<PAGE>
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON MAY , 1999
REGISTRATION NO. 333-75205
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- --------------------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
------------------------
AMENDMENT NO. 1 TO FORM S-1
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
------------------------
APPNET SYSTEMS, INC.
(Exact name of Registrant as specified in its charter)
<TABLE>
<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 13, 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 6.
<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>
--------------
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
-----
<S> <C>
PROSPECTUS SUMMARY............................. 3
RISK FACTORS................................... 6
CAUTIONARY NOTICE REGARDING FORWARD-LOOKING
STATEMENTS................................... 15
USE OF PROCEEDS................................ 16
DIVIDEND POLICY................................ 16
CAPITALIZATION................................. 17
DILUTION....................................... 19
PRO FORMA CONSOLIDATED FINANCIAL DATA.......... 20
SELECTED FINANCIAL DATA........................ 25
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF
OPERATIONS................................... 26
BUSINESS....................................... 35
<CAPTION>
PAGE
-----
<S> <C>
MANAGEMENT..................................... 50
CERTAIN RELATIONSHIPS AND TRANSACTIONS......... 59
PRINCIPAL STOCKHOLDERS......................... 64
DESCRIPTION OF CAPITAL STOCK................... 65
SHARES ELIGIBLE FOR FUTURE SALE................ 71
U.S. FEDERAL TAX CONSIDERATIONS FOR NON-U.S.
HOLDERS...................................... 73
UNDERWRITING................................... 77
NOTICE TO CANADIAN RESIDENTS................... 79
LEGAL MATTERS.................................. 80
EXPERTS........................................ 80
WHERE YOU CAN FIND ADDITIONAL INFORMATION...... 80
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.
2
<PAGE>
PROSPECTUS SUMMARY
THE FOLLOWING SUMMARY MAY NOT CONTAIN ALL THE INFORMATION THAT MAY BE
IMPORTANT TO YOU. YOU SHOULD READ THE ENTIRE PROSPECTUS, INCLUDING OUR
CONSOLIDATED FINANCIAL STATEMENTS AND THE RELATED NOTES AND THE UNAUDITED PRO
FORMA CONSOLIDATED FINANCIAL DATA, BEFORE DECIDING WHETHER TO INVEST IN OUR
COMMON STOCK. EXCEPT AS OTHERWISE INDICATED, 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. IN ADDITION, THE INFORMATION IN THIS
PROSPECTUS HAS BEEN ADJUSTED TO GIVE EFFECT TO THE CONVERSION OF 41,015 SHARES
OF OUR CLASS A PREFERRED STOCK AND 10,436 SHARES OF OUR CLASS B PREFERRED STOCK
INTO 3,957,769 SHARES OF OUR COMMON STOCK AT A CONVERSION PRICE OF $13.00 PER
SHARE, THE MID-POINT OF THE RANGE SHOWN ON THE COVER OF THIS PROSPECTUS.
APPNET SYSTEMS, INC.
AppNet is a leading provider of Internet and electronic commerce
professional services and solutions to medium-sized and large businesses. We are
one of the largest providers of Internet and electronic commerce professional
services in terms of revenue and number of professional employees. We develop
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, Internet-based
application development, electronic commerce systems integration and electronic
commerce outsourcing. For a more detailed description of our services, see
"Business."
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. 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, highly efficient channels of communication with their
suppliers and distributors and are realizing that implementing Internet and
electronic commerce solutions is necessary to remain competitive. 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 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%.
We founded AppNet to address the growing need for end-to-end Internet and
electronic commerce solutions. Through strategic acquisitions and internal
growth, we have built a company which we believe is currently one of only a few
firms with the ability to design, develop, implement and manage end-to-end
Internet and electronic commerce solutions. Over the past several years, we have
completed more than 500 projects for over 200 clients. Our client base is highly
diverse and includes prominent corporations such as Baxter Healthcare, Ciena,
Dial, Ford, GeoCities, Hyundai, K*B Toys, NEC, Norwest and Unilever.
Our goal is to become the most recognized and sought-after provider of
Internet and electronic commerce solutions to medium-sized and large businesses.
The markets for Internet and electronic commerce professional services are
highly competitive. Therefore, to achieve our goal we plan to: expand our client
relationships; increase repeat and recurring revenues; build and enhance
complementary skill sets and maintain our technological expertise; expand and
strengthen our strategic
3
<PAGE>
partnerships with leading technology vendors; pursue client-driven geographic
expansion; expand and develop industry-specific expertise; and attract and
retain a highly specialized workforce.
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 currently have offices in 16 U.S. locations, including the metropolitan
areas of Atlanta, 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 29,914,369 shares, or 30,814,369 shares if the
after this offering............. underwriters exercise their over-allotment option in
full as of March 31, 1999. Excludes 4,090,377 shares of
common stock reserved for issuance upon the exercise of
outstanding options, warrants and convertible notes and
in connection with contingent payments payable to former
stockholders of some of the companies we acquired,
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; and repay other debt.
Proposed Nasdaq National Market
Symbol.......................... "APNT".
</TABLE>
4
<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 THREE MONTHS ENDED
31, 1998 MARCH 31, 1999
---------------------- ----------------------
ACTUAL PRO FORMA ACTUAL PRO FORMA
---------- ---------- ---------- ----------
(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 28,214
---------- ---------- ---------- ----------
Loss from operations.................................... (12,804) (72,120) (14,980) (19,075)
Interest and other expense.............................. 1,775 6,641 1,262 1,476
Income tax provision (benefit).......................... (200) (100) 100 100
Dividends on and accretion of preferred stock........... 873 3,604 1,039 1,132
---------- ---------- ---------- ----------
Net loss attributable to common stockholders............ $ (15,252) $ (82,265) $(17,381) $(21,783)
---------- ---------- ---------- ----------
---------- ---------- ---------- ----------
</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 $ 10,240
Total assets.......................................................................... 163,471 168,056
Total debt............................................................................ 75,885 16,079
Class A Preferred Stock............................................................... 45,115 --
Stockholders' equity.................................................................. 16,221 125,727
</TABLE>
- ------------------------
(a) Total operating expenses, on a pro forma 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 $4.3 million and $15.2 million, respectively, for the
three months ended March 31, 1999.
5
<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, select 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;
6
<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 leading 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.
7
<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/ or 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/or 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 on a particular project. 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 a
description of the terms of employment agreements we have with 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 fall into five major categories:
8
<PAGE>
- 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 value-added service providers, such as Abovenet,
Exodus and Frontier/ Global.
Some of our competitors have begun to offer multiple Internet and electronic
commerce professional services, rather than specialize in one particular area,
and several others 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.
9
<PAGE>
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. Because we have not received patent or copyright
protection for most of our intellectual property, we must rely primarily on
nondisclosure and other contractual arrangements to protect 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.
10
<PAGE>
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.
Some of our customer contracts 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 traditionally 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
11
<PAGE>
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 $2.4 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 some of the acquired companies are fully met. 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.
12
<PAGE>
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. In some cases, we have provided 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 8.8% and 43.4%, 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
13
<PAGE>
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 "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
$13.25, 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 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 some of our
acquisitions. 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 class action suit, it could have a
material adverse effect on our business, financial condition and results of
operations.
14
<PAGE>
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 and directors and select
stockholders have agreed not to sell any shares of common stock for 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 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.
15
<PAGE>
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 $ million of aggregate indebtedness 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 4,415 shares of Class A Preferred Stock at an aggregate redemption
price of $ , including accrued dividends;
- redeem 1,140 shares of Class B Preferred Stock at an aggregate redemption
price of $ , including 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;
and
- repay $ 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.
To the extent we receive additional proceeds from this offering, we will use
them to redeem additional shares of our Class A and Class B Preferred Stock on a
pro rata basis. The number of shares of Class A and Class B Preferred Stock that
we will convert 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. We will use amounts which
may be reborrowed under the $26 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 liquidity over the next 18 months.
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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<PAGE>
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 41,015 shares of Class A Preferred Stock and 10,436
shares of Class B Preferred Stock into 3,957,769 shares of common stock at
the initial public offering price in this offering;
- a compensation charge of approximately $2.3 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 a convertible note.
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, as of
March 31, 1999;
- 1,646,875 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;
- 1,005,850 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 stockholders of some of the
companies we acquired, 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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<PAGE>
<TABLE>
<CAPTION>
MARCH 31, 1999
--------------------------
PRO FORMA
ACTUAL AS ADJUSTED
---------- --------------
(IN THOUSANDS)
<S> <C> <C>
Cash and cash equivalents............................................................. $ 5,655 $ 10,240
---------- --------------
---------- --------------
Credit facilities..................................................................... 59,400 --
Other long-term debt(a)............................................................... 1,479 1,479
Convertible notes..................................................................... 15,006 14,600
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, 29,914,369 shares issued and
outstanding....................................................................... 10 15
Additional paid-in capital.......................................................... 36,518 160,799
Notes receivable.................................................................... (685) (685)
Accumulated deficit................................................................. (30,721) (33,925)
Deferred compensation............................................................... (477) (477)
---------- --------------
Total stockholders' equity........................................................ 16,221 125,727
---------- --------------
Total capitalization.............................................................. $ 137,499 $ 142,084
---------- --------------
---------- --------------
</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.
