Additionally, the increase results from notes issued to selling
shareholders with a principal balance of approximately $15.6 million at March
31, 1999 which bear a weighted average interest rate of 5.7%. The adjustment is
as follows:
<TABLE>
<CAPTION>
YEAR ENDED
DECEMBER 31, 1998
------------------
<S> <C>
Interest on credit facility................................................................... $ 4,550,000
Interest on notes to selling shareholders..................................................... 948,000
Less: interest recorded by AppNet and acquired companies...................................... (724,000)
------------------
$ 4,774,000
------------------
------------------
<CAPTION>
THREE MONTHS ENDED
MARCH 31, 1999
--------------------
<S> <C>
Interest on credit facility................................................................... $ 1,178,000
Interest on notes to selling shareholders..................................................... 237,000
Less: interest recorded by AppNet and acquired companies...................................... (1,219,000)
--------------------
$ 196,000
--------------------
--------------------
</TABLE>
(e) This adjustment was made to eliminate costs of investment advisors and
other professionals incurred by the companies we acquired in 1998 and 1999 which
were directly attributable to the sale of those companies to AppNet.
(f) This adjustment was made to record the estimated tax benefit for the
full year of 1998 and the estimated tax provision for the three months ended
March 31, 1999 and to reflect the tax impact of the previous pro forma
adjustments, net of an applicable valuation allowance.
<TABLE>
<CAPTION>
YEAR ENDED
DECEMBER 31, 1998
------------------
<S> <C>
Income taxes............................................................................................... $ (100)
Less: historical tax (benefit)/provision recorded by AppNet and the companies we acquired.................. (953)
------------------
Net adjustment............................................................................................. $ 853
------------------
------------------
<CAPTION>
THREE MONTHS ENDED
MARCH 31, 1999
--------------------
<S> <C>
Income taxes............................................................................................... $ 100
Less: historical tax (benefit)/provision recorded by AppNet and the companies we acquired.................. 143
--------
Net adjustment............................................................................................. (43)
--------
--------
</TABLE>
(g) This adjustment was made to reflect a full year of preferred stock
dividends on the preferred stock issued to finance our acquisitions.
(h) Pro forma weighted average common shares outstanding for the year ended
December 31, 1998 reflects the effects of shares we issued in connection with
the acquisitions we made in 1998 and 1999 and GTCR's investment in AppNet, as if
all these shares had been issued as of January 1, 1998. Pro forma weighted
average common shares outstanding for the three months ended March 31, 1999
reflects the effects of shares we issued in connection with the acquisitions we
made in 1999 as if all these shares had been issued as of January 1, 1998.
Pro forma, as adjusted, weighted average shares outstanding for the year
ended December 31, 1998, and for the three months ended March 31, 1999, reflects
the pro forma weighted average shares outstanding for the respective periods
plus (1) the 6,000,000 shares to be issued in connection with this offering, (2)
the conversion of a $406,000 note payable into 39,055 shares of common stock,
(3) the conversion of promissory notes of $1,012,000 into 123,210 shares of
common stock and (4) the issuance of 4,334,281 shares of common stock in
connection with the exchange of Class A and Class B Preferred Stock and related
accrued dividends.
25
<PAGE>
(i) This adjustment was made to eliminate interest expense as a result of
the repayment of the credit facilities and the conversion of a $406,000 note
payable into shares of our common stock in connection with the offering:
<TABLE>
<CAPTION>
YEAR ENDED THREE MONTHS ENDED
DECEMBER 31, 1998 MARCH 31, 1999
------------------- --------------------
<S> <C> <C>
Repayment of credit facilities.......................................... $ (4,769) $ (1,213)
Conversion of notes payable............................................. (71) (27)
------- -------
$ (4,840) $ (1,240)
------- -------
------- -------
</TABLE>
(j) This adjustment was made to eliminate dividends on and accretion of
preferred stock as a result of the redemption and the exchange of preferred
stock in connection with this offering, as follows:
<TABLE>
<CAPTION>
YEAR ENDED THREE MONTHS ENDED
DECEMBER 31, 1998 MARCH 31, 1999
------------------- --------------------
<S> <C> <C>
Class A Preferred Stock................................................. (2,909) (958)
Class B Preferred Stock................................................. (695) (174)
------- -------
$ (3,604) $ (1,132)
------- -------
------- -------
</TABLE>
26
<PAGE>
SELECTED FINANCIAL DATA
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
The following tables contain selected financial data of AppNet for the year
ended December 31, 1998 and for the three months ended March 31, 1999 and for
its predecessor, Software Services Corporation, for each of the years in the
four-year period ended December 31, 1997 and for the period from January 1, 1998
to August 24, 1998. The consolidated statement of operations data and balance
sheet data for AppNet for the year ended December 31, 1998 are derived from
financial statements audited by Arthur Andersen LLP, independent public
accountants, and are included elsewhere in this prospectus. The statement of
operations data and balance sheet data for AppNet for the three months ended
March 31, 1999 are derived from the unaudited financial statements of AppNet
included elsewhere in this prospectus. The statement of operations data for
Software Services Corporation for the years ended December 31, 1996 and 1997 and
for the period from January 1, 1998 to August 24, 1998 and the balance sheet
data as of December 31, 1996 and 1997 and August 24, 1998 are derived from the
financial statements of Software Services Corporation, which have been audited
by Arthur Andersen LLP and are included elsewhere in this prospectus. The
statement of operations data for the years ended December 31, 1994 and 1995 and
the balance sheet data as of December 31, 1994 and 1995 are unaudited and have
been prepared on the same basis as the audited consolidated financial statements
of Software Services Corporation included elsewhere in this prospectus. In the
opinion of management, this unaudited information includes all adjustments,
consisting of only normally recurring adjustments, necessary for a fair
presentation of such information. The historical results are not necessarily
indicative of results to be expected for any future period. You should read the
data set forth below in conjunction with "Management's Discussion and Analysis
of Financial Condition and Results of Operations," our consolidated financial
statements and the related notes and Software Services Corporation's financial
statements and the related notes, included elsewhere in this prospectus.
<TABLE>
<CAPTION>
SOFTWARE SERVICES CORPORATION
------------------------------------------------------------- APPNET
EIGHT MONTHS ------------------------------
YEAR ENDED DECEMBER 31, ENDED YEAR ENDED THREE MONTHS
---------------------------------------------- AUGUST 24, DECEMBER 31, ENDED
1994 1995 1996 1997 1998 1998 MARCH 31, 1998
---------- ---------- ---------- ---------- ------------- ------------- ---------------
<S> <C> <C> <C> <C> <C> <C> <C>
(UNAUDITED)
STATEMENT OF OPERATIONS DATA:
Revenues.................... $ 9,563 $ 11,065 $ 11,789 $ 13,298 $ 10,788 $ 17,674 $ 197
Net income (loss)........... 282 181 (53) 431 (1,713) (14,379) (279)
Dividends on and accretion
of preferred stock........ -- -- -- -- -- 873 --
Net income (loss)
attributable to common
stockholders.............. 282 181 (53) 431 (1,713) (15,252) (279)
PER SHARE AMOUNTS:
Basic and diluted net loss
per common share.......... $ 0.05 $ 0.03 $ (0.01) $ 0.08 $ (0.30) $ (1.41) $ (0.23)
Weighted average common
shares outstanding........ 6,000,000 6,000,000 5,727,000 5,705,000 5,697,000 10,785,424 1,195,331
<CAPTION>
THREE MONTHS
ENDED
MARCH 31, 1999
---------------
<S> <C>
STATEMENT OF OPERATIONS DATA:
Revenues.................... $ 19,643
Net income (loss)........... (16,342)
Dividends on and accretion
of preferred stock........ (1,039)
Net income (loss)
attributable to common
stockholders.............. (17,381)
PER SHARE AMOUNTS:
Basic and diluted net loss
per common share.......... $ (0.88)
Weighted average common
shares outstanding........ 19,722,559
</TABLE>
<TABLE>
<CAPTION>
DECEMBER 31, THREE MONTHS
---------------------------------------------- AUGUST 24, DECEMBER 31, ENDED
1994 1995 1996 1997 1998 1998 MARCH 31, 1998
---------- ---------- ---------- ---------- ----------- ------------- ---------------
<S> <C> <C> <C> <C> <C> <C> <C>
(UNAUDITED)
BALANCE SHEET DATA:
Total assets.................... $ 2,239 $ 3,217 $ 3,155 $ 3,667 $ 4,973 $ 118,370 $ 3,857
Total debt(1)................... 6 575 992 666 -- 43,792 2,394
Class A Preferred Stock......... -- -- -- -- -- 37,646 --
Stockholders' equity............ 1,641 1,811 1,458 1,886 3,487 23,608 804
<CAPTION>
THREE MONTHS
ENDED
MARCH 31, 1999
---------------
<S> <C>
BALANCE SHEET DATA:
Total assets.................... $ 163,471
Total debt(1)................... 75,885
Class A Preferred Stock......... 45,115
Stockholders' equity............ 16,221
</TABLE>
- ----------------------------------
(1) Total debt includes the current and long-term portions of notes payable and
capital lease obligations for Software Services Corporation and includes the
current and long-term portions of long-term debt, convertible notes, capital
lease obligations and credit facilities for AppNet.
27
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
IN ADDITION TO HISTORICAL INFORMATION, THE FOLLOWING DISCUSSION MAY INCLUDE
FORWARD-LOOKING STATEMENTS THAT INVOLVE RISKS AND UNCERTAINTIES WHICH COULD
RESULT IN OPERATING PERFORMANCE THAT IS MATERIALLY DIFFERENT FROM MANAGEMENT'S
PROJECTIONS. FACTORS THAT COULD CAUSE OR CONTRIBUTE TO THESE DIFFERENCES INCLUDE
THOSE DISCUSSED IN "RISK FACTORS," AS WELL AS THOSE DISCUSSED ELSEWHERE IN THIS
PROSPECTUS. YOU SHOULD READ THE FOLLOWING DISCUSSION OF THE FINANCIAL CONDITION
AND RESULTS OF OPERATIONS OF APPNET AND ITS PREDECESSOR, SOFTWARE SERVICES
CORPORATION, IN CONJUNCTION WITH THEIR RESPECTIVE CONSOLIDATED FINANCIAL
STATEMENTS AND THE RELATED NOTES, "PRO FORMA CONSOLIDATED FINANCIAL DATA" AND
"SELECTED FINANCIAL DATA" INCLUDED ELSEWHERE IN THIS PROSPECTUS.
OVERVIEW
AppNet provides Internet and electronic commerce professional services and
solutions to medium-sized and large businesses. We develop end-to-end electronic
commerce solutions that improve communication and commerce between businesses
and consumers as well as among businesses and their trading partners. Through
strategic acquisitions and internal growth, we have built a company with the
ability to design, develop, implement and manage end-to-end Internet and
electronic commerce solutions.
AppNet's financial statements for the period from inception, November 6,
1997, through December 31, 1997, reflect immaterial transactions and, therefore,
these transactions have been included in our 1998 financial statements to
facilitate presentation. From inception through March 11, 1998, our operating
activities primarily consisted of developing a preliminary business plan,
recruiting personnel, engaging in discussions with prospective lenders and
strategic investors, identifying potential acquisition targets and developing
preliminary technical and marketing materials. Our strategic plan identified the
specific professional services which are required to provide clients with
end-to-end solutions. We then identified a group of companies which focused on
providing services in one or more of these professional services areas. After
reviewing and evaluating over 100 companies, we ultimately acquired a set of
companies that we believe fit together strategically and culturally and which,
when integrated with one another, could design, develop, implement and manage
end-to-end solutions. In March 1998, we completed our first acquisition. Since
that time, AppNet has completed 11 additional acquisitions.
Typically, the consideration we paid to make our acquisitions included cash,
shares of our common stock, promissory notes, promissory notes convertible into
shares of our common stock and, in six of our acquisitions, LOGEX International,
New Media Publishing, Sigma6, Salzinger & Company, Internet Outfitters and
TransForm IT, contingent payments payable in cash and/or shares of our common
stock payable upon the attainment of agreed-upon operating targets. The cash
portion of such consideration was financed primarily by an investment in our
company by GTCR and Smart Technology and borrowings under our credit facilities.
Our acquisitions have been accounted for using the purchase method of
accounting. Accordingly, the purchase price has been allocated, based on
preliminary estimates of fair value, to the tangible assets and liabilities
assumed, and in most cases, with the advice of independent valuation experts, to
the identifiable intangible assets, as of the acquisition dates. Final estimates
of fair value will be made upon the completion of independent valuations for our
1999 acquisitions and the final determination of preexisting contingencies.
Since the Internet and the electronic commerce industries are in an early stage
of development and continue to evolve rapidly and because competition in these
industries is expected to increase, the recorded goodwill and identified
intangibles from each of the acquisitions are being amortized on a straight-line
basis primarily over two to three years, the estimated period of benefit.
28
<PAGE>
AppNet's revenues are comprised primarily of fees generated for professional
services billed. We also generate fees from outsourcing services although these
fees currently represent a small portion of our revenues. Our strategy is to
increase the percentage of our revenues generated by fees from outsourcing
services. During the development of our outsourcing business, we may incur
losses and operating margins may be reduced as we build our operations and
infrastructure to support this line of business.
In general, we bill our professional services on a time and materials basis;
however, a portion of our services is billed on a fixed-price basis. AppNet
recognizes revenue from time and materials projects based on fixed hourly rates
for direct labor hours expended and revenues from fixed-price projects based on
the percentage-of-completion method of accounting, with costs and estimated
profits recorded as work is performed. Provisions for estimated losses on
uncompleted contracts are made in the period in which the losses are determined.
Changes in contract scope and estimated profitability, including final contract
settlements, may result in adjustments to costs and revenues and are recognized
in the period in which the adjustments are determined.
AppNet's cost of revenues includes all direct labor and other direct costs
related to contract performance. Cost of revenues consists primarily of salaries
and related employee benefits of billable employees.
Selling and marketing expenses are comprised of the salaries and related
employee benefits of sales and marketing employees and the costs of sales,
marketing and advertising activities. We compensate our sales employees with a
combination of base salaries and commissions. We anticipate that selling and
marketing expenses may increase as a percentage of our revenues in future
periods as we continue to build our corporate sales team and expand our
marketing strategy.
AppNet's general and administrative costs include salaries and related
employee benefits for finance, legal, human resources and administrative
personnel. The general and administrative expenses also include facilities
costs, recruiting, training and other corporate costs. As a result of
anticipated additional hiring costs associated with the integration of the
businesses we acquired in 1998 and 1999, our general and administrative expenses
will increase, although they may decline as a percentage of our revenues.
Stock-based and other acquisition-related compensation includes expenses
related to the cash and stock-based contingent payments payable to former owners
of five businesses, New Media Publishing, Sigma6, Salzinger & Company, Internet
Outfitters and TransForm IT, we acquired if agreed-upon operating targets are
achieved and these former stockholders remain employed by AppNet. These
contingent payments are accounted for as operating expenses in accordance with
Emerging Issues Task Force 95-08, "Accounting for Contingent Consideration Paid
to the Shareholders of an Acquired Company in a Purchase Business Combination,"
instead of as additional purchase consideration at the time of the acquisition
because many of the former owners to whom payments are payable must remain
employed by AppNet in order for them to receive these payments. The amount of
this compensation expense recorded periodically will fluctuate based on the
probability of achievement of the operating targets by each of the acquired
businesses and the market price of our common stock at the end of each reporting
period. This expense is recognized over the period during which these former
stockholders must remain employed by us to be eligible to receive the contingent
payments. The remaining portion of these contingent payments that is payable to
former shareholders who are not our employees or who are not required to remain
employed by us during the contingent payment period will be recorded as
additional goodwill when such targets are met. If all of the operating targets
are fully met, the aggregate amounts of compensation expense and additional
goodwill that will be recognized will be approximately $23.1 and $8.5 million,
respectively, assuming a per share price of common stock of $13.00, the
mid-point of the range shown on the cover page of this prospectus, for all
29
<PAGE>
shares issued in connection with these contingent payments. The compensation
expense will be recognized during 1999 and 2000.
A compensation charge will be recorded within stock-based and
acquisition-related compensation upon completion of this offering in connection
with the termination of our right to repurchase shares of our common stock from
Mr. Bajaj. The amount of the compensation charge will be determined based on the
number of common shares that we could have repurchased from him and the
difference between $0.3007 and the initial public offering price of our common
stock. This compensation charge would have been approximately $2.7 million if
this offering had occurred on March 31, 1999. Also, we will incur an interest
charge of approximately $0.9 million related to the beneficial conversion of
convertible notes at the time of this offering.
Operating results may fluctuate from quarter to quarter and from year to
year based on such factors as the number, size, type and profitability of
projects in which we are engaged. Other factors that could cause our quarterly
results to fluctuate include:
- effectiveness of integrating acquisitions with existing operations;
- our ability to attract, train and retain skilled management, technical and
creative personnel;
- the entrance of new competitors; and
- timing and size of acquisition-related compensation charges which
fluctuate based on the market price of our stock and the level of
achievement of the agreed upon operating targets.
APPNET PRO FORMA RESULTS OF OPERATIONS
The pro forma statement of operations for the year ended December 31, 1998
gives effect to the 12 acquisitions we made in 1998 and 1999 and GTCR's
investment in AppNet, as if these transactions had occurred on January 1, 1998.
The pro forma statement of operations for the three months ended March 31, 1999
gives effect to the acquisitions we made in 1999 as if these transactions had
occurred on January 1, 1998. Our pro forma quarterly and annual results may not
be indicative of future operations as a result of our continued integration of
acquired companies and the development of our corporate infrastructure.
THREE MONTHS ENDED MARCH 31, 1999
REVENUES. Pro forma revenues for the three months ended March 31, 1999 were
$22.3 million.
COST OF REVENUES. For the three months ended March 31, 1999, cost of
revenues was $13.1 million, or 59% of pro forma revenues.
SELLING AND MARKETING. Pro forma selling and marketing expenses for the
three months ended March 31, 1999 were $1.4 million, or 6% of pro forma
revenues.
GENERAL AND ADMINISTRATIVE. Pro forma general and administrative expenses
were $7.4 million, or 33% of pro forma revenues. The increase in general and
administrative expenses as a percentage of revenue from pro forma 1998 fiscal
year activity is a result of the build up of corporate infrastructure through
1998 and into 1999 to assist in the integration of acquisitions.
STOCK-BASED AND OTHER ACQUISITION-RELATED COMPENSATION. For the three
months ended March 31, 1999, pro forma stock-based and other acquisition-related
compensation was $2.6 million. The amount is computed based on the assumption
that operating targets will be fully met and that the fair market value of our
common stock is $13.00 per share, the mid-point of the range shown on the cover
page of this prospectus, as if the 1999 acquisitions had occurred on January 1,
1998.
30
<PAGE>
DEPRECIATION AND AMORTIZATION. Pro forma depreciation and amortization for
the three months ended March 31, 1999 was $12.8 million, of which $12.3 million
represents amortization of intangible assets.
INTEREST EXPENSE. For the three months ended March 31, 1999, pro forma
interest expense was $1.5 million, the majority of which is a result of the
financing of acquisitions. We expect to repay existing borrowings under our
credit facilities with a portion of the proceeds from this offering which, along
with the conversion of a $406,000 note payable into common stock, would have
reduced interest expense on a pro forma as adjusted basis to $0.2 million.
YEAR ENDED DECEMBER 31, 1998
REVENUES. Pro forma revenues for the year ended December 31, 1998 were
$69.2 million. This amount consists primarily of revenues from fees for
professional services. We also generated revenues from fees for outsourcing
services; the amount of these fees represented a small portion of our revenues
for this period.
COST OF REVENUES. For the year ended December 31, 1998, pro forma cost of
revenues was $41.9 million, or 61% of revenues.
SELLING AND MARKETING. Pro forma selling and marketing expenses were $3.3
million for the year ended December 31, 1998, or 5% of revenues.
GENERAL AND ADMINISTRATIVE. For the year ended December 31, 1998, pro forma
general and administrative expenses were $19.0 million, or 28% of revenues.
STOCK-BASED AND OTHER ACQUISITION-RELATED COMPENSATION. Pro forma
stock-based and other acquisition-related compensation for the year ended
December 31, 1998 was $16.8 million. This amount represents an accrual for the
estimated amount of the cash and stock-based contingent consideration to be paid
to former owners of five of our acquired businesses, New Media Publishing,
Sigma6, Salzinger & Company, Internet Outfitters and TransForm IT, during the
12-month period following acquisition. The amount is based on assumptions that
operating targets will be fully met and that the fair market value of our common
stock is $13.00 per share, the mid-point of the range shown on the cover page of
this prospectus.
DEPRECIATION AND AMORTIZATION. For the year ended December 31, 1998, pro
forma depreciation and amortization was approximately $60.3 million, the
majority of which represents amortization expense of our intangible assets.
INTEREST EXPENSE. Pro forma interest expense for the year ended December
31, 1998 was $5.9 million, or 9% of revenues. This includes interest on
indebtedness borrowed under our credit facilities in connection with our
acquisitions of approximately $4.6 million and interest on notes issued in
connection with these acquisitions of approximately $1.0 million. We expect to
repay existing borrowings under our credit facilities with a portion of the
proceeds of this offering which, along with the conversion of a $406,000 note
payable into common stock, would have reduced interest expense on a pro forma as
adjusted basis to $1.0 million.
OTHER EXPENSE, NET. For the year ended December 31, 1998, pro forma other
expense includes a charge of $0.3 million related to the refinancing of our
credit facilities during 1998 and the write-off of approximately $0.3 million
related to an investment in a joint venture that was deemed to have no value due
to the failure of the venture to generate a customer base and to generate
sufficient revenues to cover operating expenses, which resulted in the
abandonment of the operations of the venture.
31
<PAGE>
INCOME TAXES. Pro forma income tax benefit for the year ended December 31,
1998 was $0.1 million. The effective income tax rate of 0.1% was lower than the
blended federal and statutory rate primarily as a result of amortization of a
portion of our intangible assets which are not deductible for income tax
purposes and the recognition of a valuation allowance in accordance with
generally accepted accounting principles.
APPNET HISTORICAL RESULTS OF OPERATIONS
AppNet's first quarter 1999 historical results of operations may not be
indicative of results to be expected for the full year in 1999 due to the impact
of acquisitions during the first quarter of 1999 and the continued integration
of our 1998 acquisitions.
THREE MONTHS ENDED MARCH 31, 1999 COMPARED TO THREE MONTHS ENDED MARCH 31, 1998
REVENUES. Revenues for the three months ended March 31, 1999 and 1998 were
$19.6 million and $0.2 million, respectively. The increase of $19.4 million is a
result of the acquisitions that occurred during 1998 and 1999.
COST OF REVENUES. For the three months ended March 31, 1999, cost of
revenues were $11.5 million as compared to the cost of revenues for the three
months ended March 31, 1998 of $0.1 million. The increase of $11.4 million was
primarily driven by an increase in average billable headcount resulting from the
acquisitions that occurred during 1998 and 1999.
SELLING AND MARKETING. Selling and marketing expenses for the three months
ended March 31, 1999 were $1.2 million. The increase is a result of the
acquisitions we completed and the development of our corporate sales and
marketing staff.
GENERAL AND ADMINISTRATIVE. General and administrative expenses were $6.8
million and $0.2 million for the three months ended March 31, 1999 and 1998,
respectively. The increase is primarily a result of the acquisitions that
occurred during 1998 and 1999 and the development of our corporate general and
administrative staff.
STOCK-BASED AND OTHER ACQUISITION-RELATED COMPENSATION. For the three
months ended March 31, 1999, stock-based and other acquisition-related
compensation was $2.5 million. The amount is primarily attributable to the
contingent payments due to former shareholders that must remain employed to
receive the contingent payments. The amount is computed based on the fair market
value of our common stock at the end of the reporting period and the assumptions
that operating targets will be fully met.
DEPRECIATION AND AMORTIZATION. For the three months ended March 31, 1999,
depreciation and amortization was $12.7 million as compared with $0.1 million
for the three months ended March 31, 1998. The increase is primarily due to the
amortization of intangible assets resulting from the acquisitions made during
1998 and 1999. AppNet's goodwill and related amortization may increase in future
periods if AppNet is required to pay additional consideration for its
acquisitions.
INTEREST EXPENSE. Interest expense for the three months ended March 31,
1999 was $1.3 million that primarily resulted from the interest on the
outstanding balance on the credit facility entered into in August 1998.
YEAR ENDED DECEMBER 31, 1998 COMPARED TO SOFTWARE SERVICES CORPORATION
(PREDECESSOR) FOR THE YEAR ENDED DECEMBER 31, 1997
REVENUES. Revenues for the year ended December 31, 1998 were $17.7 million
as compared with revenues of $13.3 million of Software Services Corporation for
the year ended December 31, 1997. The
32
<PAGE>
difference of $4.4 million is a result of the acquisitions by AppNet during
1998, as well as internal growth which increased headcount and operations.
COST OF REVENUES. For the year ended December 31, 1998, cost of revenues of
AppNet was $11.7 million as compared to the cost of revenues of Software
Services Corporation for the year ended December 31, 1997 of $8.4 million. The
change of $3.3 million was primarily driven by the increase in billable
headcount resulting from the acquisitions that occurred during 1998 and internal
growth.
SELLING AND MARKETING. Selling and marketing expenses for the year ended
December 31, 1998 were $1.0 million as compared to $1.0 million for Software
Services Corporation for the year ended December 31, 1997.
GENERAL AND ADMINISTRATIVE. General and administrative expenses of AppNet
were $6.5 million for the year ended December 31, 1998 as compared to $3.0
million of Software Services Corporation for the year ended December 31, 1997.
The difference is primarily a result of the acquisitions that occurred during
1998.
STOCK-BASED AND OTHER ACQUISITION-RELATED COMPENSATION. For the year ended
December 31, 1998, stock-based and other acquisition-related compensation of
AppNet was $1.2 million, which represents an accrual for the estimated amount of
cash and stock-based contingent consideration to be paid to former stockholders
of acquired businesses.
DEPRECIATION AND AMORTIZATION. For the year ended December 31, 1998,
depreciation and amortization of AppNet was $10.2 million as compared with $0.3
million for the year ended December 31, 1997. The change is primarily a result
of the amortization of intangible assets recorded by AppNet in connection with
the acquisitions made in 1998.
INTEREST EXPENSE. Interest expense of AppNet for the year ended December
31, 1998 was $1.1 million that primarily resulted from the interest on the
outstanding balance on the credit facility during the period.
OTHER EXPENSE, NET. Other expense of $0.7 million includes a charge of $0.3
million related to the refinancing of our credit facilities in 1998. Other
expense also includes the write-off of $0.3 million related to an investment in
a joint venture that was deemed to have no value due to the failure of the
venture to generate a customer base and to generate sufficient revenues to cover
operating expenses, which resulted in the abandonment of the operations of the
venture.
INCOME TAXES. Income tax benefit for the year ended December 31, 1998 was
$0.2 million. The effective income tax rate of 1.4% was lower than the blended
federal and state statutory rate primarily as a result of amortization of a
portion of our intangible assets which are not deductible for income tax
purposes and the recognition of a valuation allowance in accordance with
generally accepted accounting principles.
SOFTWARE SERVICES CORPORATION (PREDECESSOR COMPANY)
PERIOD ENDED AUGUST 24, 1998 COMPARED TO THE YEAR ENDED DECEMBER 31, 1997
REVENUES. Revenues for the period ended August 24, 1998 were $10.8 million,
compared to $13.3 million for the year ended December 31, 1997. The decrease is
primarily due to the fact that we are comparing a 12-month period to an
eight-month period, offset by increased activity in SSC's technical consulting
group.
COST OF REVENUES. Cost of revenues for the period ended August 24, 1998 was
$7.4 million, compared to $8.4 million for the year ended December 31, 1997. The
amount as a percentage of revenues remained relatively consistent between the
respective periods.
33
<PAGE>
OPERATING EXPENSES. Total operating expenses for the period ended August
24, 1998 were $5.3 million, compared to $4.4 million for the year ended December
31, 1997, representing an increase of $0.9 million. The increase is a result of
a $2.7 million stock-based and acquisition-related compensation charge, incurred
in connection with the acquisition of SSC by AppNet. The offsetting decrease is
a result of the decrease in selling and marketing and general and administrative
expenses of $1.6 million as larger projects required less overall support.
INCOME TAXES. An income tax benefit of $0.6 million was recorded for the
period ended August 24, 1998, compared with an income tax provision of $0.4
million for the year ended December 31, 1997 based on the income(loss) before
income taxes for the respective period.
YEAR ENDED DECEMBER 31, 1997 COMPARED TO THE YEAR ENDED DECEMBER 31, 1996
REVENUES. Revenues for the year ended December 31, 1997 were $13.3 million,
compared to $11.8 million for the year ended December 31, 1996. The increase of
$1.5 million is a result of an increase in the number of projects completed and
amount of professional services rendered during 1997.
COST OF REVENUES. Cost of revenues for the year ended December 31, 1997 was
$8.4 million, compared to $7.7 million for the year ended December 31, 1996. The
amount as a percentage of revenues remained substantially consistent.
OPERATING EXPENSES. Total operating expenses for the year ended December
31, 1997 were $4.4 million, compared to $4.0 million for the year ended December
31, 1996, representing an increase of $0.4 million. The increase is a result of
the overall increase in general and administrative expenses for the year ended
December 31, 1997.
INCOME TAXES. An income tax provision of $0.4 million was recorded for the
year ended December 31, 1997, compared with a provision of $0.1 million for the
year ended December 31, 1996. The increase is a result of the increase in income
before income taxes for the respective period.
LIQUIDITY AND CAPITAL RESOURCES
At March 31, 1999, we had approximately $5.7 million in cash and cash
equivalents. AppNet has financed its operations and acquisitions primarily
through the issuance of preferred stock, borrowings under credit facilities and
the issuance of common stock. For the year ended December 31, 1998, cash used in
operations was $2.6 million and $71.7 million was used in investing activities.
For the three months ended March 31, 1999, cash provided by operating activities
was $1.5 million and cash used in investing activities was $27.3 million. The
principal use of cash in investing activities was to finance acquisitions. As
AppNet continues to grow its business and integrate the businesses it has
acquired, AppNet expects to use cash from operations to fund these activities.
Net cash provided by financing activities was $76.7 million and $29.0
million during the year ended December 31, 1998 and the three months ended March
31, 1999, respectively. We received proceeds from net borrowings under our
credit facilities of $37.5 million and $21.9 million during the year ended
December 31, 1998 and the three months ended March 31, 1999, respectively. In
addition, we received $36.3 million and $3.0 million as consideration for the
issuance of our preferred and common stock, respectively, during the year ended
December 31, 1998. Additionally, we received $7.0 million during the three
months ended March 31, 1999 as consideration for the issuance of preferred
stock.
In connection with five of our acquisitions, LOGEX International, Century
Computing, Incorporated, Research & Planning, Inc., The Kodiak Group and i33
communications corp., we issued notes to the selling stockholders all of which
are convertible into shares of our common stock except for the notes issued in
connection with our acquisition of Research & Planning. The balance of the
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notes at March 31, 1999 was approximately $15.6 million, $14.6 million of which
is convertible into shares of our common stock. These notes have varying
maturities, from October 1999 through April 2003, and bear interest at rates
between 4.33% and 8.0% as of March 31, 1999. In addition, in connection with the
acquisition of Software Services Corporation, we issued shares of Class B
Preferred Stock. The holders of Class B Preferred Stock are entitled to a 6%
cumulative dividend.
At December 31, 1998, our revolving credit facilities provided for
borrowings up to $40 million. In 1999, we replaced these facilities with two new
revolving credit facilities which provide for up to $66 million in borrowings,
$40 million of which has been guaranteed by an affiliate. The new revolving
credit facilities will expire on August 24, 2001. The guaranteed portion bears
interest, at our option, at LIBOR plus 2.5% or the lenders' prime rate plus
0.5%. The unguaranteed portion bears interest, at our option, at LIBOR or the
lenders' prime rate plus an applicable margin based on our operating
performance. The credit facilities are secured by all of our assets and contain
various restrictive covenants that, among other things, require us to maintain
specified financial ratios and levels of liquidity and working capital and
restrict us from paying dividends to our common stockholders. At March 31, 1999,
approximately $4.1 million remained available for borrowing under our credit
facilities based on the level of financial ratios, as set forth in the credit
facility.
We plan to use the proceeds of this offering to repay all outstanding
borrowings under our credit facilities. We intend to terminate our $40 million
credit facility following the consummation of this offering and amend our $26
million credit facility to provide for maximum aggregate revolving borrowings of
up to $20 million. The termination and amendment of these credit facilities will
reduce our interest expense in future periods. In conjunction with the
modification of these facilities, we may incur a charge of up to $0.6 million
representing the write off of financing costs related to these facilities which
have been capitalized and are not fully amortized as of March 31, 1999.
AppNet's capital expenditures for 1998 were approximately $1.2 million.
Historically, capital expenditures have been used to make leasehold improvements
to AppNet's leased office space and to purchase computer hardware and software
and furniture and fixtures. AppNet does not have any material commitments for
capital expenditures for the foreseeable future. However, AppNet does plan to
make capital expenditures, which may include office space, over the next two
years to further develop our electronic commerce outsourcing services.
During the period from the consummation of this offering through November
2000, we may be required to make contingent payments to former owners of six of
the businesses we acquired, LOGEX International, New Media Publishing, Sigma6,
Salzinger & Company, Internet Outfitters and TransForm IT. These contingent
payments are payable in cash and stock, in one case at the option of the selling
stockholders. The amount of these payments will depend on the level of
achievement of the operating targets and the market price of our common stock.
The majority of the former stockholders must remain employed by us in order to
remain eligible to receive these payments. The maximum aggregate amount of the
cash portion of these payments, assuming the operating targets are fully met, is
approximately $20 million.
Based upon current expectations, we believe amounts which may be borrowed
under our credit facility and cash flow from operations will be adequate for us
to meet our capital requirements, to finance the cash portion of our contingent
payments and pursue our business strategy for the next 18 months. To the extent
AppNet is unable to fund its operations from cash flows and existing credit
facilities during or following the next 18 months, it may need to obtain
financing from external sources either by issuing additional equity or incurring
additional indebtedness.
RECENT ACCOUNTING PRONOUNCEMENTS
In June 1998, the Financial Accounting Standards Board issued SFAS No. 133,
"Accounting for Derivatives and Hedging Activities", which establishes
accounting and reporting standards for derivative
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instruments, including derivative instruments embedded in other contracts, and
for hedging activities. SFAS No. 133 is effective for all fiscal quarters of
fiscal years beginning after June 15, 1999. We have not yet determined whether
the adoption of SFAS No. 133 will have a material effect on our results of
operations, financial position or cash flows.
YEAR 2000
We have completed a preliminary assessment of our Year 2000 readiness and
are beginning to make our systems Year 2000 compliant. The risks posed by the
Year 2000 issue could adversely affect our business in a number of significant
ways. Many of our clients and potential clients maintain their operations on
systems that could be impacted by Year 2000 problems. If our clients fail to
ensure their systems are Year 2000 compliant and Year 2000 problems materially
adversely affect them, our business could be adversely affected, particularly if
demand for our services declines as companies spend their resources to upgrade
their computer systems. We rely on our suppliers for hardware, software and
services. Our business could be adversely affected if we cannot obtain products,
services or systems that are Year 2000 compliant when we need them. We also
depend on the availability of the Internet infrastructure to conduct our
business and provide services to our clients. Disruptions in the Internet
infrastructure arising from Year 2000 problems could materially adversely affect
our business, financial condition and results of operations. In addition, our
solutions are sometimes dependent upon third-party products and components.
Failure of a third party whose products or services we employ to adequately
address Year 2000 issues could result in our involvement in litigation
concerning our products and services or those of a third party. Futhermore,
because we provide computer-related services, the risk we will be involved in a
lawsuit relating to Year 2000 issues is likely to be greater than that of
companies in other industries. We sometimes provide express warranties to
clients that our work is Year 2000 compliant.
We are in the process of obtaining assurances from our suppliers that they
are Year 2000 compliant. We have established a Year 2000 Executive Steering
Committee, appointed a Year 2000 Compliance Program Manager and adopted a formal
compliance program to oversee and coordinate our Year 2000 compliance efforts
throughout our organization. This program is designed to ensure consistency and
minimize the impact of Year 2000 problems on our operations. Our Year 2000
compliance program consists of the following five phases: awareness, assessment,
remediation, testing and implementation. Based on the early stages of our Year
2000 compliance program, we cannot estimate the percentage of completion for
each of these phases.
In the event the Company does not complete the phases of its program, the
Company may fail to meet contractual obligations, provide adequate service or
meet customer requirements. The result of such failures could make the Company
subject to litigation for which the amount of potential liability and lost
revenue cannot be reasonably estimated at this time.
Our costs in connection with Year 2000 compliance to date are approximately
$90,000. At this time, we estimate the potential costs of becoming Year 2000
compliant to be between $0.2 million and $0.6 million, which includes the cost
to replace hardware and software, outside consulting services and some internal
labor costs. However, as we continue to implement our Year 2000 compliance
program, these cost estimates may need to be significantly revised, which could
have a material adverse effect on our business, financial condition or results
of operations.
As part of our plan to integrate the back-office functions of the businesses
we have acquired, we are implementing new, uniform internal information systems,
such as general ledger, billing, accounts payable and payroll, throughout our
organization. Although we have received assurances from our vendors that these
new systems are Year 2000 compliant, our internal systems may experience
operational difficulties because of undetected errors or defects in the
technology used.
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If we fail to address a Year 2000 compliance problem in one of our systems,
the result could be a failure or interruption of normal business operations. We
believe that our Year 2000 compliance program, when fully implemented, should
minimize the risk of significant interruptions to our operations. Currently, we
do not have an expected completion date for our compliance program. At this
point, we believe that the most reasonably likely worst case scenario may
involve areas we do not directly control, such as:
- Our suppliers may provide inaccurate or misleading information to us with
respect to their products' and/or services' Year 2000 compliance. If we
had to replace every information technology system developed by a third
party throughout our organization, we estimate the cost to be $7.2 million
and that it would result in significant interruption of our operations.
- Our clients may fail to ensure that their systems are Year 2000 compliant,
which may cause the Year 2000 problem to materially adversely affect them.
If this did occur, demand for our services could decline as companies
spend their resources to upgrade their computer systems.
- The failure of third-party products and components upon which our
solutions are sometimes dependent could result in our involvement in
litigation concerning our solutions or the products and components of
third parties. We cannot accurately predict the outcome of any legal
claims in which we may become involved as a result of such failure.
- Critical utilities such as electrical power and telecommunications may be
interrupted for a significant and protracted period of time. We have taken
steps to mitigate these risks by installing back-up power supplies and
redundant telecommunications. However, we could still be adversely
impacted by failures at companies that provide us with Internet services.
We currently do not have contingency plans in place in the event we do not
complete all phases of our Year 2000 compliance program. If we do not develop
our contingency plans, our potential Year 2000 liabilities may be materially
increased.
QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
AppNet is exposed to market risk related to changes in interest rates on its
long-term credit facilities. AppNet is able to manage its interest rate risk to
some degree through management's option to select the factor used to determine
its interest rate. AppNet's credit facilities are variable rate credit
facilities. The guaranteed portion of our credit facilities bears interest, at
our option, at LIBOR plus 2.5% or the lenders' prime rate plus 0.5%. The
unguaranteed portion bears interest, at our option, at LIBOR or the lenders'
prime rate plus an applicable margin based on our operating performance. The
balance outstanding as of December 31, 1998 was $37.5 million, of which $19.7
million bears interest at a rate of 8.25% and $17.8 million bears interest at a
rate of 7.75%. Assuming the amount outstanding at March 31, 1999, which was
$59.4 million, was outstanding for the entire year, we estimate that a one
percentage point change to the weighted average interest rate at March 31, 1999
(8.0%) would equal a $0.6 million change in interest expense. If the interest
rate increased, the net loss attributable to common stockholders for the three
months ended March 31, 1999 would have increased by $0.2 million to $17.5
million.
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BUSINESS
OVERVIEW
AppNet provides Internet and electronic commerce professional services and
solutions to medium-sized and large businesses. We develop electronic commerce
solutions that improve communication and commerce between businesses and
consumers as well as among businesses and their trading partners. We focus on
maximizing the opportunities presented by the Internet and electronic commerce
to enhance all aspects of our clients' operations, from the front end of their
business, creative Website design, to the back end, back-office integration of
existing systems and electronic commerce outsourcing, creating an end-to-end
solution. We were formed in 1997 as a Delaware corporation.
Our professional services include:
- strategic consulting;
- interactive media services such as creative Website design and
development, branding, which is the creation of a unique corporate
identity for a client and its products, media planning and buying;
- Internet-based application development, which is the development of
software applications that are capable of running on the Internet and are
written in languages such as Java, C++ and Visual Basic;
- electronic commerce systems integration, which is the integration of
electronic commerce systems, which are systems that automate the receipt,
processing and delivery of transaction data and other information, with
other corporate software and computer-based applications; and
- electronic commerce outsourcing, which is the performance of electronic
commerce services that would otherwise be handled by the client's internal
staff using the client's resources.
INDUSTRY BACKGROUND
The rapid growth in the use of the Internet and electronic commerce has
revolutionized the way businesses operate and interact with their customers and
trading partners. The Internet and electronic commerce have created new channels
of communication and distribution which raise the level and increase the speed
of interaction between a business and its trading partners and customers. The
demand for Internet and electronic commerce services is increasing as more and
more companies develop on-line businesses and employ Internet and electronic
commerce solutions.
The Internet enables businesses to establish an on-line presence through
which they can offer new and complementary products and services to new and
existing markets. As a result, businesses have been able to create new sources
of revenue, improve customer care and retention and streamline their internal
operations by processing orders and payments on-line.
To date, businesses have primarily focused on using Internet and electronic
commerce solutions to improve business-to-consumer relationships. However,
businesses are increasingly using the Internet and electronic commerce to open
cost-effective, reliable, highly efficient channels of communication and
commerce with their suppliers and distributors. Internet and electronic commerce
solutions can improve the way businesses interact with their trading partners by
linking businesses' back-office systems through electronic data interchange, or
EDI, and the Internet to trading partners and suppliers. EDI is a process
through which data is transferred from a paper format into a standard electronic
format and electronically transmitted to trading partners over a private network
or the Internet. In July 1997, International Data Corporation reported that 80%
of Fortune 500 companies employed EDI to improve their business processes.
Businesses are increasingly finding that they can reliably and cost-effectively
manage a high volume of transactions on a real-time basis using EDI and the
Internet.
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In addition, by using EDI and the Internet for communication with both consumers
and trading partners, businesses are creating electronically integrated supply
chains that significantly improve their operating efficiency.
Businesses are increasingly discovering that implementing Internet and
electronic commerce solutions is necessary to remain competitive and are
demanding end-to-end Internet and electronic commerce solutions that can improve
every aspect of their operations. As a result, technology industry research
firms predict that the market for Internet and electronic commerce services
worldwide will grow significantly over the next few years. International Data
Corp. estimates that this market will increase from $4.6 billion in 1997 to
$43.7 billion by 2002, which represents a compound annual growth rate of 57%.
According to a 1998 Dataquest survey of selected Fortune 1000 companies, 83% of
such companies are currently investing, or plan to invest, in Internet solutions
and 48% are currently investing, or plan to invest, in electronic commerce
solutions.
Most businesses rely on outside specialists to design and develop Internet
and electronic commerce solutions for a number of compelling reasons. Because
Internet and electronic commerce technologies have developed so rapidly, few
businesses have employees with the advanced skills necessary to effectively
evaluate and implement these technologies successfully. Given the pressure to
get to market quickly, waiting for in-house employees to be trained to use these
technologies is not practicable. In addition, hiring trained professionals is
difficult because they are in great demand. At the same time, as business
challenges grow increasingly complex, so must the Internet and electronic
commerce solutions required to address them. Given the significant cost to
design, develop, implement and manage Internet and electronic commerce
solutions, businesses cannot afford to expend resources developing solutions
themselves. Hiring a firm that provides a comprehensive range of Internet and
electronic commerce professional services is often the most efficient and
cost-effective solution for many companies.
THE APPNET SOLUTION
Our goal in founding AppNet was to address the growing need for end-to-end
Internet and electronic commerce solutions. We offer a comprehensive range of
services involving the design, development, implementation and management of
Internet and electronic commerce solutions that facilitate and promote
communication and commerce between businesses and consumers as well as among
businesses and their trading partners. Key elements of the AppNet solution are:
- END-TO-END SERVICE OFFERING
We can provide clients with end-to-end Internet and electronic commerce
solutions. Our clients recognize significant cost and time savings and receive
integrated solutions because they can obtain all of the Internet and electronic
commerce professional services they need from one company.
- UNIQUE ELECTRONIC COMMERCE OUTSOURCING SERVICES
We offer our clients an extensive range of electronic commerce outsourcing
services as part of our overall service offering. We perform electronic commerce
services that would otherwise be handled by the client's internal staff using
the client's resources. Our business-to-business outsourcing services include
processing transactions for our clients using our resources and infrastructure.
We also operate electronic data interchange programs through which businesses
and their trading partners exchange information electronically. We monitor and
analyze the transactions processed through these programs. Our
business-to-consumer outsourcing services include managing on-line stores,
processing transactions, managing and hosting Websites and operating and
managing electronic commerce systems. Our Website managing and hosting services
include adding and editing material on a Website and making sure the Website is
operating according to its specifications. Our outsourcing services include
maintaining security at a Website by ensuring only authorized users have access
to the Website. We also store data that is generated by activity at the Website.
Clients who take advantage of these services get to market
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quickly; do not have to make the significant financial and technological
investments required to effectively build and manage their own infrastructures;
receive reliable and secure services; and can focus their attention and
resources on their core competencies.
- ABILITY TO SOLVE INCREASINGLY COMPLEX BUSINESS PROBLEMS
Our business-level and process-level strategic consulting services help our
clients solve their increasingly complex business problems with sophisticated,
vendor-neutral Internet and electronic commerce solutions. We employ
business-level strategic consulting services to develop and redefine clients'
business models to incorporate Internet and electronic commerce strategies. We
employ process-level strategic consulting services to improve the business
processes of clients who have already incorporated Internet and electronic
commerce strategies into their business models. These services, together with
the knowledge and experience we gain designing, developing, implementing and
managing each electronic commerce solution, enable us to develop comprehensive
strategies for growing on-line ventures, streamlining on-line marketing and
distribution strategies, improving operating efficiencies and reducing costs.
- ENHANCED SERVICES THROUGH THE USE OF ADVANCED PROPRIETARY TECHNOLOGIES
We use advanced proprietary technologies to design and develop more
effective Internet and electronic commerce solutions. ClientLink, a secure
Website we developed that is accessible only by us and our clients, also known
as an extranet, gives our clients on-line access to, and engages their active
participation in, the development of their Internet and electronic commerce
solutions. Within ClientLink, clients can, on a real-time basis, view any
changes that have been made to their solutions, communicate electronically with
project team members and check a calendar for information regarding product
reviews and launches. We use ClientLink to raise the level of interaction
between us and our clients, which, in turn, improves the quality, functionality
and adaptability of the solution we create.
AdMaximize, our proprietary interactive media service, enables us to
measure, on a real-time basis, a client's return on investment for its on-line
advertising dollars. AdMaximize tracks the performance of ads on the Internet
and collects real-time data on the number of users who click on the ad, the
number of new customers and the amount of sales generated by the ad. Based on
their analysis of this information, clients can make real-time adjustments to
their advertising campaigns to maximize the number of users who visit their
Websites and reduce the costs of acquiring new customers and generating sales.
As part of the outsourcing services we offer, we utilize proprietary
software, EDI Control/400 and STAR, in order to more effectively manage
electronic data interchange programs that process a high volume of transactions.
EDI Control/400 enables us to monitor and analyze our clients' transactions and
communications with their trading partners with fewer people and higher service
levels. Our client support services team uses STAR, or the Service Tracking and
Reporting System, to log, track and report on all aspects of a transaction.
- REUSABLE BUSINESS SOLUTIONS
We have developed reusable business solutions in the process of designing,
developing, implementing and managing end-to-end Internet and electronic
commerce solutions for clients in a number of industries. These reusable
business solutions were developed based on our industry-specific expertise and
utilize reusable software code and content objects. These solutions enable us to
give our clients the benefit of our knowledge and experience in addressing
complex business challenges, develop and implement Internet and electronic
commerce solutions more quickly and efficiently, focus our efforts on
customizing solutions to meet our clients' specific needs and deliver reliable
solutions based on components that have been tested and perfected through
repeated use in other solutions.
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OUR STRATEGY
Our goal is to become the most recognized and sought-after provider of
Internet and electronic commerce services to medium-sized and large business
clients. To achieve this goal we plan to:
- EXPAND CLIENT RELATIONSHIPS
We plan to cross-sell our comprehensive range of Internet and electronic
commerce professional services to existing clients. We believe that if we
continue to provide sophisticated solutions to our clients:
- our existing clients will increase the amount, scope and complexity of
services they obtain from us;
- we will strengthen our reputation as a creative source for Internet and
electronic commerce solutions; and
- we will attract new clients through referral-driven sales.
This strategy should increase our revenue predictability and result in
additional and more extensive engagements with our clients.
- INCREASE REPEAT AND RECURRING REVENUES
Our strategy is to increase the proportion of our revenues which represents
repeat business with the same clients as well as the proportion of our recurring
revenues from our electronic commerce outsourcing services. We intend to
generate repeat revenues by cross-selling services and entering into multiple
engagements with our existing clients. In addition, we plan to increase
recurring revenues by selling additional electronic commerce outsourcing
services to our new and existing clients. We charge clients who use our
electronic commerce outsourcing services either a fixed monthly rate or on a per
transaction basis, or both. Our target contract length for electronic commerce
services is one year. Increasing repeat and recurring revenues will enable us to
predict our revenues with greater accuracy and improve our operating margins.
- BUILD AND ENHANCE COMPLEMENTARY SKILL SETS AND MAINTAIN TECHNOLOGICAL
EXPERTISE
Each additional skill set we develop improves our ability to better serve
our existing and future clients. We believe it is imperative for us to stay
abreast of the newest technological developments and evolving service offerings
in order to maintain the high level of quality of our services, increase the
effectiveness of our solutions and attract and retain qualified employees. We
continually research, test and evaluate new Internet and electronic commerce
technologies which we can incorporate into our solutions. Each engagement we
complete broadens our expertise and increases our knowledge, thereby enhancing
our ability to provide the most effective Internet and electronic commerce
solutions.
- EXPAND AND STRENGTHEN MARKETING AND TECHNOLOGY RELATIONSHIPS WITH LEADING
TECHNOLOGY VENDORS
We intend to further expand our marketing and technology relationships with
several leading technology vendors and build other relationships that will
promote our growth and enhance our position in the marketplace. We have
relationships with vendors such as Harbinger, Microsoft, Oracle, SAP and TSI
International Software. Our marketing relationships with these technology
vendors generally contemplate that we will engage in joint marketing programs to
cross-sell our services. Our technology relationships with these technology
vendors generally contemplate that vendors will give us access to products which
are still being developed in exchange for our feedback about such products. Our
non-exclusive marketing and technology relationships with technology vendors
help us generate business by increasing our name recognition and visibility in
the marketplace, providing us with new sales opportunities and early access to
the newest technologies, enabling us to cross-sell our services with prominent
technology vendors and increasing our access to vendor technical training and
support.
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We do not depend, however, on any one or all of these relationships to generate
business. While we do not derive revenues directly from these relationships,
from time to time we receive sales leads and client referrals from these
vendors.
- PURSUE CLIENT-DRIVEN GEOGRAPHIC EXPANSION
We intend to open additional offices both domestically and internationally
in order to better serve clients in locations where we have already attracted
business. This allows us to serve clients locally, cross-sell services to
existing local clients and win more local business. Each new office we have
opened has enhanced our ability to attract and service large clients and to hire
additional staff without relocation burdens. We currently have offices in 14
locations in the U.S., including the metropolitan areas of Boston, Denver,
Detroit, Los Angeles, New York City and Washington, DC.
- EXPAND AND DEVELOP INDUSTRY-SPECIFIC EXPERTISE
Through our experience designing, developing, implementing and managing
Internet and electronic commerce solutions for a wide variety of companies, we
have gained significant strategic knowledge and created industry-specific
reusable business solutions. This industry-specific expertise significantly
enhances our ability to help other companies in the same industries successfully
adopt Internet and electronic commerce solutions. To date, we have developed
reusable business solutions for the retail services, financial services,
healthcare, manufacturing and telecommunications industries. We intend to
broaden the range of industries in which we have specialized knowledge and
maximize the benefits to our clients of such knowledge by creating additional
industry-specific solution templates and reusable software. We employ strategic
consultants, sales, marketing and technical staff with expertise in industries
which we believe can realize significant benefits from Internet and electronic
commerce solutions. Further developing and strengthening this expertise will
increase our knowledge of industry specific business challenges and increase the
industry-targeted services we can offer, thereby improving our ability to
penetrate specific industries.
- ATTRACT AND RETAIN A HIGHLY SPECIALIZED WORKFORCE
We will continue to recruit highly skilled and experienced professionals who
have industry-specific expertise and who are proficient in a broad range of
technological and business skills. We intend to continue to ensure that our
employees have the requisite expertise to provide our clients with a
comprehensive range of Internet and electronic commerce professional services.
We have 11 full-time recruiters and often use recruitment firms as well. We also
attract employees through referral bonus programs and advertising on the
Internet. We plan to retain and motivate our employees by giving them the
opportunity to work with cutting-edge technologies, paying competitive
compensation packages, granting stock options, reimbursing tuition expenses and
encouraging a corporate culture that is results-driven and rewards creativity,
communication and cooperation.
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SERVICES
We offer a comprehensive range of professional services involving the
design, development, implementation and management of end-to-end Internet and
electronic commerce solutions. Our services include strategic consulting,
interactive media services, Internet-based application development, electronic
commerce systems integration and electronic commerce outsourcing, each of which
is described below. Our engagements generally include more than one of these
services.
[Diagram entitled "Strategic Consulting" outlining the interaction among AppNet
Systems, Inc.'s broad-based service offerings, including "Interactive Media
Services," "Internet-Based Application Development Services," "Electronic
Commerce Systems Integration Services" and "Electronic Commerce Outsourcing
Services."]
- STRATEGIC CONSULTING
Our business- and process-level strategic consulting services help our
clients successfully develop on-line businesses and improve their overall
business processes. We employ business-level strategic consulting to study
and analyze our clients' market position, operating requirements, systems
and capabilities to determine how our clients should use the Internet and
electronic commerce to accomplish their objectives. We work with clients to
incorporate Internet and electronic commerce solutions into their businesses
and assist in developing on-line businesses and on-line marketing
strategies. We employ process-level strategic consulting with clients that
have already incorporated Internet and electronic commerce solutions into
their businesses to assist them in improving their overall business
processes by incorporating on-line system architecture and design with
existing Internet and electronic commerce solutions, thereby improving
operating efficiencies and reducing costs.
- INTERACTIVE MEDIA SERVICES
Our interactive media services include creative Website design and
development, branding, which is the creation of a unique corporate identity
for a client and its products and developing on-line advertising strategies.
Developing on-line advertising strategies includes media buying and
planning, on-line ad placement, management, tracking and reporting and
on-line promotion and campaign development. As part of an on-line
advertising strategy, we also develop affinity programs that link businesses
by rewarding one business' clients with products and services of another
business. These services are designed to maximize our clients' return on
their investments in on-line businesses by generating and increasing the
number of visitors to a Website, enhancing user experience and increasing
the effectiveness of our clients' marketing efforts. We integrate these
services into our clients' overall solutions.
- INTERNET-BASED APPLICATION DEVELOPMENT
Internet-based application development is the development of software
applications that are capable of running on the Internet and are written in
languages such as Java, C++ and Visual Basic. These services are designed to
help our clients rapidly develop highly flexible and cost-effective business
applications. We develop corporate intranets, which are secure Websites
accessible only within a particular company, and electronic commerce systems
and we Web-enable legacy systems, which are existing systems, so that they
can operate on the Internet. We design and develop more effective Internet
and electronic commerce solutions by giving our clients on-line access to
the development of their solutions. We design, build and implement solutions
that are secure, adaptable and easy to use and manage.
- ELECTRONIC COMMERCE SYSTEMS INTEGRATION
Electronic commerce systems integration is the integration of electronic
commerce systems, which are systems that automate the receipt, processing
and delivery of transaction data and other information, with other corporate
software and computer-based applications such as Websites and accounting and
financial systems. These services are designed to rapidly install and
integrate our
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solutions with our clients' existing operations so our solutions become an
integral part of our clients' critical business systems. We install our
solution, convert all necessary data, perform acceptance testing and put the
system into operation. We also integrate the solution with back-office
existing legacy systems to ensure that each client's computer-based
applications operate seamlessly and with maximum security.
- ELECTRONIC COMMERCE OUTSOURCING
We perform electronic commerce services that would otherwise be handled
by the client's internal staff using the client's internal resources. Our
electronic commerce outsourcing services help clients rapidly launch and
implement electronic commerce solutions and then cost-effectively manage,
operate, maintain and continue to develop those solutions. We provide
business-to-business outsourcing services such as operating electronic data
interchange programs and transaction processing at our outsourcing center in
Pittsfield, MA, as well as at our customer's sites. We provide
business-to-consumer outsourcing services such as managing on-line stores,
transaction processing, managing and hosting Websites and the ongoing
management, technical operation, maintenance and development of electronic
commerce solutions at our outsourcing center in Laurel, MD, as well as at
our customer's sites.
ELECTRONIC COMMERCE OUTSOURCING CENTERS
We believe our outsourcing capabilities are a key component of our full
range of Internet and electronic commerce professional service offerings and
differentiate us from our competitors. Outsourcing enables us to effectively
manage, operate and maintain the electronic commerce systems we have developed
for our clients. Fees from outsourcing services currently represent a small
portion of our revenues. However, we expect that demand for outsourcing services
will increase over time as customers recognize that outsourcing is a
cost-effective solution. For example, outsourcing is an attractive choice for
those customers who lack the internal resources required to effectively build
and manage their own infrastructure or their critical business processes and who
are under pressure to get to market quickly.
At our business-to-business electronic commerce outsourcing center, we
process and manage thousands of transactions among hundreds of trading partners
on a variety of hardware and software platforms, over private networks, and the
Internet. We use EDI Control/400, our administrative software product, to
operate, monitor and analyze electronic data interchange programs through which
businesses and their trading partners exchange information electronically. EDI
Control/400 provides our customers with detailed transaction reporting, on-line
storage of data about the transactions, and multiple levels of security ensuring
only authorized user have access to and can exchange information. At our
business-to-consumer electronic commerce outsourcing center we manage on-line
stores, process transactions and manage and host Websites. Our Website managing
and hosting services include adding and editing material on a Website and making
sure the Website is operating according to its specifications.
Our outsourcing centers operate seven days a week, 24 hours a day. Our
outsourcing center staff proactively manages and monitors the operation of each
center using network management software, including proprietary technologies we
developed. We collect, process and respond to systems-level event information
and build and maintain a central repository for inventory and asset management
information. In addition, each of our outsourcing centers features multiple
levels of security which we believe protect our clients' private information by
isolating our electronic commerce outsourcing centers from public network
infrastructures.
CLIENTS
We market our services to medium-sized and large companies from a range of
industries which we believe can benefit from Internet and electronic commerce
solutions. Our engagements vary in scope from strategic consulting assignments
to designing and implementing complex and highly functional
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intranets and extranets. Because we can offer every client a complete spectrum
of Internet and electronic commerce professional services, we can customize each
of our engagements to fit a client's specific needs. Two of our clients, Ford
and the U.S. Government, accounted for 15% and 12%, respectively, of our total
revenues for 1998. After giving pro forma effect to the acquisitions we made in
1998 and 1999 as if they had occurred on January 1, 1998, our top ten customers
would have represented approximately 35% of our 1998 pro forma revenues.
Because of the strategic and competitively sensitive nature of the services
we perform for our clients, in many cases we have agreed to keep our clients'
identities confidential. Set forth below is a partial list of the clients to
whom we provided services in 1998 that we believe is representative of our
overall client base:
<TABLE>
<S> <C>
RETAIL AND CONSUMER SERVICES TELECOMMUNICATIONS AND TECHNOLOGY
Biztravel.com Computer Sciences Corp.
Burton Snowboards Ciena
Harmony House Comshare
Hertz Lockheed Martin Integrated Business Solutions
K*B Toys FINANCIAL SERVICES
MANUFACTURING AND INDUSTRIAL @rts @lliance
Ciba Specialty Chemicals Ford Motor Credit
Dial Multex Systems
Hyundai Norwest
Johnson Controls HEALTHCARE AND PHARMACEUTICALS
NEC Acuson
Norrell Allergan Services
The Electronic Imaging Division of Toshiba Blue Cross and Blue Shield of Michigan
America Information Systems, Inc. Baxter Healthcare
Unilever 3M
MEDIA AND ENTERTAINMENT GOVERNMENT AND NONPROFIT
Cablevision AAA
Cisneros Group INTELSAT
GeoCities NASA
Grey Interactive National Library of Medicine
McCann-Erickson University of Michigan
Playboy Enterprises World Wildlife Fund
</TABLE>
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EXAMPLES OF OUR INTERNET AND ELECTRONIC COMMERCE SOLUTIONS
The following examples illustrate the kinds of Internet and electronic
commerce solutions we have developed for specific clients.
THE ELECTRONIC IMAGING DIVISION OF TOSHIBA AMERICA INFORMATION SYSTEMS, INC.
Challenge: Design and implement a restricted access dealer extranet system.
Solution: We developed the community, Web-interface and database elements of
Toshiba's FYI Dealer Extranet, an on-line system for dealers that provides a
common interface in addition to customized information that meets each
individual dealer's requirements. We designed security features which protect
market-sensitive information from unauthorized users. A conditional access
system, driven by a complex database user-authorization scheme, offers multiple
read-and-write user access levels. Employees, dealers and distributors have the
opportunity to build relationships on this Dealer Extranet. This electronic
commerce and informational site is designed to simplify ordering and shipping of
more than 10,000 spare-part SKUs for fax machines and copiers.
BURTON SNOWBOARDS
Challenge: Design and implement an on-line inventory and supply-chain
management system.
Solution: We designed and implemented an on-line inventory and supply-chain
management system that Burton management uses to control changing inventory,
manage materials and track product placement. Our solution accommodates multiple
languages and currencies and is able to generate detailed reports. Our solution
is designed to improve Burton's efficiency in managing its inventory and
supply-chain and reducing production overruns and overall costs.
AMERICA ONLINE, INC. OR AOL
Challenge: Develop a content investment strategy.
Solution: We helped AOL launch the AOL Greenhouse, a division of AOL
Studios. Our work included assisting the President of AOL Greenhouse to
establish a process for selecting and managing a portfolio of content
investments. We assisted with the development of the division's organizational
structure and portfolio management strategy. AOL invested in Internet companies,
including The Motley Fool, Inc., Hecklers On-Line and iVillage.
RETIRED PERSONS SERVICES, INC. OR RPS
Challenge: Provide technical assistance to Retired Persons Services, Inc.,
provider of the AARP Pharmacy Service, in the ongoing design, implementation and
management of its on-line pharmacy.
Solution: RPSPharmacy.com provides AARP members and others with the option
of ordering prescription refills and nonprescription pharmacy products over the
Internet. The on-line pharmacy incorporates features such as health information
to facilitate condition management and product selection, comparison of
brand-name and generic alternatives, information about related products and
special offers, patient profiling for drug utilization review and links to other
sources of health information.
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GOVERNMENT TECHNOLOGY SERVICES, INC. OR GTSI
Challenge: Design and implement an on-line computer store.
Solution: We designed and implemented an on-line computer store that enables
Federal customers to price and purchase approximately 150,000 computer products
over the Internet. The solution we developed provides customized shopping
experiences for many customers. Using our solution, GTSI hopes to streamline the
purchasing process for its customers.
K*B TOYS
Challenge: Design, implement and operate an EDI program that would
accurately process and track orders, shipping notices, invoices and other time
sensitive data, including point-of-sale information, to support streamlined
procurement and distribution center operations.
Solution: We designed and implemented an EDI program for K*B Toys to manage
inventory levels and merchandise replenishment at over 1300 mall-based stores.
Our solution incorporated features such as mapping schemes for translation of
data and network and Internet routing schemes for data delivery. Our solution is
designed to reduce communications costs, improve the efficiency of K*B Toys'
business processes and allow it to focus on its core retailing business.
HARMONY HOUSE
Challenge: Design and develop an on-line music store which would complement
its 34 retail outlets.
Solution: We designed and implemented an on-line music store that enables
customers to search for, listen to and purchase music products over the
Internet. Our solution incorporated features such as searchable databases and
music guides, selectable music samples and management features for site update
and promotion and order management. Our solution is designed to build brand
recognition and loyalty and establish an additional distribution channel.
MULTEX SYSTEMS
Challenge: Design and develop a Web-based ad campaign to increase site
traffic and trading volume and decrease the per customer acquisition cost.
Solution: We crafted a media plan which included the creation of multiple
banner ads. Using our proprietary service, AdMaximize, we served banner ads,
tracked banner ad performance and collected real-time data on click-through,
lead generation, customer acquisition and sales. Based on Multex's and our
collective analysis of this data, we were able to make real-time adjustments to
Multex's ad campaign. Our solution is designed to increase overall membership
for Multex, increase its revenues per new member and decrease its cost to
acquire new members via the Web.
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SALES AND MARKETING
As of May 1, 1999, we employed 26 full-time sales professionals. Three
corporate sales professionals concentrate on our Internet and electronic
commerce professional services to clients in the industries in which they have
extensive expertise. The other 23 members of our sales force are service-focused
and concentrate on selling individual services as well as cross-selling all of
our service offerings. Our vice president of corporate sales coordinates the
efforts of our corporate and service-focused sales personnel.
Our marketing strategy is to demonstrate to our potential clients the
advantages of Internet and electronic commerce solutions, and our expertise and
success in designing, developing, implementing and managing end-to-end
solutions. In addition, we have retained an outside public relations and
advertising firm to assist us with our marketing efforts on a company-wide
basis. Our two full-time corporate marketing professionals concentrate on
promoting and enhancing our brand on a nationwide basis. Our five full-time
service-focused marketing professionals concentrate on marketing a set of our
services, often to a targeted audience or in their local markets.
Our sales and marketing strategy is built upon the following directives:
- ENHANCE OUR BRAND AND IMPROVE OUR MARKET POSITIONING
Our goal is to become the most recognized and sought-after provider of
Internet and electronic commerce professional services to medium-sized and
large business clients. To do so, we must continue to enhance our brand and
reputation. Our brand development programs deliver the message that we are a
national company with the experience and resources to meet all of our
clients' Internet and electronic commerce services needs. To build and
differentiate our brand, we use publicity campaigns that appear on the
Internet, in print advertising, at trade shows and in educational white
papers. We also take advantage of the opportunity to strengthen our brand by
developing relationships with strategic partners. As we enhance our
industry-specific expertise, we intend to develop sales and marketing
programs targeted to specific industries.
- MANAGE OUR CLIENTS' ACCOUNTS EFFECTIVELY
Corporate sales professionals direct client leads to the appropriate
service-focused salesperson. Our corporate sales professionals also manage
accounts for large clients with multiple locations and ensure each part of
our clients' accounts are served by the technical staff which can best meet
their needs.
- CROSS-SELL SERVICES
As we integrate the diverse client bases of the companies we acquired,
we intend to continue to take advantage of opportunities to cross-sell our
services to existing clients. We intend to train every member of our sales
force to cross-sell our entire range of services. In addition, we are
creating uniform marketing and sales materials which describe the wide range
of services we offer and position AppNet as a provider of end-to-end
Internet and electronic commerce solutions.
In each of our professional services engagements, a client can contract for
the specific services it requires. We bill most of our engagements on a time and
materials basis, although we have entered into several engagements on a
fixed-price basis. Clients who use our electronic commerce outsourcing services
are charged either a fixed monthly rate or on a per transaction basis, or both.
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COMPETITION
The markets for Internet and electronic commerce professional services are
relatively new, intensely competitive, quickly evolving and subject to rapid
technological change. We expect competition to continue and intensify in the
foreseeable future.
Our competitors can be divided into several groups:
- Internet professional services providers, such as Agency.com, iXL,
Proxicom, Razorfish, Scient, Think New Ideas, US Interactive, USWeb/CKS
and Viant;
- large information technology consulting services providers, such as
Andersen Consulting, Cambridge Technology Partners, CSC, EDS, IBM and
Sapient;
- interactive advertising agencies, such as Darwin Digital, Giant Step, Grey
Interactive, Modem Media . Poppe Tyson and Thunderhouse;
- electronic commerce software and service providers, such as BroadVision,
Harbinger, Open Market and Sterling Commerce; and
- Internet access and service providers, such as Abovenet, Exodus and
Frontier/Global.
We believe we can distinguish ourselves from our competitors by offering our
clients end-to-end Internet and electronic commerce solutions. We believe we can
compete effectively on the basis of our comprehensive range of services,
technical expertise, creative talent, brand or name recognition and the speed,
reliability and price of the services we provide. However, our competitors have
also begun to offer a variety of Internet and electronic commerce professional
services, rather than specialize in one area, or have announced their intention
to do so. These companies may continue to expand their operations so that they
offer a full range of business-to-business and business-to-consumer Internet and
electronic commerce professional services and products.
There are relatively low barriers to entry into our business. We do not own
any patent technology that precludes or inhibits competitors from entering our
markets. The costs to develop and provide Internet or electronic commerce
professional services are low. Therefore, we expect to continue to face
additional competition from new entrants into our markets. Many of our
competitors have greater financial, technical, marketing and public relations
resources than AppNet. A number of our outsourcing competitors have made
substantial capital investments in their infrastructure. Because many of our
competitors have longer operating histories than we do, many of them also have
greater brand or name recognition, larger client bases and longer client
relationships on which they can rely for generating business.
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ACQUIRED COMPANIES
Our goal in founding AppNet was to build a company that could offer a
comprehensive range of Internet and electronic commerce professional services.
We began by developing a detailed strategic plan that identified the specific
professional services that are required to provide clients with end-to-end
solutions. These services were strategic consulting, interactive media services,
Internet-based application development, electronic commerce systems integration
and electronic commerce outsourcing. We then identified a group of companies
that excelled in providing services in one or more of these professional
services areas. After reviewing and evaluating over 100 companies, we ultimately
acquired a set of companies that we believe fit together strategically and
culturally and that, when integrated with one another, could design, develop,
implement and manage end-to-end solutions.
[Chart placing the companies acquired by AppNet Systems, Inc. into four
broad-based service categories, including "Strategic Consulting," "Interactive
Media Services," "Internet-Based Application Development Services" and
"Electronic Commerce Systems Integration and Outsourcing Services."]
ARBOR INTELLIGENT SYSTEMS, INC. We acquired substantially all of the assets
of Arbor Intelligent Systems on March 12, 1998. Arbor specialized in
Internet-based applications development, providing object-oriented development
services to our customers. It had approximately 30 consulting professionals as
of the date of the acquisition. We paid approximately $3.1 million for Arbor
with a combination of cash and shares of our Series A-1 Preferred Stock that
have since been converted into our common stock. During 1997, Arbor had revenues
of approximately $3.1 million.
LOGEX INTERNATIONAL, L.L.C. We acquired substantially all of the assets of
LOGEX International on April 30, 1998. LOGEX specialized in electronic commerce
systems integration and outsourcing, providing electronic commerce systems
integration services to our customers. It had approximately nine consulting
professionals as of the date of the acquisition. We paid approximately $600,000
for LOGEX with a combination of cash and a convertible promissory note. The
former LOGEX stockholders are also entitled to a potential contingent payment
payable in cash based on the achievement of agreed-upon performance criteria for
the one-year period ending on April 30, 1999.
SOFTWARE SERVICES CORPORATION. We acquired Software Services Corporation on
August 25, 1998. Software Services specialized in Internet-based applications
development, providing applications development, network architecture and design
services to our customers. It had approximately 190 consulting professionals as
of the date of the acquisition. We paid approximately $22.9 million for Software
Services with a combination of cash and shares of our common stock and Class B
Preferred Stock. During 1997, Software Services had revenues of approximately
$13.3 million.
NEW MEDIA PUBLISHING, INC. We acquired New Media Publishing on October 2,
1998. New Media Publishing specialized in interactive media services, providing
interactive community-building services to our customers. It had approximately
40 consulting professionals as of the date of the acquisition. We paid
approximately $19.0 million for New Media Publishing with a combination of cash,
shares of our common stock and options to purchase shares of our common stock.
The former New Media Publishing stockholders are also entitled to a potential
contingent payment payable in cash and in shares of our common stock of up to
$14.0 million based upon the achievement of agreed-upon performance criteria for
the 12-month period ending on September 30, 1999. During 1997, New Media
Publishing had revenues of approximately $3.0 million.
CENTURY COMPUTING, INCORPORATED. We acquired Century Computing on October
12, 1998. Century specialized in electronic commerce systems integration and
outsourcing, providing systems integration and processing services to our
customers. It had approximately 81 consulting professionals as of the date of
the acquisition. We paid approximately $29.0 million for Century with a
combination of cash, a
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convertible promissory note and options to purchase shares of our common stock.
During 1997, Century had revenues of approximately $10.9 million.
RESEARCH & PLANNING, INC. We acquired Research & Planning on October 20,
1998. Research & Planning specialized in electronic commerce systems integration
and outsourcing, providing enterprise resource planning and integration and data
warehousing services to our customers. It had approximately 40 consulting
professionals as of the date of the acquisition. We paid approximately $20.5
million for Research & Planning with a combination of cash, promissory notes and
shares of our common stock. During 1997, Research & Planning had revenues of
approximately $4.8 million.
THE KODIAK GROUP, INC. We acquired The Kodiak Group on December 14, 1998.
Kodiak specialized in electronic commerce systems integration and outsourcing,
providing EDI integration and processing services to our customers. It had
approximately 35 consulting professionals as of the date of the acquisition. We
paid approximately $15.6 million for Kodiak with a combination of cash,
convertible promissory notes and shares of our common stock. In addition, the
former Kodiak stockholders are entitled to a potential contingent payment
payable in cash of up to $4.0 million in the event that, during the three-year
period ending on December 14, 2001, Kodiak sells or licenses technology it
developed. During 1997, Kodiak had revenues of approximately $3.7 million.
I33 COMMUNICATIONS CORP. We acquired i33 communications corp. on January 8,
1999. i33 communications specialized in interactive media services, providing
media buying and planning services to our customers. It had approximately 40
consulting professionals as of the date of the acquisition. We paid
approximately $21.6 million for i33 communications with a combination of cash
and convertible promissory notes. During 1998, i33 communications had revenues
of approximately $4.4 million.
SIGMA6, INC. We acquired Sigma6, Inc. on March 4, 1999. Sigma6 specialized
in interactive media services, providing brand identity services to our
customers. Sigma6 had approximately 25 consulting professionals as of the date
of the acquisition. We paid approximately $2.5 million for Sigma6 with a
combination of cash and shares of our common stock. The former Sigma6
stockholders are also entitled to a potential contingent payment payable in cash
and in shares of our common stock of up to $2.8 million based on the achievement
of agreed-upon performance criteria during the 12-month period ending on
December 31, 1999. During 1998, Sigma6 had revenues of approximately $1.8
million.
SALZINGER & COMPANY, INC. We acquired substantially all of the assets of
Salzinger & Company on March 15, 1999. Salzinger & Company specialized in
strategic consulting, providing business-level strategic consulting services to
our customers. It had approximately eight consulting professionals as of the
date of the acquisition. We paid approximately $8.5 million for Salzinger &
Company with a combination of cash and shares of our common stock. Salzinger &
Company is also entitled to a potential contingent payment, payable in cash or,
at the seller's option, in cash and in shares of our common stock, of up to $5.0
million based on the achievement of agreed-upon performance criteria during the
period beginning on April 1, 1999 and ending on September 30, 2000. During 1998,
Salzinger & Company had revenues of approximately $3.1 million.
INTERNET OUTFITTERS, INC. We acquired Internet Outfitters on March 26,
1999. Internet Outfitters specialized in interactive media services, providing
localization and creative Web-development services to our customers. It had
approximately 25 consulting professionals as of the date of the acquisition. We
paid approximately $9.5 million for Internet Outfitters with a combination of
cash, shares of our common stock and options to purchase shares of our common
stock. The former Internet Outfitters stockholders are also entitled to receive
a potential contingent payment payable in cash and in shares of our common stock
of up to $3.5 million based on the achievement of agreed-upon performance
criteria for the year ending on December 31, 1999. During 1998, Internet
Outfitters had revenues of approximately $2.3 million.
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In connection with our acquisition of Internet Outfitters, approximately
$1.45 million of the purchase price, based upon the fair value of $17.10 per
share at the date of acquisition, in the form of shares of our common stock was
pledged to us and escrowed to be available to satisfy any potential liability in
connection with a license dispute. We also held back $750,000 of the cash
purchase price to be used to satisfy indemnification claims, including any
potential liability arising from such license dispute. These amounts will be
paid on the earlier of the date the dispute is resolved in a manner satisfactory
to us or June 30, 2001. A licensor of software used by a client of Internet
Outfitters has asserted that Internet Outfitters caused the client to underpay
the licensor in the amount of $2.2 million. Outfitters has denied any liability
for those additional amounts. In management's opinion, based on all known facts,
the software licensor's claim is without merit, however, if disposed of
unfavorably to Appnet, it could materially adversely affect us.
TRANSFORM IT, INCORPORATED. We acquired substantially all of the assets of
TransForm IT on March 29, 1999. TransForm IT specialized in strategic
consulting, providing process-level strategic consulting services to our
customers. It had approximately 10 consulting professionals as of the date of
the acquisition. We paid approximately $5.1 million for TransForm IT with a
combination of cash and shares of our common stock. TransForm IT is also
entitled to receive potential contingent payments payable in cash of up to $3.5
million based on the achievement of agreed-upon performance criteria during the
12-month period ending on March 31, 2000. In addition, the employees of
Transform Acquisition Corp., a subsidiary formed by AppNet to acquire TransForm
IT, are entitled to receive potential contingent payments payable in options to
purchase shares of our common stock based on the achievement of various revenue
levels during the 12-month period ending on March 31, 2000. During 1998,
TransForm IT had revenues of approximately $3.1 million.
We have developed a detailed process to fully integrate each acquisition
into our existing operations and create one seamless organization. We have begun
completing the integration tasks laid out in this detailed process. This
detailed process focuses on integrating the delivery of our professional
services, our sales and marketing functions, our knowledge management system and
our back-office functions.
By integrating the delivery of professional services, we can more
efficiently manage projects, provide better quality control, increase the
quality of our work and provide better customer service. By integrating our
sales and marketing functions, we can more efficiently generate leads and win
new business, provide superior customer service, coordinate the delivery of more
effective marketing messages and better train our sales personnel. By
integrating the way we manage our knowledge on a company-wide basis, we can more
efficiently interact and share information with our employees and customers,
reduce the time it takes to develop solutions for our clients, increase the
quality of our work and provide better customer service. By integrating our
back-office functions we can more efficiently monitor and manage our business,
recruit and retain employees, and administer corporate-wide benefit programs.
EMPLOYEES
As of May 1, 1999, we had approximately 755 employees. Our continuing
success will depend in large part on our ability to attract, motivate and retain
employees who are qualified to offer the services we provide. Competition for
qualified employees is intense. We believe we have been successful to date in
attracting and retaining qualified employees. Our strategy for attracting,
motivating and retaining our employees is to pay competitive salaries and cash
bonuses, grant stock options, reimburse tuition expenses and encourage a
corporate culture that is results-driven and rewards creativity, communication
and cooperation.
We believe our relationship with our employees is satisfactory. None of our
employees is represented by a union. Generally, our employees are retained on an
at-will basis and many of our key
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employees are subject to employment agreements. All of our senior managers, as
well as most of our key employees, are required to sign confidentiality
agreements and non-competition agreements which prohibit them from competing
with us during their employment and for various periods thereafter.
PROPERTIES
Our headquarters are located in Bethesda, MD and consist of approximately
13,400 square feet of leased space, the lease for which expires in May 2005. We
also lease office space in Santa Monica, CA, Golden, CO, Stamford, CT, Laurel,
MD, Cambridge, MA, Pittsfield, MA, Ann Arbor, MI, Detroit, MI, New York, NY,
Charlottesville, VA, Falls Church, VA, Vienna, VA and Amsterdam, The
Netherlands. We do not own any real estate. We do not consider any specific
leased location to be material to our operations and we believe that equally
suitable alternative locations are available in all areas where we currently do
business.
LEGAL PROCEEDINGS
We are not a party to any pending material legal proceedings.
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MANAGEMENT
EXECUTIVE OFFICERS AND DIRECTORS
Information regarding our executive officers and directors as of May 21,
1999 is set forth below. Each director's term of office will expire at our next
annual meeting of stockholders. Each officer's term of office will expire at the
first Board of Directors meeting held after our next annual meeting of
stockholders.
<TABLE>
<CAPTION>
NAME AGE POSITION
- ----------------------------------- --- ----------------------------------------------------------------------
<S> <C> <C>
Ken S. Bajaj....................... 57 Chairman of the Board of Directors, President and Chief Executive
Officer
Jack Pearlstein.................... 35 Senior Vice President, Chief Financial Officer, Treasurer and
Secretary
Toby Tobaccowala................... 60 Senior Vice President
Robert G. Harvey................... 49 Senior Vice President--Software Development Services
Robert D. McCalley................. 59 Senior Vice President--Electronic Commerce
John Cross......................... 56 Director, Executive Vice President--Strategic Consulting
William S. Dawson.................. 43 Vice President--General Counsel
Ronald B. Alexander................ 51 Senior Vice President--Finance
Philip A. Canfield................. 31 Director
Thomas M. Davidson................. 62 Director
Bruce V. Rauner.................... 43 Director
</TABLE>
KEN S. BAJAJ. Mr. Bajaj has been Chairman of our Board of Directors,
President and Chief Executive Officer since November 1997. Mr. Bajaj was Vice
Chairman of Wang Laboratories, Inc. from March 1997 until November 1997. He
joined Wang Laboratories, Inc. when that company acquired I-NET, Inc. in 1996;
at that time he was President of I-NET, Inc., a position he held from 1988 until
1996. Before joining I-NET, Inc., Mr. Bajaj had been a Vice President at
Electronic Data Systems, Inc. since 1978. Mr. Bajaj has an M.S. in electrical
engineering from the University of Toronto and a Ph.D. in systems science from
Michigan State University.
JACK PEARLSTEIN. Mr. Pearlstein has been our Senior Vice President since
July 1998 and our Chief Financial Officer, Treasurer and Secretary since May
1999. Prior to that time, Mr. Pearlstein was a Managing Director and principal
of Foxhall Capital, LLC from November 1996 until July 1998. Prior to this time,
he was Director--Mergers and Acquisitions at Digicon Corporation from November
1995 to November 1996. From September 1994 until November 1995, he was a senior
associate at Merge Global, Inc. From June 1993 until August 1994, he was a
financial analyst at Legg Mason. Mr. Pearlstein has a B.S. in Accounting from
New York University and an M.B.A. in Finance from the George Washington
University.
TOBY TOBACCOWALA. Mr. Tobaccowala has been our Senior Vice President since
August 1998. Prior to August 1998, Mr. Tobaccowala was Chief Executive Officer
and a director of Commerce Direct International for one year. Before joining
Commerce Direct International, Mr. Tobaccowala was employed by the Media
Strategic Business Unit of Electronic Data Systems, Inc. from 1973 until 1996,
most recently as President. He has an M.B.A. from the Bajaj Institute of
Management Studies.
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ROBERT G. HARVEY. Mr. Harvey has been our Senior Vice President--Software
Development Services since February 1998. Mr. Harvey was General Manager,
Midwest Operations of Wang Laboratories, Inc. from August 1996 until September
1997. He joined Wang Laboratories, Inc. when that company acquired I-NET, Inc.
in 1996; at that time he was General Manager, Midwest Operations at I-NET, Inc.,
a position he held from April 1994 until August 1996. Mr. Harvey has a B.S. in
mathematics from California State University and an M.S. in both computer
science and management from the University of California. Mr. Harvey serves in
the U.S. Army Reserve as a Colonel and in the Military Intelligence and Military
Police Corps.
ROBERT D. MCCALLEY. Mr. McCalley has been our Senior Vice
President--Electronic Commerce since February 1998. Prior to that time, Mr.
McCalley was Vice President, Wide Area Network Division of Wang Laboratories,
Inc. He joined Wang Laboratories, Inc. when that company acquired I-NET, Inc. in
1996; at that time he was Vice President, Commercial Services, at I-NET, Inc., a
company he joined in April 1991. Mr. McCalley has a B.S. in Mechanical
Engineering from George Washington University.
JOHN CROSS. Mr. Cross has been on our Board of Directors since June 1998
and our Executive Vice President--Strategic Consulting since March 1999. Mr.
Cross was the Group Vice President of Information Technology for BP Amoco
Corporation from 1998 until 1999. Mr. Cross was the Chief Information Officer
for the British Petroleum Group from 1993 until 1998. Prior to 1993, he was
General Manager for information technology in the Exploration and Production
Company of British Petroleum. Mr. Cross has a B.S. in economics and business
management from the University of Natal, South Africa.
WILLIAM S. DAWSON. Mr. Dawson has been our Vice President--General Counsel
since May 1999. Mr. Dawson was General Counsel and Secretary of SPACEHAB, Inc.
from April 1996 until May 1999. From February 1989 until April 1996, Mr. Dawson
was Senior Counsel, and subsequently Associate General Counsel, of Government
Technology Services, Inc. Prior to joining Government Technology Services, Inc.,
Mr. Dawson was an attorney with Seyforth, Shaw, Fairweather & Geraldson from
February 1986 until February 1989 and Watt, Tieder, Killian & Hoffar from May
1984 until February 1986. Mr. Dawson has a B.A. from Gordon College and a J.D.
from Catholic University Law School.
RONALD B. ALEXANDER. Mr. Alexander has been our Senior Vice President since
September 1998. He was our Chief Financial Officer from September 1998 to May
1999 and our Treasurer and Secretary from January 1999 to May 1999. Mr.
Alexander was Senior Vice President and Chief Financial Officer of GRC
International from April 1996 until September 1998. From 1994 until April 1996,
Mr. Alexander was Chief Financial Officer of Network Imaging Corporation. In
prior positions, Mr. Alexander was a Managing Director of the Blackstone Group,
a New York investment banking firm and Chief Financial Officer of Commodore
International, one of the original developers of the personal computer. Mr.
Alexander has a B.A. in physics and math from Columbia College, a J.D. from
Columbia Law School and an L.L.M. in taxation from New York University.
PHILIP A. CANFIELD. Mr. Canfield has been on our Board of Directors since
June 1998. He has been a principal at GTCR Golder Rauner, L.L.C. since 1997 and
an associate from 1992 until 1997. Prior to 1992, Mr. Canfield worked in the
corporate finance department of Kidder, Peabody & Co. He has a B.S. in finance
from the Honors Business Program at the University of Texas at Austin and an
M.B.A. from the University of Chicago. Mr. Canfield is also a director of AETEA
Information Technology, Inc., VISTA Information Technologies, Inc. and several
other private companies in GTCR's portfolio.
THOMAS M. DAVIDSON. Mr. Davidson has been on our Board of Directors since
June 1998. Mr. Davidson has been President and Chief Executive Officer of
Davidson Capital Group LLC since June 1998. From June 1997 until April 1998, Mr.
Davidson was a Managing Director of Washington Equity Partners. Prior to that,
he was a partner at the law firm of Reed, Smith, Shaw & McClay. From
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1995 until March 1997, Mr. Davidson was a partner at the law firm of Coffield,
Ungaretti & Harris. Mr. Davidson was a partner at the law firm of Verner,
Liipfert, Bernhard, McPherson & Hand from 1993 until 1995. He has a B.A. from
Williams College and an LL.D. from Duke University.
BRUCE V. RAUNER. Mr. Rauner has been on our Board of Directors since June
1998. Mr. Rauner is a managing principal of GTCR Golder Rauner, L.L.C. and has
been a principal of GTCR since 1981. Mr. Rauner has a B.A. from Dartmouth
College and an M.B.A. from Harvard University. Mr. Rauner is also a director of
AnswerThink Consulting Group, Inc., Lason, Inc., Coinmach Laundry Corporation,
Polymer Group, Inc., Province Healthcare, Inc., Esquire Communications Ltd. and
private companies in GTCR's portfolio.
RICHARD N. PERLE. Mr. Perle has agreed to join our Board of Directors for
an initial term of office to expire at our next annual meeting of stockholders.
Mr. Perle is currently director of the American Enterprise Institute's
Commission on Future Defenses. From 1981 until 1987, he was Assistant Secretary
of Defense for International Security Policy of the U.S. Department of Defense.
Mr. Perle is currently the Chairman of Hollinger Digital, Inc. and a director of
Hollinger International, Inc., Geobiotics, American Interactive Media, Inc. and
Morgan Crucible, PLC. Mr. Perle has a B.A. in International Relations from the
University of Southern California and an M.A. from Princeton University.
BOARD OF DIRECTORS
Our Board of Directors is currently composed of five directors. Each of the
current members of the Board of Directors has been elected in accordance with
the terms of the Stockholders' Agreement, dated as of June 29, 1998, by and
among AppNet and substantially all of our current stockholders, which will
terminate upon consummation of this offering. We intend to expand the Board to
include two outside directors after this offering. Prior to consummation of the
offering, AppNet and GTCR will enter into an agreement that provides that as
long as GTCR owns at least 15% of the shares owned by it immediately after the
consummation of the Offering, AppNet will nominate at least one GTCR designee to
the Board.
COMMITTEES OF THE BOARD OF DIRECTORS
After completion of this offering, we intend to establish an Audit Committee
and a Compensation Committee, each composed of a majority of independent
directors. The Audit Committee will recommend the annual appointment of our
auditors with whom the Audit Committee will review the scope of audit and
non-audit assignments and related fees, accounting principles we use in
financial reporting, internal auditing procedures and the adequacy of our
internal control procedures. The Compensation Committee will make
recommendations to the Board of Directors regarding compensation for our
executive officers. GTCR will be entitled to appoint its designee to the
Compensation Committee.
COMPENSATION OF DIRECTORS
Directors who are also employees of AppNet receive no additional
compensation for their services as directors. Directors who are not AppNet
employees will not receive a fee for attendance in person at meetings of the
Board of Directors or committees of the Board of Directors, but they will be
reimbursed for travel expenses and other out-of-pocket costs incurred in
connection with the attendance of meetings. Non-employee directors will receive
options to purchase our common stock in connection with their appointment to the
Board of Directors. Non-employee directors will also receive automatic grants of
options to purchase our common stock each year that they are re-elected to the
Board of Directors.
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LIMITATIONS ON LIABILITY AND INDEMNIFICATION MATTERS
The Delaware General Corporation Law provides that a company may indemnify
its directors and officers against liabilities they may incur as a result of
their service as a director of officer. Our certificate of incorporation and
bylaws provide for the indemnification of our directors and officers to the
fullest extent permitted by law. The effect of such provisions is to indemnify
our directors and officers against all costs, expenses and liabilities incurred
by them in connection with actions, suits or proceedings in which they are
involved because of their affiliation with us. In addition, we intend to obtain
director and officer liability insurance to effectuate these provisions.
EXECUTIVE COMPENSATION
The following table sets forth a summary of compensation for services
rendered in all capacities to us by the Chief Executive Officer and President
and each of our four other most highly paid executive officers.
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
OTHER
ANNUAL COMPENSATION ANNUAL
----------------------------------- COMPEN-
NAME AND PRINCIPAL POSITIONS YEAR SALARY BONUS SATION
- --------------------------------------------------------- --------- ------------ ---------- ----------
<S> <C> <C> <C> <C>
Ken S. Bajaj
President and Chief Executive Officer(a)............... 1998 $ $ $
Toby Tobaccowala
Senior Vice President.................................. 1998 90,278(b) 15,000
Ronald B. Alexander
Senior Vice President--Finance......................... 1998 63,135(c) 10,000 50,000(f)
Robert G. Harvey
Senior Vice President--Software Development Services... 1998 114,250(d) 40,000(g)
Robert D. McCalley
Senior Vice President--Electronic Commerce............. 1998 114,330(d) 40,000(g)
Terrence M. McManus
Senior Vice President, Secretary & Treasurer(e)........ 1998 123,547(d) 40,000(g)
</TABLE>
- ------------------------
(a) Mr. Bajaj began to receive an annual base salary of $300,000 in May 1999.
Prior to May 1999, Mr. Bajaj elected not to receive any compensation.
(b) Mr. Tobaccowala began to work for us in July 1998. The salary set forth
above for 1998 represents his salary for the six-month period from July to
December 1998.
(c) Mr. Alexander began to work for us in September 1998. The salary set forth
above for 1998 represents his salary for the four-month period from
September to December 1998.
(d) Messrs. Harvey, McCalley and McManus each began to work for us in February
1998. The salaries set forth above for 1998 represents their respective
salaries for the eleven-month period from February to December 1998.
(e) Mr. McManus resigned as of December 31, 1998.
(f) Mr. Alexander earned a $50,000 signing bonus in 1998, which will be paid
upon consummation of this offering.
(g) Messrs. Harvey, McCalley and McManus each received 56,140 shares of our
common stock as partial compensation for services rendered from February 1,
1998 to May 31, 1998.
OPTION GRANTS AND EXERCISES DURING 1998
No stock options to purchase our common stock were granted to or exercised
by the executive officers named in the table above during 1998.
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EMPLOYMENT AGREEMENTS
We have entered into a senior management agreement with Mr. Bajaj, dated as
of June 29, 1998, which provides for his employment as our President and Chief
Executive Officer until he resigns, is disabled, as determined by the Board of
Directors in its good faith judgment, dies or is terminated by the Board of
Directors for any reason. Mr. Bajaj began to receive an annual base salary of
$300,000 in May 1999, subject to increases as determined by the Board of
Directors based upon AppNet's achievement of budgetary and other objectives set
by the Board of Directors. He will also be eligible to receive a bonus of up to
50% of his salary based upon AppNet's achievement of budgetary and other
objectives set by the Board of Directors.
The senior management agreement contains provisions requiring Mr. Bajaj to
protect the confidentiality of our proprietary and confidential information. In
addition, Mr. Bajaj is prohibited, during his employment at AppNet and for 18
months after such employment ends, from competing with AppNet, soliciting any of
our employees or interfering with any of our business relationships.
The senior management agreement also restricts the transfer of all shares of
AppNet common stock Mr. Bajaj owned as of the date of the agreement until June
29, 2003, subject to specific exceptions, including:
- sales in a registered public offering; and
- sales, subject to volume limitations imposed by the senior management
agreement, under Rule 144 under the Securities Act.
The registration agreement between AppNet and substantially all of its existing
stockholders dated as of June 29, 1998 states that Mr. Bajaj may request that
his shares of AppNet common stock be included on any registration statement
filed by AppNet:
- to register common stock held by GTCR and Smart Technology; or
- on its own behalf, other than in this offering.
The senior management agreement provides that if Mr. Bajaj's employment with
us terminates before June 30, 2001, AppNet may repurchase shares of its common
stock owned by Mr. Bajaj or his permitted transferees at a price of $0.0029 per
share. The number of shares which AppNet may repurchase upon these terms is
2,036,632 until June 29, 1999, 1,358,109 until June 29, 2000 and 679,004 until
June 29, 2001, after which AppNet's right to repurchase Mr. Bajaj's common stock
terminates. If AppNet does not exercise its repurchase right, GTCR and Smart
Technology may repurchase these shares at a price of $0.0029 per share and
contribute them to AppNet in exchange for a promissory note equal to the
aggregate purchase price of such shares. GTCR's and Smart Technology's
repurchase right terminates upon the earliest of:
- the sale of capital stock with the voting power to elect a majority of the
Board of Directors to persons or entities other than GTCR and Smart
Technology, other than in a public offering;
- the sale of all or substantially all of our assets;
- GTCR and its affiliates failing to own more than 50% of the common stock
GTCR purchased under the Purchase Agreement dated June 29, 1998, as
amended; and
- June 30, 2001.
AppNet also has the right, under Mr. Bajaj's senior management agreement, if
it issues or sells common stock or rights to acquire common stock to its
employees, to repurchase up to 1,251,228 shares of common stock at a price of
$0.3007 per share from Mr. Bajaj, whether held by Mr. Bajaj or his permitted
transferees, to be issued or sold to such employees. As of May 1, 1999, AppNet
had repurchased a total of 1,041,109 of such shares from Mr. Bajaj for an
aggregate purchase price of
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$313,035. Upon the termination of Mr. Bajaj's employment, AppNet has the right
to repurchase all of this common stock, whether held by Mr. Bajaj or his
permitted transferees. AppNet's rights to repurchase this common stock terminate
upon consummation of this offering.
We have entered into senior management agreements with each of Messrs.
Tobaccowala, McCalley, Alexander, McManus and Harvey. These agreements provide
for their respective employment by AppNet until resignation, disability, as
determined by the Board of Directors in its good faith judgment, death or
termination by the Board of Directors for any reason. Each senior management
agreement sets forth the annual base salary the executive is entitled to
receive, subject to increases as determined by the Board of Directors based upon
AppNet's achievement of budgetary and other objectives set by the Board of
Directors. Each executive is eligible to receive a bonus of up to 50% of his
salary based upon AppNet's achievement of budgetary and other objectives set by
the Board of Directors.
If an executive's employment is terminated without cause, he is entitled to
receive his annual salary and life, medical and disability insurance benefits
for one year. Cause is defined generally as:
- commission of a felony or crime involving moral turpitude;
- fraud, gross negligence or willful misconduct with respect to AppNet;
- substantial and repeated failure to perform duties; or
- breach of the confidentiality or noncompete provisions of the senior
management agreement.
Each senior management agreement contains provisions requiring the executive
to protect the confidentiality of our proprietary and confidential information.
In addition, each executive is prohibited, during his employment at AppNet and
for two years after such employment ends if he resigns or is terminated for
cause or for one year after such employment ends, if he is terminated without
cause, from competing with AppNet, soliciting any of our employees or
interfering with any of our business relationships.
The senior management agreements with Messrs. Tobaccowala, Harvey, McCalley,
Alexander and McManus provided for the sale of 175,439, 63,158, 110,175, 175,439
and 63,158 shares, respectively, or 587,369 shares in the aggregate, of our
common stock to these individuals at a per share price of $0.3007, for an
aggregate consideration of $176,607. In connection with these stock purchases,
each executive delivered a promissory note to AppNet for the full amount of the
purchase price, less the par value of the stock purchased. Each promissory note
is secured by a pledge of the purchased stock.