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<PAGE>
DILUTION
AppNet's net tangible book value as of March 31, 1999 was a deficit of
$128.3 million or $(6.43) per share of common stock. 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 after giving effect to the conversion of a
note of approximately $406,000 into 39,055 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 $7.3 million
or $(0.25) per share of common stock. This represents an immediate increase in
pro forma net tangible book value of $6.18 per share of common stock to existing
stockholders and an immediate dilution in pro forma net tangible book value of
$13.25 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
Net tangible book value as of March 31, 1999.............................................. $ (6.43)
Increase in pro forma net tangible book value attributable to new investors............... 6.18
-----------
Pro forma net tangible book value per share after this offering........................... (0.25)
-----------
Dilution to new investors................................................................. $ 13.25
-----------
-----------
</TABLE>
As of March 31, 1999, there were outstanding options to purchase 1,646,875
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 to purchase
1,005,580 shares of common stock at a weighted average exercise price of $10.87
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 shares of common stock which are contingently payable pursuant to
the acquisition agreements.
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
midpoint 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)......................... 23,914,369 76.9% $ 78,944,000 20.3% $ 3.30
New investors..................................... 6,000,000 23.1 78,000,000 79.7 13.00
------------ ----- -------------- -----
Total........................................... 29,914,369 100.0% $ 156,944,000 100.0%
------------ ----- -------------- -----
------------ ----- -------------- -----
</TABLE>
- ------------------------
(1) Includes 39,055 shares resulting from the conversion of a note of
approximately $406,000 at $10.40 per share and 3,155,000 and 802,769 shares
resulting from the conversion of Class A Preferred Stock and Class B
Preferred Stock, respectively, at a conversion price of $13.00 per share,
the mid-point of the range shown on the cover page of this prospectus.
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 statement of
operations for the year ended December 31, 1998 gives effect 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. The pro forma consolidated
statement of operations for the three months ended March 31, 1999, gives effect
to the acquisitions we made in 1999, as if these acquisitions had occurred on
January 1, 1999.
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 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
substantially from those set forth herein.
The unaudited consolidated financial data 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 some
of the companies we acquired included elsewhere in this prospectus.
20
<PAGE>
APPNET SYSTEMS, INC.
PRO FORMA CONSOLIDATED STATEMENT 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) I33(A)
------------ ----------- --------- ----------- ----------- ----------- ----------- ---------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Revenues.............. $ 17,674 $ 688 $ 10,788 $ 10,040 $ 3,711 $ 5,303 $ 6,289 $ 4,360
Cost of revenues...... 11,699 471 7,392 6,192 1,542 2,667 3,221 2,251
------------ ----- --------- ----------- ----------- ----------- ----------- ---------
Gross profit........ 5,975 217 3,396 3,848 2,169 2,636 3,068 2,109
Operating expenses:
Selling and
marketing......... 964 14 567 112 227 260 66 985
General and
administrative.... 6,507 226 1,856 2,639 1,868 644 1,691 1,343
Stock-based and
other
acquisition-related
compensation...... 1,157 465 2,654 953 -- -- 250 --
Depreciation and
amortization...... 10,151 29 230 156 123 80 136 114
------------ ----- --------- ----------- ----------- ----------- ----------- ---------
Total operating
expenses........ 18,779 734 5,307 3,860 2,218 984 2,143 2,442
------------ ----- --------- ----------- ----------- ----------- ----------- ---------
Income (loss) from
operations.......... (12,804) (517) (1,911) (12) (49) 1,652 925 (333)
Interest expense
(income)............ 1,052 29 28 (41) -- (11) 2 11
Other expense, net.... 723 211 372 423 -- 99 8 35
------------ ----- --------- ----------- ----------- ----------- ----------- ---------
Income (loss) before
income taxes........ (14,579) (757) (2,311) (394) (49) 1,564 915 (379)
Income taxes.......... (200) -- (598) (135) 13 29 5 (34)
------------ ----- --------- ----------- ----------- ----------- ----------- ---------
Net income (loss)..... $ (14,379) $ (757) $ (1,713) $ (259) $ (62) $ 1,535 $ 910 $ (345)
------------ ----- --------- ----------- ----------- ----------- ----------- ---------
------------ ----- --------- ----------- ----------- ----------- ----------- ---------
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
SALZINGER(A) OUTFITTERS(A) COMPANIES(A) ADJUSTMENTS CONSOLIDATED
------------- ------------- --------------- ----------- -----------
<S> <C> <C> <C> <C> <C>
Revenues.............. $ 3,110 $ 2,343 $ 4,876 $ -- $ 69,182
Cost of revenues...... 1,738 1,287 3,481 -- 41,941
------ ------ ------ ----------- -----------
Gross profit........ 1,372 1,056 1,395 -- 27,241
Operating expenses:
Selling and
marketing......... 2 47 83 -- 3,327
General and
administrative.... 425 859 973 -- 19,031
Stock-based and
other
acquisition-related
compensation...... -- 57 -- 11,195(b) 16,731
Depreciation and
amortization...... 13 57 62 49,121(c) 60,272
------ ------ ------ ----------- -----------
Total operating
expenses........ 440 1,020 1,118 60,316 99,361
------ ------ ------ ----------- -----------
Income (loss) from
operations.......... 932 36 277 (60,316) (72,120)
Interest expense
(income)............ (20) 47 (9) 4,774(d) 5,862
Other expense, net.... -- -- 15 (1,107)(e) 779
------ ------ ------ ----------- -----------
Income (loss) before
income taxes........ 952 (11) 271 (63,983) (78,761)
Income taxes.......... -- 52 (85) 853(f) (100)
------ ------ ------ ----------- -----------
Net income (loss)..... $ 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
-----------
-----------
</TABLE>
21
<PAGE>
APPNET SYSTEMS, INC.
PRO FORMA CONSOLIDATED STATEMENT 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 PRO FORMA
APPNET I33(A) SALZINGER(A) OUTFITTERS(A) COMPANIES(A) ADJUSTMENTS CONSOLIDATED
------------ ------ ------------ ------------- --------- ----------- ------------
<S> <C> <C> <C> <C> <C> <C> <C>
Revenues........................... $ 19,643 $103 $ 417 $ 663 $1,445 $ -- $ 22,271
Cost of revenues................... 11,457 48 214 431 982 -- 13,132
------------ ------ ------------ ----- --------- ----------- ------------
Gross profit..................... 8,186 55 203 232 463 -- 9,139
Operating expenses:
Selling and marketing............ 1,190 19 48 15 81 -- 1,353
General and administrative....... 6,754 70 161 232 185 -- 7,402
Stock-based and other
acquisition-related
compensation................... 2,487 -- 675 21 -- 1,103(b) 4,286
Depreciation and amortization.... 12,735 3 3 18 8 2,406(c) 15,173
------------ ------ ------------ ----- --------- ----------- ------------
Total operating expenses....... 23,166 92 887 286 274 3,509 28,214
------------ ------ ------------ ----- --------- ----------- ------------
Income (loss) from operations...... (14,980) (37) (684) (54) 189 (3,509) (19,075)
Interest expense (income).......... 1,262 -- (2) 17 3 196(d) 1,476
Other expense, net................. -- -- 472 -- -- (472)(e) --
------------ ------ ------------ ----- --------- ----------- ------------
Income (loss) before income
taxes............................ (16,242) (37) (1,154) (71) 186 (3,233) (20,551)
Income taxes....................... 100 -- -- (27) 70 (43)(f) 100
------------ ------ ------------ ----- --------- ----------- ------------
Net loss........................... $ (16,342) $(37) $(1,154) $ (44) $ 116 $(3,190) $ (20,651)
------------ ------ ------------ ----- --------- ----------- ------------
------------ ------ ------------ ----- --------- ----------- ------------
Dividends on and accretion of
preferred stock.................. 1,039 93(g) 1,132
------------ ----------- ------------
Net loss attributable to common
stockholders..................... $ (17,381) $(3,283) $ (21,783)
------------ ----------- ------------
------------ ----------- ------------
Basic and diluted net loss per
common share..................... $ (0.88) $ (1.07)
------------ ------------
------------ ------------
Weighted average common shares
outstanding (h).................. 19,722,559 20,284,523
------------ ------------
------------ ------------
</TABLE>
22
<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.
(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 THREE MONTHS ENDED
DECEMBER 31, 1998 MARCH 31, 1999
----------------- -------------------
<S> <C> <C>
Contingent payment compensation expense................................... $ 15,574 $ 1,799
Less: Acquisition-related compensation expense recorded by acquired
companies................................................................ (4,379) (696)
----------------- -------
$ 11,195 $ 1,103
----------------- -------
----------------- -------
</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 stockholders of some of the companies we acquired 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 $30.8 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. Some of the acquisitions 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 $8.2 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 the 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.