Each senior management agreement restricts the transfer of the AppNet common
stock owned by the executive as of the date of the agreement until June 29,
2003, subject to specific exceptions, including:
- sales in a registered public offering; and
- sales, subject to volume limitations imposed by the senior management
agreement, under Rule 144 under the Securities Act.
The registration agreement between AppNet and substantially all of its existing
stockholders dated June 29, 1998 states that each executive may request that his
shares of AppNet common stock be included in any registration statement filed by
AppNet:
- to register common stock held by GTCR and Smart Technology; or
- on its own behalf, other than in this offering.
Each senior management agreement also provides that upon termination of the
executive's employment, AppNet may repurchase all or any portion of its common
stock owned by such executive
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or his permitted transferees. A portion of the executive's common stock may be
repurchased at original cost, which is defined as the price originally paid by
the executive for such common stock; the remaining common stock may be
repurchased at the fair market value of such shares. If the executive's
employment is terminated for any reason before the first anniversary of his
senior management agreement, the amount of common stock which may be repurchased
at the original cost ranges from 75% to 100%, depending on the particular
executive. The portion of common stock to be repurchased at the original cost
decreases ratably each year until it reaches zero after the fourth anniversary
of the senior management agreement. If AppNet does not exercise its repurchase
right, GTCR, Smart Technology or Mr. Bajaj may repurchase the executive's AppNet
common stock upon the same terms and contribute them to AppNet in exchange for a
promissory note equal to the aggregate purchase price of such shares. This
repurchase right terminates upon:
- the sale of capital stock with the voting power to elect a majority of the
Board of Directors to persons or entities other than GTCR and Smart
Technology, other than in a public offering; or
- the sale of all or substantially all of our assets. We intend to amend the
senior management agreements to terminate the right to repurchase an
executive's shares of our common stock at their fair market value upon
completion of this offering.
Under the terms of the senior management agreement for Mr. McManus, whose
employment with us ended on December 31, 1998, we had the option to repurchase
some or all of his shares of our common stock upon the termination of his
employment. At the time of the termination of Mr. McManus' employment, we
entered into a stock purchase agreement with him which provided that we would
repurchase 89,474 shares of our common stock from him at purchase prices ranging
from $0.3007 to $0.7139 per share, and we would pay him $160,000 in severance
pay in accordance with his senior management agreement. The stock purchase
agreement with Mr. McManus gives us, GTCR, Smart Technology and Mr. Bajaj the
option to repurchase the remaining 29,825 shares of AppNet common stock owned by
Mr. McManus at fair market value until the earlier of September 30, 1999 or the
effective date of a registration statement filed by us in connection with a
public offering of our common stock. We have not determined whether we will
repurchase the remaining 29,825 shares.
STOCK INCENTIVE PLANS
1999 STOCK INCENTIVE PLAN
We intend to adopt the AppNet Systems, Inc. 1999 Stock Incentive Plan prior
to this offering. The 1999 Stock Incentive Plan will become effective upon its
adoption by the Board of Directors and ratification by our stockholders. The
purpose of the 1999 Stock Incentive Plan will be to strengthen AppNet by
providing an incentive to its employees, officers, consultants, directors and
advisors through the granting or awarding of incentive and nonqualified stock
options, stock appreciation and dividend equivalent rights, restricted stock,
performance units, performance shares, share awards and phantom stock awards,
thereby encouraging these individuals to devote their abilities and energies to
the success of AppNet.
The 1999 Stock Incentive Plan will be administered by a compensation
committee, which will consist of non-employee directors. Under the 1999 Stock
Incentive Plan, the committee will have the authority to, among other things:
- select the employees to whom stock options and other incentive awards will
be granted;
- determine the type, size and the terms and conditions of stock options and
other incentive awards; and
- establish the terms for treatment of stock options and other incentive
awards upon a termination of employment.
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We will initially authorize 2,000,000 shares of common stock for issuance
under the 1999 Stock Incentive Plan for the grant of stock options and other
incentive awards to eligible individuals. The amount of common stock authorized
for issuance under the 1999 Stock Incentive Plan may be increased annually by
the compensation committee. The total amount of shares authorized under the Plan
may not exceed 10,000,000. The 1999 Stock Incentive Plan will terminate on the
day preceding the tenth anniversary of the date of its adoption by the Board of
Directors. The Board of Directors will be able to at any time and from time to
time amend or terminate the 1999 Stock Incentive Plan; provided, however, that,
to the extent necessary under applicable law, no such change will be effective
without the requisite approval of the stockholders. In addition, no such change
will alter or adversely impair any rights or obligations under any stock options
and other incentive awards previously granted, except with the written consent
of the grantee.
1998 STOCK OPTION AND INCENTIVE PLAN
We have adopted a stock incentive plan, the 1998 Stock Option and Incentive
Plan, and reserved 1,578,947 shares of our common stock for issuance in
connection with awards granted under such plan. Stock options and other
incentive awards under the 1998 Stock Option and Incentive Plan may be made in
the form of:
- incentive stock options;
- non-qualified stock options;
- stock appreciation rights;
- restricted stock; and
- restricted stock units.
Stock options and other incentive awards may be granted to such persons,
including officers, directors and employees, that our Board of Directors or a
Board-appointed committee shall in its discretion select.
As of May 26, 1999, options to purchase a total of 1,574,068 shares of our
common stock were outstanding under the 1998 Stock Option and Incentive Plan and
remain unexercised, 4,791 shares of our common stock have been issued upon the
exercise of options granted under the 1998 Stock Option and Incentive Plan and
options to purchase 154,936 shares of our common stock granted under the 1998
Stock Option and Incentive Plan are currently exercisable.
The Board of Directors or a Board-appointed committee is authorized to
construe, interpret and implement the provisions of the 1998 Stock Option and
Incentive Plan, to select the persons to whom awards will be made, to determine
the terms and provisions of awards and, with the consent of the grantee, to
amend the terms of any outstanding award. The determinations of the Board of
Directors or a Board-appointed committee are made in its sole discretion and are
conclusive.
The 1998 Stock Option and Incentive Plan has no termination date, however,
no incentive stock options may be granted under such plan on or after August 25,
2008. The Board of Directors may at any time and from time to time amend,
suspend or terminate the 1998 Stock Option and Incentive Plan; provided,
however, that, to the extent necessary under applicable law, no such change will
be effective without the requisite approval of the stockholders. In addition, no
such change will alter or adversely impair any rights or obligations under
awards previously granted, except with the written consent of the grantee. Upon
the adoption of our 1999 Stock Incentive Plan, no further awards will be made
under the 1998 Stock Option and Incentive Plan.
CENTURY COMPUTING, INCORPORATED INCENTIVE STOCK OPTION PLAN
In connection with our acquisition of Century Computing, we assumed its
Incentive Stock Option Plan and related award agreements with each grantee. Each
outstanding option to purchase the common stock of Century Computing was
converted into an incentive stock option to purchase our common stock based on a
conversion ratio. Originally, we reserved a total of 704,127 shares of our
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common stock for issuance in connection with options granted under the Century
Incentive Stock Option Plan.
As of May 26, 1999, options to purchase a total of 45,627 shares of our
common stock were outstanding under the Century Incentive Stock Option Plan and
remain unexercised, 658,499 shares of our common stock have been issued upon the
exercise of options granted under the Century Incentive Stock Option Plan and
options to purchase 45,627 shares of our common stock granted under the Century
Incentive Stock Option Plan are currently exercisable.
The Century Incentive Stock Option Plan is administered by Century
Computing's board of directors unless the board of directors delegates the power
and authorities related to the administration of the Century Incentive Stock
Option Plan to a board-appointed committee. The board of directors or a
board-appointed committee is authorized to construe, interpret and implement the
provisions of the Century Incentive Stock Option Plan, to select the persons to
whom awards will be made, to determine the terms and provisions of awards and,
with the consent of the grantee, to amend the terms of any outstanding award.
The determinations of the board of directors or a board-appointed committee are
made in its sole discretion and are conclusive.
The Century Incentive Stock Option Plan has no termination date, however, no
incentive stock options may be granted under the Century Incentive Stock Option
Plan after the expiration of the ten-year period beginning on the date the
Century Incentive Stock Option Plan was adopted. The board of directors may at
any time and from time to time amend or terminate the Century Incentive Stock
Option Plan; provided, however, that, to the extent necessary under applicable
law, no such change will be effective without the requisite approval of the
stockholders. AppNet does not intend to make any new grants under the Century
Incentive Stock Option Plan.
INTERNET OUTFITTERS, INC. 1996 INCENTIVE STOCK OPTION PLAN
In connection with our acquisition of Internet Outfitters, Inc., we assumed
its 1996 Incentive Stock Option Plan and related award agreements with each
grantee. Each outstanding option to purchase the common stock of Internet
Outfitters was converted into an incentive stock option to purchase our common
stock based on a conversion ratio. Originally, we reserved a total of 22,300
shares of our common stock for issuance in connection with options granted under
the Internet Outfitters Incentive Stock Option Plan.
As of May 26, 1999, options to purchase a total of 22,300 shares of our
common stock were outstanding under the Internet Outfitters Incentive Stock
Option Plan and remain unexercised, no options have been exercised and options
to purchase 1,916 shares of our common stock granted under the Internet
Outfitters Incentive Stock Option Plan are currently exercisable.
The Internet Outfitters Incentive Stock Option Plan is administered by the
Internet Outfitters board of directors unless the board of directors delegates
the power and authorities related to the administration of the Internet
Outfitters Incentive Stock Option Plan to a board-appointed committee. The board
of directors or a board-appointed committee is authorized to construe, interpret
and implement the provisions of the Internet Outfitters Incentive Stock Option
Plan, to select the persons to whom awards will be made, to determine the terms
and provisions of awards and, with the consent of the grantee, to amend the
terms of any outstanding award. The determinations of the board of directors or
a board-appointed committee are made in its sole discretion and are conclusive.
The Internet Outfitters Incentive Stock Option Plan will terminate upon the
expiration of the ten-year period beginning on the date the Internet Outfitters
Incentive Stock Option Plan was adopted. The board of directors may at any time
and from time to time amend or terminate the Internet Outfitters Incentive Stock
Option Plan; provided, however, that, to the extent necessary under applicable
law, no such change will be effective without the requisite approval of the
stockholders. AppNet does not intend to make any new grants under the Internet
Outfitters Incentive Stock Option Plan.
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CERTAIN RELATIONSHIPS AND TRANSACTIONS
GTCR AND SMART TECHNOLOGY PURCHASE AGREEMENT
GTCR, Smart Technology and AppNet are parties to a purchase agreement, dated
as of June 29, 1998, as amended and supplemented which provided for the purchase
by GTCR and Smart Technology, L.L.C., an entity controlled by Mr. Bajaj's
spouse, of 11,326,228 and 232,916 shares of our common stock, respectively, at a
price of $0.3007 per share. At that time, GTCR and Smart Technology also agreed
from time to time to purchase up to an aggregate of 96,500 shares of Class A
Preferred Stock at a price of $1,000 per share in the future on the terms
described below. GTCR is required to purchase Class A Preferred Stock at the
request of AppNet's Board of Directors and the approval of GTCR to fund AppNet's
working capital requirements and acquisitions. Upon any such purchase by GTCR of
Class A Preferred Stock, Smart Technology is required to purchase Class A
Preferred Stock in an amount equal to approximately 2% of the amount of Class A
Preferred Stock GTCR purchases. Under these provisions, GTCR and Smart
Technology have purchased aggregate amounts of approximately 44,167 and 900
shares of Class A Preferred Stock, respectively, since June 29, 1998 for
aggregate purchase prices of approximately $44,167,000 and $900,000,
respectively. The purchase agreement with GTCR and Smart Technology currently
provides that as long as GTCR owns at least 15% of the securities purchased
under the purchase agreement, AppNet must obtain GTCR's prior written consent
before taking various actions including paying any dividends, other than
dividends on the Class A Preferred Stock, issuing any equity securities or debt
securities with equity features, acquiring businesses or merging or
consolidating with another entity. The parties intend to terminate the
provisions of the purchase agreement that require GTCR and Smart to purchase
Class A Preferred Stock and that require AppNet to obtain GTCR's consent before
taking various actions upon consummation of this offering. AppNet will still be
required to obtain GTCR's consent before amending its senior management
agreements with Messrs. Bajaj, Harvey, McManus and McCalley.
In connection with AppNet's acquisition of Software Services Corporation and
the issuance of 11,576 shares of Class B Preferred Stock to the former
stockholders of that company, GTCR and Smart Technology transferred an aggregate
of 1,387,097 shares of AppNet common stock to us in exchange for an aggregate of
417.066 shares of our Class A Preferred Stock. In connection with a revolving
credit agreement between AppNet and BankBoston, N.A., GTCR and Smart Technology
sold an aggregate of 123,538 shares of our common stock and an aggregate of
approximately 362 shares of our Class A Preferred Stock to FSC Corp., an
affiliate of BankBoston, for an aggregate purchase price of $375,000. In
addition, the purchase agreement with GTCR and Smart Technology was amended in
August 1998 to decrease the commitment of GTCR and Smart Technology to purchase
96,500 shares of Class A Preferred Stock to 84,920 shares of Class A Preferred
Stock.
STOCKHOLDERS' AGREEMENT, REGISTRATION AGREEMENT AND SENIOR MANAGEMENT AGREEMENTS
In connection with the purchase agreement with GTCR and Smart Technology,
AppNet, GTCR, Smart Technology and substantially all of AppNet's existing
stockholders entered into a stockholders' agreement, dated as of June 29, 1998
and a registration agreement, dated as of June 29, 1998. In addition, each
member of AppNet's senior management entered into a senior management agreement
with AppNet upon commencement of their employment with us. The stockholders'
agreement provides, among other things, that the Board of Directors will consist
of two representatives designated by GTCR, one representative designated by Mr.
Bajaj and three or more representatives chosen jointly by GTCR and Mr. Bajaj.
The stockholder's agreement also includes provisions restricting the
transferability of our common stock, giving AppNet a right of first refusal to
purchase a stockholder's common stock and giving stockholders a conditional
right to participate if GTCR and Smart Technology transfer their shares of
common stock. The stockholders' agreement will terminate upon the consummation
of this offering. Prior to consummation of the offering, AppNet and GTCR will
enter into an agreement that provides that as long as GTCR owns at least 15% of
the shares owned by it
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immediately after the consummation of the Offering, AppNet will nominate at
least one GTCR designee to the Board.
The registration agreement provides that the holders of a majority of our
common stock issued to GTCR and Smart Technology under the purchase agreement
with GTCR and Smart Technology may have the right to demand the filing of a
registration statement with the Securities and Exchange Commission to register
all or any portion of this common stock. Substantially all of the other current
stockholders of AppNet have the right to include all or any portion of their
AppNet common stock on registration statements filed by AppNet to register
shares of the common stock issued to GTCR and Smart Technology under the
purchase agreement with GTCR and Smart Technology; subject, however, to the
ability of the underwriters of any offering to limit the number of shares
included in such registration. Holders of the majority of our common stock
issued to GTCR and Smart Technology under the purchase agreement with GTCR and
Smart Technology may require AppNet to file, and pay the expenses in connection
with, up to four registration statements on Form S-1 and an unlimited number of
registration statements on Forms S-2 and S-3, if AppNet qualifies to use such
forms. If AppNet proposes to register securities for its own account, other than
in this offering. GTCR, Smart Technology and substantially all of AppNet's other
stockholders are entitled to notice of, and to include their shares in, such
registration; subject, however, to the ability of the underwriters of any
offering to limit the number of shares included in such registration. These
registration rights cover substantially all of the shares of our common stock
and will also cover any additional shares obtained by the parties to the
registration agreement. The existence and exercise of these registration rights
may make it more difficult for AppNet to arrange future financing and may have
an adverse effect on the market price of our common stock.
In addition, our acquisition agreement with Arbor Intelligent Systems, Inc.
grants the former Arbor stockholders rights to have their shares of our common
stock included in any registration statement we file, other than in connection
with this offering; subject, however, to the ability of the underwriters of any
offering to limit the number of shares included in such registration.
The senior management agreement with Mr. Bajaj provided for the sale of
1,251,228 shares of our common stock to Mr. Bajaj at a per share price of
$0.3007. The senior management agreement restricts the transferability of these
shares. AppNet, GTCR and Smart Technology have rights to repurchase these shares
upon the termination of Mr. Bajaj's employment.
Mr. Bajaj pledged the 1,251,228 shares of common stock which he purchased in
accordance with the terms of his senior management agreement to AppNet to secure
a promissory note in the principal amount of $374,430 which Mr. Bajaj delivered
in partial payment for these shares. The senior management agreement between Mr.
Bajaj and AppNet gives AppNet the right, if it issues or sells common stock or
rights to acquire common stock, to its employees, to repurchase these shares,
whether held by Mr. Bajaj or his permitted transferees, to be issued or sold to
such employees at a price of $0.3007 per share. Upon the termination of Mr.
Bajaj's employment, AppNet has the right to repurchase all of these shares,
whether held by Mr. Bajaj or his transferees. AppNet's rights to repurchase
these shares terminate upon consummation of this offering. As of May 1, 1999,
AppNet had repurchased a total of 1,041,109 of these shares from Mr. Bajaj for
an aggregate purchase price of $313,035 reducing the principal amount of his
promissory note to $62,878.
PROFESSIONAL SERVICES AGREEMENT WITH FAIRFAX MANAGEMENT COMPANY II, L.L.C. AND
FAIRFAX CONSULTING COMPANY, L.L.C.
Stephen W. Ritterbush, a former vice chairman of our Board of Directors and
Bruce Gouldey, our former chief financial officer, are members of Fairfax
Consulting Company, L.L.C. They resigned their positions on June 29, 1998 in
connection with the GTCR and Smart Technology purchases of stock in AppNet under
the purchase agreement. We entered into a professional services agreement, dated
as of June 29, 1998, with Fairfax Management Company II, L.L.C. and Fairfax
Consulting Company, L.L.C.,
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in which Fairfax Consulting Company agreed to provide to AppNet the services of
a financial and management consultant. In return for the consultant's services,
AppNet agreed to pay Fairfax Consulting Company a monthly retainer of $16,667 as
well as any fees for consulting services in excess of the monthly retainer. The
agreement also provided that if AppNet acquired a company which was introduced
to it by Fairfax Consulting Company, AppNet shall pay a finder's fee to Fairfax
Consulting Company equal to 1% of the purchase price for the acquired company.
We did not pay any finder's fees to Fairfax Consulting Company in 1998. In 1998,
AppNet paid approximately $336,000 in consulting fees to Fairfax Consulting
Company. The professional services agreement prohibited Fairfax Management
Company from owning, controlling, rendering services to or otherwise doing
business with one of our competitors while the agreement is in effect and for a
period of 18 months after it is terminated. We terminated the professional
services agreement with Fairfax Management Company and Fairfax Consulting
Company effective as of November 20, 1998.
Fairfax Management Company purchased 2,052,632 shares of our common stock in
March 1998 for an aggregate purchase price of $5,850. AppNet repurchased
1,350,877 of these shares on June 29, 1998 in exchange for a convertible
promissory note in the principal amount of $406,175. The professional services
agreement with Fairfax Management Company and Fairfax Consulting Company
restricts the transfer of the 684,211 shares of our common stock that Fairfax
Management Company retained until June 29, 2003, except:
- in a public offering;
- under Rule 144 through a broker, dealer or market maker (other than under
Rule 144(k)), in proportion to sales by GTCR and Smart Technology under
Rule 144;
- in the event of the sale of our capital stock with the voting power to
elect a majority of the Board of Directors to persons or entities other
than GTCR or Smart Technology, other than in a public offering; or
- in the event of the sale of all or substantially all of our assets.
The principal balance of the convertible promissory note held by Fairfax
Management Company will be converted into shares of AppNet common stock upon
consummation of this offering at a conversion rate equal to 80% of the offering
price per share.
DAVIDSON AGREEMENT
Thomas M. Davidson, one of our directors, and AppNet are parties to an
agreement dated as of June 29, 1998, under which Mr. Davidson received $350,000
in cash and 52,632 shares of common stock from AppNet as a finder's fee in
connection with the GTCR and Smart Technology investments in AppNet. The
Davidson agreement states that after GTCR and Smart Technology invest a total of
$15 million in shares of our common stock and Class A Preferred Stock, Mr.
Davidson shall receive additional finder's fees equal to 1% of all additional
purchases made by GTCR and Smart Technology of Class A Preferred Stock. AppNet's
obligation to pay this 1% commission to Mr. Davidson terminates when GTCR and
Smart Technology have invested an aggregate of $100 million in shares of AppNet
common stock and Class A Preferred Stock. As of March 31, 1999, GTCR and Smart
Technology have paid a total of $48.5 million in exchange for 11,559,144 shares
of our common stock and approximately 45,067 shares of Class A Preferred Stock,
and Mr. Davidson has earned a commission of approximately $685,000.
The Davidson agreement also provided for the purchase by Mr. Davidson of
86,651 shares of our common stock at a price of $0.3007 per share. Under that
agreement, Mr. Davidson has a consulting arrangement with AppNet, which entitles
him to receive annual payments of $200,000. AppNet may terminate this consulting
arrangement upon thirty days' notice, although upon any termination prior to
June 29, 1999 for reasons other than for cause, we are required to pay to Mr.
Davidson $200,000 less
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the aggregate amount of all consulting payments made prior to termination. On
May 17, 1999, AppNet gave Mr. Davidson thirty days' notice of the termination of
the consulting arrangement.
OTHER GTCR RELATIONSHIPS
GTCR and AppNet are parties to a professional services agreement, dated as
of June 29, 1998, which entitles GTCR to $200,000 per year in exchange for
financial and management consulting services. This agreement also entitles GTCR
to receive an investment fee equal to 1% of the purchase price of the common
stock and Class A Preferred Stock it purchases from AppNet under the purchase
agreement with GTCR and Smart Technology. GTCR has earned approximately $475,000
in investment fees. The GTCR professional services agreement will terminate upon
the consummation of this offering.
GTCR has guaranteed a portion of our outstanding indebtedness. We anticipate
that this guarantee will terminate upon the repayment of our credit facilities
with the proceeds of this offering and the termination of the guaranteed portion
of our credit facilities.
OTHER SMART TECHNOLOGY RELATIONSHIPS
During 1998, Smart Technology loaned approximately $1.1 million to AppNet.
On May 31, 1998, AppNet issued a warrant to purchase 35,088 shares of its common
stock for an aggregate purchase price of $50,000 to Smart Technology as
consideration, in part, for this loan. On June 29, 1998, a portion of the $1.1
million loan equal to the purchase price of the common stock Smart Technology
acquired from AppNet under the purchase agreement with GTCR and Smart Technology
was canceled, and AppNet issued a new promissory note in the principal amount of
$903,567 to Smart Technology. This note bears interest at the rate of 12% per
annum. The principal amount of this note is reduced from time to time by an
amount equal to the purchase price of any Class A Preferred Stock purchased by
Smart Technology under the purchase agreement with GTCR and Smart Technology.
The amount outstanding under this note has been reduced to $3,300 as of May 1,
1999 and will be repaid with the proceeds of this offering. Also on June 29,
1998, in accordance with the purchase agreement with GTCR and Smart Technology,
the original warrant issued to Smart Technology was canceled and AppNet issued a
new warrant to Smart Technology to purchase 70,175 shares of AppNet common stock
for an exercise price of $0.3007 per share.
In 1998, we paid Smart Technology approximately $25,000 in exchange for
consulting services.
CROSS SENIOR MANAGEMENT AGREEMENT
We entered into a senior management agreement with John Cross, one of our
directors, in March 1999, which provides for his employment as an Executive Vice
President until he resigns, is disabled, as determined by the Board of Directors
in its good faith judgment, dies or is terminated by the Board of Directors for
any reason. Mr. Cross is entitled to receive a salary of $300,000 per year,
subject to increases as determined by the Board of Directors based upon AppNet's
achievement of budgetary and other objectives set by the Board of Directors. Mr.
Cross is eligible to receive a bonus of up to 50% of his salary based upon
AppNet's achievement of budgetary and other objectives set by the Board of
Directors.
If Mr. Cross' employment is terminated without cause, he is entitled to
receive his annual salary and life, medical and disability insurance benefits
for one year. Cause is defined generally as:
- commission of a felony or crime involving moral turpitude;
- fraud, gross negligence or willful misconduct with respect to AppNet;
- substantial and repeated failure to perform duties; or
- breach of the confidentiality or noncompete provisions of the senior
management agreement.
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The senior management agreement contains provisions requiring Mr. Cross to
protect the confidentiality of our proprietary and confidential information. In
addition, Mr. Cross is prohibited, during his employment at AppNet and for two
years after his employment ends if he resigns or is terminated for cause or for
one year after his employment ends if he is terminated without cause, from
competing with AppNet, soliciting any of our employees or interfering with any
of our business relationships.
In 1999, John Cross also received options to purchase 337,776 shares of
AppNet common stock at an exercise price of $12.825 per share. The fair value of
the common stock underlying these options as of the date of grant was $14.25 per
share.
OTHER RELATIONSHIPS AND TRANSACTIONS
Foxhall Capital, LLC, an entity controlled by Jack Pearlstein, and AppNet
signed an agreement dated January 18, 1998, under which Foxhall Capital, LLC
received approximately $450,000 in cash from AppNet as a finder's fee in
connection with AppNet's acquisition of Century Computing, Incorporated in
October 1998. Mr. Pearlstein is one of our officers.
In 1998, AppNet loaned AppNet Commerce Services, Inc., in which AppNet owns
a 50% interest, an aggregate of $0.2 million to fund its operations. Three
officers of AppNet have also been officers of this subsidiary.
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PRINCIPAL STOCKHOLDERS
The following table sets forth, as of May 26, 1999, information with respect
to the beneficial ownership of our common stock by:
- each person known to AppNet to beneficially own more than 5% of the
outstanding shares of our common stock;
- each director of AppNet and each executive officer named in the Summary
Compensation Table; and
- all directors and executive officers as a group.
Unless otherwise indicated, each stockholder has sole voting and investment
power with respect to the shares beneficially owned by the stockholder and has
the same address as AppNet.
<TABLE>
<CAPTION>
NUMBER OF SHARES OF PERCENTAGE OWNERSHIP
COMMON STOCK --------------------------------------------
BENEFICIALLY OWNED AFTER THIS
BEFORE THIS OFFERING BEFORE THIS OFFERING OFFERING(D)
---------------------- --------------------- ---------------------
<S> <C> <C> <C>
GTCR (a)........................................ 9,924,607 49.5% 43.6%
Ken S. Bajaj (b)................................ 2,905,440 14.4 9.8
Toby Tobaccowala................................ 192,982 * *
Ronald B. Alexander............................. 175,439 * *
Robert D. McCalley.............................. 166,316 * *
Robert G. Harvey................................ 119,298 * *
Philip A. Canfield (a)(c)....................... -- * *
John Cross...................................... -- * *
Thomas M. Davidson.............................. 125,355 * *
Bruce V. Rauner (a)(c).......................... -- * *
Terrence McManus................................ 29,825 * *
All executive officers and directors as a group
(11 persons).................................. 3,812,900 18.9% 12.7%
</TABLE>
- ------------------------
* Less than 1%.
(a) The address for GTCR and Messrs. Canfield and Rauner is 6100 Sears Tower,
Chicago, Illinois, 60606.
(b) All of these shares are beneficially owned by Bajaj Enterprises, LLC, a
Maryland limited liability company, over which Mr. Bajaj exercises voting
and investment control. These shares include 274,268 shares transferred from
Smart Technology and exclude 701,754 shares owned by family trusts over
which Mr. Bajaj does not exercise any voting or investment control.
(c) Each of Messrs. Canfield and Rauner is a principal of GTCR and therefore may
be deemed to share investment and voting control over the shares of our
common stock held, directly or indirectly, by GTCR. Each of Messrs. Canfield
and Rauner disclaims beneficial ownership of the shares of our common stock
held by GTCR.
(d) Gives effect to (i) the sale of 6,000,000 shares of common stock in this
offering, (ii) the conversion of a promissory note into 39,055 shares of
common stock and (iii) the exchange of 43,789 shares of Class A Preferred
Stock and 11,158 shares of Class B Preferred Stock for 4,334,281 shares of
common stock.
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DESCRIPTION OF CAPITAL STOCK
Our authorized capital stock of consists of 75,000,000 shares of common
stock, par value $0.0005 per share, 96,621 shares of Class A Preferred Stock,
par value $0.01 per share, and 20,000 shares of Class B Preferred Stock, par
value $0.01 per share. Upon consummation of this offering, there will be
4,883,379 authorized and unissued shares of preferred stock. Also upon
consummation of this offering, there will be issued and outstanding 30,441,434
shares of common stock, including 39,055 shares that will be issued upon
consummation of this offering upon conversion of a convertible promissory note,
and 4,334,281 shares that will be issued upon consummation of this offering upon
the exchange of a maximum of 43,789 shares of Class A Preferred Stock and a
maximum of 11,158 shares of Class B Preferred Stock. As of May 26, 1999, there
were 133 holders of our common stock, five holders of our Class A Preferred
Stock and 11 holders of our Class B Preferred Stock. In addition,
- 3,646,875 shares of common stock have been reserved for issuance in
connection with AppNet's stock incentive plans;
- 84,795 shares of common stock have been reserved for issuance in
connection with warrants issued to Silicon Valley Bank and Smart
Technology, L.L.C.;
- 887,473 shares of common stock reserved for issuance in connection with
outstanding promissory notes convertible into shares of our common stock
at conversion prices of $8.55 and $11.40 per share;
- 461,539 shares of common stock have been reserved for issuance in
connection with outstanding promissory notes convertible into shares of
our common stock at a conversion price of 80% of the initial public
offering price per share in this offering, assuming an initial public
offering price of $13.00, the mid-point of the range shown on the cover
page of this prospectus;
- 891,318 shares of common stock have been reserved for issuance in
connection with contingent payments payable to the former owners of five
of the companies we acquired, New Media Publishing, Sigma6, Salzinger &
Company, Internet Outfitters and TransForm IT, assuming that the market
price of our common stock at the time the contingent payments are made is
$13.00, the mid-point of the range shown on the cover page of this
prospectus; and
- 121 shares of Class A Preferred Stock have been reserved for issuance in
connection with a warrant issued to Silicon Valley Bank.
COMMON STOCK
Each share of our common stock is identical in all respects and entitles the
holder thereof to the same rights and privileges enjoyed by all other holders of
shares of common stock, and subjects them to the same qualifications,
limitations and restrictions to which all such other holders are subject.
VOTING RIGHTS. Holders of our common stock are entitled to one vote per
share on all matters to be voted on by AppNet's stockholders and may act by
written consent if the consent is signed by the holders of common stock having
at least the minimum votes necessary to authorize or take such action at
meetings. Holders of common stock do not have cumulative rights, so that holders
of a plurality of the shares of common stock present at a meeting at which a
quorum is present are able to elect all of AppNet's directors eligible for
election in a given year. The holders of a majority of the voting power of the
issued and outstanding common stock constitutes a quorum. We intend to amend our
certificate of incorporation to provide that a vote of two-thirds of the holders
of our issued and outstanding common stock will be required to remove a director
or amend our bylaws.
DIVIDENDS. Holders of our common stock are entitled to receive ratably such
dividends, if any, as are declared by AppNet's Board of Directors out of funds
legally available for the declaration of dividends, subject to the preferential
rights of any holder of preferred stock that may from time to time
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be outstanding. The terms of our credit facilities restrict AppNet's ability to
pay dividends on the common stock.
LIQUIDATION. Upon the liquidation, dissolution or winding up of AppNet, the
holders of our common stock are entitled to share pro rata in the distribution
of all of AppNet's assets available for distribution after satisfaction of all
of AppNet's liabilities and the payment of the liquidation preference of any
preferred stock that may be outstanding.
OTHER PROVISIONS. The holders of our common stock have no preemptive or
other subscription rights to purchase common stock, and there are no redemptive
rights or sinking fund provisions. The holders of our common stock are not
liable for any calls or assessments.
REGISTRATION RIGHTS. AppNet is a party to a registration agreement, dated
as of June 29, 1998, to which substantially all current stockholders of AppNet
are party, which gives the holders of a majority of the common stock issued to
GTCR and Smart Technology under the purchase agreement with GTCR and Smart
Technology a conditional right to demand registration of all or any portion this
common stock. Substantially all of the other current stockholders of AppNet have
the right to include all or any portion of their AppNet common stock on
registration statements filed by AppNet to register the common stock issued to
GTCR and Smart Technology under the purchase agreement with GTCR and Smart
Technology. Subject to various conditions, substantially all of the current
stockholders of AppNet have the right to include all or any portion of their
AppNet common stock on registration statements that we file on our own behalf,
other than in connection with this offering. These rights cover substantially
all of the shares of our common stock and will also cover any additional shares
obtained by the parties to the registration agreement.
In addition, our acquisition agreement with Arbor gave the former
stockholders of Arbor rights to have their shares of our common stock included
in any registration statement we file, other than in connection with this
offering.
PREFERRED STOCK
We intend to amend AppNet's certificate of incorporation, a copy of which is
filed as an exhibit to the registration statement of which this prospectus is a
part, to authorize AppNet's Board of Directors to issue preferred stock in one
or more series and to establish the number of shares to be included in each such
series and to fix the designations, powers, preferences and rights of the shares
of each such series and any qualifications, limitations or restrictions of each
such series. Because the Board of Directors will have the power to establish the
preferences and rights of the shares of any such series of preferred stock, it
may afford the holders of any such series of preferred stock preferences, powers
and rights, including voting rights, senior to the rights of the holders of
common stock. The issuance of preferred stock may have the effect of delaying,
deferring or preventing a change in control of AppNet.
The Board of Directors has established a class of preferred stock designated
Class A Preferred Stock consisting of 96,621 authorized shares, par value $0.01
per share, and a class of preferred stock designated Class B Preferred Stock
consisting of 20,000 authorized shares, par value $0.01 per share. The Class B
Preferred Stock ranks PARI PASSU with the Class A Preferred Stock.
We intend to use the proceeds from this offering to redeem at least 1,641
shares of Class A Preferred Stock and 418 shares of Class B Preferred Stock. All
remaining outstanding shares of Class A and Class B Preferred Stock that are not
redeemed with proceeds from this offering will be exchanged for shares of our
common stock. These shares will be canceled and will not be reissued, sold or
transferred. The preferred stock has the dividend, redemption, liquidation and
other rights described below. The exchange ratio shall be determined by dividing
the liquidation value of each share of preferred stock plus accrued and unpaid
dividends by the initial public offering price per share of common stock.
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VOTING RIGHTS. Neither Class A nor Class B Preferred Stock is entitled to
any voting rights, other than those granted by the Delaware General Corporation
Law, provided that each holder of Class A and Class B Preferred Stock is
entitled to notice of all stockholders meetings at the same time and in the same
manner to which all stockholders entitled to vote at such meetings are entitled.
DIVIDEND RIGHTS. When and as declared by AppNet's Board of Directors and to
the extent permitted under the Delaware General Corporation Law, holders of
Class A and Class B Preferred Stock are entitled to preferential cash dividends.
Dividends on each share of Class A and Class B Preferred Stock accrue on a daily
basis at the rate of 6% per annum on the liquidation value per share of $1,000,
plus all accumulated and unpaid dividends from and including the date of
issuance of such share to and including the first to occur of:
- the date on which the liquidation value of such share, plus all accrued
and unpaid dividends, is paid to the holder in connection with the
liquidation of AppNet or the redemption of such share by AppNet; and
- the date on which such share is otherwise acquired by AppNet.
Dividends on the Class A and Class B Preferred Stock accrue whether or not
they have been declared and whether or not there are profits, surplus or other
funds legally available for the payment of dividends. To the extent dividends
are not paid on March 31, June 30, September 30, and December 31 of each year
for Class A Preferred Stock, and on September 30 of each year for Class B
Preferred Stock, the accrued dividends will accumulate on such dates. All
accrued and unpaid dividends will be fully paid or declared with funds
irrevocably set apart for payment before we are entitled to pay any dividends,
distributions, redemptions or other payments with respect to any stock of AppNet
other than Class A and Class B Preferred Stock.
DISTRIBUTION OF PARTIAL DIVIDEND PAYMENTS. Unless otherwise provided, if at
any time AppNet pays less than the total amount of accrued dividends with
respect to the Class A or Class B Preferred Stock, the payment will be
distributed pro rata among the holders of the class of preferred stock, based
upon the aggregate accrued but unpaid dividends on the shares held by each such
holder.
LIQUIDATION. Upon any liquidation, dissolution or winding up of AppNet,
voluntary or involuntary, each holder of Class A or Class B Preferred Stock will
be entitled to an amount in cash equal to the aggregate liquidation value of all
shares held by the holder, plus all accrued and unpaid dividends thereon, before
any distribution or payment is made upon any securities that are junior to the
Class A and Class B Preferred Stock. The holders of Class A and Class B
Preferred Stock will not be entitled to receive any further payment. Prior to
the time of any liquidation, dissolution or winding up of AppNet, to the extent
permitted by applicable law, AppNet will declare for payment all accrued and
unpaid dividends with respect to the Class A and Class B Preferred Stock.
PRIORITY OF PREFERRED STOCK. So long as any Class A or Class B Preferred
Stock remains outstanding, without the prior written consent of the holders of a
majority of the outstanding shares of such preferred stock, AppNet will not be
entitled, nor will it permit any subsidiary, to redeem, purchase or otherwise
acquire directly or indirectly any securities that are junior to the Class A and
Class B Preferred Stock, nor is AppNet entitled directly or indirectly to pay or
declare any dividend or make any distribution upon any securities that are
junior to the Class A and Class B Preferred Stock. However, even if any such
shares of Class A or Class B Preferred Stock are outstanding, AppNet is entitled
to purchase shares of its common stock under an arrangement approved by the
Board of Directors from present or former employees of AppNet or its
subsidiaries.
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REDEMPTION RIGHTS APPLICABLE ONLY TO CLASS A PREFERRED STOCK
OPTIONAL REDEMPTIONS BY APPNET. At any time and from time to time,
AppNet may redeem all or any portion of any outstanding shares of Class A
Preferred Stock. Upon any such redemption, AppNet will pay a price per share
equal to the liquidation value thereof, plus all accrued and unpaid
dividends thereon. No redemption may be made for less than 1,000 shares or
such lesser number of shares then outstanding.
REDEMPTIONS AFTER PUBLIC OFFERINGS. At the written request of the
holders of a majority of the shares of Class A Preferred Stock then
outstanding, AppNet will apply the net cash proceeds from any public
offering of AppNet common stock under an effective registration statement
under the Securities Act to redeem shares of Class A Preferred Stock at the
liquidation value of $1,000 per share, plus all accrued and unpaid dividends
thereon. Such redemption must take place not more than five days after
AppNet receives such public offering proceeds.
REDEMPTION PAYMENTS. On any date on which Class A Preferred Stock is to
be redeemed, if AppNet's funds that are legally available for redemption are
insufficient to redeem the total number of shares to be redeemed, those
funds which are legally available will be used to redeem the maximum
possible number of shares pro rata among the holders of the shares to be
redeemed. At any time thereafter when additional funds are legally available
for redemption of shares by AppNet, such funds will be immediately used to
redeem the balance of the shares which AppNet is obligated to redeem.
SPECIAL REDEMPTIONS. If either (a) a change in ownership, which is
defined as the transfer of more than 50% of the outstanding common stock to
a person or group of persons other than any stockholder of AppNet as of June
29, 1998, has occurred or AppNet obtains knowledge that a change in
ownership is proposed or (b) a fundamental change, which is defined as the
transfer of more than 50% of AppNet's assets or mergers or consolidations
involving AppNet where Appnet is not the surviving party, is proposed to
occur, then the holder or holders of a majority of the shares of Class A
Preferred Stock then outstanding may require AppNet to redeem all or any
portion of the Class A Preferred Stock owned by such holders at a price per
share equal to the liquidation value thereof, plus all accrued and unpaid
dividends thereon, by giving written notice of such election. AppNet must
give all holders of Class A Preferred Stock prompt notice of any proposed
change in ownership or fundamental change and notice of any election to
redeem shares because of such changes.
REDEMPTION AND CONVERSION RIGHTS APPLICABLE ONLY TO CLASS B PREFERRED STOCK.
AppNet has the contractual ability to redeem or convert all outstanding
shares of Class B Preferred Stock upon an initial public offering.
Contractual provisions provide that, upon a sale of AppNet, all outstanding
shares of Class B Preferred Stock will be redeemable at a price per share
equal to the liquidation value or the holders will receive the same
consideration per share as the holders of the Class A Preferred Stock.
ANTI-TAKEOVER EFFECTS OF APPNET'S CERTIFICATE OF INCORPORATION AND BYLAWS AND
PROVISIONS OF DELAWARE LAW
AppNet's certificate of incorporation and bylaws and Section 203 of the
Delaware General Corporation Law contain provisions that may make the
acquisition of control of AppNet by means of a tender offer, open market
purchase, proxy fight or otherwise, more difficult.
BUSINESS COMBINATIONS. We intend to amend our certificate of incorporation
to provide that we will be subject to Section 203 of the Delaware General
Corporation Law. In general, subject to specific exceptions, Section 203 of the
Delaware General Corporation Law prohibits a publicly held Delaware
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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:
- upon consummation of the transaction, the interested stockholder owned 85%
of the voting stock of the corporation outstanding at the time the
transaction commenced, excluding for purposes of determining the number of
shares outstanding those shares owned by persons who are directors and
also officers and employee stock plans in which employee participants do
not have the right to determine confidentially whether shares held subject
to the plan will be tendered in a tender or exchange offer;
- the business combination is, or the transaction in which such person
became an interested stockholder was, approved by the board of directors
of the corporation before the stockholder became an interested
stockholder; or
- the business combination is approved by the board of directors of the
corporation and authorized at an annual or special meeting of the
corporation's stockholders by the affirmative vote of at least 66 2/3% of
the outstanding voting stock which is not owned by the interested
stockholder.
For purposes of Section 203, a "business combination" includes mergers,
asset sales and other transactions resulting in a financial benefit to the
interested stockholder; an "interested stockholder" is a person who, together
with affiliates and associates, owns, or, in the case of affiliates and
associates of the issuer, did own within the last three years, 15% or more of
the corporation's voting stock. The restrictions set forth in Section 203 will
not apply to a business combination with an interested stockholder who became an
interested stockholder at a time when the restrictions of Section 203 did not
apply to AppNet.
STOCKHOLDER NOMINATIONS AND PROPOSALS. We intend to amend our bylaws to
provide that stockholders must follow an advance notification procedure for
stockholder nominations of candidates for the Board of Directors and for other
stockholder business to be conducted at an annual meeting. For business a
stockholder wishes to bring before an annual meeting of stockholders, the
stockholder must deliver notice to AppNet not less than 60 days nor more than 90
days prior to the date of the anniversary of the previous year's annual meeting.
For nominations of persons for election to our Board of Directors at an annual
meeting, a stockholder must deliver notice to AppNet not less than 90 days prior
to the date of the anniversary of the previous year's annual meeting unless the
annual meeting is delayed, in which case the stockholder must deliver the notice
not less than 90 days prior to such meeting nor more than 10 days after we
mailed notice of such meeting or public disclosure of the annual meeting was
made. These advance notification provisions in our bylaws could preclude the
conduct of business at a meeting or a nomination for the election of directors
if the proper procedures are not followed. Such provisions could operate to
delay, defer or prevent a change in control of AppNet.
AUTHORIZED AND UNISSUED PREFERRED STOCK. Upon consummation of this
offering, there will be 4,883,379 authorized and unissued shares of preferred
stock. We intend to amend our certificate of incorporation to authorize the
Board of Directors to issue one or more series of preferred stock and to
establish the designations, powers, preferences and rights of each series of
preferred stock. The existence of authorized and unissued preferred stock may
enable the Board of Directors to render more difficult or to discourage an
attempt to obtain control of AppNet by means of a merger, tender offer, proxy
contest or otherwise. For example, if in the due exercise of its fiduciary
obligations, the Board of Directors were to determine that a takeover proposal
is not in AppNet's best interests, the Board of Directors could cause shares of
preferred stock to be issued without stockholder approval in one or more private
offerings or other transactions that might dilute the voting or other rights of
the proposed acquiror or insurgent stockholder or stockholder group or create a
substantial voting block in
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institutional or other hands that might undertake to support the position of the
incumbent Board of Directors.
ABSENCE OF CUMULATIVE VOTING. Our certificate of incorporation does not
include a provision for cumulative voting in the election of directors. Under
cumulative voting, a minority stockholder holding a sufficient number of shares
may be able to ensure the election of one or more directors. The absence of
cumulative voting may have the effect of limiting the ability of minority
stockholders to effect changes in our Board of Directors and, as a result, may
operate to delay, defer or prevent a change in control of AppNet.
REMOVAL OF DIRECTORS; VACANCIES. We intend to amend our certificate of
incorporation to state that, subject to the rights of the holders of our
preferred stock, directors may be removed at any time by two-thirds stockholder
vote. In addition, a majority of the directors then in office will be able to
fill board vacancies and newly created directorships resulting from any increase
in the size of our Board of Directors. This is true even if those directors do
not constitute a quorum or if only one director is left in office. These
provisions could prevent stockholders, including parties who want to take over
or acquire AppNet, from removing incumbent directors and filling the resulting
vacancies with their own nominee.
SPECIAL MEETINGS OF STOCKHOLDERS. We intend to amend our bylaws to provide
that special meetings of AppNet's stockholders may be called only by the Board
of Directors of AppNet. This provision may render it more difficult for
stockholders to take action opposed by the Board of Directors.
INDEMNIFICATION AND LIMITATION OF LIABILITY
AppNet's bylaws provide that AppNet will indemnify each of its directors,
officers, employees and agents to the fullest extent permitted by law. The
certificate of incorporation limits the liability of AppNet's directors and
stockholders to AppNet for monetary damages. The certificate of incorporation
also provides that AppNet may purchase insurance on behalf of its directors,
officers, employees and agents against liabilities they may incur in such
capacity, whether or not AppNet would have the power to indemnify against such
liabilities.
TRANSFER AGENT AND REGISTRAR
The transfer agent and registrar for our common stock is BankBoston, N.A.
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SHARES ELIGIBLE FOR FUTURE SALE
Upon consummation of this offering, 30,441,434 shares of our common stock
will be outstanding, 31,341,434 shares if the over-allotment option is exercised
in full. Of these shares, the 6,900,000 shares of common stock sold in this
offering will be freely tradable without restriction or further registration
under the Act, unless held by an "affiliate" of AppNet. An affiliate is defined
under Rule 144 as a person that controls, is controlled by or is under common
control with AppNet. All of the shares of our common stock outstanding prior to
the offering are "restricted securities," as such term is defined under Rule
144. These shares are restricted securities because they were issued in private
transactions not involving a public offering and may not be sold in the absence
of registration other than in accordance with Rule 144 or Rule 701 promulgated
under the Securities Act or another exemption from registration. This prospectus
may not be used in connection with any resale of shares of our common stock
acquired in the offering by affiliates of AppNet.
Each of AppNet, our directors, our officers, most of the former owners of
all of the businesses we acquired, GTCR and Smart Technology have agreed not to
offer or transfer, or file with the Securities and Exchange Commission a
registration statement under the Securities Act relating to, any shares of our
common stock or securities convertible into or exchangeable or exercisable for
any shares of our common stock without the prior written consent of Credit
Suisse First Boston Corporation for a period of 180 days after the date of this
prospectus. The restrictions set forth in the previous sentence do not apply to
grants of employee stock options under the terms of AppNet's stock incentive
plans in effect on the date of this prospectus, issuances of securities as a
result of the exercise of such options outstanding on the date of this
prospectus and issuances of securities as a result of the conversion of any
convertible instruments outstanding on the date of this prospectus.
In general, under Rule 144 as currently in effect, if a minimum of one year
has elapsed since the later of the date of acquisition of the restricted
securities from the issuer or from an affiliate of the issuer, a person, or
persons whose shares of common stock are aggregated, including persons who may
be deemed affiliates of AppNet, would be entitled to sell within any three-month
period a number of shares of AppNet common stock that does not exceed the
greater of
(1) one percent of the then-outstanding shares of AppNet common stock, which
equals approximately 304,414 shares immediately after this offering, or
(2) the average weekly trading volume during the four calendar weeks
preceding the date on which notice of the sale is filed with the
Securities and Exchange Commission.
Sales under Rule 144 are also subject to restrictions as to the manner of
sale, notice requirements and the availability of current public information
about AppNet. In addition, under Rule 144(k), if a period of at least two years
has elapsed since the later of the date restricted securities were acquired from
AppNet or the date they were acquired from an affiliate of AppNet, a stockholder
who is not an affiliate of AppNet at the time of sale and who has not been an
affiliate of AppNet for at least three months prior to the sale would be
entitled to sell shares of our common stock in the public market immediately
without compliance with the requirements under Rule 144 set forth above. If
shares are transferred during this period, the holding period requirement may be
satisfied by including the time period during which such shares were previously
held. The foregoing summary of Rule 144 is not intended to be a complete
description thereof.
In addition, any of our employees, directors, officers or consultants who
acquired shares under a written compensatory plan or contract may be entitled to
rely on the resale provisions of Rule 701 of the Securities Act without having
to comply with the public information, holding period, volume limitation or
notice provisions of Rule 144, and affiliates of AppNet may be entitled to sell
their Rule 701 shares without having to comply with the holding period
restrictions of Rule 144, in each
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case, commencing 90 days after the date of this prospectus, although the
contractual limitations will continue through the 180th day following the date
of this prospectus.
In addition to the restrictions on transfer described above, our executives
with whom we have entered into senior management agreements are subject to
restrictions on the transfer of shares of our common stock owned by them as of
the date they entered into the senior management agreement.
Immediately following the offering, none of the 20,068,098 "restricted
securities" will be available for immediate sale in the public market under Rule
144. Beginning 90 days after the date of this prospectus, and without
consideration of the contractual restrictions described above, 1,741,831 shares
either issued under our stock incentive plans or compensation contracts or
acquired upon the exercise of options issued under our stock incentive plans
will be outstanding and eligible for sale in reliance upon Rule 701. Additional
shares may be available if options are exercised in the 90-day period following
the date of this prospectus. Shares of our common stock issued in reliance on
Rule 701 may be resold by holders who are not affiliates of AppNet under Rule
144 without compliance with the holding period, amount and notice limitations
and by holders who are affiliates of AppNet under Rule 144 without compliance
with the holding period limitation.
Following this offering, we intend to file a registration statement on Form
S-8 under the Securities Act to register 5,383,914 shares of our common stock
reserved for issuance or previously issued under our employee benefit plans and
compensation contracts. Shares of our common stock issued under our stock
incentive plans generally will be available for sale in the open market by
holders who are not affiliates of AppNet and, subject to the volume and other
applicable limitations of Rule 144, by holders who are affiliates of AppNet,
unless such shares are subject to vesting restrictions or the contractual
restrictions described above.
We are a party to a registration agreement, dated as of June 29, 1998, which
gives the holders of a majority of the common stock issued to GTCR and Smart
Technology under the purchase agreement with GTCR and Smart Technology a
conditional right to demand registration of all or any portion of this common
stock. Substantially all of our other current stockholders have the right to
include all or any portion of their AppNet common stock on registration
statements we file to register the common stock issued to GTCR and Smart
Technology under the purchase agreement with GTCR and Smart Technology. Subject
to specific conditions, substantially all of our current stockholders have the
right to include all or any portion of their AppNet common stock on registration
statements we file on our own behalf, other than in an initial public offering.
These rights cover substantially all of the shares of our common stock and will
also cover any shares obtained by parties to the registration agreement.
Registration of these shares of our common stock would permit the sale of these
shares without regard to the restrictions of Rule 144. In addition, our
acquisition agreement with Arbor gave the former stockholders of Arbor rights to
have their shares of our common stock included in any registration statement,
other than in connection with this offering.
Prior to this offering, there has been no public market for our common
stock. No information is currently available, and we cannot predict the timing
or amount of future sales of shares, or the effect, if any, that future sales of
shares, or the availability of shares for future sale, will have on the market
price of our common stock prevailing from time to time. Sales of substantial
amounts of our common stock, including shares issuable upon the exercise of
stock options, in the public market after the lapse of the restrictions
described above, or the perception that such sales may occur, could materially
and adversely affect the prevailing market price for our common stock and our
ability to raise equity capital in the future.
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U.S. FEDERAL TAX CONSIDERATIONS FOR NON-U.S. HOLDERS
The following is a general discussion of the principal United States federal
income and estate tax consequences of the ownership and disposition of common
stock by a non-U.S. holder. As used in this prospectus, a non-U.S. holder is
defined as a holder that for United States federal income tax purposes is an
individual or entity other than:
- a citizen or individual resident of the United States;
- a corporation or partnership created or organized in or under the laws of
the United States or of any political subdivision thereof, other than a
partnership treated as foreign under U.S. Treasury regulations;
- an estate the income of which is subject to U.S. federal income taxation
regardless of its source; or
- a trust if a U.S. court is able to exercise primary supervision over the
administration of the trust and one or more U.S. persons have the
authority to control all substantial decisions of the trust.
An individual may, subject to a number of exceptions, be deemed to be a
resident alien, as opposed to a nonresident alien, by virtue of being present in
the United States for at least 31 days in the calendar year and for an aggregate
of at least 183 days during a three-year period ending in the current calendar
year, counting for such purposes all of the days present in the current year,
one-third of the days present in the immediately preceding year and one-sixth of
the days present in the second preceding year. Resident aliens are subject to
U.S. federal tax as if they were U.S. citizens.
This discussion does not address all aspects of United States federal income
and estate taxes that may be relevant to non-U.S. holders in light of their
personal circumstances, including the fact that in the case of a non-U.S. holder
that is a partnership, the U.S. tax consequences of holding and disposing of
shares of common stock may be affected by determinations made at the partner
level, or that may be relevant to non-U.S. holders which may be subject to
special treatment under United States federal income tax laws such as insurance
companies, tax-exempt organizations, financial institutions, dealers in
securities and holders of securities held as part of a "straddle," "hedge" or
"conversion transaction." This discussion also does not address U.S. state or
local or foreign tax consequences. Furthermore, this discussion is based on
provisions of the Internal Revenue Code of 1986, as amended, existing and
proposed regulations promulgated thereunder and administrative and judicial
interpretations thereof, all as of the date hereof, and all of which are subject
to change, possibly with retroactive effect. The following summary is included
herein for general information. ACCORDINGLY, PROSPECTIVE INVESTORS ARE URGED TO
CONSULT THEIR TAX ADVISERS REGARDING THE UNITED STATES FEDERAL, STATE, LOCAL AND
NON-U.S. INCOME AND OTHER TAX CONSEQUENCES OF ACQUIRING, HOLDING AND DISPOSING
OF SHARES OF COMMON STOCK.
DIVIDENDS
We do not anticipate paying cash dividends on our common stock in the
foreseeable future. In the event, however, that dividends are paid on shares of
our common stock, dividends paid to a non-U.S. holder of common stock generally
will be subject to withholding of United States federal income tax at a 30%
rate, or such lower rate as may be provided by an income tax treaty between the
United States and a foreign country if the non-U.S. holder is treated as a
resident of such foreign country within the meaning of the applicable treaty.
Non-U.S. holders should consult their tax advisors regarding their entitlement
to benefits under a relevant income tax treaty.
Dividends that are effectively connected with a non-U.S. holder's conduct of
a trade or business in the United States or, if an income tax treaty applies,
attributable to a permanent establishment in the United States, are generally
subject to U.S. federal income tax on a net income basis at regular graduated
rates, but are not generally subject to the 30% withholding tax if the non-U.S.
holder files
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the appropriate U.S. Internal Revenue Service form with the payor, which form
under U.S. Treasury regulations generally requires the non-U.S. holder to
provide a U.S. taxpayer identification number. Any such U.S. trade or business
income received by a non-U.S. holder that is a corporation may also be subject
to an additional "branch profits tax" at a 30% rate or such lower rate as may be
specified by an applicable income tax treaty.
Under currently applicable U.S. Treasury regulations, dividends paid to an
address in a foreign country are presumed, absent actual knowledge to the
contrary, to be paid to a resident of such country for purposes of the
withholding discussed above and for purposes of determining the applicability of
a tax treaty rate. Under U.S. Treasury regulations generally effective for
payments made after December 31, 2000, however, a non-U.S. holder of our common
stock who wishes to claim the benefit of an applicable treaty rate generally
will be required to satisfy applicable certification and other requirements. In
addition, under these regulations, in the case of our common stock held by a
foreign partnership, the certification requirement will generally be applied to
the partners of the partnership and the partnership will be required to provide
specified information, including a United States taxpayer identification number.
The regulations generally effective for payments made after December 31, 2000,
also provide look-through rules for tiered partnerships. Further, the Internal
Revenue Service intends to issue regulations under which a foreign trustee or
foreign executor of a U.S. or foreign trust or estate, depending on the
circumstances, will be required to furnish the appropriate withholding
certificate on behalf of the beneficiaries, grantor trust or estate, as the case
may be.
A non-U.S. holder of our common stock that is eligible for a reduced rate of
U.S. withholding tax under an income tax treaty may obtain a refund of any
excess amounts withheld by filing an appropriate claim for a refund with the
Internal Revenue Service.
The U.S. Treasury regulations generally effective for payments made after
December 31, 2000 also provide special rules for dividend payments made to
foreign intermediaries, U.S. or foreign wholly owned entities that are
disregarded for U.S. federal income tax purposes and entities that are treated
as fiscally transparent in the United States, the applicable income tax treaty
jurisdiction, or both. In addition, recently enacted legislation, effective
August 5, 1997, denies income tax treaty benefits to foreigners receiving income
derived through a partnership, or otherwise fiscally transparent entity, in
certain circumstances. Prospective investors should consult with their own tax
advisers concerning the effect, if any, of these new Treasury regulations and
this recent legislation on an investment in our common stock.
GAIN ON DISPOSITION OF COMMON STOCK
A non-U.S. holder generally will not be subject to U.S. federal income tax
in respect of gain recognized on a disposition of our common stock unless:
- the gain is U.S. trade or business income, in which case, the branch
profits tax described above may also apply to a corporate non-U.S. holder;
- the non-U.S. holder is an individual who holds our common stock as a
capital asset within the meaning of Section 1221 of the Internal Revenue
Code, is present in the United States for 183 or more days in the taxable
year of the disposition and meets other requirements;
- the non-U.S. holder is subject to tax under the provisions of the U.S. tax
law applicable to certain United States expatriates; or
- AppNet is or has been a "U.S. real property holding corporation" for
federal income tax purposes at any time during the shorter of the
five-year period preceding such disposition or the period that the
non-U.S. holder held our common stock.
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Generally, a corporation is a "U.S. real property holding corporation" if the
fair market value of its "U.S. real property interests" equals or exceeds 50% of
the sum of the fair market value of its worldwide real property interests plus
its other assets used or held for use in a trade or business. We believe that we
have not been, are not currently, and do not anticipate becoming, a "U.S. real
property holding corporation" for U.S. federal income tax purposes. The tax with
respect to stock in a "U.S. real property holding corporation" does not apply to
a non-U.S. holder whose holdings, direct and indirect, at all times during the
applicable period, constituted 5% or less of our common stock, provided that our
common stock was regularly traded on an established securities market. If we
were, or were to become, a U.S. real property holding corporation, we believe
that our common stock would be treated as "regularly traded."
If a non-U.S. holder who is an individual is subject to tax on gain which is
U.S. trade or business income, such individual generally will be taxed on the
net gain derived from a sale of common stock under regular graduated United
States federal income tax rates. If an individual non-U.S. holder is subject to
tax because such individual holds our common stock as a capital asset, is
present in the United States for 183 or more days in the taxable year of the
disposition and meets other requirements, such individual generally will be
subject to a flat 30% tax on the gain derived from a sale, which may be offset
by United States capital losses, notwithstanding the fact that such individual
is not considered a resident alien of the United States. Thus, individual
non-U.S. holders who have spent (or expect to spend) more than a DE MINIMIS
period of time in the United States in the taxable year in which they
contemplate a sale of common stock are urged to consult their tax advisers prior
to the sale concerning the U.S. tax consequences of such sale.
If a non-U.S. holder that is a foreign corporation is subject to tax on gain
which is U.S. trade or business income, it generally will be taxed on its net
gain under regular graduated United States federal income tax rates and, in
addition, will be subject to the branch profits tax equal to 30% of its
"effectively connected earnings and profits," within the meaning of the Internal
Revenue Code for the taxable year, as adjusted for specific items, unless it
qualifies for a lower rate under an applicable tax treaty.
FEDERAL ESTATE TAX
Common stock owned or treated as owned by an individual who is neither a
United States citizen nor a United States resident, as defined for United States
federal estate tax purposes, at the time of death will be included in the
individual's gross estate for United States federal estate tax purposes, unless
an applicable estate tax or other treaty provides otherwise and, therefore, may
be subject to United States federal estate tax.
INFORMATION REPORTING AND BACKUP WITHHOLDING TAX
Under U.S. Treasury regulations, we must report annually to the Internal
Revenue Service and to each non-U.S. holder the amount of dividends paid to such
holder and the tax withheld with respect to such dividends. Copies of the
information returns reporting such dividends and withholding may also be made
available to the tax authorities in the country in which the non-U.S. holder is
a resident under the provisions of an applicable income tax treaty or agreement.
Currently, United States backup withholding, which generally is a
withholding tax imposed at the rate of 31% on payments to persons that fail to
furnish specified information under the United States information reporting
requirements, generally will not apply:
- to dividends paid to non-U.S. holders that are subject to the 30%
withholding discussed above, or that are not so subject because a tax
treaty applies that reduces or eliminates such 30% withholding; or
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- before January 1, 2001, to dividends paid to a non-U.S. holder at an
address outside of the United States unless the payor has actual knowledge
that the payee is a U.S. holder.
Backup withholding and information reporting generally will apply to dividends
paid to addresses inside the United States on shares of our common stock to
beneficial owners that are not "exempt recipients" and that fail to provide
identifying information in the manner required.
The payment of the proceeds of the disposition of our common stock by a
holder to or through the U.S. office of a broker or through a non-U.S. branch of
a U.S. broker generally will be subject to information reporting and backup
withholding at a rate of 31% unless the holder either certifies its status as a
non-U.S. holder under penalties of perjury or otherwise establishes an
exemption. The payment of the proceeds of the disposition by a non-U.S. holder
of common stock to or through a non-U.S. office of a non-U.S. broker will not be
subject to backup withholding or information reporting unless the non-U.S.
broker has particular types of U.S. relationships. In the case of the payment of
proceeds from the disposition of our common stock effected by a foreign office
of a broker that is a U.S. person or a U.S. related person, existing regulations
require information reporting on the payment unless the broker receives a
statement from the owner, signed under penalty of perjury, certifying its
non-U.S. status or the broker has documentary evidence in its files as to the
non-U.S. holder's foreign status and the broker has no actual knowledge to the
contrary. For this purpose, a U.S. related person is defined as:
- a "controlled foreign corporation" for U.S. federal income tax purposes;
or
- a foreign person 50% or more of whose gross income from all sources for
the three-year period ending with the close of its taxable year preceding
the payment, or for such part of the period that the broker has been in
existence, is derived from activities that are effectively connected with
the conduct of a U.S. trade or business.
The U.S. Treasury regulations generally effective for payments made after
December 31, 2000 alter the foregoing rules. Among other things, such
regulations provide presumptions under which a non-U.S. holder is subject to
backup withholding at the rate of 31% and information reporting unless we
receive certification from the holder of non-U.S. status. Depending on the
circumstances, this certification will need to be provided:
- directly by the non-U.S. holder;
- in the case of a non-U.S. holder that is treated as a partnership or other
fiscally transparent entity, by the partners, stockholders or other
beneficiaries of such entity; or
- by qualified financial institutions or other qualified entities on behalf
of the non-U.S. holder.
Any amounts withheld under the backup withholding rules from a payment to a
non-U.S. holder will be refunded, or credited against the holder's U.S. federal
income tax liability, if any, provided that the required information is
furnished to the Internal Revenue Service.
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UNDERWRITING
Under an underwriting agreement dated , 1999, we have agreed to
sell to the underwriters named below, for whom Credit Suisse First Boston
Corporation, Hambrecht & Quist LLC, BT Alex. Brown Incorporated, The
Robinson-Humphrey Company, LLC and Charles Schwab & Co., Inc. are acting as
representatives, the following respective numbers of shares of our common stock:
<TABLE>
<CAPTION>
NUMBER
UNDERWRITERS OF SHARES
---------
<S> <C>
Credit Suisse First Boston Corporation.............................................
Hambrecht & Quist LLC..............................................................
BT Alex. Brown Incorporated........................................................
The Robinson-Humphrey Company, LLC.................................................
Charles Schwab & Co., Inc..........................................................
---------
Total..........................................................................
---------
---------
</TABLE>
The underwriting agreement provides that the underwriters are obligated to
purchase all of the shares of our common stock offered in this offering if any
are purchased, other than those shares covered by the over-allotment option
described below. The underwriting agreement also provides that if an underwriter
defaults, the purchase commitments of non-defaulting underwriters may be
increased or this offering of our common stock may be terminated.
We have granted to the underwriters a 30-day option to purchase on a pro
rata basis up to 900,000 additional shares of our common stock at the initial
public offering price less the underwriting discounts and commissions. This
option may be exercised only to cover over-allotments of our common stock.
The underwriters propose to offer our common stock initially at the public
offering price on the cover page of this prospectus and to the selling group
members at that price less a concession of $ per share. The underwriters and
the selling group members may allow a discount of $ per share on sales to other
broker/dealers. After the initial public offering, the public offering price and
concession and discount to dealers may be changed by the representatives.
The following table summarizes the compensation and estimated expenses that
we will pay.
<TABLE>
<CAPTION>
PER SHARE TOTAL
-------------------------- --------------------------
<S> <C> <C> <C> <C>
WITHOUT WITH OVER- WITHOUT WITH OVER-
OVER-ALLOTMENT ALLOTMENT OVER-ALLOTMENT ALLOTMENT
------------- ----------- ------------- -----------
Underwriting discounts and commissions paid by us.......... $ $ $ $
Expenses payable by us..................................... $ $ $ $
</TABLE>
The underwriters have informed us that they do not expect sales to accounts
over which the underwriters exercise discretionary authority to exceed 5% of the
shares of our common stock being offered.
We, our officers, our directors, most of the former owners of all of the
businesses we acquired, GTCR and Smart Technology have agreed not to offer or
transfer, or file with the Securities and Exchange Commission a registration
statement under the Securities Act relating to, any additional shares of our
common stock or securities convertible into or exchangeable or exercisable for
any shares of our common stock without the prior written consent of Credit
Suisse First Boston Corporation for a period of 180 days after the date of this
prospectus, except in our case for grants of employee stock options under our
stock incentive plans in effect on the date hereof and issuances of securities
as a result of the exercise of any options outstanding on the date hereof and
issuances of securities as a result of the conversion of any convertible
instruments outstanding on the date hereof.
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The underwriters have reserved for sale, at the initial public offering
price, up to shares of our common stock for employees and other persons
associated with AppNet who have expressed an interest in purchasing our common
stock in this offering. The number of shares of common stock available for sale
to the general public in this offering will be reduced to the extent these
persons purchase the reserved shares. Any reserved shares not so purchased will
be offered by the underwriters to the general public on the same terms as the
other shares.
We have agreed to indemnify the underwriters against liabilities under the
Securities Act, or to contribute to payments which the underwriters may be
required to make in that respect.
We have applied to list the shares of our common stock on The Nasdaq Stock
Market's National Market under the symbol "APNT".
Prior to this offering, there has been no public market for our common
stock. The initial public offering price for our common stock will be determined
by negotiation between us and the representatives and does not reflect the
market price for our common stock following this offering. Among the principal
factors considered in determining the initial public offering price will be:
- the information in this prospectus and otherwise available to the
representatives;
- market conditions for initial public offerings;
- the history of and prospects for the industry in which we compete;
- our past and present operations;
- our past and present earnings and current financial position;
- the capability of our management;
- our prospects for future earnings;
- the present state of our development and our current financial condition;
- the recent market prices of, and the demand for, publicly traded common
stock of generally comparable companies;
- the general condition of the securities markets at the time of this
offering; and
- other relevant factors.
We can offer no assurances that the initial public offering price will
correspond to the price at which our common stock will trade in the public
market subsequent to this offering or that an active trading market for our
common stock will develop and continue after this offering.
The representatives may engage in over-allotment, stabilizing transactions,
syndicate covering transactions and penalty bids in accordance with Regulation M
under the Securities Exchange Act of 1934. Over-allotment involves syndicate
sales in excess of the size of this offering, which creates a syndicate short
position. Stabilizing transactions permit bids to purchase the shares of our
common stock so long as the stabilizing bids do not exceed a specified maximum.
Syndicate covering transactions involve purchases of our common stock in the
open market after the distribution has been completed in order to cover
syndicate short positions. Penalty bids permit the representatives to reclaim a
selling concession from a syndicate member when our common stock originally sold
by the syndicate member is purchased in a syndicate covering transaction to
cover syndicate short positions.
Such stabilizing transactions, syndicate covering transactions and penalty
bids may cause the price of our common stock to be higher than it would
otherwise be in the absence of such transactions. These transactions may be
effected on The Nasdaq Stock Market's National Market or otherwise and, if
commenced, may be discontinued at any time.
82
<PAGE>
NOTICE TO CANADIAN RESIDENTS
RESALE RESTRICTIONS
The distribution of our common stock in Canada is being made only on a
private placement basis exempt from the requirement that we prepare and file a
prospectus with the securities regulatory authorities in each province where
trades of our common stock are effected. Accordingly, any resale of our common
stock in Canada must be made in accordance with applicable securities laws which
will vary depending on the relevant jurisdiction and which may require resales
to be made in accordance with available statutory exemptions or under a
discretionary exemption granted by the applicable Canadian securities regulatory
authority. Purchasers are advised to seek legal advice prior to any resale of
our common stock.
REPRESENTATIONS OF PURCHASERS
Each purchaser of our common stock in Canada who receives a purchase
confirmation will be deemed to represent to us and the dealer from whom such
purchase confirmation is received that:
- such purchaser is entitled under applicable provincial securities laws to
purchase our common stock without the benefit of a prospectus qualified
under such securities laws;
- where required by law, that such purchaser is purchasing as principal and
not as agent; and
- such purchaser has reviewed the text above under "Resale restrictions."
RIGHTS OF ACTION (ONTARIO PURCHASERS)
The securities being offered are those of a foreign issuer and Ontario
purchasers will not receive the contractual right of action prescribed by
Ontario securities law. As a result, Ontario purchasers must rely on other
remedies that may be available, including common law rights of action for
damages or rescission or rights of action under the civil liability provisions
of the U.S. federal securities law.
ENFORCEMENT OF LEGAL RIGHTS
All of the issuer's directors and officers as well as the experts named
herein may be located outside of Canada and, as a result, it may not be possible
for Canadian purchasers to effect service of process within Canada upon the
issuer or such persons. All or a substantial portion of the assets of the issuer
and such persons may be located outside of Canada and, as a result, it may not
be possible to satisfy a judgment against the issuer or such persons in Canada
or to enforce a judgment obtained in Canadian courts against such issuer or
persons outside of Canada.
NOTICE TO BRITISH COLUMBIA RESIDENTS
A purchaser of our common stock to whom the SECURITIES ACT (British
Columbia) applies is advised that such purchaser is required to file with the
British Columbia Securities Commission a report within ten days of the sale of
common stock acquired by such purchaser through this offering. Such report must
be in the form attached to British Columbia Securities Commission Blanket Order
BOR #95/17, a copy of which may be obtained from us. Only one such report must
be filed in respect of shares of our common stock acquired on the same date and
under the same prospectus exemption.
TAXATION AND ELIGIBILITY FOR INVESTMENT
Canadian purchasers of our common stock should consult their own legal and
tax advisors with respect to the tax consequences of an investment in our common
stock in their circumstances and with respect to the eligibility of our common
stock for investment by the purchaser under relevant Canadian legislation.
83
<PAGE>
LEGAL MATTERS
The validity of the shares of our common stock offered by this prospectus
will be passed upon for AppNet by Fried, Frank, Harris, Shriver & Jacobson (a
partnership including professional corporations), Washington, DC. The
underwriters have been represented by Cravath, Swaine & Moore, New York, NY.
EXPERTS
The audited financial statements and schedules included in this prospectus
and elsewhere in the registration statement have been audited by Arthur Andersen
LLP, independent public accountants, as indicated in their reports with respect
thereto, and are included herein in reliance upon the authority of said firm as
experts in giving said reports.
The pro forma consolidated statement of operations for the year ended
December 31, 1998 included in this prospectus has been examined by Arthur
Andersen LLP, independent public accountants, as indicated in their report with
respect thereto, and is included herein in reliance upon the authority of said
firm as experts in giving such reports.
WHERE YOU CAN FIND ADDITIONAL INFORMATION
AppNet has filed with the Securities and Exchange Commission a registration
statement on Form S-1 under the Securities Act and the rules and regulations
promulgated under the Securities Act with respect to its common stock offered by
this prospectus. This prospectus, which constitutes a part of the registration
statement, does not contain all of the information set forth in the registration
statement and its exhibits and schedules. For further information with respect
to AppNet and its common stock, we refer you to the registration statement,
including its exhibits and the schedules filed as a part of it. You may read and
copy the registration statement at the Securities and Exchange Commission's
following locations:
<TABLE>
<S> <C> <C>
Public Reference Room Office New York Regional Office Chicago Regional Office
450 Fifth Street, N.W. Seven World Trade Center Citicorp Center
Washington, DC 20549 Suite 1300 500 West Madison Street
New York, NY 10048 Chicago, IL 60661-2511
</TABLE>
You may also obtain copies of the registration statement by mail from the
Public Reference Section of the Securities and Exchange Commission at 450 Fifth
Street, N.W., Judiciary Plaza, Washington, DC 20549 or by telephone at
1-800-SEC-0330. The registration statement is available to the public from
commercial document retrieval services and at the Securities and Exchange
Commission's World Wide Website located at http://www.sec.gov. Upon approval of
our common stock for quotation on The Nasdaq Stock Market's National Market, you
can read AppNet's filings with the Securities and Exchange Commission at the
office of Nasdaq Operations, 1734 K Street, N.W. Washington, DC 20006.
Statements in this prospectus as to the contents of any contract or other
document are not necessarily complete, and in each instance we refer you to the
full text of such contract or document filed as an exhibit to the registration
statement, each such statement being qualified in all respects by such
reference.
We intend to furnish our stockholders with annual reports containing
financial statements audited by an independent public accounting firm and make
available to our stockholders quarterly reports for the first three quarters of
each fiscal year containing interim unaudited financial information.
84
<PAGE>
INDEX TO FINANCIAL STATEMENTS
<TABLE>
<S> <C>
APPNET SYSTEMS, INC.
Report of independent public accountants......................................... F--4
Consolidated balance sheets as of December 31, 1998 and March 31, 1999
(unaudited).................................................................... F--5
Consolidated statements of operations for the year ended December 31, 1998 and
for the three month periods ended March 31, 1998 and March 31, 1999
(unaudited).................................................................... F--6
Consolidated statements of stockholders' equity for the year ended December 31,
1998 and for the three month period ended March 31, 1999 (unaudited)........... F--7
Consolidated statements of cash flows for the year ended December 31, 1998 and
for the three month periods ended March 31, 1998 and March 31, 1999
(unaudited).................................................................... F--8
Notes to consolidated financial statements....................................... F--9
SOFTWARE SERVICES CORPORATION
Report of independent public accountants......................................... F--28
Balance sheets as of December 31, 1996 and 1997, and August 24, 1998............. F--29
Statements of operations for the years ended December 31, 1996 and 1997, for the
three month period ended March 31, 1998 (unaudited), and for the period from
January 1, 1998 to August 24, 1998............................................. F--30
Statements of stockholders' equity for the years ended December 31, 1996 and
1997, and for the period from January 1, 1998 to August 24, 1998............... F--31
Statements of cash flows for the years ended December 31, 1996 and 1997, for the
three month period ended March 31, 1998 (unaudited), and for the period from
January 1, 1998 to August 24, 1998............................................. F--32
Notes to financial statements.................................................... F--33
ARBOR INTELLIGENT SYSTEMS, INC.
Report of independent public accountants......................................... F--44
Balance sheets as of December 31, 1997 and March 11, 1998........................ F--45
Statements of operations for the year ended December 31, 1997 and for the period
from
January 1, 1998 to March 11, 1998.............................................. F--46
Statements of stockholders' deficit for the year ended December 31, 1997 and for
the period from January 1, 1998 to March 11, 1998.............................. F--47
Statements of cash flows for the year ended December 31, 1997 and for the period
from
January 1, 1998 to March 11, 1998.............................................. F--48
Notes to financial statements.................................................... F--49
</TABLE>
F-1
<PAGE>
<TABLE>
<S> <C>
NEW MEDIA PUBLISHING, INC.
Report of independent public accountants......................................... F--55
Balance sheets as of December 31, 1996 and 1997, and October 1, 1998............. F--56
Statements of operations for the years ended December 31, 1996 and 1997, and for
the period from January 1, 1998 to October 1, 1998............................. F--57
Statements of stockholders' equity for the year ended December 31, 1996 and 1997,
and for the period from January 1, 1998 to October 1, 1998..................... F--58
Statements of cash flows for the years ended December 31, 1996 and 1997, and for
the period from January 1, 1998 to October 1, 1998............................. F--59
Notes to financial statements.................................................... F--60
CENTURY COMPUTING, INCORPORATED
Report of independent public accountants......................................... F--68
Balance sheets as of December 31, 1996 and 1997 and October 11, 1998............. F--69
Statements of operations for the years ended December 31, 1996 and 1997, and for
the period from January 1, 1998 to October 11, 1998............................ F--70
Statements of stockholders' equity for the years ended December 31, 1996 and
1997, and for the period from January 1, 1998 to October 11, 1998.............. F--71
Statements of cash flows for the years ended December 31, 1996 and 1997, and for
the period from January 1, 1998 to October 11, 1998............................ F--72
Notes to financial statements.................................................... F--73
RESEARCH & PLANNING, INC.
Report of independent public accountants......................................... F--81
Balance sheets as of December 31, 1996 and 1997, and October 19, 1998............ F--82
Statements of operations for the years ended December 31, 1996 and 1997, and for
the period from January 1, 1998 to October 19, 1998............................ F--83
Statements of stockholders' equity for the years ended December 31, 1996 and
1997, and for the period from January 1, 1998 to October 19, 1998.............. F--84
Statements of cash flows for the Years Ended December 31, 1996 and 1997, and for
the period from January 1, 1998 to October 19, 1998............................ F--85
Notes to financial statements.................................................... F--86
</TABLE>
F-2
<PAGE>
<TABLE>
<S> <C>
THE KODIAK GROUP, INC.
Report of independent public accountants......................................... F--90
Balance sheets as of December 31, 1997 and December 13, 1998..................... F--91
Statements of operations for the year ended December 31, 1997 and for the period
from
January 1, 1998 to December 13, 1998........................................... F--92
Statements of stockholders' equity for the year ended December 31, 1997 and for
the period from January 1, 1998 to December 13, 1998........................... F--93
Statements of cash flows for the year ended December 31, 1997 and for the period
from
January 1, 1998 to December 13, 1998........................................... F--94
Notes to financial statements.................................................... F--95
I33 COMMUNICATIONS CORP.
Report of independent public accountants......................................... F--100
Balance sheets as of December 31, 1996, 1997 and 1998............................ F--101
Statements of operations for the years ended December 31, 1996, 1997 and 1998.... F--102
Statements of stockholders' equity (deficit) for the years ended December 31,
1996, 1997 and 1998............................................................ F--103
Statements of cash flows for the years ended December 31, 1996, 1997 and 1998.... F--104
Notes to financial statements.................................................... F--105
SALZINGER & COMPANY, INC.
Report of independent public accountants......................................... F--111
Balance sheet as of December 31, 1998............................................ F--112
Statement of operations for the year ended December 31, 1998..................... F--113
Statement of stockholder's equity for year ended December 31, 1998............... F--114
Statement of cash flows for year ended December 31, 1998......................... F--115
Notes to financial statements.................................................... F--116
INTERNET OUTFITTERS, INC.
Report of independent public accountants......................................... F--119
Balance sheet as of December 31, 1998............................................ F--120
Statement of operations for the year ended December 31, 1998..................... F--121
Statement of stockholders' equity for the year ended December 31, 1998........... F--122
Statement of cash flows for the year ended December 31, 1998..................... F--123
Notes to financial statements.................................................... F--124
</TABLE>
F-3
<PAGE>
After the 1999 reverse common stock split discussed in Note 18 to AppNet
Systems, Inc.'s consolidated financial statements is effected, we expect to be
in a position to render the following audit report.
ARTHUR ANDERSEN LLP
Washington, D.C.
March 29, 1999
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To AppNet Systems, Inc.:
We have audited the accompanying consolidated balance sheet of AppNet
Systems, Inc. (a Delaware corporation) and subsidiaries as of December 31, 1998
and the related consolidated statements of operations, stockholders' equity, and
cash flows for the year then ended. These financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these financial statements based on our audit.
We conducted our audit in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audit provides a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the financial position of AppNet
Systems, Inc. and subsidiaries as of December 31, 1998, and the results of their
operations and their cash flows for the year then ended, in conformity with
generally accepted accounting principles.
Washington, D.C.
March 29, 1999
(except with respect to the matter discussed
in Note 18, as to which the date is
, 1999.)
F-4
<PAGE>
APPNET SYSTEMS, INC.
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
DECEMBER 31, MARCH 31,
1998 1999
-------------- --------------
<S> <C> <C>
(UNAUDITED)
ASSETS
Current assets:
Cash and cash equivalents...................................................... $ 2,447,000 $ 5,655,000
Accounts receivable, net of allowance for doubtful accounts of $1,124,000 and
$1,816,000, respectively..................................................... 11,238,000 16,997,000
Other current assets........................................................... 1,118,000 1,172,000
-------------- --------------
Total current assets......................................................... 14,803,000 23,824,000
Property and equipment, net...................................................... 3,012,000 4,596,000
Intangible assets, net........................................................... 99,380,000 133,061,000
Other assets..................................................................... 1,175,000 1,990,000
-------------- --------------
Total assets................................................................. $ 118,370,000 $ 163,471,000
-------------- --------------
-------------- --------------
LIABILITIES, REDEEMABLE STOCK AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable............................................................... $ 2,737,000 $ 2,978,000
Accrued liabilities............................................................ 6,911,000 20,720,000
Current portion of convertible notes and long-term debt........................ 2,426,000 3,454,000
-------------- --------------
Total current liabilities.................................................... 12,074,000 27,152,000
Credit facilities................................................................ 37,461,000 59,400,000
Convertible notes, net of current portion........................................ 2,706,000 13,006,000
Other long-term debt, net of current portion..................................... 1,199,000 25,000
Other long-term liabilities...................................................... 3,398,000 2,274,000
-------------- --------------
Total liabilities............................................................ 56,838,000 101,857,000
-------------- --------------
Commitments and contingencies (Note 16)
Class A Preferred Stock, $.01 par value, 96,621 shares authorized, 38,093 and
45,430 shares issued and outstanding as of December 31, 1998 and March 31,
1999, respectively, liquidation value $1,000................................... 37,646,000 45,115,000
Common stock subject to put rights, $.0005 par value; 48,771 shares issued and
outstanding.................................................................... 278,000 278,000
-------------- --------------
Stockholders' equity:
Class B Preferred Stock, $.01 par value, 20,000 shares authorized, 11,576
shares issued and outstanding, liquidation value $1,000...................... 11,576,000 11,576,000
Common stock, $.0005 par value; 75,000,000 shares authorized, 19,504,173 and
19,917,545 shares issued and outstanding as of December 31, 1998 and March
31, 1999, respectively....................................................... 10,000 10,000
Additional paid-in capital..................................................... 27,222,000 36,518,000
Notes receivable from management............................................... (821,000) (685,000)
Deferred compensation.......................................................... -- (477,000)
Accumulated deficit............................................................ (14,379,000) (30,721,000)
-------------- --------------
Total stockholders' equity................................................... 23,608,000 16,221,000
-------------- --------------
Total liabilities, redeemable stock and stockholders' equity................. $ 118,370,000 $ 163,471,000
-------------- --------------
-------------- --------------
</TABLE>
The accompanying notes are an integral part of these statements.
F-5
<PAGE>
APPNET SYSTEMS, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
THREE MONTHS ENDED
MARCH 31,
YEAR ENDED ------------------------------
DECEMBER 31, 1998 1998 1999
----------------- -------------- --------------
<S> <C> <C> <C>
(UNAUDITED)
Revenues...................................................... $ 17,674,000 $ 197,000 $ 19,643,000
Cost of revenues.............................................. 11,699,000 145,000 11,457,000
----------------- -------------- --------------
Gross profit.............................................. 5,975,000 52,000 8,186,000
Operating expenses:
Selling and marketing....................................... 964,000 3,000 1,190,000
General and administrative.................................. 6,507,000 246,000 6,754,000
Stock-based and other acquisition-related compensation...... 1,157,000 -- 2,487,000
Depreciation and amortization............................... 10,151,000 58,000 12,735,000
----------------- -------------- --------------
Total operating expenses.................................. 18,779,000 307,000 23,166,000
----------------- -------------- --------------
Loss from operations.......................................... (12,804,000) (255,000) (14,980,000)
Interest expense.............................................. 1,052,000 24,000 1,262,000
Other expense, net............................................ 723,000 -- --
----------------- -------------- --------------
Loss before income taxes...................................... (14,579,000) (279,000) (16,242,000)
Income tax (benefit) provision................................ (200,000) -- 100,000
----------------- -------------- --------------
Net loss...................................................... (14,379,000) (279,000) (16,342,000)
Dividends on and accretion of preferred stock................. (873,000) -- (1,039,000)
----------------- -------------- --------------
Net loss attributable to common stockholders.................. $ (15,252,000) $ (279,000) $(17,381,000)
----------------- -------------- --------------
----------------- -------------- --------------
Basic and diluted net loss per common share................... $ (1.41) $ (.23) $ (.88)
----------------- -------------- --------------
----------------- -------------- --------------
Weighted average common shares outstanding.................... 10,785,424 1,195,331 19,722,559
----------------- -------------- --------------
----------------- -------------- --------------
</TABLE>
The accompanying notes are an integral part of these statements.
F-6
<PAGE>
APPNET SYSTEMS, INC.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
<TABLE>
<CAPTION>
STOCKHOLDERS'
REDEEMABLE EQUITY SECURITIES EQUITY
-------------------------------------------------------------------- -----------
<S> <C> <C> <C> <C> <C> <C> <C>
COMMON STOCK CLASS B
SUBJECT TO CLASS A SERIES A-1 PREFERRED
PUT RIGHTS PREFERRED STOCK PREFERRED STOCK STOCK
-------------------- ----------------------- --------------------- -----------
SHARES AMOUNT SHARES AMOUNT SHARES AMOUNT SHARES
--------- --------- ----------- ---------- --------- ---------- -----------
Initial capitalization......................... -- $ -- -- $ -- -- $ -- --
Issuance of Series A-1 preferred stock in
connection with acquisition................ -- -- -- -- 266,796 1,067,000 --
GTCR Investment.............................. 48,771 278,000 -- -- (266,796) (1,067,000) --
Repurchase and cancellation of shares in
exchange for note payable.................. -- -- -- -- -- -- --
Repurchase and cancellation of common stock
shares..................................... -- -- -- -- -- -- --
Issuance of Class A Preferred Stock.......... -- -- 37,676 37,045,000 -- -- --
Conversion of common stock into Class A
Preferred Stock............................ -- -- 417 417,000 -- -- --
Dividends on and accretion of Class A
Preferred Stock............................ -- -- -- 184,000 -- -- --
Issuance of stock in connection with the 1998
acquired businesses........................ -- -- -- -- -- -- 11,576
Repurchase and cancellation of shares sold to
management................................. -- -- -- -- -- -- --
Purchase of shares by management............. -- -- -- -- -- -- --
Stock options exercised...................... -- -- -- -- -- -- --
Net loss..................................... -- -- -- -- -- -- --
--------- --------- ----------- ---------- --------- ---------- -----------
Total, December 31, 1998....................... 48,771 $ 278,000 38,093 $37,646,000 -- $ -- 11,576
--------- --------- ----------- ---------- --------- ---------- -----------
Issuance of Class A Preferred Stock
(unaudited)................................ -- -- 7,337 7,191,000 -- -- --
Dividends on and accretion of Class A
Preferred Stock (unaudited)................ -- -- -- 278,000 -- -- --
Issuance of stock in connection with the 1999
acquired businesses (unaudited)............ -- -- -- -- -- -- --
Repurchase and cancellation of shares to
management (unaudited)..................... -- -- -- -- -- -- --
Common stock sold for cash (unaudited)....... -- -- -- -- -- -- --
Stock options exercised (unaudited).......... -- -- -- -- -- -- --
Deferred compensation pursuant to issuance of
stock options (unaudited).................. -- -- -- -- -- -- --
Amortization of deferred compensation
(unaudited)................................ -- -- -- -- -- -- --
Net loss (unaudited)......................... -- -- -- -- -- -- --
--------- --------- ----------- ---------- --------- ---------- -----------
Total, March 31, 1999 (unaudited)............ 48,771 $ 278,000 45,430 $45,115,000 -- $ -- 11,576
--------- --------- ----------- ---------- --------- ---------- -----------
--------- --------- ----------- ---------- --------- ---------- -----------
<CAPTION>
<S> <C> <C>
COMMON
STOCK ADDITIONAL NOTES
---------------------- PAID-IN RECEIVABLE FROM DEFERRED
AMOUNT SHARES AMOUNT CAPITAL MANAGEMENT COMPENSATION
---------- --------- ----------- ---------- --------------- -------------
Initial capitalization......................... $ -- 5,343,860 $ 3,000 $ 132,000 $ -- $ --
Issuance of Series A-1 preferred stock in
connection with acquisition................ -- -- -- -- -- --
GTCR Investment.............................. -- 13,342,145 7,000 4,108,000 (447,000) --
Repurchase and cancellation of shares in
exchange for note payable.................. -- (1,350,877) (1,000) (405,000) -- --
Repurchase and cancellation of common stock
shares..................................... -- (138,455) -- (789,000) -- --
Issuance of Class A Preferred Stock.......... -- -- -- -- -- --
Conversion of common stock into Class A
Preferred Stock............................ -- (1,387,097) (1,000) (416,000) -- --
Dividends on and accretion of Class A
Preferred Stock............................ -- -- -- (873,000) -- --
Issuance of stock in connection with the 1998
acquired businesses........................ 11,576,000 3,397,329 2,000 24,811,000 -- --
Repurchase and cancellation of shares sold to
management................................. -- (681,053) (228,000) 197,000 --
Purchase of shares by management............. -- 552,982 572,000 (571,000) --
Stock options exercised...................... -- 425,339 310,000 -- --
Net loss..................................... -- -- -- -- -- --
---------- --------- ----------- ---------- --------------- -------------
Total, December 31, 1998....................... $11,576,000 19,504,173 $ 10,000 $27,222,000 $(821,000) $ --
---------- --------- ----------- ---------- --------------- -------------
Issuance of Class A Preferred Stock
(unaudited)................................ -- -- -- -- -- --
Dividends on and accretion of Class A
Preferred Stock (unaudited)................ -- -- -- (1,039,000) -- --
Issuance of stock in connection with the 1999
acquired businesses (unaudited)............ -- 595,711 9,399,000 -- --
Repurchase and cancellation of shares to
management (unaudited)..................... -- (449,530) (136,000) 136,000 --
Common stock sold for cash (unaudited)....... -- 29,240 -- 375,000 -- --
Stock options exercised (unaudited).......... -- 237,951 216,000 -- --
Deferred compensation pursuant to issuance of
stock options (unaudited).................. -- -- -- 481,000 -- (481,000)
Amortization of deferred compensation
(unaudited)................................ -- -- -- -- -- 4,000
Net loss (unaudited)......................... -- -- -- -- -- --
---------- --------- ----------- ---------- --------------- -------------
Total, March 31, 1999 (unaudited)............ $11,576,000 19,917,545 $ 10,000 36,518,000 $(685,000) $(477,000)
---------- --------- ----------- ---------- --------------- -------------
---------- --------- ----------- ---------- --------------- -------------
<CAPTION>
TOTAL
ACCUMULATED STOCKHOLDERS'
DEFICIT EQUITY
------------ ------------
Initial capitalization......................... $ -- $ 135,000
Issuance of Series A-1 preferred stock in
connection with acquisition................ -- --
GTCR Investment.............................. -- 3,668,000
Repurchase and cancellation of shares in
exchange for note payable.................. -- (406,000)
Repurchase and cancellation of common stock
shares..................................... -- (789,000)
Issuance of Class A Preferred Stock.......... -- --
Conversion of common stock into Class A
Preferred Stock............................ -- (417,000)
Dividends on and accretion of Class A
Preferred Stock............................ -- (873,000)
Issuance of stock in connection with the 1998
acquired businesses........................ -- 36,389,000
Repurchase and cancellation of shares sold to
management................................. -- (31,000)
Purchase of shares by management............. -- 1,000
Stock options exercised...................... -- 310,000
Net loss..................................... (14,379,000) (14,379,000)
------------ ------------
Total, December 31, 1998....................... ($14,379,000) $23,608,000
------------ ------------
Issuance of Class A Preferred Stock
(unaudited)................................ -- --
Dividends on and accretion of Class A
Preferred Stock (unaudited)................ -- (1,039,000)
Issuance of stock in connection with the 1999
acquired businesses (unaudited)............ -- 9,399,000
Repurchase and cancellation of shares to
management (unaudited)..................... -- --
Common stock sold for cash (unaudited)....... -- 375,000
Stock options exercised (unaudited).......... -- 216,000
Deferred compensation pursuant to issuance of
stock options (unaudited).................. -- --
Amortization of deferred compensation
(unaudited)................................ -- 4,000
Net loss (unaudited)......................... (16,342,000) (16,342,000)
------------ ------------
Total, March 31, 1999 (unaudited)............ ($30,721,000) $16,221,000
------------ ------------
------------ ------------
</TABLE>
The accompanying notes are an integral part of these statements.
F-7
<PAGE>
APPNET SYSTEMS, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
FOR THE THREE
FOR THE YEAR MONTHS ENDED
ENDED ------------------------------
DECEMBER 31, 1998 MARCH 31, 1998 MARCH 31, 1999
----------------- -------------- --------------
(UNAUDITED)
<S> <C> <C> <C>
Cash flows from operating activities:
Net loss.................................................... $ (14,379,000) $ (279,000) $(16,342,000)
Adjustments to reconcile net loss to net cash used in
operating activities:
Amortization.............................................. 9,867,000 56,000 12,289,000
Depreciation.............................................. 284,000 2,000 446,000
Stock-based and other acquisition-related compensation.... 1,157,000 -- 2,487,000
Write-off of deferred financing costs..................... 291,000 -- --
Deferred tax benefit...................................... (50,000) -- --
Change in assets and liabilities:
Accounts receivable, net................................ (1,762,000) 53,000 (3,131,000)
Other current assets.................................... 399,000 (39,000) 336,000
Accounts payable........................................ 1,012,000 221,000 (1,106,000)
Accrued liabilities..................................... 547,000 46,000 6,524,000
----------------- -------------- --------------
Net cash provided by (used in) operating activities... (2,634,000) 60,000 1,503,000
----------------- -------------- --------------
Cash flows from investing activities:
Purchase of property and equipment, net..................... (1,196,000) (10,000) (923,000)
Cash paid for acquired businesses, net of cash acquired..... (69,562,000) (1,832,000) (26,109,000)
Other assets................................................ (904,000) (150,000) (218,000)
----------------- -------------- --------------
Net cash used in investing activities................. (71,662,000) (1,992,000) (27,250,000)
----------------- -------------- --------------
Cash flows from financing activities:
Proceeds from long-term debt................................ 1,104,000 -- --
Repayments of long-term debt................................ (268,000) -- --
Borrowings under credit facilities.......................... 47,261,000 2,065,000 59,400,000
Repayments of credit facilities............................. (9,800,000) -- (37,461,000)
Debt issue costs............................................ (351,000) -- (621,000)
Proceeds from issuance of common stock...................... 3,015,000 15,000 375,000
Repurchase of common stock.................................. (789,000) -- --
Proceeds from issuance of preferred stock................... 36,292,000 -- 7,046,000
Repurchase of shares sold to management..................... (31,000) -- --
Proceeds from exercise of stock options..................... 310,000 -- 216,000
----------------- -------------- --------------
Net cash provided by financing activities............. 76,743,000 2,080,000 28,955,000
----------------- -------------- --------------
Net increase in cash.......................................... 2,447,000 148,000 3,208,000
Cash and cash equivalents, beginning of period................ -- -- 2,447,000
----------------- -------------- --------------
Cash and cash equivalents, end of period...................... $ 2,447,000 $ 148,000 $ 5,655,000
----------------- -------------- --------------
----------------- -------------- --------------
Supplementary information:
Cash paid for income taxes.................................. $ -- $ -- $ --
----------------- -------------- --------------
----------------- -------------- --------------
Cash paid for interest...................................... $ 775,000 $ 24,000 $ 157,000
----------------- -------------- --------------
----------------- -------------- --------------
</TABLE>
The accompanying notes are an integral part of these statements.
F-8
<PAGE>
APPNET SYSTEMS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1998 AND MARCH 31, 1999
1. BUSINESS DESCRIPTION:
AppNet Systems, Inc. ("AppNet" or the "Company") was incorporated under the
name Internet Applications, Inc. in November 1997 ("Inception"), under the laws
of the state of Delaware. The Company changed its name to AppNet Systems, Inc.,
in March 1998. AppNet is based in Bethesda, Maryland and is a provider of
Internet and electronic commerce professional services and solutions, including
strategic consulting, interactive media services, Internet-based application
development, electronic commerce systems integration and electronic commerce
outsourcing.
The Company's financial statements for the period from Inception through
December 31, 1997 reflect immaterial transactions and, therefore, have been
included in the 1998 financial statements to facilitate presentation. From
Inception through March 11, 1998, the Company's operating activities related
primarily to recruiting personnel, raising capital, identifying operating assets
for acquisitions and developing technical and marketing materials. In March
1998, the Company completed its first acquisition and recognized its first
revenues.
There are significant risks associated with the Company, including the
susceptibility of the Company's services to rapid technological change,
increased competition from existing service providers and new entrants, lack of
an operating history, existence of fixed price contracts, realizability of
intangible assets, government regulations, the year 2000 issue and dependence
upon key members of the management team.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES AND PRACTICES:
PRINCIPLES OF CONSOLIDATION
The accompanying consolidated financial statements include the accounts of
AppNet and its wholly owned subsidiaries. All significant intercompany
transactions and accounts have been eliminated in consolidation.
USE OF ESTIMATES
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make assumptions that
affect the reported amounts of assets and liabilities and the disclosure of
contingent assets and liabilities at the date of the financial statements and
the reported amount of revenues and expenses during the reporting period. Actual
results could differ from those estimates.
CASH AND CASH EQUIVALENTS
The Company considers all highly liquid investments with original maturities
of three months or less to be cash equivalents.
F-9
<PAGE>
APPNET SYSTEMS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1998 AND MARCH 31, 1999
PROPERTY AND EQUIPMENT
Property and equipment are stated at cost, net of accumulated depreciation
and amortization. Depreciation and amortization are computed using the
straight-line method over the estimated useful lives of the related assets, as
follows:
<TABLE>
<S> <C>
three to five
Computers and equipment................................. years
five to seven
Furniture and fixtures.................................. years
</TABLE>
Leasehold improvements are amortized over the lesser of the estimated useful
life of the asset or the remaining lease term.
IMPAIRMENT OF LONG-LIVED ASSETS
In accordance with Statement of Financial Accounting Standards ("SFAS") No.
121, "Accounting for Impairment of Long-Lived Assets and for Long-Lived Assets
to Be Disposed Of," the Company reviews its recorded goodwill, other intangibles
and long-lived assets for impairment whenever events or changes in circumstances
indicate that the carrying amount of an asset may not be recoverable. When
deemed necessary, goodwill and other intangibles are assessed for possible
impairment based upon a number of factors, including turnover of the acquired
workforce and the undiscounted value of expected future operating cash flows in
relation to the Company's net investment in each subsidiary. Since Inception,
the Company has not recorded a provision for possible impairment of long-lived
assets or intangible assets associated with its acquired businesses.
INTERNAL USE COMPUTER SOFTWARE
In accordance with the American Institute of Certified Public Accountants
(the "AICPA") Statement of Position 98-1 "Accounting for the Costs of Computer
Software Developed or Obtained for Internal Use," the Company capitalizes costs
related to software and implementation in connection with its internal use
software systems. Such costs are amortized principally over three years.
FAIR VALUE OF FINANCIAL INSTRUMENTS
The Company's financial instruments consist primarily of cash and cash
equivalents, accounts receivable, accounts payable, credit facilities, long-term
debt, convertible notes and capital lease obligations. In management's opinion,
the carrying amounts of these financial instruments approximate their fair
values at December 31, 1998. Due to the related party nature of the Company's
Class A Preferred Stock, it is impracticable to estimate its fair value at
December 31, 1998.
STOCK-BASED COMPENSATION
The Company accounts for stock-based employee compensation arrangements
using the intrinsic value method in accordance with provisions of Accounting
Principles Board ("APB") Opinion No. 25, "Accounting for Stock Issued to
Employees," and complies with the disclosure provisions of SFAS No. 123,
"Accounting for Stock-Based Compensation." Under APB Opinion No. 25,
compensation cost is generally recognized based on the difference, if any, on
the date of grant between the fair value of the Company's stock and the amount
an employee must pay to acquire the stock.
F-10
<PAGE>
APPNET SYSTEMS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1998 AND MARCH 31, 1999
REVENUE RECOGNITION
Revenues from time and materials contracts are recognized based on fixed
hourly rates for direct labor hours expended. Revenues from fixed-price
contracts are recognized on the percentage-of-completion method, with costs and
estimated profits recorded as work is performed. Revenues from
cost-plus-fixed-fee contracts are recognized on the basis of direct costs plus
indirect costs incurred plus a fixed profit percentage. Revenues exclude the
cost of media and advertising purchases reimbursed by clients.
Cost of revenues includes all direct material and labor costs related to
contract performance and does not include any related depreciation expense.
Provisions for estimated losses on uncompleted contracts are made in the period
in which such losses are determined. Changes in contract performance and
estimated profitability, including final contract settlements, may result in
revisions to costs and revenues and are recognized in the period in which the
revisions are determined. Unbilled receivables on contracts are comprised of
costs, plus earnings on certain contracts in excess of contractual billings on
such contracts. Cash received in excess of costs incurred is classified as
deferred revenue.
BUSINESS CONCENTRATION AND CREDIT RISK
The following table summarizes the revenues and accounts receivable from
clients in excess of 10% of total revenues and accounts receivable:
<TABLE>
<CAPTION>
ACCOUNTS
RECEIVABLE
REVENUES FOR AS OF
THE YEAR ENDED DECEMBER 31,
DECEMBER 31, 1998 1998
------------------- ---------------
<S> <C> <C>
Customer A.................................................. 15% 12%
Customer B.................................................. 12% 13%
</TABLE>
INCOME TAXES
Income taxes are accounted for using an asset and liability approach that
requires the recognition of taxes payable or refundable for the current year and
deferred tax liabilities and assets for the future tax consequences of events
that have been recognized in the Company's financial statements or tax returns.
The measurement of current and deferred tax liabilities and assets are based on
provisions of the enacted tax law; the effects of future changes in tax laws or
rates are not anticipated. The measurement of deferred tax assets is reduced, if
necessary, by the amount of any tax benefits that, based on available evidence,
are not expected to be realized.
EARNINGS PER SHARE
SFAS No. 128 "Earnings Per Share," requires the presentation of basic and
diluted earnings per share. Basic net income (loss) per share is computed by
dividing income (loss) attributable to common stockholders by the weighted
average number of common shares outstanding for the period. The diluted net
income (loss) per share data is computed using the weighted average number of
common shares outstanding plus the dilutive effect of common stock equivalents,
unless the common stock equivalents are antidilutive.
F-11
<PAGE>
APPNET SYSTEMS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1998 AND MARCH 31, 1999
RECENT ACCOUNTING PRONOUNCEMENTS
In April 1998, the AICPA issued Statement of Position 98-5, "Reporting on
the Costs of Start-Up Activities" ("SOP 98-5"). SOP 98-5, which is effective for
fiscal years beginning after December 15, 1998, provides guidance on the
financial reporting of start-up costs and organization costs. It requires costs
for start-up activities and organization costs to be expensed as incurred. As
the Company has expensed these costs historically, the adoption of this standard
is not expected to have a significant impact on its results of operations,
financial position or cash flows.
In June 1998, the Financial Accounting Standards Board issued SFAS No. 133,
"Accounting for Derivatives and Hedging Activities" ("SFAS No. 133"), which
establishes accounting and reporting standards for derivative instruments,
including certain derivative instruments embedded in other contracts
(collectively referred to as derivatives), and for hedging activities. SFAS No.
133 is effective for all fiscal quarters of fiscal years beginning after June
15, 1999 and management has not yet determined its effect on the Company's
financial statements or disclosures.
RECLASSIFICATIONS
Certain amounts have been reclassified to conform with the current
presentation.
INTERIM FINANCIAL INFORMATION
The financial information as of March 31, 1999 and for the three months
ended March 31, 1998 and 1999 is unaudited but includes all adjustments,
consisting only of normal recurring adjustments, that AppNet's management
considers necessary for a fair presentation of AppNet's operating results and
cash flows for such periods. Results for the three month period ended March 31,
1999 are not necessarily indicative of results to be expected for the full
fiscal year of 1999 or for any future period.
3. ACQUISITIONS:
1998 ACQUISITIONS
From March 1998 through December 1998, the Company acquired businesses in
the Internet and electronic commerce professional services industry.
Collectively, these entities are referred to as the "1998 Acquired Businesses."
The accounts of the Acquired Businesses are included in the accompanying
consolidated financial statements from the date of their respective
acquisitions. These acquisitions are described as follows:
On March 12, 1998, the Company acquired the assets of Arbor Intelligent
Systems, Inc. ("Arbor"), for an aggregate purchase price of approximately
$3,100,000, including transaction costs, of which $1,100,000 was paid in the
form of the Company's Series A-1 Convertible Preferred Stock (266,796 shares
valued at $4 per share), and $2,000,000 was paid in cash. Arbor is engaged in
the business of providing object-oriented development services.
On April 30, 1998, the Company acquired the assets of LOGEX International,
L.L.C. ("LOGEX"), in exchange for approximately $300,000 in cash and a five-year
convertible note in the principal amount of $300,000 (Note 9). The former
shareholders of LOGEX are entitled to a contingent consideration payment in the
event that certain performance criteria are achieved by LOGEX during the year
ending April 30, 1999. LOGEX provides electronic commerce systems integration
services and is located in Falls Church, Virginia.
F-12
<PAGE>
APPNET SYSTEMS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1998 AND MARCH 31, 1999
On August 25, 1998, the Company acquired all the outstanding stock of
Software Services Corporation, Inc. ("SSC") for an aggregate purchase price of
approximately $23,000,000, including transaction costs, of which $12,000,000 was
paid in the form of company stock, and $11,000,000 was paid in cash. In
connection with the SSC acquisition, the Company issued 11,576 shares of its
Class B Preferred Stock at a price of $1,000 per share and 1,387,095 shares of
Company Common Stock at a price of $.3007 per share to the former SSC
shareholders. Since its inception in 1980, SSC has been in the business of
providing applications development, network design services and both full time
and temporary technical personnel, primarily in Michigan.
On October 2, 1998, the Company acquired all the outstanding stock of New
Media Publishing, Inc. ("NMP") for an aggregate purchase price of approximately
$19,470,000, including transaction costs, of which $8,820,000 was paid in cash,
$9,500,000 was paid in the form of Company Common Stock (1,111,111 shares valued
at $8.55 per share) and the remainder was paid in options to purchase 145,518
shares of Company Common Stock valued using the Black-Scholes pricing model, at
$1,150,000. These options were issued in exchange for previously outstanding
options of NMP, have exercise prices ranging from $.06 to $8.69 and have vesting
schedules ranging from three months to 32 months. The value associated with
these options has been classified as additional paid-in capital on the
accompanying consolidated balance sheet. If NMP meets certain revenue and
profitability targets and certain NMP executives remain employed by the Company,
an additional $14,000,000 is potentially payable to the former owners of NMP in
cash and Company Common Stock (Note 16). NMP is based in Falls Church, Virginia
and offers interactive community-building services to business and nonprofit
organizations.
On October 12, 1998, the Company acquired all the outstanding stock of
Century Computing, Incorporated ("Century"). Century is located in Laurel,
Maryland, and is a provider of system integration and processing services in
electronic commerce to the Federal government, Federal government contractors
and commercial enterprises. The aggregate purchase price was approximately
$29,168,000, including transaction costs, of which $2,000,000 was provided in
the form of a convertible note (Note 9), $21,600,000 was paid in cash and the
remainder was paid in options to purchase 704,127 shares of Company Common Stock
valued, using the Black-Scholes pricing model, at $5,568,000. These options were
issued in exchange for previously outstanding options of Century, have exercise
prices ranging from $.71 to $1.00 and were fully vested at the time of issuance.
The value associated with these options has been classified as additional paid
in capital on the accompanying consolidated balance sheet.
On October 20, 1998, the Company acquired all the outstanding stock of
Research and Planning, Inc. ("R&P") for an aggregate purchase price of
approximately $22,100,000, including transaction costs, of which $15,100,000 was
paid in cash, $6,000,000 was paid in the form of Company Common Stock (701,754
shares valued at $8.55 per share), and $1,000,000 was provided in the form of
notes to the previous R&P shareholders (Note 9). R&P was founded in 1979 in
Cambridge, Massachusetts and provides ERP integration and data warehousing
services.
On December 14, 1998, the Company acquired all the outstanding stock of The
Kodiak Group, Inc. ("Kodiak") for an aggregate purchase price of approximately
$16,350,000, including transaction costs, of which $12,100,000 was paid in cash,
$2,250,000 was paid in the form of Company Common Stock (197,368 shares valued
at $11.40 per share) and $2,000,000 was provided in the form of notes to the
previous Kodiak shareholders. In addition, the former Kodiak shareholders are
entitled to a potential contingent payment payable in cash of up to $4.0 million
in the event that Kodiak sells or
F-13
<PAGE>
APPNET SYSTEMS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1998 AND MARCH 31, 1999
licenses certain technology during the three-year period ending December 14,
2001. Kodiak has offices in Pittsfield, Massachusetts, Charlottesville, Virginia
and Denver, Colorado, and specializes in electronic data interchange integration
and processing services.
1999 ACQUISITIONS
From January 8, 1999 through March 29, 1999, the Company acquired an
additional five businesses in the Internet and electronic commerce professional
services industries. Collectively, these entities are referred to as the "1999
Acquired Businesses".
On January 8, 1999, the Company acquired all the outstanding stock of i33
communications corp. ("i33"), which is based in New York City. i33 provides
media buying and planning services, and, specializes in the design of creative
Internet solutions to its customers. The aggregate purchase price was
approximately $21,600,000, plus transaction costs, consisting of $10,300,000
paid in cash and $11,300,000 paid in the form of convertible notes to the
previous i33 shareholders.
On March 4, 1999, the Company acquired all of the issued and outstanding
stock of Sigma6, Inc. ("Sigma6") which is based in Michigan and specializes in
providing brand identity services to its customers. The aggregate purchase price
was approximately $2,500,000, plus transaction costs, consisting of $1,250,000
paid in cash and $1,250,000 paid in shares of Company Common Stock (97,465
shares valued at $12.83 per share). If certain performance criteria are met
during the 12-month period ending December 31, 1999, the former stockholders of
Sigma6 are entitled to a contingent payment of up to $2,800,000 consisting of
cash and Company Common Stock.
On March 15, 1999, the Company acquired certain assets of Salzinger &
Company, Inc. ("Salzinger"). The aggregate purchase price was approximately
$8,500,000, plus transaction costs, consisting of $5,000,000 in cash and
$3,500,000 in Company Common Stock (245,614 shares valued at $14.25 per share).
If certain performance criteria are met during the period ending September 30,
2000, Salzinger is entitled to a contingent payment of up to $5,000,000 in cash
or, at the seller's option, cash and Company Common Stock. Salzinger is based in
Vienna, Virginia and provides business-level strategic consulting services.
On March 26, 1999, the Company acquired all of the issued and outstanding
stock of Internet Outfitters, Inc. ("Internet Outfitters") which is based in
Santa Monica, California and provides localization and creative Web-development
services. The aggregate purchase price was approximately $9,500,000, plus
transaction costs, consisting of cash, $2,700,000 in Company Common Stock
(157,895 shares valued at $17.10 per share), and the issuance of 22,300 options
to purchase Company Common Stock. If certain performance criteria are met during
the year ending December 31, 1999, the former stockholders are entitled to a
contingent payment of up to $3,500,000 in cash and Company Common Stock.
On March 29, 1999, the Company acquired certain assets of Transform IT,
Incorporated ("Transform IT") which is based in Alexandria, Virginia and
provides process-level strategic consulting services. The aggregate purchase
price was approximately $5,120,000, plus transaction costs, consisting of
$3,500,000 in cash and $1,620,000 in Company Common Stock (94,737 shares valued
at $17.10 per share). If certain performance criteria are met during the
twelve-month period ending March 31, 2000, the seller is entitled to a
contingent payment of up to $3,500,000 in cash.
F-14
<PAGE>
APPNET SYSTEMS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1998 AND MARCH 31, 1999
ALLOCATION OF PURCHASE CONSIDERATION
The acquisitions have been accounted for using the purchase method of
accounting and, accordingly, the recognized purchase price has been allocated,
based on preliminary estimates of fair value, to the tangible assets acquired
and liabilities assumed and, with the advice of independent valuation experts,
to the identifiable intangible assets, on the acquisition dates. The Company has
recorded identifiable intangibles on the 1998 Acquired Businesses, as follows:
<TABLE>
<CAPTION>
APPRAISED
VALUE USEFUL LIFE
------------ ---------------
<S> <C> <C>
Customer lists................................................. $ 4,160,000 7-24 months
Non-competition agreements..................................... 2,800,000 36 months
Assembled workforce............................................ 4,803,000 12-48 months
Proprietary technology......................................... 4,325,000 12-24 months
</TABLE>
As of December 31, 1998, the purchase price in excess of identified tangible
and intangible assets and liabilities assumed in the amount of $93,159,000 was
allocated to goodwill.
In the three month period ended March 31, 1999, the Company recorded
identifiable intangibles related to the 1999 Acquisitions of $2,875,000. This
preliminary purchase price allocation also resulted in the allocation of
$43,225,000 to goodwill. Final estimates of fair value will be made upon the
completion of independent valuations for certain 1999 acquisitions and the final
determination of certain preexisting contingencies. As a result of the early
stage of development of the Internet and electronic commerce, the dynamics of
this rapidly evolving industry and the expectation of increasing competition,
the recorded goodwill is being amortized on a straight-line basis over three
years, the estimated period of its benefit.
The following unaudited pro forma consolidated amounts give effect to the
1998 acquisitions as if they had occurred on January 1, 1998, by consolidating
the results of operations of the 1998 Acquired Businesses with the results of
AppNet for the year ended December 31, 1998. The pro forma amounts do not
purport to be indicative of the results of operations that would have been
achieved had the transactions been in effect as of the beginning of 1998 and
should not be construed as being representative of future results of operations.
<TABLE>
<CAPTION>
DECEMBER 31, 1998
(UNAUDITED)
-----------------
<S> <C>
Revenues................................................................... $ 54,493,000
Net loss attributable to common stockholders............................... (50,273,000)
Basic and diluted net loss per share....................................... $ (2.81)
</TABLE>
The following unaudited pro forma consolidated amounts give effect to the
1998 and 1999 acquisitions as if they had occurred on January 1, 1998:
<TABLE>
<CAPTION>
FOR THE THREE MONTHS
ENDED MARCH 31,
------------------------
(UNAUDITED)
1998 1999
----------- -----------
<S> <C> <C>
Revenues......................................... $14,203,000 $22,271,000
Net loss attributable to common stockholders..... (18,081,000) (21,783,000)
Basic and diluted net loss per share............. $ (1.15) $ (1.07)
</TABLE>
F-15
<PAGE>
APPNET SYSTEMS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1998 AND MARCH 31, 1999
4. ACCOUNTS RECEIVABLE:
Accounts receivable consists of the following as of December 31, 1998:
<TABLE>
<S> <C>
Accounts receivable............................................ $9,571,000
Unbilled accounts receivable................................... 2,791,000
Allowance for doubtful accounts................................ (1,124,000)
----------
Accounts receivable, net................................... $11,238,000
----------
----------
</TABLE>
5. OTHER CURRENT ASSETS:
Other current assets consists of the following as of December 31, 1998:
<TABLE>
<S> <C>
Income tax receivable.......................................... $ 808,000
Other current assets........................................... 310,000
----------
Other current assets....................................... $1,118,000
----------
----------
</TABLE>
6. PROPERTY AND EQUIPMENT:
Property and equipment consists of the following as of December 31, 1998:
<TABLE>
<S> <C>
Computers and equipment........................................ $2,797,000
Furniture and fixtures......................................... 288,000
Leasehold improvements......................................... 211,000
----------
3,296,000
Accumulated depreciation....................................... (284,000)
----------
Property and equipment, net................................ $3,012,000
----------
----------
</TABLE>
7. INTANGIBLE ASSETS:
Intangible assets consists of the following as of December 31, 1998:
<TABLE>
<S> <C>
Customer lists................................................ $ 4,160,000
Non-competition agreements.................................... 2,800,000
Assembled workforce........................................... 4,803,000
Proprietary technology........................................ 4,325,000
Goodwill...................................................... 93,159,000
-----------
109,247,000
Accumulated amortization...................................... (9,867,000)
-----------
Intangible assets, net.................................... $99,380,000
-----------
-----------
</TABLE>
F-16
<PAGE>
APPNET SYSTEMS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1998 AND MARCH 31, 1999
8. ACCRUED LIABILITIES
Accrued liabilities consist of the following:
<TABLE>
<CAPTION>
DECEMBER MARCH 31,
31, 1999
1998 (UNAUDITED)
----------- -----------
Accrued compensation and benefits.................. $2,590,000 $4,770,000
<S> <C> <C>
Accrued dividends on Class A Preferred Stock and
Class B Preferred Stock.......................... 689,000 1,451,000
Payments due to former shareholders of Acquired
Businesses....................................... 1,500,000 3,100,000
Accrued stock-based and other acquisition-related
compensation..................................... -- 3,640,000
Other accrued liabilities.......................... 2,132,000 7,759,000
----------- -----------
Accrued liabilities............................ $6,911,000 2$0,720,000
----------- -----------
----------- -----------
</TABLE>
9. DEBT:
Debt consists of the following:
<TABLE>
<CAPTION>
MARCH 31,
1999
DECEMBER 31, --------------
1998
------------- (UNAUDITED)
<S> <C> <C>
Credit facilities:
Credit facility, bears interest at the lender's prime rate plus .5% (8.25% at
December 31, 1998), interest due monthly...................................... $ 19,730,000 $ --
Credit facility, bears interest at the lender's prime rate (7.75% at
December 31, 1998), interest due monthly...................................... 17,731,000 --
Credit facilities, bear interest at the lender's prime rate plus .25%--1.5% or
various LIBOR rates plus 2.25%--3.5%, interest due at varying monthly
intervals, interest rates ranging from 7.56% to 9.25% at March 31, 1999....... -- 59,400,000
------------- --------------
37,461,000 59,400,000
------------- --------------
Convertible notes:
Note payable, principal and interest due October 13, 1999, bears interest at 7%,
convertible at the option of the holder for common stock at $8.55 per share... 2,000,000 2,000,000
Note payable, principal and interest due June 29, 2003, bears interest at 5%,
convertible at 80% of common stock price upon a sale of Company or an initial
public offering............................................................... 406,000 406,000
Notes payable, principal and interest due December 14, 2001, bear interest at
8%, convertible at the option of the holder for common stock at $11.40 per
share......................................................................... 2,000,000 2,000,000
Note payable, principal and interest due April 30, 2003, bears interest at the
prime rate (7.75% at December 31, 1998), interest payable quarterly at July
31, October 31, January 31 and April 30, convertible at the option of the
holder at 80% of common stock price on a sale of Company or an initial public
offering...................................................................... 300,000 300,000
</TABLE>
F-17
<PAGE>
APPNET SYSTEMS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1998 AND MARCH 31, 1999
<TABLE>
<CAPTION>
MARCH 31,
1999
DECEMBER 31, --------------
1998
------------- (UNAUDITED)
<S> <C> <C>
Notes payable, principal and interest due January 8, 2002, bear interest at
rates ranging from 4.3% to 6%, two notes totaling $3,500,000 convertible at
the option of the holder at 80% of the common stock price on a sale of Company
or an initial public offering, two notes totalling $6,800,000 convertible at
the option of the holder for common stock at $11.40 per share................. -- 10,300,000
------------- --------------
4,706,000 15,006,000
------------- --------------
Other long-term debt:
Notes payable, principal and interest due January 1, 2000, bear interest at
6%............................................................................ 1,000,000 1,000,000
Note payable to Smart Technology, L.L.C., due the earlier of an initial public
offering or June 29, 2000, bears interest at 12%.............................. 150,000 3,000
Other notes payable............................................................. 425,000 426,000
Note payable to a member of Company management, due at earlier of an initial
public offering or December 31, 1999.......................................... 50,000 50,000
------------- --------------
1,625,000 1,479,000
------------- --------------
Total debt.................................................................. 43,792,000 75,885,000
Less current portion............................................................ (2,426,000) (3,454,000)
------------- --------------
Long-term debt, net of current portion...................................... $ 41,366,000 $ 72,431,000
------------- --------------
------------- --------------
</TABLE>
The future minimum principal payments of debt outstanding at December 31,
1998, as refinanced by the 1999 Credit Facilities, are as follows:
<TABLE>
<S> <C>
1999........................................................... $2,426,000
2000........................................................... 1,199,000
2001........................................................... 39,461,000
2002........................................................... --
2003........................................................... 706,000
----------
Total...................................................... $43,792,000
----------
----------
</TABLE>
1999 CREDIT FACILITIES
On January 8, 1999, the Company replaced its two existing credit agreements
("the 1998 Credit Facilities") with two credit agreements (together the "1999
Credit Facilities") entered into with a syndicate of lenders providing for
$55,000,000 in borrowings. The 1999 Credit Facilities consist of $40,000,000 in
credit loans (the "Guaranteed Loans") which have been guaranteed by a
significant stockholder and $15,000,000 of additional credit loans (the
"Unguaranteed Loans"). The 1999 Credit Facilities mature on August 24, 2001. On
March 10, 1999, the Company amended the Unguaranteed Loans increasing available
borrowings from $15,000,000 to $26,000,000. Under the terms of the Unguaranteed
Loans, the amount borrowed cannot, at any time, exceed the amount borrowed under
the Guaranteed Loans.
F-18
<PAGE>
APPNET SYSTEMS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1998 AND MARCH 31, 1999
The Guaranteed Loans bear interest, at the Company's option, at various
LIBOR rates plus 2.5 percent or the lenders' base rate plus .5 percent. The
Guaranteed Loans require the Company to pay a quarterly commitment fee of .5
percent on the unused amounts.
The Unguaranteed Loans bear interest, at the Company's option, at various
LIBOR rates or the lenders' base rate plus an applicable margin, as determined
by the Company's operating performance.
The 1999 Credit Facilities include certain restrictive covenants which
require the Company, among other things, to maintain minimum levels of earnings
before interest, taxes, depreciation, and amortization, ratios of cash flow to
debt service and place limits on capital expenditures.
1998 CREDIT FACILITIES
On August 25, 1998, the Company entered into a credit facility with a
commercial lender. The facility provided for borrowings of up to $15,000,000,
bore interest at the lender's base rate plus a defined percentage or at various
LIBOR rates, and was due on demand. For the period from August 25, 1998 to
October 13, 1998, the highest and weighted average balances outstanding under
the facility were $9,800,000 and $8,478,000, respectively.
On October 13, 1998, the Company modified its facility and entered into two
credit agreements (the "1998 Credit Facilities") with two commercial lenders.
Under the 1998 Credit Facilities, each lender provided a $20 million line of
credit which was payable upon demand, guaranteed by a significant stockholder
and bore interest at the option of the Company at the lenders' base rate plus a
defined percentage or at various LIBOR options plus 2.5 percent. For the period
from October 13, 1998, to December 31, 1998, the highest and weighted average
balances under the 1998 Credit Facilities were $37,461,000 and $36,040,000,
respectively. During this period, the average interest rate was 8.13 percent.
One of the facilities provided for a quarterly commitment fee equal to .05
percent. As a result of the 1999 Credit Facilities, which replaced the 1998
Credit Facilities and qualify for non-current classification, the amounts
outstanding under the 1998 Credit Facilities as of December 31, 1998 have been
classified as long-term in the accompanying balance sheet. In connection with
debt refinancings during 1998, the Company charged to other expense
approximately $291,000 of previously deferred financing fees.
CONVERTIBLE NOTES
In conjunction with certain of the Acquired Businesses, the Company issued
convertible notes, certain of which, at the option of the holders, allow the
holders to convert the notes to the Company Common Stock upon certain defined
events at either a stated price or a discount to the then current market price
for the Company Common Stock. Upon an initial public offering of the Company's
Common Stock, the Company may be required to record an interest charge of
approximately $875,000 related to certain beneficial conversion rights.
10. CAPITAL STOCK:
1998 COMMON STOCK SPLIT
In June 1998, upon adoption of the Company's Second Restated Certificate of
Incorporation, a two-for-one stock split of the Company Common Stock was
effected. All share and per-share amounts, including stock option information,
have been restated in these notes and the accompanying financial statements to
reflect this stock split and the 1999 Reverse Common Stock Split (see Note 18).
F-19
<PAGE>
APPNET SYSTEMS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1998 AND MARCH 31, 1999
GTCR INVESTMENT
In June 1998, the Company completed an investment transaction with GTCR
Golder Rauner, L.L.C. and certain related investment funds ("GTCR") and Smart
Technology, L.L.C. ("Smart Technology"), a party related to the Company's
President and Chief Executive Officer (the "GTCR Investment"). Prior to the GTCR
Investment, the Company had 5,343,860 shares of issued and outstanding common
stock all of which were owned by Company's initial investors (the "Initial
Investors"). Pursuant to the GTCR Investment, the Company made a net redemption
of 1,350,887 shares of Company Common Stock from certain of the Initial
Investors for $.3007 per share or $406,000 and sold an aggregate 11,559,144
shares to GTCR and Smart Technology for $.3007 per share or $3,476,000 before
deduction for expenses and fees. The Company also sold 1,251,228 shares of
Company Common Stock to the Company's President and Chief Executive Officer (the
"Reserved Stock") and 531,773 shares to other certain parties affiliated with
the GTCR Investment. These shares were sold for $.3007 per share.
GTCR and Smart Technology committed to provide up to an additional
$96,500,000 in capital to the Company to fund acquisitions as well as other
general corporate purposes. Upon the request of the Board and the approval of
GTCR and Smart Technology, shares of Class A Preferred Stock will be issued to
GTCR and Smart Technology in the ratio of 98 percent to 2 percent, respectively,
in exchange for $1,000 per share. No shares of Class A Preferred Stock were
issued at the time of the GTCR Investment. In connection with the issuance of
Class B Preferred Stock as part of the SSC transaction, the capital commitment
from GTCR and Smart Technology was decreased to $84,900,000.
In connection with the GTCR Investment, the Company entered into a
management services agreement with GTCR for $200,000 per year.
F-20
<PAGE>
APPNET SYSTEMS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1998 AND MARCH 31, 1999
COMMON STOCK SUBJECT TO PUT RIGHTS
In conjunction with its acquisition of Arbor, the Company issued 266,796
shares of Series A-1 Convertible Preferred Stock with a liquidation value of
$1,100,000. Pursuant to their terms, these shares were converted into 187,225
shares of Company Common Stock at the time of the GTCR Investment. As part of
the GTCR Investment, the Board of Directors authorized the repurchase of 138,455
shares of the common stock issued upon the conversion for $5.70 per share which
provided the holders a return equivalent to the liquidation value of the Series
A-1 Convertible Preferred Stock. In addition, the Board of Directors agreed to
grant the holders of the remaining 48,771 shares of Company Common Stock the
right to require the Company to repurchase their shares for cash at $5.70 per
share beginning on March 11, 1999, and extending for thirty days.
CLASS A PREFERRED STOCK
The holders of the Class A Preferred Stock ("Class A Preferred Stock") are
entitled to a 6 percent cumulative dividend which is paid when declared by the
Company's Board of Directors. The Company can redeem the shares at any time for
their liquidation value of $1,000 per share plus accrued but unpaid dividends.
The shares have no voting or conversion rights. Upon the earliest of the
liquidation of the Company, a change in the control of the Company, an initial
public offering ("IPO") or other fundamental change in the Company, as defined,
a majority of the holders of the Class A Preferred stock can require the Company
to redeem their shares for their liquidation value, plus accrued but unpaid
dividends. In the case of an IPO, the redemption is limited to the net funds
available from the IPO. GTCR holds approximately 97 percent of the outstanding
Class A Preferred Stock.
The Company incurred certain fees associated with the issuance of the Class
A Preferred Stock. Through December 31, 1998, the Company paid a one percent fee
of $369,000 to GTCR based on the issuance of the Company's Class A Preferred
Stock to GTCR. The Company also incurred a commission of $262,000 to one of the
Company's directors in connection with purchases of Class A Preferred Stock.
These costs were deducted from the proceeds of the Class A Preferred Stock shown
in the accompanying balance sheet. The Class A Preferred Stock is being accreted
to its liquidation value over the period to its estimated redemption date, which
is expected to occur in 1999. The accretion of the costs associated with the
Class A Preferred Stock was $184,000 for the year ended December 31, 1998 and is
classified as dividends on and accretion of preferred stock in the accompanying
statements of operations and stockholders' equity.
CLASS B PREFERRED STOCK
The holders of Class B Preferred Stock are entitled to a 6 percent
cumulative dividend which is paid when declared by the Company's Board of
Directors. The shares have no voting rights. The Company has the contractual
ability to redeem or convert all outstanding shares of Class B Preferred Stock
upon an initial public offering.
STOCK WARRANTS
The Company has issued warrants to purchase 84,795 shares of Company Common
Stock at $.3007 per share, of which 70,175 are held by Smart Technology. The
values attributable to these warrants at the time of issuance are not
significant and, therefore, have not been separately presented in the
F-21
<PAGE>
APPNET SYSTEMS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1998 AND MARCH 31, 1999
consolidated financial statements. The Company has also issued warrants to
purchase 121 shares of Class A Preferred Stock at $1,000 per share.
RESERVED STOCK
The Reserved Stock is subject to a Senior Management Agreement dated June
29, 1998 (the "Agreement") with the Company's President and Chief Executive
Officer. At the time of the GTCR Investment, 1,251,228 shares of Reserved Stock
were purchased at a price of $.3007 per share in exchange for cash equal to the
par value of the stock and a promissory note equal to the remaining balance.
Pursuant to the Agreement, the Company may, at its discretion, repurchase any or
all of the Reserved Stock for the $.3007 per share paid by the executive in
order to issue a corresponding number of shares and options to purchase shares
to certain employees. The Company's right to repurchase the Reserved Stock
expires on the first to occur of (a) a sale of the Company, (b) the failure by
GTCR to own 50 percent of the original number of Company Common Shares it
purchased in conjunction with the GTCR Investment and (c) an IPO ("Qualifying
Events"). As of December 31, 1998, the Company's President and Chief Executive
Officer had 659,649 shares of Reserved Stock remaining. Additional shares were
repurchased subsequent to year end reducing the total shares outstanding to
210,119 as of March 29, 1999.
Because the number of recorded shares to be held by the executive is not
fixed, the Company will record a charge to income equal to the difference
between the fair value of the Company's stock on the date of the Qualifying
Event and $.3007, multiplied by the number of remaining Reserved Shares retained
by the executive following the occurrence of the Qualifying Event.
SALES TO MANAGEMENT
Shortly after the GTCR Investment, the Company sold 503,860 shares of
Company Common Stock to management for $.3007 per share, the fair value at that
time. In November 1998, the Company sold 49,123 shares of Common Stock to a
member of management for $8.55 per share, the fair value at that time.
11. RETIREMENT PLAN:
During 1998, the Company maintained various 401(k) plans for its employees.
These plans had been established by the 1998 Acquired Businesses prior to
acquisition. Effective February 1, 1999, the employees of the 1998 Acquired
Businesses began making contributions to the AppNet plan. During 1998, the
Company's expense under these plans totaled $281,000.
Effective February 1, 1999, the Company established a 401(k) retirement plan
for the benefit of all eligible employees. Participants may contribute up to 15
percent of their annual compensation to the plan. Employee contributions are
fully vested. The Company will match 50 percent of each employees' contributions
up to six percent of each employees' salary. The Company may also elect to make
a discretionary contribution as determined by its Board of Directors on an
annual basis. Employees will fully vest in the Company's matching and any
discretionary contributions ratably over three years.
12. EMPLOYEE STOCK OPTION PLANS:
The Company had two stock option plans as of December 31, 1998, which were
the 1998 Stock Option and Incentive Plan and an incentive stock option plan
assumed in connection with the
F-22
<PAGE>
APPNET SYSTEMS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1998 AND MARCH 31, 1999
acquisition of Century (the "Century Plan"). Options under these plans expire no
later than ten years from the date of the grant or when employment ceases,
whichever comes first. The maximum number of shares of common stock which may be
issued pursuant to the stock option plans is 913,042 at December 31, 1998.
Options granted under the stock option plan are accounted for under APB
Opinion No. 25, and since options have been granted at prices equal to the fair
value of the Company's Common Stock on the date of grant, no compensation
expense has been recognized for the option grants. Certain options converted
from the 1998 Acquired Businesses have exercise prices ranging from $.06 to
$8.69. The value of these options was included in the purchase price of the 1998
Acquired Businesses. Had compensation cost for the plan been determined based on
the estimated fair value of the options at the grant dates consistent with the
method of SFAS No. 123, pro forma net loss attributable to common stockholders
would have been approximately $15,408,000 or a net loss of $1.43 per share for
1998. The weighted average fair value of the options granted by the Company
during 1998 is estimated to be $3.85 per option assuming the following: no
dividend yield, risk-free interest rate of 5 percent, an expected term of the
options of four years and an expected volatility of 45 percent.
The following summarizes option activity during 1998:
<TABLE>
<CAPTION>
WEIGHTED
NUMBER OF AVERAGE
SHARES EXERCISE PRICE
------------- ---------------
<S> <C> <C>
Granted in 1998................................................. 500,351 $ 7.67
Options converted from 1998 Acquired Businesses................. 849,641 .91
Exercised in 1998............................................... (425,339) .74
Cancelled in 1998............................................... (11,614) 1.08
------------- -----
Options outstanding, December 31, 1998, exercise prices range of
$.06 to $11.40................................................ 913,039 $ 4.67
------------- -----
------------- -----
Options exercisable, December 31, 1998.......................... 296,736 $ 1.37
------------- -----
------------- -----
</TABLE>
Subsequent to December 31, 1998, the Company issued options to purchase
882,883 shares of Company Common Stock.
In March 1999, the Company issued 337,776 stock options to a member of
management. These options have an exercise price of $12.83 and vest ratably over
4 years. As a result of this grant, the Company recorded deferred compensation
of $481,000. The amount of deferred compensation was based on the difference
between the estimated fair market value of the Company Common Stock at the date
of grant, as determined by the most recent third party stock transaction, and
the stated exercise price. The Company amortized $4,000 of the deferred
compensation for the three months ended March 31, 1999 in the unaudited
consolidated statement of operations.
13. EARNINGS PER SHARE:
Shares of common stock which are contingently payable pursuant to the
acquisition agreements (Note 16) are not included in the calculation of weighted
average shares outstanding for the period presented, as circumstances may arise
in which the shares would not be issued. In addition, the impact
F-23
<PAGE>
APPNET SYSTEMS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1998 AND MARCH 31, 1999
of other potentially dilutive securities are excluded from diluted earnings per
share due to their antidilutive effect as follows:
<TABLE>
<CAPTION>
DECEMBER 31,
1998
------------
<S> <C>
Stock options................................................................... 539,312
Warrants........................................................................ 84,010
Convertible notes............................................................... 413,554
</TABLE>
In addition, as of December 31, 1998, $706,000 of notes payable are
convertible, upon completion of an initial public offering of Company Common
Stock, at 80% of the IPO price.
14. INCOME TAXES:
The Company follows the provisions of SFAS No. 109, "Accounting for Income
Taxes," for financial reporting purposes. Deferred tax assets or liabilities at
the end of each period are determined using the currently enacted tax rates to
apply to taxable income in the period in which the deferred tax asset or
liability is expected to be settled or realized.
The sources of and differences between the financial accounting and tax
basis of AppNet's assets and liabilities which give rise to the net deferred tax
liability as of December 31, 1998, are as follows:
<TABLE>
<CAPTION>
DECEMBER
31, MARCH 31,
1998 1999
---------- ----------
(UNAUDITED)
<S> <C> <C>
Deferred tax liabilities:
Intangible assets........................................ $2,241,000 $1,835,000
Deferred tax assets:
Allowance for doubtful accounts.......................... 434,000 438,000
Net operating loss carryforward.......................... 1,624,000 3,078,000
Cumulative amortization differences on intangibles....... 994,000 2,480,000
Other.................................................... 506,000 522,000
Valuation allowance...................................... (1,317,000) (4,683,000)
---------- ----------
Net deferred tax liability............................. $ -- $ --
---------- ----------
---------- ----------
</TABLE>
The components of the benefit from income taxes during the year ended
December 31, 1998 are as follows:
<TABLE>
<CAPTION>
DECEMBER 31, 1998 MARCH 31, 1999
----------------- -----------------
<S> <C> <C>
(UNAUDITED)
Current--
Federal.............................................. $ (400,000) $ --
State................................................ 250,000 100,000
----------------- -----------------
Total.............................................. (150,000) 100,000
Deferred--
Federal.............................................. (50,000) --
State................................................ -- --
----------------- -----------------
Income tax benefit................................. $ (200,000) $ 100,000
----------------- -----------------
----------------- -----------------
</TABLE>
F-24
<PAGE>
APPNET SYSTEMS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1998 AND MARCH 31, 1999
For the year ended December 31, 1998, the income tax benefit differed from
the amounts computed at the statutory rate, as follows:
<TABLE>
<CAPTION>
DECEMBER 31, MARCH 31,
1998 1999
------------- -------------
<S> <C> <C>
(UNAUDITED)
Income tax benefit computed at federal statutory rates.......... $ (4,957,000) $ (5,842,000)
Nondeductible intangible amortization........................... 2,402,000 1,772,000
Nondeductible portion of stock-based and other
acquisition-related compensation, net......................... 497,000 811,000
State income taxes, net of federal income tax benefit........... 165,000 66,000
Changes in valuation allowance.................................. 1,317,000 3,671,000
Other, net...................................................... 376,000 (378,000)
------------- -------------
Total....................................................... $ (200,000) $ 100,000
------------- -------------
------------- -------------
</TABLE>
As of December 31, 1998 and March 31, 1999, the Company had approximately
$4.2 million and $7.9 million (unaudited), respectively, of net operating loss
carryforwards which begin to expire in 2018. The Company has recorded a
valuation allowance for deferred tax assets as of December 31, 1998, of
$1,317,000. In assessing the realizability of deferred tax assets, management
considers whether it is more likely than not that some portion or all of the
deferred tax assets will not be realized. The ultimate realization of deferred
tax assets is dependent upon the generation of future taxable income during the
periods in which those temporary differences become deductible. Management
considers the scheduled reversal of deferred tax liabilities, projected future
taxable income, and tax planning strategies in making this assessment.
15. RELATED PARTIES:
At December 31, 1998, the Company was owed $821,000 from members of
management. These borrowings are due at varying dates through November, 2008.
At December 31, 1998, the Company had outstanding borrowings of $150,000
from Smart Technology, $50,000 from a member of management, and $406,000 from
one of the Company's Initial Investors. Also, the convertible notes of
$4,306,000 as of December 31, 1998 and the notes payable for $1,000,000 are due
to former shareholders of the Acquired Businesses, the majority of whom are
current AppNet employees. Subsequent to December 31, 1998, the Company issued
convertible notes of $10,300,000 due to former shareholders of one of the 1999
Acquired Businesses, both of whom are current AppNet employees. The Company also
issued, subsequent to December 31, 1998, a convertible note of $1,000,000 to a
trust established for employees of one of the 1999 Acquired Businesses. Since
the trust is available to the Company's creditors, the trust's assets are
included in these financial statements. As such, the trust's note receivable and
the Company's convertible note payable held by the trust have been eliminated in
consolidation.
In December 1997, the Company entered into an agreement which was
consummated in 1998 to purchase a 50 percent ownership interest in AppNet
Commerce Services, Inc. ("ACS"). ACS was established to conduct electronic
commerce transaction processing. The remaining 50 percent interest in ACS is
owned by another company. In 1998, due to the failure of the venture to maintain
its customer base and to generate sufficient revenues to cover operating
expenses, the Company determined that its investment was impaired and recorded a
charge of approximately $300,000 which is included in the accompanying statement
of operations as a component of other expense. As of December 31, 1998, the
investment in ACS has a value of zero.
F-25
<PAGE>
APPNET SYSTEMS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1998 AND MARCH 31, 1999
During 1998, the Company was party to a professional services agreement with
one of its directors. The agreement provided for the payment of $17,000 per
month. The Company incurred approximately $200,000 related to this agreement in
1998. In addition, the Director received a fee of $350,000 in association with
the GTCR Investment. The professional services agreement also provides for a one
percent commission on certain issuances Class A Preferred Stock (Note 10). The
Company also paid approximately $336,000 related to certain fees and a
professional services agreement with one of its initial investors.
16. COMMITMENTS AND CONTINGENCIES:
LEASES
As of December 31, 1998, the Company has noncancellable operating leases,
primarily for real estate, that expire over the next six years. Rental expense
during 1998 was $512,000.
Future minimum lease payments under noncancellable operating leases are as
follows as of December 31, 1998:
<TABLE>
<S> <C>
1999............................................................ $1,424,000
2000............................................................ 1,294,000
2001............................................................ 1,187,000
2002............................................................ 1,082,000
2003............................................................ 872,000
Thereafter...................................................... 792,000
---------
Total minimum lease payments................................ $6,651,000
---------
---------
</TABLE>
LITIGATION AND CLAIMS
In connection with the acquisition of Internet Outfitters, approximately
$1,450,000 of the purchase price in the form of shares of Company Common Stock,
based upon the fair value of $17.10 per share at the date of acquisition, was
pledged to the Company and escrowed to be available to satisfy any potential
liability in connection with a license dispute. The Company also held back
$750,000 of the cash purchase price to be used to satisfy this and any other
indemnification claims.
The Company is subject to lawsuits, investigations and claims arising out of
the ordinary course of business, including those related to commercial
transactions, contracts, government regulation and employment matters. Certain
claims, suits and complaints have been filed or are pending against the Company.
In the opinion of management, based on all known facts, all matters are without
merit, and except as related to the aforementioned Internet Outfitters claim,
are of such kind, or involve such amounts, as would not have a material effect
on the financial position or results of operations of the Company if disposed of
unfavorably.
CONTINGENT PAYMENTS
The Company's acquisition of NMP provided for additional contingent payments
of up to $14,000,000 as of December 31, 1998 in the form of cash and Company
Common Stock to be made to the former owners of NMP if NMP reaches certain
revenue and earnings before interest, taxes, depreciation, and amortization
targets for the period from October 1, 1998 to September 30, 1999. The amount of
this contingent payment varies based on a sliding scale of revenues and earnings
before interest, taxes, depreciation, and amortization. If these goals are
reached, approximately 42 percent of
F-26
<PAGE>
APPNET SYSTEMS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1998 AND MARCH 31, 1999
the contingent consideration will be reflected as additional purchase
consideration if and when paid. The remaining 58 percent of the contingent
consideration will be paid only if the targets are reached and certain NMP
employees remain employed by the Company. Accordingly, pursuant to the consensus
reached in Emerging Issues Task Force Issue 95-08, "Accounting for Contingent
Consideration Paid to the Shareholders of an Acquired Company in a Purchase
Business Combination," ("EITF 95-08") an estimate of the amount expected to be
paid to these employees will be reflected as stock-based and other
acquisition-related compensation expense ratably over the period which these
employees must remain employed to receive the contingent consideration.
Revisions to this estimate will be reflected on a prospective basis each
reporting period until paid. The accompanying statement of operations reflects a
charge of $1,157,000 of stock-based and other acquisition related compensation
for this contingent payment.
The Company's acquisitions of Sigma6, Salzinger, Internet Outfitters and
Transform IT provided for contingent payments of up to $14,800,000 (unaudited)
in the form of cash and Company Common Stock to be made to the former owners of
these companies if these entities reach certain revenue and earnings targets for
periods ranging from 9 - 18 months from the date of their acquisition. The
amount of these contingent payments varies based on a sliding scale of revenues
and earnings, as defined in the acquisition agreements.
If these goals are reached for Salzinger and Sigma6, the amount will be paid
only if the targets are reached and certain Sigma6 and Salzinger employees
remain employed by the Company. Accordingly, pursuant to EITF 95-08, an estimate
of the amount to be paid to these employees will be reflected as stock-based and
other acquisition-related compensation expense ratably over the period which the
employees must remain employed to receive the contingent consideration.
Revisions to this estimate will be reflected on a prospective basis each
reporting period until paid.
If these goals are reached for Internet Outfitters and Transform IT,
approximately 23 and 33 percent, respectively, of the contingent payment will be
reflected as additional purchase price consideration if and when paid. The
remaining contingent amounts will be paid only if the targets are reached and
certain Internet Outfitters and Transform IT employees remain employed by the
Company. Accordingly, pursuant to EITF 95-08, an estimate of the amount to be
paid to these employees will be reflected as stock-based and other
acquisition-related compensation expense ratably over the period which the
employees must remain employed to receive the contingent consideration.
Revisions to this estimate will be reflected on a prospective basis each
reporting period until paid.
17. SEGMENT INFORMATION:
The Company currently operates in two operating segments: professional
services and electronic commerce processing. For the year ended December 31,
1998 and the three months ended March 31, 1999, the electronic commerce
processing segment was not significant to the overall financial statements.
18. 1999 COMMON STOCK SPLIT (UNAUDITED)
The Company is currently contemplating an initial public offering. Prior to
the effectiveness of the initial public offering, the Company intends to enter
into an agreement to exchange the Class A Preferred Stock and the Class B
Preferred Stock, not redeemed with the proceeds of the initial public offering,
into Company Common Stock based on the per share price in the initial public
offering, and declare a one for 2.85 reverse stock split. All share and
per-share amounts, including stock option information, have been restated in
these notes and the accompanying consolidated financial statements to reflect
this reverse stock split.
F-27
<PAGE>
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To Software Services Corporation:
We have audited the accompanying balance sheets of Software Services
Corporation (a Michigan corporation) as of December 31, 1996 and 1997, and
August 24, 1998, and the related statements of operations, stockholders' equity
and cash flows for the years ended December 31, 1996 and 1997, and for the
period from January 1, 1998 to August 24, 1998. These financial statements are
the responsibility of the Company's management. Our responsibility is to express
an opinion on these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audits 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 Software Services
Corporation as of December 31, 1996 and 1997, and August 24, 1998, and the
results of its operations and its cash flows for the years ended December 31,
1996 and 1997, and for the period from January 1, 1998 to August 24, 1998, in
conformity with generally accepted accounting principles.
ARTHUR ANDERSEN LLP
Ann Arbor, Michigan
February 5, 1999
F-28
<PAGE>
SOFTWARE SERVICES CORPORATION
BALANCE SHEETS
AS OF DECEMBER 31, 1996 AND 1997, AND AUGUST 24, 1998
<TABLE>
<CAPTION>
DECEMBER 31, DECEMBER 31, AUGUST 24,
1996 1997 1998
------------ ------------ ------------
<S> <C> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents............................................ $ 70,000 $ 252,000 $ 44,000
Accounts receivable, net of allowance for doubtful accounts of
$29,000, $25,000 and $255,000, respectively........................ 1,597,000 2,167,000 2,935,000
Other current assets................................................. 225,000 150,000 1,020,000
------------ ------------ ------------
Total current assets............................................... 1,892,000 2,569,000 3,999,000
Property and equipment, net............................................ 617,000 541,000 475,000
Intangible assets, net................................................. 450,000 311,000 216,000
Other assets........................................................... 196,000 246,000 283,000
------------ ------------ ------------
Total assets....................................................... $3,155,000 $3,667,000 $ 4,973,000
------------ ------------ ------------
------------ ------------ ------------
LIABILITIES AND STOCKHOLDERS' EQUITY:
Current liabilities:
Accounts payable..................................................... $ 56,000 $ 57,000 $ 725,000
Accrued liabilities.................................................. 649,000 1,058,000 761,000
Current portion of long-term debt.................................... 672,000 334,000 --
------------ ------------ ------------
Total current liabilities.......................................... 1,377,000 1,449,000 1,486,000
Long-term debt, net of current portion................................. 320,000 332,000 --
------------ ------------ ------------
Total liabilities.................................................. 1,697,000 1,781,000 1,486,000
------------ ------------ ------------
Commitments and contingencies (Note 9)
Stockholders' equity:
Common stock, no par value, 10,000,000 shares authorized, 5,700,000,
5,697,000 and 5,667,000 shares issued and outstanding,
respectively....................................................... 1,000 61,000 31,000
Additional paid-in capital (Note 1).................................. -- -- 3,344,000
Retained earnings.................................................... 1,457,000 1,825,000 112,000
------------ ------------ ------------
Total stockholders' equity......................................... 1,458,000 1,886,000 3,487,000
------------ ------------ ------------
Total liabilities and stockholders' equity......................... $3,155,000 $3,667,000 $ 4,973,000
------------ ------------ ------------
------------ ------------ ------------
</TABLE>
The accompanying notes are an integral part of these statements.
F-29
<PAGE>
SOFTWARE SERVICES CORPORATION
STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
FOR THE
FOR THE YEARS ENDED PERIOD FROM FOR THE
DECEMBER 31, JANUARY 1, 1998 THREE MONTHS
---------------------------- TO AUGUST 24, ENDED
1996 1997 1998 MARCH 31, 1998
------------- ------------- ----------------- -----------------
<S> <C> <C> <C> <C>
(UNAUDITED)
Revenues..................................... $ 11,789,000 $ 13,298,000 $ 10,788,000 $ 3,538,000
Costs of revenues............................ 7,680,000 8,416,000 7,392,000 2,483,000
------------- ------------- ----------------- -----------------
Gross profit............................. 4,109,000 4,882,000 3,396,000 1,055,000
Operating expenses:
Selling and marketing...................... 1,082,000 997,000 567,000 155,000
General and administrative................. 2,615,000 3,050,000 1,856,000 728,000
Stock-based and acquisition-related
compensation............................. -- -- 2,654,000 --
Depreciation and amortization.............. 300,000 341,000 230,000 89,000
------------- ------------- ----------------- -----------------
Total operating expenses................. 3,997,000 4,388,000 5,307,000 972,000
------------- ------------- ----------------- -----------------
Income (loss) from operations................ 112,000 494,000 (1,911,000) 83,000
Gain on sale of investment in affiliate...... -- 358,000 -- --
Interest expense, net........................ 52,000 35,000 28,000 7,000
Other expense, net........................... -- 9,000 372,000 124,000
------------- ------------- ----------------- -----------------
Income (loss) before income taxes............ 60,000 808,000 (2,311,000) (48,000)
Provision (benefit) for income taxes......... 113,000 377,000 (598,000) (225,000)
------------- ------------- ----------------- -----------------
Net (loss) income............................ $ (53,000) $ 431,000 $ (1,713,000) $ 177,000
------------- ------------- ----------------- -----------------
------------- ------------- ----------------- -----------------
Basic and diluted net (loss) income per
share...................................... $ (.01) $ .08 $ (.30) $ .03
------------- ------------- ----------------- -----------------
------------- ------------- ----------------- -----------------
Weighted average common shares outstanding... 5,727,000 5,705,000 5,697,000 5,697,000
------------- ------------- ----------------- -----------------
------------- ------------- ----------------- -----------------
</TABLE>
The accompanying notes are an integral part of these statements.
F-30
<PAGE>
SOFTWARE SERVICES CORPORATION
STATEMENTS OF STOCKHOLDERS' EQUITY
FOR THE YEARS ENDED DECEMBER 31, 1996 AND 1997,
AND FOR THE PERIOD FROM JANUARY 1, 1998 TO AUGUST 24, 1998
<TABLE>
<CAPTION>
COMMON STOCK ADDITIONAL TOTAL
---------------------- PAID-IN RETAINED STOCKHOLDERS'
SHARES AMOUNT CAPITAL EARNINGS EQUITY
---------- ---------- ------------ ------------- ------------
<S> <C> <C> <C> <C> <C>
Balance, December 31, 1995................... 6,000,000 $ 1,000 $ -- $ 1,810,000 $1,811,000
Repurchase of common stock shares.......... (300,000) -- -- (300,000) (300,000)
Net loss................................... -- -- -- (53,000) (53,000)
---------- ---------- ------------ ------------- ------------
Balance, December 31, 1996................... 5,700,000 1,000 -- 1,457,000 1,458,000
Repurchase of common stock shares.......... (63,000) -- -- (63,000) (63,000)
Issuance of common stock as compensation... 60,000 60,000 -- -- 60,000
Net income................................. -- -- -- 431,000 431,000
---------- ---------- ------------ ------------- ------------
Balance, December 31, 1997................... 5,697,000 61,000 -- 1,825,000 1,886,000
Repurchase of common stock shares.......... (30,000) (30,000) -- -- (30,000)
Capital contribution....................... -- -- 3,344,000 -- 3,344,000
Net loss................................... -- -- -- (1,713,000) (1,713,000)
---------- ---------- ------------ ------------- ------------
Balance, August 24, 1998..................... 5,667,000 $ 31,000 $ 3,344,000 $ 112,000 $3,487,000
---------- ---------- ------------ ------------- ------------
---------- ---------- ------------ ------------- ------------
</TABLE>
The accompanying notes are an integral part of these statements.
F-31
<PAGE>
SOFTWARE SERVICES CORPORATION
STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
FOR THE
PERIOD FROM
FOR THE YEARS ENDED JANUARY 1,
DECEMBER 31, 1998 TO FOR THE
-------------------- AUGUST 24, THREE MONTHS ENDED
1996 1997 1998 MARCH 31, 1998
--------- --------- --------------- --------------------
UNAUDITED
<S> <C> <C> <C> <C>
Cash flows from operating activities:
Net (loss) income................................. $ (53,000) $ 431,000 $ (1,713,000) $ 177,000
Adjustments to reconcile net (loss) income to net
cash provided by (used in) operating activities:
Depreciation and amortization................. 300,000 341,000 230,000 89,000
Deferred compensation agreements.............. -- 616,000 -- --
Gain on sale of investment in affiliate....... -- (358,000) -- --
Deferred income taxes......................... (34,000) (216,000) (935,000) (224,000)
Change in assets and liabilities:
Accounts receivable......................... 97,000 (570,000) (768,000) (62,000)
Other current assets........................ (74,000) 89,000 31,000 25,000
Other assets................................ -- (2,000) (3,000) (3,000)
Accounts payable............................ (109,000) 1,000 668,000 91,000
Accrued liabilities......................... (11,000) 409,000 (297,000) (397,000)
--------- --------- --------------- -----------
Net cash provided by (used in) operating
activities.............................. 116,000 741,000 (2,787,000) (304,000)
--------- --------- --------------- -----------
Cash flows from investing activities:
Purchase of property and equipment, net........... (221,000) (121,000) (69,000) (39,000)
Additional investment in affiliate................ -- (75,000) -- --
Proceeds from disposal of investment in
affiliate....................................... -- 490,000 -- --
--------- --------- --------------- -----------
Net cash (used in) provided by investing
activities.............................. (221,000) 294,000 (69,000) (39,000)
--------- --------- --------------- -----------
Cash flows from financing activities:
Repayments of long-term debt...................... (235,000) (236,000) (263,000) (17,000)
Net borrowings (repayments) under notes payable... 400,000 (400,000) -- 180,000
Repurchase of common stock........................ (300,000) (63,000) (30,000) --
Capital contribution.............................. -- -- 3,344,000 --
Payments under deferred compensation agreement.... -- (154,000) (403,000) (50,000)
--------- --------- --------------- -----------
Net cash (used in) provided by financing
activities.............................. (135,000) (853,000) 2,648,000 113,000
--------- --------- --------------- -----------
Net (decrease) increase in cash and cash
equivalents....................................... (240,000) 182,000 (208,000) (230,000)
Cash and cash equivalents, beginning of period...... 310,000 70,000 252,000 252,000
--------- --------- --------------- -----------
Cash and cash equivalents, end of period............ $ 70,000 $ 252,000 $ 44,000 $ 22,000
--------- --------- --------------- -----------
--------- --------- --------------- -----------
Supplementary information:
Cash paid for interest............................ $ 59,000 $ 56,000 $ 33,000 $ 15,000
--------- --------- --------------- -----------
--------- --------- --------------- -----------
Cash paid for income taxes........................ $ 182,000 $ 135,000 $ 653,000 $ 477,000
--------- --------- --------------- -----------
--------- --------- --------------- -----------
Assets financed under capital lease obligations... $ 252,000 $ -- $ -- $ --
--------- --------- --------------- -----------
--------- --------- --------------- -----------
</TABLE>
The accompanying notes are an integral part of these statements.
F-32
<PAGE>
SOFTWARE SERVICES CORPORATION
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 1996 AND 1997, AND AUGUST 24, 1998
1. BUSINESS DESCRIPTION:
Software Services Corporation (the Company) engages in application
development, computer software and networking projects, and provides both
full-time and temporary personnel to companies in the computer industry. The
Company is headquartered in Ann Arbor, Michigan.
On August 25, 1998, all of the outstanding Common Stock of the Company was
acquired by SSC Acquisition Sub. No. 1, Inc. (a Michigan Corporation and a
wholly owned subsidiary of AppNet Systems, Inc.; "AppNet"). In contemplation of
the acquisition, AppNet advanced the Company $3,344,000 to fund the repayment of
certain debt, the repurchase of certain shares, pay the Company's obligation
under a deferred compensation agreement and to fund certain acquisition expenses
paid by the Company. This amount has been included as paid in capital in the
accompanying financial statements.
There are significant risks associated with the Company, including the
subjectivity of the Company's services to rapid technological change and the
Year 2000 issue.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES AND PRACTICES:
USE OF ESTIMATES
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
INVESTMENT IN AFFILIATE
Investment in affiliate represented the Company's 10 percent interest in
Workwell Health & Safety Systems, Inc. ("Workwell"). In addition to the
investment in Workwell, the Company held an option to purchase an additional
2,353 to 2,667 shares of Workwell for $75,000. In January 1997, the Company
exercised this option and signed an agreement to sell its total investment in
Workwell for $490,000. In connection with the sale, certain employment
agreements and options were canceled and the owners of Workwell released the
Company from further payments owed under the non-competition agreements. Except
for the release of payments, all the terms and conditions of the non-competition
agreements remain in full force and effect. During 1997, the Company recognized
a $358,000 gain on this transaction; $93,000 of which represents the release of
payments by the Company under the non-competition agreements.
CASH AND CASH EQUIVALENTS
The Company considers all investments purchased with a maturity of three
months or less to be cash equivalents.
F-33
<PAGE>
SOFTWARE SERVICES CORPORATION
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1996 AND 1997, AND AUGUST 24, 1998
PROPERTY AND EQUIPMENT
Property and equipment are stated at cost, net of accumulated depreciation
and amortization. Depreciation and amortization are computed using the
straight-line method over the estimated useful lives of the related assets, as
follows:
<TABLE>
<S> <C>
three to five
Computers and equipment................................. years
Furniture and fixtures.................................. five years
</TABLE>
Purchased software and third-party costs incurred to develop software for
internal use are capitalized and amortized principally over three years.
In accordance with SFAS No. 121, "Accounting for the Impairment of
Long-Lived Assets and for Long-Lived Assets to Be Disposed Of," the Company
reviews its recorded long-lived assets for impairment whenever events or changes
in circumstances indicate that the carrying amount of an asset may not be
recoverable.
GOODWILL
Goodwill represents the excess of the purchase price over the fair value of
net assets acquired and is amortized on a straight-line basis over 5 years.
NON-COMPETITION AGREEMENTS
Non-compete agreements were entered into with former owners of various
acquisitions of the Company and are being amortized on a straight-line basis
over the lives of the related agreements, generally four to five years.
INTELLECTUAL PROPERTY
Intellectual property represents acquired and internally developed patents.
The Company capitalizes the direct external costs of acquiring the related
patents. Intellectual property is amortized on a straight-line basis over the
lives of the related assets, generally five years.
FAIR VALUE OF FINANCIAL INSTRUMENTS
The Company's financial instruments consist primarily of cash and cash
equivalents, accounts receivable, accounts payable, short-term borrowings,
long-term debt and capital lease obligations. In management's opinion, the
carrying amounts of these financial instruments approximated their fair values
at December 31, 1996 and 1997, and August 24, 1998.
SELF INSURANCE
The Company partially self insures its dental, vision and short-term
disability programs. There are stop-loss provisions on each of these programs.
Paid claims were $54,000 and $64,000 in 1996 and 1997, respectively, and $47,000
for the period from January 1, 1998 through August 24, 1998.
STOCK-BASED COMPENSATION
The Company accounts for stock-based compensation arrangements using the
intrinsic value method in accordance with provisions of Accounting Principles
Board ("APB") Opinion No. 25,
F-34
<PAGE>
SOFTWARE SERVICES CORPORATION
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1996 AND 1997, AND AUGUST 24, 1998
"Accounting for Stock Issued to Employees," and complies with the disclosure
provisions of SFAS No. 123, "Accounting for Stock-Based Compensation." Under APB
Opinion No. 25, compensation cost is recognized based on the difference, if any,
on the date of grant between the fair value of the Company's stock and the
amount an employee must pay to acquire the stock.
REVENUE RECOGNITION
Revenues from time and material contracts are recognized based on fixed
hourly rates for direct labor hours expended.
Costs of revenues include all direct, material and labor costs related to
contract performance and does not include any related depreciation expense.
BUSINESS CONCENTRATION AND CREDIT RISK
The following table summarizes the revenues and accounts receivable from
clients in excess of 10% of total revenues and accounts receivable:
<TABLE>
<CAPTION>
REVENUES ACCOUNTS RECEIVABLE
--------------------------------------------- -----------------------------------------------
FOR THE YEAR ENDED FOR THE PERIOD
ENDED AS OF AUGUST
DECEMBER 31, AUGUST 24, AS OF DECEMBER 31, 24,
------------------------ ------------------------------
1996 1997 1998 1996 1997 1998
----------- ----------- ------------------- ------------- --------------- ---------------
<S> <C> <C> <C> <C> <C> <C>
Customer A............. 62% 46% 33% 49% 37% 23%
Customer B............. * * 11% * 11% 14%
</TABLE>
- ------------------------
* Represents less than 10 percent of total.
INCOME TAXES
The Company accounts for income taxes under Statement of Financial
Accounting Standards ("SFAS") No. 109, "Accounting for Income Taxes". Under the
provisions of SFAS No. 109, deferred income taxes reflect the impact of
temporary differences between the amount of assets and liabilities recognized
for financial reporting purposes and such amounts recognized for tax reporting
purposes. Deferred tax assets may also be recognized to reflect the expected
future benefit from the utilization of net operating loss and tax credit
carryforwards. Deferred tax assets and liabilities are measured by applying
current enacted tax laws.
EARNINGS PER SHARE
SFAS No. 128, "Earnings Per Share," requires the presentation of basic and
diluted earnings per share. Basic net income (loss) per share is computed by
dividing income (loss) available to common stockholders by the weighted average
number of common shares outstanding for the period. The diluted net income
(loss) per share data is computed using the weighted average number of common
shares outstanding plus the dilutive effect of common stock equivalents, unless
the equivalents are antidilutive.
F-35
<PAGE>
SOFTWARE SERVICES CORPORATION
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1996 AND 1997, AND AUGUST 24, 1998
RECENT ACCOUNTING PRONOUNCEMENTS
In March 1998, the American Institute of Certified Public Accountants issued
Statement of Position ("SOP") 98-1, "Accounting for the Cost of Computer
Software Developed or Obtained for Internal Use." SOP 98-1 is effective for
financial statement years beginning after December 15, 1998. SOP 98-1 provides
guidance on accounting for computer software developed or obtained for internal
use, including the requirements to capitalize specified costs and the
amortization of such costs. The Company does not expect the adoption of this
standard to have a material effect on the Company's capitalization policy.
RECLASSIFICATIONS
Certain amounts from the prior year financial statements have been
reclassified to conform with the current presentation.
3. ACCOUNTS RECEIVABLE:
Accounts receivable consists of the following:
<TABLE>
<CAPTION>
DECEMBER 31, DECEMBER 31, AUGUST 24,
1996 1997 1998
------------ ------------ ------------
<S> <C> <C> <C>
Accounts receivable................................ $1,562,000 $2,014,000 $ 2,630,000
Unbilled accounts receivables...................... 64,000 178,000 560,000
Allowance for doubtful accounts.................... (29,000) (25,000) (255,000)
------------ ------------ ------------
Accounts receivable, net....................... $1,597,000 $2,167,000 $ 2,935,000
------------ ------------ ------------
------------ ------------ ------------
</TABLE>
4. OTHER CURRENT ASSETS:
Other current assets consist of the following:
<TABLE>
<CAPTION>
DECEMBER 31, DECEMBER 31, AUGUST 24,
1996 1997 1998
------------ ------------ ------------
<S> <C> <C> <C>
Prepaid expenses................................... $ 174,000 $ 91,000 $ 60,000
Other.............................................. 6,000 -- --
Deferred income tax asset.......................... 45,000 59,000 960,000
------------ ------------ ------------
Other current assets........................... $ 225,000 $ 150,000 $ 1,020,000
------------ ------------ ------------
------------ ------------ ------------
</TABLE>
F-36
<PAGE>
SOFTWARE SERVICES CORPORATION
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1996 AND 1997, AND AUGUST 24, 1998
5. PROPERTY AND EQUIPMENT:
Property and equipment consists of the following:
<TABLE>
<CAPTION>
DECEMBER 31, DECEMBER 31, AUGUST 24,
1996 1997 1998
------------ ------------ ------------
<S> <C> <C> <C>
Computer equipment and software.................... $ 874,000 $ 994,000 $ 1,054,000
Furniture and fixtures............................. 178,000 179,000 187,000
Leasehold improvements............................. 53,000 53,000 53,000
------------ ------------ ------------
1,105,000 1,226,000 1,294,000
Accumulated depreciation and amortization.......... (488,000) (685,000) (819,000)
------------ ------------ ------------
Net property and equipment..................... $ 617,000 $ 541,000 $ 475,000
------------ ------------ ------------
------------ ------------ ------------
</TABLE>
6. INTANGIBLE ASSETS:
Intangible assets consist of the following:
<TABLE>
<CAPTION>
DECEMBER 31, DECEMBER 31, AUGUST 24,
1996 1997 1998
------------ ------------ ------------
<S> <C> <C> <C>
Goodwill........................................... $ 120,000 $ 120,000 $ 120,000
Non-competition agreements......................... 380,000 380,000 380,000
Intellectual property, net......................... 150,000 155,000 155,000
Acquired contracts................................. 158,000 -- --
------------ ------------ ------------
808,000 655,000 655,000
Accumulated amortization........................... (358,000) (344,000) (439,000)
------------ ------------ ------------
Intangible assets, net......................... $ 450,000 $ 311,000 $ 216,000
------------ ------------ ------------
------------ ------------ ------------
</TABLE>
7. OTHER NON-CURRENT ASSETS:
Other non-current assets consist of the following:
<TABLE>
<CAPTION>
DECEMBER 31, DECEMBER 31, AUGUST 24,
1996 1997 1998
------------ ------------ ------------
<S> <C> <C> <C>
Other.............................................. $ 12,000 $ 10,000 $ 13,000
Deferred income tax benefit........................ 34,000 236,000 270,000
Investment in affiliate............................ 150,000 -- --
------------ ------------ ------------
Other non-current assets....................... $ 196,000 $ 246,000 $ 283,000
------------ ------------ ------------
------------ ------------ ------------
</TABLE>
F-37
<PAGE>
SOFTWARE SERVICES CORPORATION
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1996 AND 1997, AND AUGUST 24, 1998
8. ACCRUED LIABILITIES:
Accrued liabilities consists of the following:
<TABLE>
<CAPTION>
DECEMBER 31 DECEMBER 31, AUGUST 24,
1996 1997 1998
------------ ------------ ------------
<S> <C> <C> <C>
Accrued compensation and benefits.................. $ 477,000 $ 422,000 $ 440,000
Accrued commissions................................ 89,000 111,000 79,000
Income taxes payable............................... 33,000 477,000 161,000
Accrued professional fees.......................... 17,000 27,000 22,000
Other accrued liabilities.......................... 33,000 21,000 59,000
------------ ------------ ------------
Accrued liabilities............................ $ 649,000 $1,058,000 $ 761,000
------------ ------------ ------------
------------ ------------ ------------
</TABLE>
9. COMMITMENTS AND CONTINGENCIES:
The Company currently leases its facility under an operating lease. Rent
expense for the years ended December 31, 1996 and 1997, and for the period from
January 1, 1998 to August 24, 1998, totaled approximately $180,000, $243,000 and
$165,000, respectively. Future minimum lease payments at August 24, 1998, under
these agreements are as follows:
<TABLE>
<S> <C>
Period ended December 31, 1998.................................. $ 86,000
1999............................................................ 275,000
2000............................................................ 293,000
2001............................................................ 301,000
2002............................................................ 309,000
2003............................................................ 155,000
---------
Total....................................................... $1,419,000
---------
---------
</TABLE>
F-38
<PAGE>
SOFTWARE SERVICES CORPORATION
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1996 AND 1997, AND AUGUST 24, 1998
10. DEBT:
Debt consists of the following:
<TABLE>
<CAPTION>
DECEMBER 31 DECEMBER 31, AUGUST 24,
1996 1997 1998
------------ ------------ ----------
<S> <C> <C> <C>
Deferred compensation (see Note 17), repaid during the period ended
August 24, 1998 (see below)........................................... $ -- $ 403,000 $ --
Capital lease obligation, repaid during the period ended August 24, 1998
(see below)........................................................... 141,000 116,000 --
Promissory notes, repaid during the period ended August 24, 1998 (see
below)................................................................ 285,000 98,000 --
Capital lease obligation, repaid during the period ended August 24, 1998
(see below)........................................................... 73,000 49,000 --
Noncompete agreements, repaid during the year ended December 31, 1997... 93,000 -- --
Note payable, repaid during the year ended December 31, 1997............ 400,000 -- --
------------ ------------ ----------
992,000 666,000 --
Less--Current portion................................................... 672,000 334,000 --
------------ ------------ ----------
$ 320,000 $ 332,000 $ --
------------ ------------ ----------
------------ ------------ ----------
</TABLE>
As a condition of the sale of the Company to AppNet, all of the Company's
outstanding debt was repaid prior to August 24, 1998. In contemplation of the
repayment, AppNet advanced funds to the Company to repay the debt. The funds
received by AppNet have been included in additional paid-in capital in the
accompanying financial statements.
11. STOCKHOLDERS' EQUITY:
STOCK SPLIT
During 1997, the Company declared a stock split of six-to-one for each
holder of common stock. All share information included in the accompanying
financial statements has been restated to retroactively reflect the stock split.
STOCK OPTION PLAN
During 1995, the Company established a stock option plan (the "Plan") to
encourage ownership by selected employees of the Company and provide an
additional incentive to these employees to promote the success of the Company.
Under the Plan, options to purchase the Company's common stock may be granted at
the discretion of the Board of Directors. The maximum number of shares that may
be granted is 1,500,000. The Plan may be terminated at any time at the
discretion of the Board of Directors. According to the Plan, the options will be
granted at a price equal to 100 percent of the fair market value of the common
stock as determined by the Board of Directors. All options will expire ten years
after date of grant. During the years ended December 31, 1996 and 1997 and the
for the period from January 1, 1998 to August 24, 1998, the Company granted
108,000, 170,000 and 20,000 options, respectively, at an option price of $1.00,
all of which vest over four years. During the years ended December 31, 1996,
1997 and for the period from January 1, 1998 to August 24, 1998, 372,000, 90,000
and 54,000 options were cancelled due to termination of employment,
respectively. As of December 31,
F-39
<PAGE>
SOFTWARE SERVICES CORPORATION
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1996 AND 1997, AND AUGUST 24, 1998
1996 and 1997, and as of August 24, 1998, 180,000, 260,000 and zero options were
outstanding, respectively. In contemplation of the sale of the Company to
AppNet, certain option vesting was accelerated and all then vested options,
totaling 89,500, were redeemed and the remaining options of the Company were
converted to equivalent options of AppNet for $3.43 per share. The amount paid
to the stockholders, net of the option exercise price, has been recognized as
expense and included in stock-based and acquisition-related compensation in the
accompanying statement of operations. In contemplation of the redemption of the
shares, AppNet advanced approximately $217,000 to the Company to fund the
redemption. The funds advanced to the Company have been recorded as additional
paid in capital in the accompanying financial statements.
Utilizing the intrinsic value method of accounting for the value of stock
options issued during the years ended December 31, 1996 and 1997 and for the
period from January 1, 1998 to August 24, 1998, no compensation cost was
recorded in the accompanying statements of income. Had compensation cost been
determined based on the fair value at the date of grant for awards for the years
ended December 31, 1996 and 1997 and for the period from January 1, 1998 to
August 24, 1998, consistent with the provisions of SFAS No. 123, net income
(loss) would not have significantly differed from the reported amounts.
12. EARNINGS PER SHARE:
The impact of stock options are excluded from diluted earnings per share due
to their antidilutive effect and are 180,000, 260,000, and zero for the years
ended December 31, 1996 and 1997 and for the period from January 1, 1998 to
August 24, 1998.
13. INCOME TAXES:
The components of the provision (benefit) for income taxes as recorded under
SFAS No. 109 are as follows:
<TABLE>
<CAPTION>
DECEMBER 31,
---------------------- AUGUST 24,
1996 1997 1998
---------- ---------- -----------
<S> <C> <C> <C>
Federal income taxes:
Currently payable..................................... $ 12,000 $ 446,000 $ 213,000
Deferred income taxes................................. (34,000) (216,000) (935,000)
State taxes............................................. 135,000 147,000 124,000
---------- ---------- -----------
Provisions (benefit) for income taxes............... $ 113,000 $ 377,000 $ (598,000)
---------- ---------- -----------
---------- ---------- -----------
</TABLE>
The tax provision (benefit) differed from the amounts computed at the
statutory rate as follows:
<TABLE>
<CAPTION>
DECEMBER 31,
---------------------- AUGUST 24,
1996 1997 1998
---------- ---------- -----------
<S> <C> <C> <C>
Federal income taxes at the U.S. statutory rate......... $ (26,000) $ 275,000 $ (786,000)
State taxes, net of federal benefit..................... 135,000 97,000 82,000
Acquisition expenses not deductible for tax purposes.... -- -- 115,000
Other................................................... 4,000 5,000 (9,000)
---------- ---------- -----------
Total............................................... $ 113,000 $ 377,000 $ (598,000)
---------- ---------- -----------
---------- ---------- -----------
</TABLE>
F-40
<PAGE>
SOFTWARE SERVICES CORPORATION
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1996 AND 1997, AND AUGUST 24, 1998
The components of the net deferred tax asset as of December 31, 1996 and
1997, and August 24, 1998, are as follows:
<TABLE>
<CAPTION>
DECEMBER 31, DECEMBER 31, AUGUST 24,
1996 1997 1998
------------ ------------ ------------
<S> <C> <C> <C>
Current deferred income tax asset:
Deferred compensation............................ $ -- $ -- $ 829,000
Accrued expenses................................. 36,000 50,000 32,000
Accounts receivable.............................. 9,000 9,000 99,000
------------ ------------ ------------
45,000 59,000 960,000
------------ ------------ ------------
Long-term deferred income tax asset:
Deferred compensation............................ -- 137,000 137,000
Property and equipment........................... (25,000) 7,000 19,000
Other assets..................................... 59,000 92,000 114,000
------------ ------------ ------------
34,000 236,000 270,000
------------ ------------ ------------
Net deferred tax asset......................... $ 79,000 $ 295,000 $ 1,230,000
------------ ------------ ------------
------------ ------------ ------------
</TABLE>
14. RELATED-PARTY TRANSACTIONS:
The Company purchased consulting services from an affiliate for
approximately $90,000 in 1996 and 1997 and $58,000 in the period from January 1,
1998 through August 24, 1998.
15. RETIREMENT PLAN:
The Company maintains a profit sharing and retirement plan under the
provisions of section 401(k) of the Internal Revenue Code. The Plan provides for
contribution by employees and a discretionary contribution by the Company. The
Plan is for the benefit of all employees. Employees are eligible to participate
if they are at least 18 years of age and have met certain minimum service
requirements. Employee contributions are fully vested and subject to statutory
limits. The Company's contribution is discretionary and is determined by its
Board of Directors. Company contributions vest after three years of service.
There were no company contributions for the year ended December 31, 1996 and
1997, and for the period from January 1, 1998 to August 24, 1998.
16. TERMINATION AGREEMENT:
During 1997, the Company entered into an agreement to terminate an
employment agreement with a key employee of the Company (the "Termination
Agreement"). Under the terms of the Termination Agreement, the Company was to
pay the former employee a total of $662,000 as satisfaction of any claims the
former employee may have had under the employment agreement. The amount was
payable in the form of 10,000 shares of the Company's common stock valued at
$60,000 and $602,000 in the form of a note. The Note was payable in quarterly
installments of $50,000 through December 1999, with a final payment of $30,000
in March 2000. The Company recorded the net present value of this note,
discounted at 5.5 percent, in the accompanying financial statements as deferred
compensation, which is included in long-term debt. This note was fully repaid
during the period from January 1, 1998 through August 24, 1998.
F-41
<PAGE>
SOFTWARE SERVICES CORPORATION
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1996 AND 1997, AND AUGUST 24, 1998
17. DEFERRED COMPENSATION AGREEMENT:
The Company has entered into a deferred compensation agreement (the
"Agreement") with the president of the Company. Under the terms of the
Agreement, the president is to receive certain compensation should the Company
be sold or merged, as defined in the Agreement. As a result of the sale of the
Company to AppNet, the Company recognized $2,437,000 in compensation expense
during the period from January 1, 1998 through August 24, 1998, which has been
included in general and administrative expense in the accompanying statement of
operations. In contemplation of this compensation being paid, AppNet advanced
funds to the Company to pay its obligation under the Agreement. The funds
advanced from AppNet have been included as paid in capital in the accompanying
financial statements.
18. SEGMENT DISCLOSURE:
The Company has adopted SFAS No. 131, "Disclosures about Segments of an
Enterprise and Related Information." SFAS No. 131 establishes standards for
reporting information about operating segments in annual financial statements
and requires selected information about operating segments in interim financial
reports issued to stockholders. It also establishes standards for related
disclosures about products and services, geographic areas and major customers.
The Company operated in two operating segments: technical consulting and
managed services. The technical consulting group primarily provides information
technology consulting to companies on a per diem basis. The managed services
group provides information technology solutions to its customers through the
design and implementation of information systems technology on a project or
solutions basis. Substantially all of the Company's revenues are generated and
assets are located in the Midwestern United States.
The accounting policies of the segments are the same as those described in
the summary of significant accounting policies (Note 2) except that certain
deferred compensation, merger related costs, interest expense and income taxes
have not been allocated to the business segments. The Company evaluates the
performance of its operating segments based primarily upon revenues and
operating income. Assets are not allocated to the operating segments.
As summary of the Company's operating segments for the years ended December
31, 1996 and 1997 for the period from January 1, 1998 to August 24, 1998, is set
forth below.
F-42
<PAGE>
SOFTWARE SERVICES CORPORATION
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1996 AND 1997, AND AUGUST 24, 1998
The following table presents revenues and other financial information by
operating segment:
<TABLE>
<CAPTION>
FOR THE PERIOD
FOR THE YEARS ENDED ENDED
DECEMBER 31, --------------
---------------------------- AUGUST 24,
1996 1997 1998
------------- ------------- --------------
<S> <C> <C> <C>
Revenues to external customers:
Technical consulting........................................... $ 8,520,000 $ 10,205,000 $ 8,489,000
Managed services............................................... 3,269,000 3,093,000 2,299,000
------------- ------------- --------------
Total revenue to external customers.......................... 11,789,000 13,298,000 10,788,000
------------- ------------- --------------
Operating profit (loss):
Technical consulting........................................... 531,000 1,055,000 827,000
Managed services............................................... (395,000) 56,000 (84,000)
------------- ------------- --------------
Segment operating profit........................................... 136,000 1,111,000 743,000
Reconciliation to Company operating profit due to
costs not allocated to segments:
Deferred compensation.......................................... (24,000) (617,000) --
Costs associated with acquisition.............................. -- -- (2,654,000)
------------- ------------- --------------
Total operating profit......................................... $ 112,000 $ 494,000 $ (1,911,000)
------------- ------------- --------------
------------- ------------- --------------
</TABLE>
F-43
<PAGE>
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To Arbor Intelligent Systems, Inc.:
We have audited the accompanying balance sheets of Arbor Intelligent
Systems, Inc. (a Michigan corporation), as of December 31, 1997, and March 11,
1998, and the related statements of operations, stockholders' deficit, and cash
flows for the year ended December 31, 1997, and for the period from January 1,
1998 to March 11, 1998. These financial statements are the responsibility of the
Company's management. Our responsibility is to express an opinion on these
financial statements based on our 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 Arbor Intelligent Systems,
Inc. as of December 31, 1997, and March 11, 1998, and the results of its
operations and its cash flows for the year ended December 31, 1997, and for the
period from January 1, 1998 to March 11, 1998, in conformity with generally
accepted accounting principles.
ARTHUR ANDERSEN LLP
Washington, D.C.
February 19, 1999
F-44
<PAGE>
ARBOR INTELLIGENT SYSTEMS, INC.
BALANCE SHEETS
AS OF DECEMBER 31, 1997 AND MARCH 11, 1998
<TABLE>
<CAPTION>
DECEMBER 31, MARCH 11,
1997 1998
------------ -------------
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents......................................................... $ 12,000 $ 145,000
Accounts receivable, net of allowance for doubtful accounts of $15,000 and
$20,000, respectively........................................................... 464,000 449,000
Other current assets.............................................................. 14,000 27,000
------------ -------------
Total current assets............................................................ 490,000 621,000
Property and equipment, net......................................................... 92,000 84,000
Other assets, net................................................................... 198,000 146,000
------------ -------------
Total assets.................................................................... $ 780,000 $ 851,000
------------ -------------
------------ -------------
LIABILITIES AND STOCKHOLDERS' DEFICIT
Current liabilities:
Short-term borrowings............................................................. $ 300,000 $ 300,000
Accounts payable.................................................................. 210,000 292,000
Accrued liabilities............................................................... 497,000 787,000
Current portion of long-term debt................................................. 685,000 678,000
Current portion of capital lease obligations...................................... 12,000 12,000
------------ -------------
Total current liabilities....................................................... 1,704,000 2,069,000
Capital lease obligations, net of current portion................................... 11,000 9,000
------------ -------------
Total liabilities............................................................... 1,715,000 2,078,000
------------ -------------
Commitments and contingencies (Note 7)
Stockholders' deficit:
Common stock, no par value; 50,000 shares authorized; 10,000 and 14,640 shares
issued and outstanding, respectively............................................ 1,000 1,000
Additional paid-in capital........................................................ 5,000 470,000
Accumulated deficit............................................................... (941,000) (1,698,000)
------------ -------------
Total stockholders' deficit..................................................... (935,000) (1,227,000)
------------ -------------
Total liabilities and stockholders' deficit..................................... $ 780,000 $ 851,000
------------ -------------
------------ -------------
</TABLE>
The accompanying notes are an integral part of these statements.
F-45
<PAGE>
ARBOR INTELLIGENT SYSTEMS, INC.
STATEMENTS OF OPERATIONS
FOR THE YEAR ENDED DECEMBER 31, 1997,
AND FOR THE PERIOD FROM JANUARY 1, 1998 TO MARCH 11, 1998
<TABLE>
<CAPTION>
FOR THE PERIOD
FOR THE YEAR FROM JANUARY 1,
ENDED 1998 TO
DECEMBER 31, MARCH 11,
1997 1998
------------ ---------------
<S> <C> <C>
Revenues.......................................................................... $3,106,000 $ 688,000
Cost of revenues.................................................................. 2,149,000 471,000
------------ ---------------
Gross profit.................................................................. 957,000 217,000
------------ ---------------
Operating expenses:
Selling and marketing........................................................... 105,000 14,000
General and administrative...................................................... 843,000 226,000
Stock-based compensation........................................................ -- 465,000
Depreciation and amortization................................................... 186,000 29,000
------------ ---------------
Total operating expenses...................................................... 1,134,000 734,000
------------ ---------------
Loss from operations.............................................................. (177,000) (517,000)
Interest expense, net............................................................. 187,000 29,000
Other expense, net................................................................ 41,000 211,000
------------ ---------------
Net loss.......................................................................... $ (405,000) $ (757,000)
------------ ---------------
------------ ---------------
</TABLE>
The accompanying notes are an integral part of these statements.
F-46
<PAGE>
ARBOR INTELLIGENT SYSTEMS, INC.
STATEMENTS OF STOCKHOLDERS' DEFICIT
FOR THE YEAR ENDED DECEMBER 31, 1997,
AND FOR THE PERIOD FROM JANUARY 1, 1998 TO MARCH 11, 1998
<TABLE>
<CAPTION>
COMMON STOCK ADDITIONAL TOTAL
-------------------- PAID-IN RETAINED STOCKHOLDERS'
SHARES AMOUNT CAPITAL DEFICIT DEFICIT
--------- --------- ---------- ------------- -------------
<S> <C> <C> <C> <C> <C>
Balance, December 31, 1996.......................... 10,000 $ 1,000 $ 5,000 $ (536,000) $ (530,000)
Net loss.......................................... -- -- -- (405,000) (405,000)
--------- --------- ---------- ------------- -------------
Balance, December 31, 1997.......................... 10,000 1,000 5,000 (941,000) (935,000)
Exercise of stock rights.......................... 4,640 -- 465,000 -- 465,000
Net loss.......................................... -- -- -- (757,000) (757,000)
--------- --------- ---------- ------------- -------------
Balance, March 11, 1998............................. 14,640 $ 1,000 $ 470,000 $ (1,698,000) $ (1,227,000)
--------- --------- ---------- ------------- -------------
--------- --------- ---------- ------------- -------------
</TABLE>
The accompanying notes are an integral part of these statements.
F-47
<PAGE>
ARBOR INTELLIGENT SYSTEMS, INC.
STATEMENTS OF CASH FLOWS
FOR THE YEAR ENDED DECEMBER 31, 1997,
AND FOR THE PERIOD FROM JANUARY 1, 1998 TO MARCH 11, 1998
<TABLE>
<CAPTION>
FOR THE PERIOD
FOR THE YEAR FROM JANUARY 1,
ENDED 1998 TO
DECEMBER 31, MARCH 11,
1997 1998
------------ ---------------
<S> <C> <C>
Cash flows from operating activities:
Net loss........................................................................ $ (405,000) $ (757,000)
Adjustments to reconcile net loss to net cash (used in) provided by operating
activities:
Depreciation and amortization................................................. 186,000 29,000
Loss on fixed asset disposal.................................................. -- 3,000
Write-off of commitment fees, net............................................. -- 28,000
Stock-based compensation...................................................... -- 465,000
Change in assets and liabilities:
Accounts receivable......................................................... 92,000 15,000
Other current assets........................................................ (10,000) (13,000)
Accounts payable............................................................ 2,000 82,000
Accrued liabilities......................................................... 12,000 290,000
------------ ---------------
Net cash (used in) provided by operating activities....................... (123,000) 142,000
------------ ---------------
Cash flows from investing activities:
Purchase of property and equipment, net......................................... (86,000) --
------------ ---------------
Cash flows from financing activities:
Proceeds from long-term debt.................................................... 172,000 --
Repayments of long-term debt.................................................... (86,000) (7,000)
Short-term borrowings........................................................... 150,000 --
Repayments of capital lease obligations......................................... -- (2,000)
------------ ---------------
Net cash provided by (used in) financing activities....................... 236,000 (9,000)
------------ ---------------
Net increase in cash and cash equivalents......................................... 27,000 133,000
Cash and cash equivalents, beginning of period.................................... (15,000) 12,000
------------ ---------------
Cash and cash equivalents, end of period.......................................... $ 12,000 $ 145,000
------------ ---------------
------------ ---------------
Supplementary information:
Cash paid for interest.......................................................... $ 186,000 $ 36,000
------------ ---------------
------------ ---------------
</TABLE>
The accompanying notes are an integral part of these statements.
F-48
<PAGE>
ARBOR INTELLIGENT SYSTEMS, INC.
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 1997 AND MARCH 11, 1998
1. BUSINESS DESCRIPTION:
Arbor Intelligent Systems, Inc. ("Arbor" or the "Company") was incorporated
on August 31, 1988, under the laws of the state of Michigan. The Company is an
Internet-based applications development group providing object-oriented
development services. The Company is headquartered in Ann Arbor, Michigan, and
operates primarily in the surrounding Ann Arbor area.
On March 12, 1998, certain assets and liabilities of the Company were
acquired by AppNet Systems, Inc. ("AppNet"). The Company incurred $198,000 of
expenses in conjunction with the sale to AppNet primarily for early debt
retirement. This has been classified in other expenses in the accompanying
statements of operations.
There are significant risks associated with the Company, including the
subjectivity of the Company's services to rapid technological change and the
Year 2000 issue.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES AND PRACTICES:
USE OF ESTIMATES
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and the
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amount of revenues and expenses during the reporting
period. Actual results could differ from those estimates.
CASH AND CASH EQUIVALENTS
The Company considers all highly liquid investments with original maturities
of three months or less to be cash equivalents.
PROPERTY AND EQUIPMENT
Property and equipment are stated at cost, net of accumulated depreciation
and amortization. Depreciation and amortization are computed using the
straight-line method over the estimated useful lives of the related assets, as
follows:
<TABLE>
<S> <C>
three to five
Computers, equipment and software........................ years
Furniture and fixtures................................... seven years
</TABLE>
Purchased software and third-party costs incurred to develop software for
internal use are capitalized and amortized principally over three years.
In accordance with Statement of Financial Accounting Standards ("SFAS") No.
121, "Accounting for the Impairment of Long-Lived Assets and for Long-Lived
Assets to Be Disposed Of," the Company reviews its recorded long-lived assets
for impairment whenever events or changes in circumstances indicate that the
carrying amount of an asset may not be recoverable.
F-49
<PAGE>
ARBOR INTELLIGENT SYSTEMS, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1997 AND MARCH 11, 1998
SOFTWARE DEVELOPMENT COSTS
The Company has capitalized costs related to the development of certain
software products. In accordance with SFAS No. 86, "Accounting for the Costs of
Computer Software to Be Sold, Leased, or Otherwise Marketed," capitalization of
costs begins when technological feasibility has been established and ends when
the product is available for general release to customers. Amortization has been
computed and recognized based on the products' estimated economic lives of two
years. Capitalized costs and amortization periods are management's estimates and
are subject to change due to rapid technological changes in software
development.
FAIR VALUE OF FINANCIAL INSTRUMENTS
The Company's financial instruments consist primarily of cash and cash
equivalents, accounts receivable, accounts payable, short-term borrowings,
long-term debt and capital lease obligations. In management's opinion, the
carrying amounts of these financial instruments approximated their fair values
at December 31, 1997, and March 11, 1998.
STOCK-BASED COMPENSATION
The Company accounts for stock-based employee compensation arrangements
using the intrinsic value method in accordance with provisions of Accounting
Principles Board ("APB") Opinion No. 25, "Accounting for Stock Issued to
Employees," and complies with the disclosure provisions of SFAS No. 123,
"Accounting for Stock-Based Compensation." Under APB Opinion No. 25,
compensation cost is recognized based on the difference, if any, on the date of
grant between the fair value of the Company's stock and the amount an employee
must pay to acquire the stock.
REVENUE RECOGNITION
Revenues from time and material contracts are generally recognized based on
fixed hourly rates for direct labor hours expended.
Costs of revenues include all direct material and labor costs related to
contract performance and does not include any related depreciation expense.
Revenues from software product sales are recognized when the related product
is delivered, provided no significant vendor obligations remain. Revenues from
all maintenance agreements are recognized ratably over the term of the
agreement, generally one year.
BUSINESS CONCENTRATION AND CREDIT RISK
The following table summarizes the revenues and accounts receivable from
clients in excess of 10% of total revenues and accounts receivable:
<TABLE>
<CAPTION>
REVENUES
------------------------------------------ ACCOUNTS RECEIVABLE
FOR THE YEAR ENDED FOR THE PERIOD ENDED ----------------------------------------
DECEMBER 31, MARCH 11, AS OF DECEMBER 31, AS OF MARCH 11,
1997 1998 1997 1998
------------------- --------------------- --------------------- -----------------
<S> <C> <C> <C> <C>
Customer A.......................... 23% 48% 23% 19%
Customer B.......................... 18% 15% 17% 16%
</TABLE>
F-50
<PAGE>
ARBOR INTELLIGENT SYSTEMS, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1997 AND MARCH 11, 1998
INCOME TAXES
The Company, with the consent of its shareholders, has elected to be taxed
pursuant to Subchapter S of the Internal Revenue Code (an "S corporation"). In
lieu of corporation income taxes, the shareholders of an S corporation are taxed
on their proportionate share of the Company's taxable income. Therefore, no
provision for federal income taxes has been included in the accompanying
financial statements.
RECENT ACCOUNTING PRONOUNCEMENTS
In March 1998, the AIPCA issued Statement of Position 98-4 ("SOP 98-4"),
"Deferral of the Effective Date of a Provision of SOP 97-2." SOP 98-4 defers for
one year the application of certain provisions of Statement of Position 97-2
("SOP 97-2"), "Software Revenue Recognition." The Company does not expect the
adoption of SOP 97-2 or 98-4 to have a material effect on the Company's results
of operations, financial position or cash flows.
3. ACCOUNTS RECEIVABLE:
Accounts receivable consists of the following:
<TABLE>
<CAPTION>
DECEMBER 31, MARCH 11,
1997 1998
------------ ----------
<S> <C> <C>
Commercial clients................................................. $ 479,000 $ 469,000
Allowance for doubtful accounts.................................... (15,000) (20,000)
------------ ----------
Accounts receivable, net....................................... $ 464,000 $ 449,000
------------ ----------
------------ ----------
</TABLE>
4. PROPERTY AND EQUIPMENT:
Property and equipment consists of the following:
<TABLE>
<CAPTION>
DECEMBER 31, MARCH 11,
1997 1998
------------ -----------
<S> <C> <C>
Computers, equipment and software................................. $ 207,000 $ 204,000
Furniture and fixtures............................................ 30,000 30,000
------------ -----------
237,000 234,000
Accumulated depreciation and amortization......................... (145,000) (150,000)
------------ -----------
Property and equipment, net................................... $ 92,000 $ 84,000
------------ -----------
------------ -----------
</TABLE>
F-51
<PAGE>
ARBOR INTELLIGENT SYSTEMS, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1997 AND MARCH 11, 1998
5. OTHER NON-CURRENT ASSETS:
Other non-current assets consists of the following:
<TABLE>
<CAPTION>
DECEMBER 31, MARCH 11,
1997 1998
------------ -----------
<S> <C> <C>
Software development costs........................................ $ 423,000 $ 423,000
Commitment fees................................................... 43,000 --
------------ -----------
466,000 423,000
Accumulated amortization.......................................... (268,000) (277,000)
------------ -----------
Other non-current assets, net................................. $ 198,000 $ 146,000
------------ -----------
------------ -----------
</TABLE>
6. ACCRUED LIABILITIES:
Accrued liabilities consists of the following:
<TABLE>
<CAPTION>
DECEMBER 31, MARCH 11,
1997 1998
------------ ----------
<S> <C> <C>
Accrued compensation and benefits.................................. $ 423,000 $ 487,000
Accrued financing fees............................................. -- 198,000
Other.............................................................. 74,000 102,000
------------ ----------
Accrued liabilities............................................ $ 497,000 $ 787,000
------------ ----------
------------ ----------
</TABLE>
7. COMMITMENTS AND CONTINGENCIES:
LEASES
The Company has noncancelable operating leases, primarily for real estate,
that expire over the next three years. Rental expense for operating leases
during the year ended December 31, 1997 and for the period from January 1, 1998
to March 11, 1998, was $14,000 and $3,000, respectively.