(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 facility
23
<PAGE>
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
5.4%. The adjustment is as follows:
<TABLE>
<CAPTION>
YEAR ENDED THREE MONTHS ENDED
DECEMBER 31, 1998 MARCH 31, 1999
----------------- -------------------
<S> <C> <C>
Interest on credit facility..................................... $ 4,550,000 $ 1,178,000
Interest on notes to selling shareholders....................... 948,000 237,000
Less: interest recorded by AppNet and acquired companies........ (724,000) (1,219,000)
----------------- -------------------
$ 4,774,000 $ 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 THREE MONTHS ENDED
DECEMBER 31, 1998 MARCH 31, 1999
----------------- -------------------
<S> <C> <C>
Income taxes.............................................................. $ (100) $ 100
Less: historical tax (benefit)/provision recorded by AppNet and the
companies we acquired............................................... (953) 143
------- ------
Net adjustment............................................................ $ 853 (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, 1999.
24
<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 four years 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.
25
<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 is a leading provider of Internet and electronic commerce
professional services and solutions to medium-sized and large businesses. We are
one of the largest providers of Internet and electronic commerce professional
services in terms of revenue and number of professional employees. 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 select 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 some cases, contingent payments payable in
cash and/or shares of our common stock. 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. Since the Internet and the electronic commerce
industries are in an early stage of development and continue to evolve rapidly
and because of the expectation that competition will 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.
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.
26
<PAGE>
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
stockholders of some businesses 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 98-05, "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 some of the former stockholders to whom these 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 amount of additional goodwill will be
approximately $8.2 million, 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 shares issued in connection with these contingent payments.
If the operating targets are fully met, the aggregate amount of compensation
expense that will be recognized during 1999 and 2000, assuming a price per share
of $13.00, the mid-point of the range shown on the cover page of this
prospectus, will be approximately $22.6 million.
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
27
<PAGE>
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.
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;
- timing of future acquisitions and related costs; and
- timing and size of acquisition-related compensation charges which
fluctuate based on the market price of our stock.
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, 1999.
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 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 $4.3 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,
1999.
DEPRECIATION AND AMORTIZATION. Pro forma depreciation and amortization for
the three months ended March 31, 1999 was $15.2 million, of which $14.7 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.
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
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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 stockholders of some acquired businesses 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 were 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.
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. In addition, other expense
includes transaction costs incurred by the companies we acquired of
approximately $0.7 million.
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
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
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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.
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 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 were $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 some of the former
stockholders of acquired businesses.
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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
due to the fact that we are comparing a 12-month period to an eight-month
period.
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 consistent over the respective
periods.
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 general and administrative expenses of $1.0 million
and the fact that we are comparing a 12-month period to an eight-month period.
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.
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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 our 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.
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 some of our acquisitions, we issued notes to the selling
stockholders, some of which are convertible into shares of our common stock. The
balance of these 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
certain financial ratios 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 our current operating
performance.
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. In conjunction with the modification of these
facilities, we may incur a charge of up to $0.6 million representing the
unamortized deferred financing costs related to these facilities 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
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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 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 stockholders of
some of the businesses we acquired. 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.
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 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 have also provided express warranties to some
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
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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. At this time, we cannot
estimate the percentage of completion for each of these phases or when each
phase will be completed.
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, if these costs become significant, it 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.
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. 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 outstanding balance under its variable rate credit
facilities, as of December 31, 1998, was $37.5 million. 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.
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BUSINESS
OVERVIEW
We are a leading provider of Internet and electronic commerce professional
services and solutions to medium-sized and large businesses. We are one of the
largest providers of Internet and electronic commerce professional services in
terms of revenue and number of professional employees. 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. Our professional services include strategic consulting,
interactive media services, Internet-based application development, electronic
commerce systems integration and electronic commerce outsourcing. We were formed
in 1997 as a Delaware corporation.
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 paper form into a business application,
translated into standard electronic data interchange format and electronically
transmitted to trading partners over a private network or the Internet.
International Data Corporation reports that 80% of Fortune 500 companies employ
EDI to improve their business processes. Businesses are increasingly finding
that they can reliably and cost-effectively manage high volume transaction
environments on a real-time basis using EDI and the Internet. 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.
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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 services include strategic consulting, interactive media
services, Internet-based application development, electronic commerce systems
integration and electronic commerce outsourcing. 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 a compelling value proposition to our clients by providing an
extensive range of electronic commerce outsourcing services as part of our
overall service offering. We perform electronic commerce functions that would
traditionally be handled by the client's internal staff using the client's
resources. Our business-to-business services include outsourced transaction
processing and operating EDI environments. These services include tracking,
auditing, monitoring and reporting on high volume EDI environments. Our
business-to-consumer services include commerce storefront management,
transaction processing, managed Web-hosting and the operation and management of
electronic commerce systems. Managed Web-hosting services combine standard
Web-hosting services with additional value-added services such as Website
maintenance, Website content management, security services and data storage.
Clients who take advantage of our electronic commerce outsourcing services get
to market quickly; do not have to make the significant financial and
technological investments required to effectively build and manage their own
infrastructures; receive reliable, secure, value-added 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.
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- 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 and to deliver value-added
services. ClientLink, a secure Web site 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 strategic and developmental
processes used to create 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 scalability 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 banner ad performance and collects
real-time data on click-through, lead generation, customer acquisition and
sales. Based on their analysis of this information, clients can make real-time
adjustments to their advertising campaigns to maximize site traffic and reduce
the costs of acquiring new customers and generating sales.
As part of the electronic commerce outsourcing services we offer, we utilize
proprietary software, EDI Control/400 and STAR, in order to more effectively
manage high transaction EDI programs. EDI Control/400 enables us to manage
complex EDI programs and monitor, audit and report on our clients' transaction
traffic 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 incidents from
identification through resolution.
- 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.
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.
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- 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 cutting-edge 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 STRATEGIC PARTNERSHIPS WITH LEADING TECHNOLOGY
VENDORS
We intend to further expand our relationships with several leading
technology vendors and build other strategic partnerships 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. These strategic alliances increase our name recognition and visibility
in the marketplace, provide us with new sales opportunities and early access to
cutting-edge technologies, enable us to cross-sell our services with prominent
technology vendors and increase our access to vendor technical training and
support. See "--Strategic Relationships."
- 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 16
locations in the U.S., including the metropolitan areas of Atlanta, 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
value-added industry-targeted services we can offer, thereby improving our
ability to penetrate specific industries.
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- 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.
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. Our
engagements generally include more than one of these services.
[Diagram to be inserted]
- 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 system architecture and design with existing
Internet and electronic commerce solutions, thereby improving operating
efficiencies and reducing costs.
- INTERACTIVE MEDIA SERVICES
The primary focus of our interactive media services is creative Website
design and development, branding, media planning and buying. These services
are designed to maximize our clients' return on their investments in on-line
businesses by generating and increasing Website traffic, enhancing user
experience and increasing the effectiveness of their marketing efforts. We
integrate our creative Website design, development and branding services, as
well as on-line media buying and planning, on-line ad serving, management,
tracking and reporting and on-line promotion and campaign development, into
our clients' overall solutions.
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- INTERNET-BASED APPLICATION DEVELOPMENT
Our Internet-based application development services include 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 secure
Websites accessible only within a particular company, or corporate
intranets, and electronic commerce systems and we Web-enable legacy, or
existing, systems. We design and develop more effective Internet and
electronic commerce solutions by giving our clients on-line access to the
strategic and developmental processes used to create their solutions. We
design, build and implement solutions that are scalable, secure, adaptable
and easy to use and manage.
- ELECTRONIC COMMERCE SYSTEMS INTEGRATION
Our electronic commerce systems integration services involve the
integration of electronic commerce systems with other corporate software and
computer-based applications such as Websites, accounting systems and
enterprise resource planning systems or systems which enable a company to
manage every aspect of its operations, including financial systems,
manufacturing and human resources. These services are designed to rapidly
install and integrate our solutions with our clients' existing operations so
our solutions become an integral part of their critical business systems. We
install our solution, convert and initialize all necessary data, perform
acceptance testing and put the system into operation. We also integrate the
solution with back-office legacy systems to ensure that each client's
critical applications operate seamlessly and with maximum security.
- ELECTRONIC COMMERCE OUTSOURCING
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 EDI management 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 commerce storefront management, transaction processing,
managed Web-hosting and the ongoing management, technical operation,
maintenance and development of electronic commerce systems 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. 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 mission 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 value added networks,
leased lines and the Internet. We use EDI Control/400, our administrative
software product, to control and regulate these high-volume, EDI transaction
environments. EDI Control/400 provides our customers with detailed transaction
reporting, on-line data retention, management and archiving, and multiple levels
of security. At our business-to-consumer electronic commerce outsourcing center
we provide commerce storefront management and transaction processing, managed
Web-hosting services and the ongoing management, technical operation,
maintenance and development of electronic commerce systems.
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Our outsourcing centers operate seven days a week, 24 hours a day. To
maintain maximum reliability, we minimize the use and operation of multiple
platforms, implement hardware component redundancy and use network management
software. Our outsourcing center staff proactively manages and monitors
systems-level events, processes and thresholds using a variety of network
management software, including proprietary technologies we developed. These
systems operations management processes enable us to collect, process and
respond to systems-level event information from a variety of sources and to
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 intranets and
extranets. Because we can offer every client a complete spectrum of Internet and
electronic commerce professional services which incorporate elements of
strategic consulting, interactive media services, Internet-based application
development, electronic commerce systems integration and electronic commerce
outsourcing, 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.