The Company leases certain equipment under capital leases.
F-52
<PAGE>
ARBOR INTELLIGENT SYSTEMS, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1997 AND MARCH 11, 1998
Future minimum lease payments under capital leases and noncancelable
operating leases are as follows as of March 11, 1998:
<TABLE>
<CAPTION>
CAPITAL OPERATING
LEASES LEASES
--------- -----------
<S> <C> <C>
Period ended December 31, 1998.......................................... $ 12,000 $ 8,000
1999.................................................................... 12,000 6,000
2000.................................................................... -- 3,000
2001.................................................................... -- 1,000
--------- -----------
Total minimum lease payments........................................ 24,000 $ 18,000
-----------
-----------
Less: Amount representing interest...................................... (3,000)
---------
Present value of capital lease obligations.............................. 21,000
Less: Current portion of capital lease obligations...................... (12,000)
---------
Long-term portion of capital lease obligations.......................... $ 9,000
---------
---------
</TABLE>
Equipment under capital leases is summarized as follows:
<TABLE>
<CAPTION>
DECEMBER 31, MARCH 11,
1997 1998
------------ ----------
<S> <C> <C>
Computer equipment...................................................................... $ 34,000 $ 34,000
Accumulated depreciation................................................................ (9,000) (10,000)
------------ ----------
Computer equipment, net............................................................. $ 25,000 $ 24,000
------------ ----------
------------ ----------
</TABLE>
8. DEBT:
Debt consists of the following:
<TABLE>
<CAPTION>
DECEMBER 31, MARCH 11,
1997 1998
------------ ----------
<S> <C> <C>
Note payable, due 2001, bears interest at prime plus 4%, plus 1.5% of gross revenues,
payable in monthly installments, secured by the assets of Arbor Intelligent Systems,
Inc., guaranteed by former shareholder............................................... $ 434,000 $ 425,000
Note payable, due February 14, 1998, bears interest at 11.75%.......................... 1,000 --
Note payable, in default, due October 5, 1997, bears interest at 20%, payable in full,
guaranteed by former shareholder..................................................... 100,000 100,000
Note payable to related party, non-interest-bearing.................................... 150,000 153,000
------------ ----------
Total debt......................................................................... $ 685,000 $ 678,000
------------ ----------
------------ ----------
</TABLE>
The Company is not in compliance with debt covenants related to the note
payable, due 2001. As such, the note payable has been classified as current
since it is callable.
The Company has a line of credit which expired on December 31, 1997, and was
collateralized by substantially all of the assets of the Company and is
guaranteed by the majority shareholder. The line of credit had a maximum
borrowing of $300,000. Interest on the outstanding balance was calculated at
10.5 percent. As of December 31, 1997, and March 11, 1998, there were borrowings
under the line of credit totaling $300,000.
F-53
<PAGE>
ARBOR INTELLIGENT SYSTEMS, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1997 AND MARCH 11, 1998
The line of credit and notes payable contain restrictions on certain debt
and stock transactions.
9. RETIREMENT PLAN:
The Company maintains a profit-sharing and retirement plan under the
provisions of section 401(k) of the Internal Revenue Code. The Plan provides for
contributions by employees and a discretionary contribution by the Company. The
Plan is for the benefit of all employees. Participants may contribute up to 18%
of their compensation, subject to statutory limits. Employee contributions are
fully vested. The Company's contribution is discretionary and is determined by
its Board of Directors. Company contributions vest after five years of service.
There were no Company contributions for the year ended December 31, 1997 and for
the period from January 1, 1998 to March 11, 1998.
Effective February 1, 1999, Arbor employees are covered by the AppNet 401(k)
Plan.
10. EMPLOYEE STOCK RIGHTS:
The Company maintained a stock rights program for key employees. Pursuant to
the program, granted rights to acquire stock expired at the earlier of ten years
from the grant date or the termination of employment. The grants had value to
the employee only upon an equity transaction such as a public sale of common
stock or acquisition. Prior to the acquisition of the Company by AppNet, no
compensation expense had been recognized for these granted rights as such an
equity event was not deemed probable. Immediately prior to the AppNet
acquisition, rights to acquire 4,640 shares of common stock were exercised. A
charge of $465,000 which reflects the fair value of the Arbor common stock
acquired through exercise of these rights (as determined by the AppNet
acquisition) has been reflected as stock-based compensation in the accompanying
statement of operations in the period from January 1, 1998 to March 11, 1998.
The following summarizes rights during 1997 and for the period from January
1, 1998 to March 11, 1998:
<TABLE>
<CAPTION>
NUMBER OF
SHARES
-----------
<S> <C>
Stock rights outstanding December 31, 1996, exercise price of $0.................. 4,657
Granted in 1997................................................................. --
Exercised in 1997............................................................... --
Expired in 1997................................................................. (517)
-----------
Stock rights outstanding December 31, 1997, exercise price of $0.................. 4,140
Granted in 1998................................................................. 500
Exercised in 1998............................................................... (4,640)
Expired in 1998................................................................. --
-----------
Stock rights outstanding, March 11, 1998.......................................... --
-----------
-----------
Stock rights exercisable, December 31, 1997....................................... 1,673
-----------
-----------
</TABLE>
11. RELATED-PARTY TRANSACTIONS:
The Company has a non-interest bearing loan with the majority shareholder in
the amount of $150,000 and $153,000 as of December 31, 1997 and March 11, 1998,
respectively.
The Company leases its real estate from the majority shareholder for $8,250
per month, on a month-to-month basis.
F-54
<PAGE>
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To New Media Publishing, Inc.:
We have audited the accompanying balance sheets of New Media Publishing,
Inc. (a Virginia corporation), as of December 31, 1996 and 1997, and October 1,
1998, and the related statements of operations, stockholders' equity, and cash
flows for the years ended December 31, 1996 and 1997, and for the period from
January 1, 1998 to October 1, 1998. These financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these financial statements based on our 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 New Media Publishing, Inc.
as of December 31, 1996 and 1997, and October 1, 1998, and the results of its
operations and its cash flows for the years ended December 31, 1996 and 1997,
and for the period from January 1, 1998 to October 1, 1998, in conformity with
generally accepted accounting principles.
ARTHUR ANDERSEN LLP
Washington, D.C.
February 9, 1999
F-55
<PAGE>
NEW MEDIA PUBLISHING, INC.
BALANCE SHEETS
AS OF DECEMBER 31, 1996 AND 1997, AND OCTOBER 1, 1998
<TABLE>
<CAPTION>
DECEMBER 31,
-------------------------- OCTOBER 1,
1996 1997 1998
------------ ------------ ------------
<S> <C> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents............................................. $ 129,000 $ 317,000 $ 224,000
Accounts receivable, net of allowance for doubtful accounts of $0, $0,
and $208,000, respectively.......................................... 265,000 628,000 1,184,000
Other current assets.................................................. 2,000 19,000 69,000
------------ ------------ ------------
Total current assets................................................ 396,000 964,000 1,477,000
Property and equipment, net............................................. 102,000 275,000 403,000
Other assets............................................................ -- 10,000 10,000
------------ ------------ ------------
Total assets........................................................ $ 498,000 $ 1,249,000 $ 1,890,000
------------ ------------ ------------
------------ ------------ ------------
LIABILITIES, PREFERRED STOCK AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable...................................................... $ 62,000 $ 163,000 $ 149,000
Accrued liabilities................................................... 50,000 552,000 321,000
Current portion of long-term debt..................................... 250,000 51,000 --
Current portion of capital lease obligations.......................... -- 32,000 --
------------ ------------ ------------
Total current liabilities........................................... 362,000 798,000 470,000
Long-term debt, net of current portion.................................. -- 50,000 --
Other long-term debt.................................................... 4,000 7,000 1,000
Capital lease obligations............................................... -- 71,000 --
------------ ------------ ------------
Total liabilities................................................... 366,000 926,000 471,000
Commitments and contingencies (Note 11)
Mandatorily redeemable preferred stock, no par value; 0, 0, and
1,450,000 shares authorized; 0, 0, and 1,428,570 shares issued and
outstanding at December 31, 1996 and 1997, and October 1, 1998,
respectively; liquidation value $.875 per share....................... -- -- 1,230,000
Stockholders' equity:
Common stock, no par value; 8,550,000 authorized; 5,937,500,
5,000,000, and 5,000,000 shares issued and outstanding,
respectively........................................................ -- -- --
Less: Treasury stock, at cost, 1,250,000 shares....................... -- (51,000) (51,000)
Additional paid-in capital............................................ -- 1,000 1,000
Retained earnings..................................................... 132,000 373,000 239,000
------------ ------------ ------------
Total stockholders' equity.......................................... 132,000 323,000 189,000
------------ ------------ ------------
Total liabilities, preferred stock and stockholders' equity......... $ 498,000 $ 1,249,000 $ 1,890,000
------------ ------------ ------------
------------ ------------ ------------
</TABLE>
The accompanying notes are an integral part of these statements.
F-56
<PAGE>
NEW MEDIA PUBLISHING, INC.
STATEMENTS OF OPERATIONS
FOR THE YEARS ENDED DECEMBER 31, 1996 AND 1997,
AND FOR THE PERIOD FROM JANUARY 1, 1998 TO OCTOBER 1, 1998
<TABLE>
<CAPTION>
FOR THE YEARS ENDED FOR THE PERIOD
DECEMBER 31, FROM JANUARY 1,
-------------------------- 1998 TO
1996 1997 OCTOBER 1, 1998
------------ ------------ ------------------
<S> <C> <C> <C>
Revenues......................................................... $ 1,291,000 $ 3,028,000 $ 3,711,000
Cost of revenues................................................. 385,000 1,211,000 1,542,000
------------ ------------ ------------------
Gross profit................................................. 906,000 1,817,000 2,169,000
------------ ------------ ------------------
Operating expenses:
Selling and marketing.......................................... 3,000 88,000 227,000
General and administrative..................................... 498,000 1,246,000 1,868,000
Depreciation and amortization.................................. 38,000 68,000 123,000
------------ ------------ ------------------
Total operating expenses..................................... 539,000 1,402,000 2,218,000
------------ ------------ ------------------
Income (loss) from operations.................................... 367,000 415,000 (49,000)
Interest expense, net............................................ 24,000 17,000 --
------------ ------------ ------------------
Income (loss) before income taxes................................ 343,000 398,000 (49,000)
Provision for income taxes....................................... 69,000 157,000 13,000
------------ ------------ ------------------
Net income (loss)................................................ $ 274,000 $ 241,000 $ (62,000)
------------ ------------ ------------------
------------ ------------ ------------------
</TABLE>
The accompanying notes are an integral part of these statements.
F-57
<PAGE>
NEW MEDIA PUBLISHING, INC.
STATEMENTS OF STOCKHOLDERS' EQUITY
FOR THE YEARS ENDED DECEMBER 31, 1996
AND 1997, AND FOR THE PERIOD FROM JANUARY 1, 1998 TO OCTOBER 1, 1998
<TABLE>
<CAPTION>
REDEEMABLE EQUITY
SECURITIES
--------------------
STOCKHOLDERS' EQUITY
MANDATORILY -----------------------------------
REDEEMABLE
PREFERRED STOCK COMMON STOCK
-------------------- ---------------------- TREASURY
SHARES AMOUNT SHARES AMOUNT STOCK
--------- --------- --------- ----------- -----------
<S> <C> <C> <C> <C> <C>
Balance, December 31, 1995............................................... -- $ -- 5,937,500 $ -- $ --
Net income............................................................. -- -- -- -- --
--------- --------- --------- ----------- -----------
Balance, December 31, 1996............................................... -- -- 5,937,500 -- --
Issuance of 312,500 shares of common stock............................. -- -- 312,500 -- --
Repurchase of 1,250,000 shares of common stock......................... -- -- (1,250,000) -- (51,000)
Net income............................................................. -- -- -- -- --
--------- --------- --------- ----------- -----------
Balance, December 31, 1997............................................... -- -- 5,000,000 -- (51,000)
Issuance of 1,428,570 shares of Mandatorily Redeemable Preferred
Stock................................................................ 1,428,570 1,230,000 -- -- --
Accretion of preferred stock dividend.................................. -- -- -- -- --
Net loss............................................................... -- -- -- -- --
--------- --------- --------- ----------- -----------
Balance, October 1, 1998................................................. 1,428,570 $1,230,000 5,000,000 $ -- $ (51,000)
--------- --------- --------- ----------- -----------
--------- --------- --------- ----------- -----------
<CAPTION>
ADDITIONAL TOTAL
PAID-IN RETAINED STOCKHOLDERS'
CAPITAL EARNINGS EQUITY
----------- --------- ------------
<S> <C> <C> <C>
Balance, December 31, 1995............................................... $ -- $(142,000) $ (142,000)
Net income............................................................. -- 274,000 274,000
----------- --------- ------------
Balance, December 31, 1996............................................... -- 132,000 132,000
Issuance of 312,500 shares of common stock............................. 1,000 -- 1,000
Repurchase of 1,250,000 shares of common stock......................... -- -- (51,000)
Net income............................................................. -- 241,000 241,000
----------- --------- ------------
Balance, December 31, 1997............................................... 1,000 373,000 323,000
Issuance of 1,428,570 shares of Mandatorily Redeemable Preferred
Stock................................................................ -- -- --
Accretion of preferred stock dividend.................................. -- (72,000) (72,000)
Net loss............................................................... -- (62,000) (62,000)
----------- --------- ------------
Balance, October 1, 1998................................................. $ 1,000 $ 239,000 $ 189,000
----------- --------- ------------
----------- --------- ------------
</TABLE>
The accompanying notes are an integral part of these statements.
F-58
<PAGE>
NEW MEDIA PUBLISHING, INC.
STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED DECEMBER 31, 1996 AND 1997,
AND FOR THE PERIOD FROM JANUARY 1, 1998 TO OCTOBER 1, 1998
<TABLE>
<CAPTION>
FOR THE YEARS ENDED FOR THE PERIOD
DECEMBER 31, FROM JANUARY 1,
---------------------- 1998 TO
1996 1997 OCTOBER 1, 1998
---------- ---------- ---------------
<S> <C> <C> <C>
Cash flows from operating activities:
Net income (loss)..................................................... $ 274,000 $ 241,000 $ (62,000)
Adjustments to reconcile net income (loss) to net cash provided by
(used in) operating activities:
Depreciation and amortization..................................... 38,000 68,000 123,000
Deferred income taxes............................................. 3,000 1,000 (4,000)
Change in assets and liabilities:
Accounts receivable, net........................................ (251,000) (363,000) (556,000)
Other assets.................................................... 1,000 (25,000) (52,000)
Accounts payable................................................ (15,000) 101,000 (14,000)
Accrued liabilities............................................. 9,000 502,000 (303,000)
---------- ---------- ---------------
Net cash provided by (used in) operating activities........... 59,000 525,000 (868,000)
---------- ---------- ---------------
Cash flows from investing activities:
Purchase of property and equipment, net............................... (78,000) (138,000) (251,000)
---------- ---------- ---------------
Cash flows from financing activities:
Proceeds from long-term debt.......................................... 125,000 250,000 --
Repayments of long-term debt.......................................... -- (449,000) (101,000)
Repayments of capital lease obligations............................... -- -- (103,000)
Proceeds from issuance of preferred stock............................. -- -- 1,230,000
Proceeds from issuance of common stock................................ -- 1,000 --
Payments to repurchase common stock................................... -- (1,000) --
---------- ---------- ---------------
Net cash provided by (used in) financing activities........... 125,000 (199,000) 1,026,000
---------- ---------- ---------------
Net increase (decrease) in cash and cash equivalents.................... 106,000 188,000 (93,000)
Cash and cash equivalents, beginning of period.......................... 23,000 129,000 317,000
---------- ---------- ---------------
Cash and cash equivalents, end of period................................ $ 129,000 $ 317,000 $ 224,000
---------- ---------- ---------------
---------- ---------- ---------------
Supplementary information:
Cash paid for income taxes............................................ $ 43,000 $ 32,000 $ 218,000
---------- ---------- ---------------
---------- ---------- ---------------
Cash paid for interest................................................ $ 24,000 $ 23,000 $ 13,000
---------- ---------- ---------------
---------- ---------- ---------------
Non-cash financing and investing activities:
Issuance of note payable for repurchase of common stock (Note 6)...... $ -- $ 50,000 $ --
---------- ---------- ---------------
---------- ---------- ---------------
Capital lease additions (Note 11)..................................... $ -- $ 103,000 $ --
---------- ---------- ---------------
---------- ---------- ---------------
Accretion of preferred stock dividend (Note 2)........................ $ -- $ -- $ 72,000
---------- ---------- ---------------
---------- ---------- ---------------
</TABLE>
The accompanying notes are an integral part of these statements.
F-59
<PAGE>
NEW MEDIA PUBLISHING, INC.
NOTES TO FINANCIAL STATEMENTS
AS OF DECEMBER 31, 1996 AND 1997, AND OCTOBER 1, 1998
1. BUSINESS DESCRIPTION:
New Media Publishing, Inc. ("NMP" or the "Company") was incorporated in
1995, under the laws of the state of Virginia. NMP is a provider of
comprehensive interactive community-building services for commercial and
not-for-profit entities. The Company is headquartered in Falls Church, Virginia.
On October 2, 1998, all of the issued and outstanding stock of the Company
was acquired by AppNet Systems, Inc. ("AppNet").
There are significant risks associated with the Company, including the
subjectivity of the Company's services to rapid technological change and the
Year 2000 issue.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES AND PRACTICES:
USE OF ESTIMATES
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and the
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amount of revenues and expenses during the reporting
period. Actual results could differ from those estimates.
CASH AND CASH EQUIVALENTS
The Company considers all highly liquid investments with original maturities
of three months or less to be cash equivalents.
PROPERTY AND EQUIPMENT
Property and equipment are stated at cost, net of accumulated depreciation
and amortization. Depreciation and amortization are computed using the
straight-line method over the estimated useful lives of the related assets, as
follows:
<TABLE>
<S> <C>
three
Computer equipment............................................. years
seven
Furniture and fixtures......................................... years
</TABLE>
Purchased software is capitalized and amortized principally over three
years. Leasehold improvements are amortized over the lesser of the estimated
useful life of the asset or the remaining lease term.
In accordance with Statement of Financial Accounting Standards ("SFAS") No.
121, "Accounting for the Impairment of Long-Lived Assets and for Long-Lived
Assets to Be Disposed Of," the Company reviews its recorded long-lived assets
for impairment whenever events or changes in circumstances indicate that the
carrying amount of an asset may not be recoverable.
FAIR VALUE OF FINANCIAL INSTRUMENTS
The Company's financial instruments consist primarily of cash and cash
equivalents, accounts receivable, accounts payable, long-term debt, capital
lease obligations and Mandatorily Redeemable
F-60
<PAGE>
NEW MEDIA PUBLISHING, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
AS OF DECEMBER 31, 1996 AND 1997, AND OCTOBER 1, 1998
Preferred Stock. In management's opinion, the carrying amounts of these
financial instruments approximated their fair values at December 31, 1996 and
1997, and October 1, 1998.
CAPITAL STOCK
On December 8, 1997, the Board of Directors approved a common stock split of
625-to-1. In addition, on April 23, 1998, the Board of Directors approved a
common and preferred stock split of ten-to-one. All share amounts in the
accompanying financial statements have been retroactively adjusted to reflect
these splits.
In March 1998, the Company amended and restated its Articles of
Incorporation. The amended and restated Articles of Incorporation increased the
authorized number of shares of no par common stock to 7,500,000 shares and
authorized 1,428,570 shares of a new class of $0.0875 cumulative annual
dividend, nonparticipating, convertible, redeemable, voting, no par preferred
stock called the Series A Convertible Preferred Stock (the "Mandatorily
Redeemable Preferred Stock"). The Company issued 1,428,570 shares of the
Mandatorily Redeemable Preferred Stock for net proceeds of $1,230,000. Dividends
on the Mandatorily Redeemable Preferred Stock were to cease to accrue on the
sixth anniversary of the issue date. In the event of liquidation, holders of the
Mandatorily Redeemable Preferred Stock would have first received an amount per
share equal to the original issue price of the shares plus accrued but unpaid
dividends thereon and then participate pro rata with the holders of the
Company's common stock in the distribution of any remaining funds in excess of
$5,000,000. Each share of Mandatorily Redeemable Preferred Stock was convertible
at any time at the option of the holder into one share of common stock, subject
to adjustment as a result of the occurrence of certain events. Further,
beginning on March 5, 2004, the Company would have been required, at the request
of the holders, to redeem at the original issue price plus accrued but unpaid
dividends, at least 10 percent of the outstanding Mandatorily Redeemable
Preferred Stock on each successive calendar quarter until all shares had been
redeemed. The dividend on the Mandatorily Redeemable Preferred Stock was
originally due March 1999. The holders of the Mandatorily Redeemable Preferred
Stock forgave payment of this dividend in conjunction with NMP's purchase by
AppNet.
The Company's common stock, including common stock which may be authorized
and issued in the future, is subject to a Shareholders' Agreement, which
includes certain co-sale rights, transfer restrictions, and buy back rights. On
April 23, 1998, the Board of Directors approved an increase in the authorized
number of shares of common and preferred stock to 8,550,000 and 1,450,000,
respectively.
STOCK-BASED COMPENSATION
The Company accounts for stock-based employee compensation arrangements
using the intrinsic value method in accordance with provisions of Accounting
Principles Board ("APB") Opinion No. 25, "Accounting for Stock Issued to
Employees," and complies with the disclosure provisions of SFAS No. 123,
"Accounting for Stock-Based Compensation." Under APB Opinion No. 25,
compensation cost is recognized based on the difference, if any, on the date of
grant between the fair value of the Company's stock and the amount an employee
must pay to acquire the stock.
REVENUE RECOGNITION
Revenues from time and materials contracts are recognized based on fixed
hourly rates for direct labor hours expended. Revenues from fixed-price
contracts are recognized on the percentage-of-
F-61
<PAGE>
NEW MEDIA PUBLISHING, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
AS OF DECEMBER 31, 1996 AND 1997, AND OCTOBER 1, 1998
completion method, with costs and estimated profits recorded as work is
performed. Revenues exclude the costs of media and advertising purchases
reimbursed by clients.
Cost of revenues include all direct material and labor costs related to
contract performance, and does not include any related depreciation expense.
Provisions for estimated losses on uncompleted contracts are made in the period
in which such losses are determined. Changes in job performance and estimated
profitability, including final contract settlements, may result in revisions to
costs and income and are recognized in the period in which the revisions are
determined. Unbilled receivables on contracts are comprised of costs, plus
earnings on certain contracts in excess of contractual billings on such
contracts. Cash received in excess of costs incurred is classified as deferred
revenue.
BUSINESS CONCENTRATION AND CREDIT RISK
The following table summarizes the revenues and accounts receivable from
clients in excess of 10% of total revenues and accounts receivable:
<TABLE>
<CAPTION>
REVENUES ACCOUNTS RECEIVABLE
----------------------------------------- ---------------------------------
FOR THE YEAR ENDED FOR THE PERIOD AS OF
DECEMBER 31, ENDED DECEMBER 31, AS OF
-------------------- OCTOBER 1, -------------------- OCTOBER 1,
1996 1997 1998 1996 1997 1998
--------- --------- ------------------- --------- --------- -----------
<S> <C> <C> <C> <C> <C> <C>
Customer A........................... * 16.3% * * 21.7% *
</TABLE>
- ------------------------
* Represents less than 10% of total.
INCOME TAXES
Income taxes are accounted for using an asset and liability approach that
requires the recognition of taxes payable or refundable for the current year and
deferred tax liabilities and assets for the future tax consequences of events
that have been recognized in the Company's financial statements or tax returns.
The measurement of current and deferred tax liabilities and assets are based on
provisions of the enacted tax law; the effects of future changes in tax laws or
rates are not anticipated. The measurement of deferred tax assets is reduced, if
necessary, by the amount of any tax benefits that, based on available evidence,
are not expected to be realized.
3. ACCOUNTS RECEIVABLE:
Accounts receivable consists of the following:
<TABLE>
<CAPTION>
DECEMBER 31,
---------------------- OCTOBER 1,
1996 1997 1998
---------- ---------- ------------
<S> <C> <C> <C>
Accounts receivable.................................... $ 169,000 $ 486,000 $ 943,000
Unbilled accounts receivable........................... 96,000 142,000 449,000
Allowance for doubtful accounts........................ -- -- (208,000)
---------- ---------- ------------
Accounts receivable, net........................... $ 265,000 $ 628,000 $ 1,184,000
---------- ---------- ------------
---------- ---------- ------------
</TABLE>
F-62
<PAGE>
NEW MEDIA PUBLISHING, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
AS OF DECEMBER 31, 1996 AND 1997, AND OCTOBER 1, 1998
4. PROPERTY AND EQUIPMENT:
Property and equipment consists of the following:
<TABLE>
<CAPTION>
DECEMBER 31,
----------------------- OCTOBER 1,
1996 1997 1998
---------- ----------- -----------
<S> <C> <C> <C>
Computer equipment..................................... $ 145,000 $ 386,000 $ 627,000
Furniture and fixtures................................. 7,000 7,000 7,000
Leasehold improvements................................. -- -- 10,000
---------- ----------- -----------
152,000 393,000 644,000
Accumulated depreciation and amortization.............. (50,000) (118,000) (241,000)
---------- ----------- -----------
Property and equipment, net........................ $ 102,000 $ 275,000 $ 403,000
---------- ----------- -----------
---------- ----------- -----------
</TABLE>
5. ACCRUED LIABILITIES:
Accrued liabilities consists of the following:
<TABLE>
<CAPTION>
DECEMBER 31,
--------------------- OCTOBER 1,
1996 1997 1998
--------- ---------- ----------
<S> <C> <C> <C>
Accrued compensation and benefits.......................... $ 29,000 $ 198,000 $ 102,000
Accrued bonuses............................................ -- 200,000 --
Accrued Mandatorily Redeemable Preferred Stock dividends... -- -- 72,000
Deferred revenues.......................................... 21,000 154,000 147,000
--------- ---------- ----------
Accrued liabilities.................................... $ 50,000 $ 552,000 $ 321,000
--------- ---------- ----------
--------- ---------- ----------
</TABLE>
6. DEBT:
Debt consists of the following:
<TABLE>
<CAPTION>
DECEMBER 31,
--------------------- OCTOBER 1,
1996 1997 1998
---------- --------- ----------
<S> <C> <C> <C>
Note payable to former shareholder, due December 31, 1999,
bore interest at 8%, interest payable quarterly.......... $ -- $ 50,000 $ --
Bank note payable, due May 15, 2000, payable in monthly
installments of $6,944 plus interest at bank's prime rate
plus 1% secured by the Company's assets.................. -- 51,000 --
Note payable, principal due April 27, 1997, bears interest
at 10%, payable semi-annually............................ 250,000 -- --
---------- --------- ----------
Total debt............................................. 250,000 101,000 --
---------- --------- ----------
Less: Current portion...................................... 250,000 51,000 --
---------- --------- ----------
Long term-debt, net of current portion................. $ -- $ 50,000 $ --
---------- --------- ----------
---------- --------- ----------
</TABLE>
F-63
<PAGE>
NEW MEDIA PUBLISHING, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
AS OF DECEMBER 31, 1996 AND 1997, AND OCTOBER 1, 1998
In 1997, the Company had a line of credit which was collateralized by
substantially all of the assets of the Company. Under the terms of the line of
credit, borrowings were limited to 80 percent of qualified accounts receivable,
up to a maximum borrowing of $250,000. Interest on the outstanding balance was
calculated as the bank's prime rate of interest plus one and one-half percent.
As of December 31, 1997, there was no amount outstanding under the line of
credit. The agreement expired in May 1998.
The note payable issued to the former shareholder related to the
reacquisition of 1,250,000 shares of common stock. The note was paid in full in
February 1998.
The bank note payable contained certain restrictions on capital
expenditures, the incurrence of additional indebtedness, payment of cash
dividends and treasury stock transactions. This bank borrowing was paid in full
during February 1998.
7. RETIREMENT PLAN:
The Company maintains a retirement plan under the provisions of section
401(k) of the Internal Revenue Code. The plan was adopted January 1, 1997. The
Plan provides for contributions by employees and by the Company. Participants
may contribute up to 15 percent of their compensation, subject to statutory
limits. The Company's contribution is discretionary and is determined by its
Board of Directors. Company contributions vest immediately. Company
contributions totaled $32,000, and $40,000 for the year ended December 31, 1997,
and for the period from January 1, 1998 to October 1, 1998, respectively.
Effective February 1,1999, NMP employees are covered by the AppNet 401(k) plan.
8. EMPLOYEE STOCK OPTION PLAN:
On December 31, 1997, the Company adopted a stock option plan for employees,
directors, and consultants of the Company. Options expire no later than ten
years from the date of the grant or when employment ceases, whichever comes
first. The maximum number of shares of common stock which may be issued pursuant
to the stock option plan was 714,290.
The stock option plan is accounted for under APB Opinion No. 25 and no
compensation has been recognized for the plan. Had compensation cost for the
plan been determined based on the estimated fair value of the options at the
grant dates consistent with the method of SFAS No. 123, the effect to pro forma
net income would have been approximately $7,000 and $91,000, for the year ended
December 31, 1997, and for the period from January 1, 1998 to October 1, 1998,
respectively. The weighted average fair value of the options granted during
1997, and during the period from January 1, 1998 to October 1, 1998, is
estimated to be $.03, and $.22, respectively, per option assuming the following:
dividend yield of 0 percent, risk-free interest rate ranging from 5.40 to 6.00
percent, volatility of 0 percent, and an expected term of the options of 5
years.
F-64
<PAGE>
NEW MEDIA PUBLISHING, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
AS OF DECEMBER 31, 1996 AND 1997, AND OCTOBER 1, 1998
The following summarizes option activity during 1997 and for the period from
January 1, 1998 to October 1, 1998:
<TABLE>
<CAPTION>
STOCK OPTIONS
OUTSTANDING
--------------------
1997 1998
--------- ---------
<S> <C> <C>
Beginning of period....................................... -- 286,000
Granted................................................. 286,000 168,000
Exercised............................................... -- --
Cancelled............................................... -- (33,000)
--------- ---------
End of period............................................. 286,000 421,000
--------- ---------
--------- ---------
Exercisable at end of period.............................. -- 14,000
--------- ---------
--------- ---------
</TABLE>
<TABLE>
<CAPTION>
WEIGHTED AVERAGE
EXERCISE PRICE
--------------------
1997 1998
--------- ---------
<S> <C> <C>
Beginning of period....................................... $ -- $ .03
Granted................................................. .03 1.16
Exercised............................................... -- --
Cancelled............................................... -- .05
End of period............................................. $ .03 $ .48
--------- ---------
--------- ---------
Exercisable at end of period.............................. $ -- $ .04
--------- ---------
--------- ---------
</TABLE>
When AppNet acquired NMP (Note 1), the options outstanding under the stock
option plan were assumed as part of the purchase combination and converted to
AppNet options.
9. INCOME TAXES:
The Company follows the provisions of SFAS No. 109, "Accounting for Income
Taxes," for financial reporting purposes. Deferred tax assets or liabilities at
the end of each period are determined using the currently enacted tax rates to
apply to taxable income in the period in which the deferred tax asset or
liability is expected to be settled or realized.
F-65
<PAGE>
NEW MEDIA PUBLISHING, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
AS OF DECEMBER 31, 1996 AND 1997, AND OCTOBER 1, 1998
The sources of and differences between the financial accounting and tax
basis of NMP's assets and liabilities that give rise to the net deferred tax
liability (asset) are as follows:
<TABLE>
<CAPTION>
DECEMBER 31,
-------------------- OCTOBER 1,
1996 1997 1998
--------- --------- -----------
<S> <C> <C> <C>
Deferred tax liability
Depreciation................................................. $ 4,000 $ 8,000 $ 2,000
Deferred tax asset
Reserves..................................................... 1,000 4,000 71,000
--------- --------- -----------
Net deferred tax liability (asset)............................. $ 3,000 $ 4,000 (69,000)
--------- ---------
--------- ---------
Less: Valuation allowance...................................... 69,000
-----------
Net deferred tax liability (asset)............................. $ --
-----------
-----------
</TABLE>
The components of the provision for income taxes for the years ended
December 31, 1996 and 1997, and for the period from January 1, 1998 to October
1, 1998, are as follows:
<TABLE>
<CAPTION>
DECEMBER 31,
--------------------- OCTOBER 1,
1996 1997 1998
--------- ---------- -----------
<S> <C> <C> <C>
Federal income taxes:
Current.................................................. $ 55,000 $ 132,000 $ 13,000
Deferred provision (benefit)............................. 3,000 1,000 (4,000)
State taxes................................................ 11,000 24,000 4,000
--------- ---------- -----------
Provision for income taxes................................. $ 69,000 $ 157,000 $ 13,000
--------- ---------- -----------
--------- ---------- -----------
</TABLE>
For the years ended December 31, 1996 and 1997, and for the period from
January 1, 1998 to October 1, 1998, the provision for income taxes differed from
the amounts computed at the statutory rate, as follows:
<TABLE>
<CAPTION>
DECEMBER 31,
---------------------- OCTOBER 1,
1996 1997 1998
---------- ---------- -----------
<S> <C> <C> <C>
Income tax computed at statutory rates.................... $ 116,000 $ 135,000 $ (17,000)
State income taxes, net of federal income tax benefit..... 7,000 15,000 3,000
Change in valuation allowance............................. (53,000) -- 35,000
Other, net................................................ (1,000) 7,000 (8,000)
---------- ---------- -----------
$ 69,000 $ 157,000 $ 13,000
---------- ---------- -----------
---------- ---------- -----------
</TABLE>
The valuation allowance for deferred tax assets as of January 1, 1996 was
$53,000. In assessing the realizability of deferred tax assets, management
considers whether it is more likely than not that some portion or all of the
deferred tax assets will not be realized. Management considers the scheduled
reversal of deferred tax liabilities, projected future taxable income, and tax
planning strategies in making this assessment. For the year ended December 31,
1996, management determined that the deferred tax asset would be realized and
decreased the valuation allowance by $53,000. For the period
F-66
<PAGE>
NEW MEDIA PUBLISHING, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
AS OF DECEMBER 31, 1996 AND 1997, AND OCTOBER 1, 1998
from January 1, 1998 to October 1, 1998, management determined that a valuation
allowance of $35,000 was required.
10. RELATED PARTIES:
Certain directors and other parties related to the Company through common
shareholder interests provided administrative and management consulting services
to the Company totaling $115,000, $191,000 and $34,000 for the years ended
December 31, 1996 and 1997, and for the period from January 1, 1998 to October
1, 1998, respectively. Rent expense to companies related through common
shareholder interest totaled $34,000, $74,000, and $74,000 for the years ended
December 31, 1996 and 1997, and for the period from January 1, 1998 to October
1, 1998, respectively. Accounts payable included $40,000, $76,000 and $0 related
to these transactions at December 31, 1996 and 1997, and October 1, 1998,
respectively.
11. COMMITMENTS AND CONTINGENCIES:
COMMITMENTS
In connection with the repurchase by the Company of 1,250,000 shares of the
Company's common stock, the Company entered into a consulting and
non-competition agreement with a former shareholder on April 1, 1997, which
provided for monthly payments by the Company totaling $57,600 for the period
from January 1, 1998 to December 31, 1999. The Company accelerated the payment
schedule and paid the remaining balance as of October 1, 1998.
LEASES
The Company has noncancelable operating leases, primarily for real estate,
that expire over the next two years. Rental expense for operating leases during
the years ended December 31, 1996 and 1997, and for the period from January 1,
1998 to October 1, 1998, was $34,000, $79,000 and $154,000, respectively.
During 1997, the Company entered into a capital lease for certain equipment.
This capital lease was paid-off on October 1, 1998.
Future minimum lease payments under the noncancelable operating leases are
as follows as of October 1, 1998:
<TABLE>
<CAPTION>
OPERATING
LEASES
----------
<S> <C>
Period ended December 31, 1998.................................................... $ 30,000
1999.............................................................................. 122,000
----------
Total minimum lease payments.................................................. $ 152,000
----------
----------
</TABLE>
F-67
<PAGE>
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To Century Computing, Inc.:
We have audited the accompanying balance sheets of Century Computing, Inc.
(a Delaware corporation), as of December 31, 1996 and 1997, and October 11,
1998, and the related statements of operations, stockholders' equity, and cash
flows for the years ended December 31, 1996 and 1997, and for the period from
January 1, 1998 to October 11, 1998. These financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these financial statements based on our 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 Century Computing, Inc. as
of December 31, 1996 and 1997, and October 11, 1998, and the results of its
operations and its cash flows for the years ended December 31, 1996 and 1997,
and for the period from January 1, 1998 to October 11, 1998, in conformity with
generally accepted accounting principles.
ARTHUR ANDERSEN LLP
Washington, D.C.
February 22, 1999
F-68
<PAGE>
CENTURY COMPUTING, INC.
BALANCE SHEETS
AS OF DECEMBER 31, 1996 AND 1997, AND OCTOBER 11, 1998
<TABLE>
<CAPTION>
DECEMBER 31,
-------------------------- OCTOBER 11,
1996 1997 1998
------------ ------------ ------------
<S> <C> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents............................................ $ 549,000 $ 1,225,000 $ 8,000
Accounts receivable, net of allowance for doubtful accounts of $0, $0
and $129,000, respectively......................................... 1,260,000 2,023,000 2,178,000
Other current assets................................................. 62,000 62,000 684,000
------------ ------------ ------------
Total current assets............................................. 1,871,000 3,310,000 2,870,000
Property and equipment, net............................................ 416,000 573,000 653,000
Deferred income taxes.................................................. 30,000 -- --
Other assets........................................................... 11,000 11,000 11,000
------------ ------------ ------------
Total assets..................................................... $2,328,000 $ 3,894,000 $ 3,534,000
------------ ------------ ------------
------------ ------------ ------------
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable..................................................... $ 255,000 $ 280,000 $ 703,000
Accrued liabilities.................................................. 338,000 1,194,000 1,294,000
------------ ------------ ------------
Total current liabilities........................................ 593,000 1,474,000 1,997,000
Deferred income taxes................................................ -- -- 67,000
------------ ------------ ------------
Total liabilities................................................ 593,000 1,474,000 2,064,000
------------ ------------ ------------
Commitments and contingencies (Note 7)
Stockholders' equity
Class A common stock, voting, $.01 par value; 2,500,000 shares
authorized; 603,055, 603,055, and 606,929 shares issued and
outstanding, respectively.......................................... 6,000 6,000 6,000
Class B common stock, nonvoting, $.01 par value; 2,500,000 shares
authorized; 11,630, 14,380, and 17,461 shares issued and
outstanding, respectively.......................................... -- -- --
Less: Treasury stock, at cost--257,987, 258,056, and 258,306,
respectively....................................................... (1,175,000) (1,176,000) (1,178,000)
Additional paid-in capital........................................... 255,000 271,000 315,000
Retained earnings.................................................... 2,649,000 3,319,000 2,327,000
------------ ------------ ------------
Total stockholders' equity....................................... 1,735,000 2,420,000 1,470,000
------------ ------------ ------------
Total liabilities and stockholders' equity....................... $2,328,000 $ 3,894,000 $ 3,534,000
------------ ------------ ------------
------------ ------------ ------------
</TABLE>
The accompanying notes are an integral part of these statements.
F-69
<PAGE>
CENTURY COMPUTING, INC.
STATEMENTS OF OPERATIONS
FOR THE YEARS ENDED DECEMBER 31, 1996 AND 1997,
AND FOR THE PERIOD FROM JANUARY 1, 1998 TO OCTOBER 11, 1998
<TABLE>
<CAPTION>
FOR THE
FOR THE YEARS ENDED PERIOD FROM
DECEMBER 31, JANUARY 1, 1998
--------------------------- TO OCTOBER 11,
1996 1997 1998
------------ ------------- --------------------
<S> <C> <C> <C>
Revenues...................................................... $ 7,198,000 $ 10,850,000 $ 10,040,000
Cost of revenues.............................................. 3,356,000 5,309,000 6,192,000
------------ ------------- --------------------
Gross profit.............................................. 3,842,000 5,541,000 3,848,000
Operating expenses:
Selling, general and administrative......................... 2,992,000 3,890,000 2,751,000
Acquisition-related compensation............................ -- -- 953,000
Depreciation and amortization............................... 153,000 179,000 156,000
------------ ------------- --------------------
Total operating expenses.................................. 3,145,000 4,069,000 3,860,000
Income (loss) from operations................................. 697,000 1,472,000 (12,000)
Interest income, net.......................................... 8,000 29,000 41,000
Other income (expense)........................................ 20,000 -- (423,000)
------------ ------------- --------------------
Income (loss) before income taxes............................. 725,000 1,501,000 (394,000)
Provision (benefit) for income taxes.......................... 279,000 580,000 (135,000)
------------ ------------- --------------------
Net income (loss)............................................. $ 446,000 $ 921,000 $ (259,000)
------------ ------------- --------------------
------------ ------------- --------------------
</TABLE>
The accompanying notes are an integral part of these statements.
F-70
<PAGE>
CENTURY COMPUTING, INC.
STATEMENTS OF STOCKHOLDERS' EQUITY
FOR THE YEARS ENDED DECEMBER 31, 1996 AND 1997,
AND FOR THE PERIOD FROM JANUARY 1, 1998 TO OCTOBER 11, 1998
<TABLE>
<CAPTION>
COMMON STOCK COMMON STOCK
CLASS A CLASS B ADDITIONAL
-------------------- -------------------- TREASURY PAID-IN
SHARES AMOUNT SHARES AMOUNT STOCK CAPITAL
--------- --------- --------- --------- ------------- ----------
<S> <C> <C> <C> <C> <C> <C>
Balance, December 31, 1995.................................. 613,485 $ 6,000 -- $ -- $ (1,036,000) $ 258,000
Repurchase of 21,755 shares of common stock............... -- -- -- -- (139,000) --
Stock conversion.......................................... (10,430) -- 11,630 -- -- (3,000)
Dividends to stockholders................................. -- -- -- -- -- --
Net income................................................ -- -- -- -- -- --
--------- --------- --------- --------- ------------- ----------
Balance, December 31, 1996.................................. 603,055 6,000 11,630 -- (1,175,000) 255,000
Repurchase of 189 shares of common stock.................. -- -- -- -- (1,000) --
Exercise of stock options................................. -- -- 2,750 -- -- 16,000
Dividends to stockholders................................. -- -- -- -- -- --
Net income................................................ -- -- -- -- -- --
--------- --------- --------- --------- ------------- ----------
Balance, December 31, 1997.................................. 603,055 6,000 14,380 -- (1,176,000) 271,000
Repurchase of 250 shares of common stock.................. -- -- -- -- (2,000) --
Exercise of stock options................................. 3,874 -- 3,081 -- -- 44,000
Dividends to stockholders................................. -- -- -- -- -- --
Net loss.................................................. -- -- -- -- -- --
--------- --------- --------- --------- ------------- ----------
Balance, October 11, 1998................................... 606,929 $ 6,000 17,461 $ -- $ (1,178,000) $ 315,000
--------- --------- --------- --------- ------------- ----------
--------- --------- --------- --------- ------------- ----------
<CAPTION>
TOTAL
RETAINED STOCKHOLDERS'
EARNINGS EQUITY
------------ ------------
<S> <C> <C>
Balance, December 31, 1995.................................. $ 2,374,000 $1,602,000
Repurchase of 21,755 shares of common stock............... -- (139,000)
Stock conversion.......................................... -- (3,000)
Dividends to stockholders................................. (171,000) (171,000)
Net income................................................ 446,000 446,000
------------ ------------
Balance, December 31, 1996.................................. 2,649,000 1,735,000
Repurchase of 189 shares of common stock.................. -- (1,000)
Exercise of stock options................................. -- 16,000
Dividends to stockholders................................. (251,000) (251,000)
Net income................................................ 921,000 921,000
------------ ------------
Balance, December 31, 1997.................................. 3,319,000 2,420,000
Repurchase of 250 shares of common stock.................. -- (2,000)
Exercise of stock options................................. -- 44,000
Dividends to stockholders................................. (733,000) (733,000)
Net loss.................................................. (259,000) (259,000)
------------ ------------
Balance, October 11, 1998................................... $ 2,327,000 $1,470,000
------------ ------------
------------ ------------
</TABLE>
F-71
<PAGE>
CENTURY COMPUTING, INC.
STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED DECEMBER 31, 1996 AND 1997,
AND FOR THE PERIOD FROM JANUARY 1, 1998 TO OCTOBER 11, 1998
<TABLE>
<CAPTION>
FOR THE PERIOD
FOR THE YEARS FROM JANUARY 1,
ENDED DECEMBER 31, 1998 TO
------------------------- OCTOBER 11,
1996 1997 1998
----------- ------------ ---------------
<S> <C> <C> <C>
Cash flows from operating activities:
Net income (loss).................................................. $ 446,000 $ 921,000 $ (259,000)
Adjustments to reconcile net income (loss) to net cash provided by
(used in) operating activities:
Deferred income taxes.......................................... (25,000) 78,000 (156,000)
Depreciation and amortization.................................. 153,000 179,000 156,000
Change in assets and liabilities:
Accounts receivable.......................................... 53,000 (763,000) (155,000)
Other current assets......................................... (39,000) 28,000 (475,000)
Accounts payable............................................. 83,000 25,000 423,000
Accrued liabilities.......................................... 6,000 780,000 176,000
----------- ------------ ---------------
Net cash provided by (used in) operating activities........ 677,000 1,248,000 (290,000)
----------- ------------ ---------------
Cash flows from investing activities:
Purchase of property and equipment, net............................ (243,000) (336,000) (236,000)
----------- ------------ ---------------
Cash flows from financing activities:
Repayments of long-term debt....................................... (127,000) -- --
Payments to repurchase common stock................................ (139,000) (1,000) (2,000)
Dividends to stockholders.......................................... (171,000) (251,000) (733,000)
Proceeds from exercise of stock options............................ -- 16,000 44,000
Stock conversion................................................... (3,000) -- --
----------- ------------ ---------------
Net cash used in financing activities...................... (440,000) (236,000) (691,000)
----------- ------------ ---------------
Net (decrease) increase in cash and cash equivalents................. (6,000) 676,000 (1,217,000)
Cash and cash equivalents, beginning of period....................... 555,000 549,000 1,225,000
----------- ------------ ---------------
Cash and cash equivalents, end of period............................. $ 549,000 $ 1,225,000 $ 8,000
----------- ------------ ---------------
----------- ------------ ---------------
</TABLE>
The accompanying notes are an integral part of these statements.
F-72
<PAGE>
CENTURY COMPUTING, INC.
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 1996 AND 1997, AND OCTOBER 11, 1998
1. BUSINESS DESCRIPTION:
Century Computing, Inc. ("Century" or the "Company") was incorporated in
1979, under the laws of the state of Delaware. Century is a government
contractor that provides systems integration and processing services to improve
clients' business processes, including networking and data communications,
computer and Internet security, image processing, graphical user interfacing and
object-oriented design and development. Century is headquartered in Laurel,
Maryland, and operates primarily in the United States.
On October 11, 1998, all of the issued and outstanding stock of the Company
was acquired by AppNet Systems, Inc. ("AppNet").
There are significant risks associated with the Company, including the
subjectivity of the Company's services to rapid technological changes,
government regulations and the Year 2000 issue.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES AND PRACTICES:
USE OF ESTIMATES
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and the
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amount of revenues and expenses during the reporting
period. Actual results could differ from those estimates.
CASH AND CASH EQUIVALENTS
The Company considers all highly liquid investments with original maturities
of three months or less to be cash equivalents.
PROPERTY AND EQUIPMENT
Property and equipment are stated at cost, net of accumulated depreciation
and amortization. Depreciation and amortization are computed over the estimated
useful lives of the related assets, as follows:
<TABLE>
<S> <C>
Computers, equipment and software........................ three to five
years
Furniture and fixtures................................... seven years
</TABLE>
Purchased software and third-party costs incurred to develop software for
internal use are capitalized and amortized principally over five years.
Leasehold improvements are amortized over the lesser of the estimated useful
life of the asset or the remaining lease term.
In accordance with Statement of Financial Accounting Standards ("SFAS") No.
121, "Accounting for the Impairment of Long-Lived Assets and for Long-Lived
Assets to Be Disposed Of," the Company reviews its recorded long-lived assets
for impairment whenever events or changes in circumstances indicate that the
carrying amount of an asset may not be recoverable.
F-73
<PAGE>
CENTURY COMPUTING, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1996 AND 1997, AND OCTOBER 11, 1998
SOFTWARE DEVELOPMENT COSTS
The Company has capitalized costs related to the development of certain
software products. In accordance with SFAS No. 86, "Accounting for the Costs of
Computer Software to Be Sold, Leased, or Otherwise Marketed," capitalization of
costs begins when technological feasibility has been established and ends when
the product is available for general release to customers. Amortization has been
computed and recognized based on the products' estimated economic lives of two
years. Capitalized costs and amortization periods are management's estimates and
may have to be modified due to inherent technological changes in software
development.
FAIR VALUE OF FINANCIAL INSTRUMENTS
The Company's financial instruments consist primarily of cash, marketable
securities, accounts receivable, short-term borrowings and accounts payable. In
management's opinion, the carrying amounts of these financial instruments
approximated their fair values at December 31, 1996 and 1997, and October 11,
1998.
STOCK-BASED COMPENSATION
The Company accounts for its stock-based employee compensation arrangements
using the intrinsic value method in accordance with provisions of Accounting
Principles Board ("APB") Opinion No. 25, "Accounting for Stock Issued to
Employees," and complies with the disclosure provisions of SFAS No. 123,
"Accounting for Stock-Based Compensation." Under APB Opinion No. 25,
compensation cost is recognized based on the difference, if any, on the date of
grant between the fair value of the Company's stock and the amount an employee
must pay to acquire the stock.
REVENUE RECOGNITION
Revenues from time and material contracts are recognized based on fixed
hourly rates for direct labor hours expended. Revenues from fixed-price
contracts are recognized on the percentage-of-completion method, with costs and
estimated profits recorded as work is performed. Revenues from
cost-plus-fixed-fee contracts are recognized on the basis of direct costs, plus
indirect costs incurred, plus a fixed profit percentage.
Cost of revenues includes all direct material and labor costs related to
contract performance and does not include any related depreciation expense.
Provisions for estimated losses on uncompleted contracts are made in the period
in which such losses are determined. Changes in contract performance and
estimated profitability, including final contract settlements, may result in
revisions to costs and income and are recognized in the period in which the
revisions are determined. Unbilled receivables on contracts are comprised of
costs, plus earnings on certain contracts in excess of contractual billings on
such contracts.
Revenues from software sales are recognized when the related product is
sold, provided no significant vendor obligations remain.
BUSINESS CONCENTRATION AND CREDIT RISK
Revenues for the years ended December 31, 1996 and 1997 and for the period
from January 1, 1998 through October 11, 1998, were concentrated with 45, 74 and
62 percent of agencies of the United States Government, respectively.
F-74
<PAGE>
CENTURY COMPUTING, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1996 AND 1997, AND OCTOBER 11, 1998
Billed accounts receivable and unbilled accounts receivable as of December
31, 1996 and 1997, and October 11, 1998, were concentrated with 56, 78 and 55
percent and 51, 78 and 50 percent of agencies of the United States Government,
respectively.
INCOME TAXES
Income taxes are accounted for using an asset and liability approach that
requires the recognition of taxes payable or refundable for the current year and
deferred tax liabilities and assets for the future tax consequences of events
that have been recognized in the Company's financial statements or tax returns.
The measurement of current and deferred tax liabilities and assets are based on
provisions of the enacted tax law; the effects of future changes in tax laws or
rates are not anticipated. The measurement of deferred tax assets is reduced, if
necessary, by the amount of any tax benefits that, based on available evidence,
are not expected to be realized.
RECENT ACCOUNTING PRONOUNCEMENTS
In March 1998, AIPCA issued Statement of Position 98-4 ("SOP 98-4"),
"Deferral of the Effective Date of a Provision of SOP 97-2." SOP 98-4 defers for
one year the application of certain provisions of Statement of Position 97-2
("SOP 97-2"), "Software Revenue Recognition." The Company does not expect the
adoption of these standards to have a material effect on the Company's results
of operations, financial position, or cash flows.
RECLASSIFICATIONS
Certain amounts from the prior year financial statements have been
reclassified to conform with the current presentation.
3. ACCOUNTS RECEIVABLE:
Accounts receivable consists of the following:
<TABLE>
<CAPTION>
DECEMBER 31,
-------------------------- OCTOBER 11,
1996 1997 1998
------------ ------------ ------------
<S> <C> <C> <C>
Commercial clients................................. $ 258,000 $ 264,000 $ 663,000
Government agencies and contractors................ 330,000 938,000 823,000
------------ ------------ ------------
588,000 1,202,000 1,486,000
Allowance for doubtful accounts.................... -- -- (129,000)
------------ ------------ ------------
Accounts receivable, net....................... $ 588,000 $ 1,202,000 $ 1,357,000
------------ ------------ ------------
------------ ------------ ------------
</TABLE>
Unbilled accounts receivable consists of the following:
<TABLE>
<CAPTION>
DECEMBER 31,
-------------------------- OCTOBER 11,
1996 1997 1998
------------ ------------ ------------
<S> <C> <C> <C>
Commercial clients................................. $ 329,000 $ 179,000 $ 409,000
Government agencies and contractors................ 343,000 642,000 412,000
------------ ------------ ------------
Unbilled accounts receivable................... $ 672,000 $ 821,000 $ 821,000
------------ ------------ ------------
------------ ------------ ------------
</TABLE>
F-75
<PAGE>
CENTURY COMPUTING, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1996 AND 1997, AND OCTOBER 11, 1998
4. OTHER CURRENT ASSETS:
Other current assets consists of the following:
<TABLE>
<CAPTION>
DECEMBER 31,
---------------------------- OCTOBER 11,
1996 1997 1998
------------- ------------- -------------
<S> <C> <C> <C>
Deferred income taxes............................ $ 20,000 $ 48,000 $ 195,000
Income tax receivable............................ 26,000 -- 460,000
Other current assets............................. 16,000 14,000 29,000
------------- ------------- -------------
Total........................................ $ 62,000 $ 62,000 $ 684,000
------------- ------------- -------------
------------- ------------- -------------
</TABLE>
5. PROPERTY AND EQUIPMENT:
Property and equipment consists of the following:
<TABLE>
<CAPTION>
DECEMBER 31,
---------------------------- OCTOBER 11,
1996 1997 1998
------------- ------------- -------------
<S> <C> <C> <C>
Computers, equipment and software................ $ 1,709,000 $ 2,049,000 $ 2,218,000
Furniture and fixtures........................... 40,000 50,000 51,000
Leasehold improvements........................... 154,000 154,000 252,000
------------- ------------- -------------
1,903,000 2,253,000 2,521,000
Accumulated depreciation and amortization........ (1,487,000) (1,680,000) (1,868,000)
------------- ------------- -------------
Property and equipment, net.................. $ 416,000 $ 573,000 $ 653,000
------------- ------------- -------------
------------- ------------- -------------
</TABLE>
6. ACCRUED LIABILITIES:
Accrued liabilities consists of the following:
<TABLE>
<CAPTION>
DECEMBER 31,
---------------------------- OCTOBER 11,
1996 1997 1998
------------- ------------- -------------
<S> <C> <C> <C>
Accrued compensation and benefits................ $ 293,000 $ 914,000 $ 1,204,000
Income tax payable............................... -- 204,000 --
Deferred income taxes............................ -- 76,000 --
Other accrued liabilities........................ 45,000 -- 90,000
------------- ------------- -------------
Total........................................ $ 338,000 $ 1,194,000 $ 1,294,000
------------- ------------- -------------
------------- ------------- -------------
</TABLE>
7. LEASES:
The Company has entered into a noncancelable operating lease for real estate
that expires in 2005. Rental expense for the operating lease during the years
ended December 31, 1996 and 1997, and for the period from January 1, 1998 to
October 11, 1998, was $123,000, $127,000, and $109,000, respectively.
F-76
<PAGE>
CENTURY COMPUTING, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1996 AND 1997, AND OCTOBER 11, 1998
Future minimum lease payments under noncancelable operating leases are as
follows as of October 11, 1998:
<TABLE>
<S> <C>
Period ended December 31, 1998.................................. $ 40,000
1999............................................................ 195,000
2000............................................................ 195,000
2001............................................................ 195,000
2002............................................................ 195,000
2003............................................................ 195,000
Thereafter...................................................... 263,000
---------
Total minimum lease payments................................ $1,278,000
---------
---------
</TABLE>
8. SHORT-TERM BORROWING:
The Company had a revolving line of credit that expired April 30, 1998,
which was secured by the accounts receivable of the Company. Under the terms of
the line of credit, borrowings were available up to a maximum borrowing of
$1,500,000. Interest on the outstanding balance was calculated at the bank's
prime rate plus one-half of one percent per annum, payable monthly. As of
December 31, 1996 and 1997, and October 11, 1998, there were no outstanding
amounts.
9. NOTE PAYABLE:
During 1995, the Company purchased a portion of a stockholder's shares for
$379,000, payable in three annual installments in January 1996, 1997 and 1998.
The Company placed $252,000 into an interest bearing escrow account during 1995
to satisfy the first two annual payments. The remaining balance was placed into
the escrow account during 1996. As of December 31, 1996 and 1997, and for the
period ended October 11, 1998, there was no outstanding balance on the note
payable.
10. RETIREMENT PLAN:
The Company maintains a profit-sharing and retirement plan under the
provisions of section 401(k) of the Internal Revenue Code. The Plan provides for
contributions by employees and a discretionary contribution by the Company. The
plan is for the benefit of all employees who have attained the age of 21.
Participants may contribute up to 15 percent of their compensation, subject to
statutory limits. Employee contributions are fully vested. The Company's
contribution is discretionary and is determined by its Board of Directors.
Company contributions vest twenty percent per year over the five years, after
the first year. Company contributions totaled $125,000, $182,000 and $170,000
for the years ended December 31, 1996 and 1997, and for the period from January
1, 1998 to October 11, 1998, respectively.
Effective February 1, 1999, Century's employees are covered by AppNet's
401(k) plan.
11. STOCKHOLDER AGREEMENTS:
During the year ended December 31, 1996, the Company established Class B
common stock. This Class B common stock has no voting rights. The Company gave
the holders of the Class A common stock the option of retaining their Class A
voting stock, converting their Class A voting stock to
F-77
<PAGE>
CENTURY COMPUTING, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1996 AND 1997, AND OCTOBER 11, 1998
Class B stock or selling their Class A voting stock back to the Company. The
activity related to this program is presented in the statement of stockholders'
equity as stock conversion.
12. EMPLOYEE STOCK OPTION PLAN:
The Company maintained a stock option plan for key employees. The issued
options expire no later than ten years from the date of the grant or when
employment ceases, whichever comes first.
Options granted under the plan are accounted for pursuant to APB Opinion No.
25, "Accounting for Stock Issued to Employees," and no compensation has been
recognized for the plan. Had compensation cost for the plan been determined
based on the estimated fair value of the options at the grant dates consistent
with the method of SFAS No. 123, pro forma net income (loss) would have been
approximately $354,000, $844,000 and $380,000 for the years ended December 31,
1996 and 1997, and for the period from January 1, 1998 to October 11, 1998. The
weighted-average fair value of the options granted during 1996, 1997, and during
the period from January 1, 1998 to October 11, 1998, is estimated to be $5.58,
$5.50 and $5.84, respectively, per option. All stock options were granted at
fair market value at the date of grant.
The following summarizes option activity during 1996, 1997 and for the
period from January 1, 1998 to October 11, 1998:
<TABLE>
<CAPTION>
OPTIONS OUTSTANDING
----------------------------------------------------------------
1996 1997 OCTOBER 11, 1998
-------------------- -------------------- --------------------
CLASS A CLASS B CLASS A CLASS B CLASS A CLASS B
--------- --------- --------- --------- --------- ---------
<S> <C> <C> <C> <C> <C> <C>
Beginning of period............... -- 87,399 10,730 81,603 10,730 77,153
Granted......................... 10,730 21,604 -- 540 5,000 10,490
Exercised....................... -- -- -- (2,750) (3,874) (3,081)
Expired......................... -- (27,400) -- (2,240) -- (260)
--------- --------- --------- --------- --------- ---------
End of period..................... 10,730 81,603 10,730 77,153 11,856 84,302
--------- --------- --------- --------- --------- ---------
--------- --------- --------- --------- --------- ---------
Exercisable at end of period...... -- 75,334 10,730 77,153 11,856 84,302
--------- --------- --------- --------- --------- ---------
--------- --------- --------- --------- --------- ---------
</TABLE>
<TABLE>
<CAPTION>
WEIGHTED AVERAGE EXERCISE PRICE
-----------------------------------
<S> <C> <C> <C>
OCTOBER 11,
1996 1997 1998
--------- --------- -------------
Beginning of period.......................................... $ 5.23 $ 5.52 $ 5.50
Granted.................................................... 6.03 7.41 7.97
Exercised.................................................. -- 6.03 6.26
Expired.................................................... 5.19 6.03 7.41
--------- --------- -----
End of period................................................ $ 5.52 $ 5.50 $ 5.84
--------- --------- -----
--------- --------- -----
Exercisable at end of period................................. $ 5.58 $ 5.50 $ 5.84
--------- --------- -----
--------- --------- -----
</TABLE>
13. INCOME TAXES:
The Company follows the provisions of SFAS No. 109, "Accounting for Income
Taxes," for financial reporting purposes. Deferred tax assets or liabilities at
the end of each period are determined
F-78
<PAGE>
CENTURY COMPUTING, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1996 AND 1997, AND OCTOBER 11, 1998
using the currently enacted tax rates to apply to taxable income in the period
in which the deferred tax asset or liability is expected to be settled or
realized.
The components of the net deferred tax asset (liability) are as follows:
<TABLE>
<CAPTION>
DECEMBER 31,
---------------------- OCTOBER 11,
1996 1997 1998
---------- ---------- -----------
<S> <C> <C> <C>
Total deferred tax liabilities.......................... $ -- $ (76,000) $ (67,000)
Total deferred tax assets............................... 50,000 48,000 195,000
---------- ---------- -----------
Net deferred tax asset (liability)...................... $ 50,000 $ (28,000) $ 128,000
---------- ---------- -----------
---------- ---------- -----------
</TABLE>
The sources of and differences between the financial accounting and tax
basis of Century Computing, Inc.'s assets and liabilities that give rise to the
net deferred tax asset (liability) are as follows:
<TABLE>
<CAPTION>
DECEMBER 31,
---------------------- OCTOBER 11,
1996 1997 1998
---------- ---------- -----------
<S> <C> <C> <C>
Deferred tax liabilities
Software development costs............................ $ -- $ -- $ (21,000)
Other................................................. -- (76,000) (46,000)
---------- ---------- -----------
-- (76,000) (67,000)
---------- ---------- -----------
---------- ---------- -----------
Deferred tax assets
Depreciation and amortization......................... 30,000 21,000 12,000
Other................................................. 20,000 27,000 183,000
---------- ---------- -----------
$ 50,000 $ 48,000 $ 195,000
---------- ---------- -----------
---------- ---------- -----------
</TABLE>
The components of the provision (benefit) for income taxes as of December
31, 1996 and 1997, and October 11, 1998, are as follows:
<TABLE>
<CAPTION>
DECEMBER 31,
---------------------- OCTOBER 11,
1996 1997 1998
---------- ---------- -----------
<S> <C> <C> <C>
Federal income taxes:
Current............................................... $ 250,000 $ 409,000 $ 7,000
Deferred.............................................. (23,000) 64,000 (119,000)
State taxes............................................. 52,000 107,000 (23,000)
---------- ---------- -----------
Provision (benefit) for income taxes.................... $ 279,000 $ 580,000 $ (135,000)
---------- ---------- -----------
---------- ---------- -----------
</TABLE>
F-79
<PAGE>
CENTURY COMPUTING, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1996 AND 1997, AND OCTOBER 11, 1998
The tax provision (benefit) differed from the amounts computed at the
statutory rate, as follows:
<TABLE>
<CAPTION>
DECEMBER 31,
---------------------- OCTOBER 11,
1996 1997 1998
---------- ---------- -----------
<S> <C> <C> <C>
Federal income taxes at the U.S. statutory rate......... $ 246,000 $ 510,000 $ (134,000)
State taxes, net of federal benefit..................... 34,000 70,000 (15,000)
Other................................................... (1,000) -- 14,000
---------- ---------- -----------
Total............................................... $ 279,000 $ 580,000 $ (135,000)
---------- ---------- -----------
---------- ---------- -----------
</TABLE>
14. ACQUISITION-RELATED COMPENSATION:
In conjunction with AppNet Systems, Inc.'s purchase of Century, Century paid
an unconditional cash bonus of approximately $953,000 to certain employees for
past services.
F-80
<PAGE>
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To Research & Planning, Inc.:
We have audited the accompanying balance sheets of Research & Planning, Inc.
(a Massachusetts corporation), as of December 31, 1996 and 1997, and October 19,
1998, and the related statements of operations, stockholders' equity, and cash
flows for the years ended December 31, 1996 and 1997, and for the period from
January 1, 1998 to October 19, 1998. These financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these financial statements based on our 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 the Company as of December
31, 1996 and 1997, and October 19, 1998, and the results of its operations and
its cash flows for the years ended December 31, 1996 and 1997, and for the
period from January 1, 1998 to October 19, 1998 in conformity with generally
accepted accounting principles.
ARTHUR ANDERSEN LLP
Washington, D.C.
February 19, 1999
F-81
<PAGE>
RESEARCH & PLANNING, INC.
BALANCE SHEETS
AS OF DECEMBER 31, 1996, AND 1997, AND OCTOBER 19, 1998
<TABLE>
<CAPTION>
DECEMBER 31,
-------------------------- OCTOBER 19,
1996 1997 1998
------------ ------------ ------------
<S> <C> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents............................................. $ 74,000 $ 93,000 $ 310,000
Accounts receivable, net of allowance for doubtful accounts of $1,000,
$15,000 and $40,000, respectively................................... 865,000 1,374,000 1,407,000
Other current assets.................................................. 73,000 137,000 30,000
------------ ------------ ------------
Total current assets................................................ 1,012,000 1,604,000 1,747,000
Property and equipment, net............................................. 97,000 262,000 457,000
------------ ------------ ------------
Total assets........................................................ $ 1,109,000 $ 1,866,000 $ 2,204,000
------------ ------------ ------------
------------ ------------ ------------
LIABILITIES AND STOCKHOLDERS' EQUITY
Liabilities:
Short-term borrowing.................................................. $ -- $ 200,000 $ --
Accounts payable...................................................... 10,000 25,000 198,000
Accrued liabilities................................................... 116,000 301,000 457,000
------------ ------------ ------------
Total liabilities................................................... 126,000 526,000 655,000
------------ ------------ ------------
Commitments and contingencies (Note 6)
Stockholders' equity:
Common stock, $0.10 par value; 100,000 authorized; 11,111 shares
issued; and 10,000 outstanding...................................... 1,000 1,000 1,000
Less: Treasury stock, at cost--1,111 shares........................... (11,000) (11,000) (11,000)
Additional paid-in capital............................................ 12,000 12,000 12,000
Retained earnings..................................................... 981,000 1,338,000 1,547,000
------------ ------------ ------------
Total stockholders' equity.......................................... 983,000 1,340,000 1,549,000
------------ ------------ ------------
Total liabilities and stockholders' equity.......................... $ 1,109,000 $ 1,866,000 $ 2,204,000
------------ ------------ ------------
------------ ------------ ------------
</TABLE>
The accompanying notes are an integral part of these statements.
F-82
<PAGE>
RESEARCH & PLANNING, INC.
STATEMENTS OF OPERATIONS
FOR THE YEARS ENDED DECEMBER 31, 1996, AND 1997,
AND FOR THE PERIOD FROM JANUARY 1, 1998 TO OCTOBER 19, 1998
<TABLE>
<CAPTION>
FOR THE YEARS ENDED FOR THE PERIOD
DECEMBER 31, FROM JANUARY 1,
-------------------------- 1998 TO
1996 1997 OCTOBER 19, 1998
------------ ------------ ----------------
<S> <C> <C> <C>
Revenues........................................................... $ 3,329,000 $ 4,781,000 $ 5,303,000
Cost of revenues................................................... 1,753,000 2,434,000 2,667,000
------------ ------------ ----------------
Gross profit................................................... 1,576,000 2,347,000 2,636,000
------------ ------------ ----------------
Operating expenses:
Selling and marketing............................................ 93,000 86,000 260,000
General and administrative....................................... 418,000 657,000 644,000
Depreciation and amortization.................................... 30,000 53,000 80,000
------------ ------------ ----------------
Total operating expenses....................................... 541,000 796,000 984,000
------------ ------------ ----------------
Income from operations............................................. 1,035,000 1,551,000 1,652,000
Interest income, net............................................... 7,000 13,000 11,000
Other expense...................................................... -- -- 99,000
------------ ------------ ----------------
Income before income taxes......................................... 1,042,000 1,564,000 1,564,000
Provision for income taxes......................................... 3,000 23,000 29,000
------------ ------------ ----------------
Net income......................................................... $ 1,039,000 $ 1,541,000 $ 1,535,000
------------ ------------ ----------------
------------ ------------ ----------------
</TABLE>
The accompanying notes are an integral part of these statements.
F-83
<PAGE>
RESEARCH & PLANNING, INC.
STATEMENTS OF STOCKHOLDERS' EQUITY
FOR THE YEARS ENDED DECEMBER 31, 1996, AND, 1997,
AND FOR THE PERIOD FROM JANUARY 1, 1998 TO OCTOBER 19, 1998
<TABLE>
<CAPTION>
COMMON STOCK ADDITIONAL
------------------------ TREASURY PAID- IN RETAINED
SHARES AMOUNT STOCK CAPITAL EARNINGS
----------- ----------- ----------- ----------- ----------
<S> <C> <C> <C> <C> <C>
Balance, December 31, 1995............................. 10,000 $ 1,000 $ (11,000) $ 12,000 $ 604,000
Distributions to stockholders........................ -- -- -- -- (662,000)
Net income........................................... -- -- -- -- 1,039,000
----------- ----------- ----------- ----------- ----------
Balance, December 31, 1996............................. 10,000 1,000 (11,000) 12,000 981,000
Distributions to stockholders........................ -- -- -- -- (1,184,000)
Net income........................................... -- -- -- -- 1,541,000
----------- ----------- ----------- ----------- ----------
Balance, December 31, 1997............................. 10,000 1,000 (11,000) 12,000 1,338,000
Distributions to stockholders........................ -- -- -- -- (1,326,000)
Net income........................................... -- -- -- -- 1,535,000
----------- ----------- ----------- ----------- ----------
Balance, October 19, 1998.............................. 10,000 $ 1,000 $ (11,000) $ 12,000 $1,547,000
----------- ----------- ----------- ----------- ----------
----------- ----------- ----------- ----------- ----------
<CAPTION>
TOTAL
STOCKHOLDERS'
EQUITY
------------
<S> <C>
Balance, December 31, 1995............................. $ 606,000
Distributions to stockholders........................ (662,000)
Net income........................................... 1,039,000
------------
Balance, December 31, 1996............................. 983,000
Distributions to stockholders........................ (1,184,000)
Net income........................................... 1,541,000
------------
Balance, December 31, 1997............................. 1,340,000
Distributions to stockholders........................ (1,326,000)
Net income........................................... 1,535,000
------------
Balance, October 19, 1998.............................. $1,549,000
------------
------------
</TABLE>
The accompanying notes are an integral part of these statements.
F-84
<PAGE>
RESEARCH & PLANNING, INC.
STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED DECEMBER 31, 1996 AND, 1997,
AND FOR THE PERIOD FROM JANUARY 1, 1998 TO OCTOBER 19, 1998
<TABLE>
<CAPTION>
FOR THE PERIOD
FOR THE YEARS ENDED FROM JANUARY 1,
DECEMBER 31, 1998 TO
-------------------------- OCTOBER 19,
1996 1997 1998
------------ ------------ ---------------
<S> <C> <C> <C>
Cash flows from operating activities:
Net income........................................................ $ 1,039,000 $ 1,541,000 $ 1,535,000
Adjustments to reconcile net income to net cash provided by
operating activities:
Depreciation and amortization................................. 30,000 53,000 80,000
Change in assets and liabilities:
Accounts receivable, net.................................... (308,000) (509,000) (33,000)
Other current assets........................................ (45,000) (64,000) 107,000
Accounts payable............................................ (1,000) 15,000 173,000
Accrued liabilities......................................... 70,000 185,000 156,000
------------ ------------ ---------------
Net cash provided by operating activities................. 785,000 1,221,000 2,018,000
------------ ------------ ---------------
Cash flows from investing activities:
Purchase of property and equipment, net........................... (64,000) (218,000) (275,000)
------------ ------------ ---------------
Cash flows from financing activities:
Net proceeds (repayments) under short-term borrowings............. -- 200,000 (200,000)
Distributions to stockholders..................................... (662,000) (1,184,000) (1,326,000)
------------ ------------ ---------------
Net cash used in financing activities..................... (662,000) (984,000) (1,526,000)
------------ ------------ ---------------
Net increase in cash and cash equivalents........................... 59,000 19,000 217,000
Cash and cash equivalents, beginning of period...................... 15,000 74,000 93,000
------------ ------------ ---------------
Cash and cash equivalents, end of period............................ $ 74,000 $ 93,000 $ 310,000
------------ ------------ ---------------
------------ ------------ ---------------
Supplementary information:
Cash paid for interest............................................ $ -- $ -- $ 2,000
------------ ------------ ---------------
------------ ------------ ---------------
Cash paid for income taxes........................................ $ 3,000 $ 23,000 $ --
------------ ------------ ---------------
------------ ------------ ---------------
</TABLE>
The accompanying notes are an integral part of these statements.
F-85
<PAGE>
RESEARCH & PLANNING, INC.
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 1996 AND 1997, AND OCTOBER 19, 1998
1. BUSINESS DESCRIPTION:
Research & Planning, Inc. ("R&P" or the "Company") was incorporated in 1968,
under the laws of the state of Massachusetts. R&P is an information technology
services company providing Enterprise Resource Planning integration and support,
data warehousing, decision support applications and business-to-business
electronic commerce solutions. R&P is headquartered in Cambridge, Massachusetts
and operates primarily in the United States.
On October 20, 1998, all of the issued and outstanding stock of the Company
was acquired by AppNet Systems, Inc. ("AppNet"). The Company incurred $99,000 of
expenses in conjunction with the sale to AppNet for accounting and consulting
fees. This has been classified in other expenses in the accompanying statements
of operations.
There are significant risks associated with the Company, including the
subjectivity of the Company's services to rapid technological change and the
Year 2000 issue.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES AND PRACTICES:
USE OF ESTIMATES
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and the
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amount of revenues and expenses during the reporting
period. Actual results could differ from those estimates.
CASH AND CASH EQUIVALENTS
The Company considers all highly liquid investments with original maturities
of three months or less to be cash equivalents.
PROPERTY AND EQUIPMENT
Property and equipment are stated at cost, net of accumulated depreciation
and amortization. Depreciation and amortization are computed using the
straight-line method over the estimated useful lives of the related assets, as
follows:
<TABLE>
<S> <C>
five
Computers, equipment and software................................ years
five
Furniture and fixtures........................................... years
</TABLE>
Purchased software is capitalized and amortized principally over five years.
Leasehold improvements are amortized over the lesser of the estimated useful
life of the asset or the remaining lease term.
In accordance with Statement of Financial Accounting Standards No. 121,
"Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to
Be Disposed Of," the Company reviews its recorded long-lived assets for
impairment whenever events or changes in circumstances indicate that the
carrying amount of an asset may not be recoverable.
F-86
<PAGE>
RESEARCH & PLANNING, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1996 AND 1997, AND OCTOBER 19, 1998
FAIR VALUE OF FINANCIAL INSTRUMENTS
The Company's financial instruments consist primarily of cash and cash
equivalents, accounts receivable, accounts payable and short-term borrowings. In
management's opinion, the carrying amounts of these financial instruments
approximated their fair values at December 31, 1996 and 1997, and October 19,
1998.
REVENUE RECOGNITION
Revenues pursuant to fixed-fee contracts are recognized on the
percentage-of-completion method with costs and estimated profits recorded as
work is performed. Revenues from time and material contracts are recognized
based on fixed hourly rates for direct labor expended.
Cost of revenues includes all direct material and labor costs related to
contract performance and does not include any related depreciation expense.
Provisions for estimated losses on uncompleted contracts are made on a
contract by contract basis and are recognized in the period in which such losses
are determined. Changes in contract performance and estimated profitability,
including final contract settlements, may result in revisions to costs and
income and are recognized in the period in which revisions are determined.
Unbilled receivables on contracts are comprised of costs, plus earnings on
certain contracts in excess of contractual billings on such contracts.
BUSINESS CONCENTRATION AND CREDIT RISK
The following table summarizes the revenues and accounts receivable from
clients in excess of 10% of total revenues and accounts receivable:
<TABLE>
<CAPTION>
REVENUES
------------------------------------- ACCOUNTS RECEIVABLE
-------------------------------------
FOR THE
YEAR ENDED FOR THE AS OF
DECEMBER 31, PERIOD ENDED DECEMBER 31, AS OF
-------------------- OCTOBER 19, -------------------- OCTOBER 19,
1996 1997 1998 1996 1997 1998
--------- --------- --------------- --------- --------- ---------------
<S> <C> <C> <C> <C> <C> <C>
Customer A....................... 19% 28% 41% 18% 24% 44%
Customer B....................... * 16% 10% * 17% *
Customer C....................... 15% * * 11% * *
Customer D....................... * 10% 13% * 22% *
Customer E....................... 13% * * * * *
Customer F....................... * 12% * * * *
</TABLE>
- ------------------------
* Represents less than 10% of total.
INCOME TAXES
The Company, with the consent of its shareholders, has elected to be taxed
pursuant to Subchapter S of the Internal Revenue Code (an "S Corporation"). In
lieu of corporate income taxes, the shareholders of an S corporation are taxed
on their proportionate share of the Company's taxable income. Therefore, no
provision for federal income taxes has been included in the accompanying
financial statements.
F-87
<PAGE>
RESEARCH & PLANNING, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1996 AND 1997, AND OCTOBER 19, 1998
RECENT ACCOUNTING PRONOUNCEMENTS
In March 1998, the American Institute of Certified Public Accountants
("AICPA") issued Statement of Position 98-1 ("SOP 98-1"), "Accounting for the
Cost of Computer Software Developed or Obtained for Internal Use". SOP 98-1 is
effective for financial statements for years beginning after December 15, 1998.
SOP 98-1 provides guidance on accounting for computer software developed or
obtained for internal use, including the requirement to capitalize specified
costs and the amortization of such costs. The Company does not expect the
adoption of this standard to have a material effect on the Company's
capitalization policy.
3. ACCOUNTS RECEIVABLE:
Accounts receivable consists of the following:
<TABLE>
<CAPTION>
DECEMBER 31,
------------------------ OCTOBER 19,
1996 1997 1998
---------- ------------ ------------
<S> <C> <C> <C>
Accounts receivable................................... $ 586,000 $ 951,000 $ 1,084,000
Unbilled accounts receivable.......................... 280,000 438,000 363,000
Allowance for doubtful accounts....................... (1,000) (15,000) (40,000)
---------- ------------ ------------
Accounts receivable, net.......................... $ 865,000 $ 1,374,000 $ 1,407,000
---------- ------------ ------------
---------- ------------ ------------
</TABLE>
4. PROPERTY AND EQUIPMENT:
Property and equipment consists of the following:
<TABLE>
<CAPTION>
DECEMBER 31,
------------------------ OCTOBER 19,
1996 1997 1998
---------- ------------ ------------
<S> <C> <C> <C>
Computers, equipment and software..................... $ 275,000 $ 385,000 $ 507,000
Furniture and fixtures................................ 114,000 222,000 375,000
---------- ------------ ------------
389,000 607,000 882,000
Accumulated depreciation and amortization............. (292,000) (345,000) (425,000)
---------- ------------ ------------
Property and equipment, net....................... $ 97,000 $ 262,000 $ 457,000
---------- ------------ ------------
---------- ------------ ------------
</TABLE>
5. ACCRUED LIABILITIES:
Accrued liabilities consists of the following:
<TABLE>
<CAPTION>
DECEMBER 31,
---------------------- OCTOBER 19,
1996 1997 1998
---------- ---------- -----------
<S> <C> <C> <C>
Accrued compensation and benefits........................ $ 54,000 $ 113,000 $ 289,000
Accrued dividends........................................ 39,000 86,000 --
Deposits................................................. -- 54,000 73,000
Other.................................................... 23,000 48,000 95,000
---------- ---------- -----------
Total................................................ $ 116,000 $ 301,000 $ 457,000
---------- ---------- -----------
---------- ---------- -----------
</TABLE>
F-88
<PAGE>
RESEARCH & PLANNING, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1996 AND 1997, AND OCTOBER 19, 1998
6. LEASES:
The Company has noncancelable operating leases, primarily for real estate,
that expire over the next five years. Rental expense for operating leases during
the years ended December 31, 1996 and 1997, and for the period from January 1,
1998 to October 19, 1998, was $77,000, $185,000 and $300,000, respectively.
Future minimum lease payments under noncancelable operating leases are as
follows as of October 19, 1998:
<TABLE>
<S> <C>
Period ended December 31, 1998.................................. $ 102,000
1999............................................................ 410,000
2000............................................................ 410,000
2001............................................................ 391,000
2002............................................................ 332,000
2003............................................................ 332,000
Thereafter...................................................... 332,000
---------
Total future minimum lease payments......................... $2,309,000
---------
---------
</TABLE>
7. SUBLEASE INCOME:
The Company subleases certain portions of their leased buildings. These
subleases extend over varying dates through September 2000. For the years ended
December 31, 1996 and 1997, and for the period from January 1, 1998 to October
19, 1998, the Company earned $17,000, $46,000 and $153,000, respectively, in
sublease income, which is included in general and administrative expenses as an
offset to lease expense in the accompanying statements of operations.
8. SHORT-TERM BORROWING:
The Company has a line of credit which expired on October 19, 1998, and was
collateralized by substantially all of the assets of the Company and was
guaranteed by the stockholders of the Company. Under the terms of the line of
credit, borrowings are limited to $200,000. Interest on the outstanding balance
was calculated as the Bank's prime rate plus 1.50 percent. As of December 31,
1996 and 1997, and October 19, 1998, there were borrowings under the line of
credit totaling $0, $200,000, and $0, respectively.
9. RETIREMENT PLAN:
The Company maintained a profit-sharing and retirement plan under the
provisions of section 401(k) of the Internal Revenue Code. The Plan provided for
contributions by employees and a discretionary contribution by the Company as
determined by the Board of Directors. The plan was for the benefit of all
employees who had completed one year of service or 1,000 hours and had full-time
status. Participants could contribute up to 15 percent of their compensation,
subject to statutory limits. Employee contributions fully vest immediately upon
contribution. Company contributions vested fully after five years. Company
contributions totaled $66,000, $82,000, and $85,000 for the years ended December
31, 1996 and 1997, and for the period from January 1, 1998 to October 19, 1998,
respectively. Effective February 1, 1999, Research and Planning, Inc. employees
are covered by the AppNet 401(k) plan.
F-89
<PAGE>
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To The Kodiak Group, Inc.:
We have audited the accompanying balance sheets of The Kodiak Group, Inc. (a
Massachusetts corporation), as of December 31, 1997, and December 13, 1998, and
the related statements of operations, stockholders' equity, and cash flows for
the year ended December 31, 1997, and for the period from January 1, 1998 to
December 13, 1998. These financial statements are the responsibility of the
Company's management. Our responsibility is to express an opinion on these
financial statements based on our 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 The Kodiak Group, Inc. as of
December 31, 1997, and December 13, 1998, and the results of its operations and
its cash flows for the year ended December 31, 1997, and for the period from
January 1, 1998 to December 13, 1998 in conformity with generally accepted
accounting principles.
ARTHUR ANDERSEN LLP
Washington, D.C.
February 19, 1999
F-90
<PAGE>
THE KODIAK GROUP, INC.
BALANCE SHEETS
AS OF DECEMBER 31, 1997 AND DECEMBER 13, 1998
<TABLE>
<CAPTION>
DECEMBER 31, DECEMBER 13,
1997 1998
------------ ------------
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents.......................................................... $ 300,000 $ --
Accounts receivable, net of allowance for doubtful accounts of $39,000 and $97,000,
respectively..................................................................... 768,000 1,247,000
Other current assets............................................................... 18,000 48,000
------------ ------------
Total current assets............................................................. 1,086,000 1,295,000
Property and equipment, net.......................................................... 278,000 319,000
Other assets......................................................................... 12,000 72,000
------------ ------------
Total assets..................................................................... $1,376,000 $1,686,000
------------ ------------
------------ ------------
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable................................................................... $ 50,000 $ 61,000
Accrued liabilities................................................................ 113,000 845,000
Current portion of long-term debt.................................................. 49,000 --
Current portion of capital lease obligation........................................ 18,000 23,000
------------ ------------
Total current liabilities........................................................ 230,000 929,000
Long-term debt, net of current portion............................................... 32,000 --
Capital lease obligation, net of current portion..................................... 39,000 16,000
------------ ------------
Total liabilities................................................................ 301,000 945,000
------------ ------------
Commitments and contingencies (Note 6)
Stockholders' equity:
Common stock, $.01 par value; 1,000 shares authorized; 400 shares issued and
outstanding...................................................................... -- --
Additional paid-in capital......................................................... 4,000 4,000
Retained earnings.................................................................. 1,071,000 737,000
------------ ------------
Total stockholders' equity....................................................... 1,075,000 741,000
------------ ------------
Total liabilities and stockholders' equity....................................... $1,376,000 $1,686,000
------------ ------------
------------ ------------
</TABLE>
The accompanying notes are an integral part of these statements.
F-91
<PAGE>
THE KODIAK GROUP, INC.
STATEMENTS OF OPERATIONS
FOR THE YEAR ENDED DECEMBER 31, 1997,
AND FOR THE PERIOD FROM JANUARY 1, 1998 TO DECEMBER 13, 1998
<TABLE>
<CAPTION>
FOR THE PERIOD
FOR THE YEAR FROM JANUARY 1,
ENDED 1998 TO
DECEMBER 31, DECEMBER 13,
1997 1998
------------ ----------------
<S> <C> <C>
Revenues.......................................................................... $3,687,000 $ 6,289,000
Cost of revenues.................................................................. 2,065,000 3,221,000
------------ ----------------
Gross profit.................................................................. 1,622,000 3,068,000
------------ ----------------
Operating expenses:
Selling and marketing........................................................... 48,000 66,000
General and administrative...................................................... 1,061,000 1,691,000
Acquisition related compensation................................................ -- 250,000
Depreciation and amortization................................................... 136,000 136,000
------------ ----------------
Total operating expenses...................................................... 1,245,000 2,143,000
------------ ----------------
Income from operations............................................................ 377,000 925,000
Interest expense, net............................................................. 5,000 2,000
Other expense, net................................................................ -- 8,000
------------ ----------------
Income before income taxes........................................................ 372,000 915,000
Provision for income taxes........................................................ 1,000 5,000
------------ ----------------
Net income........................................................................ $ 371,000 $ 910,000
------------ ----------------
------------ ----------------
</TABLE>
The accompanying notes are an integral part of these statements.
F-92
<PAGE>
THE KODIAK GROUP, INC.
STATEMENTS OF STOCKHOLDERS' EQUITY
FOR THE YEAR ENDED DECEMBER 31, 1997,
AND FOR THE PERIOD FROM JANUARY 1, 1998 TO DECEMBER 13, 1998
<TABLE>
<CAPTION>
COMMON STOCK ADDITIONAL TOTAL
------------------------ PAID-IN RETAINED STOCKHOLDERS'
SHARES AMOUNT CAPITAL EARNINGS EQUITY
----------- ----------- ----------- ------------- -------------
<S> <C> <C> <C> <C> <C>
Balance, December 31, 1996........................... 400 $ -- $ 4,000 $ 740,000 $ 744,000
Distributions to stockholders...................... -- -- -- (40,000) (40,000)
Net income......................................... -- -- -- 371,000 371,000
--- ----- ----------- ------------- -------------
Balance, December 31, 1997........................... 400 -- 4,000 1,071,000 1,075,000
Distributions to stockholders...................... -- -- -- (1,244,000) (1,244,000)
Net income......................................... -- -- -- 910,000 910,000
--- ----- ----------- ------------- -------------
Balance, December 13, 1998........................... 400 $ -- $ 4,000 $ 737,000 $ 741,000
--- ----- ----------- ------------- -------------
--- ----- ----------- ------------- -------------
</TABLE>
The accompanying notes are an integral part of these statements.
F-93
<PAGE>
THE KODIAK GROUP, INC.
STATEMENTS OF CASH FLOWS
FOR THE YEAR ENDED DECEMBER 31, 1997,
AND FOR THE PERIOD FROM JANUARY 1, 1998 TO DECEMBER 13, 1998
<TABLE>
<CAPTION>
FOR THE PERIOD
FOR THE YEAR FROM JANUARY 1,
ENDED 1998 TO
DECEMBER 31, DECEMBER 13,
1997 1998
------------- ---------------
<S> <C> <C>
Cash flows from operating activities:
Net income..................................................................... $ 371,000 $ 910,000
Adjustments to reconcile net income to net cash provided by operating
activities--
Depreciation and amortization.............................................. 136,000 136,000
Loss on fixed asset disposals.............................................. -- 7,000
Change in assets and liabilities:
Accounts receivable, net................................................. (50,000) (479,000)
Other assets............................................................. (4,000) (90,000)
Accounts payable......................................................... (12,000) 11,000
Accrued liabilities...................................................... 16,000 732,000
------------- ---------------
Net cash provided by operating activities.............................. 457,000 1,227,000
------------- ---------------
Cash flows from investing activities:
Purchase of property and equipment, net........................................ (177,000) (184,000)
------------- ---------------
Cash flows from financing activities:
Proceeds from long-term debt................................................... 118,000 --
Repayments of long-term debt................................................... (96,000) (81,000)
Repayments on capital lease obligations........................................ (55,000) (18,000)
Distributions to stockholders.................................................. (40,000) (1,244,000)
------------- ---------------
Net cash used in financing activities.................................. (73,000) (1,343,000)
------------- ---------------
Net increase (decrease) in cash and cash equivalents............................. 207,000 (300,000)
Cash and cash equivalents, beginning of period................................... 93,000 300,000
------------- ---------------
Cash and cash equivalents, end of period......................................... $ 300,000 $ --
------------- ---------------
------------- ---------------
Supplementary information:
Cash paid for interest......................................................... $ 16,000 $ 11,000
------------- ---------------
------------- ---------------
Cash paid for income taxes..................................................... $ 1,000 $ --
------------- ---------------
------------- ---------------
</TABLE>
The accompanying notes are an integral part of these statements.
F-94
<PAGE>
THE KODIAK GROUP, INC.
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 1997 AND DECEMBER 13, 1998
1. BUSINESS DESCRIPTION:
The Kodiak Group, Inc. ("Kodiak" or the "Company") was incorporated in 1994,
under the laws of the state of Massachusetts. Kodiak is an electronic commerce
services company which provides electronic data interchange ("EDI") integration
and processing services to clients who are looking to create, maintain or expand
their EDI systems. Kodiak is headquartered in Pittsfield, Massachusetts and
operates primarily in the Northeast.
On December 13, 1998, all of the issued and outstanding stock of the Company
was acquired by AppNet Systems, Inc. ("AppNet").
There are significant risks associated with the Company, including the
subjectivity of the Company's services to rapid technological change, government
regulations and the Year 2000 issue.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES AND PRACTICES:
USE OF ESTIMATES
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and the
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amount of revenues and expenses during the reporting
period. Actual results could differ from those estimates.
CASH AND CASH EQUIVALENTS
The Company considers all highly liquid investments with original maturities
of three months or less to be cash equivalents.
PROPERTY AND EQUIPMENT
Property and equipment are stated at cost, net of accumulated depreciation
and amortization. Depreciation and amortization are computed using the
straight-line method over the estimated useful lives of the related assets, as
follows:
<TABLE>
<S> <C>
three to five
Computers, equipment and software........................ years
Furniture and fixtures................................... five years
</TABLE>
Purchased software and third-party costs incurred to develop software for
internal use are capitalized and amortized principally over three years.
Leasehold improvements are amortized over the lesser of the estimated useful
life of the asset or the remaining lease term.
In accordance with Statement of Financial Accounting Standards ("SFAS") No.
121, "Accounting for the Impairment of Long-Lived Assets and for Long-Lived
Assets to Be Disposed Of," the Company reviews its recorded long-lived assets
for impairment whenever events or changes in circumstances indicate that the
carrying amount of an asset may not be recoverable.
F-95
<PAGE>
THE KODIAK GROUP, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1997 AND DECEMBER 13, 1998
SOFTWARE DEVELOPMENT COSTS
The Company has capitalized costs related to the development of certain
software products. In accordance with SFAS No. 86, "Accounting for the Costs of
Computer Software to Be Sold, Leased, or Otherwise Marketed," capitalization of
costs begins when technological feasibility has been established and ends when
the product is available for general release to customers. Amortization will be
computed and recognized based on the products' estimated economic lives of three
years. Capitalized costs and amortization periods are management's estimates and
may have to be modified due to inherent technological changes in software
development.
FAIR VALUE OF FINANCIAL INSTRUMENTS
The Company's financial instruments consist primarily of cash and cash
equivalents, accounts receivable, accounts payable, and capital lease
obligations. In management's opinion, the carrying amounts of these financial
instruments approximated their fair values at December 31, 1997, and December
13, 1998.
REVENUE RECOGNITION
Revenues from time and material contracts are recognized based on fixed
hourly rates for direct labor hours expended. Revenues from fixed-price
contracts are recognized on the percentage-of-
completion method, with costs and estimated profits recorded as work is
performed.
Cost of revenues includes all direct material and labor costs related to
contract performance and does not include any related depreciation expense.
Provisions for estimated losses on uncompleted contracts are made in the period
in which such losses are determined. Changes in contract performance and
estimated profitability, including final contract settlements, may result in
revisions to costs and income and are recognized in the period in which the
revisions are determined. Unbilled receivables on contracts are comprised of
costs, plus earnings on certain contracts in excess of contractual billings on
such contracts. Cash received in excess of costs incurred is classified as
deferred revenue.
Revenues from software sales are recognized when the related product is
sold, provided no significant vendor obligations remain.
BUSINESS CONCENTRATION AND CREDIT RISK
The following table summarizes the revenues and accounts receivable from
clients in excess of 10% of total revenues and accounts receivable:
<TABLE>
<CAPTION>
REVENUES ACCOUNTS RECEIVABLE
------------------------------------------ --------------------------------
FOR THE YEAR ENDED FOR THE PERIOD ENDED AS OF DECEMBER AS OF DECEMBER
DECEMBER 31, DECEMBER 13, 31, 13,
1997 1998 1997 1998
------------------- --------------------- --------------- ---------------
<S> <C> <C> <C> <C>
Customer A.................................. 52% 32% 62% 13%
Customer B.................................. * 28% * 43%
Customer C.................................. * 14% * 23%
</TABLE>
- ------------------------
* Represents less than 10% of total
F-96
<PAGE>
THE KODIAK GROUP, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1997 AND DECEMBER 13, 1998
INCOME TAXES
The Company, with the consent of its shareholders, has elected to be taxed
pursuant to subchapter S of the Internal Revenue Code (an "S corporation"). In
lieu of corporation income taxes, the shareholders of an S corporation are taxed
on their proportionate share of the Company's taxable income. Therefore, no
provision for federal income taxes has been included in the accompanying
financial statements.
RECENT ACCOUNTING PRONOUNCEMENTS
In March 1998, AIPCA issued Statement of Position 98-4 ("SOP 98-4"),
"Deferral of the Effective Date of a Provision of SOP 97-2." SOP 98-4 defers for
one year the application of certain provisions of Statement of Position 97-2
("SOP 97-2"), "Software Revenue Recognition." Different informal and
unauthoritative interpretations of certain provisions of SOP 97-2 have arisen
and, as a result, the AICPA is deliberating amendments to SOP 97-2, so it can
issue interpretations regarding the applicability and the method of application
of those provisions. The Company does not expect the adoption of this standard
to have a material effect on the Company's results of operations, financial
position, or cash flows.
3. ACCOUNTS RECEIVABLE:
Accounts receivable consists of the following:
<TABLE>
<CAPTION>
DECEMBER 31, DECEMBER 13,
1997 1998
------------ ------------
<S> <C> <C>
Accounts receivable.............................................. $ 613,000 $1,077,000
Unbilled accounts receivable..................................... 194,000 267,000
Allowance for doubtful accounts.................................. (39,000) (97,000)
------------ ------------
Accounts receivable, net..................................... $ 768,000 $1,247,000
------------ ------------
------------ ------------
</TABLE>
4. PROPERTY AND EQUIPMENT:
Property and equipment consists of the following:
<TABLE>
<CAPTION>
DECEMBER 31, DECEMBER 13,
1997 1998
------------ ------------
<S> <C> <C>
Computers, equipment and software................................ $ 398,000 $ 508,000
Furniture and fixtures........................................... 138,000 199,000
Leasehold improvements........................................... 25,000 28,000
------------ ------------
561,000 735,000
Accumulated depreciation and amortization........................ (283,000) (416,000)
------------ ------------
Property and equipment, net.................................. $ 278,000 $ 319,000
------------ ------------
------------ ------------
</TABLE>
F-97
<PAGE>
THE KODIAK GROUP, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1997 AND DECEMBER 13, 1998
5. ACCRUED LIABILITIES:
Accrued liabilities consists of the following:
<TABLE>
<CAPTION>
DECEMBER 31, DECEMBER 13,
1997 1998
------------ ------------
<S> <C> <C>
Accrued compensation and benefits................................ $ 39,000 $ 406,000
Accrued professional fees........................................ 29,000 131,000
Deferred revenue................................................. 42,000 107,000
Other accrued liabilities........................................ 3,000 201,000
------------ ------------
$ 113,000 $ 845,000
------------ ------------
------------ ------------
</TABLE>
6. LEASES:
The Company has noncancelable operating leases, primarily for real estate,
that expire over the next three years. Rental expense for operating leases
during the year ended December 31, 1997, and for the period from January 1, 1998
to December 13, 1998, was $77,000, and $105,000, respectively.