Set forth below is a list of some of the clients to whom we provided
services in 1998:
<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 Speciality 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 System, 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.
The FYI Dealer Extranet moves an essential Toshiba business process to the
Internet, which has resulted in substantial time and cost savings. Employees,
dealers and distributors build strong relationships on this electronic commerce
and informational site. The site simplifies 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 a complex, yet easy to use on-line
inventory and supply-chain management system that Burton management uses to
quickly and efficiently control changing inventory, manage materials and track
product placement. Our solution accommodates multiple languages and currencies
and is able to generate fast, detailed reports. Using our solution, Burton has
improved its efficiency in managing its inventory and supply-chain and reduced
production overuns 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, portfolio management strategy and revenue development. Our work
resulted in successful investments in leading 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
important 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 a user-friendly 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
effectively manage inventory levels and merchandise replenishment at over 1300
mall-based stores. Our solution incorporated features such as comprehensive
mapping schemes for easy translation of data, cost-efficient value-added network
and Internet routing schemes and scalability to accommodate increasing
transaction volume. Using our solution, K*B Toys has reduced its communications
costs by approximately 75%, improved the efficiency of its overall processes and
allowed 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 a user-friendly 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 easily searchable
databases and music guides, easily selectable music samples and robust
management features for site update and promotion and order management. Using
our solution, Harmony House has built brand recognition and loyalty and
established 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,
instantly 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 and optimize all Website ad
performance. Using our solution, Multex has increased its overall membership,
increased its revenues per new member and has decreased its cost to acquire new
members via the Web.
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STRATEGIC RELATIONSHIPS
We have formed strategic, non-exclusive alliances with a number of leading
technology companies. These strategic alliances, among other things:
- increase our name recognition and visibility in the marketplace;
- provide us with new sales opportunities;
- provide us with early access to cutting edge technologies;
- enable us to cross-sell our services with prominent technology vendors;
and
- increase our access to vendor technical training and support.
We have formed strategic alliances with Harbinger, Microsoft, Oracle, SAP
and TSI International Software among others. We intend to continue to build
strategic relationships that will promote our growth and enhance our position in
the marketplace.
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 particular 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 particular
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.
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- 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 leading 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.
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 fall into five major categories:
- 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 value-added 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, some of our
competitors have also begun to offer a variety of Internet and electronic
commerce professional services, rather than specialize in one particular area,
and several others 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
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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.
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 select 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 to be inserted]
ARBOR INTELLIGENT SYSTEMS, INC. We acquired substantially all of the assets
of Arbor Intelligent Systems on March 12, 1998. Arbor became part of our
Internet-based applications development group, 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 became part of our electronic
commerce systems integration and outsourcing group, 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
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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 became part of our Internet-based
applications development group, 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 became part of our interactive media services group,
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 became a part of our electronic commerce systems integration
and outsourcing group, 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 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 became part of our electronic commerce systems
integration and outsourcing group, providing enterprise resource planning, or
ERP, 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 became part of our electronic commerce systems integration and
outsourcing group, 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 became part of our interactive media services group,
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 became part
of our interactive media services group, 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
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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 became part of our
strategic consulting group, 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 became part of our interactive media services group,
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.
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.
TRANSFORM IT, INCORPORATED. We acquired substantially all of the assets of
TransForm IT on March 29, 1999. TransForm IT became part of our strategic
consulting group, 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.
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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 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 1, 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
Ronald B. Alexander................ 51 Senior Vice President, Chief Financial Officer, Secretary and
Treasurer
Jack Pearlstein.................... 35 Senior Vice President
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
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.
RONALD B. ALEXANDER. Mr. Alexander has been our Senior Vice President and
Chief Financial Officer since September 1998 and our Treasurer and Secretary
since January 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.
JACK PEARLSTEIN. Mr. Pearlstein has been our Senior Vice President since
July 1998. 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
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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.
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.
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.
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.
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 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,
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Polymer Group, Inc., Province Healthcare, Inc., Esquire Communications Ltd. and
private companies in GTCR's portfolio.
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; these directors will be
appointed by the current members of 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.
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.
LIMITATIONS ON LIABILITY AND INDEMNIFICATION MATTERS
The Delaware General Corporation Law provides that a company may indemnify
its directors and officers against particular liabilities they 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.
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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
Chief Financial Officer, Secretary & Treasurer......... 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. None of these
executive officers currently holds any options to purchase our common stock.
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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 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/or 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/or 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 and/or 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 $313,035. Upon the termination of Mr. Bajaj's
employment, AppNet has the right to repurchase all of
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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/or 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 or his permitted transferees. A portion of the
executive's common stock may be repurchased at
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"Original Cost," I.E., 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 Original Cost ranges from 75% to 100%,
depending on the particular executive. The portion of common stock to be
repurchased at 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 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 authorize 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 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 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 March 31, 1999, options to purchase a total of 1,495,963 shares of our
common stock were outstanding under the 1998 Stock 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 Incentive Plan and options to purchase
161,885 shares of our common stock granted under the 1998 Stock 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 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 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 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
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
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common stock based on a conversion ratio. Originally, we reserved a total of
668,920 shares of our common stock for issuance in connection with options
granted under the Century Stock Option Plan.
As of March 31, 1999, options to purchase a total of 45,627 shares of our
common stock were outstanding under the Century 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 Stock Option Plan and options to
purchase 45,627 shares of our common stock granted under the Century Stock
Option Plan are currently exercisable.
The Century 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 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
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 Stock Option Plan has no termination date, however, no incentive
stock options may be granted under the Century Stock Option Plan after the
expiration of the ten-year period beginning on the date the Century Stock Option
Plan was adopted. The board of directors may at any time and from time to time
amend or terminate the Century 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 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' Stock Option Plan.
As of March 31, 1999, options to purchase a total of 22,300 shares of our
common stock were outstanding under the Internet Outfitters' Stock Option Plan
and remain unexercised, no options have been exercised and options to purchase
1,326 shares of our common stock granted under the Internet Outfitters' Stock
Option Plan are currently exercisable.
The Internet Outfitters' 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' 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' 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
comittee are made in its sole discretion and are conclusive.
The Internet Outfitters' Stock Option Plan will terminate upon the
expiration of the ten-year period beginning on the date the Internet Outfitters'
Stock Option Plan was adopted. The board of directors may at any time and from
time to time amend or terminate the Internet Outfitters' 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'
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 (the "Purchase Agreement")
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 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.
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 addition, the Purchase
Agreement 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, 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 the right, subject to
particular conditions, to participate if GTCR and Smart Technology transfer
their shares of common stock. The Stockholders' Agreement will terminate upon
the consummation of this offering.
The Registration Agreement provides that the holders of a majority of our
common stock issued to GTCR and Smart Technology under the Purchase Agreement
(the "GTCR/Smart Common Stock") have the right in some circumstances to demand
the filing of a registration statement with the Securities and Exchange
Commission with respect to all or any portion of the GTCR/Smart 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
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GTCR/Smart Common Stock; subject, however, to the ability of the underwriters of
any offering to limit the number of shares included in such registration.
Holders of GTCR/Smart Common Stock 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 (the
"Fairfax Agreement"), dated as of June 29, 1998, with Fairfax Management Company
II, L.L.C. and Fairfax Consulting Company, L.L.C. (together with Fairfax
Management Company II, L.L.C., "Fairfax"), in which Fairfax 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 a monthly retainer of
$16,667 as well as any fees for consulting services in excess of the monthly
retainer. We terminated the consulting services portion of the Fairfax Agreement
in October 1998. The Fairfax Agreement also provided that if AppNet acquired a
company which was introduced to it by Fairfax, AppNet shall pay a finder's fee
to Fairfax equal to 1% of the purchase price for the acquired company. We did
not pay any finder's fees to Fairfax in 1998. In 1998, AppNet paid approximately
$336,000 in consulting fees to Fairfax. The Fairfax Agreement prohibited Fairfax
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
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of 18 months after it is terminated. We terminated the remaining portion of the
Fairfax Agreement effective as of November 20, 1998.
AppNet repurchased 1,350,877 shares of its common stock from Fairfax on June
29, 1998 in exchange for a convertible promissory note in the principal amount
of $406,175. The Fairfax Agreement restricts the transfer of the 684,211 shares
of our common stock that Fairfax retained until June 29, 2003, except:
- in a public offering;
- under Rule 144 through a broker, dealer or market maker (other than
pursuant to 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 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
Technologies 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 the aggregate amount of all consulting payments made
prior to termination.
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. GTCR has earned approximately $475,000 in investment fees. This
agreement will terminate upon the consummation of this offering.
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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 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. 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, 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.
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.