The Company leases certain equipment under a capital lease.
Future minimum lease payments under the capital lease and noncancelable
operating leases are as follows as of December 13, 1998:
<TABLE>
<CAPTION>
CAPITAL OPERATING
LEASES LEASES
--------- ----------
<S> <C> <C>
Period ended December 31, 1998......................................... $ 2,000 $ 7,000
1999................................................................... 26,000 160,000
2000................................................................... 14,000 153,000
2001................................................................... -- 59,000
--------- ----------
Total future minimum lease payments................................ 42,000 $ 379,000
--------- ----------
----------
Less: Amount representing interest..................................... (3,000)
---------
Present value of capital lease obligation.............................. 39,000
Less: Current portion of capital lease obligation...................... (23,000)
---------
Long-term portion of capital lease obligation.......................... $ 16,000
---------
---------
</TABLE>
Equipment under the capital lease is summarized as follows:
<TABLE>
<CAPTION>
DECEMBER 31, DECEMBER 13,
1997 1998
------------ ------------
<S> <C> <C>
Computer equipment............................................... $ 84,000 $ 84,000
Less: Accumulated amortization................................... (47,000) (75,000)
------------ ------------
Total........................................................ $ 37,000 $ 9,000
------------ ------------
------------ ------------
</TABLE>
F-98
<PAGE>
THE KODIAK GROUP, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1997 AND DECEMBER 13, 1998
7. SHORT-TERM BORROWINGS:
The Company had a line of credit, which expired in October 1998. The line of
credit was collateralized by substantially all of the assets of the Company.
Under the terms of the line of credit, borrowings were limited to $80,000.
Interest on the outstanding balance was calculated at the Bank's prime rate plus
1.75 percent. There were no borrowings under the line of credit during the year
ended December 31, 1997, or the period from January 1, 1998 through October
1998.
8. DEBT:
Debt consists of the following:
<TABLE>
<CAPTION>
DECEMBER 31, DECEMBER 13,
1997 1998
------------ ------------
<S> <C> <C>
Note payable, due October 30, 1999 bears interest at 9.25
percent, payable in 24 installments of $4,083, secured by
capital assets................................................. $ 81,000 $ --
Less: Current maturities......................................... (49,000) --
------------ ------------
Long-term debt, net of current portion....................... $ 32,000 $ --
------------ ------------
------------ ------------
</TABLE>
This loan was paid in full in November 1998. Kodiak has not entered into any
additional loan agreements with outside parties.
9. RETIREMENT PLAN:
The Company maintains a profit-sharing and retirement plan under the
provisions of section 401(k) of the Internal Revenue Code. The Plan provides for
contributions by employees and a discretionary contribution by the Company. The
plan is for the benefit of all employees who have reached one year of service.
Participants may contribute up to 12 percent of their compensation, subject to
statutory limits. Employee contributions are fully vested. The Company's
contribution is discretionary and is determined by its Board of Directors. In
1997 and 1998, the discretionary rate was 3 percent of gross salary. Company
contributions vest at a rate of 25 percent a year, beginning in the employee's
first eligible year. Company contributions totaled $39,000, and $51,000 for the
year ended December 31, 1997, and for the period from January 1, 1998 to
December 13, 1998, respectively.
Effective February 1, 1999, Kodiak employees are covered by the AppNet
401(k) Plan.
F-99
<PAGE>
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To i33 Communications Corporation:
We have audited the accompanying balance sheets of i33 Communications
Corporation (a Delaware corporation), as of December 31, 1996, 1997, and 1998,
and the related statements of operations, stockholders' equity (deficit), and
cash flows for the years then ended. 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 i33 Communications
Corporation as of December 31, 1996, 1997, and 1998, and the results of its
operations and its cash flows for the years then ended in conformity with
generally accepted accounting principles.
ARTHUR ANDERSEN LLP
Washington, D.C.
February 23, 1999
F-100
<PAGE>
I33 COMMUNICATIONS CORPORATION
BALANCE SHEETS
AS OF DECEMBER 31, 1996, 1997, AND 1998
<TABLE>
<CAPTION>
1996 1997 1998
---------- ---------- ------------
<S> <C> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents................................................ $ 1,000 $ 23,000 $ 1,000
Accounts receivable, net of allowance for doubtful accounts of $0,
$86,000 and $417,000, respectively..................................... 444,000 541,000 1,741,000
Other current assets..................................................... 1,000 1,000 12,000
---------- ---------- ------------
Total current assets................................................... 446,000 565,000 1,754,000
Property and equipment, net................................................ 124,000 262,000 568,000
Other assets............................................................... -- 7,000 12,000
---------- ---------- ------------
Total assets........................................................... $ 570,000 $ 834,000 $ 2,334,000
---------- ---------- ------------
---------- ---------- ------------
LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT)
Current liabilities:
Short-term borrowings.................................................... $ -- $ -- $ 500,000
Accounts payable......................................................... 39,000 250,000 1,076,000
Accrued liabilities...................................................... 292,000 356,000 1,082,000
Current portion of long-term debt........................................ 104,000 -- --
Current portion of capital lease obligations............................. 3,000 24,000 41,000
---------- ---------- ------------
Total current liabilities.............................................. 438,000 630,000 2,699,000
Capital lease obligations, net of current portion.......................... 7,000 21,000 15,000
---------- ---------- ------------
Total liabilities...................................................... 445,000 651,000 2,714,000
---------- ---------- ------------
Commitments and contingencies (Note 6)
Stockholders' equity (deficit):
Common stock, no par value; 100 shares authorized; issued and
outstanding............................................................ 1,000 1,000 1,000
Retained earnings (accumulated deficit).................................. 124,000 182,000 (381,000)
---------- ---------- ------------
Total stockholders' equity (deficit)................................... 125,000 183,000 (380,000)
---------- ---------- ------------
Total liabilities and stockholders' equity (deficit)................... $ 570,000 $ 834,000 $ 2,334,000
---------- ---------- ------------
---------- ---------- ------------
</TABLE>
The accompanying notes are an integral part of these statements.
F-101
<PAGE>
I33 COMMUNICATIONS CORPORATION
STATEMENTS OF OPERATIONS
FOR THE YEARS ENDED DECEMBER 31, 1996, 1997, AND 1998
<TABLE>
<CAPTION>
1996 1997 1998
---------- ------------ ------------
<S> <C> <C> <C>
Revenues.................................................................. $ 980,000 $ 2,266,000 $ 4,360,000
Cost of revenues.......................................................... 524,000 982,000 2,251,000
---------- ------------ ------------
Gross profit.......................................................... 456,000 1,284,000 2,109,000
---------- ------------ ------------
Operating expenses:
Selling and marketing................................................... 41,000 471,000 985,000
General and administrative.............................................. 173,000 550,000 1,343,000
Depreciation............................................................ 12,000 45,000 114,000
---------- ------------ ------------
Total operating expenses.............................................. 226,000 1,066,000 2,442,000
---------- ------------ ------------
Income (loss) from operations............................................. 230,000 218,000 (333,000)
Other expense............................................................. -- -- 35,000
Interest expense, net..................................................... -- (1,000) 11,000
---------- ------------ ------------
Income (loss) before income taxes......................................... 230,000 217,000 (379,000)
Provision (benefit) for income taxes...................................... 106,000 159,000 (34,000)
---------- ------------ ------------
Net income (loss)......................................................... $ 124,000 $ 58,000 $ (345,000)
---------- ------------ ------------
---------- ------------ ------------
</TABLE>
The accompanying notes are an integral part of these statements.
F-102
<PAGE>
I33 COMMUNICATIONS CORPORATION
STATEMENTS OF STOCKHOLDERS' EQUITY (DEFICIT)
FOR THE YEARS ENDED DECEMBER 31, 1996, 1997, AND 1998
<TABLE>
<CAPTION>
RETAINED TOTAL
COMMON STOCK EARNINGS STOCKHOLDERS'
---------------------- (ACCUMULATED EQUITY
SHARES AMOUNT DEFICIT) (DEFICIT)
----------- --------- ----------------- ------------
<S> <C> <C> <C> <C>
Balance, January 1, 1996...................................... -- $ -- $ -- $ --
Issuance of 100 shares of common stock...................... 100 1,000 -- 1,000
Net income.................................................. -- -- 124,000 124,000
--- --------- ----------------- ------------
Balance, December 31, 1996.................................... 100 1,000 124,000 125,000
Net income.................................................. -- -- 58,000 58,000
--- --------- ----------------- ------------
Balance, December 31, 1997.................................... 100 1,000 182,000 183,000
Distributions to stockholders............................... -- -- (218,000) (218,000)
Net loss.................................................... -- -- (345,000) (345,000)
--- --------- ----------------- ------------
Balance, December 31, 1998.................................... 100 $ 1,000 $ (381,000) $ (380,000)
--- --------- ----------------- ------------
--- --------- ----------------- ------------
</TABLE>
The accompanying notes are an integral part of these statements.
F-103
<PAGE>
I33 COMMUNICATIONS CORPORATION
STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED DECEMBER 31, 1996, 1997, AND 1998
<TABLE>
<CAPTION>
1996 1997 1998
---------- ----------- -------------
<S> <C> <C> <C>
Cash flows from operating activities:
Net income (loss)....................................................... $ 124,000 $ 58,000 $ (345,000)
Adjustments to reconcile net income (loss) to net cash provided by
operating activities--
Depreciation........................................................ 12,000 45,000 114,000
Deferred income taxes............................................... 106,000 133,000 (45,000)
Change in assets and liabilities:
Accounts receivable, net.......................................... (444,000) (97,000) (1,200,000)
Other assets...................................................... -- (7,000) (16,000)
Accounts payable.................................................. 39,000 211,000 826,000
Accrued liabilities............................................... 186,000 (69,000) 771,000
---------- ----------- -------------
Net cash provided by operating activities....................... 23,000 274,000 105,000
---------- ----------- -------------
Cash flows used in investing activities:
Purchase of property and equipment, net................................. (125,000) (140,000) (362,000)
---------- ----------- -------------
Cash flows from financing activities:
Proceeds from short-term borrowings..................................... -- -- 500,000
Proceeds from long-term debt............................................ 104,000 -- --
Payments on capital lease obligations................................... (1,000) (112,000) (47,000)
Distributions to stockholders........................................... -- -- (218,000)
---------- ----------- -------------
Net cash provided by (used in) financing activities............. 103,000 (112,000) 235,000
---------- ----------- -------------
Net increase (decrease) in cash and cash equivalents...................... 1,000 22,000 (22,000)
Cash and cash equivalents, beginning of year.............................. -- 1,000 23,000
---------- ----------- -------------
Cash and cash equivalents, end of year.................................... $ 1,000 $ 23,000 $ 1,000
---------- ----------- -------------
---------- ----------- -------------
Supplementary information:
Cash paid for interest.................................................. $ -- $ 13,000 $ 11,000
---------- ----------- -------------
---------- ----------- -------------
Cash paid for income taxes.............................................. $ -- $ 1,000 $ 5,000
---------- ----------- -------------
---------- ----------- -------------
Non-cash financing and investing activities:
Property capital lease additions........................................ $ 11,000 $ 42,000 $ 59,000
---------- ----------- -------------
---------- ----------- -------------
</TABLE>
The accompanying notes are an integral part of these statements.
F-104
<PAGE>
I33 COMMUNICATIONS CORPORATION
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 1996, 1997, AND 1998
1. BUSINESS DESCRIPTION:
i33 Communications Corporation ("i33" or the "Company") was incorporated in
January 1996, under the laws of the state of Delaware. The Company is an
interactive agency specializing in strategy, design, technology and online
advertising management for mid-sized to large companies. Revenues are generated
from web site design and development, online media buying and planning, online
advertising management, site audits, web publishing and project management
tools, custom application and database development and hosting services. i33 is
headquartered and operates primarily in New York.
On January 8, 1999, all of the issued and outstanding stock of the Company
was acquired by AppNet Systems, Inc. The Company incurred $35,000 in consulting
fees in conjunction with the sale to AppNet. This has been classified as other
expense in the accompanying statements of operations.
There are significant risks associated with the Company, including the
subjectivity of the Company's services to rapid technological change and the
Year 2000 issue.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES AND PRACTICES:
USE OF ESTIMATES
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and the
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amount of revenues and expenses during the reporting
period. Actual results could differ from those estimates.
CASH AND CASH EQUIVALENTS
The Company considers all highly liquid investments with original maturities
of three months or less to be cash equivalents.
PROPERTY AND EQUIPMENT
Property and equipment are stated at cost, net of accumulated depreciation
and amortization. Depreciation and amortization are computed using the
straight-line method over the estimated useful lives of the related assets, as
follows:
<TABLE>
<S> <C>
Computer equipment............................................. five years
seven
Furniture and fixtures......................................... years
</TABLE>
Purchased software for internal use is capitalized and amortized principally
over three years. Leasehold improvements are amortized over the lesser of the
estimated useful life of the asset or the remaining lease term.
In accordance with Statement of Financial Accounting Standards No. 121
("SFAS"), "Accounting for the Impairment of Long-Lived Assets and for Long-Lived
Assets to Be Disposed Of," the Company reviews its recorded long-lived assets
for impairment whenever events or changes in circumstances indicate that the
carrying amount of an asset may not be recoverable.
F-105
<PAGE>
I33 COMMUNICATIONS CORPORATION
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1996, 1997, AND 1998
FAIR VALUE OF FINANCIAL INSTRUMENTS
The Company's financial instruments consist primarily of cash and cash
equivalents, accounts receivable, accounts payable, short-term borrowings, and
capital lease obligations. In management's opinion, the carrying amounts of
these financial instruments approximated their fair values at December 31, 1996,
1997, and 1998.
REVENUE RECOGNITION
Revenues from time and material contracts are recognized based on fixed
hourly rates for direct labor hours expended. Revenues from fixed-price
contracts are recognized on the percentage-of-
completion method, with costs and estimated profits recorded as work is
performed. Revenues from fixed-price advertising contracts in which the Company
delivers advertising impressions for its customers on third-party websites are
recognized ratably over the period the advertising impressions are delivered. In
accordance with industry practice, the cost of third-party advertising placed by
the Company on behalf of its clients is offset against the related customer
reimbursement in the accompanying statements of operations.
Cost of revenues includes all direct material and labor costs related to
contract performance and does not include any related depreciation expense.
Provisions for estimated losses on uncompleted contracts are made in the period
in which such losses are determined. Changes in contract performance and
estimated profitability, including final contract settlements, may result in
revisions to costs and income and are recognized in the period in which the
revisions are determined. Unbilled receivables on contracts are comprised of
costs, plus earnings on certain contracts in excess of contractual billings on
such contracts. Cash received in excess of costs incurred is classified as
deferred revenue.
BUSINESS CONCENTRATION AND CREDIT RISK
The following table summarizes the revenues and receivables from clients in
excess of 10% of total revenues and receivables:
<TABLE>
<CAPTION>
REVENUES
FOR THE ACCOUNTS
YEARS ENDED RECEIVABLE
DECEMBER 31, AS OF DECEMBER 31,
------------------------------- -------------------------------
<S> <C> <C> <C> <C> <C> <C>
1996 1997 1998 1996 1997 1998
--------- --------- --------- --------- --------- ---------
Customer A..................................... * * * * * 20%
Customer B..................................... * * * * * 12%
Customer C..................................... * * 10% * * 16%
Customer D..................................... * 14% * * 16% *
Customer E..................................... * 13% * * * *
Customer F..................................... * 11% * * * *
Customer G..................................... 25% * * 50% 14% *
Customer H..................................... 11% * * 12% * *
</TABLE>
- ------------------------
* Represents less than 10% of total.
F-106
<PAGE>
I33 COMMUNICATIONS CORPORATION
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1996, 1997, AND 1998
INCOME TAXES
In 1996, the Company was taxed as a C corporation. As such, income taxes are
accounted for using an asset and liability approach that requires the
recognition of taxes payable or refundable for the current year and deferred tax
liabilities and assets for the future tax consequences of events that have been
recognized in the Company's financial statements or tax returns. The measurement
of current and deferred tax liabilities and assets are based on provisions of
the enacted tax law; the effects of future changes in tax laws or rates are not
anticipated. The measurement of deferred tax assets is reduced, if necessary, by
the amount of any tax benefits that, based on available evidence, are not
expected to be realized.
In 1997 and 1998, the Company, with the consent of its shareholders, has
elected to be taxed pursuant to subchapter S of the Internal Revenue Code ("an S
corporation"). In lieu of corporation income taxes, the shareholders of an S
corporation are taxed on their proportionate share of the Company's taxable
income. Therefore, no provision for federal income taxes has been included in
the accompanying financial statements. The Company is subject to state and city
income taxes based on the Company's taxable income and alternative minimum tax.
The recorded tax provision for 1997 and 1998 relates to these state and city
taxes. The significant components of differences between income reported for
financial statement purposes and income reported for tax purposes relates to tax
basis adjustments for accounts receivable, payroll and corporate tax
liabilities.
3. ACCOUNTS RECEIVABLE:
Accounts receivable consists of the following:
<TABLE>
<CAPTION>
DECEMBER 31,
------------------------------------
<S> <C> <C> <C>
1996 1997 1998
---------- ---------- ------------
Accounts receivable.................................... $ 444,000 $ 599,000 $ 2,009,000
Unbilled accounts receivable........................... -- 28,000 149,000
Allowance for doubtful accounts........................ -- (86,000) (417,000)
---------- ---------- ------------
Accounts receivable, net........................... $ 444,000 $ 541,000 $ 1,741,000
---------- ---------- ------------
---------- ---------- ------------
</TABLE>
4. PROPERTY AND EQUIPMENT:
Property and equipment consists of the following:
<TABLE>
<CAPTION>
DECEMBER 31,
------------------------------------
<S> <C> <C> <C>
1996 1997 1998
---------- ---------- ------------
Computer equipment..................................... $ 79,000 $ 169,000 $ 474,000
Furniture and fixtures................................. 44,000 112,000 131,000
Leasehold improvements................................. 13,000 38,000 134,000
---------- ---------- ------------
136,000 319,000 739,000
Accumulated depreciation and amortization.............. (12,000) (57,000) (171,000)
---------- ---------- ------------
Property and equipment, net........................ $ 124,000 $ 262,000 $ 568,000
---------- ---------- ------------
---------- ---------- ------------
</TABLE>
F-107
<PAGE>
I33 COMMUNICATIONS CORPORATION
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1996, 1997, AND 1998
5. ACCRUED LIABILITIES:
Accrued liabilities consists of the following:
<TABLE>
<CAPTION>
DECEMBER 31,
------------------------------------
<S> <C> <C> <C>
1996 1997 1998
---------- ---------- ------------
Deferred revenue....................................... $ 24,000 $ -- $ --
Deferred tax liability................................. 106,000 239,000 194,000
Accrued media expense.................................. -- -- 798,000
Accrued compensation................................... 147,000 -- --
Other accrued liabilities.............................. 15,000 117,000 90,000
---------- ---------- ------------
Total accrued liabilities.......................... $ 292,000 $ 356,000 $ 1,082,000
---------- ---------- ------------
---------- ---------- ------------
</TABLE>
6. LEASES:
The Company has noncancelable operating leases, primarily for real estate,
that expire over the next 3 years. Rental expense for operating leases during
the years ended December 31, 1996, 1997, and 1998, was $21,000, $73,000 and
$102,000, respectively.
The Company leases certain equipment under capital leases.
Future minimum lease payments under capital leases and noncancelable
operating leases are as follows as of December 31, 1998:
<TABLE>
<CAPTION>
CAPITAL OPERATING
LEASES LEASES
--------- ----------
<S> <C> <C>
Year ended December 31, 1999................................................. $ 39,000 $ 93,000
2000......................................................................... 21,000 63,000
2001......................................................................... 5,000 42,000
--------- ----------
Total minimum lease payments............................................. 65,000 $ 198,000
----------
----------
Less: Amount representing interest........................................... (9,000)
---------
Present value of capital lease obligations................................... 56,000
Less: Current portion of capital lease obligations........................... 41,000
---------
Long-term portion of capital lease obligation................................ $ 15,000
---------
---------
</TABLE>
Equipment under capital leases is summarized as follows:
<TABLE>
<CAPTION>
DECEMBER 31,
-------------------------------
<S> <C> <C> <C>
1996 1997 1998
--------- --------- ---------
Computer equipment........................................... $ 11,000 $ 54,000 $ 93,000
Accumulated depreciation..................................... (1,000) (7,000) (14,000)
--------- --------- ---------
Total.................................................... $ 10,000 $ 47,000 $ 79,000
--------- --------- ---------
--------- --------- ---------
</TABLE>
F-108
<PAGE>
I33 COMMUNICATIONS CORPORATION
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1996, 1997, AND 1998
7. INCOME TAXES:
The Company follows the provisions of SFAS No. 109, "Accounting for Income
Taxes," for financial reporting purposes. Deferred tax assets or liabilities at
the end of each period are determined using the currently enacted tax rates to
apply to taxable income in the period in which the deferred tax asset or
liability is expected to be settled or realized.
The components of the net deferred tax liability as of December 31, 1996,
1997, and 1998 are as follows:
<TABLE>
<CAPTION>
DECEMBER 31,
----------------------------------
<S> <C> <C> <C>
1996 1997 1998
---------- ---------- ----------
Total deferred tax liabilities........................... $ 106,000 $ 242,000 $ 199,000
Total deferred tax assets................................ -- (3,000) (5,000)
---------- ---------- ----------
Net deferred tax liability............................... $ 106,000 $ 239,000 $ 194,000
---------- ---------- ----------
---------- ---------- ----------
</TABLE>
The sources of and differences between the financial accounting and tax
basis of i33's assets and liabilities that give rise to the net deferred tax
liability are as follows:
<TABLE>
<CAPTION>
DECEMBER 31,
----------------------------------
<S> <C> <C> <C>
1996 1997 1998
---------- ---------- ----------
Deferred tax liabilities:
Differences from accrual to cash basis................. $ 106,000 $ 242,000 $ 199,000
Deferred tax assets:
Other.................................................. -- (3,000) (5,000)
---------- ---------- ----------
$ 106,000 $ 239,000 $ 194,000
---------- ---------- ----------
---------- ---------- ----------
</TABLE>
The components of the provision (benefit) for income taxes as of December
31, 1996, 1997, and 1998, are as follows:
<TABLE>
<CAPTION>
DECEMBER 31,
----------------------------------
<S> <C> <C> <C>
1996 1997 1998
---------- ---------- ----------
Federal income taxes:
Current................................................. $ -- $ -- $ --
Deferred................................................ 66,000 136,000 --
State taxes:
Current................................................. -- 26,000 11,000
Deferred................................................ 40,000 (3,000) (45,000)
---------- ---------- ----------
Provisions (benefit) for income taxes..................... $ 106,000 $ 159,000 $ (34,000)
---------- ---------- ----------
---------- ---------- ----------
</TABLE>
F-109
<PAGE>
I33 COMMUNICATIONS CORPORATION
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1996, 1997, AND 1998
For the years ended December 31, 1996, 1997, and 1998, the provision
(benefit) for income taxes differed from the amounts computed at the statutory
rate, as follows:
<TABLE>
<CAPTION>
DECEMBER 31,
----------------------------------
<S> <C> <C> <C>
1996 1997 1998
---------- ---------- ----------
Income tax computed at statutory rate..................... $ 78,000 $ -- $ --
State income taxes, net of federal income tax benefit..... 27,000 23,000 (34,000)
C Corporation Federal tax................................. -- 136,000 --
Other, net................................................ 1,000 -- --
---------- ---------- ----------
$ 106,000 $ 159,000 $ (34,000)
---------- ---------- ----------
---------- ---------- ----------
</TABLE>
8. RELATED PARTIES:
The Company conducts certain transactions with a related party. These
transactions include the borrowing of funds for which the balances outstanding
at December 31, 1996, 1997, and 1998 were $104,000, $0 and $0, respectively. In
addition, the Company shares office space and has purchased equipment from a
related party during the years ended December 31, 1996, 1997, and 1998.
The Company has a note with a relative of one of the shareholders, which is
collateralized by substantially all of the assets of the Company and is
personally guaranteed by the Company's President and Chief Technical Officer.
Under the terms of the agreement, the loan was interest free and payment was due
upon the sale of the Company. As of December 31, 1998, the balance due on the
note was $500,000. The note was repaid on January 8, 1999.
During the years ended December 31, 1997 and 1998, the Company wrote off
amounts due from a related party of $5,000 and $18,000, respectively.
F-110
<PAGE>
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To Salzinger & Company:
We have audited the accompanying balance sheet of Salzinger & Company (a
Virginia corporation), as of December 31, 1998, and the related statements of
operations, stockholder's equity, and cash flows for the year then ended. These
financial statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audit.
We conducted our audit in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audit provides a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of Salzinger & Company as of
December 31, 1998, and the results of its operations and its cash flows for the
year then ended in conformity with generally accepted accounting principles.
ARTHUR ANDERSEN LLP
Washington, D.C.
March 15, 1999
F-111
<PAGE>
SALZINGER & COMPANY
BALANCE SHEET
AS OF DECEMBER 31, 1998
<TABLE>
<S> <C>
ASSETS
Current assets:
Cash.......................................................................... $ 193,000
Accounts receivable........................................................... 1,707,000
---------
Total current assets........................................................ 1,900,000
Property and equipment, net..................................................... 43,000
Other assets.................................................................... 14,000
---------
Total assets................................................................ $1,957,000
---------
---------
LIABILITIES AND STOCKHOLDER'S EQUITY
Liabilities:
Short-term borrowing.......................................................... $ 130,000
Accounts payable.............................................................. 34,000
Accrued liabilities........................................................... 177,000
---------
Total current liabilities................................................... 341,000
---------
Commitments and contingencies (Note 6)
Stockholder's equity:
Common stock, $1.00 par value; 5,000 shares authorized; 1,000 shares issued
and outstanding............................................................. 1,000
Retained earnings............................................................. 1,615,000
---------
Total stockholder's equity.................................................. 1,616,000
---------
Total liabilities and stockholder's equity.................................. $1,957,000
---------
---------
</TABLE>
The accompanying notes are an integral part of this statement.
F-112
<PAGE>
SALZINGER & COMPANY
STATEMENT OF OPERATIONS
FOR THE YEAR ENDED DECEMBER 31, 1998
<TABLE>
<S> <C>
Revenues........................................................................ $3,110,000
Cost of revenues................................................................ 1,738,000
---------
Gross profit................................................................ 1,372,000
---------
Operating expenses:
Selling and marketing......................................................... 2,000
General and administrative.................................................... 425,000
Depreciation and amortization................................................. 13,000
---------
Total operating expenses.................................................... 440,000
---------
Income from operations.......................................................... 932,000
Interest income................................................................. 20,000
---------
Net income...................................................................... $ 952,000
---------
---------
</TABLE>
The accompanying notes are an integral part of this statement.
F-113
<PAGE>
SALZINGER & COMPANY
STATEMENT OF STOCKHOLDER'S EQUITY
FOR THE YEAR ENDED DECEMBER 31, 1998
<TABLE>
<CAPTION>
COMMON STOCK TOTAL
---------------------- RETAINED STOCKHOLDER'S
SHARES AMOUNT EARNINGS EQUITY
----------- --------- ------------ -------------
<S> <C> <C> <C> <C>
Balance, December 31, 1997........................................ 1,000 $ 1,000 $ 663,000 $ 664,000
Net income...................................................... -- -- 952,000 952,000
----- --------- ------------ -------------
Balance, December 31, 1998........................................ 1,000 $ 1,000 $ 1,615,000 $ 1,616,000
----- --------- ------------ -------------
----- --------- ------------ -------------
</TABLE>
The accompanying notes are an integral part of this statement.
F-114
<PAGE>
SALZINGER & COMPANY
STATEMENT OF CASH FLOWS
FOR THE YEAR ENDED DECEMBER 31, 1998
<TABLE>
<S> <C>
Cash flows from operating activities:
Net income.................................................................... $ 952,000
Adjustments to reconcile net income to net cash used in operating activities:
Depreciation and amortization............................................... 13,000
Change in assets and liabilities:
Accounts receivable....................................................... (1,152,000)
Other assets.............................................................. (5,000)
Accounts payable.......................................................... 19,000
Accrued liabilities....................................................... 11,000
----------
Net cash used in operating activities................................... (162,000)
----------
Cash flows from financing activities:
Short-term borrowing.......................................................... 130,000
----------
Net decrease in cash............................................................ (32,000)
Cash, beginning of year......................................................... 225,000
----------
Cash, end of year............................................................... $ 193,000
----------
----------
</TABLE>
The accompanying notes are an integral part of this statement.
F-115
<PAGE>
SALZINGER & COMPANY
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 1998
1. BUSINESS DESCRIPTION:
Salzinger & Company ("Salzinger" or the "Company") was incorporated in 1995,
under the laws of the state of Virginia. Salzinger is a consulting company
providing business-level strategic consulting in website marketing strategy
development, planning and implementation. It is headquartered in Virginia and
operates primarily in the Northeast, with some international clients.
On March 15, 1999, certain assets of the Company were acquired by AppNet
Systems, Inc.
There are significant risks associated with the Company, including the
subjectivity of the Company's services to rapid technological change and the
Year 2000 issue.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES AND PRACTICES:
USE OF ESTIMATES
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and the
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amount of revenues and expenses during the reporting
period. Actual results could differ from those estimates.
PROPERTY AND EQUIPMENT
Property and equipment are stated at cost, net of accumulated depreciation
and amortization. Depreciation and amortization are computed using the
straight-line method over the estimated useful lives of the related assets, as
follows:
<TABLE>
<S> <C>
three
Computer equipment and software................................. years
Furniture and fixtures.......................................... five years
Automobile...................................................... five years
</TABLE>
Purchased software is capitalized and amortized principally over three
years.
In accordance with Statement of Financial Accounting Standards No. 121,
"Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to
Be Disposed Of," the Company reviews its recorded long-lived assets for
impairment whenever events or changes in circumstances indicate that the
carrying amount of an asset may not be recoverable.
FAIR VALUE OF FINANCIAL INSTRUMENTS
The Company's financial instruments consist primarily of cash, accounts
receivable, accounts payable and short-term borrowing. In management's opinion,
the carrying amounts of these financial instruments approximated their fair
values at December 31, 1998.
REVENUE RECOGNITION
Revenues from time and material contracts are recognized based on fixed
hourly rates for direct labor hours expended. The Company also enters into
arrangements in which a portion of its fee is based on the successful completion
of a transaction. Revenue under these contracts is recognized when
F-116
<PAGE>
SALZINGER & COMPANY
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1998
the transaction has closed and the Company is due its success fee. Included
within revenues in the accompanying statement of operations are success fees of
approximately $730,000.
Cost of revenues includes all direct material and labor costs related to
contract performance and does not include any related depreciation expense.
Unbilled receivables on contracts are comprised of costs, plus earnings on
certain contracts in excess of contractual billings on such contracts. Cash
received in excess of costs incurred is classified as deferred revenue.
BUSINESS CONCENTRATION AND CREDIT RISK
The following table summarizes the revenues and accounts receivable from
clients in excess of 10% of total revenues and accounts receivable:
<TABLE>
<CAPTION>
REVENUES ACCOUNTS RECEIVABLE
FOR THE YEAR ENDED AS OF
DECEMBER 31, 1998 DECEMBER 31, 1998
------------------- ---------------------
<S> <C> <C>
Company A............................................. 31% 50%
Company B............................................. 21% 27%
Company C............................................. 15% *
Company D............................................. 15% 13%
</TABLE>
- ------------------------
* Represents less than 10% of total.
INCOME TAXES
The Company, with the consent of its shareholders, has elected to be taxed
pursuant to Subchapter S of the Internal Revenue Code (an "S Corporation"). In
lieu of corporation income taxes, the shareholders of an S corporation are taxed
on their proportionate share of the Company's taxable income. Therefore, no
provision for federal or state income taxes has been included in the
accompanying financial statements.
3. ACCOUNTS RECEIVABLE:
Accounts receivable consists of the following:
<TABLE>
<S> <C>
Accounts receivable............................................. $1,522,000
Unbilled accounts receivable.................................... 185,000
---------
Total....................................................... $1,707,000
---------
---------
</TABLE>
There was no allowance for doubtful accounts recorded as management believes
that all amounts will be collected.
F-117
<PAGE>
SALZINGER & COMPANY
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1998
4. PROPERTY AND EQUIPMENT:
Property and equipment consists of the following:
<TABLE>
<S> <C>
Computer equipment and software................................... $ 21,000
Furniture and fixtures............................................ 9,000
Automobile........................................................ 35,000
---------
65,000
Accumulated depreciation and amortization......................... (22,000)
---------
Property and equipment, net................................... $ 43,000
---------
---------
</TABLE>
5. ACCRUED LIABILITIES:
Accrued liabilities consists of the following:
<TABLE>
<S> <C>
Accrued compensation and benefits................................. $ 151,000
Deferred revenue.................................................. 25,000
Other............................................................. 1,000
---------
Accrued liabilities........................................... $ 177,000
---------
---------
</TABLE>
6. LEASES:
The Company is party to a sublease agreement under which it rents its
corporate office. The sublease is renewable on a month-to-month basis. The
Company is also party to a second lease which is renewed annually. Rental
expense for operating leases during the year ended December 31, 1998 was
$130,000.
The Company leases certain equipment under noncancelable operating leases.
Future minimum lease payments under noncancelable operating leases for
office space and equipment are as follows as of December 31, 1998:
<TABLE>
<S> <C>
1999............................................................... $ 81,000
2000............................................................... 13,000
---------
Total minimum lease payments................................... $ 94,000
---------
---------
</TABLE>
7. RELATED PARTIES:
The Company's sole stockholder loaned $130,000 to the Company in December
1998. The Company repaid the loan in January 1999.
8. RETIREMENT PLAN:
The Company maintains a profit-sharing and retirement plan under the
provisions of section 408(p) of the Internal Revenue Code. The Plan provides for
contributions by employees and a discretionary contribution by the Company. The
plan is for the benefit of all employees. Participants may contribute up to
$6,000 annually. Employee contributions are fully vested. The Company
contributes 2 percent of employees total salary. The Company's contribution
vests immediately. Company contributions totaled $23,000 for the year ended
December 31, 1998.
F-118
<PAGE>
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To Internet Outfitters, Inc.:
We have audited the accompanying balance sheet of Internet Outfitters, Inc.
(a California corporation), as of December 31, 1998, and the related statements
of operations, stockholders' equity, and cash flows for the year then ended.
These financial statements are the responsibility of the Company's management.
Our responsibility is to express an opinion on these financial statements based
on our audit.
We conducted our audit in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audit provides a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of the Company as of December
31, 1998, and the results of its operations and its cash flows for the year then
ended, in conformity with generally accepted accounting principles.
ARTHUR ANDERSEN LLP
Washington, D.C.
March 26, 1999
F-119
<PAGE>
INTERNET OUTFITTERS, INC.
BALANCE SHEET
AS OF DECEMBER 31, 1998
<TABLE>
<S> <C>
ASSETS
Current assets:
Cash............................................................................ $ 70,000
Accounts receivable, net........................................................ 555,000
Other current assets............................................................ 71,000
---------
Total current assets........................................................ 696,000
Property and equipment, net....................................................... 239,000
Other assets...................................................................... 6,000
---------
Total assets................................................................ $ 941,000
---------
---------
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable................................................................ $ 227,000
Accrued liabilities............................................................. 184,000
Current portion of long-term debt............................................... 316,000
Current portion of capital lease obligations.................................... 17,000
---------
Total current liabilities................................................... 744,000
Long-term debt, net of current portion............................................ 53,000
Capital lease obligations, net of current portion................................. 3,000
Deferred tax liability............................................................ 29,000
---------
Total liabilities........................................................... 829,000
---------
Commitments and contingencies (Note 11)
Stockholders' equity:
Common stock, no par value; 20,000,000 shares authorized; 7,695,641 shares
issued and outstanding........................................................ 8,000
Additional paid-in capital...................................................... 221,000
Deferred compensation........................................................... (164,000)
Retained earnings............................................................... 47,000
---------
Total stockholders' equity.................................................. 112,000
---------
Total liabilities and stockholders' equity.................................. $ 941,000
---------
---------
</TABLE>
The accompanying notes are an integral part of this statement.
F-120
<PAGE>
INTERNET OUTFITTERS, INC.
STATEMENT OF OPERATIONS
FOR THE YEAR ENDED DECEMBER 31, 1998
<TABLE>
<S> <C>
Revenues........................................................................ $2,343,000
Cost of revenues................................................................ 1,287,000
---------
Gross profit........................................................ 1,056,000
---------
Operating expenses:
Selling and marketing......................................................... 47,000
General and administrative.................................................... 859,000
Stock-based compensation...................................................... 57,000
Depreciation and amortization................................................. 57,000
---------
Total operating expenses............................................ 1,020,000
---------
Income from operations.......................................................... 36,000
Interest expense, net........................................................... 47,000
---------
Loss before income taxes........................................................ (11,000)
Provision for income taxes...................................................... 52,000
---------
Net loss........................................................................ $ (63,000)
---------
---------
</TABLE>
The accompanying notes are an integral part of this statement.
F-121
<PAGE>
INTERNET OUTFITTERS, INC.
STATEMENT OF STOCKHOLDERS' EQUITY
FOR THE YEAR ENDED DECEMBER 31, 1998
<TABLE>
<CAPTION>
COMMON STOCK ADDITIONAL TOTAL
----------------------- PAID-IN DEFERRED RETAINED STOCKHOLDERS'
SHARES AMOUNT CAPITAL COMPENSATION EARNINGS EQUITY
------------ --------- ---------- ------------- ----------- ------------
<S> <C> <C> <C> <C> <C> <C>
Balance, December 31, 1997........ 7,695,641 $ 8,000 $ -- $ -- $ 110,000 $ 118,000
Stock-based compensation........ -- -- 221,000 (164,000) -- 57,000
Net loss........................ -- -- -- -- (63,000) (63,000)
------------ --------- ---------- ------------- ----------- ------------
Balance, December 31, 1998........ 7,695,641 $ 8,000 $ 221,000 $ (164,000) $ 47,000 $ 112,000
------------ --------- ---------- ------------- ----------- ------------
------------ --------- ---------- ------------- ----------- ------------
</TABLE>
The accompanying notes are an integral part of this statement.
F-122
<PAGE>
INTERNET OUTFITTERS, INC.
STATEMENT OF CASH FLOWS
FOR THE YEAR ENDED DECEMBER 31, 1998
<TABLE>
<S> <C>
Cash flows from operating activities:
Net loss....................................................................... $ (63,000)
Adjustments to reconcile net loss to net cash used in operating activities:
Deferred income taxes........................................................ (29,000)
Stock-based compensation..................................................... 57,000
Depreciation and amortization................................................ 57,000
Change in assets and liabilities:
Accounts receivable, net................................................... (217,000)
Other assets............................................................... (8,000)
Accounts payable........................................................... 5,000
Accrued liabilities........................................................ 138,000
---------
Net cash used in operating activities.................................... (60,000)
---------
Cash flows from investing activities:
Purchase of property and equipment, net........................................ (124,000)
---------
Cash flows from financing activities:
Proceeds from long-term debt................................................... 292,000
Repayments of long-term debt................................................... (28,000)
Repayments of capital lease obligations........................................ (13,000)
---------
Net cash provided by financing activities................................ 251,000
---------
Net increase in cash............................................................. 67,000
Cash, beginning of year.......................................................... 3,000
---------
Cash, ending of year............................................................. $ 70,000
---------
---------
Supplementary information:
Cash paid for interest......................................................... $ 45,000
---------
---------
Cash paid for income taxes..................................................... $ 63,000
---------
---------
</TABLE>
The accompanying notes are an integral part of this statement.
F-123
<PAGE>
INTERNET OUTFITTERS, INC.
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 1998
1. BUSINESS DESCRIPTION:
Internet Outfitters, Inc. ("IO" or the "Company") was incorporated in 1994
under the laws of the state of California. IO is an information technology
services company providing internet and web-based solutions designed to improve
clients' business processes, including strategy consulting, applications
development, electronic commerce, systems design, technology development,
integration, and operation. The Company is headquartered in Santa Monica,
California and operates primarily in the western region of the United States.
On March 22, 1999, the Company entered into a Stock Purchase Agreement with
AppNet Systems, Inc. ("AppNet"). The transaction was completed on March 26,
1999.
There are significant risks associated with the Company, including the
subjectivity of the Company's services to rapid technological change and the
Year 2000 issue.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES AND PRACTICES:
USE OF ESTIMATES
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and the
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amount of revenues and expenses during the reporting
period. Actual results could differ from those estimates.
PROPERTY AND EQUIPMENT
Property and equipment are stated at cost, net of accumulated depreciation
and amortization. Depreciation and amortization are computed using the
straight-line method over the estimated useful lives of the related assets, as
follows:
<TABLE>
<S> <C>
three to five
Computer equipment and software.......................... years
Furniture and fixtures................................... seven years
</TABLE>
Purchased software and third-party costs incurred to develop software for
internal use are capitalized and amortized principally over three years.
In accordance with Statement of Financial Accounting Standards ("SFAS") No.
121, "Accounting for the Impairment of Long-Lived Assets and for Long-Lived
Assets to Be Disposed Of," the Company reviews its recorded long-lived assets
for impairment whenever events or changes in circumstances indicate that the
carrying amount of an asset may not be recoverable.
FAIR VALUE OF FINANCIAL INSTRUMENTS
The Company's financial instruments consist primarily of cash, accounts
receivable, accounts payable, long-term debt and capital lease obligations. In
management's opinion, the carrying amounts of these financial instruments
approximated their fair values at December 31, 1998.
F-124
<PAGE>
INTERNET OUTFITTERS, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1998
STOCK-BASED COMPENSATION
The Company accounts for stock-based employee compensation arrangements
using the intrinsic value method in accordance with provisions of Accounting
Principles Board ("APB") Opinion No. 25, "Accounting for Stock Issued to
Employees," and complies with the disclosure provisions of SFAS No. 123,
"Accounting for Stock-Based Compensation." Under APB Opinion No. 25,
compensation cost is recognized based on the difference, if any, on the date of
grant between the fair value of the Company's stock and the amount an employee
must pay to acquire the stock.
REVENUE RECOGNITION
Revenues from time and material contracts are recognized based on fixed
hourly rates for direct labor hours expended. Revenues from fixed-price
contracts are recognized on the percentage-of-
']completion method, with costs and estimated profits recorded as work is
performed. Revenues from fixed-price advertising contracts in which the Company
delivers advertising impressions for its customers on third-party websites are
recognized ratably over the period the advertising impressions are delivered. In
accordance with industry practice, the cost of third party advertising placed by
the Company on behalf of its clients is offset against the related customer
reimbursement in the accompanying statement of operations. Revenues from
cost-plus-fixed-fee contracts are recognized on the basis of direct costs plus
indirect costs incurred plus a fixed profit percentage.
Costs of revenues includes all direct material and labor costs related to
contract performance and does not include any related depreciation expense.
Provisions for estimated losses on uncompleted contracts are made in the period
in which such losses are determined. Changes in contract performance and
estimated profitability, including final contract settlements, may result in
revisions to costs and income and are recognized in the period in which the
revisions are determined. Unbilled revenues on contracts are comprised of costs,
plus earnings on certain contracts in excess of contractual billings on such
contracts. Cash received in excess of costs incurred is classified as deferred
revenue.
BUSINESS CONCENTRATION AND CREDIT RISK
The following table summarizes the revenues and receivables from clients in
excess of 10% of total revenues and receivables:
<TABLE>
<CAPTION>
REVENUES ACCOUNTS
FOR THE YEAR RECEIVABLE
ENDED AS OF
DECEMBER 31, 1998 DECEMBER 31, 1998
----------------- -----------------
<S> <C> <C>
Customer A............................................. 42.2% 27.0%
Customer B............................................. 18.1% 33.9%
Customer C............................................. 12.5% *
</TABLE>
- ------------------------
* Represents less than 10 percent of total.
INCOME TAXES
Income taxes are accounted for using an asset and liability approach that
requires the recognition of taxes payable or refundable for the current year and
deferred tax liabilities and assets for the future tax consequences of events
that have been recognized in the Company's financial statements or tax returns.
The measurement of current and deferred tax assets and liabilities are based on
provisions of
F-125
<PAGE>
INTERNET OUTFITTERS, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1998
the enacted tax law; the effects of future changes in tax laws or rates are not
anticipated. The measurement of deferred tax assets is reduced, if necessary, by
the amount of any tax benefits that, based on available evidence, are not
expected to be realized.
3. ACCOUNTS RECEIVABLE:
Accounts receivable consists of the following as of December 31, 1998:
<TABLE>
<S> <C>
Commercial clients................................................ $ 560,000
Unbilled accounts receivable...................................... 41,000
Less: Allowance for doubtful accounts............................. (46,000)
---------
Accounts receivable, net...................................... $ 555,000
---------
</TABLE>
In February 1998, the Company entered into a factoring agreement to sell,
with recourse, on an ongoing basis, certain accounts receivable to a third
party. Collections received on these accounts may be replaced by new receivables
in order to maintain the aggregate outstanding balance. Proceeds from the sale
of receivables are collateralized by substantially all of the assets of the
Company. At no time may the total accounts receivable factored exceed $350,000.
Fees associated with these transactions are included in interest expense in the
accompanying statement of operations. The factoring agreement has an initial
term of one year and is renewed from year to year thereafter unless terminated
by either party.
As of December 31, 1998, accounts receivable totaling $224,000 had been
pledged as collateral against this asset-based borrowing.
In accordance with SFAS No. 125, "Accounting for Transfers and Servicing of
Financial Assets and Extinguishments of Liabilities," the Company's accounts
receivable program will be accounted for as a secured borrowing. The receivables
and the corresponding debt are included as an asset and liability, respectively,
on the accompanying balance sheet.
4. OTHER CURRENT ASSETS:
Other current assets consists of the following as of December 31, 1998:
<TABLE>
<S> <C>
Deferred tax asset................................................ $ 58,000
Other assets...................................................... 13,000
---------
Total......................................................... $ 71,000
---------
---------
</TABLE>
F-126
<PAGE>
INTERNET OUTFITTERS, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1998
5. PROPERTY AND EQUIPMENT:
Property and equipment consists of the following as of December 31, 1998:
<TABLE>
<S> <C>
Computer equipment and software................................... $ 332,000
Furniture and fixtures............................................ 8,000
---------
340,000
Accumulated depreciation and amortization......................... 101,000
---------
Property and equipment, net................................... $ 239,000
---------
---------
</TABLE>
6. ACCRUED LIABILITIES:
Accrued liabilities consists of the following as of December 31, 1998:
<TABLE>
<S> <C>
Accrued compensation and benefits................................. $ 96,000
Taxes payable..................................................... 33,000
Deferred revenue.................................................. 30,000
Other accrued liabilities......................................... 25,000
---------
Total......................................................... $ 184,000
---------
</TABLE>
7. DEBT:
In July 1996, the Company issued a $41,000 note payable to an officer of the
Company with a maturity of December 31, 1999. Interest on this note was payable
monthly at a rate of 8 percent. In April 1998, the Company issued a second note
in the amount of $51,000 payable to this officer, which contained a maturity of
June 30, 1999. Interest on this note was payable monthly at a rate of 12
percent.
In December 1998, the Company refinanced the outstanding balances of the
above notes and issued a single $92,000 note payable to this officer. This note
bears interest monthly at a rate of 10 percent and matures on December 31, 2000.
The Company issued a $50,000 note payable to a related party in March 1996,
which bears interest monthly at a rate of 8 percent. Principal payments were due
on a quarterly basis with a scheduled maturity of March 1, 1999. In December
1998, the Company rescheduled the payments of the remaining outstanding balance
of $45,000. The amended note has a scheduled maturity of December 31, 1999. All
other terms remained unchanged from the original note.
In 1998, the Company entered into a factoring agreement, the proceeds from
which are treated as a secured borrowing (see Note 3). The outstanding balance
at December 31, 1998 will be repaid through the subsequent sale of additional
accounts receivable from the Company. Finance charges of 2.25 percent are
payable monthly on the average outstanding balance for the respective period. In
addition, the Company is required to pay a monthly administrative fee of 0.75
percent of the face amount of each purchased receivable during the respective
period. The outstanding balance is secured by substantially all of the assets of
the Company. As of December 31, 1998, $224,000 was outstanding related to this
agreement.
F-127
<PAGE>
INTERNET OUTFITTERS, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1998
In March 1998, IO issued a note payable to an employee of the Company in the
amount of $17,000. This note bears interest annually at a rate of 12 percent. At
December 31, 1998, $8,000 was outstanding related to this note. The remaining
principal is secured by a $26,000 billed receivable of the Company and will be
repaid upon receipt of payment from those receivables.
As of December 31, 1998, the maturities of long-term debt were as follows:
<TABLE>
<S> <C>
1999.............................................................. $ 316,000
2000.............................................................. 53,000
---------
Total......................................................... $ 369,000
---------
</TABLE>
8. EMPLOYEE STOCK OPTION PLAN:
The Company has a stock option plan for key employees. Options expire no
later than ten years from the date of the grant or when employment ceases,
whichever comes first. One-third of the granted options vest on the grant date.
The remaining options vest ratably on the first and second anniversaries of the
date of grant. The maximum number of shares of common stock that may be issued
pursuant to the stock option plan is 5,000,000 shares at December 31, 1998.
The stock option plan is accounted for under APB Opinion No. 25, "Accounting
for Stock Issued to Employees." Had compensation cost for the plan been
determined based on the estimated fair value of the options at the grant dates
consistent with the method of SFAS No. 123, pro forma net loss would have been
approximately $289,000 for the year ended December 31, 1998. The weighted
average fair value of the options granted during 1998 is estimated to be $0.84
per option assuming the following: dividend yield of 0 percent, risk-free
interest rate of 5 percent and an expected term of the options of 3.4 years.
The following summarizes option activity during 1998:
<TABLE>
<CAPTION>
WEIGHTED-
NUMBER OF AVERAGE
SHARES EXERCISE PRICE
---------- ---------------
<S> <C> <C>
Options outstanding December 31, 1997, exercise price range of
$0.10 to $0.16.................................................. 2,431,000 $ 0.13
Granted in 1998............................................... 345,000 0.20
----------
Options outstanding, December 31, 1998, exercise price range of
$0.10 to $0.20.................................................. 2,776,000 0.14
---------- -----
---------- -----
Options exercisable, December 31, 1998............................ 1,716,000 $ 0.13
---------- -----
---------- -----
</TABLE>
9. INCOME TAXES:
The Company follows the provisions of SFAS No. 109, "Accounting for Income
Taxes," for financial reporting purposes. Deferred tax assets or liabilities at
the end of each period are determined using the currently enacted tax rates to
apply to taxable income in the period in which the deferred tax asset or
liability is expected to be settled or realized.
F-128
<PAGE>
INTERNET OUTFITTERS, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1998
The components of the net deferred tax asset are as follows as of December
31, 1998:
<TABLE>
<S> <C>
Total deferred tax liabilities.................................... $ (29,000)
Total deferred tax assets......................................... 58,000
---------
Net deferred tax asset........................................ $ 29,000
---------
---------
</TABLE>
The sources of and differences between the financial accounting and tax
basis of Internet Outfitters, Inc.'s assets and liabilities that give rise to
the net deferred tax asset are as follows as of December 31, 1998:
<TABLE>
<S> <C>
Deferred tax liabilities
Depreciation.................................................... $ (29,000)
Deferred tax assets
Reserves........................................................ 35,000
Stock-based compensation........................................ 23,000
---------
Net deferred tax asset........................................ $ 29,000
---------
---------
</TABLE>
The components of the provision for income taxes as of December 31, 1998,
are as follows:
<TABLE>
<S> <C>
Federal income taxes:
Current......................................................... $ 68,000
Deferred........................................................ (29,000)
State taxes....................................................... 13,000
---------
Provision for income taxes........................................ $ 52,000
---------
---------
</TABLE>
For the year ended December 31, 1998, the provision for income taxes
differed from the amounts computed at the statutory rate, as follows:
<TABLE>
<S> <C>
Income tax computed at statutory rates............................ $ (4,000)
State income taxes, net of federal income tax benefit............. 9,000
Permanent differences............................................. 48,000
Other, net........................................................ (1,000)
---------
$ 52,000
---------
---------
</TABLE>
10. RELATED PARTIES:
See Note 7 for a description of certain long-term debt obligations with
related parties.
In 1998, IO has entered into a service agreement with a relative of an
officer of the Company. Under this agreement, this individual will act as
financial advisor for any sale, merger or financing transaction entered into by
the Company and, in exchange, will receive a fee equal to three percent of the
transaction consideration. No fees were paid in 1998 in connection with this
agreement.
F-129
<PAGE>
INTERNET OUTFITTERS, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1998
11. COMMITMENTS AND CONTINGENCIES:
LEASES
The Company has noncancelable operating leases, primarily for real estate,
that expire over the next 2 years. One of the operating leases maintains an
escalation provision that requires annual incremental increases of at least 3
percent. Rental expense for operating leases during the year ended December 31,
1998 was $63,000.
The Company leases certain equipment under capital leases.
Future minimum lease payments under capital leases and noncancelable
operating leases are as follows as of December 31, 1998:
<TABLE>
<CAPTION>
CAPITAL OPERATING
LEASES LEASES
---------- -----------
<S> <C> <C>
1999................................................................... $ 17,000 $ 68,000
2000................................................................... 5,000 11,000
---------- -----------
Total minimum lease payments....................................... 22,000 $ 79,000
-----------
-----------
Less: Amount representing interest..................................... (2,000)
----------
Present value of capital lease obligations............................. 20,000
Less: Current portion of capital lease obligations..................... (17,000)
----------
Long-term portion of capital lease obligations......................... $ 3,000
----------
----------
</TABLE>
Equipment under capital leases is summarized as follows as of December 31,
1998:
<TABLE>
<S> <C>
Computer equipment................................................ $ 49,000
Accumulated depreciation.......................................... (15,000)
---------
Total......................................................... $ 34,000
---------
---------
</TABLE>
LITIGATION AND CLAIMS
In 1998, one of the Company's suppliers informed IO that it believed the
Company had caused a third-party client of the Company to enter into an
incorrect license for a supplier's software. The supplier asserted that the
correct license required additional payments of approximately $2,200,000 in
license fees and technical support fees. The Company denies any liability for
additional licensing fees. While the Company intends to vigorously contest any
claim by the supplier that additional fees are owed in connection with the third
party, the ultimate resolution of this matter cannot be determined at this time.
F-130
<PAGE>
[LOGO]
<PAGE>
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 13. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION.
The following table sets forth expenses and costs payable by AppNet (other
than underwriting discounts and commissions) expected to be incurred in
connection with the issuance and distribution of the securities described in
this registration statement. All amounts are estimated except for the Securities
and Exchange Commission's registration fee and the National Association of
Securities Dealers' filing fee.
<TABLE>
<CAPTION>
AMOUNT
------------
<S> <C>
Registration fee under Securities Act........................................... $ 47,955
NASD filing fee................................................................. 17,750
The Nasdaq National Market fees................................................. 95,000
Legal fees and expenses......................................................... 850,000
Accounting fees and expenses.................................................... 1,000,000
Printing and engraving expenses................................................. 600,000
Registrar and transfer agent fees............................................... 5,000
Miscellaneous expenses.......................................................... 100,000
------------
Total........................................................................... $ 2,715,705
------------
------------
</TABLE>
ITEM 14. INDEMNIFICATION OF DIRECTORS AND OFFICERS.
AppNet's bylaws provide that AppNet shall indemnify to the fullest extent
authorized by the Delaware General Corporation Law, each person who is involved
in any litigation or other proceeding because such person is or was a director
or officer of AppNet, against all expense, loss or liability reasonably incurred
or suffered in connection therewith. AppNet's bylaws provide that a director or
officer may be paid expenses incurred in defending any proceeding in advance of
its final disposition upon receipt by AppNet of an undertaking, by or on behalf
of the director or officer, to repay all amounts so advanced if it is ultimately
determined that such director or officer is not entitled to indemnification.
Section 145 of the Delaware General Corporation Law permits a corporation to
indemnify any director or officer of the corporation against expenses (including
attorneys' fees), judgments, fines and amounts paid in settlement actually and
reasonably incurred in connection with any action, suit or proceeding brought by
reason of the fact that such person is or was a director or officer of the
corporation, if such person acted in good faith and in a manner that he
reasonably believed to be in or not opposed to the best interests of the
corporation, and, with respect to any criminal action or proceeding, if he had
no reason to believe his conduct was unlawful. In a derivative action, (I.E.,
one brought by or on behalf of the corporation), indemnification may be made
only for expenses, actually and reasonably incurred by any director or officer
in connection with the defense or settlement of such an action or suit, if such
person acted in good faith and in a manner that he reasonably believed to be in
or not opposed to the best interests of the corporation, except that no
indemnification shall be made if such person shall have been adjudged to be
liable to the corporation, unless and only to the extent that the court in which
the action or suit was brought shall determine that the defendant is fairly and
reasonably entitled to indemnity for such expenses despite such adjudication of
liability.
Pursuant to Section 102(b)(7) of the Delaware General Corporation Law,
AppNet's certificate of incorporation eliminates the liability of a director to
the corporation or its stockholders for monetary damages for such breach of
fiduciary duty as a director, except for liabilities arising (a) from any breach
of the director's duty of loyalty to the corporation or its stockholders; (b)
from acts or omissions
II-1
<PAGE>
not in good faith or which involve intentional misconduct or a knowing violation
of law; (c) under Section 174 of the Delaware General Corporation Law; or (d)
from any transaction from which the director derived an improper personal
benefit.
AppNet intends to obtain primary and excess insurance policies insuring its
directors and officers and those of its subsidiaries against certain liabilities
they may incur in their capacity as directors and officers. Under such policies,
the insurer, on behalf of AppNet, may also pay amounts for which AppNet has
granted indemnification to the directors or officers.
Additionally, reference is made to the Underwriting Agreement filed as
Exhibit 1.1 hereto, which provides for indemnification by the Underwriters of
AppNet, its directors and officers who sign the registration statement and
persons who control AppNet, under certain circumstances.
ITEM 15. RECENT SALES OF UNREGISTERED SECURITIES.
AppNet has issued securities in the following transactions, each of which,
unless otherwise indicated, was intended to be exempt from the registration
requirements of the Securities Act by virtue of Section 4(2).
On March 10, 1998, AppNet issued a warrant to purchase 31,250 shares of
Class B Preferred Stock for an aggregate purchase price of $125,000 to Silicon
Valley Bank as consideration, in part, for a loan from Silicon Valley Bank in
the principal amount of $2,262,500. Pursuant to the terms of an Exchange
Agreement, dated as of June 12, 1998, between AppNet and Silicon Valley Bank,
the warrant to purchase Class B Preferred Stock was exchanged for two new
warrants: (a) a warrant to purchase 14,620 shares of AppNet common stock for an
aggregate purchase price of $4,396 and (b) a warrant to purchase 121 shares of
Class A Preferred Stock for an aggregate purchase price of $121,000. This
exchange was exempt from the registration requirements of the Securities Act by
virtue of Section 3(a)(9) of the Securities Act.
On March 11, 1998, AppNet issued a total of 5,378,947 shares of its common
stock to its founders in the following amounts and for the following
consideration: (1) 3,157,895 shares to Ken Bajaj for an aggregate purchase price
of $9,000; (2) 2,052,632 shares to Fairfax Management Company for an aggregate
purchase price of $5,850; (3) 56,140 shares to Terrence McManus in exchange for
$80, as consideration for past services and in exchange for a binding obligation
to provide future services; (4) 56,140 shares to Robert Harvey in exchange for
$80, as consideration for past services and in exchange for a binding obligation
to provide future services; and (5) 56,140 shares to Robert McCalley in exchange
for $80, as consideration for past services and in exchange for a binding
obligation to provide future services. On June 29, 1998, AppNet repurchased a
portion of the shares issued to Fairfax Management Company in return for a
convertible promissory note in the principal amount of $406,175. The principal
amount of this note will automatically convert into shares of AppNet common
stock upon the consummation of this offering using a per share purchase price
equal to 80% of the offering price per common share.
On March 12, 1998, AppNet issued an aggregate of 266,796 shares of Series
A-1 Convertible Preferred Stock, par value $0.001, to Arbor and employees of
Arbor, as partial payment for the assets of Arbor. The Series A-1 Convertible
Preferred Stock issued to Arbor and the Arbor employees was valued at
approximately $1,067,184. On June 29, 1998, all of the shares of the Series A-1
Convertible Preferred Stock were converted into 187,225 shares of our common
stock. On June 29, 1998, AppNet redeemed 138,455 shares of its common stock that
were issued to Arbor for $789,192.
On April 30, 1998, as partial payment for the assets of LOGEX, AppNet issued
a convertible promissory note to LOGEX in the principal amount of $300,000. The
principal amount of this note, and, with AppNet's consent, accrued interest on
the note, is convertible into AppNet common stock at the holder's option upon
(a) the consummation of this offering, using a per share purchase price equal
II-2
<PAGE>
to 80% of the offering price per common share or (b) a change in control of
AppNet, using a per share purchase price equal to 80% of the fair market value
at the time of the change in control.
On May 31, 1998, AppNet issued a warrant to purchase 35,088 shares of its
common stock for an aggregate purchase price of $50,000 to Smart Technology as
consideration, in part, for a loan from Smart Technology in the maximum
principal amount of $1,000,000. On June 29, 1998, in accordance with the
Purchase Agreement, this warrant was canceled, and AppNet issued a new warrant
to Smart Technology to purchase 70,175 shares of AppNet common stock for an
aggregate purchase price of approximately $21,100.
On June 29, 1998, GTCR and Smart Technology purchased 11,326,228 and 232,916
shares of AppNet common stock, respectively, for aggregate purchase prices of
$3,405,514 and $70,032, respectively, from AppNet under a purchase agreement,
dated as of June 29, 1998). Under the purchase agreement, GTCR and Smart
Technology have also purchased aggregate amounts of approximately 44,113 and 900
shares of Class A Preferred Stock, respectively, since June 29, 1998, for
aggregate purchase prices of approximately $44,113,000 and $900,000,
respectively.
On June 29, 1998, AppNet issued 1,251,228, 63,158, 110,175 and 63,158 shares
of its common stock to Ken Bajaj, Robert Harvey, Robert McCalley and Terrence
McManus, respectively, for an aggregate purchase price of $447,320.
On June 29, 1998, AppNet issued an aggregate of 35,088 shares of its common
stock to Anchor Financial Group, Inc., Pascal Luck and Robert Stewart in
satisfaction in full of all obligations of AppNet for finder's fees in
connection with investments by GTCR and Smart Technology in AppNet under the
purchase agreement with GTCR and Smart Technology. These shares had an aggregate
value of $10,550.
On June 29, 1998, AppNet issued 52,632 shares of its common stock to Thomas
Davidson for payment, in part, of a finder's fee in connection with the GTCR and
Smart Technology investments in AppNet. These shares had an aggregate value of
$15,825. AppNet also issued 86,651 shares of its common stock to Mr. Davidson
for an aggregate purchase price of $26,053.
Since June 29, 1998, AppNet issued an aggregate of 552,982 shares of its
common stock to twelve of its employees for an aggregate purchase price of
$571,498.
On August 1, 1998, GTCR and Smart Technology exchanged an aggregate of
1,387,097 shares of our common stock for an aggregate of 417.066 shares of Class
A Preferred Stock. This exchange was exempt from the registration requirements
of the Securities Act by virtue of Section 3(a)(9) of the Securities Act.
On August 25, 1998, AppNet issued an aggregate of 11,576 shares of Class B
Preferred Stock and 1,387,095 shares of its common stock to the ten stockholders
of SSC in connection with the acquisition of SSC. The Class B Preferred Stock
issued to the SSC stockholders was valued at $11,576,000 and the common stock
was valued at approximately $417,066.
On October 2, 1998, AppNet issued an aggregate of 1,111,111 shares of its
common stock to the five stockholders of NMP as payment, in part, for all of the
issued and outstanding capital stock of NMP. The common stock issued to the NMP
stockholders was valued at $9,500,000. Also in connection with the acquisition
of NMP, AppNet assumed options to purchase an aggregate of 145,518 shares of its
common stock to the NMP stockholders.
On October 12, 1998, as payment, in part, for all of the issued and
outstanding capital stock of Century, AppNet issued a convertible promissory
note to Riggs & Co., as nominee on behalf of the twenty-nine stockholders of
Century, in the aggregate principal amount of $2,000,000. Each of the
twenty-nine Century stockholders obtained a percentage beneficial interest in
the note. All or any portion of the unpaid balance of the note is convertible at
the holder's option, at any time prior to
II-3
<PAGE>
payment in full, into shares of AppNet common stock, using a per share purchase
price of $8.55. Also in connection with the acquisition of Century, AppNet
assumed options to purchase an aggregate of 704,127 shares of its common stock
to the Century stockholders.
On October 20, 1998, AppNet issued an aggregate of 701,754 shares of its
common stock to the two stockholders of R&P as payment, in part, for all of the
issued and outstanding capital stock of R&P. The common stock issued to the R&P
stockholders was valued at $6,000,000.
On December 14, 1998, AppNet issued an aggregate of 197,368 shares of its
common stock and four convertible promissory notes in an aggregate principal
amount of $2,000,000 to the four stockholders of Kodiak as payment, in part, for
all of the issued and outstanding capital stock of Kodiak. The common stock
issued to the Kodiak stockholders was valued at $2,250,000. All or any portion
of the unpaid balance of each of these notes is convertible at the holder's
option, at any time prior to payment in full, into shares of AppNet common
stock, using a per share purchase price of $11.40.
On January 6, 1999, AppNet issued 29,240 shares of its common stock to
Antares Leveraged Capital Corporation for an aggregate purchase price of
$375,003.
On January 8, 1999, AppNet issued two convertible promissory notes in an
aggregate principal amount of $3,500,000 to the two former stockholders of i33
as partial payment for their shares of the capital stock of i33. The principal
amount of, and accrued interest on, these notes is convertible into AppNet
common stock at the holder's option commencing upon (a) the consummation of this
offering, using a per share purchase price equal to 80% of the offering price
per common share, or (b) a change in control of AppNet, using a per share
purchase price equal to 80% of the fair market value at the time of the change
in control. In addition, AppNet issued two convertible subordinated promissory
notes in an aggregate principal amount of $6,800,000 to the two former i33
stockholders as partial payment for their shares of the capital stock of i33.
All or any portion of the principal of, and accrued interest on, each of these
notes is convertible, at the holder's option, commencing upon the consummation
of this offering or a change in control of AppNet, into shares of common stock,
using a per share purchase price of $11.40. Also in connection with the
acquisition of i33, AppNet issued a convertible promissory note in a principal
amount of $1,000,000 to a trust for the benefit of i33 employees. The principal
amount of, and accrued interest on, this note is convertible into AppNet common
stock at the holder's option commencing upon (a) the consummation of this
offering, using a per share purchase price equal to 80% of the offering price
per common share, or (b) a change in control of AppNet, using a per share
purchase price equal to 80% of the fair market value at the time of the change
in control.
On March 4, 1999, AppNet issued an aggregate of 97,465 shares of its common
stock to the four stockholders of Sigma6 as payment, in part, for all of the
issued and outstanding capital stock of Sigma6. The common stock issued to the
Sigma6 stockholders was valued at $1,250,000.
On March 15, 1999, AppNet issued an aggregate of 245,614 shares of its
common stock to Salzinger as payment, in part, for substantially all of the
assets of Salzinger. The common stock issued to Salzinger was valued at
$3,500,000.
On March 25, 1999, AppNet issued an aggregate of 157,895 shares of its
common stock to the 19 stockholders of Internet Outfitters as payment, in part,
for all of the issued and outstanding capital stock of Internet Outfitters. The
common stock issued to the Internet Outfitters stockholders was valued at
$2,700,000. Also in connection with the acquisition of Internet Outfitters,
AppNet assumed options to purchase an aggregate of 22,300 shares of its common
stock to the Internet Outfitters' stockholders.
II-4
<PAGE>
On March 29, 1999, AppNet issued an aggregate of 94,737 shares of its common
stock to TransForm IT as payment, in part, for substantially all of the assets
of TransForm IT. The common stock issued to TransForm IT was valued at
$1,620,000.
From August 1998 through May 26, 1999, AppNet granted options under the 1998
Plan to purchase an aggregate of 1,574,068 shares of its common stock at
exercise prices ranging from $0.04341 to $17.10 to employees and officers and
directors. AppNet issued an aggregate of 4,791 shares of its common stock
pursuant to option exercises under the 1998 Plan at exercise prices ranging from
$0.04341 to $0.14464.
From August 1998 through May 26, 1999, AppNet assumed options under the
Century Plan to purchase an aggregate of 704,127 shares of its common stock at
exercise prices ranging from $0.7159 to $1.4099. AppNet issued an aggregate of
658,499 of its common stock pursuant to option exercises under the Century Plan
at exercise prices ranging from $0.7159 to $1.4099.
From August 1998 through May 26, 1999, AppNet assumed options under the
Internet Outfitters' Plan to purchase an aggregate of 22,300 shares of its
common stock at exercise prices ranging from $2.25 to $3.76, none of which has
been exercised.
ITEM 16. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES.
The following documents are filed as exhibits to this registration
statement:
<TABLE>
<CAPTION>
EXHIBIT DESCRIPTION
- ----------- --------------------------------------------------------------------------------------------------------
<C> <S>
1.1 Form of Underwriting Agreement**
3.1 Form of Restated Certificate of Incorporation of AppNet Systems, Inc. to be effective upon closing of
the offering**
3.2 Form of Amended and Restated Bylaws of AppNet Systems, Inc. to be effective upon closing of the
offering**
4.1 Form of certificate of common stock of AppNet Systems, Inc.**
4.2 Registration Agreement, dated as of June 29, 1998, by and among AppNet Systems, Inc., GTCR Golder
Rauner, L.L.C., Fairfax Management Company II, L.L.C., Smart Technology, L.L.C. and certain stockholders
of AppNet Systems, Inc.**
5.1 Opinion of Fried, Frank, Harris, Shriver & Jacobson*
10.1 Intentionally Omitted
10.2 Agreement of Purchase and Sale of Assets, dated March 12, 1998, by and between AppNet Systems, Inc.,
Arbor Intelligent Systems, Inc., AppNet of Michigan, Inc. and Ronald Suarez, Robert Simms and Robert
Royce for purchase and sale of substantially all of the assets of Arbor Intelligent Systems, Inc.**
10.3 Merger Agreement, dated June 31, 1998, by and among AppNet Systems, Inc., SSC Acquisition Sub #1, Inc.,
Software Services Corporation and its stockholders for the purchase of all of the issued and outstanding
capital stock of Software Services Corporation**
10.4 Merger Agreement, dated October 2, 1998, by and among AppNet Systems, Inc., NMP Acquisition Sub #1,
Inc., New Media Publishing, Inc. and its stockholders for the purchase of all of the issued and
outstanding capital stock of New Media Publishing, Inc.**
</TABLE>
II-5
<PAGE>
<TABLE>
<CAPTION>
EXHIBIT DESCRIPTION
- ----------- --------------------------------------------------------------------------------------------------------
<C> <S>
10.5 Agreement and Plan of Merger, dated September 17, 1998, by and among AppNet Systems, Inc.,
AppNet/Century, Inc., Century Computing, Incorporated and its stockholders for the purchase of all of
the issued and outstanding capital stock of Century Computing, Incorporated**
10.6 Stock Purchase Agreement, dated October 20, 1998, by and among AppNet Systems, Inc., Research &
Planning, Inc., Thomas H. Rauh and William Rosenfeld for the purchase of all of the issued and
outstanding capital stock of Research & Planning, Inc.**
10.7 Stock Purchase Agreement, dated as of November 25, 1998, by and among AppNet Systems, Inc., The Kodiak
Group, Inc. and its stockholders for the purchase of all of the issued and outstanding capital stock of
The Kodiak Group, Inc.**
10.8 Stock Purchase Agreement, dated December 23, 1998, by and among AppNet Systems, Inc., i33 communications
corp., Drew Rayman and Enno Vandermeer for the purchase of all of the issued and outstanding capital
stock of i33 communications corp.**
10.9 Merger Agreement, dated as of February 25, 1999, as amended, by and among AppNet Systems, Inc., AppNet
Sigma6, Inc., Sigma6, Inc. and the stockholders of Sigma6, Inc., for the purchase of all of the issued
and outstanding capital stock of Sigma6, Inc.**
10.10 Asset Purchase Agreement, dated as of March 1, 1999, by and among AppNet Systems, Inc., Salzinger
Acquisition Corp., Salzinger & Company, Inc. and Steven Salzinger for the purchase of substantially all
of the assets of Salzinger & Company, Inc.**
10.11 Stock Purchase Agreement, dated as of March 22, 1999, by and among AppNet Systems, Inc., Internet
Outfitters, Inc. and its stockholders for the purchase of all of the issued and outstanding capital
stock of Internet Outfitters, Inc.**
10.12 Asset Purchase Agreement, dated as of March 29, 1999, by and among AppNet Systems, Inc., Transform
Acquisition Corp., TransForm IT, Incorporated and John C. King, Thomas E. Hunt and Roy A. Chandler for
the purchase of substantially all of the assets of TransForm IT, Incorporated**
10.13 Form of Recapitalization Agreement, dated as of May , 1999, by and among AppNet Systems, Inc. and
owners of AppNet's preferred stock
10.14 Revolving Credit Agreement, dated as of January 8, 1999, by and among AppNet Systems, Inc., BankBoston,
N.A. and Antares Capital Corporation**
10.15 Second Amendment to Revolving Credit Agreement, dated as of May 24, 1999, by and among AppNet Systems,
Inc., BankBoston, N.A. and Antares Capital Corporation
10.16 First Amendment to Revolving Credit Agreement, dated as of March 10, 1999, by and among AppNet Systems,
Inc., BankBoston, N.A. and Antares Capital Corporation**
10.17 Form of Lock-Up Agreement**
10.18 Century Computing, Incorporated Incentive Stock Plan, as amended**
10.19 AppNet Systems, Inc. 1998 Stock Option and Incentive Plan (as amended and restated)**
10.20 Form of AppNet Systems, Inc. 1999 Incentive Stock Plan
10.21 Internet Outfitters, Inc. 1996 Incentive Stock Option Plan, as amended**
10.22 Form of Senior Management Agreement, as amended
</TABLE>
II-6
<PAGE>
<TABLE>
<CAPTION>
EXHIBIT DESCRIPTION
- ----------- --------------------------------------------------------------------------------------------------------
<C> <S>
10.23 Senior Management Agreement, dated as of June 29, 1998, by and between AppNet Systems, Inc. and Ken S.
Bajaj
10.24 Letter Agreement, dated as of May 28, 1999, by and among AppNet Systems, Inc., BankBoston, N.A. and
Antares Capital Corporation
21.1 Subsidiaries of AppNet Systems, Inc.**
23.1 Consent of Arthur Andersen LLP**
23.2 Consent of Fried, Frank, Harris, Shriver & Jacobson (included in Exhibit 5.1 above)*
23.3 Consent of Gartner Group/Dataquest**
23.4 Consent of International Data Corporation
24.1 Power of Attorney**
27.1 Financial data schedule**
</TABLE>
- ------------------------
* To be filed by amendment.
** Previously filed.
II-7
<PAGE>
ITEM 17. UNDERTAKINGS.
The undersigned registrant hereby undertakes that, for purposes of
determining any liability under the Securities Act, each filing of the
registrant's annual reports pursuant to section 13(a) or section 15(d) of the
Securities Exchange Act of 1934 (and, where applicable, each filing of an
employee benefit plan's annual report pursuant to section 15(d) of the
Securities Exchange Act of 1934) that is incorporated by reference in the
registration statement 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.
Insofar as indemnification for liabilities arising under the Securities Act
may be permitted to directors, officers and controlling persons of the
registrant pursuant to the foregoing provisions, 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 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 that:
(1) To provide to the Underwriters at the closing specified in the
underwriting agreement certificates in such denominations and registered in such
names as required by the Underwriters to permit proper delivery to each
purchaser.
(2) For purposes of determining any liability under the Securities Act, 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 424b(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) For purposes of determining any liability under the Securities Act, each
post-effective amendment that contains a form of prospectus shall be deemed to
be a new registration statement relating to the securities offered therein, and
the offering of such securities at that time shall be deemed to be the initial
bona fide offering thereof.
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, the registrant
has duly caused this Amendment No. 3 to the registration statement to be signed
on its behalf by the undersigned, thereunto duly authorized, in the City of
Bethesda, State of Maryland, on May 28, 1999.
APPNET SYSTEMS, INC.
By: /s/ KEN S. BAJAJ
-----------------------------------------
Ken S. Bajaj
CHIEF EXECUTIVE OFFICER
(PRINCIPAL EXECUTIVE OFFICER)
II-8
<PAGE>
Pursuant to the requirements of the Securities Act of 1933, this Amendment
No. 3 to the registration statement has been signed by the following persons in
the capacities and on the dates indicated.
<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
- ------------------------------ -------------------------- -------------------
<C> <S> <C>
President, Chief Executive
/s/ KEN S. BAJAJ Officer and Director
- ------------------------------ (Principal Executive May 28, 1999
Ken S. Bajaj Officer)
/s/ JOHN CROSS*
- ------------------------------ Executive Vice President May 28, 1999
John Cross and Director
/s/ THOMAS M. DAVIDSON*
- ------------------------------ Director May 28, 1999
Thomas M. Davidson
/s/ BRUCE RAUNER*
- ------------------------------ Director May 28, 1999
Bruce Rauner
/s/ PHILIP A. CANFIELD*
- ------------------------------ Director May 28, 1999
Philip A. Canfield
/s/ JACK PEARLSTEIN Chief Financial Officer
- ------------------------------ (Principal Financial and May 28, 1999
Jack Pearlstein Accounting Officer)
</TABLE>
<TABLE>
<S> <C> <C> <C>
*By: /s/ KEN S. BAJAJ
-------------------------
Ken S. Bajaj
CHIEF EXECUTIVE OFFICER
(PRINCIPAL EXECUTIVE
OFFICER)
Attorney in fact
</TABLE>
II-9
<PAGE>
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To AppNet Systems, Inc.:
We have audited, in accordance with generally accepted auditing standards,
the consolidated financial statements of AppNet Systems, Inc. and the financial
statements of Software Services Corporation included in this registration
statement and have issued our reports thereon dated March 29, 1999 (except with
respect to the matter discussed in Note 18, as to which the date is May ,
1999) and February 5, 1999, respectively. Our audits were made for the purpose
of forming an opinion on the basic financial statements taken as a whole. The
accompanying Schedule II -- Valuation and Qualifying Accounts for AppNet
Systems, Inc. and Software Services Corporation are the responsibility of the
Company's management and are presented for purposes of complying with the
Securities and Exchange Commission's rules and are not part of the basic
financial statements. This schedule has been subjected to the auditing
procedures applied in the audit of the basic financial statements and, in our
opinion, fairly states in all material respects the financial data required to
be set forth therein in relation to the basic financial statements taken as a
whole.
ARTHUR ANDERSEN LLP
Washington, D.C.
March 29, 1999
S-1
<PAGE>
SCHEDULE II
APPNET SYSTEMS, INC.
VALUATION AND QUALIFYING ACCOUNTS
<TABLE>
<CAPTION>
ADDITIONS
----------------------
CHARGED
BEGINNING TO ENDING
BALANCE DEDUCTIONS EXPENSE OTHER(1) BALANCE
---------- ----------- ---------- ---------- ------------
<S> <C> <C> <C> <C> <C>
PERIOD ENDING DECEMBER 31, 1998
Allowance for Doubtful Accounts................. $ -- $ 166,000 $ 539,000 $ 751,000 $ 1,124,000
</TABLE>
SOFTWARE SERVICES CORPORATION (PREDECESSOR)
VALUATION AND QUALIFYING ACCOUNTS
<TABLE>
<CAPTION>
ADDITIONS
----------------------
CHARGED
BEGINNING TO ENDING
BALANCE DEDUCTIONS EXPENSE OTHER(1) BALANCE
---------- ----------- ---------- ---------- ------------
<S> <C> <C> <C> <C> <C>
PERIOD ENDING DECEMBER 31, 1996
Allowance for Doubtful Accounts................. $ 49,000 $ 37,000 $ 17,000 -- $ 29,000
PERIOD ENDING DECEMBER 31, 1997
Allowance for Doubtful Accounts................. $ 29,000 $ 10,000 $ 6,000 -- $ 25,000
PERIOD FROM JANUARY 1 TO AUGUST 24, 1998
Allowance for Doubtful Accounts................. $ 25,000 $ (1,000) $ 229,000 -- $ 255,000
</TABLE>
- ------------------------
(1) Amounts reflected in opening balance sheets of acquired companies in
accordance with the purchase method of accounting.
S-2
<PAGE>
INDEX TO EXHIBITS
The following documents are filed as exhibits to this registration
statement:
<TABLE>
<CAPTION>
EXHIBIT DESCRIPTION
- ----------- --------------------------------------------------------------------------------------------------------
<C> <S>
1.1 Form of Underwriting Agreement
3.1 Form of Restated Certificate of Incorporation of AppNet Systems, Inc. to be effective upon closing of
the offering
3.2 Form of Amended and Restated Bylaws of AppNet Systems, Inc. to be effective upon closing of the offering
4.1 Form of certificate of common stock of AppNet Systems, Inc.
4.2 Registration Agreement, dated as of June 29, 1998, by and among AppNet Systems, Inc., GTCR Golder
Rauner, L.L.C., Fairfax Management Company II, L.L.C., Smart Technology, L.L.C. and certain stockholders
of AppNet Systems, Inc.**
5.1 Opinion of Fried, Frank, Harris, Shriver & Jacobson*
10.1 Intentionally Omitted
10.2 Agreement of Purchase and Sale of Assets, dated March 12, 1998, by and between AppNet Systems, Inc.,
Arbor Intelligent Systems, Inc., AppNet of Michigan, Inc. and Ronald Suarez, Robert Simms and Robert
Royce for purchase and sale of substantially all of the assets of Arbor Intelligent Systems, Inc.**
10.3 Merger Agreement, dated June 31, 1998, by and among AppNet Systems, Inc., SSC Acquisition Sub #1, Inc.,
Software Services Corporation and its stockholders for the purchase of all of the issued and outstanding
capital stock of Software Services Corporation**
10.4 Merger Agreement, dated October 2, 1998, by and among AppNet Systems, Inc., NMP Acquisition Sub #1,
Inc., New Media Publishing, Inc. and its stockholders for the purchase of all of the issued and
outstanding capital stock of New Media Publishing, Inc.**
10.5 Agreement and Plan of Merger, dated September 17, 1998, by and among AppNet Systems, Inc.,
AppNet/Century, Inc., Century Computing, Incorporated and its stockholders for the purchase of all of
the issued and outstanding capital stock of Century Computing, Incorporated**
10.6 Stock Purchase Agreement, dated October 20, 1998, by and among AppNet Systems, Inc., Research &
Planning, Inc., Thomas H. Rauh and William Rosenfeld for the purchase of all of the issued and
outstanding capital stock of Research & Planning, Inc.**
10.7 Stock Purchase Agreement, dated as of November 25, 1998, by and among AppNet Systems, Inc., The Kodiak
Group, Inc. and its stockholders for the purchase of all of the issued and outstanding capital stock of
The Kodiak Group, Inc.**
10.8 Stock Purchase Agreement, dated December 23, 1998, by and among AppNet Systems, Inc., i33 communications
corp., Drew Rayman and Enno Vandermeer for the purchase of all of the issued and outstanding capital
stock of i33 communications corp.**
10.9 Merger Agreement, dated as of February 25, 1999, by and among AppNet Systems, Inc., AppNet Sigma6, Inc.,
Sigma6, Inc. and the stockholders of Sigma6, Inc., as amended, for the purchase of all of the issued and
outstanding capital stock of Sigma6, Inc.**
10.10 Asset Purchase Agreement, dated as of March 1, 1999, by and among AppNet Systems, Inc., Salzinger
Acquisition Corp., Salzinger & Company, Inc. and Steven Salzinger for the purchase of substantially all
of the assets of Salzinger & Company, Inc.**
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
EXHIBIT DESCRIPTION
- ----------- --------------------------------------------------------------------------------------------------------
<C> <S>
10.11 Stock Purchase Agreement, dated as of March 22, 1999, by and among AppNet Systems, Inc., Internet
Outfitters, Inc. and its stockholders for the purchase of all of the issued and outstanding capital
stock of Internet Outfitters, Inc.**
10.12 Asset Purchase Agreement, dated as of March 29, 1999, by and among AppNet Systems, Inc., Transform
Acquisition Corp., TransForm IT, Incorporated and John C. King, Thomas E. Hunt and Roy A. Chandler for
the purchase of substantially all of the assets of TransForm IT, Incorporated**
10.13 Recapitalization Agreement, dated as of May , 1999, by and among AppNet Systems, Inc., the Class A
Preferred Stockholders and the Class B Preferred Stockholders*
10.14 Revolving Credit Agreement, dated as of January 8, 1999, by and among AppNet Systems, Inc., BankBoston,
N.A. and Antares Capital Corporation**
10.15 Intentionally Omitted
10.16 First Amendment to Revolving Credit Agreement, dated as of March 10, 1999, by and among AppNet Systems,
Inc., BankBoston, N.A. and Antares Capital Corporation**
10.17 Form of Lock-Up Agreement
10.18 Century Computing, Incorporated Incentive Stock Plan, as amended**
10.19 AppNet Systems, Inc. 1998 Stock Option and Incentive Plan (as amended and restated)
10.20 AppNet Systems, Inc. 1999 Incentive Stock Plan*
10.21 Internet Outfitters, Inc. 1996 Incentive Stock Option Plan, as amended**
10.22 Form of Senior Management Agreement, as amended*
10.23 Senior Management Agreement, dated as of June 29, 1998, by and between AppNet Systems, Inc. and Ken S.
Bajaj, as amended
10.24 Letter Agreement, dated as of May 28, 1999, by and among AppNet Systems, Inc., BankBoston, N.A. and
Antares Capital Corporation
21.1 Subsidiaries of AppNet Systems, Inc.**
23.1 Consent of Arthur Andersen LLP
23.2 Consent of Fried, Frank, Harris, Shriver & Jacobson (included in Exhibit 5.1 above)*
23.3 Consent of Gartner Group/Dataquest**
23.4 Consent of International Data Corporation**
24.1 Power of Attorney**
27.1 Financial data schedule
</TABLE>
- ------------------------
* To be filed by amendment.
** Previously filed.
<PAGE>
Exhibit 10.9
- --------------------------------------------------------------------------------
EXECUTION COPY
MERGER AGREEMENT
by and among
APPNET SYSTEMS, INC.,
(Buyer)
APPNET SIGMA6, INC.,
(Newco)
SIGMA6, INC.,
(Sigma6)
and
THE SHAREHOLDERS OF SIGMA6
(collectively, Sellers)
Dated as of February 25, 1999
- --------------------------------------------------------------------------------
<PAGE>
TABLE OF CONTENTS
Page
1. Definitions..............................................................1
2. The Merger...............................................................8
(a) The Merger...........................................................8
(b) Effective Time of the Merger.........................................9
(c) Articles of Incorporation............................................9
(d) Bylaws...............................................................9
(e) Directors and Officers of Surviving Corporation......................9
(f) Effect of the Merger.................................................9
(g) Conversion of Shares................................................10
(h) Purchase Price......................................................10
(i) Earned Payout Amount...............................................11
(j) Net Worth Adjustment...............................................12
(k) [Reserved]..........................................................12
(l) The Closing........................................................12
(m) Deliveries at the Closing...........................................13
(n) Shareholders' Representative........................................13
(o) Escrow Arrangements.................................................14
3. Representations and Warranties Concerning the Transaction...............14
(a) Representations and Warranties of each Seller.......................14
(i) Authorization of Transaction.....................................15
(ii) Noncontravention................................................15
(iii) Broker's Fees..................................................15
(iv) Investment......................................................16
(v) Sigma6 Shares....................................................16
(b) Representations and Warranties of the Buyer and Newco...............16
(i) Organization of the Buyer and Newco..............................16
(ii) Authorization of Transaction....................................16
(iii) Noncontravention...............................................17
(iv) Brokers' Fees...................................................17
(v) Investment.......................................................17
4. Representations and Warranties Concerning Selling Corporation............17
(a) Organization, Qualification, and Corporate Power....................18
(b) Capitalization......................................................18
(c) Noncontravention....................................................19
(d) Subsidiaries........................................................19
(e) Financial Statements................................................19
(f) Events Subsequent to September 30, 1998.............................20
(g) Undisclosed Liabilities.............................................22
(h) Tax Matters.........................................................23
(i) Tangible Assets.....................................................24
(j) Owned Real Property.................................................24
(k) Intellectual Property...............................................24
-i-
<PAGE>
(l) Real Property Leases................................................26
(m) Contracts...........................................................27
(n) Notes and Accounts Receivable.......................................28
(o) Powers of Attorney..................................................28
(p) Insurance...........................................................28
(q) Litigation..........................................................29
(r) Employees...........................................................29
(s) Employee Benefits...................................................30
(t) Guaranties..........................................................31
(u) Environment, Health, and Safety.....................................32
(v) Legal Compliance....................................................32
(w) Certain Business Relationships with Buyer...........................33
(x) Brokers' Fees.......................................................34
5. Pre-Closing Covenants...................................................34
(a) General.............................................................34
(b) Notices and Consents................................................34
(c) Operation of Business...............................................34
(d) Preservation of Business............................................34
(e) Access..............................................................34
(f) Notice of Developments; Delivery of Disclosure Schedules............35
(g) Exclusivity.........................................................35
(h) Cancellation of Options, Bonus Programs and Phantom Stock Plans.....35
6. Additional Agreements and Covenants.....................................36
(a) Sale of Delphi Automotive Systems Receivable at Closing.............36
(b) General.............................................................36
(c) Litigation Support..................................................36
(d) Transition..........................................................36
(e) Confidentiality.....................................................37
(f) Termination of Bank Facilities; Release of Guaranties...............37
(g) Monitoring Information..............................................37
(h) Landlords' Consents.................................................37
(i) Additional Tax Matters..............................................38
(j) Covenant Not to Compete............................................38
(k) Reorganization Intent..............................................38
(l) Conduct During Earned Payout Periods................................38
(m) Harmony House Relationship..........................................39
(n) Employee Benefits...................................................39
7. Conditions to Obligations to Close......................................40
(a) Conditions to Obligation of the Buyer...............................40
(b) Conditions to Obligations of the Sellers............................43
8. Remedies for Breaches of This Agreement.................................45
(a) Survival............................................................45
(b) Indemnification Provisions for Benefit of the Buyer.................45
(c) Matters Involving Third Parties.....................................47
(d) Exclusive Remedy....................................................48
(e) Payment; General Right of Offset....................................48
-ii-
<PAGE>
(f) Other Indemnification Provisions....................................48
(h) Arbitration with Respect to Certain Indemnification Matters.........48
9. Termination.............................................................49
(a) Termination of Agreement............................................49
(b) Effect of Termination...............................................50
10. Miscellaneous..........................................................50
(a) [Reserved]..........................................................50
(b) Press Releases and Announcements....................................50
(c) No Third-Party Beneficiaries........................................50
(d) Entire Agreement....................................................50
(e) Succession and Assignment...........................................51
(f) Facsimile/Counterparts..............................................51
(g) Descriptive Headings................................................51
(h) Notices.............................................................51
(i) Governing Law......................................................52
(j) Amendments and Waivers.............................................53
(k) Severability........................................................53
(l) Expenses...........................................................53
(m) Construction........................................................53
(n) Incorporation of Exhibits, Annexes, and Schedules...................53
(o) Specific Performance................................................54
-iii-
<PAGE>
LIST OF EXHIBITS, ANNEXES AND SCHEDULES
EXHIBITS
Exhibit A Form of Escrow Agreement
Exhibit B Financial Statements
Exhibit C Joinder to Stockholders Agreement
Exhibit D Form of Equity Subscription Agreement
Exhibit E Form of Senior Management Agreement
Exhibit F Joinder to the Registration Agreement
Exhibit G Form of Opinion of Sellers' Legal Counsel
Exhibit H Form of Option Cancellation Agreement
ANNEXES AND TABLES
Annex I Determination of Earned Payout Amount
Annex II Exceptions to Representations and Warranties of Sellers
Annex III Exceptions to Representations and Warranties of Buyer
Annex IV List of Key Employees
SCHEDULES
Allocation Schedule
Sellers' and Sigma6's Disclosure Schedule
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MERGER AGREEMENT
This MERGER AGREEMENT ("Agreement") is entered into as of the 25th
day of February, 1999, by and among APPNET SYSTEMS, INC., a Delaware corporation
(the "Buyer"), APPNET SIGMA6, INC., a Michigan corporation and wholly owned
subsidiary of Buyer ("Newco"), SIGMA6, INC., a Michigan corporation ("Sigma6"),
and THE SHAREHOLDERS OF SIGMA6 LISTED ON THE SIGNATURE PAGE HEREOF
(collectively, the "Sellers"). The Buyer, Newco and the Sellers are referred to
herein individually as a "Party" and collectively as the "Parties." Sigma6 and
Newco are sometimes referred to herein as the "Constituent Corporations." If the
context so requires, references herein to Sigma6 shall mean the Surviving
Corporation (as hereinafter defined) for periods after the Closing Date.
The Sellers in the aggregate own all of the outstanding capital
stock of Sigma6.
This Agreement contemplates a transaction in which Sigma6 will merge
with and into Newco, with Newco being the surviving corporation, and the shares
of capital stock of Sigma6 being converted into the right to receive the
Purchase Price (as hereinafter identified), and the Parties intend such merger
transaction to be a tax-free reorganization under Section 368 of the Code (as
defined) and intend this Agreement to be a "plan of reorganization" within the
meaning of the regulations promulgated under such section of the Code.
Now, therefore, in consideration of the premises and the mutual
promises herein made, and in consideration of the representations, warranties,
and covenants herein contained, the Parties agree as follows:
1. Definitions.
"AA" shall mean Arthur Andersen, L.L.P.
"AA Determination" shall have the meaning set forth in Section
2(j) below.
"Adjusted EBITDA of Sigma6" shall mean the adjusted earnings
before interest, taxes and depreciation and amortization of Sigma6 as determined
in accordance with GAAP on the accrual basis of accounting during the Earned
Payout Period as determined by Annex I attached hereto.
"Adverse Consequences" means all damages from complaints,
actions, suits, proceedings, hearings, investigations, claims, demands,
judgments, orders, decrees, stipulations, injunctions, damages, dues, penalties,
fines, costs, amounts paid in settlement, liabilities, obligations, taxes,
liens, losses, expenses, and fees, including all reasonable attorneys' fees and
court costs.
"Affiliate" has the meaning set forth in Rule 12b-2 of the
regulations promulgated under the Securities Exchange Act of 1934, as amended.
<PAGE>
"Affiliated Group" means any affiliated group within the
meaning of Code Sec. 1504 (or any similar group defined under a similar
provision of state, local or foreign law).
"Basis" means any past or present fact, situation,
circumstance, status, condition, activity, practice, plan, occurrence, event,
incident, action, failure to act, or transaction that a person similarly
situated would reasonably believe would result for any specified consequence.
"Buyer" has the meaning set forth in the preface above.
"Buyer Common Stock" means the Buyer's Common Stock, par value
$.0005 per share.
"Buyer's Shares" means the shares of Buyer Common Stock which
are issued to the Sellers pursuant to this Agreement.
"Cash Portion of the Purchase Price" has the meaning set forth
in Section 2(h) below.
"Cash Portion of the Earnout" has the meaning set forth in
Section 2(i) below.
"Closing" has the meaning set forth in Section 2(l) below.
"Closing Date" has the meaning set forth in Section 2(l)
below.
"Closing Determination" has the meaning set forth in Section
2(j) below.
"Code" means the Internal Revenue Code of 1986, as amended.
"Confidential Information" means all confidential information
and trade secrets of Sigma6 including, without limitation, the identity, lists
or descriptions of any customers, referral sources or organizations; financial
statements, cost reports or other financial information; contract proposals, or
bidding information; business plans and training and operations methods and
manuals; personnel records; fee structure; and management systems, policies or
procedures, including related forms and manuals; provided, that the Confidential
Information shall not include information to the extent such information (i) was
or becomes known to and available for use by the public other than as a result
of the act or omission of the receiving party which act or omission is a breach
of the confidentiality provision contained in Section 6(e) of this Agreement,
(ii) was or becomes available to the receiving party on a non-confidential basis
from a source other than the Buyer or its advisors without breach of this
Agreement provided that such source is not known to such receiving party to be
bound by a confidentiality agreement or otherwise prohibited from transmitting
the information to receiving party by a contractual, legal or fiduciary
obligation known to such receiving party, (iii) was within receiving party's
possession prior to its being furnished to such receiving party by or on behalf
of Buyer without breach of this Agreement, provided that, to the receiving
party's Knowledge, the source of such
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information was not bound by a confidentiality agreement with Buyer or Sigma6 or
otherwise prohibited from transmitting the information to the receiving party by
a contractual, legal or fiduciary obligation, or (iv) which is required to be
and actually is disclosed by operation of law.
"Constituent Corporations" has the meaning set forth in the
preface above.
"Controlled Group of Corporations" has the meaning set forth
in Code Sec. 1563.
"Customer Contract or Agreement" means any agreement to which
Sigma6 is bound whereby Sigma6 provides marketing, strategy, hosting,
programming, creative or project management services and/or related consulting
services in Sigma6's Business to a third party during the 1998 fiscal year of
Sigma6.
"Deferred Intercompany Transaction" has the meaning set forth
in Treas. Reg. ss.1.1502-13.
"Delphi Receivable" has the meaning set forth in Section 6(a)
below.
"Disclosure Schedule" has the meaning set forth in Section 4
below.
"E-Commerce Services" has the meaning set forth in Section
6(m) below.
"Earned Payout Amount" has the meaning set forth in Section
2(i) below.
"Earned Payout Period" means the period from January 1, 1999
through December 31, 1999.
"Earnout Shares" has the meaning set forth in Section 2(i).
"Effective Time" has the meaning set forth in Section 2(a)
below.
"Employee Benefit Plan" means any (a) nonqualified deferred
compensation or retirement plan or arrangement which is an Employee Pension
Benefit Plan, (b) qualified defined contribution retirement plan or arrangement
which is an Employee Pension Benefit Plan, (c) qualified defined benefit
retirement plan or arrangement which is an Employee Pension Benefit Plan
(including any Multiemployer Plan), or (d) Employee Welfare Benefit Plan or
Material fringe benefit plan or program.