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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 one of its subsidiaries, AppNet Commerce Services,
Inc., an aggregate of $0.2 million to fund the subsidiary's 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 March 31, 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
COMMON STOCK PERCENTAGE OWNERSHIP
BENEFICIALLY OWNED ------------------------------------------
BEFORE THIS OFFERING BEFORE THIS OFFERING AFTER THIS OFFERING
---------------------- --------------------- -------------------
<S> <C> <C> <C>
GTCR (a)........................................... 9,924,607 49.7% 43.4%
Ken S. Bajaj (b)................................... 2,631,172 13.2 8.8
Toby Tobaccowala................................... 175,439 * *
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)......................................... 3,503,544 17.5% 11.7%
</TABLE>
- ------------------------
* Less than 1%.
(a) The address for GTCR and Messrs. Canfield and Rauner is 6100 Sears Tower,
Chicago, Illinois, 60606.
(b) Excludes 701,754 shares owned by family trusts and 274,268 shares
beneficially owned by Smart Technology 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.
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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 completion of this offering, there will be issued
and outstanding 29,914,369 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 3,957,769 shares that will be issued upon
consummation of this offering upon conversion of a maximum of 41,015 shares of
Class A Preferred Stock and a maximum of 10,436 shares of Class B Preferred
Stock. As of March 31, 1999, there were 129 holders of our common stock, five
holders of our Class A Preferred Stock and 11 holders of our Class B Preferred
Stock. In addition,
- 1,646,875 shares of common stock have been reserved in connection with the
grant of options to purchase common stock;
- 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.;
- 121 shares of Class A Preferred Stock have been reserved for issuance in
connection with a warrant issued to Silicon Valley Bank;
- 500,594 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; and
- 891,318 shares of common stock have been reserved for issuance in
connection with contingent payments payable to the former stockholders of
some of the companies we acquired, 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.
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 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
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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 GTCR/Smart Common Stock
the right to demand registration of all or any portion of the GTCR/Smart Common
Stock in some circumstances. 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 GTCR/Smart Common
Stock. 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 4,415 shares of Class A Preferred
Stock and 1,140 shares of Class B Preferred 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.
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:
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- 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.
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.
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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 particular mergers or
consolidations involving AppNet, 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.
CONVERSION RIGHTS. Upon consummation of this offering, AppNet will
convert all outstanding shares of Class A Preferred Stock that are not
redeemed with the proceeds of this offering.
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. Upon
consummation of this offering, we will convert all outstanding shares of
Class B Preferred Stock that are not redeemed with the proceeds of this
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 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 such 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;
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- 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 particular 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 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 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.
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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 in some circumstances. The
certificate of incorporation also provides that AppNet may purchase insurance on
behalf of its directors, officers, employees and agents against particular
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 The Bank of New
York.
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SHARES ELIGIBLE FOR FUTURE SALE
Upon consummation of this offering, 29,914,369 shares of our common stock
will be outstanding, 30,814,369 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 "AppNet Affiliate")
as that term is defined in Rule 144. 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 AppNet Affiliates.
Each of AppNet, our directors, officers and select stockholders have agreed
not to offer, sell, contract to sell, announce an intention to sell, pledge or
otherwise dispose of, directly or indirectly, 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
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 AppNet Affiliates, 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 299,144 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 AppNet Affiliate, a stockholder
who is not an AppNet Affiliate at the time of sale and who has not been an
AppNet Affiliate 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 AppNet Affiliates may be entitled to sell
their Rule 701 shares without having to comply with the holding period
restrictions of Rule 144, in each case,
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commencing 90 days after the date of this prospectus, although the contractual
limitations will continue through the th 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 "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,
shares either issued under our stock incentive plans 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 -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 AppNet Affiliates under Rule 144
without compliance with the holding period, amount and notice limitations and by
holders who are AppNet Affiliates 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 shares of our common stock
reserved or to be available for issuance pursuant to our stock incentive plans.
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 AppNet
Affiliates and, subject to the volume and other applicable limitations of Rule
144, by holders who are AppNet Affiliates, 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 GTCR/Smart Common Stock the right to
demand registration of all or any portion of the GTCR/Smart Common Stock in some
circumstances. 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 GTCR/Smart Common Stock. 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 defined below. As used in this prospectus, the
term "Non-U.S. Holder" means 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 both 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 to particular types of 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
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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 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 (the "Final Regulations"), 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 the Final 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 Final Regulations 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 Final Regulations 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 certain other requirements;
- the Non-U.S. Holder is subject to tax pursuant to 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 under clause (a)
above, 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 under clause (b)
above, such individual generally will be subject to a flat 30% tax on the gain
derived from a sale, which may be offset by particular 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 under
clause (a) above, 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 United States 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 particular 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
- 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.
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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:
- 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 Final Regulations 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 certain 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 the terms and subject to the conditions contained in 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 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>
TOTAL
------------------------------------
<S> <C> <C> <C>
WITHOUT WITH OVER-
PER SHARE 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 and directors and particular existing stockholders have
agreed not to offer, sell, contract to sell, announce an intention to sell,
pledge or otherwise dispose of, directly or indirectly, 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 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
77
<PAGE>
issuances of securities as a result of the conversion of any convertible
instruments outstanding on the date hereof.
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 respect thereof.
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 set forth 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 such 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.
78
<PAGE>
These transactions may be effected on The Nasdaq Stock Market's National Market
or otherwise and, if commenced, may be discontinued at any time.
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 pursuant to 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 pursuant to 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 particular circumstances and with respect to the eligibility of
our common stock for investment by the purchaser under relevant Canadian
legislation.
79
<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.
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, D.C. 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.
80
<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
$1,773,000, 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. 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, 2001, 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.
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.
F-18
<PAGE>
APPNET SYSTEMS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1998 AND MARCH 31, 1999
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, 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 convert 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.................................................... *
Legal fees and expenses............................................................ *
Accounting fees and expenses....................................................... *
Printing and engraving expenses.................................................... *
Registrar and transfer agent fees.................................................. *
Miscellaneous expenses............................................................. *
---------
Total.............................................................................. $
---------
---------
</TABLE>
* To be filed by amendment.
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
II-1
<PAGE>
breach of the director's duty of loyalty to the corporation or its stockholders;
(b) from acts or omissions 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) or Regulation D
thereunder.
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 16,150 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
II-2
<PAGE>
the holder's option 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 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 (the "Purchase Agreement"). 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. 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
II-3
<PAGE>
portion of the unpaid balance of the note 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 $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 26, 1999, AppNet issued an aggregate of 157,895 shares of its
common stock to the 19 stockholders of Outfitters as payment, in part, for all
of the issued and outstanding capital stock of Outfitters. The common stock
issued to the Outfitters stockholders was valued at $2,700,000. Also in
connection with the acquisition of Outfitters, AppNet assumed options to
purchase an aggregate of 22,300 shares of its common stock to the 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 March 31, 1999, AppNet granted options under the
1998 Plan to purchase an aggregate of 1,495,963 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 March 31 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 March 31, 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.*
3.2 Form of Amended and Restated Bylaws of AppNet Systems, Inc.*
4.1 Form of certificate of common stock*
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
</TABLE>
II-5
<PAGE>
<TABLE>
<CAPTION>
EXHIBIT DESCRIPTION
- ----------- --------------------------------------------------------------------------------------------------------
<C> <S>
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.
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 Intentionally Omitted
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**
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
</TABLE>
II-6
<PAGE>
<TABLE>
<CAPTION>
EXHIBIT DESCRIPTION
- ----------- --------------------------------------------------------------------------------------------------------
<C> <S>
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.
II-8
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, the Registrant
has duly caused this Amendment No. 1 to its registration statement to be signed
on its behalf by the undersigned, thereunto duly authorized, in the City of
Bethesda, State of Maryland, on May 13, 1999.
APPNET SYSTEMS, INC.
By: /s/ KEN S. BAJAJ
-----------------------------------------
Ken S. Bajaj
CHIEF EXECUTIVE OFFICER
(PRINCIPAL EXECUTIVE OFFICER)
By: /s/ RONALD B. ALEXANDER
-----------------------------------------
Ronald B. Alexander
SENIOR VICE PRESIDENT
AND CHIEF FINANCIAL OFFICER
(PRINCIPAL FINANCIAL AND
ACCOUNTING OFFICER)
Pursuant to the requirements of the Securities Act of 1933, this
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 13, 1999
Ken S. Bajaj Officer)
/s/ JOHN CROSS*
- ------------------------------ Executive Vice President May 13, 1999
John Cross and Director
/s/ THOMAS M. DAVIDSON*
- ------------------------------ Director May 13, 1999
Thomas M. Davidson
/s/ BRUCE RAUNER*
- ------------------------------ Director May 13, 1999
Bruce Rauner
</TABLE>
II-9
<PAGE>
<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
- ------------------------------ -------------------------- -------------------
<C> <S> <C>
/s/ PHILIP A. CANFIELD*
- ------------------------------ Director May 13, 1999
Philip A. Canfield
/s/ RONALD B. ALEXANDER Chief Financial Officer
- ------------------------------ (Principal Financial and May 13, 1999
Ronald B. Alexander Accounting Officer)
</TABLE>
<TABLE>
<S> <C> <C> <C>
*By: /s/ KEN S. BAJAJ
-------------------------
Ken S. Bajaj
CHIEF EXECUTIVE OFFICER
Attorney in fact
*By: /s/ RONALD B. ALEXANDER
-------------------------
Ronald B. Alexander
CHIEF FINANCIAL OFFICER
(PRINCIPAL
FINANCIAL AND ACCOUNTING
OFFICER)
Attorney in fact
</TABLE>
II-10
<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>
Exhibit 10.2
AGREEMENT OF PURCHASE AND SALE OF ASSETS
- ----------------------------------------
THIS AGREEMENT dated as of March 12, 1998 by and between Arbor
Intelligent Systems, Inc., a Michigan corporation having its principal office at
538 N. Division, Ann Arbor, Michigan 48104 ("Seller"), AppNet Systems, Inc., a
Delaware corporation having its principal office at Suite 940, 8000 Towers
Crescent Drive, Vienna, Virginia 22182 and AppNet of Michigan, Inc., a Delaware
corporation having its principal office at 538 N. Division, Ann Arbor, MI 48104
("Purchaser"); Ronald Suarez ("Suarez"); Robert Simms ("Simms"); and Robert
Royce ("Royce").
W I T N E S S E T H:
WHEREAS, Seller is engaged in the business of developing, marketing,
distributing and servicing software applications (the "Business");
WHEREAS, Purchaser desires to purchase and acquire from Seller, and
Seller desires to sell, transfer and assign to Purchaser all of the assets and
properties used in the Business for the purchase price and upon and subject to
the terms and conditions hereinafter set forth.
NOW THEREFORE, in consideration of the mutual covenants and agreements
hereinafter set forth, the parties hereby agree as follows:
1. PURCHASE AND SALE OF BUSINESS AND ASSETS.
1.1 ASSETS TRANSFERRED. Subject to and upon the terms and
conditions set forth in this Agreement, Seller will sell, transfer, convey,
assign and deliver to Purchaser and Purchaser will purchase and acquire from
Seller at the Closing (as hereafter defined) all right, title and interest of
Seller in and to the properties, assets and rights of every nature, kind and
description, tangible and intangible (including goodwill), whether real,
personal or mixed, whether accrued, contingent or otherwise and whether now
existing or hereinafter acquired relating to or used or held for use in
connection with the Business as the same may exist on the Closing Date
(collectively, the "Assets"), including without limitation all those items in
the following categories that conform to the definition of the term "Assets":
(i) all equipment, furniture, furnishings, and
similar property (including any of the foregoing purchased subject to any
conditional sales or title retention agreement in favor of any other individual,
sole proprietorship, corporation, partnership (general or limited), trust,
business trust, limited liability company, unincorporated organization or
association, joint venture, government or political subdivision including any
agency or instrumentality thereof or any other entity or any other nature
("Person"));
(ii) all rights to software sold or licensed and any
software under development prior to or on the Closing Date, including all of
Seller's rights pertaining to all documentation, source code, object code,
enhancements and other materials associated therewith;
<PAGE>
(iii) all of the rights of the Seller under all
contracts, arrangements, license and technology agreements, leases (other than
leases to real property) and agreements, including, without limitation, all
value added reseller agreements, distribution agreements, software license
agreements and Seller's right to receive payment for services rendered and to
receive goods and services pursuant to such contracts and to assert claims and
take other rightful actions in respect of breaches, defaults and other
violations of such contracts and otherwise;
(iv) all prepaid expenses;
(v) all notes and accounts receivable held by Seller
and all notes, bonds and other evidences of indebtedness of and rights to
receive payments from any Person held by Seller;
(vi) (a) all trademarks, service marks and trade
names throughout the world, including registrations and applications for
registration thereof, if any, (b) all copyright registrations throughout the
world and applications therefor, and any other non-registered copyrights, (the
items described in clauses (a) and (b) being hereafter collectively referred to
as the "Intellectual Property");
(vii) all designs, plans, trade secrets, inventions,
processes, methods, procedures and research records (collectively, the
"Know-How");
(viii) all books, records, manuals and other
materials (except for any of Seller's corporate records to the extent not
necessary for the operation of the Business in the ordinary course), including,
without limitation, all records and materials maintained at the offices of
Seller, advertising matter, catalogues, price lists, correspondence, mailing
lists, lists of customers, distribution lists, sales and promotional materials
and records, purchasing materials and records, research and development files,
records, patent disclosures, communication, advertising or similar media
materials and plates, accounting records, sales order files and litigation
files;
(ix) all cash on hand and on deposit and all cash
equivalents including money market funds and certificates of deposit; and
(x) to the extent their transfer is permitted by law,
all governmental licenses, permits, approvals, license applications, license
amendment applications and product registrations.
The Assets shall be conveyed free and clear of all liabilities,
obligations, liens and encumbrances excepting only those liabilities and
obligations which are expressly agreed to be assumed by Purchaser hereunder and
those liens and encumbrances securing the same which are specifically disclosed
herein or expressly permitted by the terms hereof.
1.2 EXCLUDED ASSETS. Notwithstanding the definition of Assets
set forth in Section 1.1 of this Agreement or any other provision of this
Agreement, Seller will not sell,
2
<PAGE>
transfer, convey, assign or otherwise deliver to Purchaser any of the assets or
items listed on Schedule 1.2 hereof.
2. CLOSING; PURCHASE PRICE.
2.1 TIME AND PLACE OF CLOSING. The closing of the sale of the
Assets (the "Closing") shall take place at 10:00 a.m. local time, on the 12th
day of March, 1998, at the offices of Michaels, Wishner & Bonner, P.C., or such
other time and place as the parties may agree upon. The day on which the Closing
actually takes place is herein sometimes referred to as the "Closing Date".
2.2 PURCHASE PRICE. Subject to Section 2.3 and Section 2.4
hereof, Purchaser shall pay or provide to Seller the following consideration in
connection with the purchase of the Assets (hereafter "Purchase Price"):
(i) $401,038 (as hereafter adjusted in this
Section 2.2) in current funds;
(ii) 266,796 shares of Series A-1 Convertible
Preferred Stock (sometimes hereafter referred to as the "Shares") having the
rights and preferences set forth in Exhibit A hereof each of which shall be
deemed to have a value of $4.00 per share;
(iii) $1,617,879, which amount shall be used to
satisfy all of the obligations set forth in Schedule 2.2 hereof ("Obligations");
and
(iv) the assumption of the payment of all expenses,
including accounts payable, salaries due through the Closing, accrued and unpaid
vacation and sick leave and deferred income liabilities, other than the
Obligations, which have been incurred to operate the Business through the
Closing, whether or not accrued, which Seller has not yet paid ("Expenses"),
which shall include, but not be limited to, those items listed in Schedule
2.2(iv) hereof;
provided, however, that the Purchase Price shall increase or decrease, dollar
for dollar, to the extent Seller's Current Net Worth as of the Closing exceeds
or is less than zero. For purposes hereof Seller's Current Net Worth shall equal
the difference between Seller's Current Assets less Seller's Current
Liabilities. Subject to Section 2.3 hereof, Seller's Current Assets shall mean
all of Seller's cash, cash equivalents, accounts receivable aged less than 90
days, the credit owed to Seller for the Michigan Single Business Tax, up to
$8,000 in amount, and work-in-process valued at the amount billable therefor, as
of the Closing. Seller's Current Liabilities shall mean all of the Expenses, all
of which to the extent known on the Closing will be set forth in a Schedule of
Expenses delivered at the Closing, and all other liabilities of a nature which
Seller would be required to set forth as part of Seller's current liabilities on
a balance sheet prepared in accordance with generally accepted accounting
principles.
2.3 PAYMENT OF THE PURCHASE PRICE. Purchaser shall pay and
deliver to Seller the consideration described in Section 2.2(i) and (ii) at the
Closing less the amount of funds and
3
<PAGE>
shares deliverable to the Escrow Agent under Section 2.5 and less the amount of
$100,000 which Purchaser shall retain from the amount otherwise payable under
Section 2.2(i) pending the determination of Seller's Current Net Worth. On the
120th day after the Closing, Purchaser will present Seller with a statement of
Seller's Current Net Worth at the Closing. In preparation of the statement of
Seller's Current Net Worth, as and for accounts receivable, Purchaser shall only
be obligated to include accounts receivable aged 90 days or less as of the
Closing which have been paid on or prior to the preparation of the statement of
Seller's Current Net Worth and as and for work-in-process, Purchaser shall only
be obligated to include work-in-process to the extent that it has matured into
an account receivable for which payment has been made on or prior to the
preparation of the statement of Seller's Current Net Worth. The final statement
shall be prepared having the level of detail which would generally exist on a
balance sheet prepared in accordance with generally accepted accounting
principals. If Seller accepts this statement, Purchaser shall pay to Seller the
remaining amount, if any, then due Seller under Section 2.2(i) as adjusted for
Seller's Current Net Worth exclusive of the amount of funds paid into escrow. If
Seller's Current Net Worth exceeds a negative $100,000, Seller shall pay
Purchaser an amount equivalent to such excess. If Seller disputes the statement,
the parties will negotiate in faith towards resolving the dispute. Failing such
resolution, either party shall have the right to submit the dispute to binding
arbitration in accordance with the Commercial Arbitration Rules of the American
Arbitration Association. Such arbitration will be conducted in Ann Arbor,
Michigan. Each party shall bear its own expenses of the arbitration. Following
the arbitration award, Purchaser shall pay to Seller the amount remaining due to
Seller under Section 2.2(i) as adjusted for Seller's Current Net Worth,
exclusive of the funds paid into escrow. In any event the Purchaser and Seller
shall only be entitled to the one purchase price adjustment referred to above
and such purchase price adjustment must be calculated within the 120 day period
referred to above. Notwithstanding the above, at any time after 60 days but
prior to 100 days following the Closing, Seller shall may by written notice to
Purchaser cause Purchaser to prepare the statement of Seller's Current Worth as
of a date Seller determines which falls prior to the date otherwise required
hereunder. Purchaser shall thereupon have up to 10 days from the date of receipt
of such notice to prepare the statement. All provisions set forth in this
Section 2.3 regarding the statement of Seller's Current Worth which Purchaser
was to otherwise prepare on the 120th day following the Closing shall apply to
the earlier statement herein required by Seller.