"Employee Pension Benefit Plan" has the meaning set forth in
ERISA Sec. 3(2).
"Employee Welfare Benefit Plan" has the meaning set forth in
ERISA Sec. 3(1).
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"Equitable Exceptions" shall have the meaning set forth in
Section 3(a)(i) below.
"ERISA" means the Employee Retirement Income Security Act of
1974, as amended.
"Escrow Agent" means Michigan National Bank.
"Escrow Agreement" means the Escrow Agreement to be executed
by and among the Sellers, Buyer and the Escrow Agent in the form of Exhibit A.
"Escrow Period" has the meaning specified in Section 2(o).
"Escrow Sum" has the meaning specified in Section 2(o).
"Extremely Hazardous Substance" has the meaning set forth in
Sec. 302 of the Emergency Planning and Community Right-to-Know Act of 1986, as
amended.
"Fair Market Value" has the meaning set forth in Section
2(h)(ii).
"Fiduciary" has the meaning set forth in ERISA Sec. 3(21).
"Financial Statements" has the meaning set forth in Section
4(e) below.
"Funded Indebtedness" means all (i) indebtedness of Sigma6 for
borrowed money or other interest-bearing indebtedness; (ii) capital lease
obligations of Sigma6 other than the leases set forth on Schedule 1.1; (iii)
other than as specifically set forth on Schedule 1.1, obligations of Sigma6 to
pay the deferred purchase or acquisition price for goods or services, other than
obligations under operating leases that are not past due and other than trade
accounts payable or accrued expenses in the Ordinary Course of Business on no
more than 90 day payment terms; (iv) indebtedness of others guaranteed by Sigma6
or indebtedness of others secured by an encumbrance on Sigma6's property, in
either case excluding the existence of potential contractual indemnities made by
Sigma6 in the Ordinary Course of Business (but not any claims therefor) and the
real property leases set forth on Section 4(l) of the Disclosure Schedule; (v)
indebtedness of Sigma6 under extended credit terms of more than 60 days from
vendors provided to Sigma6; and (vi) transaction costs of Sigma6 and/or Sellers
associated with this Agreement or the transactions contemplated hereby that are
paid by Sigma6.
"GAAP" means generally accepted accounting principles,
consistently applied, as in effect from time to time.
"Gross Revenues" means the gross revenue of Sigma6 as normally
calculated on the Financial Statements as calculated in accordance with GAAP on
the accrual basis of accounting.
"Indemnified Party" has the meaning set forth in Section 8(d)
below.
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"Indemnifying Party" has the meaning set forth in Section 8(d)
below.
"Initial Public Offering" shall mean the first underwritten
public offering of Buyer Common Stock, pursuant to an effective registration
statement under the Securities Act, with net proceeds to Buyer of not less than
$10 million.
"Intellectual Property" means all (a) trademarks, service
marks, trade dress, logos, trade names, and corporate names and registrations
and applications for registration thereof, (b) copyrights and registrations and
applications for registration thereof, (c) computer software, data, and
documentation, (d) trade secrets and confidential business information
(including formulas, compositions, inventions (whether patentable or
unpatentable and whether or not reduced to practice), know-how, manufacturing
and production processes and techniques, research and development information,
drawings, specifications, designs, plans, proposals, technical data,
copyrightable works, financial, marketing, and business data, pricing and cost
information, business and marketing plans, and customer and supplier lists and
information, (e) other proprietary rights, and (f) copies and tangible
embodiments thereof (in whatever form or medium).
"Interim Period" has the meaning set forth in Section 7(a)
below.
"Harmony House" has the meaning set forth in Section 6(m)
below.
"Harmony House Online" has the meaning set forth in Section
6(m) below.
"Key Employees" has the meaning set forth in Section 7(a)
below.
"Knowledge" means (a) with respect to each Seller, information
which is known by such Seller or which a prudent person in the position of the
Seller would reasonably be deemed to know and (b) with respect to Newco, Buyer
or Sigma6, knowledge after due inquiry of the officers of such Party and the
employees of such party with responsibility for the matters in question.
"Liability" means any liability, debt, obligation, amount or
sum due (whether known or unknown, whether absolute or contingent, whether
liquidated or unliquidated, and whether due or to become due) including any
liability for Taxes, but excluding the existence of potential contractual
indemnities made by Sigma6 which are in the Ordinary Course of Business (but not
any claims therefor).
"Material" has the meaning set forth in Section 4 below.
"MBCA" has the meaning set forth in Section 2(a) below.
"Merger" has the meaning set forth in Section 2(a) below.
"Merger Documents" has the meaning set forth in Section 2(b)
below.
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"Minimum Net Worth" has the meaning set forth in Section 2(j)
below.
"Most Recent Balance Sheet" means the balance sheet contained
within the Most Recent Financial Statements.
"Most Recent Financial Statements" means the Financial
Statements for and as of the Most Recent Fiscal Year End.
"Most Recent Fiscal Year End" has the meaning set forth in
Section 4(e) below.
"Multiemployer Plan" has the meaning set forth in ERISA Sec.
3(37).
"Net Worth of Sigma6" means the total assets of Sigma6 less
the total liabilities of Sigma6 (other than Funded Indebtedness) including any
costs of conversion from a cash basis to an accrual method of accounting,
determined in accordance with GAAP and on the accrual method of accounting. In
calculating the total assets of Sigma6, no Material increase in the intangible
assets of Sigma6 since December 31, 1997 shall be included in calculating the
Net Worth of Sigma6 without the written consent of Buyer; provided, however,
that for purposes of calculating Net Worth of Sigma6 under this Agreement, total
assets shall include $130,443 of capitalized software costs which were written
off in December, 1998 and provided, further, that for the purposes of
calculating the Net Worth of Sigma6, any liabilities satisfied by indemnity
payments actually made by Sellers to Buyer shall not be included as liabilities
of Sigma6.
"Net Service Revenues" means the Gross Revenues of Sigma6 for
any period less (i) all bad debt expense for such period; and (ii) any revenues
from the sale of any assets of Sigma6 during such period outside the Ordinary
Course of Business.
"Newco" has the meaning set forth in the preface above.
"Ordinary Course of Business" means the ordinary course of
business consistent with custom and practice prior to the Closing Date
(including with respect to quantity and frequency).
"Option Cancellation Agreement" has the meaning set forth in
Section 7(a) herein.
"Party" has the meaning set forth in the preface above.
"PBGC" means the Pension Benefit Guaranty Corporation.
"Prohibited Transaction" has the meaning set forth in ERISA
Sec. 406 and Code Sec. 4975.
"Purchase Price" has the meaning set forth in Section 2(h)
below.
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"Registration Agreement" means that certain Registration
Agreement dated June 29, 1998 by and among Buyer and the stockholders of Buyer.
"Reportable Event" has the meaning set forth in ERISA Sec.
4043.
"Securities Act" means the Securities Act of 1933, as amended.
"Security Interest" means any mortgage, pledge, security
interest, encumbrance, charge, or other lien, other than (a) mechanic's,
materialmen's and similar liens, (b) liens for Taxes not yet due and payable (or
for Taxes that the taxpayer is contesting in good faith through appropriate
proceedings), (c) liens arising under workers' compensation, unemployment
insurance, social security, retirement, and similar legislation, (d) liens
arising in connection with sales of foreign receivables, (e) liens on goods in
transit incurred pursuant to documentary letters of credit, (f) purchase money
liens and liens securing rental payments under lease arrangements, (g) other
liens arising in the Ordinary Course of Business and not incurred in connection
with the borrowing of money and (h) rights of vendors, suppliers and customers
in the Ordinary Course of Business, provided such rights are not in connection
with the borrowing of money.
"Sellers" has the meaning set forth in the preface above.
"Sellers' Representative" has the meaning set forth in the
Section 2(n) below.
"Sigma6" has the meaning set forth in the preface above.
"Sigma6's Business" means the business of providing internet
or intranet integration and design support or project services to, writing
custom software for, and implementing related consulting services for, business
customers.
"Sigma6 Common Shares" means all outstanding shares of the
common stock, no par value per share, of Sigma6.
"Sigma6 IP" has the meaning set forth in Section 4(k) below.
"Sigma6 Optionholders" means the holders, if any, of options
for the purchase of Sigma6 Common Shares listed on the Allocation Schedule
hereto.
"Sigma6 Options" means all the agreements, if any, between
Sigma6 and those persons listed on the Allocation Schedule hereto related to the
issuance of Sigma6 Common Shares.
"Sigma6 Preferred Shares" means all outstanding shares of the
preferred stock, no par value per share, of Sigma6.
"Sigma6 Shares" means collectively, the Sigma6 Shares and
Sigma6 Preferred Shares.
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"Stock Portion of the Earnout" has the meaning set forth in
Section 2(i) below.
"Stock Portion of the Purchase Price" has the meaning set
forth in Section 2(h) below.
"Stockholders Agreement" means that certain Stockholders
Agreement dated June 29, 1998 by and among Buyer and the stockholders of Buyer.
"Stub Period Financial Statements" means the Financial
Statements for and as of the Stub Period End.
"Stub Period Balance Sheet" means the balance sheet included
in the Stub Period Financial Statements.
"Stub Period End" has the meaning set forth in Section 4(e)
below.
"Surviving Corporation" has the meaning set forth in Section
2(a) below.
"Subsidiary" means any corporation with respect to which
another specified corporation has the power to vote or direct the voting of
sufficient securities to elect a majority of the directors.
"Tax" means any federal, state, local, or foreign income,
gross receipts, license, payroll, employment, excise, severance, stamp,
occupation, premium, windfall profits, environmental, customs duties, capital
stock, franchise, profits, withholding, social security (or similar),
unemployment, disability, real property, personal property, sales, use,
transfer, registration, value added, alternative or add-on minimum, estimated
tax, or other tax of any kind whatsoever, including any interest, penalty or
addition thereto.
"Tax Return" means any federal, foreign, state and local
governmental tax return, declaration, report, claim for refund, or information
return or statement relating to Taxes, including any schedule or attachment
thereto, and including any amendment thereof.
"Updated Disclosure Schedule" has the meaning set forth in
Section 3(a) below.
2. The Merger.
(a) The Merger. At the Effective Time (as defined below),
Sigma6 shall be merged with and into Newco (the "Merger") and the separate
existence of Sigma6 shall thereupon cease, and the name of Newco, as the
surviving corporation in the Merger (the "Surviving Corporation"), shall by
virtue of the Merger be changed to "Sigma6, Inc."; provided, that such name is
available in Michigan, and the Surviving Corporation shall operate as "Sigma6,
Inc." in the State of Michigan. The Merger shall have the effects set forth in
the Michigan Business Corporation Act (the "MBCA").
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(b) Effective Time of the Merger. As soon as practicable after
the satisfaction or waiver of the conditions hereinafter set forth, the parties
hereto will file with the Secretary of State of the State of Michigan a
certificate or articles of merger or ownership and other documents (the "Merger
Documents"), in such respective forms as required by, and executed in accordance
with, the relevant provisions of the MBCA in order to effect the Merger. The
Merger shall become effective at such time as the Merger Documents shall have
been accepted for filing with the Secretary of State of the State of Michigan or
such other times and dates as the parties shall agree should be specified in the
Merger Documents (the "Effective Time").
(c) Articles of Incorporation. The Articles of Incorporation
of Newco in effect at the time of the Merger shall be the Articles of
Incorporation of the Surviving Corporation, until thereafter amended as provided
thereunder and in the MBCA.
(d) Bylaws. The Bylaws of Newco in effect at the time of the
Merger shall be the Bylaws of the Surviving Corporation until altered, amended
or repealed, as provided thereunder and in the Articles of Incorporation and the
MBCA.
(e) Directors and Officers of Surviving Corporation.
(i) The directors of Newco at the Effective Time which
shall be Ken Bajaj, Philip Canfield, Bruce Rauner and John Cross
shall be the directors of the Surviving Corporation and shall hold
office from the Effective Time until their respective successors are
duly elected or appointed and qualify in the manner provided in the
Articles of Incorporation and Bylaws of the Surviving Corporation,
or as otherwise provided by law.
(ii) The officers of Newco at the Effective Time shall
be the officers of the Surviving Corporation and shall hold office
from the Effective Time until their respective successors are duly
elected or appointed and qualify in the manner provided in the
Articles of Incorporation and Bylaws of the Surviving Corporation,
or as otherwise provided by law.
(f) Effect of the Merger. The Merger shall have the effects
set forth in the MBCA. Without limiting the generality of the foregoing, and
subject thereto, at the Effective Time, all the properties, rights, privileges,
powers and franchise of the Constituent Corporations shall vest in the Surviving
Corporation, and all debts, liabilities and duties of the Constituent
Corporations shall become the debts, liabilities and duties of the Surviving
Corporation. The purpose of the Surviving Corporation shall be the purposes of
Sigma6 immediately prior to the Merger. The total number of shares which the
Surviving Corporation is authorized to issue shall be 1,000 shares of Common
Stock, no par value per share.
(g) Conversion of Shares. At the Effective Time, by virtue of
the Merger and without any action on the part of the Sellers:
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(i) Each Sigma6 Share issued and outstanding immediately
prior to the Effective Time (other than Sigma6 Shares as to which
the holders thereof shall have properly exercised appraisal rights
under the MBCA, if any) shall be converted into the right to receive
in cash and Buyer's Shares its portion of the Purchase Price (as
hereinafter defined) for Sigma6 Common Shares and Sigma6 Preferred
Shares (as applicable).
(ii) Each Sigma6 Share held in the treasury of Sigma6
immediately prior to the Effective Time shall be canceled and
retired and cease to exist.
(iii) No interest, dividends or other distributions
shall be payable upon the surrender of certificates that represented
Sigma6 Shares at the Effective Time.
(h) Purchase Price. The purchase price for Sigma6 Shares shall
be composed of (i) the Cash Portion of the Purchase Price; (ii) the Stock
Portion of the Purchase Price, and (iii) the Earned Payout Amount. The Buyer
agrees to pay to the Sellers in the aggregate the sum of (i) $1,250,000 (to be
reduced dollar for dollar by (A) the payments made by Sigma6 to cancel the stock
options; (B) the amount of any outstanding Funded Indebtedness; and (C) the Net
Worth adjustment, if any, made pursuant to Section 2(j) below) in cash (the
"Cash Portion of the Purchase Price"); (ii) $1,250,000 in Buyer's Shares,
consisting of an aggregate of 277,778 shares of Buyer Common Stock as set forth
in the Allocation Schedule attached hereto (the "Stock Portion of the Purchase
Price"); and (iii) the Earned Payout Amount as determined pursuant to Section
2(i) below, in exchange for the Sigma6 Shares to be purchased by Buyer pursuant
to the terms hereof. $250,000 of the Cash Portion of the Purchase Price will be
paid in cash by wire transfer of funds to the Escrow Agent to be held in escrow
pursuant to Section 2(o) for satisfaction of Sellers' indemnification
obligations specified in Article VIII. The balance of the Cash Portion of the
Purchase Price shall be paid by Buyer to Sellers at the Closing by delivery of
cash by wire transfer of funds in the amounts set forth on the Allocation
Schedule. The Stock Portion of the Purchase Price shall be issued by Buyer to
Sellers at the Closing by the delivery of Buyer's Shares in the amounts set
forth on the Allocation Schedule next to such Seller's name. Each acquirer of
Buyer's Shares shall enter into an equity subscription agreement in the form
attached hereto as Exhibit D. The sum of the Cash Portion of the Purchase Price,
the Stock Portion of the Purchase Price, and the Earned Payout Amount shall be
referred to as the "Purchase Price." Each of (i) the Cash Portion of the
Purchase Price and (ii) the Stock Portion of the Purchase Price shall be
allocated among Sellers in dollar amounts set forth on the Allocation Schedule;
provided, however, that the number of Buyer Shares allocable to each Seller
shall be rounded down to the nearest whole number.
(i) Earned Payout Amount.
(i) In addition to the Cash Portion of the Purchase
Price and the Stock Portion of the Purchase Price, the Buyer agrees
to pay to the Sellers, if earned, an earned payout amount (the
"Earned Payout Amount") equal to the amount
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calculated in accordance with Annex I attached hereto and the tables
attached thereto; provided, however, that in no event will the
Earned Payout Amount exceed $2,800,000. An example of the
calculation is also attached to Annex I.
(ii) The Earned Payout Amount shall be payable in a
combination of (A) cash (the "Cash Portion of the Earnout") and (B)
Buyer's Shares (the "Stock Portion of the Earnout"). The Cash
Portion of the Earnout shall be equal to 50% of the Earned Payout
Amount and the Stock Portion of the Earnout shall be 50% of the
Earned Payout Amount. The aggregate number of Buyer's Shares, if
any, (the "Earnout Shares") to be issued as the Stock Portion of the
Earnout shall be equal to (A) the aggregate value in dollars of the
Stock Portion of the Earnout divided by (B) the Fair Market Value of
the Buyer's Stock as of April 15, 2000. For purposes of this
Agreement, the "Fair Market Value" per share of the Buyer's Shares
as of April 15, 2000 shall be equal to the following: (x) if, but
only if, the Initial Public Offering is not completed on or before
April 14, 2000, the price per share as of the most recent sale or
other exchange (pursuant to a merger or other acquisition) of Buyer
Common Stock or (y) if, but only if, the Initial Public Offering is
completed on or before April 14, 2000, the closing bid price per
share of Buyer Common Stock as listed on the NASDAQ National Market
System or other applicable stock exchange on April 14, 2000.
(iii) The Cash Portion of the Earned Payout Amount, if
any, shall be payable in cash by Buyer to Sellers by wire transfer
or other delivery of immediately available funds to an account or
accounts designated by Sellers on or prior to April 15, 2000. The
Earnout Shares, if any, shall be payable on April 15, 2000 by the
delivery of the certificates representing such shares to Sellers;
provided, that each Seller receiving Sellers' Earnout Shares must
enter into an equity purchase agreement in the form attached hereto
as Exhibit D.
(iv) The Earned Payout Amount shall be determined by AA
in accordance with the terms of this Agreement and Annex I hereto.
(v) The payment of the Earned Payout Amount to (A) a
Seller who is a Key Employee shall be contingent on such Key
Employee's not resigning from employment with the Surviving
Corporation without Good Reason (as defined in the applicable Senior
Management Agreement) or such Key Employee not being terminated by
the Surviving Corporation or Buyer for Cause (as defined in the
applicable Senior Management Agreement) prior to April 15, 2000;
provided that the Buyer has not breached such Key Employee's Senior
Management Agreement; provided, that Buyer has a thirty-day period
to reasonably cure any such breach. Notwithstanding the foregoing,
the payment when due of the Cash Portion of the Earned Payout Amount
is expressly subordinated in liquidation to all obligations from
time to time outstanding under the Buyer's senior revolving credit
facilities with BankBoston, N.A., as amended from time to time, or
any senior credit facilities in replacement thereof.
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(vi) In the event that a Seller is employed by the Buyer
or any of its Affiliates on April 15, 2000, then each such Seller
shall also be entitled to receive a stock option grant exercisable
for the purchase of up to 15,000 shares of Buyer Common Stock (as
adjusted for any stock splits, stock dividends, combinations,
recapitalizations or other similar events). Each of such stock
option grants shall be issued as of April 15, 2000 and will
exercisable over a four-year vesting period from the date of grant
at an exercise price equal to the Fair Market Value of the Buyer
Common Stock as of April 15, 2000. All other terms and conditions of
such stock option agreements shall be subject to the customary terms
and conditions of Buyer's stock option plan then utilized for its
key employees and executives.
(j) Net Worth Adjustment. The Cash Portion of the Purchase
Price shall be adjusted downward on a dollar-for-dollar basis by the amount by
which the Net Worth of Sigma6 is less than $200,000 (the "Minimum Net Worth") as
of the Closing Date. The Net Worth of Sigma6 as of the Closing Date shall
initially be determined prior to the Closing Date by Sigma6 in good faith within
two business days prior to the Closing Date (the "Closing Determination").
Following the Closing Date, the Net Worth of Sigma6 as of the Closing Date shall
be determined by AA in accordance with the terms of this Agreement (at the
expense of the Buyer), which determination (the "AA Determination") shall be
submitted in writing to the Buyer and the Sellers not later than sixty (60) days
after the Closing. Unless the Sellers' Representative on behalf of all Sellers
objects in writing to the AA Determination within ten business days of the
receipt of such determination, the AA Determination shall be final, conclusive
and binding on the Parties. If no objection is made, Sellers shall pay to Buyer
by wire transfer (or by the return to the Buyer, at Sellers' Representative's
option, the equivalent number of shares of Buyer Common Stock (valued at $4.50
per share) equal to) the amount, if any, by which the amount of the AA
Determination is less than the Minimum Net Worth (less any deduction against the
Cash Portion of the Purchase Price as a result of the Closing Determination)
within ten (10) days after the AA Determination.
(k) [Reserved]
(l) The Closing. The closing of the transactions contemplated
by this Agreement (the "Closing") shall take place at the offices of Hogan &
Hartson, LLP in Washington, D.C. commencing at 9:00 a.m. local time on the first
business day following the satisfaction or waiver of all conditions to the
obligations of the Parties to consummate the transactions contemplated hereby,
or such other date as the Buyer and the Sellers may mutually determine (the
"Closing Date"); provided, however, that the Closing Date shall be no later than
March 5, 1999.
(m) Deliveries at the Closing. At the Closing, (i) the Sellers
will deliver to the Buyer the various certificates, instruments, and documents
referred to in Section 7(a) below, (ii) the Buyer will deliver to the Sellers
(as applicable) the various certificates, instruments, and documents referred to
in Section 7(b) below, (iii) each of the Sellers will deliver to the Buyer stock
certificates representing all of its Sigma6 Shares, endorsed in blank or
accompanied by duly
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executed assignment documents, and (iv) the Sigma6 Optionholders shall each
deliver to the Buyer the Option Cancellation Agreements required by Section 7(a)
below, if applicable.
(n) Sellers' Representative.
(i) In order to administer efficiently (A) the
implementation of the Agreement by the Sellers, (B) the waiver of
any condition to the obligations of the Sellers to consummate the
transactions contemplated hereby, and (C) the settlement of any
dispute with respect to the Agreement, the Sellers hereby designate
Russell Zack as their representative (the "Sellers'
Representative").
(ii) The Sellers hereby authorize the Sellers'
Representative (A) to take all action necessary in connection with
the implementation of the Agreement on behalf of the Sellers, the
waiver of any condition to the obligations of the Sellers to
consummate the transactions contemplated hereby, or the settlement
of any dispute, (B) to give and receive all notices required to be
given under the Agreement and (C) to take any and all additional
action as is contemplated to be taken by or on behalf of the Sellers
by the terms of this Agreement.
(iii) In the event that the Sellers' Representative
dies, becomes legally incapacitated or resigns from such position,
William Tiggertt III shall fill such vacancy and shall be deemed to
be the Sellers' Representative for all purposes of this Agreement;
however, no change in the Sellers' Representative shall be effective
until Buyer is given notice of it by the Sellers.
(iv) All decisions and actions by the Sellers'
Representative shall be binding upon all of the Sellers, and no
Seller shall have the right to object, dissent, protest or otherwise
contest the same, in the absence of fraud, gross negligence or
willful misconduct of the Sellers' Representative.
(v) By their execution of this Agreement, the Sellers
agree that: (A) Buyer shall be able to rely conclusively on the
instructions and decisions of the Sellers' Representative as to any
actions required or permitted to be taken by the Sellers or the
Sellers' Representative hereunder, and no party hereunder shall have
any cause of action against Buyer for action taken by Buyer in
reliance upon the instructions or decisions of the Sellers'
Representative; (B) all actions, decisions and instructions of the
Sellers' Representative shall be conclusive and binding upon all of
the Sellers; no Seller shall have any cause of action against Buyer
or Sigma6 for any action taken or omitted to be taken, decision made
or omitted to be made or any instruction given or omitted to be
given by the Sellers' Representative; and no Seller shall have any
cause of action against the Sellers' Representative for any action
taken, decision made or instruction given by the Sellers'
Representative under this Agreement, except for fraud, gross
negligence or willful breach of this Agreement by the Sellers'
Representative; (C) the Sellers' Representative shall be deemed to
fulfill any fiduciary obligation to the Sellers so long as no Seller
is adversely affected by any action or failure to act of the
Sellers' Representative in a
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disproportionate measure compared to any other Seller; (D) remedies
available at law for any breach of the provisions of this Section
2(n) are inadequate; therefore, Buyer shall be entitled to temporary
and permanent injunctive relief without the necessity of proving
damages if Buyer brings an action to enforce the provisions of this
Section 2(n); (E) the provisions of this Section 2(n) are
independent and severable, shall constitute an irrevocable power of
attorney, coupled with an interest and surviving death, granted by
the Sellers to the Sellers' Representative and shall be binding upon
the executors, heirs, legal representatives and successors of each
Seller; and (F) all reasonable fees and expenses incurred by the
Sellers' Representative shall be paid by the Sellers pro rata in
proportion to their percentage interest in Sigma6 at Closing.
(o) Escrow Arrangements. Pursuant to the terms and conditions
of the Escrow Agreement to be entered into among the Sellers, Buyer and the
Escrow Agent, $250,000 of the Cash Portion of the Purchase Price shall be
delivered to the Escrow Agent at Closing in immediately available funds. Such
monies (which is hereinafter referred to as the "Escrow Sum") shall be held
pursuant to the terms of the Escrow Agreement to satisfy the amounts owing by
the Sellers to Buyer pursuant to the indemnification provisions of Article VIII
below. At the conclusion of the period ending on the eighteen month anniversary
of the Closing Date (such period being referred to herein as the "Escrow
Period"), any remaining portion of the Escrow Sum not theretofore paid to Buyer
in accordance with the terms of the Escrow Agreement or subject to a pending
claim under the Escrow Agreement and this Agreement shall be disbursed to the
Sellers. The Sellers and Buyer agree that each will execute and deliver such
reasonable instruments and documents as are furnished by any other party to
enable such furnishing party to receive those portions of the Escrow Sum to
which the furnishing party is entitled under the provisions of the Escrow
Agreement and this Agreement.
3. Representations and Warranties Concerning the Transaction.
(a) Representations and Warranties of each Seller. Each Seller
individually represents and warrants to the Buyer as follows as of the date of
this Agreement and as of the Closing Date (as though made then and as though the
Closing Date were substituted for the date of this Agreement throughout this
Section 3(a)), except as set forth in Annex II attached hereto: provided,
however, that Annex II may be updated as of the Closing Date ("Updated
Disclosure Schedule") and if accepted by Buyer, the additional matters set forth
therein shall be exceptions hereto except as otherwise set forth in Article VIII
herein and Sellers shall not be liable for matters disclosed on Annex II or the
Updated Disclosure Schedule except as otherwise set forth in Article VIII
herein. Any reference to Annex II or the Disclosure Schedule shall mean as
modified by the Updated Disclosure Schedule.
(i) Authorization of Transaction. The Seller has full
power and authority to execute and deliver this Agreement and the
other agreements and documents executed in connection herewith and
to perform its obligations hereunder and thereunder and this
Agreement and such other agreements and documents have been duly
executed and delivered by the Seller. This Agreement
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and such other agreements and documents constitute the valid and
legally binding obligation of the Seller, enforceable in accordance
with their terms and conditions, except that (A) such enforceability
may be subject to bankruptcy, insolvency, reorganization, fraudulent
conveyance, moratorium or other laws, decisions or equitable
principles now or hereafter in effect relating to or affecting the
enforcement of creditors' rights or debtors' obligations generally
or non-competition arrangements, and to general equity principles,
and (B) the remedy of specific performance and injunctive and other
forms of equitable relief may be subject to equitable defenses and
to the discretion of the court before which any proceeding therefor
may be brought (the terms of clause (A) and (B) are sometimes
collectively referred to as the "Equitable Exceptions"). The Seller
need not give any notice to, make any filing with, or obtain any
authorization, consent, or approval of any government or
governmental agency in order to consummate the transactions
contemplated by this Agreement (other than as provided for in
Article 2 of this Agreement).
(ii) Noncontravention. Neither the execution and the
delivery of this Agreement by the Seller, nor the consummation of
the transactions contemplated hereby by the Seller, will (A) violate
any statute, regulation, rule, judgment, order, decree, stipulation,
injunction, charge, or other restriction of any government,
governmental agency, or court to which the Seller is subject or (B)
except as set forth in Section 3(a) of the Disclosure Schedule,
conflict with, result in a breach of, constitute a default under,
result in the acceleration of, create in any part the right to
accelerate, terminate, modify, or cancel, or require any notice
under any contract, lease, sublease, license, sublicense, franchise,
permit, indenture, agreement or mortgage for borrowed money,
instrument of indebtedness, Security Interest, or other arrangement
to which the Seller is a party or by which it is bound or to which
any of its assets is subject.
(iii) Broker's Fees. Seller has no Liability or
obligation to pay any fees or commissions to any broker, finder, or
agent with respect to the transactions contemplated by this
Agreement for which the Buyer could become liable or obligated.
(iv) Investment. The Seller is not acquiring Buyer's
Shares with a view to or for sale in connection with any
distribution thereof within the meaning of the Securities Act.
(v) Sigma6 Shares. The Seller holds of record and owns
beneficially the number of Sigma6 Common Shares and/or Sigma6
Preferred Shares set forth next to its name in Section 4(b) of the
Disclosure Schedule, and except as set forth in Section 4(b) of the
Disclosure Schedule, such Sigma6 Shares are free and clear of any
restrictions on transfer all of which have been terminated as of or
prior to the Closing Date (other than any restrictions under the
Securities Act and state securities laws), claims, Taxes, Security
Interests, options, warrants, rights,
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contracts, calls, commitments, equities, and demands. Except as set
forth in Section 4(b) of the Disclosure Schedule, the Seller is not
a party to (or has otherwise waived all rights under) any option,
warrant, right, contract, call, put, or other agreement or
commitment providing for the disposition or acquisition of any
capital stock of Sigma6 (other than this Agreement). The Seller is
not a party to (or has otherwise terminated) any voting trust,
proxy, or other agreement or understanding with respect to the
voting of any capital stock of Sigma6.
(vi) Disclosure. The representations and warranties
contained in this Section 3(a) as amended, modified and/or
supplemented by Annex II do not contain any untrue statement of a
fact or omit to state any Material (as defined) fact necessary in
order to make the statements and information contained in this
Section 3(a) not misleading that result in Adverse Consequences.
(b) Representations and Warranties of the Buyer and Newco. The
Buyer and Newco represent and warrant to the Sellers that the statements
contained in this Section 3(b) are correct and complete as of the date of this
Agreement and will be correct and complete as of the Closing Date (as though
made then and as though the Closing Date were substituted for the date of this
Agreement throughout this Section 3(b)), except as set forth in Annex III
attached hereto.
(i) Organization of the Buyer and Newco. Each of the
Buyer and Newco is a corporation duly organized, validly existing,
and in good standing under the laws of the jurisdiction of its
incorporation. The Buyer has delivered to Sellers correct and
complete copies of the charter and bylaws of Buyer and Newco (as
amended to date). Neither Buyer nor Newco is in default under or in
violation of its charter or bylaws.
(ii) Authorization of Transaction. Each of the Buyer and
Newco has full power and authority (including full corporate power
and authority) to execute and deliver this Agreement and the other
agreements and documents executed in connection herewith and to
perform its obligations hereunder and thereunder and this Agreement
and such other documents have been duly executed and delivered by
the Buyer and Newco. This Agreement and such other agreements and
documents constitute the valid and legally binding obligation of the
Buyer and Newco, enforceable in accordance with their terms and
conditions except for the Equitable Exceptions. Neither the Buyer
nor Newco needs to give any notice to, make any filing with, or
obtain any authorization, consent, or approval of any government or
governmental agency in order to consummate the transactions
contemplated by this Agreement (other than as provided for in
Article 2 of this Agreement).
(iii) Noncontravention. Neither the execution and the
delivery of this Agreement by the Buyer or Newco, nor the
consummation of the transactions contemplated hereby by the Buyer or
Newco, will (A) violate any statute,
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regulation, rule, judgment, order, decree, stipulation, injunction,
charge, or other restriction of any government, governmental agency,
or court to which the Buyer is subject or any provision of its
charter or bylaws or (B) conflict with, result in a breach of,
constitute a default under, result in the acceleration of, create in
any party the right to accelerate, terminate, modify, or cancel, or
require any notice under any contract, lease, sublease, license,
sublicense, franchise, permit, indenture, agreement or mortgage for
borrowed money, instrument of indebtedness, Security Interest, or
other arrangement to which the Buyer or Newco is a party or by which
it is bound or to which any of its assets is subject and which has a
Material adverse effect on Buyer.
(iv) Brokers' Fees. Neither Newco nor the Buyer has any
Liability or obligation to pay any fees or commissions to any
broker, finder, or agent with respect to the transactions
contemplated by this Agreement for which the Sellers could become
liable or obligated.
(v) Investment. Neither Newco nor the Buyer is acquiring
Sigma6 Shares with a view to or for sale in connection with any
distribution thereof within the meaning of the Securities Act.
4. Representations and Warranties Concerning Sigma6. Sigma6 and the
Sellers jointly and severally represent and warrant to the Buyer that,
subject to the specific qualifications and limitations set forth herein,
the statements contained in this Section 4 are correct and complete as of
the date of this Agreement and will be correct and complete as of the
Closing Date (as though made then and as though the Closing Date were
substituted for the date of this Agreement throughout this Section 4),
except as set forth in the Disclosure Schedule delivered by the Sellers to
the Buyer on the date hereof and initialed by the Parties (the "Disclosure
Schedule"). The Disclosure Schedule may be updated one or more times prior
to the Closing Date. Any updated Disclosure Schedule shall be delivered at
or before the Closing. In the event any such updated Disclosure Schedule
indicates any Material adverse change from information previously provided
to the Buyer, Buyer shall be entitled to terminate this Agreement (without
any liability whatsoever to Sigma6) by written notice delivered to Sigma6
following receipt of such updated Disclosure Schedule. An event or matter
that causes any representation or warranty contained in this Section to be
inaccurate, incorrect or false will not be deemed to be "Material," to
have a "Material" change in or in respect of, to have a "Material" adverse
effect or to be "Materially" affected unless the loss that may reasonably
be expected to occur to Sigma6 with respect to such event or matter, when
taken together with all other related losses that may reasonably be
expected to occur to Sigma6 as a result of any such events or matters,
would exceed $20,000 in the aggregate or unless such event or matter
constitutes a criminal violation of law. For purposes of this paragraph,
the word "loss" shall mean any and all direct or indirect payments,
obligations, assessments, losses, losses of income, liabilities, costs and
expenses paid or incurred; provided, however, that losses shall be net of
any insurance proceeds entitled to be received from a nonaffiliated
insurance company on account of such loss (after taking into account any
cost incurred in obtaining such proceeds or any increases in insurance
premiums as a direct result thereof). A Customer Contract or Agreement is
"Material" if during either calendar year 1998
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such Customer Contract or Agreement produced or is expected to produce $50,000
of Gross Revenues. Nothing in the Disclosure Schedule shall be deemed adequate
to disclose an exception to a representation or warranty made herein, however,
unless the Disclosure Schedule identifies the exception with reasonable
particularity and describes the relevant facts in reasonable detail as the
context requires. The Disclosure Schedule will be arranged in paragraphs
corresponding to the lettered and numbered paragraphs contained in this Section
4.
(a) Organization, Qualification, and Corporate Power. Sigma6
is a corporation duly organized, validly existing, and in good standing under
the laws of the jurisdiction of its incorporation. Except as disclosed in
Section 4(a) of the Disclosure Schedule, Sigma6 is duly authorized to conduct
business and is in good standing under the laws of the State of Michigan, which
is the only jurisdiction in which the nature of its businesses or the ownership
or leasing of its properties requires such qualification. Sigma6 has full
corporate power and authority to carry on the businesses in which it is engaged
and to own and use the properties owned and used by it; provided, however, that
for all properties used but not owned by Sigma6, such power and authority are
only to the extent that Sigma6 has the rights to use such properties (which
rights are sufficient to operate its Sigma6's Business). Section 4(a) of the
Disclosure Schedule lists the directors and officers of Sigma6. Sigma6 has
delivered to the Buyer correct and complete copies of the charter and bylaws of
Sigma6 (as amended to date). The minute books containing the records of meetings
and/or resolutions of the stockholders, the board of directors, and any
committees of the board of directors, the stock certificate books and the stock
record books of Sigma6 are correct and complete in all Material respects. Sigma6
is not in default under or in violation of any provision of its charter or
bylaws.
(b) Capitalization. The entire authorized capital stock of
Sigma6 consists of 50,000 shares of common stock, no par value, of which 20,000
are issued and outstanding, none are subject to issuance pursuant to vested
options, none are subject to issuance pursuant to unvested options and none are
reserved for issuance pursuant to future option grants. All of the issued and
outstanding Sigma6 Shares have been duly authorized, are validly issued, fully
paid, and nonassessable, and are held of record by the Sellers except as set
forth in Section 4(b)-1 of the Disclosure Schedule. Except as set forth in
Section 4(b)-2 of the Disclosure Schedule, there are no outstanding or
authorized options, warrants, rights, contracts, calls, puts, rights to
subscribe, conversion rights, or other agreements or commitments to which Sigma6
is a party or which are binding upon Sigma6 providing for the issuance,
disposition, or acquisition of any of its capital stock. Except as set forth in
Section 4(b)-3 of the Disclosure Schedule, there are no outstanding or
authorized stock appreciation, phantom stock, or similar rights with respect to
Sigma6. There are no voting trusts, proxies, or any other agreements or
understandings with respect to the voting of the capital stock of Sigma6.
(c) Noncontravention. Except as disclosed in Section 4(c) of
the Disclosure Schedule and solely as applicable to Sigma6, neither the
execution and the delivery of this Agreement, nor the consummation of the
transactions contemplated hereby, will (i) violate any statute, regulation,
rule, judgment, order, decree, stipulation, injunction, charge, or other
restriction of any government, governmental agency, or court to which Sigma6 is
subject or any provision of the charter or bylaws of Sigma6, except to the
extent any such violation does not or could not result
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in a Material adverse effect on Sigma6, or (ii) conflict with, result in a
breach of, constitute a default under, result in the acceleration of, create in
any party the right to accelerate, terminate, modify, or cancel, or require any
notice under any contract, lease, sublease, license, sublicense, franchise,
permit, indenture, agreement or mortgage for borrowed money, instrument of
indebtedness, Security Interest on the property owned or leased by Sigma6, or
other arrangement to which Sigma6 is a party or by which it is bound or to which
any of its assets is subject (or result in the imposition of any Security
Interest upon any of its assets). Except as set forth on Section 4(c) of the
Disclosure Schedule, Sigma6 does not need to give any notice to, make any filing
with, or obtain any authorization, consent, or approval of any government or
governmental agency in order for the Parties to consummate the transactions
contemplated by this Agreement.
(d) Subsidiaries. Sigma6 has no Subsidiaries.
(e) Financial Statements. Attached hereto as Exhibit B are the
following Sigma6 financial statements (collectively the "Financial Statements"):
audited balance sheet and statement of income, changes in stockholder's equity,
and cash flow as of and for the fiscal years ended December 31, 1996 and 1997
(the most recent of such dates to be referred to as the "Most Recent Fiscal Year
End") and an unaudited consolidated balance sheet and statement of income,
changes in stockholder's equity, and cash flow as of and for the fiscal year
ended December 31, 1999 and for the one (1) month period ended January 31, 1999
(the "Stub Period End") for Sigma6. The Financial Statements have been prepared
in accordance with GAAP applied on a consistent basis throughout the periods
covered thereby, are correct and complete, fairly present the financial
condition of Sigma6 as of such dates, and are consistent with the books and
records of Sigma6 (which books and records are correct and complete), subject,
in the case of the Stub Period Financial Statements, to normal adjustments upon
audit.
(f) Events Subsequent to September 30, 1998. Since September
30, 1998, except as set forth on the Disclosure Schedule, there has not been any
Material adverse change in the assets, Liabilities, business, financial
condition, operations, or results of operations, or future prospects of Sigma6,
excluding general economic and general industry conditions. Without limiting the
generality of the foregoing since September 30, 1998, except as set forth on the
Disclosure Schedule:
(i) Sigma6 has not sold, leased, transferred, or
assigned any of its assets, tangible or intangible, other than for a
fair consideration in the Ordinary Course of Business;
(ii) Sigma6 has not entered into any contract, lease,
sublease, license or sublicense (or series or related contracts,
leases, subleases, licenses and sublicenses) outside the Ordinary
Course of Business;
(iii) Sigma6 has not accelerated, terminated (except as
otherwise specifically provided for therein), modified, or canceled
any contract, lease, sublease, license or sublicense (or series of
related contracts, leases, subleases, licenses and sublicenses) to
which Sigma6 is a party or by which it is bound other than in the
Ordinary Course of Business;
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(iv) no party has notified Sigma6 of any acceleration,
termination (except as otherwise specifically provided for therein),
modification (except as otherwise specifically provided for therein)
or cancellation of any outstanding Customer Contract or any other
contract, agreement, lease, sublease, license or sublicense (or
series of related contracts, leases, subleases, licenses and
sublicenses), other than in the Ordinary Course of Business;
(v) Sigma6 has not imposed any Security Interest upon
any of its Material assets, tangible or intangible that has not been
released on or prior to the Closing Date;
(vi) Except as set forth in Section 4(f) - (vi) of the
Disclosure Schedule, Sigma6 has not made any capital expenditure (or
series of related capital expenditures) involving more than $20,000
in the aggregate, or outside the Ordinary Course of Business;
(vii) Sigma6 has not made any capital investment in, any
loan to, or any acquisition of the securities or assets of any other
person (or series of related capital investments, loans, and
acquisitions) involving more than $15,000 in the aggregate;
(viii) Sigma6 has not created, incurred, assumed, or
guaranteed any indebtedness (including capitalized lease
obligations) involving more than $15,000 individually or in the
aggregate or outside the Ordinary Course of Business;
(ix) Sigma6 has not delayed or postponed (beyond its
normal practice) the payment of any accounts payable and other
Liabilities or made any changes in any accounting methods or
procedures not required by GAAP;
(x) Sigma6 has not canceled, compromised, waived, or
released any right or claim (or series of related rights and claims)
either involving more than $10,000 or outside the Ordinary Course of
Business;
(xi) Sigma6 has not granted any license or sublicense of
any rights under or with respect to any Sigma6 IP or any other
Intellectual Property licensed by Sigma6 (as licensee) except any
such license or sublicense as was granted in the Ordinary Course of
Business or any other agreements set forth in Section 4(k) of the
Disclosure Schedule;
(xii) there has been no change made or authorized in the
charter or bylaws of Sigma6, other than in connection with this
Agreement and the transactions contemplated hereby;
(xiii) except as set forth in Section 4(f) - (xiii) of
the Disclosure Schedule, Sigma6 has not issued, sold, or otherwise
disposed of any of its capital stock, or granted any options,
warrants, or other rights to purchase or obtain
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(including upon conversion or exercise) any of its capital stock
that exist and are effective at any time after the Closing;
(xiv) except as set forth in Section 4(f) - (xiv) of the
Disclosure Schedule, Sigma6 has not declared, set aside, or paid any
dividend or distribution with respect to its capital stock nor
redeemed, purchased, or otherwise acquired any of its capital stock;
(xv) Sigma6 has not made any consulting or other payment
to the Sellers other than in the Ordinary Course of Business;
(xvi) Sigma6 has not experienced any damage, destruction
or loss involving more than $15,000 (whether or not covered by
insurance) to its property;
(xvii) Sigma6 has not made any loan to, or entered into
any other transaction with, any of its officers, directors or
employees (who are not Sellers) outside the Ordinary Course of
Business giving rise to any claim or right on its part against the
person or on the part of the person against it;
(xviii) Sigma6 has not made any loan to, or entered into
any other transaction with, any of the Sellers other than in the
Ordinary Course of Business giving rise to any claim or right on its
part against the person or on the part of such person against it;
(xix) Sigma6 has not entered into any employment
contract or collective bargaining agreement, written or oral, or
modified in any material respect the terms of any existing such
contract or agreement with any of its full-time staff employees
other than in the Ordinary Course of Business;
(xx) Sigma6 has not granted an increase outside the
Ordinary Course of Business in the base compensation of any of its
directors, officers, and employees (other than the Sellers);
(xxi) Sigma6 has not granted an increase in the base
compensation, nor has Sigma6 made any payments or promises or
commitments to pay to any of the Sellers to make any other payments
(other than salary and reimbursement of customary expenses) to any
of the Sellers, including without limitation bonuses other than in
the Ordinary Course of Business;
(xxii) Sigma6 has not adopted any (A) bonus, (B)
profit-sharing, (C) incentive compensation, (D) pension, (E)
retirement, (F) medical, hospitalization, life, or other insurance,
(G) severance, or (H) other plan, contract or commitment for any of
its directors, officers, and employees, or modified or terminated
any existing such plan, contract or commitment other than renewals
of insurance policies in the Ordinary Course of Business;
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(xxiii) Sigma6 has not made any other change in
employment terms for any of its directors, officers, and full-time
staff employees other than in the Ordinary Course of Business;
(xxiv) Sigma6 has not made or pledged to make any
Material charitable or other capital contribution outside the
Ordinary Course of Business;
(xxv) except as set forth in Section 4(f) of the
Disclosure Schedule, there has not been any other occurrence, event,
incident, action, failure to act, or transaction outside the
Ordinary Course of Business involving Sigma6 involving more than
$5,000 individually or in the aggregate; and
(xxvi) except as set forth in Section 4(f) of the
Disclosure Schedule, Sigma6 has not entered into any agreement
committing to any of the foregoing.
(g) Undisclosed Liabilities. Except as set forth on Section
4(g) of the Disclosure Schedule hereto, Sigma6 does not have any Liability (and
there is no Basis for any present or future charge, complaint, action, suit,
proceeding, hearing, investigation, claim, or demand against Sigma6 giving rise
to any Liability, including, without limitation, Liability under the Fair Labor
Standards Act of 1938, as amended and the rules and regulations promulgated
thereunder) which is individually in excess of $15,000, except for (i)
Liabilities set forth on the face of the Stub Period End Balance Sheet, (ii)
Liabilities described on Schedule 4(g) of the Disclosure Schedule and (iii)
Liabilities which have arisen after the Stub Period End in the Ordinary Course
of Business (none of which relates to any breach of contract, breach of
warranty, tort, infringement, or violation of law or arose out of any charge,
complaint, action, suit, proceedings, hearing, investigation, claim, or demand).
(h) Tax Matters. Except as set forth on Section 4(h) of the
Disclosure Schedule,
(i) Sigma6 has filed all Tax Returns that it was
required to file. All such Tax Returns were correct and complete in
all respects. All Taxes owed by Sigma6 (whether or not shown on any
Tax Return) based on operations through the Stub Period End have
been paid or accrued on the Stub Period End Balance Sheet. Sigma6
currently is not the beneficiary of any extension of time within
which to file any Tax Return. No claim has ever been made by any
taxing authority in a jurisdiction where Sigma6 does not file Tax
Returns that it is or may be subject to taxation by that
jurisdiction. There are no Security Interests on any of the assets
of Sigma6 that arose in connection with any failure (or alleged
failure) to pay any Tax, other than for Taxes that are not yet due
which have been accrued for since the Most Recent Fiscal Year End.
(ii) Sigma6 has withheld and paid all Taxes required to
have been withheld and paid in connection with amounts paid or owing
to any employee, creditor, independent contractor, or other third
party and Sigma6 has properly reflected the status of all employees
and independent contractors in connection
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therewith as required by applicable Tax law and the Fair Labor
Standards Act of 1938, as amended, and the rules and regulations
promulgated thereunder.
(iii) Neither Sellers nor any of the officers of Sigma6
have received, nor do any of them have any Basis to expect to
receive, any notice that any taxing authority intends to assess any
additional Taxes for any period for which Tax Returns have been
filed. There is no dispute or claim concerning any Tax Liability of
Sigma6 either (A) claimed or raised by any authority in writing or
(B) as to which the Sellers or the officers of Sigma6 or employees
responsible for Tax matters of Sigma6 have Knowledge based upon
personal contact with any agent of such authority. Section 4(h) of
the Disclosure Schedule lists all federal, state, local, and foreign
income Tax Returns filed with respect to Sigma6 for taxable periods
ended on or after December 31, 1990, indicates those Tax Returns
that have been audited, and indicates those Tax Returns that
currently are the subject of audit. Sigma6 has delivered to the
Buyer correct and complete copies of all federal income Tax Returns
filed, examination reports received, and statements of deficiencies
assessed against or agreed to, by Sigma6 since December 31, 1990.
(iv) Sigma6 has not waived any statute of limitations in
respect of Taxes or agreed to any extension of time with respect to
a Tax assessment or deficiency.
(v) Sigma6 has not filed a consent under Code Sec.
341(f) concerning collapsible corporations. Sigma6 has not made any
payments, is not obligated to make any payments, nor is a party to
any agreement that under certain circumstances could obligate it to
make any payments that will not be deductible to Sigma6 under Code
Sec. 280G. Sigma6 has not been a United States real property holding
corporation within the meaning of Code Sec. 897(c)(2) during the
applicable period specified in Code Sec. 897(c)(1)(A)(ii). Sigma6
has disclosed on its federal income Tax Returns all positions taken
therein that could give rise to a substantial understatement of
federal income Tax within the meaning of Code Sec. 6662. Sigma6 is
not a party to any Tax allocation or sharing agreement. Sigma6 has
never been (nor has any Liability for unpaid Taxes because it once
was) a member of an Affiliated Group filing a consolidated federal
income Tax Return and has never incurred any Liability for the Taxes
of any Person under Treas. Reg.ss.1.1502-6 (or any similar provision
of state, local, or foreign law), as a transferee or successor, by
contract, or otherwise, during any part of any consolidated return
year within any part of which consolidated return year also was a
member of the Affiliated Group.
(vi) Section 4(h) of the Disclosure Schedule sets forth
the following information with respect to Sigma6 as of the most
recent practicable date (as well as on an estimated pro forma basis
as of the Closing giving effect to the consummation of the
transactions contemplated hereby): (A) the amount of any net
operating loss, net capital loss, unused investment or other credit,
unused foreign
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tax, or excess charitable contribution allocable to Sigma6; and (B)
the amount of any deferred gain or loss allocable to Sigma6 arising
out of any Deferred Intercompany Transaction.
(vii) The unpaid Taxes of Sigma6 through the Stub Period
End do not exceed the reserve for Tax Liability set forth on the
face of the Stub Period Balance Sheet.
(i) Tangible Assets. Sigma6 owns or leases substantially all
tangible assets necessary for the conduct of Sigma6's Business as presently
conducted and as presently proposed to be conducted. Each such tangible asset is
free from Material defects (patent or latent), has been maintained in accordance
with normal industry practice, is in good operating condition and repair
(subject to normal wear and tear), and is suitable for the purposes for which it
presently is used.
(j) Owned Real Property. Sigma6 does not own nor does it have
any interest in any real property or improvements thereon (other than the leases
disclosed in Section 4(l) of the Disclosure Schedule, and the leasehold
improvements relating to the same) nor does Sigma6 have any options, agreements
or contracts under which it has the right or obligation to acquire any interest
in any real property or improvements (other than as disclosed in Section 4(l) of
the Disclosure Schedule)
(k) Intellectual Property.
(i) Attached hereto as Section 4(k) of the Disclosure
Schedule is a list and brief description of all Intellectual
Property owned or utilized by Sigma6. Sigma6 has furnished Buyer
with copies of all license agreements to which Sigma6 is a party,
either as licenser or licensee, with respect to any Intellectual
Property. Except as set forth on Section 4(k) of the Disclosure
Schedule or as specfically excluded under this Section 4(k), Sigma6
has good title to or the right to use all the Intellectual Property
and all inventions, processes, designs, formulae, trade secrets and
know-how necessary for the conduct of Sigma6's Business, in its
business as presently conducted or currently proposed to be
conducted without the payment of any royalty or similar payment.
Furthermore, Sigma6 is not infringing on any Intellectual Property
right of others; provided, however, that the foregoing
representation related to infringement (A) shall not apply to
generally commercially available Intellectual Property which is
licensed by Sigma6 for its own use and (B) shall only apply to
infringement which individually or in the aggregate results in a
Material Adverse Effect to Sigma6. In addition, none of Sellers nor
Sigma6 has Knowledge of any infringement by others of any such
rights owned by Sigma6, except as set forth in Section 4(k) of the
Disclosure Schedule.
(ii) All licenses set forth on Section 4(k) of the
Disclosure Schedule are valid and binding obligations of Sigma6, and
to the Knowledge of the Sellers and Sigma6, of the other parties
thereto, and enforceable against
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Sigma6, and to the Knowledge of the Sellers and Sigma6, the other
parties thereto in accordance with their respective terms, except
for the Equitable Exceptions. Sigma6 owns and possesses all right,
title and interest in and to, or has the right to use pursuant to a
valid license without infringement by Sigma6, all Intellectual
Property utilized in the operation of the business of Sigma6.
(iii) All personnel, including employees, agents,
consultants, and contractors, who have contributed to or
participated in the conception and development of any Intellectual
Property owned by Sigma6 (the "Sigma6 IP") have executed the
nondisclosure agreements listed on Section 4(k) of the Disclosure
Schedule and either (1) have been party to a written agreement with
Sigma6 that on its face has accorded Sigma6 full, effective,
exclusive and original ownership of all Sigma6 IP, or (2) have
executed appropriate instruments of assignment in favor of Sigma6 as
assignee that have conveyed to Sigma6 full, effective, and exclusive
ownership of all Sigma6 IP.
(iv) Sigma6 has also delivered to the Buyer correct and
complete samples or copies of all trademarks, service marks, trade
names, copyrights, patents, registrations and, as relate to the
foregoing, applications, licenses, agreements, and permissions (as
amended to date) owned or licensed by Sigma6 (as licensee), and have
made available to the Buyer correct and complete copies of all other
written documentation evidencing ownership and prosecution (if
applicable) of each such item. With respect to each item of Sigma6
IP used in, or otherwise necessary for the conduct of, the business
of Sigma6 as heretofore conducted: (A) Sigma6 possesses all right,
title, and interest in and to such item of Intellectual Property;
(B) the item is not subject to any outstanding judgment, order,
decree, stipulation, injunction, or charge; (C) no charge,
complaint, action, suit, proceeding, hearing, investigation, claim,
or demand is pending or, to the Knowledge of the Sellers and Sigma6,
is threatened which challenges the legality, validity,
enforceability, use, or ownership of the item; and (D) Sigma6 has
not agreed to indemnify any person or entity for or
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against any interference, infringement, misappropriation, or other
conflict with respect to the item.
(v) None of the computer software, computer firmware,
computer hardware (whether general or special purpose), and other
similar or related items of automated, computerized, and/or software
system(s) that are used or relied on by Sigma6 in the conduct of
Sigma6's Business will in any Material respect malfunction, cease to
function, generate incorrect data, or produce incorrect results when
processing, providing, and/or receiving (i) date-related data into
and between the 1900's and the year 2001 and (ii) date-related data
in connection with any valid date in the 1900's and the years 2000
and 2001.
(l) Real Property Leases. Section 4(l) of the Disclosure
Schedule lists and describes briefly all real property leased or subleased to
Sigma6. Sigma6 has delivered to the Buyer correct and complete copies of the
leases and subleases listed in Section 4(l) of the Disclosure Schedule (as
amended to date). With respect to each lease and sublease listed in Section 4(l)
of the Disclosure Schedule:
(i) the lease or sublease is legal, valid, binding,
enforceable, and in full force and effect, subject to the Equitable
Exceptions;
(ii) the lease or sublease will continue to be legal,
valid, binding, enforceable, and in full force and effect on
identical terms immediately following the Closing;
(iii) Sigma6 is not and, to the Knowledge of the Sellers
and Sigma6, no other party to the lease or sublease is in breach or
default, and no event has occurred which, with notice or lapse of
time, would constitute a breach or default or permit termination,
modification, or acceleration thereunder;
(iv) Sigma6 has not, and to the Knowledge of the Sellers
and Sigma6 no other party to the lease or sublease has, repudiated
any provision thereof;
(v) there are no disputes, oral agreements, or
forbearance programs in effect as to the lease or sublease;
(vi) Sigma6 has not assigned, transferred, conveyed,
mortgaged, deeded in trust, or encumbered any interest in the
leasehold or subleasehold; and
(vii) all facilities leased or subleased thereunder have
received all approvals of governmental authorities (including
licenses and permits) required in connection with the operation
thereof and have been operated and maintained in accordance with
applicable laws, rules, and regulations.
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(m) Contracts. Section 4(m) of the Disclosure Schedule lists
the following contracts, agreements, Customer Contracts or Agreements and other
written arrangements to which Sigma6 is a party:
(i) any written agreement (or group of related written
agreements) for the lease of personal property from or to third
parties providing for lease payments in excess of $15,000 per annum;
(ii) other than as referenced in paragraph (i)
immediately preceding, any written agreement (or group of related
written agreements) for the furnishing or receipt of services which
Sigma6 reasonably projects will involve more than the sum of $30,000
per annum or $50,000 over the life of such agreement;
(iii) any written agreement concerning a partnership or
joint venture;
(iv) any written agreement (or group of related written
agreements) under which it has created, incurred, assumed, or
guaranteed (or may create, incur, assume, or guarantee) indebtedness
(including lease obligations) involving more than $15,000 or under
which it has imposed (or may impose) a Security Interest on any of
its assets, tangible or intangible;
(v) any written arrangement requiring confidentiality or
noncompetition other than agreements with customers, employees,
licensors, vendors or subcontractors in the Ordinary Course of
Business;
(vi) any written arrangement with any of its directors,
officers, or employees, or any of its Affiliates other than standard
contracts for service as employees or subcontractors in the Ordinary
Course of Business; and
(vii) any other written arrangement (or group of related
written arrangements) either involving more than $25,000 per annum
or not entered into in the Ordinary Course of Business.
Sigma6 has delivered to the Buyer a correct and complete copy of
each written arrangement listed in Section 4(m) of the Disclosure Schedule (as
amended to date). With respect to each written arrangement so listed: (A) the
written arrangement is legal, valid, binding, enforceable against Sigma6 and, to
Sigma6 and Seller's Knowledge, the other parties thereto and in full force and
effect, subject to the Equitable Exceptions; (B) except as set forth in Section
4(m) of the Disclosure Schedule, the written arrangement will continue to be
legal, valid, binding, enforceable and in full force and effect on identical
terms immediately following the Closing, subject to the Equitable Exceptions and
if Newco performs thereunder and does not breach such agreement after the
Closing Date, (C) Sigma6 is not, nor to the Knowledge of the Sellers and Sigma6
is any other party, in breach or default, and no event has occurred which with
notice or lapse of time would constitute a breach or default or except in the
Ordinary Course of Business
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permit termination, modification, or acceleration, under the written
arrangement; and (D) Sigma6 has not, nor to the Knowledge of the Sellers and
Sigma6 has any other party, repudiated any provision of the written arrangement.
Sigma6 is not a party to any oral contract, agreement, or other arrangement
which, if reduced to written form, would be required to be listed in Section
4(m) of the Disclosure Schedule under the terms of this Section 4(m). No
unfilled Customer Contract or Agreement obligating Sigma6 to perform services
will result in a Material loss to Sigma6 upon completion of performance. Except
as set forth in Section 4(m) of the Disclosure Schedule, Sigma6 has not been
notified that any of its customers intends either to dispute charges under or to
terminate early a Material Customer Contract or Agreement.
(n) Notes and Accounts Receivable. All notes and accounts
receivable of Sigma6 are reflected properly on its books and records, are valid
receivables and are subject to no setoffs or counterclaims, are presently
current and collectible, and will be collected in accordance with their terms at
their recorded amounts, subject only to the reserve for bad debts set forth on
the face of the Stub Period Balance Sheet (rather than in any notes thereto) as
adjusted for the passage of time through the Closing Date in accordance with the
past custom and practice of Sigma6.
(o) Powers of Attorney. There are no outstanding powers of
attorney executed on behalf of Sigma6.
(p) Insurance. Section 4(p) of the Disclosure Schedule sets
forth the following information with respect to each insurance policy (including
policies providing property, casualty, liability, and workers' compensation
coverage and bond and surety arrangements) to which Sigma6 has been a party, a
named insured, or otherwise the beneficiary of coverage at any time within the
past two (2) years:
(i) the name address and telephone number of the agent;
(ii) the name of the insurer, the name of the
policyholder, and the name of each covered insured;
(iii) the policy number and the period of coverage;
(iv) the scope and amount (including a description of
how deductibles and ceilings are calculated and operate) of
coverage; and
(v) a description of any retroactive premium adjustments
or other loss sharing arrangements.
With respect to each such insurance policy: (A) the policy is legal,
valid, binding, and enforceable against Sigma6 and, to Sigma6 and Seller's
Knowledge, the insurer, and in full force and effect; (B) the policy will
continue to be legal, valid, binding, and enforceable against Sigma6 and, to
Sigma6 and Seller's Knowledge, the insurer, and in full force and effect on
identical terms immediately following the Closing Date if Buyer performs
thereunder and does not fail to
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pay premiums under such policy when due; (C) Sigma6 is not in breach or default
(including with respect to the payment of premiums or the giving of notices),
and no event has occurred which, with notice or the lapse of time, would
constitute such a breach or default or permit termination, modification, or
acceleration under the policy; and (D) Sigma6 has not and to the Knowledge of
the Sellers and Sigma6, no other party to the policy has repudiated any
provision thereof. Sigma6 has been covered during the past three years by
insurance in scope and amount customary and reasonable for the businesses in
which it has engaged during the aforementioned period. Except as set forth in
Section 4(p) of the Disclosure Schedule, Sigma6 currently has no and has never
had any self-insurance arrangements.
(q) Litigation. Section 4(q) of the Disclosure Schedule sets
forth each instance in which Sigma6 (i) is subject to any unsatisfied judgment,
order, decree, stipulation, injunction, or charge or (ii) is a party or, to the
Knowledge of the Sellers and Sigma6, is threatened to be made a party to any
charge, complaint, action, suit, proceeding, hearing, or investigation of or in
any court or quasi-judicial or administrative agency of any federal, state,
local, or foreign jurisdiction or before any arbitrator. Except as specifically
described on Section 4(q) of the Disclosure Schedule, no matter listed thereon
could reasonably be expected, individually, to result in a Material adverse
effect to Sigma6. Neither the Sellers nor any of the directors or the officers
(or employees with responsibility for litigation matters) of Sigma6 has any
Basis that any such charge, complaint, action, suit, proceeding, hearing, or
investigation may be brought or threatened against Sigma6.
(r) Employees. To Seller's Knowledge without inquiry, no
non-clerical employee or any full-time group of employees has any plans to
terminate employment with Sigma6. Sigma6 is not a party to or bound by any
collective bargaining agreement, nor has it experienced any strikes, grievances,
claims of unfair labor practices, or other collective bargaining disputes.
Sigma6 has not committed any unfair labor practice. There are no organizational
efforts presently being made or, to the Knowledge of the Sellers and Sigma6,
threatened by or on behalf of any labor union with respect to employees of
Sigma6.
(s) Employee Benefits. Section 4(s) of the Disclosure Schedule
lists all Employee Benefit Plans that Sigma6 maintains or to which Sigma6
contributes for the benefit of any current or former employee of Sigma6.
(i) Each Employee Benefit Plan (and each related trust
or insurance contract) complies in form and in operation in all
respects with the applicable requirements of ERISA and the Code.
(ii) All required reports and descriptions, if any,
(including Form 5500 Annual Reports, Summary Annual Reports,
PBGC-1's and Summary Plan Descriptions) have been filed or
distributed appropriately with respect to each Employee Benefit
Plan. The requirements of Part 6 of Subtitle B of Title I of ERISA
and of Code Sec. 4980B have been met with respect to each Employee
Welfare Benefit Plan.
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(iii) All contributions (including all employer
contributions and employee salary reduction contributions) which are
due have been paid to each Employee Pension Benefit Plan and all
contributions for any period ending on or before the Closing Date
which are not yet due have been paid to each Employee Pension
Benefit Plan or accrued in accordance with the past custom and
practice of Sigma6. All premiums or other payments which are due for
all periods ending on or before the Closing Date have been paid with
respect to each Employee Welfare Benefit Plan.
(iv) Each Employee Benefit Plan which is an Employee
Pension Benefit Plan meets the requirements of a "qualified plan"
under Code Sec. 401(a) and has received a currently valid and
favorable determination letter from the Internal Revenue Service or
is entitled to rely on a determination letter issued to a sponsoring
organization, and that nothing has occurred since the receipt of
such letter that would affect the tax qualified status of each such
Employee Pension Benefit Plan.
(v) The market value of assets under each Employee
Pension Benefit Plan (other than any Multiemployer Plan) equals or
exceeds the present value of Liabilities thereunder (determined on
an accumulated benefit obligation basis) as of the last day of the
most recent plan year. No Employee Pension Benefit Plan (other than
any Multiemployer Plan) has been completely or partially terminated
or been the subject of a Reportable Event as to which notices would
be required to be filed with the PBGC. No proceeding by the PBGC to
terminate any Employee Pension Benefit Plan (other than any
Multiemployer Plan) has been instituted or, to the Knowledge of the
Sellers and Sigma6, threatened.
(vi) There have been no Prohibited Transactions with
respect to any Employee Benefit Plan. No Fiduciary has any Liability
for breach of fiduciary duty or any other failure to act or comply
in connection with the administration or investment of the assets of
any Employee Benefit Plans. No charge, complaint, action, suit,
proceeding, hearing, investigation, claim, or demand with respect to
the administration or the investment of the assets of any Employee
Benefit Plan (other than routine claims for benefits) is pending or,
to the Knowledge of the Sellers and Sigma6, threatened. Neither the
Sellers nor Sigma6 has any Basis for any such charge, complaint,
action, suit, proceeding, hearing, investigation, claim, or demand.
(vii) Sigma6 has delivered to the Buyer correct and
complete copies of (A) the plan documents and summary plan
descriptions, (B) the most recent determination letter received from
the Internal Revenue Service, (C) the most recent Form 5500 Annual
Report, and (D) all related trust agreements, insurance contracts,
and other funding agreements which implement each Employee Benefit
Plan.
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(viii) Sigma6 does not contribute to, has never
contributed to, nor ever has been required to contribute to any
Multiemployer Plan or has any Liability (including withdrawal
Liability) under any Multiemployer Plan.
(ix) Sigma6 has not incurred, and neither the Sellers
nor any of the directors or the officers (or employees with
responsibility for litigation matters) of Sigma6 has any reason to
expect that Sigma6 will incur, any Liability to the PBGC (other than
PBGC premium payments) or otherwise under Title IV of ERISA
(including any withdrawal Liability) or under the Code with respect
to any Employee Pension Benefit Plan that Sigma6 and the Controlled
Group of Corporations which includes Sigma6 maintains or ever has
maintained or to which any of them contributes, ever has
contributed, or ever has been required to contribute.
(x) Sigma6 does not maintain, nor has it ever maintained
or contributed to, or ever has been required to contribute to any
Employee Welfare Benefit Plan providing health, accident, or life
insurance benefits to former employees, their spouses, or their
dependents (other than in accordance with Code Sec. 4980B).
(t) Guaranties. Except as set forth on Section 4(t) of the
Disclosure Schedule, Sigma6 is not a guarantor nor is it otherwise liable for
any Liability or obligation (including indebtedness) of any other person other
than such potential liabilities to which Sigma6 is subject based on the acts or
omissions of its employees, subcontractors and other agents performing services
for Sigma6 in the Ordinary Course of Business (of which there are no claims for
actual liability therefor).
(u) Environment, Health, and Safety.
(i) Sigma6 and its Affiliates have complied in all
Material respects with all laws (including rules and regulations
thereunder) of federal, state, local, and foreign governments (and
all agencies thereof) concerning the environment, public health and
safety, and employee health and safety, and no charge, complaint,
action, suit, proceeding, hearing, investigation, claim, demand, or
notice has been filed or commenced against any of them alleging any
failure to comply with any such law or regulation.
(ii) Sigma6 has no Liability (and there is no Basis for
any present or future charge, complaint, action, suit, proceeding,
hearing, investigation, claim, or demand against Sigma6 giving rise
to any Liability) under the Occupational Safety and Health Act, as
amended, or any other law (or rule or regulation thereunder) of any
federal, state, local, or foreign government (or agency thereof)
concerning employee health and safety.
(iii) Sigma6 does not have any Material Liability (and
Sigma6 has not exposed any employee to any substance or condition
that could form the
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Basis for any present or future charge, complaint, action, suit,
proceeding, hearing, investigation, claim, or demand (under the
common law or pursuant to statute) against Sigma6 giving rise to any
Liability) for any illness of or personal injury to any employee.
(iv) Sigma6 has obtained and been in compliance in all
Material respects with all of the terms and conditions of all
permits, licenses, and other authorizations which are required
under, and has complied in all Material respects with all other
limitations, restrictions, conditions, standards, prohibitions,
requirements, obligations, schedules, and timetables which are
contained in, all federal, state, local, and foreign laws (including
rules, regulations, codes, plans, judgments, orders, decrees,
stipulations, injunctions, and charges thereunder) relating to
public health and safety, worker health and safety, and pollution or
protection of the environment, including laws relating to emissions,
discharge, releases, or threatened releases of pollutants,
contaminants, or chemical, industrial, hazardous, or toxic materials
or wastes into ambient air, surface water, ground water, or lands or
otherwise relating to the manufacture, processing, distribution,
use, treatment, storage, disposal, transport, or handling of
pollutants, contaminants, or chemical, industrial, hazardous, or
toxic materials or wastes.
(v) Legal Compliance. Except as it would not, individually or
in the aggregate, have a Material adverse effect:
(i) Sigma6 has complied with all laws (including rules
and regulations thereunder) of federal, state, local, and foreign
governments (and all agencies thereof), including, without
limitation, the Fair Labor Standards Act of 1938, as amended, and
the rules and regulations promulgated thereunder. No charge,
complaint, action, suit, proceeding, hearing, investigation, claim,
demand, or notice has been filed or commenced against Sigma6 which
is currently pending and alleges any failure to comply with any such
law or regulation.
(ii) Sigma6 has complied with all applicable laws
(including rules and regulations thereunder) relating to the
employment of labor (including but not limited to the engagement of
independent contractors under the Fair Labor Standards Act of 1938,
as amended, and the rules and regulations promulgated thereunder),
employee civil rights, hiring of engaging non-United States
citizens, and equal employment opportunities.
(iii) Sigma6 has not violated in any respect or received
a notice or charge asserting any violation of the Sherman Act, the
Clayton Act, the Robinson-Patman Act, or the Federal Trade Act, each
as amended.
(iv) Sigma6 has not:
(A) made or agreed to make any contribution,
payment, or gift of funds or property to any governmental
official, employee, or agent
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where either the contribution, payment, or gift or the purpose
thereof was illegal under the laws of any federal, state,
local, or foreign jurisdiction;
(B) established or maintained any unrecorded fund
or asset for any purpose, or made any false entries on any
books or records for any reason; or
(C) made or agreed to make any contribution, or
reimbursed any political gift or contribution made by any
other person, to any candidate for federal, state, local, or
foreign public office in excess of $500.
(v) Sigma6 has filed in a timely manner all reports,
documents, and other materials it was required to file (and the
information contained therein was correct and complete in all
respects) under all applicable laws (including rules and regulations
thereunder).
(vi) Sigma6 has possession of all records and documents
it was required to retain under all applicable laws (including rules
and regulations thereunder).
(w) Certain Business Relationships with Sigma6. Except as set
forth in Section 4(w) of the Disclosure Schedule, neither the Sellers nor its
Affiliates has been involved in any business arrangement or relationship with
Sigma6 within the past twelve (12) months other than service relationships in
the Ordinary Course of Business, and neither the Sellers nor its Affiliates owns
any Material property or right, tangible or intangible, which is used in
Sigma6's Business.
(x) Brokers' Fees. Sigma6 does not have any Liability or
obligation to pay any fees or commissions to any broker, finder, or similar
representative with respect to the transactions contemplated by this Agreement.
5. Pre-Closing Covenants. The Parties agree as follows with respect
to the period between the execution of this Agreement and the Closing or the
earlier termination of this Agreement.
(a) General. Each of the Parties will use its reasonable
efforts to take all action and to do all things necessary, proper, or advisable
to consummate and make effective the transactions contemplated by this Agreement
(including satisfying the closing conditions set forth in Section 7 below).
(b) Notices and Consents. Each of the Parties will (and the
Sellers will cause Sigma6 to) give any notices to third parties, and will use
best efforts to obtain third party consents, that the other Party may reasonably
request in connection with matters disclosed or required to be disclosed in the
Disclosure Schedule. Each of the Parties will take any additional action (and
the Sellers will cause Sigma6 to take any additional action) that may be
necessary,
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proper, or advisable in connection with any other notices to, filings with, and
authorizations, consents, and approvals of governments, governmental agencies,
and third parties that he, she or it may be required to give, make, or obtain.
(c) Operation of Business. Except as contemplated hereby, or
as may be incidental to or in furtherance of the transactions contemplated
hereby, or as may have been set forth herein or in the Disclosure Schedule,
neither Party will (and Sellers will not cause or permit Sigma6 to) engage in
any practice, take any action, embark on any course of inaction, or enter into
any transaction outside the Ordinary Course of Business.
(d) Preservation of Business. Except as contemplated hereby,
or as may be incidental to or in furtherance of the transactions contemplated
hereby, or as may have been set forth herein or in the Disclosure Schedule,
Sigma6 will (and the Sellers will cause Sigma6 to) use reasonable commercial
efforts to keep its business and properties substantially intact, including its
present operations, physical facilities, working conditions, and relationships
with lessors, licensers, suppliers, customers, and employees.
(e) Access.
(i) Only in the event that neither Buyer or Sellers
exercised its right to terminate this Agreement as provided in
Section 9 herein, each Party will permit (and the Sellers will cause
Sigma6 to permit) representatives of the other Party to have access
at reasonable times, and in a manner so as not to interfere with the
normal business operations of such Party, to the headquarters of
such Party and to all books, records, contracts, Tax records, and
documents of or pertaining to such Party; provided, however, that
Buyer shall direct all requests for information and material only
through Sellers' Representative, unless otherwise agreed to by Buyer
and Seller's Representative in writing.
(ii) Buyer shall proceed to arrange with the Sellers a
mutually agreeable time and place at which Buyer may conduct
interviews with key employees and/or customers of Sigma6 mutually
agreed to by Buyer and the Sellers' Representative.
(f) Notice of Developments. Each Party will give prompt
written notice to the other Party of any Material development affecting the
assets, Liabilities, business, financial condition, operations, results of
operations, or future prospects of such Party. Each Party will give prompt
written notice to the others of any Material development affecting the ability
of the Parties to consummate the transactions contemplated by this Agreement.
Except for the right of Sigma6 to update any Disclosure Schedule as provided in
Section 4 hereof, no disclosure by any Sellers or Sigma6 pursuant to this
Section 5(f) shall be deemed to amend or supplement Annex II or the Disclosure
Schedule or to prevent or cure any misrepresentation, breach of warranty, and/or
breach of covenant.
(g) Exclusivity. Until termination or consummation as provided
for herein, Sigma6 and the Sellers will not (i) solicit, initiate, or encourage
the submission of any
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proposal or offer from any person relating to any (A) liquidation, dissolution,
or recapitalization, (B) merger or consolidation, (C) acquisition or purchase of
securities or assets, or (D) similar transaction or business combination
involving Sigma6 or (ii) participate in any discussions or negotiations
regarding, furnish any information with respect to, assist or participate in, or
facilitate in any other manner any effort or attempt by any person to do or seek
any of the foregoing. The Sellers will notify the Buyer immediately if any
person makes any proposal, offer, inquiry, or contact with respect to any of the
foregoing.
(h) Cancellation and Exchange of Options, Bonus Programs and
Phantom Stock Plans. Sigma6 shall have provided for the cancellation, at or
prior to the Closing, of all Sigma6 Options, stock option plans, deferred bonus
programs or phantom equity plans. The amounts payable for the cancellation of
the Sigma6 Options will be paid by Sellers and at no cost to Sigma6 or Buyer,
or, if paid by Sigma6, such payments will be a reduction of the Cash Portion of
the Purchase Price pursuant to Section 2(h). In conjunction with the
cancellation of such programs, all eligible employees who have not executed new
employment agreements shall have signed cancellation agreements which include
provisions that each employee will not, for a period of one year from the date
of Closing or one year from the termination of his or her employment with his or
her employer (i.e., Sigma6) whichever period is longer: (i) service or solicit
any customers of his or her employer, or (ii) solicit for employment any
employee of his or her employer.
6. Additional Agreements and Covenants. The Parties further covenant
and agree as follows:
(a) Sale of Delphi Automotive Systems Receivable to Sellers at
Closing. The parties hereto agree that Sellers shall have the right to purchase
from Sigma6 the accounts receivable due from Delphi Automotive Systems (the
"Delphi Receiveable") in the aggregate amount of $250,000.00 simultaneous with
the Closing. In the event of such purchase, the parties hereto further agree
that (i) Sigma6 will utilize the funds received from the Sellers from the sale
of the Delphi Receivable to pay down any Funded Indebtedness then existing on
the Closing Date which has not been paid; (ii) the Sellers shall be the sole
owner of the Delphi Receivable and (iii) upon receipt by Sigma6 of any sums in
payment of the Delphi Receivable, such payments shall be held in trust and
delivered to Sellers' Representative properly endorsed.
(b) General. In case at any time after the Closing any further
action is necessary or desirable to carry out the purposes of this Agreement,
each of the Parties will take such further action (including the execution and
delivery of such further instruments and documents) as any other Party
reasonably may request, all at the sole cost and expense of the requesting Party
(unless the requesting Party is entitled to indemnification for such cost and
expense under Section 8 below). The Sellers and Sigma6 acknowledge and agree
that from and after the Closing the Buyer will be entitled to possession of all
documents, books, records, agreements, and financial data of any sort relating
to Sigma6; provided that Sellers may retain any copies of the foregoing as shall
be necessary to comply with applicable tax and other laws, regulations and
ordinances.
(c) Litigation Support. In the event and for so long as any
Party actively is contesting or defending against any charge, complaint, action,
suit, proceeding, hearing,
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investigation, claim, or demand in connection with (i) any transaction
contemplated under this Agreement or (ii) any fact, situation, circumstance,
status, condition, activity, practice, plan, occurrence, event, incident,
action, failure to act, or transaction on or prior to the Closing Date involving
Sigma6, each of the other Parties will cooperate with him or it and his, her or
its counsel in the contest or defense, make available their personnel, and
provide such testimony and access to their books and records as shall be
necessary in connection with the contest or defense, all at the sole cost and
expense of the contesting or defending Party (unless the contesting or defending
Party is entitled to indemnification therefor under Section 8 below).
(d) Transition. The Sellers will not take any action that
primarily is designed or intended to have the effect of discouraging any lessor,
licenser, customer, supplier, or other business associate of Sigma6 from
maintaining the same business relationships with Sigma6 after the Closing for a
period of twenty-four (24) months thereafter as it maintained with Sigma6 prior
to the Closing. The Sellers will refer all customer inquiries relating to
Sigma6's Business to the Buyer and/or Sigma6 from and after the Closing for a
period of twenty-four (24) months thereafter.
(e) Confidentiality. The Sellers will treat and hold as such
all of the Confidential Information, refrain from using any of the Confidential
Information except in connection with this Agreement for a period of three (3)
years from the Closing Date, and except as otherwise permitted hereunder or as
may be required by law, deliver promptly to the Buyer or destroy, at the
reasonable request and option of the Buyer, all tangible embodiments (and all
copies) of the Confidential Information which are in its possession. In the
event that the Sellers are requested or required (by request for information or
documents in any legal proceeding, interrogatory, subpoena, civil investigative
demand, or similar legal process) to disclose any Confidential Information, the
Sellers will notify the Buyer promptly of the request or requirement so that the
Buyer may seek an appropriate protective order or waive compliance with the
provisions of this Section 6(e). If, in the absence of a protective order or the
receipt of a waiver hereunder, the Sellers are compelled to disclose any
Confidential Information or else stand liable for contempt, then Sellers may
disclose the Confidential Information; provided, however, that the Sellers shall
use their reasonable efforts to cooperate with Buyer to obtain, at the
reasonable request of the Buyer, an order or other assurance that confidential
treatment will be accorded to such portion of the Confidential Information
required to be disclosed as the Buyer shall reasonably designate.
(f) Termination of Bank Facilities; Release of Guaranties.
Sellers shall take all reasonable best efforts necessary to (i) retire all of
Sigma6's outstanding bank indebtedness and (ii) fully, completely and
unconditionally release and/or substitute Buyer or Sigma6 at or prior to Closing
as guarantor for the Sellers on all leases of Sigma6 or other guarantees.
(g) Monitoring Information. Prior to the Closing, each Party
shall deliver such information to the other Party as may reasonably be requested
by Buyer, Sigma6 or Sellers.
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(h) Landlords' Consents. On or before the Closing Date,
Sellers shall cause Sigma6 to obtain from its landlords (to the extent required
under the pertinent premises lease) written consent to the assignment of all
leases being assumed by Buyer, which assignments are deemed to have resulted
from the transactions contemplated by this Agreement.
(i) Additional Tax Matters. Buyer and Sellers recognize that
each of them will need access, from time to time, after the Closing Date, to
certain accounting and Tax records and information held by the Buyer and/or
Sigma6 to the extent such records and information pertain to events occurring on
or prior to the Closing Date; therefore, Buyer agrees to cause Sigma6 to (A) use
its best efforts to properly retain and maintain such records for a period of
six (6) years from the date the Tax Returns for the year in which the Closing
occurs are filed or until the expiration of the statute of limitations as may be
extended by law from time to time that applies to the Tax Return in question
(i.e., including Tax Returns for years preceding the year in which the Closing
occurs), whichever is later, and (B) allow the Sellers and their agents and
representatives at times and dates mutually acceptable to the Parties, to
inspect, review and make copies of such records as such other party may deem
necessary or appropriate from time to time, such activities to be conducted
during normal business hours and at the other Party's expense.
(j) Covenant Not to Compete. For a period of four (4) years
from and after the Closing Date, the Sellers will not, directly or indirectly,
as principal, agent, trustee or through the agency of any corporation,
partnership, association or agent or agency, (i) own, manage, control,
participate in, consult with, render services for, or in any manner engage in
any activity or business competing with the Business in the United States of
America and Canada, (ii) service or solicit any of Sigma6's Business from any
customer of Sigma6, (iii) request or advise any customer of Sigma6 to withdraw,
curtail or cancel such customer's business with Sigma6, or (iv) solicit for
employment any person employed by Sigma6 at any time within the 180 day period
immediately preceding such solicitation; provided, however, that no owner of
less than five percent (5%) of the outstanding stock of any publicly traded
corporation shall be deemed to engage solely by reason thereof in any of its
businesses and provided, further, that the Harmony House Online relationship as
specifically described in Section 6(m) shall not be a violation of this covenant
not to compete (provided that the Sellers comply with the provisions of Section
6(m)). For purposes of this Agreement, the Parties have agreed to allocate
$50,000 of the aggregate Purchase Price to the covenant not to compete contained
in this Section 6(j).
(k) Reorganization Intent. The Parties agree that the Merger
is intended to be a tax-free reorganization under Section 368 of the Code, and
this Agreement is intended to be a "plan of reorganization" within the meaning
of the regulations promulgated under such section of the Code. None of the
Parties has taken, shall take or fail to take any action that would jeopardize
the qualification of the Merger as such a tax-free reorganization (other than
actions contemplated by this Agreement or as may be otherwise legally required).
(l) Conduct During Earned Payout Period. Sellers acknowledge
and agree that, during the Earned Payout Period, Buyer shall be entitled to
oversee the operation and management of Sigma6's Business, including the setting
of goals and review of budgets and performance. The Sellers further agree,
during the Earned Payout Period, not to allow Sigma6 to
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cut staff, capital expenditures and general and administrative expenses or take
other actions that are not consistent with Sigma6's prior practices and/or
prudent business practices, and Sellers agree not and not to allow Sigma6 to
engage in any activity in order to increase current year profits of the business
of Sigma6 at the expense of the longer term growth of the business of Sigma6.
During the Earned Payout Period, the Buyer agrees that it will not (i)
unreasonably require that the business of Sigma6 be operated substantially
different as it was prior to the Merger except in so far as the prior practices
of Sigma6 were imprudent or unreasonable or its productivity efficiency and
profitability can be improved and increased through economies of scale, Buyer's
experience or otherwise; (ii) unreasonably change (A) the prices charged for
Sigma6's services, (B) the level of compensation of Sigma6's full-time corporate
employees or (C) the level Sigma6's general and administrative expenses, unless
the prior business practices were unreasonable or imprudent and/or unless the
changes are reasonably necessary to support the growth of Sigma6's Business.
(m) Harmony House Relationship. The Sellers shall have the
option to participate with Harmony House Inc. ("Harmony House") in a limited
partnership, called Harmony House Online, L.P. ("Harmony House Online");
provided, however, that all E-Commerce Services provided to Harmony House Online
or any Affiliate thereof shall be provided by the Buyer or its Affiliates
pursuant to an arms-length agreement; and provided, further that, except in his
capacity as an employee of Buyer or its Affiliate, the sole relationship between
any Seller and Harmony House shall be his ownership interest therein pursuant to
the terms of this Agreement (e.g. there shall be no consulting or other services
provided by any Seller to Harmony House). "E-Commerce Services" shall mean all
web site design and development, software development, e-commerce transaction
processing and all site hosting. In the event that (i) an exclusive services
contract between Harmony House Online and the Buyer for the provision of
E-Commerce Services to Harmony House Online (A) is not executed within a
reasonable time after the formation of Harmony House Online, or (B) is
terminated or (ii) any E-Commerce Services are provided to Harmony House Online
by a party other than the Buyer or its Affiliates, then the Sellers'
participation in any manner with Harmony House Online shall be discontinued (and
all Sellers shall immediately withdraw their interests or shall cause their
Affiliates to withdraw their interests in Harmony House Online) unless Buyer
agrees to allow continued participation of Sellers by its express written
consent.
(n) Employee Benefits.
(i) Immediately following the Closing Date, the
employees of Sigma6, during such time as their employment with
Buyer, Newco and/or their affiliates is continued, shall be eligible
to participate in Buyer's Employee Benefit Plans on the same terms
and conditions as similarly situated employees of the Buyer are
eligible to participate therein. Buyer shall cause Buyer's Benefit
Plans to recognize prior service of a Sigma6 employee with Sigma6 to
the extent recognized under the corresponding Seller Benefit Plans
prior to the Closing as service with Buyer and its affiliates for
purposes of (i) any Buyer Employee Benefit Plan that is not an
Employee Pension Benefit Plan for purposes of any waiting period and
eligibility requirements and (ii) any Buyer Benefit Plan that is an
Employee Pension
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Benefit Plan, for purposes of eligibility (including eligibility for
early retirement benefits) and vesting (but not benefit accrual)
thereunder.
(ii) Newco or Buyer shall, from and after the Closing
Date, provide continuation coverage under Part 6 of Subtitle B of
Title I of ERISA and Code Section 4980B for those covered employees
of Sigma6 with respect to whom, on or prior to the Closing Date, a
"qualifying event" (as defined in ERISA Section 603 and Code Section
4980B(f)(3)) has occurred, and shall meet all continuing obligations
thereunder.
7. Conditions to Obligations to Close.
(a) Conditions to Obligation of the Buyer. The obligation of
the Buyer to consummate the transactions to be performed by it in connection
with the Closing is subject to satisfaction or waiver of the following
conditions:
(i) the representations and warranties set forth in
Section 3(a) and Section 4 above shall be true and correct in all
Material respects at and as of the Closing Date;
(ii) the Sellers shall have performed and complied with
all of their covenants hereunder in all Material respects through
the Closing;
(iii) Sigma6 will have procured all third party consents
and given all notices required in connection with this Agreement and
the transactions contemplated hereby, including without limitation
all action necessary in connection with and/or the receipt of any
notices to, filings with, and authorizations, consents and approvals
of governments, governmental agencies, and third parties as set
forth herein or in the Disclosure Schedule including any Filing
required under the Hart-Scott-Rodino Act;
(iv) no action, suit, or proceeding shall be pending or
threatened before any court or quasi-judicial or administrative
agency of any federal, state, local, or foreign jurisdiction wherein
an unfavorable judgment, order, decree, stipulation, injunction, or
charge would (A) prevent consummation of any of the transactions
contemplated by this Agreement, (B) cause any of the transactions
contemplated by this Agreement to be rescinded following
consummation, or (C) affect adversely the right of the Buyer to own,
operate, or control Sigma6 Shares or Sigma6 (and no such judgment,
order, decree, stipulation, injunction, or charge shall be in
effect);
(v) The Sellers and Sigma6 shall have delivered to the
Buyer a certificate (without qualification as to knowledge or
Materiality or otherwise) to the effect that each of the conditions
specified above in Section 7(a)(i)-(iv) is satisfied in all
respects;
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(vi) the acquisition by the Buyer of Sigma6 Shares shall
represent one hundred percent (100%) of the issued and outstanding
capital stock of Sigma6 and all of such Sigma6 Shares shall be free
and clear of any Security Interests or other liens, claims or
encumbrances of any nature whatsoever;
(vii) the Sellers shall have purchased any personal use
assets (e.g., automobiles) from Sigma6 at a purchase price equal to
the greater of (A) the net book value of such assets as of the
Closing or (B) the outstanding indebtedness (including, without
limitation all Funded Indebtedness) secured by such assets;
provided, however, that personal use assets under this paragraph
shall not include cellular telephones or pagers purchased by Sigma6
for use by its officers and employees;
(viii) the Buyer shall have received from Sellers an
executed Escrow Agreement in the form and substance set forth as
Exhibit A attached hereto;
(ix) the Buyer shall have received from each Seller an
executed joinder to the Stockholders Agreement in the form and
substance set forth as Exhibit C attached hereto;
(x) the Buyer and Sigma6 shall have received from each
of the Key Employees listed on Annex IV (the "Key Employees") an
executed employment agreement in the form and substance attached
hereto as Exhibit E; provided, however, the Buyer, in its sole
discretion, may add to or subtract from the list of those employees
it determines to be or not to be Key Employees on Annex IV and thus
the Buyer shall determine who shall deliver employment agreements in
the form of Exhibit E;
(xi) the Buyer shall have received from each Seller an
executed joinder to the Registration Agreement in the form and
substance set forth as Exhibit F attached hereto;
(xii) the Buyer shall have received the resignations,
effective as of the Closing, of each director of Sigma6 prior to the
Closing and the termination in full without liability of any
consulting or management agreements with Columbia Capital or its
Affiliates;
(xiii) the Buyer shall be satisfied that the Net Worth
of Sigma6 as of the Closing Date equaled or exceeded $200,000 or an
appropriate adjustment shall have been made to the Purchase Price as
provided in Section 2(j);
(xiv) the Buyer shall be satisfied that the Net Service
Revenues of Sigma6 during the fiscal year ending December 31, 1997
equaled or exceeded $1,400,000 and during the twelve month period
ended on the Stub Period End (such period being referred to as the
"Interim Period") equaled or exceeded $1,600,000;
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(xv) the Buyer shall be satisfied that the Adjusted
EBITDA of Sigma6 (A) during the fiscal year ended December 31, 1997
equaled or exceeded $300,000 or 21% of Net Service Revenues for such
fiscal year, and (B) during the Interim Period equaled or exceeded
$0;
(xvi) the Buyer shall be satisfied in its sole
discretion with the results of its continuing legal, financial and
business due diligence investigations of Sigma6, all of which shall
be final and completed to Buyer's satisfaction prior to Closing;
(xvii) no Material adverse change shall have occurred in
Sigma6's Business or its future prospects;
(xviii) Sellers shall have caused Sigma6 to cancel each
outstanding phantom stock, deferred bonus or option plan, if any,
and all outstanding Sigma6 Options shall have been canceled pursuant
to the Option Cancellation Agreement in the form of Exhibit H hereto
(individually, a "Option Cancellation Agreement" and collectively
the "Option Cancellation Agreements"), and the cost of such
cancellation, if any, shall be borne by Sellers or if such cost is
borne by Sigma6, such amount will reduce the Cash Portion of the
Purchase Price pursuant to Section 2(h);
(xix) Sellers shall have caused each party receiving
Buyer's Shares under this Agreement to execute an Equity
Subscription Agreement in the form of Exhibit D hereto;
(xx) all liens and Security Interests securing debts of
Sigma6 which have been paid in full prior to or at the Closing shall
have been fully released of record to the reasonable satisfaction of
the Buyer and all Uniform Commercial Code financing statements
covering such debts shall have been terminated;
(xxi) no unsatisfied liens for the failure to pay Taxes
of any nature whatsoever shall exist against Sigma6, or against or
in any way affecting any Sigma6 Share;
(xxii) the Sellers shall and Sigma6 shall have caused
all of Sigma6's stockholders, officers, directors and/or employees
to, have repaid in full all debts and other obligations, if any,
owed to Sigma6, and the Sellers shall have caused all Funded
Indebtedness to be paid off prior to the Closing Date;
(xxiii) the Buyer shall have received from Sigma6 the
Financial Statements;
(xxiv) all appropriate corporate and shareholder
authorizations of Sigma6 shall have been obtained;
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(xxv) since December 31, 1997, Sigma6 shall have made no
dividend, consulting or other payment to the Sellers, except as set
forth on Section 4(m) of the Disclosure Schedule and bonuses as set
forth on Section 4(m) of the Disclosure Schedule;
(xxvi) except as set forth on the Disclosure Schedule,
since December 31, 1997, Sigma6 shall not have transferred,
conveyed, disposed of and/or sold any of its Material assets, except
in the Ordinary Course of Business;
(xxvii) all Intellectual Property created or developed
by any Seller and any other current employee of Sigma6 that has been
used historically by Sigma6 or is being used currently by Sigma6
(other than "work for hire" which has been developed by Sigma6 for a
customer and continues to be used by Sigma6 in the performance of
continuing services for that customer) shall be one hundred percent
(100%) owned by Sigma6 as of the Closing Date;
(xxviii) the Buyer and Newco shall have received from
the Sellers and Sigma6 an opinion of counsel in the form and
substance set forth as Exhibit G hereto; and
(xxix) at least ninety-five percent (95%) of all
shareholders of Sigma6 shall have agreed to participate in the
Merger without any dissenter's rights exercised.
The Buyer may waive any condition specified in this Section 7(a) if
it executes a writing so stating at or prior to the Closing.
(b) Conditions to Obligations of the Sellers. The obligations
of the Sellers to consummate the transactions to be performed by them in
connection with the Closing is subject to satisfaction or waiver of the
following conditions:
(i) the representations and warranties set forth in
Section 3(b) above shall be true and correct in all Material
respects at and as of the Closing Date;
(ii) the Buyer shall have performed and complied with
all of its covenants hereunder in all Material respects through the
Closing;
(iii) Buyer will have procured all third party consents
needed by Buyer and given all notices required in connection with
this Agreement and the transactions contemplated hereby, including
without limitation all action necessary in connection with and/or
the receipt of any notices to, filings with, and authorizations,
consents and approvals of governments, governmental agencies, and
third parties as set forth herein or in the Disclosure Schedule
including any filing required under the Hart-Scott-Rodino Act;
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(iv) no action, suit or proceeding shall be pending or
threatened before any court or quasi-judicial or administrative
agency of any federal, state, local, or foreign jurisdiction wherein
an unfavorable judgment, order, decree, stipulation, injunction, or
charge would (A) prevent consummation of any of the transactions
contemplated by this Agreement or (B) cause any of the transactions
contemplated by this Agreement to be rescinded following
consummation (and no such judgment, order, decree, stipulation,
injunction, or charge shall be in effect);
(v) the Buyer shall have delivered to the Sellers a
certificate (without qualification as to knowledge or Materiality or
otherwise) to the effect that each of the conditions specified above
in Section 7(b)(i)-(iii) is satisfied in all respects;
(vi) Sellers shall have received from the Buyer an
executed Escrow Agreement in the form and substance set forth as
Exhibit A attached hereto;
(vii) each Seller shall have received from the Buyer an
executed joinder to the Stockholders Agreement in the form and
substance set forth as Exhibit C attached hereto;
(viii) the Buyer shall execute and deliver an Equity
Subscription Agreement in the form of Exhibit D hereto, with each of
the Sellers acquiring Buyer Shares;
(ix) the Key Employees shall have received from the
Buyer an executed employment agreement, in the form and substance
attached hereto as Exhibit E; provided, however, the Buyer, in its
sole discretion, may add to or subtract from the list of those
employees it determines to be or not to be Key Employees on Annex IV
and thus the Buyer shall determine who shall receive employment
agreements in the form of Exhibit E;
(x) each Seller shall have received from the Buyer an
executed joinder to the Registration Agreement in the form and
substance set forth as Exhibit F attached hereto;
(xi) all actions to be taken by the Buyer in connection
with consummation of the transactions contemplated hereby will be
reasonably satisfactory in form and substance to the Sellers.
The Sellers' Representative may waive any condition specified in
this Section 7(b) if they execute a writing so stating at or prior to the
Closing.
8. Remedies for Breaches of This Agreement.
(a) Survival. All of the representations and warranties of the
Sellers contained in Section 4 above (other than the representations and
warranties of the Sellers contained
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in Section 4(h) above) shall survive the Closing hereunder (unless the Buyer
knew of any misrepresentation or breach of warranty at the time of the Closing
pursuant to a writing provided by Sigma6 or Seller) and continue in full force
and effect for a period of three (3) years thereafter. The other
representations, warranties, and covenants of the Parties contained in this
Agreement (including the representations and warranties of the Sellers contained
in Section 4(h) above) shall survive the Closing (unless the damaged Party knew
of any misrepresentation or breach of warranty or covenant pursuant to a writing
provided by the other Party at the time of the Closing) and continue in full
force and effect for the applicable statute of limitations period thereafter,
except as otherwise provided elsewhere in this Agreement.
(b) Indemnification Provisions for Benefit of the Buyer.