2.4 HOLDBACK. Purchaser shall have the right to holdback the
amount required for the payment of any of the Obligations until and unless
Purchaser shall have received: (i) a full and complete release, subject to the
payment of the Obligation, from the holder of such Obligation of any claim such
holder has or may have against Seller, Purchaser or the Business; or (ii) a
final court order requiring the payment of such Obligation or a final court
order providing that no such payment is required. If such releases are not
available at the Closing, the amount required for payment of the Obligations
will be placed in escrow under Section 2.5.
2.5 ESCROW. In addition to the amount referenced in Section
2.3, Purchaser shall withhold $80,207.60 from the amount payable to Seller under
Section 2.2(i) and 53,359 shares of Series A-1 Convertible Preferred Stock from
the shares deliverable to Seller under Section 2.2(ii). Such funds and shares,
along with the amounts required for payment of any of the Obligations
(collectively "Escrow Fund"), shall be placed in escrow with Commercial
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Settlements, Inc. ("Escrow Agent") subject to the provisions of the Escrow
Agreement attached hereto as Exhibit B. The Escrow Fund to the extent it
consists of cash or cash equivalents shall serve to (i) provide Seller with the
amounts required to satisfy any of the Obligations upon receipt of appropriate
releases from the holders thereof and (ii) secure and satisfy to the extent
hereinafter set forth, along with the Shares held in Escrow, all indemnities of
Seller pursuant to Section 8.4 of this Agreement. Purchaser shall have the right
to apply funds, shares of Series A Convertible Preferred Stock or any
combination thereof as Purchaser determines for such satisfaction of any
indemnity claim Purchaser possesses. Each share used to satisfy any such claim
shall be deemed equal to $4.00 per share.
2.6 ALLOCATION. The Purchase Price shall be allocated to the
Assets as described in Schedule 2.6 hereof.
2.7 EXCLUDED LIABILITIES. Purchaser shall not assume any
liabilities, obligations or commitments (the "Excluded Liabilities") of Seller
relating to or arising out of the operation of the Business prior to Closing
other than the Expenses, the obligation to perform subsequent to Closing under
any agreements assigned to Purchaser as part of the Assets or any liens or
encumbrances against any of the Assets which Purchaser expressly assumes in
writing. For purposes hereof, all such liabilities referred to above which
Purchaser has agreed to assume are referred to as the "Specified Liabilities".
3. REPRESENTATIONS AND WARRANTIES OF SELLER. Seller, Suarez, Royce and
Simms, jointly and severally, represent and warrant to Purchaser as follows:
3.1 ORGANIZATION, STANDING AND QUALIFICATION. Seller is a
corporation duly organized, validly existing and in good standing under the laws
of Michigan has ail requisite corporate power and authority and is entitled to
carry on the Business and to own or lease and operate the Assets as and in the
places where the Business is now conducted. Seller is duly qualified, licensed
or domesticated and in good standing in each of the jurisdictions, where the
nature of its activities conducted in connection with the Business or the
character of the properties owned, leased or operated by it in connection with
the Business require such qualification, licensing or domestication. Seller has
delivered to Purchaser true and complete copies of its Articles of Incorporation
and By-Laws, as amended and in effect.
3.2 OPERATIONS OF THE BUSINESS. Seller has conducted the
Business only through the Seller and not through any other Person.
3.3 TRANSACTIONS WITH CERTAIN PERSONS; THE ASSETS. Except as
set forth on Schedule 3.3, during the past three years Seller (i) has not, in
connection with its operation of the Business, directly or indirectly purchased,
leased or otherwise acquired any property or obtained any services from, or
sold, leased or otherwise disposed of any property or furnished any services to,
or otherwise dealt with (except with respect to remuneration for services
rendered as a director, officer or employee of Seller), in the ordinary course
of business or otherwise, (A) any Person beneficially owning 10% or more of the
common stock of Seller (a "Major Stockholder") or (B) any Person, firm or
corporation which, directly or indirectly, alone or together with others,
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controls, is controlled by or is under common control with Seller, and, (ii) in
connection with its operation of the Business, does not owe any amount to, or
has any contract with or commitment to, any Major Stockholders, directors,
officers, employees or consultants (other than compensation for current services
not yet due and payable and reimbursement of expenses arising in the ordinary
course of business), and none of such Persons owes any amount to Seller in
connection with its operation of the Business. The Assets constitute all of the
properties and assets relating to or used or held for use in connection with the
Business since December 31, 1997, (excluding inventories sold, cash disposed of,
accounts receivable collected, prepaid expenses realized, contracts fully
performed, and properties or assets replaced by equivalent or superior
properties or assets, in each case in the ordinary course of business). Except
for the assets and services set forth on Schedule 1.2 hereof, the Assets
comprise all assets and services used to conduct the Business as now being
conducted by Seller. There are no assets or properties used in the Business and
owned by any Person other than Seller which will not be leased or licensed to
Purchaser under valid, current lease or license arrangements.
3.4 EXECUTION, DELIVERY AND PERFORMANCE OF AGREEMENTS:
AUTHORITY. Other than as to the default that may occur under the Seller's
contract with IC&C Gmbh or as itemized on Schedule 3.12.3, the execution,
delivery and performance of this Agreement or any other agreements required
hereunder (the Agreement and such other agreements hereafter referred to as
"Basic Agreements") by Seller will not, with or without the giving of notice or
the passage of time, or both, conflict with, result in a default, right to
accelerate or loss of rights under, or result in the creation of any lien,
charge or encumbrance pursuant to, any provision of Seller's Articles of
Incorporation or By-laws or any franchise, mortgage, deed of trust, lease,
license, agreement, understanding, law, rule or regulation or any order,
judgment or decree to which Seller is a party or by which Seller may be bound or
affected. Seller has the full power and authority to enter into the Basic
Agreements and to carry out the transactions contemplated therein. This
Agreement has been duly executed and delivered by Seller and constitutes the
legal, valid and binding obligation of Seller enforceable against Seller in
accordance with its terms.
3.5 FINANCIAL STATEMENTS. Seller has delivered to Purchaser
copies (initialed by Seller's chief financial officer and identified with
reference to this Section 3.5 of this Agreement) of the following financial
statements prepared by Seller, all of which are complete and correct, and except
as otherwise set forth therein, have been prepared from the books and records of
the Seller in accordance with generally accepted accounting principles
consistently applied ("GAAP") and maintained throughout the periods indicated
and fairly present the financial condition of the Seller as at their respective
dates and the results of its operations for the periods covered thereby:
(i) Audited balance sheet at December 31, 1997,
and audited statements of operations and source and application of funds for the
fiscal year then ended;
(ii) Unaudited balance sheet at December 31, 1996,
and unaudited statement of operations and source and application of funds for
the fiscal year then ended; and
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(iii) Unaudited balance sheet ("the Unaudited Balance
Sheet") at January 31, 1998 ("the Balance Sheet Date") and the unaudited
statement of operations and source and application of funds for the one month
period then ended.
Such statements of operations do not contain any items of special or
nonrecurring income or any other income not earned in the ordinary course of
business except as expressly specified therein, and the interim financial
statements of January 31, 1998, include all adjustments, which consist only of
normal recurring accruals, necessary for such fair presentation.
3.6 ABSENCE OF UNDISCLOSED LIABILITIES. Except as and to the
extent reflected or reserved against on the face of the Unaudited Balance Sheet
(excluding any notes thereto), as of the Balance Sheet Date Seller did not have
(i) any debts, liabilities or obligations (whether absolute, accrued, contingent
or otherwise) of any nature whatsoever, including, without limitation, any
foreign or domestic tax liabilities or deferred tax liabilities incurred in
respect to or measured by the Seller's income for its period prior to the close
of business on the Balance Sheet Date or (ii) any other debt, liabilities or
obligations relating to or arising out of any act, omission, transaction,
circumstance, sale of goods or services, state of facts or other condition which
occurred or existed on or before such date, whether or not then known, due or
payable. Purchaser shall only have the liability and obligation to pay or honor
any employee benefits, including vacation, severance, sick leave and health care
benefits, which accrued prior to the Closing Date for any of Seller's employees
who Purchaser employs after the Closing Date to the extent such liability or
obligation was included as part of Expenses.