(i) In the event Sigma6 or the Sellers, as applicable,
breach any of their representations, warranties, agreements, and
covenants contained herein, (other than a breach by a Seller of
his/her individual representations and warranties, which are
addressed in Section (8)(b)(ii) below) and provided that the
particular representation, warranty, agreement, or covenant survives
the Closing and that the Buyer makes a written claim for
indemnification against the Sellers pursuant to Section 10(h) below
within the applicable survival period, then the Sellers agree to
jointly and severally indemnify the Buyer from and against the
entirety of any Adverse Consequences the Buyer may suffer through
and after the date of the claim for indemnification (including any
Adverse Consequences the Buyer may suffer after the end of the
applicable survival period resulting from, arising out of, relating
to, in the nature of, or caused by the breach; provided, however,
that the Sellers shall not have any obligation to indemnify the
Buyer from and against any Adverse Consequences resulting from,
arising out of, relating to, in the nature of, or caused by the
breach of any representation or warranty or covenant of Sellers in
this Agreement (i) until the Buyer has suffered aggregate losses by
reason of all such breaches in excess of a $15,000 threshold (at
which point the Sellers will be obligated to indemnify the Buyer
from and against all such aggregate indemnifiable losses relating
back to the first dollar) or (ii) in excess of the Purchase Price
(after which point Sellers shall have no obligation to indemnify
Buyer from and against further such Adverse Consequences); provided,
further, however, that the limitations set forth (a) in (i) and (ii)
above specifically shall not apply to the liability of Sellers with
respect to Adverse Consequences resulting from or attributable to
intentional fraud or any willful misconduct by the Sellers and (b)
in (i) above specifically shall not apply to the liability of
Sellers with respect to any breaches of the representations and
warranties contained in Section 4(g), Section 4(h) and Section 4(n)
hereof. Notwithstanding the foregoing, the liability of each Seller
shall, in all events, be limited to the portion of the Purchase
Price actually received by such Seller (other than the breach by a
Seller of his/her individual representations and warranties in
Section 3(a)).
(ii) In the event any Seller breaches any of its
representations and warranties, contained in Section 3(a) herein,
and provided that the particular
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representation, warranty, or covenant survives the Closing and that
the Buyer makes a written claim for indemnification against such
Seller pursuant to Section 10(h) below within the applicable
survival period, then, such Seller agrees to indemnify the Buyer
from and against the entirety of any Adverse Consequences the Buyer
may suffer through and after the date of the claim for
indemnification (including any Adverse Consequences the Buyer may
suffer after the end of the applicable survival period) resulting
from, arising out of, relating to, in the nature of, or caused by
the breach.
(iii) The Sellers agree to indemnify the Buyer from and
against the entirety of any Adverse Consequences the Buyer may
suffer resulting from, arising out of, relating to, in the nature
of, or caused by any Liability of Sigma6 arising under
Reg.ss.1.1502-6 (because Sigma6 once was a member of an Affiliated
Group during any part of any consolidated return year within any
part of which consolidated return year any corporation other than
Sigma6 also was a member of the Affiliated Group). The Sellers agree
to indemnify the Buyer from and against the entirety of any transfer
Taxes which may become due and owing by reason of the transactions
contemplated by this Agreement.
(iv) The Sellers shall indemnify the Buyer from and
against the entirety of all Tax Liability created from and the
conversion by Sigma6 to the accrual basis of tax accounting from the
cash basis of tax accounting to the extent such Taxes are in excess
of the reserve, if any, for such Tax Liability used to determine the
Net Worth of Sigma6.
(v) The Sellers agree to indemnify the Buyer from and
against (A) the entirety of any brokerage fees or investment banking
commissions due by Sellers or Sigma6 by reason of the transactions
contemplated by this Agreement and (B) any Adverse Consequences the
Buyer may suffer resulting from, arising out of, relating to, in the
nature of, or caused by any Liability of Sigma6 (to the extent such
Liability is not otherwise included or reserved for on the balance
sheet of Sigma6 used to determine the Net Worth adjustment) incurred
in connection with (i) any obligation of Sigma6 to Agis Global
Internet Services ("Agis") in connection with any dispute between
Sigma6 and Agis which has not been completely resolved prior to the
Closing Date, (ii) any obligation of Sigma6 to Ameritech in
connection with disputed fees in existence as of the Closing Date,
(iii) the nonpayment of any license fees described on Section 4(g)
of the Disclosure Schedule, (iv) any portion of the receivable by
Cherub (as referenced in the Disclosure Schedule) which is not
collected by Sigma6, or (v) any payments made by Cortex or Buyer to
the Seller named Jani Anderson in connection with the guarantee of
such Seller's automobile lease.
(vi) The Sellers agree to indemnify Buyer from and
against the entirety of any Adverse Consequences the Buyer or its
affiliates may suffer resulting from, arising out of, relating to,
in the nature of, or caused by any Liability
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related to Harmony House Online, except those Liabilities for which
Buyer would be liable in the Ordinary Course of Business and are
specifically assumed by Buyer (or its affiliates) under contracts to
provide E-Commerce Services to Harmony House Online.
(vii) The Parties shall make appropriate adjustments for
tax benefits in determining the liability of the Sellers under this
Section 8.
(c) Matters Involving Third Parties. If any third party shall
notify any Party (the "Indemnified Party") with respect to any matter which may
give rise to a claim for indemnification against any other Party (the
"Indemnifying Party") under this Section 8, then the Indemnified Party shall
notify in writing each Indemnifying Party thereof promptly, which notice shall
describe the matter in reasonable detail, including relevant evidence and
estimated loss; provided, however, that no delay on the part of the Indemnified
Party in notifying any Indemnifying Party shall relieve the Indemnifying Party
from any liability or obligation hereunder unless (and then solely to the
extent) the Indemnifying Party thereby is damaged and materially prejudiced from
adequately defending such claim. In the event any Indemnifying Party notifies
the Indemnified Party within thirty (30) days after the Indemnified Party has
given notice of the matter that the Indemnifying party is assuming the defense
thereof, (A) the Indemnifying Party will defend the Indemnified Party against
the matter with counsel of its choice reasonably satisfactory to the Indemnified
Party, (B) the Indemnified Party may retain separate co-counsel at its sole cost
and expense (except that the Indemnifying Party will be responsible for the fees
and expenses of the separate co-counsel to the extent the Indemnified Party
reasonably concludes that the counsel the Indemnifying Party has selected has a
conflict of interest), (C) the Indemnified Party will not consent to the entry
of any judgment or enter into any settlement or compromise with respect to the
matter without the written consent of the Indemnifying Party (not to be withheld
unreasonably), and (D) the Indemnifying Party will not consent to the entry of
any judgment with respect to the matter, or enter into any settlement or
compromise which does not include a provision whereby the plaintiff or claimant
in the matter releases the Indemnified Party from all Liability with respect
thereto, without the written consent of the Indemnified Party (not to be
withheld unreasonably). In the event no Indemnifying Party notifies in writing
the Indemnified Party within thirty (30) days after the Indemnified Party has
given notice of the matter that the Indemnifying Party is assuming the defense
thereof, however, the Indemnified Party may defend against, or enter into any
settlement with respect to, the matter in any manner it reasonably may deem
appropriate. At any time after commencement of any such action, any Indemnifying
Party may request an Indemnified Party to accept a bona fide offer from the
other Party(ies) to the action for a monetary settlement payable solely by such
Indemnifying Party (which does not burden or restrict the Indemnified Party nor
otherwise prejudice him or her) whereupon such action shall be taken unless the
Indemnified Party determines that the dispute should be continued, the
Indemnifying Party shall be liable for indemnity hereunder only to the extent of
the lesser of (i) the amount of the settlement offer or (ii) the amount for
which the Indemnified Party may be liable with respect to such action. In
addition, the Party controlling the defense of any third party claim shall
deliver, or cause to be delivered, to the other Party copies of all
correspondence, pleadings, motions, briefs, appeals or other written statements
relating to or submitted in connection with the defense of the third party
claim, and
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<PAGE>
timely notices of, and the right to participate in (as an observer) any hearing
or other court proceeding relating to the third party claim.
(d) Exclusive Remedy. The Parties acknowledge and agree that
the foregoing indemnification provisions in this Section 8 shall be the
exclusive monetary remedy of the Parties for any breach of the representations,
warranties and covenants of the Parties contained in this Agreement.
(e) Payment; General Right of Offset. The Indemnifying Parties
shall promptly pay to the Indemnified Party in cash the amount of any Adverse
Consequences to which such Indemnified Party becomes entitled by reason of the
provisions of Section 2 or Section 8 of this Agreement. Notwithstanding the
foregoing, in connection with the indemnification of Buyer pursuant to Section
8(b)(i), Section 8(b)(iii), Section 8(b)(iv) or Section 8(b)(v), (i) Buyer shall
have the option (at Buyer's sole discretion) to first seek indemnification
payments through offset against the Escrow Sum after an indemnification claim
has been made therefor, for the amount of any Adverse Consequences or any other
payments to which Buyer becomes entitled by reason of the provisions of this
Agreement and (ii) any one or more of the Sellers shall have the option to
satisfy such Seller's obligation to the Buyer under Section 8(b) by surrendering
to Buyer that portion of the Stock Portion of the Purchase Price required to
fund that obligation (with such surrendered Stock valued at the lesser of (A)
such Stock's then-current fair market value or (B) the value stated in Section
2(h)). Furthermore, and in lieu of receiving a cash payment from the Sellers,
Buyer, in its sole discretion, may after the first anniversary of the Closing
Date elect to offset against any Earned Payout Amount payable to Sellers, after
an indemnification claim has been made therefor, the amount of any Adverse
Consequences or any other payments to which Buyer may become entitled to by
reason of the provisions of this Agreement. In the event that Buyer offsets more
than the amount of any Adverse Consequences (as finally determined), Buyer shall
be responsible to Sellers for such sums which should not have been subject to an
offset, together with interest at the prime rate of Bank Boston, N.A.
(f) Other Indemnification Provisions. Subject in all events to
the time limitations set forth in Section 8(a) and the monetary and other
limitations in Section 8(b) and 8(c), the foregoing indemnification provisions
are in addition to, and not in derogation of, any statutory or common law remedy
any Party may have for breach of representation, warranty, or covenant.
(g) Arbitration with Respect to Certain Indemnification
Matters. THE PARTIES AGREE TO SUBMIT TO ARBITRATION, IN ACCORDANCE WITH THESE
PROVISIONS, ANY DISPUTED CLAIM OR CONTROVERSY ARISING FROM OR RELATED TO THE
ALLEGED BREACH OF THIS AGREEMENT OR ANY DISPUTED INDEMNIFICATION CLAIM MADE
PURSUANT TO THIS SECTION 8. THE PARTIES FURTHER AGREE THAT THE ARBITRATION
PROCESS AGREED UPON HEREIN SHALL BE THE EXCLUSIVE MEANS FOR RESOLVING ALL
DISPUTES MADE SUBJECT TO ARBITRATION HEREIN, BUT THAT NO ARBITRATOR SHALL HAVE
AUTHORITY TO EXPAND THE SCOPE OF THESE ARBITRATION PROVISIONS. ANY ARBITRATION
HEREUNDER SHALL BE CONDUCTED UNDER THE COMMERCIAL ARBITRATION RULES OF THE
AMERICAN ARBITRATION ASSOCIATION (AAA). EITHER PARTY MAY INVOKE ARBITRATION
PROCEDURES
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<PAGE>
HEREIN BY WRITTEN NOTICE FOR ARBITRATION CONTAINING A STATEMENT OF THE MATTER TO
BE ARBITRATED. THE PARTIES SHALL THEN HAVE FOURTEEN (14) DAYS IN WHICH THEY MAY
IDENTIFY A MUTUALLY AGREEABLE, NEUTRAL ARBITRATOR. AFTER THE FOURTEEN (14) DAY
PERIOD HAS EXPIRED, THE PARTIES SHALL PREPARE AND SUBMIT TO THE AAA A JOINT
SUBMISSION, WITH EACH PARTY TO CONTRIBUTE HALF OF THE APPROPRIATE ADMINISTRATIVE
FEE. IN THE EVENT THE PARTIES CANNOT AGREE UPON A NEUTRAL ARBITRATOR WITHIN
FOURTEEN (14) DAYS AFTER WRITTEN NOTICE FOR ARBITRATION IS RECEIVED, THEIR JOINT
SUBMISSION TO THE AAA SHALL REQUEST ARBITRATORS WHO ARE PRACTICING ATTORNEYS
WITH PROFESSIONAL EXPERIENCE IN THE FIELD OF CORPORATE LAW, AND THE PARTIES
SHALL ATTEMPT TO SELECT AN ARBITRATOR FROM THE PANEL ACCORDING TO AAA
PROCEDURES. UNLESS OTHERWISE AGREED BY THE PARTIES, THE ARBITRATION HEARING
SHALL TAKE PLACE IN THE WASHINGTON, D.C. METROPOLITAN AREA, AT A PLACE
DESIGNATED BY THE AAA. ALL ARBITRATION PROCEDURES HEREUNDER SHALL BE
CONFIDENTIAL. EACH PARTY SHALL BE RESPONSIBLE FOR ITS COSTS INCURRED IN ANY
ARBITRATION, AND THE ARBITRATOR SHALL NOT HAVE AUTHORITY TO INCLUDE ALL OR ANY
PORTION OF SAID COSTS IN AN AWARD REGARDLESS OF WHICH PARTY PREVAILS. THE
ARBITRATOR MAY INCLUDE EQUITABLE RELIEF. ANY ARBITRATION AWARDED SHALL BE
ACCOMPANIED BY A WRITTEN STATEMENT CONTAINING A SUMMARY OF THE ISSUES IN
CONTROVERSY, A DESCRIPTION OF THE AWARD, AND AN EXPLANATION OF THE REASONS FOR
THE AWARD.
9. Termination.
(a) Termination of Agreement. The Parties may terminate this
Agreement as provided below:
(i) the Buyer and the Sellers may terminate this
Agreement by mutual written consent at any time prior to the
Closing;
(ii) the Buyer may terminate this Agreement by giving
written notice to the Sellers at any time prior to the Closing in
the event the Sellers are in breach of any representation, warranty,
or covenant contained in this Agreement in any Material respect and
such breach has not been cured within ten (10) days of written
notice thereof, and the Sellers may terminate this Agreement by
giving written notice to the Buyer at any time prior to the Closing
in the event the Buyer is in breach of any representation, warranty,
or covenant contained in this Agreement in any Material respect and
such breach has not been cured within ten (10) days of written
notice thereof;
(iii) the Buyer may terminate this Agreement by giving
written notice to the Sellers at any time prior to the Closing if
the Closing shall not have occurred on or before March 5, 1999 by
reason of the failure of any condition precedent under Section 7(a)
hereof (unless the failure results primarily from the Buyer itself
breaching any representation, warranty, or covenant contained in
this Agreement); or
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<PAGE>
(iv) the Sellers may terminate this Agreement by giving
written notice to the Buyer at any time prior to the Closing if the
Closing shall not have occurred on or before March 5, 1999 by reason
of the failure of any condition precedent under Section 7(b) hereof
(unless the failure results primarily from the Sellers himself or
itself breaching any representation, warranty, or covenant contained
in this Agreement).
Nothing contained in this Section 9(a) shall alter, affect, modify
or restrict any Parties' rights to rely on and/or seek indemnification for a
breach of any of the representations and warranties and/or conditions or
covenants of any of the Parties contained in this Agreement.
(b) Effect of Termination. If either Buyer or Sellers
terminate this Agreement pursuant to Section 9(a) above, all obligations of the
Parties hereunder shall terminate without any Liability of any Party to any
other Party.
10. Miscellaneous
(a) [Reserved]
(b) Press Releases and Announcements. Except as may be
required by applicable securities laws or stock exchange requirements, no Party
shall issue any press release or public announcement relating to the subject
matter of this Agreement prior to, at or about the Closing without the prior
written approval of the Buyer and the Sellers, which written approval will not
be unreasonably withheld; provided, however, that any Party may make any public
disclosure it believes in good faith is required by law or regulation (in which
case the disclosing Party will advise the other Parties prior to making the
disclosure).
(c) No Third-Party Beneficiaries. This Agreement shall not
confer any rights or remedies upon any person other than the Parties and their
respective successors and permitted assigns.
(d) Entire Agreement. This Agreement (including the documents
referred to herein) constitutes the entire agreement among the Parties and
supersedes any prior understandings, agreements, or representations by or among
the Parties, written or oral, that may have related in any way to the subject
matter hereof; provided, however, that unless and until the consummation of the
purchase and sale transaction contemplated hereunder occurs, the Confidentiality
Agreement shall remain in full force and effect.
(e) Succession and Assignment. This Agreement shall be binding
upon and inure to the benefit of the Parties named herein and their respective
successors and permitted assigns. No Party may assign either this Agreement or
any of his, her or its rights, interests, or obligations hereunder without the
prior written approval of the Buyer and the Sellers; provided, however, that the
Buyer or Newco may assign (i) any or all of its rights and interests hereunder
to a wholly-owned Subsidiary of Buyer (in any or all of which cases the Buyer
and Newco nonetheless shall remain liable and responsible for the performance of
all of its respective
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<PAGE>
obligations hereunder) or (ii) any or all of its rights under Section 8 of the
Agreement to any lender providing debt financing to the Buyer or its Affiliates.
(f) Facsimile/Counterparts. This Agreement may be executed in
one or more counterparts, each of which shall be deemed an original but all of
which together will constitute one and the same instrument. A facsimile,
telecopy or other reproduction of this Agreement may be executed by one or more
parties hereto, and an executed copy of this Agreement may be delivered by one
or more parties hereto by facsimile or similar instantaneous electronic
transmission device pursuant to which the signature of or on behalf of such
party can be seen, and such execution and delivery shall be considered valid,
binding and effective for all purposes. At the request of any Party hereto, all
parties hereto agree to execute an original of this Agreement as well as any
facsimile, telecopy or other reproduction hereof.
(g) Descriptive Headings. The descriptive section headings
contained in this Agreement are inserted for convenience or reference only and
shall not control or affect in any way the meaning, interpretation, or
construction of any of the provisions of this Agreement.
(h) Notices. All notices, requests, demands, claims, and other
communications hereunder will be in writing. Any notice, request, demand, claim,
or other communication hereunder shall be deemed duly given if (and then two
business days after) it is sent by registered or certified mail, return receipt
requested, postage prepaid, and addressed to the intended recipient as set forth
below:
If to Sigma6 or the Sellers:
Mr. Russell Zack, President
Sigma6, Inc.
1435 Randolph Street Suite 403
Detroit, Michigan 48226
Tel: (313) 963-2115
Fax: (313) 963-2342
with a copy to:
Couzens, Lansky, Fealk, Ellis, Roeder & Lazar, P.C.
39395 West 12 Mile Road, Suite 200
P.O. Box 9057
Farmington Hills, Michigan 48333-9057
Attention: Donald A. Wagner
Tel: 248-489-8600
Fax 248-489-4156
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<PAGE>
If to the Buyer:
AppNet Systems, Inc.
6707 Democracy Blvd., Suite 1000
Bethesda, MD 20817
Attn: Toby Tobaccowala
Tel: (301) 493-8900
Fax: (301) 581-2488
with a copy to:
Hogan & Hartson L.L.P.
555 Thirteenth Street, NW
Washington, D.C. 20004
Attn: Christopher J. Hagan, Esq.
Tel: (202) 637-5771
Fax: (202) 637-5910
Any Party may give any notice, request, demand, claim, or other
communication hereunder using any other means (including personal delivery,
expedited courier, messenger service, telecopy, telex, ordinary mail, or
electronic mail), but no such notice, request, demand, claim, or other
communication shall be deemed to have been duly given unless and until it
actually is received by the individual for whom it is intended. Any Party may
change the address to which notices, requests, demands, claims, and other
communications hereunder are to be delivered by giving the other parties notice
in the manner herein set forth.
(i) Governing Law. ALL QUESTIONS CONCERNING THE CONSTRUCTION,
VALIDITY AND INTERPRETATION OF THIS AGREEMENT WILL BE GOVERNED BY AND CONSTRUED
IN ACCORDANCE WITH THE LAWS OF THE STATE OF MICHIGAN WITHOUT GIVING EFFECT TO
ANY CHOICE OF LAW OR CONFLICT OF LAW PROVISION OR RULE (WHETHER OF THE STATE OF
MICHIGAN OR ANY OTHER JURISDICTION) THAT WOULD CAUSE THE APPLICATION OF THE LAWS
OF ANY JURISDICTION OTHER THAN THE STATE OF MICHIGAN.
(j) Amendments and Waivers. No amendment of any provision of
this Agreement shall be valid unless the same shall be in writing and signed by
the Buyer and the Sellers. No waiver by any Party of any default,
misrepresentation, or breach of warranty or covenant hereunder, whether
intentional or not, shall be deemed to extend to any prior or subsequent
default, misrepresentation, or breach of warranty or covenant hereunder or
affect in any way any rights arising by virtue of any prior or subsequent such
occurrence.
(k) Severability. Any term or provision of this Agreement that
is invalid or unenforceable in any situation in any jurisdiction shall not
affect the validity or enforceability of the remaining terms and provisions
hereof or the validity or enforceability of the offending term or provision in
any other situation or in any other jurisdiction. If the final judgment
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<PAGE>
of a court of competent jurisdiction declares that any term or provision hereof
is invalid or unenforceable, the Parties agree that the court making the
determination of invalidity or unenforceability shall have the power to reduce
the scope, duration, or area of the term or provision, to delete specific words
or phrases, or to replace any invalid or unenforceable term or provision with a
term or provision that is valid and enforceable and that comes closest to
expressing the intention of the invalid or unenforceable term or provision, and
this Agreement shall be enforceable as so modified after the expiration of the
time within which the judgment may be appealed.
(l) Expenses. Each of the Parties and Sigma6 will bear his,
her or its own costs and expenses (including legal fees and expenses and
investment banking fees) incurred in connection with this Agreement and the
transactions contemplated hereby. Buyer and Sellers agree that Sigma6's expenses
shall be included as Funded Indebtedness. The Sellers acknowledge and agree that
Sigma6 has not borne or will bear any of the Sellers' costs and expenses
(including any of its legal fees and expenses and investment banking fees) in
connection with this Agreement or any of the transactions contemplated hereby.
(m) Construction. The language used in this Agreement will be
deemed to be the language chosen by the Parties to express their mutual intent,
and no rule of strict construction shall be applied against any Party. Any
reference to any federal, state, local, or foreign statute or law shall be
deemed also to refer to all rules and regulations promulgated thereunder, unless
the context requires otherwise. The Parties intend that each representation,
warranty, and covenant contained herein shall have independent significance. If
any Party has breached any representation, warranty, or covenant relating to the
same subject matter as any other representation, warranty or covenant
(regardless of the relative levels of specificity) which the Party has not
breached, it shall not detract from or mitigate the fact that the Party is in
breach of the first representation, warranty, or covenant.
(n) Incorporation of Exhibits, Annexes, and Schedules. The
Exhibits, Annexes, and Schedules identified in this Agreement are incorporated
herein by reference and made a part hereof.
(o) Specific Performance. Each of the Parties acknowledges and
agrees that the other Parties would be damaged irreparably in the event any of
the provisions of this Agreement are not performed in accordance with their
specific terms or otherwise are breached. Accordingly, each of the Parties
agrees that the other Parties shall be entitled to an injunction or injunctions
to prevent breaches of the provisions of this Agreement and to enforce
specifically this Agreement and the terms and provisions hereof in any action
instituted in any court of the United States or any state thereof having
jurisdiction over the Parties and the matter, in addition to any other remedy to
which they may be entitled, at law or in equity.
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<PAGE>
IN WITNESS WHEREOF, the Parties hereto have executed this Agreement
as of the date first above written.
BUYER:
APPNET SYSTEMS, INC.
By: /s/ Toby Tobaccawala
-------------------------------------
Name: Toby Tobaccawala
--------------------------------
Title: Senior Vice President
-------------------------------
NEWCO:
APPNET SIGMA6, INC.
By: /s/ Toby Tobaccawala
-------------------------------------
Name: Toby Tobaccawala
--------------------------------
Title: Senior Vice President
-------------------------------
Sigma6:
SIGMA6, INC.
By: /s/ Russell Zack
-------------------------------------
Name: Russell Zack
Title: President
[SIGNATURES CONTINUED ON NEXT PAGE]
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<PAGE>
SELLERS:
/s/ Russell Zack
---------------------------------------
Russell Zack
/s/ William Tigertt III
---------------------------------------
William Tigertt III
/s/ Rodrigo Sanchez
---------------------------------------
Rodrigo Sanchez
/s/ Jani Anderson
---------------------------------------
Jani Anderson
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<PAGE>
AMENDMENT NO. 1
TO
MERGER AGREEMENT
DATED AS OF FEBRUARY 25, 1999
AMONG
APPNET SYSTEMS, INC., ("BUYER")
APPNET SIGMA6, INC., ("NEWCO")
SIGMA6, INC. ("SIGMA6")
AND
THE SHAREHOLDERS OF SIGMA6 ("SELLERS")
WHEREAS, Buyer, Newco, Sigma6 and Sellers entered into that
certain merger agreement dated February 25, 1999 (the "AGREEMENT") whereby the
Parties agreed to merge Sigma6 with and into Newco upon the terms and conditions
of the Agreement;
WHEREAS, Buyer and Sellers have agreed to modify that certain
provision in the Agreement related to the sale of certain accounts receivable
and to adjust the indemnities based on the Updated Disclosure Schedule;
WHEREAS, the Buyer, Newco, Sigma6 and the Sellers wish to
amend the Agreement as set forth herein;
NOW, THEREFORE, the Parties hereby agree as follows:
1. SECTION 6(A). Section 6(a) of the Agreement is hereby amended by
replacing SECTION 6(A) in its entirety with the following:
"SALE OF MCCANN RECEIVABLE TO SELLERS AT CLOSING. The parties
hereto agree that Sellers shall have the right to purchase
from Sigma6 the accounts receivable due from McCann-Erickson
(the "MCCANN RECEIVABLE") in the aggregate amount of
$90,876.00 simultaneous with the Closing. In the event of such
purchase, the parties hereto further agree that (i) Sigma6
will utilize the funds received from the Sellers from the sale
of the McCann Receivable to pay down any Funded Indebtedness
then existing on the Closing Date which has not been paid;
(ii) the Sellers shall be the sole owner of the McCann
Receivable and (iii) upon receipt by Sigma6 of any sums in
payment of the McCann Receivable, such payments shall be held
in trust and delivered to Sellers' Representative properly
endorsed."
2. SECTION 8(B)(V). Section 8(b)(v) is amended to replace the
parenthetical "(to the extent such Liability is not otherwise included
or reserved for on the balance sheet of Sigma6 used to determine the
Net Worth adjustment)" beginning in line 5 of Section 8(b)(v) with the
following:
"(to the extent such Liabilities do not exceed their
respective accruals or reserves on the balance sheet of Sigma6
used to determine the Net
<PAGE>
Worth adjustment)"
3. SECTION 8(b)(v). Section 8(b)(v) is amended to replace "or (v) any
payments made by Cortex or Buyer to the Seller named Jani Anderson in
connection with the guarantee of such Seller's automobile lease" in the
last three lines of Section 8(b)(v) with the following:
", (v) any portion of the receivable by Reservision (as
referenced in the Updated Disclosure Schedule) which is not
collected by Sigma6, or (vi) any payments made by Sigma6 or
Buyer to the Seller named Jani Anderson in connection with the
guarantee of such Seller's automobile lease"
4. DEFINED TERMS. Capitalized terms used herein and not otherwise defined are
used as defined in the Agreement.
* * * * *
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<PAGE>
IN WITNESS WHEREOF, the parties hereto have executed this
Amendment No. 1 as of this 4th day of March, 1999.
BUYER:
APPNET SYSTEMS, INC.
By: /s/ Toby Tobaccowala
------------------------------
Name: Toby Tobaccowala
Title: Senior Vice President
NEWCO:
APPNET SIGMA6, INC.
By: /s/ Toby Tobaccowala
------------------------------
Name: Toby Tobaccowala
Title: Senior Vice President
SIGMA6:
SIGMA6, INC.
By: /s/ Russell Zack
------------------------------
Name: Russell Zack
Title: President
[SIGNATURES CONTINUED ON NEXT PAGE]
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<PAGE>
SELLERS:
/s/ Russell Zack
------------------------------
Russell Zack
/s/ William Tigertt III
------------------------------
William Tigertt III
/s/ Rodrigo Sanchez
------------------------------
Rodrigo Sanchez
/s/ Jani Anderson
------------------------------
Jani Anderson
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<PAGE>
FORM OF RECAPITALIZATION AGREEMENT
THIS RECAPITALIZATION AGREEMENT (this "AGREEMENT") is made as
of _____ __, 1999 among AppNet Systems, Inc., a Delaware corporation (the
"COMPANY"), GTCR Fund VI, L.P., a Delaware limited partnership ("GTCR FUND VI"),
GTCR VI Executive Fund, L.P., a Delaware limited partnership ("EXECUTIVE FUND"),
GTCR Associates VI, a Delaware general partnership ("ASSOCIATES FUND" and,
together with GTCR Fund VI and the Executive Fund, the "GTCR INVESTORS"), FSC
Corp. ("FSC"), Smart Technology, L.L.C. ("SMART TECHNOLOGY" and, together with
the GTCR Investors and FSC, the "STOCKHOLDERS"). Except as otherwise indicated
herein, capitalized terms used herein are defined in Section 5 hereof.
Each Stockholder owns the number of shares of the Company's
Class A Preferred Stock, par value $.01 per share (the "CLASS A PREFERRED") set
forth opposite such Stockholder's name on the SCHEDULE OF STOCKHOLDERS attached
hereto.
Section 1B of Part B.II. of Article Four of the Company's
Fourth Restated Certificate of Incorporation (the "CERTIFICATE") provides that
the Company shall, at the request of the holders of a majority of the Class A
Preferred, apply the net cash proceeds from any public offering of equity
securities to redeem the outstanding shares of Class A Preferred at a price
equal to the liquidation value thereof plus accrued and unpaid dividends
thereon. Section 6(l) of the Merger Agreement, dated as of July 31, 1998 (the
"MERGER AGREEMENT") by and among the Company, SSC Acquisition Sub #1, Inc.,
Software Services Corporation ("SSC") and the shareholders of SSC, provides that
in the event of an initial public offering of equity securities by the Company
the Company shall take all actions necessary so that the Company's Class B
Preferred Stock, par value $.01 per share (the "CLASS B PREFERRED") is either
(i) converted into shares of the Company's common stock or (ii) entitled to
receive the same per share consideration as that paid with respect to the Class
A Preferred.
The Company has filed a Registration Statement on Form S-1
(File No. 333-75205) (the "REGISTRATION STATEMENT") with the Securities and
Exchange Commission relating to an initial public offering (the "INITIAL PUBLIC
OFFERING") of the Company's common stock, par value $.0005 per share (the
"COMMON STOCK"), under the Securities Act. The Stockholders desire that the
Company redeem the shares of Class A Preferred with the net proceeds of the
Initial Public Offering after payment of underwriting discounts and reasonable
out-of-pocket fees and expenses incurred in connection therewith (the "NET
PROCEEDS"). However, the Company desires to use a portion of the Net Proceeds to
repay certain outstanding indebtedness, as described in the Registration
Statement (the "INDEBTEDNESS") and to maintain certain proceeds for working
capital as required by the Company's lenders. If the Company applies the
proceeds as set forth above, the remaining Net Proceeds may not be sufficient to
redeem all outstanding shares of Class A Preferred and Class B Preferred.
- 1 -
<PAGE>
The Stockholders and the Company desire to enter into an
agreement pursuant to which (i) the Net Proceeds remaining after the repayment
of the Indebtedness and after the application of proceeds as required by the
Company's lenders shall be used by the Company to redeem shares of Class A
Preferred and Class B Preferred and (ii) to the extent that the remaining Net
Proceeds of the Initial Public Offering are not sufficient to redeem all shares
of Class A Preferred and Class B Preferred, the remaining shares of Class A
Preferred and Class B Preferred shall be exchanged for shares of Common Stock.
The parties hereto agree as follows:
Section 1. REDEMPTION AND EXCHANGE.
1A. PAYMENT OF INDEBTEDNESS; REDEMPTION. At the Closing, the
Company shall apply the Net Proceeds to repay the Indebtedness and to maintain
certain proceeds for working capital, as required pursuant to a letter dated May
___, 1999 from BankBoston, N.A. and Antares Capital Corporation (a copy of which
is attached as EXHIBIT A hereto) (the "BANK BOSTON LETTER"). Subject to the
terms of the BankBoston Letter, the Company shall use the remaining Net Proceeds
to redeem shares of Class A Preferred and Class B Preferred, on a pro rata basis
according to the aggregate liquidation value and accrued and unpaid dividends of
the Class A Preferred and Class B Preferred, respectively. The redemption price
for each share of Class A Preferred Stock shall equal the liquidation value
thereof plus accrued and unpaid dividends thereon. The redemption of the Class A
Preferred Stock pursuant to this Section 1A is referred to herein as the
"REDEMPTION." At the Closing (as defined below), each Stockholder shall tender
to the Company the shares of Class A Preferred Stock held by such Stockholder
which are being redeemed pursuant to the Redemption. As described below in
Section 1B, any shares of Class A Preferred Stock not so tendered shall have the
right to receive Exchange Shares.
1B. EXCHANGE OF THE REMAINING SHARES OF CLASS A PREFERRED
STOCK. At the Closing, the Company shall issue to each Stockholder a number of
shares of Common Stock equal to (i) the aggregate liquidation value plus accrued
and unpaid dividends of the shares of Class A Preferred Stock, if any, held by
such Stockholder after giving effect to the Redemption divided by (ii) the
initial offering price of a share of Common Stock in the Initial Public
Offering, in exchange for the surrender to the Company and cancellation of the
shares of Class A Preferred Stock, if any, remaining after giving effect to the
Redemption and held by such Stockholder. The shares of Common Stock to be issued
to the Stockholders hereunder are referred to herein as the "EXCHANGE SHARES."
- 2 -
<PAGE>
1C. THE CLOSING. The closing of the transactions contemplated
hereby (the "CLOSING") shall take place concurrently with the consummation of
the Initial Public Offering and at the same location. At the Closing, the
Company (i) shall pay to each Stockholder the aggregate redemption price for the
shares of Class A Preferred Stock being redeemed and (ii) shall deliver, or
cause the Company's transfer agent to deliver, to each Stockholder stock
certificates evidencing the Exchange Shares to be issued by the Company to each
such Stockholder, registered in each such Stockholder's name or its nominee's
name, upon presentment and delivery by each such Stockholder to the Company of
the certificates representing the Class A Preferred Stock held by such
Stockholder duly endorsed for transfer to the Company. Each certificate for
Exchange Shares shall be imprinted with a legend in substantially the following
form:
The shares represented by this certificate have not been
registered under the Securities Act of 1933 (the "Act") or
applicable state securities law and may not be sold or
transferred unless (i) a registration statement covering such
shares is effective under the Act or (ii) the transaction is
exempt from registration under the Act and, if the Company
reasonably requests, an opinion reasonably satisfactory to the
Company to such effect has been rendered by counsel.
Section 2. CONDITIONS OF EACH STOCKHOLDER'S OBLIGATION AT THE
CLOSING. The obligation of each Stockholder to deliver its shares of Class A
Preferred Stock for redemption and exchange hereunder at the Closing is subject
to the satisfaction as of the Closing of the following conditions:
2A. REPRESENTATIONS AND WARRANTIES. The representations and
warranties contained in Section 3 hereof shall be true and correct in all
material respects at and as of the Closing as though then made, except to the
extent of changes caused by the transactions expressly contemplated herein.
2B. INITIAL PUBLIC OFFERING. The Company shall consummate the
Initial Public offering concurrently with the transactions contemplated hereby.
2C. AMENDMENT OF CERTIFICATE OF INCORPORATION; AMENDMENT TO
PURCHASE AGREEMENT. The Company shall have amended and restated its certificate
of incorporation in the form of EXHIBIT B attached hereto (the "RESTATED
CERTIFICATE"), the Restated Certificate shall be in full force and effect as of
the Closing under the laws of Delaware and shall not have been further amended
or modified. The Company shall have entered into an amendment to the Purchase
- 3 -
<PAGE>
Agreement, dated June 29, 1998 (the "PURCHASE AGREEMENT"), among the Company,
GTCR Golder Rauner, L.L.C. and Smart Technology, substantially in the form of
EXHIBIT C attached hereto, and the Purchase Agreement as so amended shall be in
full force and effect and shall not have been further amended or modified.
2D. SECURITIES LAW COMPLIANCE. The Company shall have made all
filings under all applicable federal and state securities laws necessary to
consummate the issuance of the Common Stock pursuant to this Agreement in
compliance with such laws.
2E. ISSUANCE OF CAPITAL STOCK. From the date hereof until the
Closing Date, the Company shall not have issued any additional shares of its
capital stock.
2F. CLOSING DOCUMENTS. The Company shall have delivered to
each Stockholder the following documents, which shall be in form and substance
reasonably satisfactory to the holders of a majority of the shares of Class A
Preferred Stock:
(a) A certificate of an authorized officer of the Company
stating that the conditions specified in Sections 2A
through 2E, inclusive, have been satisfied.
(b) Certified copies of (i) the resolutions adopted by
the Company's board of directors authorizing the
execution, delivery and performance of this Agreement
and all other agreements contemplated hereby, the
filing of the Restated Certificate, the issuance of
the Exchange Shares and the consummation of all other
transactions contemplated by this Agreement, and (ii)
the resolutions duly adopted by the Company's
stockholders adopting the Restated Certificate.
(c) Certified copies of the Restated Certificate and the
Company's bylaws, each as in effect at the Closing.
2G. WAIVER. Any condition specified in this Section 2 may be
waived if consented to by the holders of a majority of the shares of Class A
Preferred Stock held by all Stockholders.
Section 3. REPRESENTATIONS AND WARRANTIES OF THE COMPANY. As a
material inducement to the Stockholders to enter into this Agreement and to
perform their obligations hereunder, the Company hereby represents and warrants
that:
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<PAGE>
3A. ORGANIZATION AND CORPORATE POWER. The Company is a
corporation duly organized, validly and in good standing under the laws of
Delaware and is qualified to do business in every jurisdiction in which the
failure to so qualify has had or would reasonably be expected to have a material
adverse effect on the financial condition, operating results, assets or
operations or business prospects of the Company and its Subsidiaries taken as a
whole.
3B. AUTHORIZATION, NO BREACH. The execution, delivery and
performance of this Agreement and all other agreements contemplated hereby to
which the Company is a party have been duly authorized and the Restated
Certificate has been duly authorized and executed by the Company. This Agreement
and all other agreements contemplated hereby to which the Company is a party
each constitutes a valid and binding obligation of the Company, enforceable in
accordance with its terms. Subject to the filing of the Restated Certificate
with the Secretary of State of the State of Delaware, the execution and delivery
by the Company of this Agreement and all other agreements contemplated hereby to
which the Company is a party, the issuance of the Exchange Shares hereunder, and
the fulfillment of and compliance with the respective terms hereof and thereof
by the Company, do not and shall not (i) conflict with or result in a breach of
the terms, conditions or provisions of, (ii) constitute a default under, (iii)
result in the creation of any lien, security interest, charge or encumbrance
upon the Company's or any Subsidiary's capital stock or assets pursuant to, (iv)
give any third party the right to modify, terminate or accelerate any obligation
under, (v) result in a violation of, or (vi) require any authorization, consent,
approval, exemption or other action by or notice or declaration to, or filing
with, any court or administrative or governmental body or agency pursuant to,
the Certificate or the certificate of incorporation of any Subsidiary, or any
law, statute. rule or regulation to which the Company or any Subsidiary is
subject, or any agreement, instrument, order, judgment or decree to which the
Company or any Subsidiary is a party or by which their respective property is
bound, other than as expressly contemplated in such agreements described above
and other than those made and obtained.
3C. CAPITAL STOCK AND RELATED MATTERS. As of the date hereof,
the authorized capital stock of the Company consists of 75,000,000 shares of
Common Stock, ____ of which are issued and outstanding, and 5,000,000 shares of
preferred stock, par value $.01 per share, of which 96,621 are designated as
Class A Preferred (_____ of which are issued and outstanding) and 20,000 are
designated as Class B Preferred (11,576 of which are issued and outstanding). As
of the Closing, all of the outstanding shares of the Company's capital stock
(including the Exchange Shares) shall be validly issued, fully paid and
non-assessable. There are no statutory, or contractual stockholders preemptive
rights or rights of refusal with respect to the issuance of Exchange Shares
hereunder which have not been waived or terminated. The offer, sale and issuance
of the Exchange Shares hereunder do not require registration under the
Securities Act or any applicable state securities laws.
-5-
<PAGE>
Section 4. REPRESENTATIONS AND WARRANTIES OF THE STOCKHOLDERS.
Each Stockholder hereby represents and warrants to the Company, as to itself
only and not jointly and severally, that:
4A. AUTHORIZATION; ENFORCEABILITY. The execution, delivery and
performance of this Agreement and all other agreements contemplated hereby to
which the Stockholder is a party each constitutes a valid and binding obligation
of such Stockholder, enforceable in accordance with its terms.
4B. NO VIOLATION. The execution and delivery by the
Stockholder of this Agreement and all other agreements contemplated hereby to
which the Stockholder is a party, and the fulfillment of and compliance with the
respective terms hereof and thereof by the Stockholder, will not (a) conflict
with, result in a breach of any of the terms, conditions or provisions of, (b)
constitute a default under, (c) result in the violation of, (d) result in the
creation of any lien, security interest, charge or encumbrance upon such
Stockholders' Class A Preferred Stock, (e) give any third party the right to
terminate or to accelerate any obligation under, or (f) require any
authorization, consent, approval, execution or other action by or notice to or
filing with any court or administrative or governmental body under, the
provisions of the certificate of incorporation or bylaws of the Stockholder
(where the Stockholder is an incorporated entity) or any statute, regulation,
rule, judgment, order, decree or other restriction of any government,
governmental agency or court to which the Stockholder is subject or by which
its, his or her property is bound or any agreement to which the Stockholder is a
party.
4C. OWNERSHIP. Each Stockholder owns the shares of Class A
Preferred Stock set forth opposite such Stockholder's name on the SCHEDULE OF
STOCKHOLDERS free and clear of any restrictions on transfer, claims, taxes,
liens, charges, encumbrances, pledges, security interests, options, warrants,
rights, contracts, calls, commitments, equities and demands, except for
applicable restrictions on transfer under securities laws.
Section 5. DEFINITIONS. For the purposes of this Agreement,
the following terms have the meanings set forth below:
"PERSON" means an individual, a partnership, a corporation, a
limited liability company, an association, a joint stock company, a trust, a
joint venture, an unincorporated organization and a governmental entity or any
department, agency or political subdivision thereof.
"SECURITIES ACT" means the Securities Act of 1933, as amended,
or any similar
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<PAGE>
federal law then in force.
"SUBSIDIARY" means, with respect to any Person, any
corporation, limited liability company, partnership, association or other
business entity of which (i) if a corporation, a majority of the total voting
power of shares of stock entitled (without regard to the occurrence of any
contingency) to vote in the election of directors, managers or trustees thereof
is at the time owned or controlled, directly or indirectly, by that Person or
one or more of the other Subsidiaries of that Person or a combination thereof,
or (ii) if a limited liability company, partnership, association or other
business entity, a majority of the partnership or other similar ownership
interest thereof is at the time owned or controlled, directly or indirectly, by
any Person or one or more Subsidiaries of that Person or a combination thereof.
For purposes hereof, a Person or Persons shall be deemed to have a majority
ownership interest in a limited liability company, partnership, association or
other business entity if such Person or Persons shall be allocated a majority of
limited liability company, partnership, association or other business entity
gains or losses or shall be or control any managing director or general partner
of such limited liability company, partnership, association or other business
entity.
Section 6. MISCELLANEOUS.
6A. TERMINATION. This Agreement shall terminate upon the
earlier of (i) July 31, 1999, if the Initial Public Offering has not occurred by
such date and (ii) the delivery of notice by the Company to each Stockholder
that the Initial Public Offering will not be consummated.
6B. REMEDIES. Any Person having any rights under any provision
of this Agreement shall be entitled to enforce such rights specifically (without
posting a bond or other security), to recover damages by reason of any breach of
any provision of this Agreement and to exercise all other rights granted by law.
6C. CONSENT TO AMENDMENTS. Except as otherwise expressly
provided herein, the provisions of this Agreement may be amended and the Company
may take any action herein prohibited, or omit to perform any act herein
required to be performed by it, only if the Company has obtained the written
consent of the holders of a majority of the Class A Preferred Stock (or the
Exchange Shares issued in exchange therefor). .
6D. SURVIVAL OF REPRESENTATIONS AND WARRANTIES. All
representations and warranties contained herein or made in writing by any party
in connection herewith shall survive the execution and delivery of this
Agreement and the consummation of the transactions contemplated hereby,
regardless of any investigation made by any Stockholder or on its behalf.
-7-
<PAGE>
6E. SUCCESSORS AND ASSIGNS. Except as otherwise expressly
provided herein. all covenants and agreements contained in this Agreement by or
on behalf of any of the parties hereto shall bind and inure to the benefit of
the respective successors and assigns of the parties hereto whether so expressed
or not. In addition, and whether or not any express assignment has been made,
the provisions of this Agreement which are for any Stockholder's benefit as a
Stockholder or holder of Class A Preferred Stock or Exchange Shares are also for
the benefit of, and enforceable by, any subsequent holder of such Class A
Preferred Stock or Exchange Shares, as the case may be.
6F. SEVERABILITY. Whenever possible, each provision of this
Agreement shall be interpreted in such manner as to be effective and valid under
applicable law, but if any provision of this Agreement is held to be prohibited
by or invalid under applicable law, such provision shall be ineffective only to
the extent of such prohibition or invalidity, without invalidating the remainder
of this Agreement.
6G. 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
shall constitute one and the same Agreement.
6H. DESCRIPTIVE HEADINGS, INTERPRETATION. The descriptive
headings of this Agreement are inserted for convenience only and do not
constitute a substantive part of this Agreement. The use of the word
"'including" in this Agreement shall be by way of example rather than by
limitation.
6I. GOVERNING LAW. All questions concerning the construction,
validity and interpretation of this Agreement and the exhibits and schedules
hereto shall be governed by the internal law, and not the law of conflicts, of
Delaware.
6J. NOTICES. All notices, demands or other communications to
be given or delivered under or by reason of the provisions of this Agreement
shall be in writing and shall be deemed to have been given when delivered
personally to the recipient, sent to the recipient by reputable overnight
courier service (charges prepaid) or telecopied to the recipient. Such notices,
demands and other communications shall be sent to the Company and each
Stockholder at the address indicated next to such party's name on the signature
pages hereto or to such other address or to the attention of such other person
as the recipient party has specified by prior written notice to the sending
party.
6K. ENTIRE AGREEMENT. Except as otherwise expressly set forth
herein, this
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<PAGE>
Agreement embodies the complete agreement among the 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. Without
limiting the foregoing, each of the Company and each Stockholder hereby waives
any rights it may have under the Certificate with respect to the redemption or
conversion of the Class A Preferred Stock and agree that this Agreement shall
govern such matters.
* * * * *
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<PAGE>
IN WITNESS WHEREOF, the parties hereto have executed this
Recapitalization Agreement on the date first written above.
Address: APPNET SYSTEMS, INC.
6707 Democracy Boulevard
Suite 1000
Bethesda, MD 20817 By:
----------------------------
Attention: Ken S. Bajaj
Telecopier: Its:
----------------------------
Address: GTCR FUND VI, L.P.
6100 Sears Tower
Chicago, IL 60606-6402 By: GTCR Partners VI, L.P.
Attention: Philip A. Canfield Its: General Partner
Telecopier: 312/382-2201
By: GTCR Golder Rauner, L.L.C.
Its: General Partner
By:
----------------------------
Name: Philip A. Canfield
Its: Principal
Address: GTCR VI EXECUTIVE FUND, L.P.
6100 Sears Tower
Chicago, IL 60606-6402 By: GTCR Partners VI, L.P.
Attention: Philip A. Canfield Its: General Partner
Telecopier: 312/382-2201
By: GTCR Golder Rauner, L.L.C.
Its: General Partner
By:
----------------------------
Name: Philip A. Canfield
Its: Principal
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<PAGE>
Address: GTCR ASSOCIATES VI
6100 Sears Tower
Chicago, IL 60606-6402 By: GTCR Partners VI, L.P.
Attention: Philip A. Canfield Its: Managing General Partner
Telecopier: 312/382-2201
By: GTCR Golder Rauner, L.L.C.
Its: General Partner
By:
----------------------------
Name: Philip A. Canfield
Its: Principal
Address: SMART TECHNOLOGY, L.L.C.
By:
----------------------------
Its:
----------------------------
Address: FSC CORPORATION
By:
----------------------------
Its:
----------------------------
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<PAGE>
SCHEDULE OF STOCKHOLDERS
Name Shares of Class A Preferred
GTCR Fund VI, L.P.
GTCR VI Executive Fund, L.P.
GTCR Associates VI
Smart Technology, L.L.C.
FSC Corp.
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<PAGE>
EXHIBIT A
[BankBoston Letter]
-13-
<PAGE>
Exhibit 10.15
SECOND AMENDMENT
TO
REVOLVING CREDIT AGREEMENT (UNGUARANTEED)
Second Amendment dated as of May 24, 1999 to Revolving Credit Agreement
(the "Second Amendment"), by and among APPNET SYSTEMS, INC., a Delaware
corporation (the "Borrower"), BANKBOSTON, N.A. and the other lending
institutions listed on SCHEDULE 1 to the Credit Agreement (as hereinafter
defined) (the "Banks"), amending certain provisions of the Revolving Credit
Agreement dated as of January 8, 1999 (as amended and in effect from time to
time, the "Credit Agreement") by and among the Borrower, the Banks, BankBoston,
N.A. as agent for the Banks (the "Agent") and Antares Capital Corporation as
co-agent for the Banks. Terms not otherwise defined herein which are defined in
the Credit Agreement shall have the same respective meanings herein as therein.
WHEREAS, the Borrower and the Banks have agreed to modify certain terms
and conditions of the Credit Agreement as specifically set forth in this Second
Amendment;
NOW, THEREFORE, in consideration of the premises and the mutual
agreements contained herein and for other good and valuable consideration, the
receipt and sufficiency of which are hereby acknowledged, the parties hereto
hereby agree as follows:
Section 1. AMENDMENT TO SECTION 1.1 OF THE CREDIT AGREEMENT. Section
1.1 of the Credit Agreement is hereby amended as follows:
(a) The definition of "Consolidated Quick Assets" contained in ss.1.1
of the Credit Agreement is hereby amended by deleting such definition in its
entirety and restating it as follows:
CONSOLIDATED QUICK ASSETS. All cash and Accounts Receivables
(including, without duplication, the unbilled portion of Accounts
Receivable for services rendered in the ordinary course of business) of
the Borrower and its Subsidiaries on a consolidated basis that, in
accordance with generally accepted accounting principles, are properly
classified as current assets, PROVIDED that Accounts Receivable shall
be included only if good and collectible as determined by the Borrower
in accordance with established practice consistently applied and, with
respect to such Accounts Receivable, only if (a) payable and
outstanding not more than ninety (90) days after the date of the
invoices for services rendered or other transaction out of which any
such Account Receivable arose or (b) if payable and outstanding more
than ninety (90) such days, only 75% of the aggregate value of such
Accounts Receivable, and, to the extent the aggregate amount of such
Accounts Receivable is in excess of $500,000, only 50% of the aggregate
value of those Accounts Receivable which exceed $500,000; and such
Accounts Receivable shall be taken at their face value.
<PAGE>
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(b) The definition of "Consolidated Current Liabilities" contained
in Section 1.1 of the Credit Agreement is hereby amended by inserting
immediately after the words "PROVIDED, HOWEVER," the words "any nonrecurring
one-time liabilities relating to any acquisitions permitted hereunder which
are required to be capitalized shall not be included as a Consolidated
Current Liability and"
Section 2. AMENDMENT TO SECTION 10 OF THE CREDIT AGREEMENT. Section
10.5 of the Credit Agreement is hereby amended by deleting the words "less than
1.75:1.00 at any time" which appear in ss.10.5 and substituting in place thereof
the words "less than (a) 1.75:1.00 at any time from the Closing Date through the
fiscal quarter ended December 31, 1998; (b) 1.70:1.00 at any time during the
fiscal quarter ended March 31, 1999; and (c) 1.75 at any time thereafter"
Section 3. AMENDMENT TO SECTION 13 OF THE CREDIT AGREEMENT. Section
13.1 of the Credit Agreement is hereby amended by deleting Section 13.1(p) in
its entirety and restating it as follows:
(p) the Borrower shall at any time, legally or beneficially
own less than 100% of the capital stock of each Subsidiary (other than
AppNet Commerce Services, Inc.), or (i) prior to the IPO, the Investors
shall at any time, legally or beneficially own less than fifty one
percent (51%) of the capital stock of the Borrower, as adjusted
pursuant to any stock split, stock dividend or recapitalization or
reclassification of the capital of the Borrower and (ii) subsequent to
the IPO, any person or group of persons (within the meaning of Section
13 or 14 of the Securities Exchange Act of 1934, as amended) other than
the Investors shall have acquired beneficial ownership (within the
meaning of Rule 13d-3 promulgated by the Securities and Exchange
Commission under said Act) of thirty percent (30%) or more of the
common stock of the Borrower (as determined on a fully diluted basis),
or during any period of twelve consecutive calendar months, individuals
who were directors (the "Incumbent Board") of the Borrower on the first
day of such period shall cease to constitute a majority of the board of
directors of the Borrower, PROVIDED, HOWEVER, that if the election or
nomination for election by the Borrower's common stockholders of any
new director was approved by a vote of at least two-thirds of the
Incumbent Board, such new director shall, for purposes of this Credit
Agreement, be considered as a member of the Incumbent Board;
Section 4. CONDITIONS TO EFFECTIVENESS. This Second Amendment shall not
become effective until the Agent receives a counterpart of this Second
Amendment, executed by the Borrower, each Subsidiary and the Banks
Section 5. REPRESENTATIONS AND WARRANTIES. The Borrower hereby
represents that, on and as of the date hereof, each of the representations
and warranties made by it in Section 7 of the Credit Agreement remain true as
of the date hereof (except to the extent of changes resulting from
transactions contemplated or permitted by the Credit Agreement and the other
Loan Documents and changes occurring in the ordinary course of business that
singly or in the aggregate are not materially adverse, and to the extent that
such representations and warranties relate expressly to an earlier date),
PROVIDED, that all references therein to the Credit Agreement shall refer to
such Credit Agreement as amended hereby. In addition, the Borrower hereby
represents and warrants that the execution and delivery by the Borrower and
its Subsidiaries of
<PAGE>
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this Second Amendment and the performance by the Borrower and its Subsidiaries
of all of its agreements and obligations under the Credit Agreement and the
other Loan Documents as amended hereby are within the corporate authority of
each of the Borrower and its Subsidiaries and has been duly authorized by all
necessary corporate action on the part of the Borrower and its Subsidiaries.
Section 6. RATIFICATION, ETC. Except as expressly amended hereby, the
Credit Agreement and all documents, instruments and agreements related thereto,
including, but not limited to the Security Documents, are hereby ratified and
confirmed in all respects and shall continue in full force and effect. The
Credit Agreement and this Second Amendment shall be read and construed as a
single agreement. All references in the Credit Agreement or any related
agreement or instrument to the Credit Agreement shall hereafter refer to the
Credit Agreement as amended hereby.
Section 7. NO WAIVER. Nothing contained herein shall constitute a
waiver of, impair or otherwise affect any Obligations, any other obligation of
the Borrower or any rights of the Agent or the Banks consequent thereon.
Section 8. COUNTERPARTS. This Second Amendment may be executed in one
or more counterparts, each of which shall be deemed an original but which
together shall constitute one and the same instrument.
Section 9. GOVERNING LAW. THIS SECOND AMENDMENT SHALL BE GOVERNED BY,
AND CONSTRUED IN ACCORDANCE WITH, THE LAWS OF THE COMMONWEALTH OF MASSACHUSETTS
(WITHOUT REFERENCE TO CONFLICT OF LAWS).
<PAGE>
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IN WITNESS WHEREOF, the parties hereto have executed this Second
Amendment as a document under seal as of the date first above written.
APPNET SYSTEMS, INC.
By: /s/ Ken S. Bajaj
----------------------------------------
Title: President and Chief Executive Officer
BANKBOSTON, N.A.
By: /s/ Jay L. Massimo
----------------------------------------
Jay L. Massimo, Director
ANTARES CAPITAL CORPORATION
By: /s/
----------------------------------------
Title:
<PAGE>
Exhibit 10.20
FORM OF
APPNET SYSTEMS, INC.
1999 STOCK INCENTIVE PLAN
AS OF MAY __, 1999
(Reflects Reverse-Stock Split)
<PAGE>
APPNET SYSTEMS, INC.
1999 STOCK INCENTIVE PLAN
1. PURPOSE.
The purpose of this Plan is to strengthen AppNet Systems,
Inc., a Delaware corporation (the "Company"), by providing an incentive to its
employees, officers, directors and consultants and thereby encouraging them to
devote their abilities and industry to the success of the Company's business
enterprise. It is intended that this purpose be achieved by extending to
employees (including future employees who have received a formal written offer
of employment), officers, directors, and consultants of the Company and its
Subsidiaries an added long-term incentive for high levels of performance and
unusual efforts through the grant of Incentive Stock Options, Nonqualified Stock
Options, Formula Options, Stock Appreciation Rights, Dividend Equivalent Rights,
Performance Awards, Share Awards, Phantom Stock and Restricted Stock (as each
term is herein defined).
2. DEFINITIONS.
For purposes of the Plan:
2.1 "ADJUSTED FAIR MARKET VALUE" means, in the event of a
Change in Control, the highest price per Share paid to holders of the Shares in
any transaction (or series of related transactions) constituting or resulting in
a Change in Control other than pursuant to Section 2.10(b).
2.2 "AFFILIATE" means, with respect to any Person, any other
Person that, directly or indirectly through one or more intermediaries,
controls, or is controlled by, or under common control with, such Person. Any
Relative (for this purpose, "Relative" means a spouse, child, parent, parent of
spouse, sibling or grandchild) of an individual shall be deemed to be an
Affiliate of such individual for purposes hereof. Neither the Company nor any
Person controlled by the Company shall be deemed to be an Affiliate of any
holder of Company stock.
2.3 "AGREEMENT" means the written agreement between the
Company and an Optionee or Grantee evidencing the grant of an Option or Award
and setting forth the terms and conditions thereof.
<PAGE>
2.4 "AWARD" means a grant of Restricted Stock, Phantom Stock,
a Stock Appreciation Right, a Performance Award, a Dividend Equivalent Right, a
Share Award, or any or all of them.
2.5 "BENEFICIAL OWNERSHIP" means ownership within the meaning
of Rule 13d-3 promulgated under the Exchange Act.
2.6 "BENEFICIARY" means an individual, trust or estate who or
which, by a written designation of the Optionee or Grantee filed with the
Company by operation of law succeeds to the rights and obligations of the
Optionee or Grantee under the Plan and an Agreement upon the Optionee's or
Grantee's death.
2.7 "BOARD" means the Board of Directors of the Company.
2.8 "CAUSE" means:
(a) for purposes of Section 6.4, the term "Cause"
shall mean (i) intentional failure to perform duties as a Director, (ii)
intentional misrepresentation or the commission of an act of fraud in the
performance of such duties, (iii) breach of fiduciary duty involving personal
profit including, without limitation, embezzlement, misappropriation or
conversion of assets or opportunities of the Company or any of its Subsidiaries
or (iv) willful violation of any law, rule or regulation (other than traffic
violations or similar offenses) in connection with the performance of duties as
a Director; PROVIDED, HOWEVER, that if the term "Cause" is defined in the
Articles of Incorporation of the Company, Cause shall have the meaning given
such term in such Articles, or
(b) in the case of an Optionee or Grantee whose
employment with the Company or a Subsidiary is, as the date of the applicable
Agreement, subject to the terms of an employment agreement between such Optionee
or Grantee and the Company or Subsidiary, which employment agreement includes a
definition of "Cause," the term "Cause" as used in this Plan or any Agreement
shall have the meaning set forth in such employment agreement during the period
that such employment agreement remains in effect; or
(c) in all other cases, the term "Cause" as used in
this Plan or any Agreement shall mean (i) intentional failure to perform
reasonably assigned duties, (ii) dishonesty or willful misconduct in the
performance of duties, (iii) involvement in a transaction in connection with the
performance of duties to the Company or any of its Subsidiaries which
transaction is adverse to the interests of the Company or any of its
Subsidiaries and which is engaged in for personal profit or (iv) willful
violation of any law, rule or regulation (other than traffic violations or
similar offenses) in connection with the performance of duties.
-2-
<PAGE>
2.9 "CHANGE IN CAPITALIZATION" means any increase or reduction
in the number of Shares, or any change (including, without limitation, in the
case of a spin-off, dividend or other distribution in respect of Shares, a
change in value) in the Shares or exchange of Shares for a different number or
kind of shares or other securities of the Company or another corporation, by
reason of a reclassification, recapitalization, merger, consolidation,
reorganization, spin-off, split-up, issuance of warrants or rights or
debentures, stock dividend, stock split or reverse stock split, cash dividend,
property dividend, combination or exchange of shares, repurchase of shares,
change in corporate structure or a substantially similar transaction.
2.10 A "CHANGE IN CONTROL" shall mean the occurrence of any of
the following:
(a) An acquisition in one transaction or a series of
related transactions (other than directly from the Company or pursuant to
Options or Awards granted under this Plan or otherwise by the Company) of any
Voting Securities of the Company by any Person, immediately after which such
Person has Beneficial Ownership of fifty percent (50%) or more of the combined
voting power of the Company's then outstanding Voting Securities; PROVIDED,
HOWEVER, in determining whether a Change in Control has occurred pursuant to
this Section 2.10(a), Voting Securities which are acquired in a "Non-Control
Acquisition" (as hereinafter defined) shall not constitute an acquisition which
would cause a Change in Control. A "Non-Control Acquisition" shall mean an
acquisition by (i) an employee benefit plan (or a trust forming a part thereof)
maintained by (A) the Company or (B) any corporation or other Person of which a
majority of its voting power or its voting equity securities or equity interest
is owned, directly or indirectly, by the Company (for purposes of this
definition, a "Related Entity"), (ii) the Company or any Related Entity, or
(iii) any Person in connection with a "Non-Control Transaction" (as hereinafter
defined);
(b) The individuals who, as of the date hereof, are
members of the Board (the "Incumbent Board"), cease for any reason to constitute
at least a majority of the members of the Board; PROVIDED, HOWEVER, that if the
election, or nomination for election by the Company's common stockholders, of
any new director was approved by a vote of at least a majority of the Incumbent
Board, such new director shall, for purposes of this Plan, be considered as a
member of the Incumbent Board; PROVIDED FURTHER, HOWEVER, that no individual
shall be considered a member of the Incumbent Board if such individual initially
assumed office as a result of either an actual or threatened "Election Contest"
(as described in Rule 14a-11 promulgated under the Exchange Act) or other actual
or threatened solicitation of proxies or consents by or on behalf of a Person
other than the Board (a "Proxy Contest") including by reason of any agreement
intended to avoid or settle any Election Contest or Proxy Contest; or
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(c) The consummation of:
(i) A merger, consolidation or
reorganization involving the Company unless:
(A) the stockholders of the Company,
immediately before such merger,
consolidation or reorganization, own
directly or indirectly immediately following
such merger, consolidation or
reorganization, more than fifty percent
(50%) of the combined voting power of the
outstanding voting securities of the
corporation resulting from such merger or
consolidation or reorganization (the
"Surviving Corporation") in substantially
the same proportion as their ownership of
the Voting Securities immediately before
such merger, consolidation or
reorganization,
(B) the individuals who were members
of the Incumbent Board immediately prior to
the execution of the agreement providing for
such merger, consolidation or reorganization
constitute at least a majority of the
members of the board of directors of the
Surviving Corporation, or a corporation
Beneficially Owning directly or indirectly a
majority of the voting securities of the
Surviving Corporation, and
(C) no Person other than (1) the
Company, (2) any Related Entity, (3) any
employee benefit plan (or any trust forming
a part thereof) that, immediately prior to
such merger, consolidation or
reorganization, was maintained by the
Company, the Surviving Corporation, or any
Related Entity or (4) any Person who,
together with its Affiliates, immediately
prior to such merger, consolidation or
reorganization had Beneficial Ownership of
fifty percent (50%) or more of the then
outstanding Voting Securities, owns,
together with its Affiliates, Beneficial
Ownership of fifty percent (50%) or more of
the combined voting power of the Surviving
Corporation's then outstanding voting
securities.
(D) a transaction described in
clauses (A) through (C) above shall herein
be referred to as a "Non-Control
Transaction;"
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(ii) A complete liquidation or dissolution
of the Company; or
(iii) An agreement for the sale or other
disposition of all or substantially all of the assets
of the Company to any Person (other than a transfer
to a Related Entity or the distribution to the
Company's stockholders of the stock of a Related
Entity or any other assets).
Notwithstanding the foregoing, a Change in Control shall not be deemed
to occur solely because any Person (the "Subject Person") acquired Beneficial
Ownership of fifty percent (50%) or more of the combined voting power of the
Company's then outstanding Voting Securities as a result of the acquisition of
Voting Securities by the Company which, by reducing the number of Voting
Securities then outstanding, increases the proportional number of shares
Beneficially Owned by the Subject Persons, provided that if a Change in Control
would occur (but for the operation of this sentence) as a result of the
acquisition of Voting Securities by the Company, and (1) before such share
acquisition by the Company the Subject Person becomes the Beneficial Owner of
any new or additional Voting Securities in a related transaction or (2) after
such share acquisition by the Company the Subject Person becomes the Beneficial
Owner of any new or additional Voting Securities which in either case increases
the percentage of the then outstanding Voting Securities Beneficially Owned by
the Subject Person, then a Change in Control shall occur.
2.11 "CODE" means the Internal Revenue Code of 1986, as
amended.
2.12 "COMMITTEE" means a committee, as described in
Section 3.1, appointed by the Board from time to time to administer the Plan and
to perform the functions set forth herein.
2.13 "COMPANY" means AppNet Systems, Inc.
2.14 "DIRECTOR" means a director of the Company.
2.15 "DISABILITY" means:
(a) in the case of an Optionee or Grantee whose
employment with the Company or a Subsidiary is, as of the date of the applicable
Agreement, subject to the terms of an employment agreement between such Optionee
or Grantee and the Company or Subsidiary, which employment agreement includes a
definition of "Disability," the term "Disability" as used in this Plan or any
Agreement shall have the meaning set forth in such employment agreement during
the period that such employment agreement remains in effect; or
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(b) in all other cases, the term "Disability" as used
in this Plan or any Agreement shall mean a physical or mental infirmity which
impairs the Optionee's or Grantee's ability to perform substantially his or her
duties for a period of one hundred eighty (180) consecutive days.
2.16 "DISABILITY DATE" means the date which is six (6) months
after the date on which an Optionee or Grantee is first absent from active
employment with the Company by reason of a Disability.
2.17 "DIVIDEND EQUIVALENT RIGHT" means a right to receive all
or some portion of the cash dividends that are or would be payable with respect
to Shares.
2.18 "DIVISION" means any of the operating units or divisions
of the Company designated as a Division by the Committee.
2.19 "ELIGIBLE INDIVIDUAL" means any of the following
individuals who is designated by the Committee as eligible to receive Options or
Awards subject to the conditions set forth herein: (a) any director (other than
a Nonemployee Director), officer or employee of the Company or a Subsidiary, (b)
any individual to whom the Company or a Subsidiary has extended a formal,
written offer of employment, or (c) any consultant or advisor of the Company or
a Subsidiary.
2.20 "EXCHANGE ACT" means the Securities Exchange Act of 1934,
as amended.
2.21 "FAIR MARKET VALUE" on any date means the closing sales
prices of the Shares on such date on the principal national securities exchange
on which such Shares are listed or admitted to trading, or, if such Shares are
not so listed or admitted to trading, the average of the per Share closing bid
price and per Share closing asked price on such date as quoted on the National
Association of Securities Dealers Automated Quotation System or such other
market in which such prices are regularly quoted, or, if there have been no
published bid or asked quotations with respect to Shares on such date, the Fair
Market Value shall be the value established by the Board in good faith and, in
the case of an Incentive Stock Option, in accordance with Section 422 of the
Code.
2.22 "FORMULA OPTION" means an Option granted pursuant to
Section 6.
2.23 "GRANTEE" means a person to whom an Award has been
granted under the Plan.
2.24 "INCENTIVE STOCK OPTION" means an Option satisfying the
requirements of Section 422 of the Code and designated by the Committee as an
Incentive Stock Option.
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2.25 "INITIAL PUBLIC OFFERING" means the consummation of the
first public offering of Shares pursuant to a registration statement (other than
on Form S-8 or successor form) filed with, and declared effective by, the
Securities and Exchange Commission.
2.26 "NONEMPLOYEE DIRECTOR" means a director of the Company
who is a "nonemployee director" within the meaning of Rule 16b-3 promulgated
under the Exchange Act.
2.27 "NONQUALIFIED STOCK OPTION" means an Option which is not
an Incentive Stock Option.
2.28 "NORMAL RETIREMENT DATE" means the date on which an
Optionee or Grantee terminates active employment with the Company on or after
attainment of age 65, but does not include termination by the Company for Cause.
2.29 "OPTION" means a Nonqualified Stock Option, an Incentive
Stock Option, a Formula Option, or any or all of them.
2.30 "OPTIONEE" means a person to whom an Option has been
granted under the Plan.
2.31 "OUTSIDE DIRECTOR" means a director of the Company who is
an "outside director" within the meaning of Section 162(m) of the Code and the
regulations promulgated thereunder.
2.32 "PARENT" means any corporation which is a parent
corporation (within the meaning of Section 424(e) of the Code) with respect to
the Company.
2.33 "PERFORMANCE AWARDS" means Performance Units, Performance
Shares or either or both of them.
2.34 "PERFORMANCE-BASED COMPENSATION" means any Option or
Award that is intended to constitute "performance based compensation" within the
meaning of Section 162(m)(4)(C) of the Code and the regulations promulgated
thereunder.
2.35 "PERFORMANCE CYCLE" means the time period specified by
the Committee at the time Performance Awards are granted during which the
performance of the Company, a Subsidiary or a Division will be measured.
2.36 "PERFORMANCE OBJECTIVES" has the meaning set forth in
Section 11.
2.37 "PERFORMANCE SHARES" means Shares issued or transferred
to an Eligible Individual under Section 11.
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2.38 "PERFORMANCE UNITS" means Performance Units granted to an
Eligible Individual under Section 11.
2.39 "PERSON" means `person' as such term is used for purposes
of Section 13(d) or 14(d) of the Exchange Act, including without limitation, any
individual, corporation, limited liability company, partnership, trust,
unincorporated organization, government or any agency or political subdivision
thereof, or any other entity or any group of Persons.
2.40 "PHANTOM STOCK" means a right granted to an Eligible
Individual under Section 12 representing a number of hypothetical Shares.
2.41 "PLAN" means the AppNet Systems, Inc. 1999 Stock
Incentive Plan, as amended and restated from time to time.
2.42 "POOLING TRANSACTION" means an acquisition of the Company
in a transaction which is intended to be treated as a "pooling of interests"
under generally accepted accounting principles.
2.43 "RESTRICTED STOCK" means Shares issued or transferred to
an Eligible Individual pursuant to Section 10.
2.44 "SHARE AWARD" means a grant of Shares pursuant to Section
12.
2.45 "SHARES" means the common stock, par value $.0005 per
share, of the Company.
2.46 "STOCK APPRECIATION RIGHT" means a right to receive all
or some portion of the increase in the value of the Shares as provided in
Section 8 hereof.
2.47 "SUBSIDIARY" means (i) except as provided in subsection
(ii) below, any corporation which is a subsidiary corporation (within the
meaning of Section 424(f) of the Code) with respect to the Company, and (ii)
with respect to provisions relating to the eligibility to receive Options or
Awards other than Incentive Stock Options and to continued employment for
purposes of Options and Awards (unless the Committee determines otherwise), any
entity, whether or not incorporated, in which the Company directly or indirectly
owns fifty percent (50%) or more of the outstanding equity or other ownership
interests.
2.48 "SUCCESSOR CORPORATION" means a corporation, or a parent
or subsidiary thereof, which issues or assumes an Option or Award in a
transaction described in Section 424(a) without regard to Sections 424(a)(1) and
(2) thereof.
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2.49 "TAX BENEFIT" means an actual decrease in the Company's
liability for taxes in any period.
2.50 "TEN-PERCENT STOCKHOLDER" means an Eligible Individual,
who, at the time an Incentive Stock Option is to be granted to him or her, owns
(within the meaning of Section 422(b)(6) of the Code) stock possessing more than
ten percent (10%) of the total combined voting power of all classes of stock of
the Company, or of a Parent or a Subsidiary.
2.51 "TERMINATION OF EMPLOYMENT" means the later of (i)
severance of the employer-employee relationship with the Company or (ii) the
resignation, removal or termination of an officer or Director of the Company.
2.52 "TRANSITION PERIOD" means the period beginning with an
Initial Public Offering and ending as of the earlier of (i) the date of the
first annual meeting of stockholders of the Company at which Directors are to be
elected that occurs after the close of the third (3rd) calendar year following
the calendar year in which the Initial Public Offering occurs, (ii) the
expiration of the Plan, (iii) a material modification of the Plan within the
meaning of Treasury Regulation ss. 1.162-27(h)(1)(iii), or (iv) the issuance of
all Shares that have been allocated under the Plan.
2.53 "VOTING SECURITIES" means all outstanding voting
securities of the Company entitled to vote generally in the election of the
Board of Directors.
3. ADMINISTRATION.
3.1 The Plan shall be administered by the Committee, which
shall be appointed by the Board. The Committee shall hold meetings at such times
as may be necessary for the proper administration of the Plan. The Committee
shall keep minutes of its meetings. A quorum shall consist of a majority of the
members of the Committee and a majority of a quorum may authorize any action.
Any decision or determination reduced to writing and signed by all of the
members of the Committee shall be as fully effective as if made by a majority
vote at a meeting duly called and held. The Committee shall consist of at least
two (2) Directors and may consist of the entire Board; PROVIDED, HOWEVER, that
from and after the date of an Initial Public Offering, (A) if the Committee
consists of less than the entire Board, each member shall be a Nonemployee
Director and (B) to the extent necessary for any Option or Award intended to
qualify as Performance-Based Compensation to so qualify, each member of the
Committee, whether or not it consists of the entire Board, shall be an Outside
Director.
3.2 For purposes of the preceding sentence, if one or more
members of the Committee is not a Nonemployee Director and, if necessary for any
Option or Award
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intended to qualify as Performance-Based Compensation to so qualify, an Outside
Director, but recuses himself or herself or abstains from voting with respect to
a particular action taken by the Committee, then the Committee, with respect to
that action, shall be deemed to consist only of the members of the Committee who
have not recused themselves or abstained from voting. Subject to applicable law,
the Committee may delegate its authority under the Plan to any other person or
persons.
3.3 No member of the Committee shall be liable for any action,
failure to act, determination or interpretation made in good faith with respect
to this Plan or any transaction hereunder. The Company hereby agrees to
indemnify each member of the Committee for all costs and expenses and, to the
extent permitted by applicable law, any liability incurred in connection with
defending against, responding to, negotiating for the settlement of or otherwise
dealing with any claim, cause of action or dispute of any kind arising in
connection with any actions in administering this Plan or in authorizing or
denying authorization to any transaction hereunder.
3.4 Subject to the express terms and conditions set forth
herein, the Committee shall have the power from time to time to:
(a) determine those Eligible Individuals to whom
Options shall be granted under the Plan and the number of such Options to be
granted and to prescribe the terms and conditions (which need not be identical)
of each such Option, including the purchase price per Share subject to each
Option, and make any amendment or modification to any Option Agreement
consistent with the terms of the Plan;
(b) select those Eligible Individuals to whom Awards
shall be granted under the Plan and to determine the number of Shares in respect
of which each Award is granted, the terms and conditions (which need not be
identical) of each such Award, including the restrictions or Performance
Objectives relating to Awards and the maximum value of any Award, and make any
amendment or modification to any Award Agreement consistent with the terms of
the Plan;
(c) construe and interpret the Plan and the Options
and Awards granted hereunder and to establish, amend and revoke rules and
regulations for the administration of the Plan, including, without limitation,
correcting any defect or supplying any omission, or reconciling any
inconsistency in the Plan or in any Agreement, in the manner and to the extent
it shall deem necessary or advisable, including so that the Plan and the
operation of the Plan complies with the Code to the extent applicable and other
applicable law, and otherwise to make the Plan fully effective. All decisions
and determinations by the Committee in the exercise of this power shall be
final, binding and conclusive upon the Company, its Subsidiaries, the Optionees
and Grantees, and all other persons having any interest therein;
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(d) determine the duration and purposes for leaves of
absence which may be granted to an Optionee or Grantee on an individual basis
without constituting a termination of employment or service for purposes of the
Plan;
(e) exercise its sole discretion with respect to the
powers and rights granted to it as set forth in the Plan; and
(f) generally, exercise such powers and to perform
such acts as are deemed necessary or advisable to promote the best interests of
the Company with respect to the Plan.
4. STOCK SUBJECT TO THE PLAN; GRANT LIMITATIONS.
4.1 The aggregate number of Shares that may be made the
subject of Options and Awards granted under the Plan shall not exceed
2,000,000 plus the additional Shares described in Section 4.2; PROVIDED,
HOWEVER, that the aggregate maximum number of Shares that may be made the
subject of Options and Awards granted under the Plan shall not exceed
10,000,000; and PROVIDED, FURTHER, HOWEVER, that in the aggregate, not more
than one-third of the number of allotted Shares may be made the subject of
Restricted Stock Awards under Section 10 of the Plan (other than shares of
Restricted Stock made in settlement of Performance Units pursuant to Section
11.2(b)). Upon a Change in Capitalization, the maximum number of Shares
referred to in the first sentence of this Section 4.1 shall be adjusted in
number and kind pursuant to Section 14. The Company shall reserve for the
purposes of the Plan, out of its authorized but unissued Shares or out of
Shares held in the Company's treasury, or partly out of each, such number of
Shares as shall be determined by the Board.
4.2 As of January 1 of each year, commencing with the year
2000, the aggregate number of Shares that may be made the subject of Options
and Awards granted under the Plan shall automatically increase by a number
equal to an amount determined by the Committee in its sole discretion.
4.3 Upon the granting of an Option or an Award, the number of
Shares available under Section 4.1 for the granting of further Options and
Awards shall be reduced as follows:
(a) In connection with the granting of an Option or
an Award (other than the granting of a Performance Unit denominated in dollars),
the number of Shares shall be reduced by the number of Shares in respect of
which the Option or Award is granted or denominated.
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(b) In connection with the granting of a Performance
Unit denominated in dollars, the number of Shares shall be reduced by an amount
equal to the quotient of (i) the dollar amount in which the Performance Unit is
denominated, divided by (ii) the Fair Market Value of a Share on the date the
Performance Unit is granted.
4.4 Whenever any outstanding Option or Award or portion
thereof expires, is canceled, or is otherwise terminated for any reason without
having been exercised or payment having been made in respect of the entire
Option or Award, the Shares allocable to the expired, canceled, or otherwise
terminated portion of the Option or Award may again be the subject of Options or
Awards granted hereunder.
5. OPTION GRANTS FOR ELIGIBLE INDIVIDUALS.
5.1 AUTHORITY OF COMMITTEE. Subject to the provisions of the
Plan, the Committee shall have full and final authority to select those Eligible
Individuals who will receive Options, the terms and conditions of which shall be
set forth in an Agreement; PROVIDED, HOWEVER, that no Eligible Individual shall
receive any Incentive Stock Options unless he is an employee of the Company, a
Parent or a Subsidiary at the time the Incentive Stock Option is granted.
5.2 PURCHASE PRICE. The purchase price (which may be greater
than, less than or equal to the Fair Market Value on the date of grant) or the
manner in which the purchase price is to be determined for Shares under each
Option shall be determined by the Committee and set forth in the Agreement
pursuant to which each Option is granted; PROVIDED, HOWEVER, that the purchase
price per Share under each Incentive Stock Option shall not be less than 100% of
the Fair Market Value of a Share on the date the Option is granted (110% in the
case of an Incentive Stock Option granted to a Ten-Percent Stockholder).
5.3 MAXIMUM DURATION. Options granted hereunder shall be for
such term as the Committee shall determine, PROVIDED, HOWEVER, that an Option
shall not be exercisable after the expiration of ten (10) years from the date it
is granted (five (5) years in the case of an Incentive Stock Option granted to a
Ten-Percent Stockholder); PROVIDED, FURTHER, HOWEVER, that the Committee may
provide that an Option (other than an Incentive Stock Option) may, upon the
death of the Optionee, be exercised for up to one (1) year following the date of
the Optionee's death even if such period extends beyond ten (10) years from the
date the Option is granted. The Committee may, subsequent to the granting of any
Option, extend the term thereof, but in no event shall the term as so extended
exceed the maximum term provided for in the preceding sentence.
5.4 EXERCISABILITY. Subject to Sections 5.5 and 7.5, each
Option shall become exercisable in such installments (which need not be equal)
and at such times as
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may be designated by the Committee and set forth in the Agreement. To the extent
not exercised, installments shall accumulate and be exercisable, in whole or in
part, at any time after becoming exercisable, but not later than the date the
Option expires. The Committee may accelerate the exercisability of any Option or
portion thereof at any time.
5.5 TERMINATION. Subject to Sections 7.5 and 13 and unless
otherwise provided by the Committee, in its sole discretion, in the applicable
Agreement, the following provisions shall apply to Options upon a Termination of
Employment:
(a) Subject to Section 5.3, unless otherwise
determined by the Committee at the time of grant (and set forth in the
applicable Agreement) or at a later date, except in the case of Disability,
retirement on or after the Optionee's Normal Retirement Date and death as
provided in Sections 5.5(c) and 5.5(d) below, upon an Optionee's Termination of
Employment with the Company, a Parent or a Subsidiary for any reason other than
a termination for Cause, any unexercised Option held by such Optionee shall
expire three (3) months after the Optionee has a Termination of Employment and
such Option may only be exercised by the Optionee or his or her Beneficiary to
the extent that the Option or a portion thereof was exercisable on the date of
Termination of Employment; PROVIDED, HOWEVER, that no Option may be exercised
after the expiration date specified for the particular Option in the Agreement.
(b) If the Optionee's Termination of Employment
arises as a result of a termination for Cause, then, unless the Committee
determines otherwise at the time of the Termination of Employment, any
unexercised Options held by such Optionee shall terminate and expire
concurrently with the Optionee's Termination of Employment and no rights
thereunder may be exercised.
(c) Subject to Section 5.3, unless otherwise
determined by the Committee at the time of grant (and set forth in the
applicable Agreement) or at a later date, if an Optionee suffers a Disability or
retires on or after the Optionee's Normal Retirement Date, any unexercised
Option held by such disabled or retired Optionee shall expire one (1) year after
the Disability Date or date of Termination of Employment by reason of
retirement, as the case may be, and such Option may only be exercised by the
Optionee or his or her guardian or legal representative to the extent that the
Option or a portion thereof was exercisable on the Disability Date or the date
of Termination of Employment by reason of retirement, as the case may be;
PROVIDED, HOWEVER, no Option may be exercised after the expiration date
specified for the particular Option in the Agreement.
(d) Subject to Section 5.3, unless otherwise
determined by the Committee at the time of grant (and set forth in the
applicable Agreement) or at a later date, if an Optionee dies while still
employed by the Company, the Options which the
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Optionee was entitled to exercise on the date of the Optionee's death may be
exercised at any time after the Optionee's death by the Optionee's Beneficiary;
PROVIDED, HOWEVER, that no Option may be exercised after the earlier of: (i) one
(1) year after the Optionee's death or (ii) the expiration date specified for
the particular Option in the Agreement. If an Optionee dies after his or her
Termination of Employment, then the Options which the Optionee was entitled to
exercise on the date of the Optionee's death may be exercised by his or her
Beneficiary within the period specified in Sections 5.5(a) or 5.5(c), as the
case may be.
(e) Subject to Section 5.3 and notwithstanding any
other provision of this Section 5.5, upon an Optionee's Termination of
Employment at any time on, or within one (1) year after, the occurrence of a
Change in Control, each Option held by the Optionee that was exercisable as of
the date of such Termination of Employment shall remain exercisable for a period
ending not before the earlier of (A) the first anniversary of the Termination of
Employment or (B) the expiration of the stated term of the Option.
(f) Unless otherwise determined by the Committee at
the time of grant (and set forth in the applicable Agreement) or at a later
date, the Option (or portion thereof), to the extent not yet vested and
exercisable as of the date of the Optionee's Termination of Employment, shall
terminate immediately upon such date.
5.6 DEFERRED DELIVERY OF OPTION SHARES. The Committee may, in
its sole discretion, permit Optionees to elect to defer the issuance of Shares
upon the exercise of one or more Nonqualified Stock Options granted pursuant to
the Plan. The terms and conditions of such deferral shall be determined at the
time of the grant of the Option or thereafter and shall be set forth in the
Agreement evidencing the Option.
5.7 MODIFICATION. No modification of a Option shall adversely
alter or impair any rights or obligations under the Option without the
Optionee's consent.
5.8 LIMITATIONS ON INCENTIVE STOCK OPTIONS. To the extent that
the aggregate Fair Market Value (determined as of the date of the grant) of
Shares with respect to which Incentive Stock Options granted under the Plan and
"incentive stock options" (within the meaning of Section 422 of the Code)
granted under all other plans of the Company or its Subsidiaries (in either case
determined without regard to this Section 5.8) are exercisable by an Optionee
for the first time during any calendar year exceeds $100,000, such Incentive
Stock Options shall be treated as Nonqualified Stock Options. In applying the
limitation in the preceding sentence in the case of multiple Option grants,
Options which were intended to be Incentive Stock Options shall be treated as
Nonqualified Stock Options according to the order in which they were granted
such that the most recently granted Options are first treated as Nonqualified
Stock Options.
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6. OPTION GRANTS FOR NONEMPLOYEE DIRECTORS.
6.1 GRANT. Formula Options shall be granted (i) to a
Nonemployee Director who becomes a member of the Board after May __, 1999 upon
election or appointment and (ii) to all Nonemployee Directors who are members of
the Board as follows:
(a) INITIAL GRANT. Each Nonemployee Director who
becomes a Director after May ___, 1999 shall, upon becoming a Director, be
granted a Formula Option in respect of [ ] Shares.
(b) ANNUAL GRANT. Each Nonemployee Director shall be
granted a Formula Option in respect of [ ] Shares on the first business day
of January in each year that the Plan is in effect provided that the Nonemployee
Director is a Director on such date; PROVIDED, HOWEVER, that a Nonemployee
Director shall not be entitled to receive an annual grant pursuant to this
Section 6.1(b) for the calendar year in which such Nonemployee Director is first
elected or appointed to the Board.
(c) TERMS AND CONDITIONS. All Formula Options granted
pursuant to this Section 6 shall be evidenced by an Agreement containing such
other terms and conditions not inconsistent with the provisions of this Plan as
determined by the Board; PROVIDED, HOWEVER, that such terms shall not vary the
price, amount or timing of Formula Options provided under this Section 6,
including provisions dealing with vesting, forfeiture and termination of such
Formula Options.
6.2 PURCHASE PRICE. The purchase price for Shares under each
Formula Option shall be equal to 100% of the Fair Market Value of such Shares on
the date the Formula Option is granted.
6.3 VESTING. Subject to Sections 6.4 and 7.5, each Formula
Option shall become fully vested and exercisable with respect to [ %] of the
Shares subject thereto on each of the [ ] anniversaries of the date of
grant; PROVIDED, HOWEVER, that the Optionee continues to serve as a Director
as of such date. If an Optionee ceases to serve as a Director for any reason,
the Optionee shall have no rights with respect to any Formula Option which
has not then vested pursuant to the preceding sentence and the Optionee shall
automatically forfeit any Formula Option or portion thereof which remains
unvested.
6.4 DURATION. Subject to Section 7.5, each Formula Option
shall terminate on the date which is the tenth (10th) anniversary of the date of
grant; PROVIDED, HOWEVER, that if an Optionee dies while a Director and prior to
such tenth (10th) anniversary, the Formula Option may be exercised for up to one
(1) year following the
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date of the Optionee's death even if such period extends beyond ten (10) years
from the date the Formula Option is granted, unless terminated earlier as
follows:
(a) If an Optionee's service as a Director terminates
for any reason other than Disability, death or Cause, the Optionee may for a
period of three (3) months after such termination exercise his or her Formula
Option to the extent, and only to the extent, that such Formula Option or
portion thereof was vested and exercisable as of the date the Optionee's service
as a Director terminated, after which time the Formula Option shall
automatically terminate in full.
(b) If an Optionee's service as a Director terminates
by reason of the Optionee's resignation or removal from the Board due to
Disability, the Optionee or his or her guardian or legal representative may, for
a period of one (1) year after such termination, exercise his or her Formula
Option to the extent, and only to the extent, that such Formula Option or
portion thereof was vested and exercisable, as of the date the Optionee's
service as Director terminated, after which time the Formula Option shall
automatically terminate in full.
(c) If an Optionee's service as a Director terminates
for Cause, the Formula Option granted to the Optionee hereunder shall
immediately terminate in full and no rights thereunder may be exercised.
(d) If an Optionee dies while a Director, the Formula
Option which the Optionee was entitled to exercise on the date of the Optionee's
death may be exercised at any time after the Optionee's death by the Optionee's
Beneficiary; PROVIDED, HOWEVER, that no Formula Option may be exercised after
the first anniversary of the Optionee's death. If an Optionee dies after his or
her service as a Director terminates, then the Formula Options to which the
Optionee was entitled to exercise on the date of the Optionee's death may be
exercised by his or her Beneficiary within the period specified in Sections.
6.4(a) or 6.4 (b), as the case may be.
(e) Notwithstanding any other provision of this
Section 6.4, in the event an Optionee's service as a Director of the Company is
terminated at any time on, or within one (1) year after, the occurrence of a
Change in Control, each Formula Option held by the Optionee that was exercisable
as of the date of termination of the Optionee's service shall remain exercisable
for a period ending not before the earlier of (A) the first anniversary of the
termination of the Optionee's employment or service or (B) the expiration of the
stated term of the Formula Option.
(f) The Formula Option (or portion thereof), to the
extent not yet vested and exercisable as of the date the Director's service as a
Director terminates for any reason shall terminate immediately upon such date.
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7. TERMS AND CONDITIONS APPLICABLE TO ALL OPTIONS.
7.1 ADDITIONAL TERMS. The provisions of this Section 7 shall
apply to all Options.
7.2 NON-TRANSFERABILITY. No Option granted hereunder shall be
transferable by the Optionee to whom it is granted otherwise than by will or by
the laws of descent and distribution or, in the case of an Option other than an
Incentive Stock Option, in the Committee's sole discretion, to a spouse or
former spouse in a transfer described in Section 1041(a) of the Code (a "Code
1041 Transfer"), and, except with respect to an Option transferred pursuant to a
Code 1041 Transfer, an Option shall be exercisable during the lifetime of such
Optionee only by the Optionee or his or her guardian or legal representative.
Notwithstanding the foregoing, the Committee may set forth in the Agreement
evidencing an Option (other than an Incentive Stock Option) at the time of grant
or thereafter, that the Option may be transferred to members of the Optionee's
immediate family, to trusts solely for the benefit of such immediate family
members and to partnerships in which such family members and/or trusts are the
only partners. Following transfer, for purposes of this Plan, a transferee of an
Option shall be deemed to be the Optionee; provided that the Option shall be
exercisable by the transferee only to the extent and for such periods that the
Option would have been exercisable if held by the original Optionee. For this
purpose, immediate family means the Optionee's spouse, parents, children,
stepchildren and grandchildren and the spouses of such parents, children,
stepchildren and grandchildren. The terms of an Option shall be final, binding
and conclusive upon the beneficiaries, executors, administrators, heirs and
successors of the Optionee.
7.3 METHOD OF EXERCISE.
(a) The exercise of an Option shall be made only by a
written notice delivered in person or by mail to the Secretary of the Company at
the Company's principal executive office, specifying the number of Shares to be
purchased and, to the extent applicable, accompanied by payment therefor and
otherwise in accordance with such procedures which may be approved by the
Committee from time to time, and in accordance with the Agreement pursuant to
which the Option was granted; PROVIDED, HOWEVER, that Options may not be
exercised by an Optionee for twelve months following a hardship distribution to
the Optionee, to the extent such exercise is prohibited under Treasury
Regulation ss. 1.401(k)-1(d)(2)(iv)(B)(4). The purchase price for any Shares
purchased pursuant to the exercise of an Option shall be paid, as determined by
the Committee in its sole discretion, by any one or a combination of the
following: (a) delivery of cash or a check to the order of the Company or (b)
transferring to the Company Shares that have been held by the Optionee for at
least six (6) months (or such lesser period as may be permitted by the
Committee) prior to the exercise of the Option
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and that have a Fair Market Value equal in amount to the purchase price, such
transfer to be upon such terms and conditions as determined by the Committee. In
addition, both Options and Formula Options may be exercised through a registered
broker-dealer pursuant to such cashless exercise procedures which are, from time
to time, deemed acceptable by the Committee. Any Shares transferred to the
Company as payment of the purchase price under an Option shall be valued at
their Fair Market Value on the day preceding the date of exercise of such
Option. If requested by the Committee, the Optionee shall deliver the Agreement
evidencing the Option to the Secretary of the Company who shall endorse thereon
a notation of such exercise and return such Agreement to the Optionee. No
fractional Shares (or cash in lieu thereof) shall be issued upon exercise of an
Option and the number of Shares that may be purchased upon exercise shall be
rounded to the nearest number of whole Shares.
(b) If the Fair Market Value of the Shares with
respect to which the Option is being exercised exceeds the purchase price of
such Option, an Optionee may, instead of exercising an Option as provided in
Section 7.3(a), request that the Committee authorize payment to the Optionee of
the difference between the Fair Market Value of part or all of the Shares which
are the subject of the Option and the purchase price of the Option, such
difference to be determined as of the date the Committee receives the request
from the Optionee. The Committee, in its sole discretion, may grant or deny such
a request from an Optionee with respect to part or all of the Shares as to which
the Option is then exercisable and, to the extent granted, shall direct the
Company to make the payment to the Optionee either in cash or in Shares or in
any combination thereof; PROVIDED, HOWEVER, that the payment in Shares shall be
based upon the Fair Market Value of Shares as of the date the Committee received
the request from the Optionee. An Option shall be deemed to have been exercised
and shall be canceled to the extent that the Committee grants a request pursuant
to this Section 7.3(b).
7.4 RIGHTS OF OPTIONEES. No Optionee shall be deemed for any
purpose to be the owner of any Shares subject to any Option unless and until (a)
the Option shall have been exercised pursuant to the terms thereof, (b) the
Company shall have issued and delivered Shares to the Optionee, and (c) the
Optionee's name shall have been entered as a stockholder of record on the books
of the Company. Thereupon, the Optionee shall have full voting, dividend and
other ownership rights with respect to such Shares, subject to such terms and
conditions as may be set forth in the applicable Agreement.
7.5 EFFECT OF CHANGE IN CONTROL.
(a) Notwithstanding anything contained in Sections 5
or 6 to the contrary, in the event of a Change in Control, the Committee, in its
sole discretion, may provide in writing in connection with, or in contemplation
of, any such Change in Control for any or all of the following alternatives
(separately or in any combination): (i) for the
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assumption by the Successor Corporation of the Options theretofore granted or
the substitution by such corporation for such Options of new options covering
the stock of the Successor Corporation with appropriate adjustments as to the
number and kinds of shares and the purchase prices; (ii) for the continuation of
the Plan in which event the Plan and the Options shall continue under such terms
as may be provided; (iii) for the accelerated vesting of the Options; or (iv)
for the payment in cash upon the surrender to the Company for cancellation of
any Option or portion of an Option to the extent not yet exercised in an amount
equal to the excess, if any, of (i) (A) in the case of a Nonqualified Stock
Option, the greater of (1) the Fair Market Value, on the date preceding the date
of surrender, of the Shares subject to the Option or portion thereof surrendered
or (2) the Adjusted Fair Market Value of the Shares subject to the Option or
portion thereof surrendered or (B) in the case of an Incentive Stock Option, the
Fair Market Value, on the date preceding the date of surrender, of the Shares
subject to the Option or portion thereof surrendered, over (ii) the aggregate
purchase price for such Shares under the Option or portion thereof surrendered.
Any vesting of an Option or portion of an Option pursuant to this Section 7.5(a)
or surrender of an Option for a cash payment shall be conditioned upon the
consummation of the Change in Control and shall be effective only immediately
before the consummation of the Change in Control. Upon consummation of the
Change in Control, the Plan and all outstanding but unexercised Options shall
terminate, except to the extent provision is made in writing in connection with
such transaction for continuation of the Plan, or the assumption or substitution
of such Options. The Committee shall send written notice of an event that will
result in such a termination to all individuals who hold Options not later than
the time at which the Company gives notice thereof to its stockholders.
(b) To the extent set forth in the applicable
Agreement, if, as a result of a Change in Control transaction, an Option
intended to qualify as an Incentive Stock Option fails to so qualify SOLELY
because of the failure to meet the holding requirements of Code Section
422(a)(1) (a "Disqualifying Disposition"), the Company shall make a cash payment
to the Optionee equal to the amount which will, after taking into account all
taxes imposed on the Disqualifying Disposition and the receipt of such payment,
leave the Optionee in the same after-tax position the Optionee would have been
in had the Code Section 422(a)(1) holding requirements been met at the time of
the Disqualifying Disposition; PROVIDED, HOWEVER, that no payment described in
this Section shall exceed the Tax Benefit to the Company resulting from
deductions relating to ordinary income recognized by the Optionee as a result of
the Disqualifying Disposition and the receipt of such payment. The payment
described in this Section shall be made by the Company within thirty (30) days
of the filing by the
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Company of the federal tax return which includes the tax items associated with
the income recognized by the Optionee as a result of the Disqualifying
Disposition (or, if the Tax Benefit described in the preceding sentence is not
realized until a later year, within thirty (30) days of the filing by the
Company of the federal tax return with respect to which such Tax Benefit is
realized); PROVIDED, HOWEVER, that if more than one Optionee is entitled to a
cash payment pursuant to this Section 7.5(b) in any single tax year and the Tax
Benefit realized by the Company in such year with respect to all such Optionees
is less than the aggregate amount of the payments due to such Optionees
hereunder, then (i) each such Optionee shall receive a portion of such cash
payment equal to an amount determined by multiplying the amount of the Tax
Benefit realized by the Company in such year by a fraction the numerator of
which is equal to the amount of payment due to such Optionee and the denominator
of which is equal to the aggregate amount due to all such Optionees entitled to
a payment hereunder, and (ii) subject to further application of this proviso,
shall be entitled to receive the remaining portion within thirty (30) days of
the filing by the Company of the federal tax return with respect to which such
Tax Benefit is realized.
(c) To the extent set forth in the applicable
Agreement and provided that an Optionee is not entitled to payment under Section
7.5(b) hereof, if, as a result of a Change in Control transaction, an Option
intended to qualify as an Incentive Stock Option fails to so qualify SOLELY
because the vesting of the Option is accelerated pursuant to Section 7.5(a) and
such acceleration causes the aggregate fair market value (determined at the time
the Option is granted) of the Shares with respect to which Options are
exercisable for the first time by an Optionee during the calendar year in which
such vesting occurs to exceed $100,000, within the meaning of Code Section
422(d) (a "Disqualified Option"), then, upon exercise of such Disqualified
Option, the Company shall make a cash payment to the Optionee equal to the
amount which will, after taking into account all taxes imposed on the exercise
of such Disqualified Option and the receipt of such payment, leave the Optionee
in the same after-tax position the Optionee would have been in had the
Disqualified Option continued to qualify as an Incentive Stock Option on the
date of exercise and the Optionee sold the Shares received upon exercise of the
Option at their Fair Market Value on the date of exercise; PROVIDED, HOWEVER,
that no payment described in this Section shall exceed the Tax Benefit to the
Company resulting from deductions relating to ordinary income recognized by the
Optionee as a result of exercising the Disqualified Option and the receipt of
such payment. The payment described in this Section shall be made by the Company
within thirty (30) days of the filing by the Company of the federal tax return
which includes the tax items associated with the income recognized by the
Optionee as a result of exercising the Disqualified Option (or, if the Tax
Benefit described in the preceding sentence is not realized until a later year,
within thirty (30) days of the filing by the Company of the federal tax return
with respect to which such Tax Benefit is realized); PROVIDED, HOWEVER, that if
more than one Optionee is entitled to a cash payment pursuant to this Section
7.5(c) in any single tax year and the Tax Benefit realized by the Company in
such year with respect to all such Optionees is less than the aggregate amount
of the payments due to such Optionees hereunder, then (i) each such Optionee
shall receive a portion of such cash payment equal
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to an amount determined by multiplying the amount of the Tax Benefit realized by
the Company in such year by a fraction the numerator of which is equal to the
amount of payment due to such Optionee and the denominator of which is equal to
the aggregate amount due to all such Optionees entitled to a payment hereunder,
and (ii) subject to further application of this proviso, shall be entitled to
receive the remaining portion within thirty (30) days of the filing by the
Company of the federal tax return with respect to which such Tax Benefit is
realized.
8. STOCK APPRECIATION RIGHTS.
The Committee may in its sole discretion, either alone or in
connection with the grant of an Option, grant Stock Appreciation Rights in
accordance with the Plan, the terms and conditions of which shall be set forth
in an Agreement. If granted in connection with an Option, a Stock Appreciation
Right shall cover the same Shares covered by the Option (or such lesser number
of Shares as the Committee may determine) and shall, except as provided in this
Section 8, be subject to the same terms and conditions as the related Option.
8.1 TIME OF GRANT. A Stock Appreciation Right may be granted
(a) at any time if unrelated to an Option, or (b) if related to an Option,
either at the time of grant, or (except in the case of an Incentive Stock
Option) at any time thereafter during the term of the Option.
8.2 STOCK APPRECIATION RIGHT RELATED TO AN OPTION.
(a) EXERCISE. Subject to Section 8.9, a Stock
Appreciation Right granted in connection with an Option shall be exercisable at
such time or times and only to the extent that the related Options are
exercisable (including, without limitation, exercisability upon Termination of
Employment or a Change in Control), and will not be transferable except to the
extent the related Option may be transferable. A Stock Appreciation Right
granted in connection with an Incentive Stock Option shall expire no later than
the expiration of the related Incentive Stock Option and shall be exercisable
only if the Fair Market Value of a Share on the date of exercise exceeds the
purchase price of the Option specified in the related Incentive Stock Option
Agreement.
(b) TREATMENT OF RELATED OPTIONS AND STOCK
APPRECIATION RIGHTS UPON EXERCISE. Upon the exercise of a Stock Appreciation
Right granted in connection with an Option, the Option shall be canceled to the
extent of the number of Shares as to which the Stock Appreciation Right is
exercised, and upon the exercise of an Option granted in connection with a Stock
Appreciation Right, the Stock Appreciation Right
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shall be canceled to the extent of the number of Shares as to which the Option
is exercised or surrendered.
8.3 STOCK APPRECIATION RIGHT UNRELATED TO AN OPTION.
(a) TERMS. Stock Appreciation Rights unrelated to
Options shall contain such terms and conditions as to exercisability (subject to
Section 8.9), vesting and duration as the Committee shall determine, but in no
event shall they have a term of greater than ten (10) years; PROVIDED, HOWEVER,
that the Committee may provide that Stock Appreciation right may, upon the death
of the Grantee, be exercised for up to one (1) year following the date of the
Grantee's death even if such period extends beyond ten (10) years from the date
the Stock Appreciation Right is granted.
(b) TERMINATION. Subject to Section 13 and except as
provided in Section 8.9, and unless otherwise provided by the Committee, in its
sole discretion, in the applicable Agreement, upon a Grantee's Termination of
Employment, a Stock Appreciation Right shall be exercisable by the Grantee to
the same extent that an Option would be exercisable by an Optionee upon the
Optionee's Termination of Employment under the provisions of Section 5.5;
PROVIDED, HOWEVER, no Stock Appreciation Right may be exercised after the
expiration date specified for the particular Stock Appreciation Right in the
applicable Agreement.
8.4 AMOUNT PAYABLE. Subject to Section 8.7, upon the exercise
of a Stock Appreciation Right, the Grantee shall be entitled to receive an
amount determined by multiplying (x) the excess of the Fair Market Value of a
Share on the date preceding the date of exercise of such Stock Appreciation
Right over (A) in the case of a Stock Appreciation Right granted in connection
with an Option, the per Share purchase price under the related Option, or (B) in
the case of a Stock Appreciation Right unrelated to an Option, the Fair Market
Value of a Share on the date the Stock Appreciation Right was granted, by (y)
the number of Shares as to which such Stock Appreciation Right is being
exercised. Notwithstanding the foregoing, the Committee may limit in any manner
the amount payable with respect to any Stock Appreciation Right by including
such a limit in the Agreement evidencing the Stock Appreciation Right at the
time it is granted.
8.5 NON-TRANSFERABILITY. No Stock Appreciation Right shall be
transferable by the Grantee to whom it was granted otherwise than by will or by
the laws of descent and distribution or, in the Committee's sole discretion,
(except in the case of a Stock Appreciation Right granted in connection with an
Incentive Stock Option), to a spouse or former spouse in a transfer described in
Section 1041(a) of the Code (a "Code 1041 Transfer"), and, except with respect
to a Stock Appreciation Right transferred pursuant to a Code 1041 Transfer, such
Stock Appreciation Right shall be exercisable during the lifetime of such
Grantee only by the Grantee or his or her guardian or legal
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representative. The terms of such Stock Appreciation Right shall be final,
binding and conclusive upon the beneficiaries, executors, administrators, heirs
and successors of the Grantee.
8.6 METHOD OF EXERCISE. Stock Appreciation Rights shall be
exercised by a Grantee only by a written notice delivered in person or by mail
to the Secretary of the Company at the Company's principal executive office,
specifying the number of Shares with respect to which the Stock Appreciation
Right is being exercised. If requested by the Committee, the Grantee shall
deliver the Agreement evidencing the Stock Appreciation Right being exercised
and the Agreement evidencing any related Option to the Secretary of the Company
who shall endorse thereon a notation of such exercise and return such Agreement
to the Grantee.
8.7 FORM OF PAYMENT. Payment of the amount determined under
Section 8.4 may be made in the sole discretion of the Committee solely in whole
Shares in a number determined at their Fair Market Value on the date preceding
the date of exercise of the Stock Appreciation Right, or solely in cash, or in a
combination of cash and Shares. If the Committee decides to make full payment in
Shares and the amount payable results in a fractional Share, no fractional
Shares (or cash in lieu thereof) shall be issued upon the exercise of the Stock
Appreciation Right and the number of Shares that will be delivered shall be
rounded to the nearest number of whole Shares.
8.8 MODIFICATION. No modification of an Award shall adversely
alter or impair any rights or obligations under the Agreement without the
Grantee's consent.
8.9 EFFECT OF CHANGE IN CONTROL. Notwithstanding anything
contained in this Section 8 to the contrary, in the event of a Change in
Control, the Committee, in its sole discretion, may provide in writing in
connection with, or in contemplation of, any such Change in Control for any or
all of the following alternatives (separately or in any combination): (i) for
the assumption by the Successor Corporation of the Stock Appreciation Rights
theretofore granted or the substitution by such corporation for such Stock
Appreciation Rights of new stock appreciation rights covering the stock of the
Successor Corporation with appropriate adjustments as to the number and kinds of
shares and the purchase prices; (ii) for the continuation of the Plan in which
event the Plan and the Stock Appreciation Rights shall continue under such terms
as may be provided; (iii) for the accelerated vesting of the Stock Appreciation
Rights; or (iv) with respect to a Stock Appreciation Right unrelated to an
Option, for the payment in cash upon the surrender to the Company for
cancellation of any such Stock Appreciation Right or portion of a Stock
Appreciation Right to the extent not yet exercised in an amount equal to the
excess, if any, of (A) the greater of (i) the Fair Market Value, on the date
preceding the date of exercise, of the underlying Shares subject to the Stock
Appreciation Right or portion thereof exercised and (ii) the Adjusted Fair
Market Value, on the date preceding
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the date of exercise, of the Shares over (B) the aggregate Fair Market Value, on
the date the Stock Appreciation Right was granted, of the Shares subject to the
Stock Appreciation Right or portion thereof exercised. Any vesting of Stock
Appreciation Rights pursuant to this Section 8.9 or surrender of a Stock
Appreciation Right for a cash payment shall be conditioned upon the consummation
of the Change in Control and shall be effective only immediately before the
consummation of the Change in Control. Upon consummation of the Change in
Control, the Plan and all outstanding but unexercised Stock Appreciation Rights
shall terminate, except to the extent provision is made in writing in connection
with such transaction for the continuation of the Plan, or the assumption or
substitution of such Stock Appreciation Rights. The Committee shall send written
notice of an event that will result in such a termination to all individuals who
hold Stock Appreciation Rights not later than the time at which the Company
gives notice thereof to its stockholders.
9. DIVIDEND EQUIVALENT RIGHTS.
The Committee may in its sole discretion grant Dividend
Equivalent Rights to Eligible Individuals in tandem with an Option or Award or
as a separate Award. The terms and conditions (including, without limitation,
terms and conditions relating to a Change in Control) applicable to each
Dividend Equivalent Right shall be specified in the Agreement under which the
Dividend Equivalent Right is granted. In the sole discretion of the Committee,
amounts payable in respect of Dividend Equivalent Rights may be payable
currently or deferred until the lapsing of restrictions on such Dividend
Equivalent Rights or until the vesting, exercise, payment, settlement or other
lapse of restrictions on the Option or Award to which the Dividend Equivalent
Rights relate. In the event that the amount payable in respect of Dividend
Equivalent Rights are to be deferred, the Committee shall determine whether such
amounts are to be held in cash or reinvested in Shares or deemed (notionally) to
be reinvested in Shares. If amounts payable in respect of Dividend Equivalent
Rights are to be held in cash, there may be credited at the end of each year (or
portion thereof) interest on the amount of the account at the beginning of the
year at a rate per annum as the Committee, in its sole discretion, may
determine. In the sole discretion of the Committee, Dividend Equivalent Rights
may be settled in cash or Shares or a combination thereof, in a single
installment or multiple installments. With respect to Dividend Equivalent Rights
granted in tandem with an Option, the Agreement may provide that the Optionee
may elect to have amounts payable in respect of such Dividend Equivalent Rights
applied against the purchase price of such Option. To the extent necessary for
any Dividend Equivalent Right intended to qualify as Performance-Based
Compensation under Section 162(m) of the Code to so qualify, the terms and
conditions of the Dividend Equivalent Right shall be such that payment of the
Dividend Equivalent Right is contingent upon attainment of specified Performance
Objectives
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within the Performance Cycle, as provided for in Section 11, and such Dividend
Equivalent Right shall be treated as a Performance Award for purposes of
Sections 11 and 16.
10. RESTRICTED STOCK.
10.1 GRANT. The Committee may in its sole discretion grant
Awards to Eligible Individuals of Restricted Stock, which shall be evidenced by
an Agreement between the Company and the Grantee. Each Agreement shall contain
such restrictions, terms and conditions as the Committee may, in its sole
discretion, determine and (without limiting the generality of the foregoing)
such Agreements may require that an appropriate legend be placed on Share
certificates. Awards of Restricted Stock shall be subject to the terms and
provisions set forth below in this Section 10.
10.2 RIGHTS OF GRANTEE. Shares of Restricted Stock granted
pursuant to an Award hereunder shall be issued in the name of the Grantee as
soon as reasonably practicable after the Award is granted PROVIDED that the
Grantee has executed an Agreement evidencing the Award, the appropriate blank
stock powers and, in the sole discretion of the Committee, an escrow agreement
and any other documents which the Committee may require as a condition to the
issuance of such Shares. If a Grantee shall fail to execute the Agreement
evidencing a Restricted Stock Award, the appropriate blank stock powers, an
escrow agreement or any other documents which the Committee may require within
the time period prescribed by the Committee at the time the Award is granted,
the Award shall be null and void. At the sole discretion of the Committee,
Shares issued in connection with a Restricted Stock Award shall be deposited
together with the stock powers with an escrow agent (which may be the Company)
designated by the Committee. Unless the Committee determines otherwise and as
set forth in the Agreement, upon delivery of the Shares to the escrow agent, the
Grantee shall have all of the rights of a stockholder with respect to such
Shares, including the right to vote the Shares and to receive all dividends or
other distributions paid or made with respect to the Shares.
10.3 NON-TRANSFERABILITY. Until all restrictions upon the
Shares of Restricted Stock awarded to a Grantee shall have lapsed in the manner
set forth in Section 10.4, such Shares shall not be sold, transferred or
otherwise disposed of and shall not be pledged or otherwise hypothecated, nor
shall they be delivered to the Grantee.
10.4 LAPSE OF RESTRICTIONS.
(a) GENERALLY. Subject to Section 10.4(b),
restrictions upon Shares of Restricted Stock awarded hereunder shall lapse at
such time or times and on such terms and conditions as the Committee may
determine; PROVIDED, HOWEVER, that
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except in the case of Shares of Restricted Stock issued in full or partial
settlement of another Award or other earned compensation, such restrictions
shall not fully lapse prior to the third anniversary of the date on which such
Shares of Restricted Stock were granted. The Agreement evidencing the Award
shall set forth any such restrictions.
(b) EFFECT OF CHANGE IN CONTROL. Notwithstanding
anything in this Section 10 to the contrary, in the event of a Change in
Control, the Committee, in its sole discretion, may provide in writing in
connection with, or in contemplation of, any such Change in Control for any or
all of the following alternatives (separately or in any combination): (i) for
the assumption by the Successor Corporation of the shares of Restricted Stock
theretofore granted or the substitution by such corporation for such shares of
Restricted Stock of new shares of restricted stock of the Successor Corporation
with appropriate adjustments as to the number and kinds of shares; (ii) for the
continuation of the Plan in which event the Plan and the shares of Restricted
Stock shall continue under such terms as may be provided; or (iii) for the lapse
of all restrictions upon the shares of Restricted Stock. Any vesting of shares
of Restricted Stock pursuant to this Section 10.5(b) shall be conditioned upon
the consummation of the Change in Control and shall be effective only
immediately before the consummation of the Change in Control.
10.5 TERMS OF RESTRICTED STOCK.
(a) FORFEITURE OF RESTRICTED STOCK. Subject to
Sections 10.4(b), 10.5(b) and 13, all Restricted Stock shall be forfeited and
returned to the Company and all rights of the Grantee with respect to such
Restricted Stock shall terminate unless the Grantee continues in the service of
the Company as an employee or director until the expiration of the forfeiture
period for such Restricted Stock and satisfies any and all other conditions set
forth in the Agreement. The Committee, in its sole discretion, shall determine
the forfeiture period (which may, but need not, lapse in installments) and any
other terms and conditions applicable with respect to any Restricted Stock
Award.
(b) WAIVER OF FORFEITURE PERIOD. Notwithstanding
anything contained in this Section 10 to the contrary, the Committee may, in its
sole discretion, waive the forfeiture period and any other conditions set forth
in any Agreement under appropriate circumstances (including, without limitation,
the death, Disability or retirement of the Grantee or a material change in
circumstances arising after the date of grant) and subject to such terms and
conditions (including, without limitation, forfeiture of a proportionate number
of the Restricted Stock) as the Committee shall deem appropriate, PROVIDED that
the Grantee shall at that time have completed at least one (1) year of
employment or service after the date of grant.
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10.6 MODIFICATION OR SUBSTITUTION. Subject to the terms of the
Plan, including, without limitation, Section 16, the Committee may modify
outstanding Awards of Restricted Stock or accept the surrender of outstanding
shares of Restricted Stock (to the extent the restrictions on such Shares have
not yet lapsed) and grant new Awards in substitution for them. Notwithstanding
the foregoing, no modification of an Award shall adversely alter or impair any
rights or obligations under the Agreement without the Grantee's consent.
10.7 TREATMENT OF DIVIDENDS. At the time an Award of Shares of
Restricted Stock is granted, the Committee may, in its sole discretion,
determine that the payment to the Grantee of dividends, or a specified portion
thereof, declared or paid on such Shares by the Company shall be (a) deferred
until the lapsing of the restrictions imposed upon such Shares and (b) held by
the Company for the account of the Grantee until such time. In the event that
dividends are to be deferred, the Committee shall determine whether such
dividends are to be reinvested in Shares (which shall be held as additional
Shares of Restricted Stock) or held in cash. If deferred dividends are to be
held in cash, there may be credited at the end of each year (or portion thereof)
interest on the amount of the account at the beginning of the year at a rate per
annum as the Committee, in its sole discretion, may determine. Payment of
deferred dividends in respect of Shares of Restricted Stock (whether held in
cash or as additional Shares of Restricted Stock), together with interest
accrued thereon, if any, shall be made upon the lapsing of restrictions imposed
on the Shares in respect of which the deferred dividends were paid, and any
dividends deferred (together with any interest accrued thereon) in respect of
any Shares of Restricted Stock shall be forfeited upon the forfeiture of such
Shares.
10.8 DELIVERY OF SHARES. Upon the lapse of the restrictions on
Shares of Restricted Stock, the Committee shall cause a stock certificate to be
delivered to the Grantee with respect to such Shares, free of all restrictions
hereunder.
11. PERFORMANCE AWARDS.
11.1 PERFORMANCE OBJECTIVES
(a) ESTABLISHMENT. Performance Objectives for
Performance Awards may be expressed in terms of (i) earnings per Share, (ii)
Share price, (iii) pre-tax profits, (iv) net earnings, (v) return on equity or
assets, (vi) revenues, (vii) EBITDA (earnings before interest, taxes,
depreciation and amortization), (viii) market share, or market penetration, (ix)
any combination of the foregoing or (x) prior to the end of the Transition
Period, such other criteria as the Committee may determine, and may be
determined before or after accounting changes, special charges, foreign currency
effects, acquisitions, divestitures, or other extraordinary events as determined
by the Committee.
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Performance Objectives may be in respect of the performance of the Company, any
of its Subsidiaries, any of its Divisions or any combination thereof.
Performance Objectives may be absolute or relative (to prior performance of the
Company or to the performance of one or more other entities or external indices)
and may be expressed in terms of a progression within a specified range. The
Performance Objectives with respect to a Performance Cycle shall be established
in writing by the Committee by the earlier of (x) the date on which a quarter of
the Performance Cycle has elapsed or (y) the date which is ninety (90) days
after the commencement of the Performance Cycle, and in any event while the
performance relating to the Performance Objectives remain substantially
uncertain.
(b) EFFECT OF CERTAIN EVENTS. At the time of the
granting of a Performance Award, or at any time thereafter, in either case to
the extent permitted under Section 162(m) of the Code and the regulations
thereunder without adversely affecting the treatment of the Performance Award as
Performance-Based Compensation, the Committee may provide for the manner in
which performance will be measured against the Performance Objectives (or may
adjust the Performance Objectives) to reflect the impact of specified corporate
transactions, accounting or tax law changes and other extraordinary or
nonrecurring events.
(c) DETERMINATION OF PERFORMANCE. Prior to the
vesting, payment, settlement or lapsing of any restrictions with respect to any
Performance Award that is intended to constitute Performance-Based Compensation
made to a Grantee who is subject to Section 162(m) of the Code, the Committee
shall certify in writing that the applicable Performance Objectives have been
satisfied.
11.2 PERFORMANCE UNITS. The Committee, in its sole discretion,
may grant Awards of Performance Units to Eligible Individuals, the terms and
conditions of which shall be set forth in an Agreement between the Company and
the Grantee. Performance Units may be denominated in Shares or a specified
dollar amount and, contingent upon the attainment of specified Performance
Objectives within the Performance Cycle, represent the right to receive payment
as provided in Section 11.2(b) of (i) in the case of Share-denominated
Performance Units, the Fair Market Value of a Share on the date the Performance
Unit was granted, the date the Performance Unit became vested or any other date
specified by the Committee, (ii) in the case of dollar-denominated Performance
Units, the specified dollar amount or (iii) a percentage (which may be more than
100%) of the amount described in clause (i) or (ii) depending on the level of
Performance Objective attainment; PROVIDED, HOWEVER, that, the Committee may at
the time a Performance Unit is granted specify a maximum amount payable in
respect of a vested Performance Unit. Each Agreement shall specify the number of
Performance Units to which it relates, the Performance Objectives which must be
satisfied in order for the
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Performance Units to vest and the Performance Cycle within which such
Performance Objectives must be satisfied.
(a) VESTING AND FORFEITURE. Subject to Sections
11.1(c) and 11.4, Performance Units shall become vested in such installments
(which need not be equal) and at such times or times and on such terms,
conditions and satisfaction of Performance Objectives as the Committee may, in
its sole discretion, determine at the time an Award is granted.
(b) PAYMENT OF AWARDS. Subject to Section 11.1(c),
payment to Grantees in respect of vested Performance Units shall be made as soon
as practicable after the last day of the Performance Cycle to which such Award
relates unless the Agreement evidencing the Award provides for the deferral of
payment, in which event the terms and conditions of the deferral shall be set
forth in the Agreement. Subject to Section 11.4, such payments may be made
entirely in Shares valued at their Fair Market Value as of the day preceding the
date of payment or such other date specified by the Committee, entirely in cash,
or in such combination of Shares and cash as the Committee in its sole
discretion shall determine at any time prior to such payment; PROVIDED, however,
that if the Committee in its sole discretion determines to make such payment
entirely or partially in Shares of Restricted Stock, the Committee must
determine the extent to which such payment will be in Shares of Restricted Stock
and the terms of such Restricted Stock at the time the Award is granted.
(c) NON-TRANSFERABILITY. Until the vesting of
Performance Units, such Performance Units shall not be sold, transferred or
otherwise disposed of and shall not be pledged or otherwise hypothecated.
11.3 PERFORMANCE SHARES. The Committee, in its sole
discretion, may grant Awards of Performance Shares to Eligible Individuals, the
terms and conditions of which shall be set forth in an Agreement between the
Company and the Grantee. Each Agreement may require that an appropriate legend
be placed on Share certificates. Awards of Performance Shares shall be subject
to the following terms and provisions:
(a) RIGHTS OF GRANTEE. The Committee shall provide at
the time an Award of Performance Shares is made the time or times at which the
actual Shares represented by such Award shall be issued in the name of the
Grantee; PROVIDED, HOWEVER, that no Performance Shares shall be issued until the
Grantee has executed an Agreement evidencing the Award, the appropriate blank
stock powers and, in the sole discretion of the Committee, an escrow agreement
and any other documents which the Committee may require as a condition to the
issuance of such Performance Shares. If a Grantee shall fail to execute the
Agreement evidencing an Award of Performance Shares, the appropriate blank stock
powers, an escrow agreement and any other documents which the Committee
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may require within the time period prescribed by the Committee at the time the
Award is granted, the Award shall be null and void. At the sole discretion of
the Committee, Shares issued in connection with an Award of Performance Shares
shall be deposited together with the stock powers with an escrow agent (which
may be the Company) designated by the Committee. Except as restricted by the
terms of the Agreement, upon delivery of the Shares to the escrow agent, the
Grantee shall have, in the sole discretion of the Committee, all of the rights
of a stockholder with respect to such Shares, including the right to vote the
Shares and to receive all dividends or other distributions paid or made with
respect to the Shares.
(b) NON-TRANSFERABILITY. Until any restrictions upon
the Performance Shares awarded to a Grantee shall have lapsed in the manner set
forth in Sections 11.3(c) or 11.4, such Performance Shares shall not be sold,
transferred or otherwise disposed of and shall not be pledged or otherwise
hypothecated, nor shall they be delivered to the Grantee. The Committee may also
impose such other restrictions and conditions on the Performance Shares, if any,
as it deems appropriate.
(c) LAPSE OF RESTRICTIONS. Subject to Sections
11.1(c) and 11.4, restrictions upon Performance Shares awarded hereunder shall
lapse and such Performance Shares shall become vested at such time or times and
on such terms, conditions and satisfaction of Performance Objectives as the
Committee may, in its sole discretion, determine at the time an Award is
granted.
(d) TREATMENT OF DIVIDENDS. At the time the Award of
Performance Shares is granted, the Committee may, in its sole discretion,
determine that the payment to the Grantee of dividends, or a specified portion
thereof, declared or paid on Shares represented by such Award which have been
issued by the Company to the Grantee shall be (i) deferred until the lapsing of
the restrictions imposed upon such Performance Shares and (ii) held by the
Company for the account of the Grantee until such time. In the event that
dividends are to be deferred, the Committee shall determine whether such
dividends are to be reinvested in Shares (which shall be held as additional
Performance Shares) or held in cash. If deferred dividends are to be held in
cash, there may be credited at the end of each year (or portion thereof)
interest on the amount of the account at the beginning of the year at a rate per
annum as the Committee, in its sole discretion, may determine. Payment of
deferred dividends in respect of Performance Shares (whether held in cash or in
additional Performance Shares), together with interest accrued thereon, if any,
shall be made upon the lapsing of restrictions imposed on the Performance Shares
in respect of which the deferred dividends were paid, and any dividends deferred
(together with any interest accrued thereon) in respect of any Performance
Shares shall be forfeited upon the forfeiture of such Performance Shares.
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(e) DELIVERY OF SHARES. Upon the lapse of the
restrictions on Performance Shares awarded hereunder, the Committee shall cause
a stock certificate to be delivered to the Grantee with respect to such Shares,
free of all restrictions hereunder.
11.4 EFFECT OF CHANGE IN CONTROL. Notwithstanding anything in
this Section 11 to the contrary, in the event of a Change in Control, the
Committee, in its sole discretion, may provide in writing in connection with, or
in contemplation of, any such Change in Control for any or all of the following
alternatives (separately or in any combination): (i) for the assumption by the
Successor Corporation of the Performance Awards theretofore granted or the
substitution by such corporation for such Performance Awards of new performance
awards of the Successor Corporation with appropriate adjustments as to the
applicable performance objectives and, if necessary, the number and kinds of
shares; (ii) for the continuation of the Plan in which event the Plan and the
Performance Awards shall continue under such terms as may be provided; or (iii)
for the vesting of outstanding Performance Awards as if all Performance
Objectives had been satisfied at the maximum level and, in the case of
Performance Units which become vested as a result of a Change in Control, for a
payment which may be made entirely in Shares valued at their Fair Market Value
as of the day preceding the payment, entirely in cash, or in such combination of
Shares and cash as the Committee shall determine in its sole discretion at any
time prior to such payment; provided that such payment shall be made within ten
(10) business days after such Change in Control. Any vesting of Performance
Awards pursuant to this Section 11.4 shall be conditioned upon the consummation
of the Change in Control and shall be effective only immediately before the
consummation of the Change in Control.
11.5 TERMINATION. Except as provided in Section 13, and unless
otherwise provided by the Committee, in its sole discretion, in the applicable
Agreement, the following provisions shall apply to Performance Awards upon a
Termination of Employment:
(a) TERMINATION OF EMPLOYMENT PRIOR TO END OF
PERFORMANCE CYCLE. Except as provided in Sections 11.5(b) and (d), in the case
of a Grantee's Termination of Employment, prior to the end of a Performance
Cycle, the Grantee will not be entitled to any Performance Awards, and any
Performance Shares shall be forfeited.
(b) DISABILITY, RETIREMENT OR DEATH PRIOR TO END OF
PERFORMANCE CYCLE. Unless otherwise provided by the Committee, in its sole
discretion, in the Agreement, if a Grantee's Disability Date or Termination of
Employment by reason of retirement on or after the Grantee's Normal Retirement
Date or death occurs following at least twelve (12) months of participation in
any Performance Cycle, but prior to the end of a Performance Cycle, the Grantee
or such Grantee's Beneficiary, as the case may be,
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shall be entitled to receive a pro-rata share of his or her Performance Award as
determined under Subsection (c).
(c) PRO-RATA PAYMENT.
(I) PERFORMANCE UNITS. With respect to
Performance Units, the amount of any payment made to a Grantee (or Beneficiary)
under circumstances described in Section 11.5(b) will be the amount determined
by multiplying the amount of the Performance Units payable in Shares or dollars
which would have been earned, determined at the end of the Performance Cycle,
had such employment not been terminated, by a fraction, the numerator of which
is the number of whole months such Grantee was employed during the Performance
Cycle, and the denominator of which is the total number of months of the
Performance Cycle. Any such payment shall be made as soon as practicable after
the end of the respective Performance Cycle, and shall relate to attainment of
Performance Objectives over the entire Performance Cycle.
(II) PERFORMANCE SHARES. With respect to
Performance Shares, the amount of Performance Shares held by a Grantee (or
Beneficiary) with respect to which restrictions shall lapse under circumstances
described in Section 11.5(b) will be the amount determined by multiplying the
amount of the Performance Shares with respect to which restrictions would have
lapsed, determined at the end of the Performance Cycle, had such employment not
been terminated, by a fraction, the numerator of which is the number of whole
months such Grantee was employed during the Performance Cycle, and the
denominator of which is the total number of months of the Performance Cycle. The
Committee shall determine the amount of Performance Shares with respect to which
restrictions shall lapse under this Section 11.5(c)(II) as soon as practicable
after the end of the respective Performance Cycle, and such determination shall
relate to attainment of Performance Objectives over the entire Performance
Cycle. At that time, all Performance Shares relating to that Performance Cycle
with respect to which restrictions shall not lapse shall be forfeited.
(d) OTHER EVENTS. Notwithstanding anything to the
contrary in this Section 11, the Committee may, in its sole discretion,
determine to pay all or any portion of a Performance Award to a Grantee who has
a Termination of Employment prior to the end of a Performance Cycle under
certain circumstances (including, without limitation, a material change in
circumstances arising after the date of grant) and subject to such terms and
conditions as the Committee shall deem appropriate, provided that the Grantee
shall have completed at his or her date of Termination of Employment at least
one (1) year of employment after the date of grant.
(e) TERMINATION OF EMPLOYMENT AFTER END OF
PERFORMANCE CYCLE. Subject to Section 11.5(f), in the case of a Grantee's
Termination of Employment after
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the end of a Performance Cycle in which the applicable Performance Objectives
have been satisfied, the Grantee shall not be entitled to any Performance Awards
that have not yet vested as of the date of the Grantee's Termination of
Employment.
(f) WAIVER OF FORFEITURE. Notwithstanding anything to
the contrary in Section 11(e), in the case of a Grantee's Termination of
Employment after the end of a Performance Cycle in which the applicable
Performance Objectives have been satisfied, the Committee may, in its sole
discretion, waive the forfeiture of Performance Awards and any other conditions
set forth in any Agreement under appropriate circumstances (including, without
limitation, the death, Disability, or retirement of the Grantee or a material
change in circumstances arising after the date of grant) and subject to such
terms and conditions as the Committee shall deem appropriate.
11.6 MODIFICATION OR SUBSTITUTION. Subject to the terms of the
Plan, including, without limitation, Section 16, the Committee may modify
outstanding Performance Awards or accept the surrender of outstanding
Performance Awards and grant new Performance Awards in substitution for them.
Notwithstanding the foregoing, no modification of a Performance Award shall
adversely alter or impair any rights or obligations under the Agreement without
the Grantee's consent.
12. OTHER SHARE BASED AWARDS.
12.1 SHARE AWARDS. The Committee may, in its sole discretion,
grant a Share Award to any Eligible Individual on such terms and conditions as
the Committee may, in its sole discretion, determine. Share Awards may be made
as additional compensation for services rendered by the Eligible Individual or
may be in lieu of cash or other compensation to which the Eligible Individual is
entitled from the Company.
12.2 PHANTOM STOCK AWARDS.
(a) GRANT. The Committee may, in its sole discretion,
grant shares of Phantom Stock to any Eligible Individual. Such Phantom Stock
shall be subject to the terms and conditions established by the Committee and
set forth in the applicable Agreement.
(b) PAYMENT OF AWARDS. Upon the vesting of a Phantom
Stock Award, the Grantee shall be entitled to receive a cash payment in respect
of each share of Phantom Stock which shall be equal to the Fair Market Value of
a Share as of the date of the Phantom Stock Award was granted, or such other
date as determined by the Committee at the time the Phantom Stock Award was
granted. The Committee may, at the time a Phantom Stock Award is granted,
provide a limitation on the amount payable in respect of each share of Phantom
Stock. In lieu of a cash payment, the Committee
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may settle Phantom Stock Awards with Shares having a Fair Market Value on the
date of vesting equal to the cash payment to which the Grantee has become
entitled.
13. EMPLOYMENT AGREEMENT GOVERNS TERMINATION OF EMPLOYMENT. An
employment agreement, if applicable, between an Optionee or Grantee and the
Company shall govern with respect to the terms and conditions applicable to such
Option or Award upon a termination or change in the status of the employment of
the Optionee or Grantee, to the extent that such employment agreement provides
for terms and conditions that differ from the terms and conditions provided for
in the applicable Agreement or the Plan; PROVIDED, HOWEVER, that to the extent
necessary for an Option or Award intended to qualify as performance-based
compensation under Section 162(m) of the Code to so qualify, the terms of the
applicable Agreement or the Plan shall govern the Option or Award; and, PROVIDED
FURTHER, that the Committee shall have reviewed and, in its sole discretion,
approved the employment agreement.
14. ADJUSTMENT UPON CHANGES IN CAPITALIZATION.
(a) In the event of a Change in Capitalization, the Committee
shall conclusively determine the appropriate adjustments, if any, to (i) the
maximum number and class of Shares or other stock or securities with respect to
which Options or Awards may be granted under the Plan, (ii) the maximum number
and class of Shares or other stock or securities with respect to which Options
or Awards may be granted to any Eligible Individual during any calendar year
period, (iii) the number and class of Shares or other stock or securities which
are subject to outstanding Options or Awards granted under the Plan and the
purchase price therefor, if applicable, (iv) the number and class of Shares or
other securities in respect of which Formula Options are to be granted under
Section 6 and (v) the Performance Objectives.
(b) Any such adjustment in the Shares or other stock or
securities subject to outstanding Incentive Stock Options (including any
adjustments in the purchase price) shall be made in such manner as not to
constitute a modification as defined by Section 424(h)(3) of the Code and only
to the extent otherwise permitted by Sections 422 and 424 of the Code and, to
the extent necessary for any Option or Award intended to qualify as
Performance-Based Compensation to continue to so qualify, any such adjustment in
the Shares or other stock or securities subject to such Options and Awards shall
be made in such manner as to comply with Section 162(m) of the Code and the
regulations promulgated thereunder.
(c) If, by reason of a Change in Capitalization, a Grantee of
an Award shall be entitled to, or an Optionee shall be entitled to exercise an
Option with respect to, new, additional or different shares of stock or
securities of the Company or any other corporation, such new, additional or
different shares shall thereupon be subject to all of
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the conditions, restrictions and performance criteria which were applicable to
the Shares subject to the Award or Option, as the case may be, prior to such
Change in Capitalization.
15. EFFECT OF CERTAIN TRANSACTIONS. Subject to Sections 7.5, 8.9,
10.4(b) and 11.4 or as otherwise provided in an Agreement, in the event of (a)
the liquidation or dissolution of the Company or (b) a merger or consolidation
of the Company (a "Transaction"), the Plan and the Options and Awards issued
hereunder shall continue in effect in accordance with their respective terms,
except that following a Transaction each Optionee and Grantee shall be entitled
to receive in respect of each Share subject to any outstanding Options or
Awards, as the case may be, upon exercise of any Option or payment or transfer
in respect of any Award, the same number and kind of stock, securities, cash,
property or other consideration that each holder of a Share was entitled to
receive in the Transaction in respect of a Share; PROVIDED, HOWEVER, that such
stock, securities, cash, property, or other consideration shall remain subject
to all of the conditions, restrictions and performance criteria which were
applicable to the Options and Awards prior to such Transaction.
16. INTERPRETATION. Following the required registration of any equity
security of the Company pursuant to Section 12 of the Exchange Act, unless
otherwise expressly stated in the relevant Agreement, each Option, Stock
Appreciation Right and Performance Award granted under the Plan to a "covered
employee" within the meaning of Section 162(m)(3) of the Code is intended to be
Performance-Based Compensation (except that, in the event of a Change in
Control, payment of Performance Awards to a Grantee who remains a "covered
employee" with respect to such payment may not qualify as Performance-Based
Compensation). The Committee shall not be entitled to exercise any discretion
otherwise authorized hereunder with respect to such Options or Awards if the
ability to exercise such discretion or the exercise of such discretion itself
would cause the compensation attributable to such Options or Awards to fail to
qualify as Performance-Based Compensation. Notwithstanding anything to the
contrary in the Plan, the provisions of the Plan may at any time be bifurcated
by the Board or the Committee in any manner so that certain provisions of the
Plan or any Performance Award intended (or required in order) to satisfy the
applicable requirements of Section 162(m) of the Code are only applicable to
persons whose compensation is subject to Section 162(m).
17. POOLING TRANSACTIONS. Notwithstanding anything contained in the
Plan or any Agreement to the contrary, in the event of a Change in Control which
is also intended to constitute a Pooling Transaction, the Committee shall take
such actions, if any, as are specifically recommended by an independent
accounting firm retained by the Company to the extent reasonably necessary in
order to assure that the Pooling Transaction will qualify as such, including,
without limitation, (a) deferring the vesting,
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exercise, payment, settlement or lapsing of restrictions with respect to any
Option or Award, (b) providing that the payment or settlement in respect of any
Option or Award be made in the form of cash, Shares or securities of a successor
or acquirer of the Company, or a combination of the foregoing, and (c) providing
for the extension of the term of any Option or Award to the extent necessary to
accommodate the foregoing, but not beyond the maximum term permitted for any
Option or Award.
18. EFFECTIVE DATE, TERMINATION AND AMENDMENT OF THE PLAN.
18.1 EFFECTIVE DATE. The effective date of this Plan shall be
the date the Plan is adopted by the Board, subject only to the approval of the
affirmative vote of the holders of a majority of the securities of the Company
present, or represented, and entitled to vote at a meeting of the stockholders
duly held in accordance with the applicable laws of the State of Delaware within
twelve (12) months of the adoption of the Plan by the Board.
18.2 PLAN AMENDMENT OR TERMINATION. The Plan shall terminate
on the day preceding the tenth anniversary of the date of its adoption by the
Board and no Option or Award may be granted thereafter. The Board may sooner
terminate the Plan and the Board may at any time and from time to time amend,
modify or suspend the Plan; PROVIDED, HOWEVER, that:
(a) no such amendment, modification, suspension or
termination shall impair or adversely alter any Options or Awards theretofore
granted under the Plan, except with the consent of the Optionee or Grantee, nor
shall any amendment, modification, suspension or termination deprive any
Optionee or Grantee of any Shares which he or she may have acquired through or
as a result of the Plan; and
(b) to the extent necessary under any applicable law,
regulation or exchange requirement no amendment shall be effective unless
approved by the stockholders of the Company in accordance with applicable law,
regulation or exchange requirement.
19. NON-EXCLUSIVITY OF THE PLAN. The adoption of the Plan by the Board
shall not be construed as amending, modifying or rescinding any previously
approved incentive arrangement or as creating any limitations on the power of
the Board to adopt such other incentive arrangements as it may deem desirable,
including, without limitation, the granting of stock options otherwise than
under the Plan, and such arrangements may be either applicable generally or only
in specific cases.
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20. LIMITATION OF LIABILITY. As illustrative of the limitations of
liability of the Company, but not intended to be exhaustive thereof, nothing in
the Plan shall be construed to:
(a) give any person any right to be granted an Option or Award
other than at the sole discretion of the Committee;
(b) give any person any rights whatsoever with respect to
Shares except as specifically provided in the Plan;
(c) limit in any way the right of the Company or any
Subsidiary to terminate the employment of any person at any time; or
(d) be evidence of any agreement or understanding, expressed
or implied, that the Company will employ any person at any particular rate of
compensation or for any particular period of time.
21. REGULATIONS AND OTHER APPROVALS; GOVERNING LAW.
21.1 Except as to matters of federal law, the Plan and the
rights of all persons claiming hereunder shall be construed and determined in
accordance with the laws of the State of Delaware without giving effect to
conflicts of laws principles thereof.
21.2 The obligation of the Company to sell or deliver Shares
with respect to Options and Awards granted under the Plan shall be subject to
all applicable laws, rules and regulations, including all applicable federal and
state securities laws, and the obtaining of all such approvals by governmental
agencies as may be deemed necessary or appropriate by the Committee.
21.3 The Board may make such changes as may be necessary or
appropriate to comply with the rules and regulations of any government
authority, or to obtain for Eligible Individuals granted Incentive Stock Options
the tax benefits under the applicable provisions of the Code and regulations
promulgated thereunder.
21.4 Each Option and Award is subject to the requirement that,
if at any time the Committee determines, in its sole discretion, that the
listing, registration or qualification of Shares issuable pursuant to the Plan
is required by any securities exchange or under any state or federal law, or the
consent or approval of any governmental regulatory body is necessary or
desirable as a condition of, or in connection with, the grant of an Option or
Award or the issuance of Shares, no Options or Awards shall be granted or
payment made or Shares issued, in whole or in part, unless listing,
registration, qualification, consent or approval has been effected or obtained
free of any conditions as acceptable to the Committee.
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21.5 Notwithstanding anything contained in the Plan or any
Agreement to the contrary, in the event that the disposition of Shares acquired
pursuant to the Plan is not covered by a then current registration statement
under the Securities Act of 1933, as amended (the "Securities Act"), and is not
otherwise exempt from such registration, such Shares shall be restricted against
transfer to the extent required by the Securities Act and Rule 144 or other
regulations thereunder. The Company may place on any certificate representing
any such Shares any legend deemed desirable by the Company's counsel to comply
with federal or state securities laws and the Committee may require any
individual receiving Shares pursuant to an Option or Award granted under the
Plan, as a condition precedent to receipt of such Shares, to represent and
warrant to the Company in writing that the Shares acquired by such individual
are acquired without a view to any distribution thereof and will not be sold or
transferred other than pursuant to an effective registration thereof under said
Act or pursuant to an exemption applicable under the Securities Act or the rules
and regulations promulgated thereunder.
22. MISCELLANEOUS.
22.1 MULTIPLE AGREEMENTS. The terms of each Option or Award
may differ from other Options or Awards granted under the Plan at the same time,
or at some other time. The Committee may also grant more than one Option or
Award to a given Eligible Individual during the term of the Plan, either in
addition to, or in substitution for, one or more Options or Awards previously
granted to that Eligible Individual.
22.2 CAPTIONS. The use of captions in this Plan or any
Agreement is for the convenience of reference only and shall not affect the
meaning of any provision of the Plan or such Agreement.
22.3 SEVERABILITY. Whenever possible, each provision of the
Plan or an Agreement shall be interpreted in such manner as to be effective and
valid under applicable law, but if any provision of the Plan or an Agreement
shall be held by a court of competent jurisdiction to be prohibited by or
invalid or unenforceable under applicable law, then (a) such provision shall be
deemed to be amended to accomplish the objectives of the provision as originally
written to the fullest extent permitted by law and (b) all other provisions of
the Plan or an Agreement shall remain in full force and effect.
22.4 WITHHOLDING OF TAXES.
(a) At such times as an Optionee or Grantee
recognizes taxable income in connection with the receipt of Shares or cash
hereunder (a "Taxable Event"), the Optionee or Grantee shall pay to the Company
an amount equal to the federal, state and local income taxes and other amounts
as may be required by law to be withheld by the Company in connection with the
Taxable Event (the "Withholding Taxes") prior to
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the issuance, or release from escrow, of such Shares or the payment of such
cash. The Company shall have the right to deduct from any payment of cash to an
Optionee or Grantee an amount equal to the Withholding Taxes in satisfaction of
the obligation to pay Withholding Taxes. In satisfaction of the obligation to
pay Withholding Taxes to the Company, the Optionee or Grantee may make a written
election (the "Tax Election"), which may be accepted or rejected in the sole
discretion of the Committee, to have withheld a portion of the Shares then
issuable to him or her having an aggregate Fair Market Value, on the date
preceding the date of such issuance, equal to the Withholding Taxes.
(b) If an Optionee makes a disposition, within the
meaning of Section 424(c) of the Code and regulations promulgated thereunder, of
any Share or Shares issued to such Optionee pursuant to the exercise of an
Incentive Stock Option within the two-year period commencing on the day after
the date of the grant or within the one-year period commencing on the day after
the date of transfer of such Share or Shares to the Optionee pursuant to such
exercise, the Optionee shall, within ten (10) days of such disposition, notify
the Company thereof, by delivery of written notice to the Company at its
principal executive office.
22.5 POST-TRANSITION PERIOD. Any Option or Award granted under
the Plan after the expiration of the Transition Period which is intended to be
Performance-Based Compensation shall be subject to the approval of the material
terms of the Plan by a majority of the stockholders of the Company in accordance
with Section 162(m) of the Code and the regulations promulgated thereunder.
-39-
<PAGE>
EXHIBIT 10.22
FORM OF
SENIOR MANAGEMENT AGREEMENT
THIS SENIOR MANAGEMENT AGREEMENT (this "AGREEMENT") is made as of
__________, between AppNet Systems, Inc., a Delaware corporation (the
"CORPORATION") and __________ (the "EXECUTIVE").
The Company and Executive desire to enter into an agreement pursuant to
which Executive will purchase, and the Company will sell, _____ shares of the
Company's Common Stock, par value $.0005 per share (the "EXECUTIVE STOCK").
Certain definitions are set forth in Section 9 of this Agreement.
The execution and delivery of this Agreement by the Company and
Executive is related to the purchase of shares of Common Stock and shares of the
Company's Class A Preferred Stock, par value $.01 per share (the "CLASS A
PREFERRED") by Smart Technology, L.L.C. ("SMART TECHNOLOGY"), GTCR Golder
Rauner, L.L.C., a Delaware limited liability company ("GTCR" and, together with
Smart Technology, the "INVESTORS" and each an "INVESTOR") pursuant to a purchase
agreement between the Company and the Investors dated as of June 29, 1998 (the
"PURCHASE Agreement"). Certain provisions of this Agreement are intended for the
benefit of, and will be enforceable by, the Investors.
The parties hereto agree as follows:
PROVISIONS RELATING TO EXECUTIVE STOCK
1. OWNERSHIP. Executive acknowledges that as of the date of this
Agreement, he owns beneficially and of record the Carried Stock free and clear
of all liens and encumbrances.
2. PURCHASE AND SALE OF EXECUTIVE STOCK.
(a) Upon execution of this Agreement, Executive will purchase,
and the Company will sell, _____ shares of Common Stock at a price of $____
per share. The Company will deliver to Executive the certificates representing
such Executive Stock, and Executive will deliver to the Company a check or wire
transfer of funds in the aggregate amount of $_____ and a promissory note in the
form of ANNEX A attached hereto in an aggregate principal amount of $_____ (the
"EXECUTIVE NOTE"). Executive's obligations under the Executive Note shall be
secured by a pledge of all of the shares of Common Stock purchased hereunder to
the Company and in connection therewith, Executive shall enter into a pledge
agreement in the form of ANNEX B attached hereto.
(b) Within 30 days after the date hereof, Executive will make
an effective election with the Internal Revenue Service under Section 83(b) of
the Internal Revenue Code and the regulations promulgated thereunder in the form
of ANNEX C attached hereto.
(c) In connection with the purchase and sale of the Executive
Stock hereunder, Executive represents and warrants to the Company that:
<PAGE>
(i) The Executive Stock to be acquired by Executive
pursuant to this Agreement will be acquired for Executive's own account and not
with a view to, or intention of, distribution thereof in violation of the
Securities Act, or any applicable state securities laws, and the Executive Stock
will not be disposed of in contravention of the Securities Act or any applicable
state securities laws.
(ii) Executive is an executive officer of the
Company, is sophisticated in financial matters and is able to evaluate the risks
and benefits of the investment in the Executive Stock.
(iii) Executive is able to bear the economic risk of
his investment in the Executive Stock for an indefinite period of time because
the Executive Stock has not been registered under the Securities Act and,
therefore, cannot be sold unless subsequently registered under the Securities
Act or an exemption from such registration is available.
(iv) Executive has had an opportunity to ask
questions and receive answers concerning the terms and conditions of the
offering of Executive Stock and has had full access to such other information
concerning the Company as he has requested.
(v) This Agreement constitutes the legal, valid and
binding obligation of Executive, enforceable in accordance with its terms, and
the execution, delivery and performance of this Agreement by Executive does not
and will not conflict with, violate or cause a breach of any agreement, contract
or instrument to which Executive is a party or any judgment, order or decree to
which Executive is subject.
(vi) Executive is a resident of the State of _____.
(d) As an inducement to the Company to issue the Executive
Stock to Executive, as a condition thereto, Executive acknowledges and agrees
that neither the issuance of the Executive Stock to Executive nor any provision
contained herein shall entitle Executive to remain in the employment of the
Company and its Subsidiaries or affect the right of the Company to terminate
Executive's employment at any time for any reason.
3. REPURCHASE OPTION.
(a) In the event that Executive ceases to be employed by the
Company and its Subsidiaries for any reason (the "SEPARATION"), the Executive
Stock (whether held by Executive or one or more of Executive's transferees,
other than the Company) will be subject to repurchase, in each case at the
option of the Company, the Investors and Ken S. Bajaj ("Bajaj") pursuant to the
terms and conditions set forth in this Section 3(a) (the "REPURCHASE OPTION"). A
percentage of the Executive Stock will be subject to repurchase at the
Executive's Original Cost for such shares, calculated in accordance with the
following schedule (the "ORIGINAL COST SHARES"):
2
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<TABLE>
<CAPTION>
PERCENTAGE OF EXECUTIVE STOCK
DATE TO BE REPURCHASED AT ORIGINAL COST
---- ----------------------------------
<S> <C>
Date of this Agreement until 1st Anniversary of this Agreement __%
Date immediately following 1st Anniversary of this Agreement until __%
2nd Anniversary of this Agreement
Date immediately following 2nd Anniversary of this Agreement until __%
3rd Anniversary of this Agreement
Date immediately following 3rd Anniversary of this Agreement until __%
4th Anniversary of this Agreement
Date immediately following 4th Anniversary of this Agreement and __%
thereafter
</TABLE>
The purchase price for the remaining shares of Executive Stock shall be the Fair
Market Value of such shares (the "FAIR MARKET VALUE SHARES").
(b) The Company may elect to purchase all or any portion of
the Original Cost Shares and the Fair Market Value Shares by delivering written
notice (the "REPURCHASE NOTICE") to the holder or holders of the Executive Stock
within 180 days after the Separation. The Repurchase Notice will set forth the
number of Original Cost Shares and Fair Market Value Shares to be acquired from
each holder, the aggregate consideration to be paid for such shares and the time
and place for the closing of the transaction. The number of shares to be
repurchased by the Company shall first be satisfied to the extent possible from
the shares of Executive Stock held by Executive at the time of delivery of the
Repurchase Notice. If the number of shares of Executive Stock then held by
Executive is less than the total number of shares of Executive Stock which the
Company has elected to purchase, the Company shall purchase the remaining shares
elected to be purchased from the other holder(s) of Executive Stock under this
Agreement, pro rata according to the number of shares of Executive Stock held by
such other holder(s) at the time of delivery of such Repurchase Notice
(determined as nearly as practicable to the nearest share). The number of
Original Cost Shares and Fair Market Value Shares to be repurchased hereunder
will be allocated among Executive and the other holders of Executive Stock (if
any) pro rata according to the number of shares of Executive Stock to be
purchased from such person.
(c) If for any reason the Company does not elect to purchase
all of the Executive Stock pursuant to the Repurchase Option, the Investors and
Bajaj shall be entitled to exercise the Repurchase Option for all or any portion
of the shares of Executive Stock that the Company has not elected to purchase
(the "AVAILABLE SHARES"). As soon as practicable after the Company has
determined that there will be Available Shares, but in any event within 150 days
after the Separation, the Company shall give written notice (the "OPTION
NOTICE") to the Investors and Bajaj setting forth the number of Available Shares
and the purchase price for the Available Shares. The Investors and Bajaj may
elect to purchase any or all of the Available Shares by
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<PAGE>
giving written notice to the Company within one month after the Option Notice
has been given by the Company. If the Investors and Bajaj elect to purchase an
aggregate number of shares greater than the number of Available Shares, the
Available Shares shall be allocated among the Investors and Bajaj based upon the
number of shares of Common Stock owned by each Investor and Bajaj on a fully
diluted basis (excluding, in the case of Bajaj, shares owned by him that are
subject to repurchase at cost). As soon as practicable, and in any event within
ten days, after the expiration of the one-month period set forth above, the
Company shall notify each holder of Executive Stock as to the number of shares
being purchased from such holder by the Investors and Bajaj (the "SUPPLEMENTAL
REPURCHASE NOTICE"). At the time the Company delivers the Supplemental
Repurchase Notice to the holder(s) of Executive Stock, the Company shall also
deliver written notice to the Investors and Bajaj setting forth the number of
shares the Investors and Bajaj are entitled to purchase, the aggregate purchase
price and the time and place of the closing of the transaction. The number of
Original Cost Shares and Fair Market Value Shares to be repurchased hereunder
shall be allocated among the Company, the Investors and Bajaj pro rata according
to the number of shares of Executive Stock to be purchased by each of them.
Notwithstanding the foregoing, the Investors and Bajaj shall not exercise their
Repurchase Option as to the Original Cost Shares pursuant to this Section 3(c)
if the Company has sufficient assets to fully exercise its Repurchase Option as
to the Original Cost Shares but has not exercised such right. Furthermore, if
the Investors and Bajaj repurchase any Original Cost Shares, they shall
contribute such Original Cost Shares to the Company in exchange for a promissory
note from the Company with an aggregate principal amount equal to the purchase
price paid for such shares, bearing interest (payable quarterly) at a rate per
annum equal to the prime rate as published in the WALL STREET JOURNAL from time
to time, and having a term of no longer than five years.
(d) The closing of the purchase of the Executive Stock
pursuant to the Repurchase Option shall take place on the date designated by the
Company in the Repurchase Notice or Supplemental Repurchase Notice, which date
shall not be more than one month nor less than five days after the delivery of
the later of either such notice to be delivered. The Company will pay for the
Executive Stock to be purchased by it pursuant to the Repurchase Option by first
offsetting amounts outstanding under any bona fide debts owed by Executive to
the Company and will pay the remainder of the purchase price by, at its option,
(A) a check or wire transfer of funds, or (B) a check or wire transfer of funds
for at least one-third of the purchase price, and a subordinated note or notes
payable in two equal annual installments beginning on each of the first and
second anniversary of the closing of such purchase and bearing interest (payable
quarterly) at a rate per annum equal to the prime rate as published in THE WALL
STREET JOURNAL from time to time in the aggregate amount of the remainder of the
purchase price for such shares. The Investors and Bajaj will pay for the
Executive Stock purchased by it by a check or wire transfer of funds. The
Company, the Investors and Bajaj will be entitled to receive customary
representations and warranties from the sellers regarding such sale and to
require that all sellers' signatures be guaranteed.
(e) Notwithstanding anything to the contrary contained in this
Agreement, all repurchases of Executive Stock by the Company shall be subject to
applicable restrictions contained in the Delaware General Corporation Law and in
the Company's and its Subsidiaries'
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<PAGE>
debt and equity financing agreements. If any such restrictions prohibit the
repurchase of Executive Stock hereunder which the Company is otherwise entitled
or required to make, the Company may make such repurchases as soon as it is
permitted to do so under such restrictions.
(f) Notwithstanding anything to the contrary contained in this
Agreement, if the Executive delivers the notice of objection described in the
definition of Fair Market Value, or if the Fair Market Value of a Fair Market
Value Share is otherwise determined to be an amount more than 10% greater than
the per share repurchase price for Fair Market Value Shares originally
determined by the Board, each of the Company, the Investors and Bajaj shall have
the right to revoke its or their exercise of the Repurchase Option for all or
any portion of the Executive Stock elected to be repurchased by it by delivering
notice of such revocation in writing to the holders of the Executive Stock
during (i) the thirty-day period beginning on the date the Company, the
Investors and Bajaj receive Executive's written notice of objection and (ii) the
thirty-day period beginning on the date the Company, the Investors and Bajaj are
given written notice that the Fair Market Value of a Fair Market Value Share was
finally determined to be an amount more than 10% greater than the per share
repurchase price for Fair Market Value Shares originally determined by the
Board.
(g) The provisions of this Section 3 shall terminate upon the
consummation of a Sale of the Company.
4. RESTRICTIONS ON TRANSFER OF EXECUTIVE STOCK.
(a) RETENTION OF EXECUTIVE STOCK. Until the fifth anniversary
of the date of this Agreement, Executive shall not sell, transfer, assign,
pledge or otherwise dispose of any interest in any shares of Executive Stock,
except pursuant to: (i) a Sale of the Company, (ii) Section 3 of this Agreement,
(iii) Section 4 of the Stockholders Agreement, (iv) a sale described in clause
(i) of the definition of "PUBLIC SALE," or (v) after a Public Offering, upon any
sale by the Investors or an Affiliate of the type described in clause (ii) of
the definition of "PUBLIC SALE" (a "RULE 144 SALE"), to the extent of the lesser
of (a) the number of shares of Executive Stock held by Executive that are not
subject to repurchase at Original Cost and (b) the number of shares of Executive
Stock held by Executive multiplied by a fraction, the numerator of which is the
number of shares of Common Stock sold by the Investors and their Affiliates in
the Rule 144 Sale and the denominator of which is the total number of shares of
Common Stock held by the Investors and their Affiliates immediately prior to
such sale.
(b) CERTAIN PERMITTED TRANSFERS. The restrictions in this
Section 4 will not apply with respect to (i) transfers of shares of Executive
Stock pursuant to applicable laws of descent and distribution or (ii) transfer
of shares of Executive Stock among Executive's Family Group; provided that such
restrictions will continue to be applicable to the Executive Stock after any
such transfer and the transferees of such Executive Stock have agreed in writing
to be bound by the provisions of this Agreement.
(c) TERMINATION OF RESTRICTIONS. The restrictions on the
Transfer of shares of Executive Stock set forth in this Section 4 will continue
with respect to each share of Executive Stock until the date on which such
Executive Stock has been transferred in a transaction
5
<PAGE>
permitted by this Section 4 (except in a transaction contemplated by Section
4(b)); provided that in any event such restrictions will terminate on a Sale of
the Company.
5. ADDITIONAL RESTRICTIONS ON TRANSFER OF EXECUTIVE STOCK.
(a) LEGEND. The certificates representing the Executive Stock
will bear a legend in substantially the following form:
"THE SECURITIES REPRESENTED BY THIS CERTIFICATE HAVE NOT BEEN
REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED (THE
"ACT"), AND MAY NOT BE SOLD OR TRANSFERRED IN THE ABSENCE OF
AN EFFECTIVE REGISTRATION STATEMENT UNDER THE ACT OR AN
EXEMPTION FROM REGISTRATION THEREUNDER. THE SECURITIES
REPRESENTED BY THIS CERTIFICATE ARE ALSO SUBJECT TO ADDITIONAL
RESTRICTIONS ON TRANSFER, CERTAIN REPURCHASE OPTIONS AND
CERTAIN OTHER AGREEMENTS SET FORTH IN A SENIOR MANAGEMENT
AGREEMENT BETWEEN THE COMPANY AND AN EXECUTIVE OF THE COMPANY
DATED AS OF JULY 31, 1998. A COPY OF SUCH AGREEMENT MAY BE
OBTAINED BY THE HOLDER HEREOF AT THE COMPANY'S PRINCIPAL PLACE
OF BUSINESS WITHOUT CHARGE."
(b) OPINION OF COUNSEL. No holder of Executive Stock may sell,
transfer or dispose of any Executive Stock (except pursuant to an effective
registration statement under the Securities Act) without first delivering to the
Company an opinion of counsel (reasonably acceptable in form and substance to
the Company) that neither registration nor qualification under the Securities
Act and applicable state securities laws is required in connection with such
transfer.
PROVISIONS RELATING TO EMPLOYMENT
6. EMPLOYMENT. The Company agrees to employ Executive and Executive
accepts such employment for the period beginning as of the date hereof and
ending upon his separation pursuant to Section 6(c) hereof (the "EMPLOYMENT
PERIOD").
(a) POSITION AND DUTIES. During the Employment Period,
Executive shall serve as a Senior Vice President of the Company and shall have
such duties, responsibilities and authority as may be assigned by the President
and Chief Executive Officer, subject to the power of the Board to expand or
limit such duties, responsibilities and authority and to override actions of the
Senior Vice President. Executive shall report to the President and Chief
Executive Officer. Executive shall devote his best efforts and his full business
time and attention to the business and affairs of the Company and its
subsidiaries.
(b) SALARY, BONUS AND BENEFITS. During the Employment Period,
the Company will pay Executive a base salary (the "ANNUAL BASE SALARY") of
$200,000 per annum, subject to any increase as determined by the Board based
upon the Company's achievements of
6
<PAGE>
budgetary and other objectives set by the Board. In addition, Executive shall be
eligible to receive a bonus of up to fifty (50%) percent of the Annual Base
Salary based upon the Company's achievement of budgetary and other objectives
set by the Board. Executive's Annual Base Salary for any partial year will be
prorated based upon the number of days elapsed in such year. In addition, during
the Employment Period, Executive will be entitled to such other benefits
approved by the Board and made available to the Company's senior management.
(c) SEPARATION. Executive's employment by the Company will
continue until Executive's resignation, disability (as determined by the Board
in its good faith judgment) or death or until the Board terminates Executive's
employment for any reason or without any reason. If the Employment Period is
terminated by the Board without Cause, subject to the provisions of this
Agreement, Executive shall be entitled to receive his Annual Base Salary and his
life insurance, medical insurance and disability insurance benefits (but no
bonuses or other fringe benefits) through the end of the Noncompete Period (as
defined below in Section 8, including any extensions pursuant to Section 8(a))
(such payment, the "SEVERANCE PAYMENT") payable in accordance with normal
payroll practices.
7. CONFIDENTIAL INFORMATION.
(a) Executive acknowledges that the Company and its
Subsidiaries are engaged in the business of acquiring businesses that provide
electronic commerce services and operating those businesses after their
acquisition (the "BUSINESS"). Executive further acknowledges that the Business
and its continued success depend upon the use and protection of a large body of
confidential and proprietary information, and that he holds a position of trust
and confidence by virtue of which he necessarily possesses, has access to and,
as a consequence of his signing this Agreement, will continue to possess and
have access to, highly valuable, confidential and proprietary information of the
Company and its Subsidiaries not known to the public in general, and that it
would be improper for him to make use of this information for the benefit of
himself and others. All of such confidential and proprietary information now
existing or to be developed in the future will be referred to in this Agreement
as "CONFIDENTIAL INFORMATION." This includes, without limitation, information
relating to the nature and operation of the Business, the persons, firms and
corporations which are customers or active prospects of the Company during
Executive's employment by the Company, the Company's development, transition and
transformation plans, methodology and methods of doing business, strategic,
acquisition, marketing and expansion plans, including plans regarding planned
and potential acquisitions and sales, financial and business plans, employee
lists, numbers and location of sales representatives, new and existing programs
and services (and those under development), prices and terms, customer service,
integration processes requirements, costs of providing service, support and
equipment and equipment maintenance costs. Confidential Information shall not
include any information that has become generally known to and available for use
by the public other than as a result of Executive's acts or omissions.
(b) Disclosure of any Confidential Information of the Company
shall not be prohibited if such disclosure is directly pursuant to a valid and
existing order of a court or other governmental body or agency within the United
States; provided, however, that (i) Executive
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<PAGE>
shall first have given prompt notice to the Company of any such possible or
prospective order (or proceeding pursuant to which any such order may result)
and (ii) Executive shall afford the Company a reasonable opportunity to prevent
or limit any such disclosure.
(c) During the Employment Period and at all times thereafter,
Executive will preserve and protect as confidential all of the Confidential
Information known to Executive or at any time in Executive's possession or
control. In addition, during the Employment Period and at all times thereafter,
Executive will not disclose to any unauthorized person or use for his own
account any of such Confidential Information without the Board's written
consent. Executive agrees to deliver to the Company at a Separation, or at any
other time the Company may request in writing, all memoranda, notes, plans,
records, reports and other documents (and copies thereof) containing or
otherwise relating to any of the Confidential Information (including, without
limitation, all acquisition prospects, lists and contact information) which he
may then possess or have under his control. Executive acknowledges that all such
memoranda, notes, plans, records, reports and other documents are and at all
times will be and remain the property of the Company.
(d) Executive will fully comply with any agreement reasonably
required by any of the Company's affiliates, business partners, suppliers or
contractors with respect to the protection of the confidential and proprietary
information of such entities.
8. NONCOMPETITION AND NONSOLICITATION. Executive acknowledges that in
the course of his employment with the Company he will become familiar with the
Confidential Information concerning the Company and such Subsidiaries and that
his services will be of special, unique and extraordinary value to the Company.
Executive agrees that the Company has a protectable interest in the Confidential
Information acquired by Executive during the course of his employment with the
Company. Therefore, Executive agrees that:
(a) NONCOMPETITION. So long as Executive is employed or
affiliated with the Company or any Subsidiary and for an additional (i) two
years thereafter, in the event the Employment Period is terminated as a result
of Executive's resignation or is terminated with Cause or (ii) one year
thereafter, in the event the Employment Period is terminated without Cause (the
"NONCOMPETE PERIOD"), he shall not, anywhere in the United States, directly or
indirectly own, manage, control, participate in, consult with, render services
for, or in any manner engage in the Business or any other business engaged in by
the Company at the time of Separation; provided that in the event of a
termination without Cause, the Board may extend the Noncompete Period for an
additional one-year term by giving notice to Executive ninety (90) days prior to
the end of the then-existing Noncompete Period.
(b) NONSOLICITATION. During the Noncompete Period, Executive
shall not directly or indirectly through another entity (i) induce or attempt to
induce any employee of the Company or any of its Subsidiaries to leave the
employ of the Company or such Subsidiary, or in any way interfere with the
relationship between the Company or any of its Subsidiaries and any employee
thereof, (ii) hire any person who was an employee of the Company or any of its
Subsidiaries within 180 days prior to the time such employee was hired by the
Executive, (iii)
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induce or attempt to induce any owner of a site location, customer, supplier,
licensee or other business relation of the Company or any of its Subsidiaries to
cease doing business with the Company or such Subsidiary or in any way interfere
with the relationship between any such customer, supplier, licensee or business
relation and the Company or any of its Subsidiaries or (iv) directly or
indirectly acquire or attempt to acquire an interest in any business relating to
the business of the Company or any of its Subsidiaries and with which the
Company or any of its Subsidiaries has entertained discussions or has requested
and received information relating to the acquisition of such business by the
Company or any of its Subsidiaries in the two-year period immediately preceding
a Separation.
(c) ENFORCEMENT. If, at the time of enforcement of Section 7
or 8 of this Agreement, a court holds that the restrictions stated herein are
unreasonable under circumstances then existing, the parties hereto agree that
the maximum duration, scope or geographical area reasonable under such
circumstances shall be substituted for the stated period, scope or area and that
the court shall be allowed to revise the restrictions contained herein to cover
the maximum duration, scope and area permitted by law. Because Executive's
services are unique and because Executive has access to Confidential
Information, the parties hereto agree that money damages would be an inadequate
remedy for any breach of this Agreement. Therefore, in the event of a breach or
threatened breach of Section 7 or Section 8 of this Agreement, the Company or
any of its successors or assigns shall, in addition to other rights and remedies
existing in its favor, be entitled to specific performance and/or injunctive or
other relief in order to enforce, or prevent any violations of, the provisions
of Section 7 or Section 8 from any court of competent jurisdiction.
(d) ADDITIONAL ACKNOWLEDGMENTS. Executive acknowledges that
the provisions of this Section are in consideration of: (i) employment with the
Company and (ii) additional good and valuable consideration as set forth in this
Agreement. Executive expressly agrees and acknowledges that the restrictions
contained in Sections 7 and 8 do not preclude Executive from earning a
livelihood, nor does it unreasonably impose limitations on Executive's ability
to earn a living. In addition, Executive agrees and acknowledges that the
potential harm to the Company of its non-enforcement outweighs any harm to the
Executive of its enforcement by injunction or otherwise. Executive acknowledges
that he has carefully read this Agreement and has given careful consideration to
the restraints imposed upon the Executive by this Agreement, and is in full
accord as to their necessity for the reasonable and proper protection of the
Confidential Information. Executive expressly acknowledges and agrees that each
and every restraint imposed by this Agreement is reasonable with respect to
subject matter, time period and geographical area.
GENERAL PROVISIONS
9. DEFINITIONS.
"AFFILIATE" or "AFFILIATES" of an Investor means any direct or indirect
general or limited partner of such Investor, or any employee or owner thereof,
or any other person, entity or investment fund controlling, controlled by or
under common control with such Investor.
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"CAUSE" means (i) the commission of a felony or a crime involving moral
turpitude or the commission of any other act or omission involving dishonesty or
fraud with respect to the Company or any of its Subsidiaries or any of their
customers or suppliers, (ii) conduct tending to bring the Company or any of its
Subsidiaries into substantial public disgrace or disrepute, (iii) substantial
and repeated failure to perform duties of the office held by Executive as
reasonably directed by the Board, (iv) gross negligence or willful misconduct
with respect to the Company or any of its Subsidiaries or (v) any breach of
Section 7 or 8 of this Agreement.
"EXECUTIVE'S FAMILY GROUP" means Executive's spouse and descendants
(whether natural or adopted), any trust solely for the benefit of Executive
and/or Executive's spouse and/or descendants and any retirement plan for the
Executive.
"EXECUTIVE STOCK" will continue to be Executive Stock in the hands of
any holder other than Executive (except for the Company and the Investors and
except for transferees in a Public Sale), and except as otherwise provided
herein, each such other holder of Executive Stock will succeed to all rights and
obligations attributable to Executive as a holder of Executive Stock hereunder.
Executive Stock will also include shares of the Company's capital stock issued
with respect to Executive Stock by way of a stock split, stock dividend or other
recapitalization.
"FAIR MARKET VALUE" of each share of Executive Stock means the average
of the closing prices of the sales of the Common Stock on all securities
exchanges on which such Common Stock may at the time be listed, or, if there
have been no sales on any such exchange on any day, the average of the highest
bid and lowest asked prices on all such exchanges at the end of such day, or, if
on any day such Common Stock is not so listed, the average of the representative
bid and asked prices quoted in the NASDAQ System as of 4:00 P.M., New York time,
or, if on any day such Common Stock is not quoted in the NASDAQ System, of the
average of the highest bid and lowest asked prices on such day in the domestic
over-the-counter market as reported by the National Quotation Bureau
Incorporated, or any similar successor organization, in each such case averaged
over a period of 21 days consisting of the day as of which the Fair Market Value
is being determined and the 20 consecutive business days prior to such day. If
at any time such Common Stock is not listed on any securities exchange or quoted
in the NASDAQ System or the over-the-counter market, the Fair Market Value will
be the fair value of such Common Stock determined in good faith by the Board
(the "BOARD CALCULATION"). If the Executive reasonably disagrees with the Board
Calculation, the Executive may, within 30 days after receipt of the Board
Calculation, deliver a notice (an "OBJECTION NOTICE") to the Company setting
forth the Executive's calculation of Fair Market Value. The Board and the
Executive will negotiate in good faith to agree on such Fair Market Value, but
if such agreement is not reached within 30 days after the Company has received
the Objection Notice, Fair Market Value shall be determined by an appraiser
jointly selected by the Board and the Executive, which appraiser shall submit to
the Board and the Executive a report within 30 days of its engagement setting
forth such determination. If the parties are unable to agree on an appraiser
within 45 days after the Company has received the Objection Notice, within seven
days, each party shall submit the names of four nationally recognized investment
banking firms, and each party shall be entitled to strike two names from the
other party's list of firms, and the appraiser shall be selected by lot from the
remaining four investment banking firms. The expenses of such appraiser shall be
10
<PAGE>
borne by the Executive unless the appraiser's valuation is not less than 10%
greater than the amount determined by the Board, in which case, the costs of the
appraiser shall be borne by the Company. The determination of such appraiser
shall be final and binding upon all parties. If the Repurchase Option is
exercised within 90 days after a Separation, then Fair Market Value shall be
determined as of the date of such Separation; thereafter, Fair Market Value
shall be determined as of the date the Repurchase Option is exercised.
"ORIGINAL COST" means, with respect to each share of Executive Stock
purchased hereunder, $___ (as proportionately adjusted for all subsequent stock
splits, stock dividends and other recapitalizations).
"PERSON" means an individual, a partnership, a limited liability
company, a corporation, an association, a joint stock company, a trust, a joint
venture, an unincorporated organization and a governmental entity or any
department, agency or political subdivision thereof
"PUBLIC OFFERING" means the sale in an underwritten public offering
registered under the Securities Act of shares of the Company's Common Stock
approved by the Board.
"PUBLIC SALE" means (i) any sale pursuant to a registered public
offering under the Securities Act or (ii) any sale to the public pursuant to
Rule 144 promulgated under the Securities Act effected through a broker, dealer
or market maker (other than pursuant to Rule 144(k)).
"SALE OF THE COMPANY" means any transaction or series of transactions
pursuant to which any person(s) or entity(ies) other than the Investors and its
Affiliates in the aggregate acquire(s) (i) capital stock of the Company
possessing the voting power (other than voting rights accruing only in the event
of a default, breach or event of noncompliance) to elect a majority of the
Company's board of directors (whether by merger, consolidation, reorganization,
combination, sale or transfer of the Company's capital stock, shareholder or
voting agreement, proxy, power of attorney or otherwise) or (ii) all or
substantially all of the Company's assets determined on a consolidated basis;
provided that the term "SALE OF THE COMPANY" shall not include a Public
Offering.
"SECURITIES ACT" means the Securities Act of 1933, as amended from time
to time.
"STOCKHOLDERS AGREEMENT" means the Stockholders Agreement dated June
29, 1998, among the Company and certain of its stockholders.
"SUBSIDIARY" means any corporation of which fifty percent (50%) or more
of the securities having ordinary voting power in electing the board of
directors are, at the time as of which any determination is being made, owned by
the Company either directly or through one or more Subsidiaries. The term
Subsidiary shall also include any joint venture arrangement between the Company
and any other entity, including, without limitation, the Company's joint venture
arrangement with Commerce Direct International, Inc., a Delaware corporation.
"TRANSFER" means to sell, transfer, assign, pledge or otherwise dispose
of (whether with or
11
<PAGE>
without consideration and whether voluntarily or involuntarily or by operation
of law).
10. NOTICES. Any notice provided for in this Agreement must be in
writing and must be either personally delivered, mailed by first class mail
(postage prepaid and return receipt requested) or sent by reputable overnight
courier service (charges prepaid) to the recipient at the address below
indicated:
If to the Company:
AppNet Systems, Inc.
6700-A Rockledge Drive
Suite 525
Bethesda, MD 20817
Attention: _____
with a copy to:
GTCR Golder Rauner, L.L.C.
6100 Sears Tower
Chicago, Illinois 60606-6402
Attention: Bruce V. Rauner
Philip A. Canfield
and
Kirkland & Ellis
200 East Randolph
Chicago, Illinois 60601
Attention: Stephen L. Ritchie
and
Tucker, Flyer & Lewis
1615 L Street, N.W.
Suite 400
Washington, D.C. 20036-5612
Attention: Arthur E. Cirulnick
If to the Executive:
----------
If to the Investors:
12
<PAGE>
GTCR Golder Rauner, L.L.C.
6100 Sears Tower
Chicago, Illinois 60606-6402
Attention: Bruce V. Rauner
Philip A. Canfield
and
Smart Technology, L.L.C.
10201 Norton Road
Potomac, MD 20854
with a copy to:
Kirkland & Ellis
200 East Randolph Drive
Chicago, Illinois 60601
Attention: Stephen L. Ritchie
and
Tucker, Flyer & Lewis
1615 L Street, N.W.,
Suite 400
Washington, D.C. 20036-5612
Attention: Arthur E. Cirulnick
or such other address or to the attention of such other person as the recipient
party shall have specified by prior written notice to the sending party. Any
notice under this Agreement will be deemed to have been given when so delivered
or sent or, if mailed, five days after deposit in the U.S. mail.
11. GENERAL PROVISIONS.
(a) EXPENSES. Each of the Company and the Executive shall pay
its or his legal, accounting and other expenses incurred in connection with the
negotiation and execution of this Agreement and the consummation of the
transactions contemplated by this Agreement.
(b) TRANSFERS IN VIOLATION OF AGREEMENT. Any Transfer or
attempted Transfer of any Executive Stock in violation of any provision of this
Agreement shall be void, and the Company shall not record such Transfer on its
books or treat any purported transferee of such Executive Stock as the owner of
such stock for any purpose.
13
<PAGE>
(c) SEVERABILITY. Whenever possible, each provision of this
Agreement will be interpreted in such manner as to be effective and valid under
applicable law, but if any provision of this Agreement is held to be invalid,
illegal or unenforceable in any respect under any applicable law or rule in any
jurisdiction, such invalidity, illegality or unenforceability will not affect
any other provision or any other jurisdiction, but this Agreement will be
reformed, construed and enforced in such jurisdiction as if such invalid,
illegal or unenforceable provision had never been contained herein.
(d) INTENDED THIRD-PARTY BENEFICIARIES. The Investors are
intended to be third-party beneficiaries to this entire Agreement and the rights
and obligations of the parties hereto. It is understood and agreed by the
parties hereto that this Agreement shall be enforceable by GTCR and, provided
GTCR is seeking to enforce substantially the same rights, the other Investor(s)
in accordance with its terms as though each of the Investors were a party to
every provision hereof. Except as expressly provided herein, no other third
parties are intended by the parties hereto to be beneficiaries hereof.
(e) COMPLETE AGREEMENT. This Agreement, those documents
expressly referred to herein and other documents of even date herewith embody
the complete agreement and understanding among the parties 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 in
any way.
(f) COUNTERPARTS. This Agreement may be executed in separate
counterparts, each of which is deemed to be an original and all of which taken
together constitute one and the same agreement.
(g) SUCCESSORS AND ASSIGNS. Except as otherwise provided
herein, this Agreement shall bind and inure to the benefit of and be enforceable
by Executive, the Company, the Investors and their respective successors and
assigns (including subsequent holders of Executive Stock); provided that the
rights and obligations of Executive under this Agreement shall not be assignable
except in connection with a permitted transfer of Executive Stock hereunder. The
rights and obligations of GTCR under this Agreement may be assigned at any time,
in whole or in part, to any investment fund managed by GTCR, or any successor
thereto; provided that such assignment occurs in the manner provided in the
Purchase Agreement.
(h) CHOICE OF LAW. The corporate law of the State of Delaware
will govern all questions concerning the relative rights of the Company and its
stockholders. All other questions concerning the construction, validity and
interpretation of this Agreement and the exhibits hereto will be governed by and
construed in accordance with the internal laws of the State of Maryland, without
giving effect to any choice of law or conflict of law provision or rule (whether
of the State of Maryland or any other jurisdiction) that would cause the
application of the laws of any jurisdiction other than the State of Maryland.
(i) REMEDIES. Each of the parties to this Agreement (including
the Investors) will be entitled to enforce its rights under this Agreement
specifically, to recover damages and costs (including attorney's fees) caused by
any breach of any provision of this Agreement and to
14
<PAGE>
exercise all other rights existing in its favor. The parties hereto agree and
acknowledge that money damages may not be an adequate remedy for any breach of
the provisions of this Agreement and that any party may in its sole discretion
apply to any court of law or equity of competent jurisdiction (without posting
any bond or deposit) for specific performance and/or other injunctive relief in
order to enforce or prevent any violations of the provisions of this Agreement.
(j) AMENDMENT AND WAIVER. The provisions of this Agreement may
be amended and waived only with the written consent of the Company and the
Executive.
(k) BUSINESS DAYS. If any time period for giving notice or
taking action hereunder expires on a day which is a Saturday, Sunday or holiday
in the state in which the Company's chief executive office is located, the time
period shall be automatically extended to the business day immediately following
such Saturday, Sunday or holiday.
(l) TERMINATION. This Agreement (except for the provisions of
Section 6) shall survive a Separation and shall remain in full force and effect
after such Separation.
(m) ADJUSTMENTS OF NUMBERS. All numbers set forth herein which
refer to share prices or amounts will be appropriately adjusted to reflect stock
splits, stock dividends, combinations of shares and other recapitalizations
affecting the subject class of stock.
15
<PAGE>
IN WITNESS WHEREOF, the parties hereto have executed this Senior
Management Agreement on the date first written above.
APPNET SYSTEMS, INC.
By:
-----------------------------
Name:
Title:
-----------------------------
[Executive]
16
<PAGE>
FORM OF AMENDMENT TO APPNET SYSTEMS, INC.
SENIOR MANAGEMENT AGREEMENT
This Amendment to the Senior Management Agreement ("Amendment") is made
as of the ____ day of __________, ____, by and between AppNet Systems, Inc., a
Delaware corporation (the "Company") and __________ (the "Executive").
WHEREAS, the Executive and the Company have entered into a Senior
Management Agreement dated __________, ("Senior Management Agreement"); and
WHEREAS, the Executive and the Company wish to amend that Senior
Management Agreement;
NOW, THEREFORE, in consideration of the foregoing, of the mutual
promises herein contained and of other good and valuable consideration, the
receipt and sufficiency of which is hereby acknowledged, the parties, hereto,
intending to be legally bound, agree as follows:
SECTION 1. Unless otherwise specifically defined herein, each term used
herein which is defined in the Senior Management Agreement shall have the
meaning assigned to such term in the Senior Management Agreement. Except as
amended and supplemented hereby, all of the terms of the Senior Management
Agreement shall remain and continue in full force and effect and are hereby
confirmed in all respects. Each reference to "hereof," "hereunder," "herein,"
and "hereby" and each similar reference and each reference to "this Agreement"
and each other similar reference contained in the Senior Management Agreement
shall from and after the effective date of this Amendment refer to the Senior
Management Agreement as amended by this Amendment.
SECTION 2. Section 3(g) of the Senior Management Agreement is hereby
amended to read in its entirety as follows:
"(g) The provisions of this Section 3 shall terminate upon the
consummation of a Sale of the Company; PROVIDED THAT, the Repurchase Option of
the Company, the Investors, and Bajaj, set forth in Section 3(a) hereof to
repurchase the Fair Market Value Shares shall terminate immediately upon a
Public Offering."
SECTION 3. The corporate law of the State of Delaware will govern all
questions concerning the relative rights of the Company and the stockholders.
All other questions concerning the construction, validity and interpretation of
this Amendment will be governed by and construed in accordance with the internal
laws of the State of Maryland, without giving effect to any choice of law or
conflict of law provision or rule (whether of the State of Maryland or any other
jurisdiction) that would cause the application of the laws of any jurisdiction
other than the State of Maryland.
<PAGE>
SECTION 4. This Amendment may be executed in separate counterparts,
each of which is deemed to be an original and all of which taken together
constitute one and the same agreement.
<PAGE>
IN WITNESS WHEREOF, the Company and Executive have executed this Amendment on
the date first written above.
APPNET SYSTEMS, INC.
By:
-----------------------------
Name:
Title:
-----------------------------
[Executive]
<PAGE>
Exhibit 10.24
May 28, 1999
VIA OVERNIGHT COURIER
AppNet Systems, Inc.
6707 Democracy Boulevard, Suite 1000
Bethesda, Maryland 20817
Attention: Mr. Jack Pearlstein
RE: REPAYMENT OF LOANS AND PREFERRED STOCK
Ladies and Gentlemen:
Reference is hereby made to each of (a) that certain Revolving Credit
Agreement, dated as of January 8, 1999 (as amended and in effect from time to
time, the "Unguaranteed Credit Agreement"), by and among AppNet Systems, Inc.
(the "Borrower"), BankBoston, N.A. and the other lending institutions set forth
on SCHEDULE 1 thereto (collectively, the "Banks"), BankBoston, N.A. as agent for
itself and the Banks (in such capacity, the "Agent") and Antares Capital
Corporation as co-agent for itself and the Banks; and (b) that certain Revolving
Credit Agreement, dated as of January 8, 1999 (as amended and in effect from
time to time, the "Guaranteed Credit Agreement"), by and among AppNet Systems,
Inc. (the "Borrower"), BankBoston, N.A. and the other lending institutions set
forth on SCHEDULE 1 thereto (collectively, the "Guaranteed Banks"), BankBoston,
N.A. as agent for itself and the Guaranteed Banks (in such capacity, the
"Guaranteed Agent") and Antares Capital Corporation as co-agent for itself and
the Guaranteed Banks. Capitalized terms used herein and which are not otherwise
defined shall have the respective meanings ascribed thereto in the Unguaranteed
Credit Agreement.
The Borrower has advised the Agent, the Guaranteed Agent, the Banks and
the Guaranteed Banks that, in connection with the Borrower's IPO, the Borrower
is contemplating (a) repaying all outstanding Obligations (as such term is
defined in the Guaranteed Credit Agreement) under the Guaranteed Credit
Agreement and terminating the Commitment (as such term is defined in the
Guaranteed Credit Agreement) of each of the Guaranteed Banks under the
Guaranteed Credit Agreement in their entirety, but retaining in full force and
effect the Commitment under the Unguaranteed Credit Agreement, and retaining
such Commitment in effect without the limitations to borrowings based on the
Guaranteed Credit Agreement set forth in ss.2.1 and ss.3.2 of the Unguaranteed
Credit Agreement (such transaction being hereinafter referred to as the
"Termination of Guaranteed Facility"); (b) redeeming all or a portion of the
Borrower's Class A and Class B Preferred Stock (the "Stock Redemption") and
<PAGE>
AppNet Systems, Inc.
May 28, 1999
Page -2-
converting or exchanging any Class A and Class B Preferred Stock that is not
redeemed for the Borrower's common stock; and (c) prepaying all or a portion of
the Seller Subordinated Debt (the "Subordinated Debt Repayment"). The occurrence
of the Termination of Guaranteed Facility, the Stock Redemption and/or the
Subordinated Debt Repayment, or any one of or any combination of such events
shall hereinafter be referred to as the "IPO Transactions".
As you are aware, (a) ss.2.1 of the Unguaranteed Credit Agreement does
not permit the sum of the outstanding Revolving Credit Loans PLUS the Maximum
Drawing Amount and all Unpaid Reimbursement Obligations to exceed the Guaranteed
Credit Agreement Outstandings; (b) ss.2.3 of the Unguaranteed Credit Agreement
does not permit the Total Commitment under the Unguaranteed Credit Agreement to
exceed the amount of the Total Commitment under the Guaranteed Credit Agreement;
(c) ss.3.2 of the Unguaranteed Credit Agreement requires that, to the extent the
sum of the outstanding amount of the Revolving Credit Loans, the Maximum Drawing
Amount and all Unpaid Reimbursement Obligations exceeds the Guaranteed Credit
Agreement Outstandings, then the Borrower will repay such excess; (d) ss.9.4 of
the Unguaranteed Credit Agreement does not permit the Borrower to effect the
Stock Redemption (except with respect to the Class A Preferred Stock); (e)
ss.9.18 of the Unguaranteed Credit Agreement does not permit the Borrower to
prepay, redeem or repurchase any of the Seller Subordinated Debt; (f) Section
12.6 of the Unguaranteed Credit Agreement requires, as a condition to borrowing
thereunder, that the Borrower demonstrate that the Total Commitment in the
Guaranteed Credit Agreement is not less than the Total Commitment in the
Unguaranteed Credit Agreement and that the sum of the outstanding Revolving
Credit Loans plus the Maximum Drawing Amount and all Unpaid Reimbursement
Obligations under the Unguaranteed Credit Agreement does not exceed the
Guaranteed Credit Agreement Outstandings; (g) ss.2.3 of the Guaranteed Credit
Agreement does not permit the Borrower to reduce the Total Commitment under the
Guaranteed Credit Agreement to an amount which is less than the Total Commitment
under the Unguaranteed Credit Agreement; (h) ss.9.4 of the Guaranteed Credit
Agreement does not permit the Borrower to effect the Stock Redemption (except
with respect to the Class A Preferred Stock); and (i) ss.9.18 of the Guaranteed
Credit Agreement does not permit the Borrower to prepay, redeem or repurchase
any of the Seller Subordinated Debt. As such, the Borrower has asked the Agent,
the Guaranteed Agent and the Majority Banks (as such term is defined in each of
the Unguaranteed Credit Agreement and the Guaranteed Credit Agreement) to
consent to the IPO Transactions. The Agent, the Guaranteed Agent and the
Majority Banks hereby consents to the IPO Transactions on the conditions that:
(a) the net cash proceeds received by the Borrower in connection with
the IPO are an amount which is not less than the aggregate amount necessary to
repay all outstanding Revolving Credit Loans under each of the Guaranteed Credit
Agreement
<PAGE>
AppNet Systems, Inc.
May 28, 1999
Page -3-
and the Unguaranteed Credit Agreement, together with any and all
interest and fees accrued thereunder;
(b) the Borrower shall (i) use the net cash proceeds received in
connection with the IPO to repay all outstanding Revolving Credit Loans under
each of the Guaranteed Credit Agreement and the Unguaranteed Credit Agreement,
and any and all interest and fees accrued to date thereunder; (ii) permanently
reduce the Total Commitment under the Guaranteed Credit Agreement to zero; and
(iii) permanently reduce the Total Commitment under the Unguaranteed Credit
Agreement to $20,000,000;
(c) the Borrower shall have demonstrated to the satisfaction of the
Agent that the Borrower has not less than $10,000,000 of cash and "Cash
Equivalents" (defined as all investment in direct obligations of the United
States of America or any agency thereof with a maturity of not more than one
year, certificates of deposit with a maturity of less than ninety (90) days
issued by BKB or any other commercial bank organized under the laws of the
United States of America or any state thereof if such other bank has a
short-term debt rating in the highest rating category of either Moody's
Investors Services, Inc. or Standard & Poors Corporation, and commercial paper
with a maturity of less than ninety (90) days that is rated in the highest
rating category of either Moody's Investors Services, Inc. or Standard & Poors
Corporation) on its balance sheet and located at the Agent's Head Office, and,
in addition, the Borrower agreeing at all times from and after the date hereof
to maintain not less than $10,000,000 of cash and Cash Equivalents on its
balance sheet and located at the Agent's Head Office;
(d) the Borrower shall not make any Subordinated Debt Repayments until
such time as all of the Class A and Class B Preferred Stock has been redeemed or
otherwise converted or exchanged into the Borrower's common stock;
(e) until such time as the amount of cash and Cash Equivalents on the
balance sheet of the Borrower is equal to or greater than $15,000,000, the
Borrower shall not be permitted to use more than sixty percent (60%) of the
"Remaining IPO Proceeds" (defined as the net cash proceeds received by the
Borrower in connection with the IPO after giving effect to all required
repayments required to be made to the Agent and the Banks pursuant to paragraph
(b) above and after giving effect to the Borrower retaining any cash required to
cause the Borrower to comply with paragraph (c) above) to effect any Stock
Redemption or Subordinated Debt Repayment, and, at such time as the cash and
Cash Equivalents on the Borrower's balance sheet equal or exceed $15,000,000 the
Borrower shall be permitted to use 100% of any remaining Remaining IPO Proceeds
to effect the Stock Redemption and the Subordinated Debt Repayment so long as at
all times (both before and after giving effect to any Stock Redemption and
Subordinated
<PAGE>
AppNet Systems, Inc.
May 28, 1999
Page -4-
Debt Repayment) the amount of the cash and Cash Equivalents on the Borrower's
balance sheet is not less than $15,000,000;
(f) the Borrower will not use any Revolving Credit Loans under the
Unguaranteed Credit Agreement to fund any Stock Redemptions or to make any
Subordinated Debt Repayments, and such Stock Redemptions and Subordinated Debt
Repayments shall be made only with the Remaining IPO Proceeds;
(g) the Borrower agrees to cause Claymore Partners to deliver to the
Agent the results of its commercial finance examination by not later than
September 30, 1999, and the result shall be satisfactory to Claymore, the Agent
and the Majority Banks in their sole discretion (including the compliance by the
Borrower with all of the financial management requirements that Claymore or the
Agent may require);
(h) notwithstanding anything to the contrary contained in the
Unguaranteed Credit Agreement (including without limitation the covenant
contained in ss.10.1 thereof), the Borrower's Leverage Ratio at all times from
and after the date of the consummation of the IPO Transactions shall not exceed
2.50:1.00;
(i) all Stock Redemptions and Subordinated Debt Payments shall have
been consummated by not later than thirty (30) days after the consummation of
the IPO; and
(j) no Default or Event of Default (as such terms are defined in each
of the Guaranteed Credit Agreement and the Unguaranteed Credit Agreement) has
occurred and is continuing or would exist as a result of the IPO Transactions.
Subject to such conditions, the Majority Banks, the Guaranteed Agent
and the Agent hereby consent to the IPO Transactions pursuant to ss.26 of each
of the Guaranteed Credit Agreement and the Unguaranteed Credit Agreement. This
consent shall not be construed, however, as a waiver of any other provisions of
the Loan Documents (as such term is defined in each of the Guaranteed Credit
Agreement and the Unguaranteed Credit Agreement) or to permit the Borrower or
any Subsidiary to take any other action which is prohibited by the terms of the
Unguaranteed Credit Agreement, the Guaranteed Credit Agreement and the other
Loan Documents (as such term is defined in each of the Guaranteed Credit
Agreement and the Unguaranteed Credit Agreement).
The Borrower hereby acknowledges and agrees that (a) the execution and
delivery by the Borrower of this consent shall constitute the election by the
Borrower upon the consummation of the IPO Transactions to permanently reduce the
Total Commitment under the Unguaranteed Credit Agreement to $20,000,000 and the
notice required by ss.2.3 of the Unguaranteed Credit Agreement; (b) the Borrower
agrees that upon the consummation of the IPO Transactions it shall at all times
thereafter maintain
<PAGE>
AppNet Systems, Inc.
May 28, 1999
Page -5-
cash and Cash Equivalents of not less than $10,000,000 on its balance sheet, and
(c) the Borrower agrees upon the consummation of the IPO Transactions to be
bound by the covenant contained in subparagraphs (b), (g) and (h) and by all the
requirements set forth in paragraphs (a) - (j) above, and any failure to so
comply with any covenant contained therein shall constitute an Event of Default
under the Unguaranteed Credit Agreement.
<PAGE>
AppNet Systems, Inc.
May 28, 1999
Page -6-
Except as expressly stated herein, neither the execution of this
consent nor the failure of the Banks or the Guaranteed Banks to exercise any
right or remedy constitutes a waiver of any Default or Event of Default (as such
terms are defined in each of the Guaranteed Credit Agreement and the
Unguaranteed Credit Agreement) or of such right or remedy or any other right or
remedy under the Guaranteed Credit Agreement and the Unguaranteed Credit
Agreement.
Sincerely,
BANKBOSTON, N.A., individually and as
Agent and Guaranteed Agent
By: /s/
----------------------------------
Title:
ANTARES CAPITAL CORPORATION
By: /s/
----------------------------------
Title:
ACNOWLEDGED AND AGREED:
APPNET SYSTEMS, INC.
By: /s/
------------------------------------
Title:
APPNET OF MICHIGAN, INC.
By: /s/
------------------------------------
Title:
APPNET OF MARYLAND, INC.
By: /s/
------------------------------------
Title:
<PAGE>
AppNet Systems, Inc.
May 28, 1999
Page -7-
SOFTWARE SERVICES CORPORATION
By: /s/
------------------------------------
Title:
NEW MEDIA PUBLISHING, INC.
By: /s/
------------------------------------
Title:
RESEARCH & PLANNING, INC.
By: /s/
------------------------------------
Title:
CENTURY COMPUTING, INCORPORATED
By: /s/
------------------------------------
Title:
THE KODIAK GROUP, INC.
By: /s/
------------------------------------
Title:
I33 COMMUNICATION CORP.
By: /s/
------------------------------------
Title:
SIGMA6, INC.
By: /s/
------------------------------------
Title:
<PAGE>
AppNet Systems, Inc.
May 28, 1999
Page -8-
SALZINGER ACQUISITION CORP.
By: /s/
------------------------------------
Title:
GTCR FUND VI, L.P.
By: GTCR Partners VI, L.P.
Its: General Partner
By: GTCR Golder Rauner, L.L.C.
Its: General Partner
By: /s/
------------------------------------
Philip A. Canfield, Principal
<PAGE>
Exhibit 23.4
CONSENT OF INTERNATIONAL DATA CORPORATION
We hereby consent to the use of WORLDWIDE INTERNET AND E-COMMERCE SERVICES
MARKET AND TREND FORECAST, 1998-2002 and HOW REAL IS INTERNET COMMERCE?, two
International Data Corporation reports, and to all references to us included in
or made part of AppNet Systems' Registration Statement on Form S-1 (File No.
333-75205) and any related prospectus.
Date: 5/25/99 International Data Corporation
/s/ Brigitte Zepernick
------------------------------
Brigitte Zepernick
Sr. Account Executive