3.7 TAXES. Except as set forth in Schedule 3.7, all taxes,
including without limitation, income, property, sales, use, franchise, added
value, employees' income withholding and social security taxes, imposed by the
United States or by any foreign country or by a state, municipality, subdivision
or instrumentality of the United States or of any foreign country, or by any
other taxing authority, which are due or payable by Seller, and all interest and
penalties thereon, whether disputed or not (hereinafter, "Taxes"), have been
paid in full or adequate provisions have been made therefor, all tax returns
required to be filed in connection therewith have been accurately prepared and
duly and timely filed and all deposits required by law to be made by Seller with
respect to employees withholding taxes have been duly made. Seller has not been
delinquent in the payment of any foreign or domestic tax, assessment or
governmental charge or deposit and has no tax deficiency or claim outstanding,
proposed or assessed against it, and there is no basis for any such deficiency
or claim. There is not now in force any extension of time with respect to the
date on which any tax return was or is due to be filed or with respect to Seller
or any waiver or agreement by any Seller for the extension of time for the
assessment of any tax.
3.8 ABSENCE OF CHANGES OR EVENTS. Except as set forth in
Schedule 3.8, Seller has conducted the Business only in the ordinary course and
has not, on behalf of, in connection with or relating to the Business or the
Assets since the Balance Sheet Date:
(i) incurred any obligation or liability, absolute,
accrued, contingent or otherwise, whether due or to become due, except current
liabilities for trade or business
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obligations incurred in connection with the purchase or sale of goods or
services in the ordinary course of business and consistent with its prior
practice, none of which liabilities, in any case or in the aggregate, materially
and adversely affects the business, liabilities or financial condition of the
Business;
(ii) discharged or satisfied any lien, charge or
encumbrance relating to the Business other than those then required to be
discharged or satisfied, or paid any obligation or liability, absolute, accrued,
contingent or otherwise, whether due or to become due, other than current
liabilities shown on the Unaudited Balance Sheet and current liabilities
incurred since the date thereof in the ordinary course of business and
consistent with its prior practice;
(iii) except for Permitted Encumbrances (as defined
in Section 3.11.1), mortgaged, pledged or subjected to lien, charge, security
interest or any other encumbrance or restriction on any of the Seller's
property, business or assets, tangible or intangible;
(iv) sold, transferred, leased to others or otherwise
disposed of any of the Assets, or canceled or compromised any debt or claim, or
waived or released any right of substantial value;
(v) received any notice of termination of any
contract, lease or other agreement or suffered any damage, destruction or loss
(whether or not covered by insurance) which, in any case or in the aggregate,
has had a materially adverse effect on the assets, operations or prospects of
the Seller;
(vi) encountered any labor union organizing activity,
had any actual or threatened employee strikes, work stoppages, slowdowns or
lockouts, or had any material change in its relations with its employees,
agents, customers or suppliers;
(vii) transferred or granted any rights under, or
entered into any settlement regarding the breach or infringement of, any United
States or foreign license, patent, copyright, trademark, trade name, invention
or similar rights, or modified any existing rights with respect thereto:
(viii) made any material change in the rate of
compensation, commission, bonus or other direct or indirect remuneration
payable, or paid or agreed or orally promised to pay, conditionally or
otherwise, any bonus, extra compensation, pension or severance or vacation pay,
to any shareholder, director, officer, employee, salesman, distributor or agent
of Seller other than in the ordinary course of business and consistent with
prior practices;
(ix) made any capital expenditures or capital
additions or betterments in excess of an aggregate of $10,000;
(x) instituted, settled or agreed to settle any
litigation, action or proceeding before any court or governmental body relating
to Seller or the Assets;
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(xi) failed to replenish Seller's supplies in a
normal and customary manner consistent with its prior practice and prudent
business practices prevailing in the industry, or made any purchase commitment
in excess of the normal, ordinary and usual requirements of the business or at
any price in excess of the then current market price or upon terms and
conditions more onerous than those usual and customary in the industry, or made
any change in its selling, pricing, advertising or personnel practices
inconsistent with its prior practice and prudent business practices prevailing
in the industry;
(xii) suffered any change, event or condition which,
in any case or in the aggregate, has had or may have a materially adverse affect
on Seller's condition (financial or otherwise), properties, assets, liabilities,
operations or prospects, including, without limitation, any change in the
Seller's revenues, costs, backlog or relations with its employees, agents,
customers or suppliers; or
(xiii) entered into any agreement or made any
commitment to take any of the types of action described in subparagraphs (i)
through (xii) above.
3.9 LITIGATION. Except as disclosed in Schedule 3.9, there is
no claim, legal action, suit, arbitration, or other legal or administrative
proceeding or to the knowledge of Seller, Suarez, Royce or Simms, any
governmental investigation, nor any order, decree or judgment in progress,
pending or in effect, or to the knowledge of Seller, Suarez, Royce or Simms
threatened, against or relating to Seller in connection with the Business, or
against or relating to the transactions contemplated by this Agreement, and
Seller does not know or have reason to be aware of any basis for the same. For
the purposes of this Agreement, the term "knowledge" shall mean actual knowledge
without any investigation having been undertaken. Except as set forth in
Schedule 3.9, no citations, fines or penalties have been asserted against Seller
since January 1, 1995, under any foreign, federal, state or local law relating
to air or water pollution or other environmental protection matters,
occupational health or safety or medical devices.
3.10 COMPLIANCE WITH LAWS AND OTHER INSTRUMENTS. Seller has
complied with all existing laws, rules, regulations, ordinances, orders,
judgments and decrees applicable to the Business, properties or operations of
the Seller as presently conducted. Schedule 3.10 hereto contains a complete and
correct list of all permits, concessions, grants, franchises, licenses, filings
and other governmental authorizations and approvals which are necessary for the
conduct of the Business, all of which have been duly made or obtained and are in
full force and effect and there are no proceedings pending or, to knowledge of
Seller, Suarez, Royce or Simms, threatened which may result in the revocation,
cancellation or suspension or any adverse modification, of any thereof. Seller
is not in violation of any term of its Articles of Incorporation or By-Laws.
Except as set forth on Schedule 3.10, neither the ownership nor use of the
Assets nor the conduct of the Business conflicts with the rights of any other
Person, firm or corporation or violates, or with or without the giving of notice
or the passage of time, or both, will violate, conflict with or result in a
default, right to accelerate or loss of rights under, any terms or provisions of
any lien, encumbrance, mortgage, deed of trust, lease, license, agreement,
understanding, law, ordinance, rule or regulation, or any order, judgment or
decree to which Seller is a party or by which it may be bound or affected.
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3.11 PROPERTIES.
3.11.1 Schedule 3.11 hereto includes a complete
and correct list of all tangible personal property included in the Assets with
an initial cost in excess of $2,000. Seller has good title to all the personal
property listed or required to be listed in Schedule 3.11, including, without
limitation, the properties reflected as being so owned on the Unaudited Balance
Sheet, in each case free and clear of any liens, security interests or
encumbrances except (i) liens for current Taxes not yet due and payable, (ii)
statutory liens of warehousemen, mechanics and materialmen and other like
statutory liens which arose in the ordinary course of business, and (iii) such
other encumbrances and easements which do not, individually or in the aggregate,
materially detract from the value or interfere with the use of the properties
affected thereby, for the purposes for which they are currently used or
otherwise (the exceptions described in the foregoing clauses (i), (ii), and
(iii) being referred to as "Permitted Encumbrances").
3.11.2 None of the tangible personal property
included in the Assets is leased by Seller.
3.12 CONTRACTS.
3.12.1 Schedule 3.12 hereto contains a complete
and correct list of all agreements, contracts and commitments (collectively, the
"Material Contracts") of the following types, whether written or oral by which
any of the Assets are bound or to which Seller is a party or by which it is
bound:
(i) mortgages, indentures, security
agreements and other agreements and instruments relating to the borrowing of
money by, or any extension of credit to, Seller;
(ii) employment, consulting and agency
agreements (other than employment arrangements terminable at will without
liability on the part of the employer or upon payment of no more than applicable
statutory or regulatory severance or termination benefits);
(iii) collective bargaining agreements;
(iv) sales agency, manufacturer's
representative, distributorship or marketing agreements;
(v) agreements, orders or commitments
for the purchase by Seller or any of Seller's Affiliates of supplies or
services, in each case involving payments or receipts in excess of $5,000 in the
aggregate;
(vi) licenses to or from others of
Intellectual Property and Know-How involving payments or receipts in excess of
$4,000;
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(vii) agreements or commitments for capital
expenditures in excess of $5,000 for any single project or related series of
projects;
(viii) brokerage or finder's agreements;
(ix) partnership, joint venture or other
arrangements or agreements involving a sharing of profits or expenses;
(x) contracts or commitments to sell, lease
or otherwise dispose of any Assets other than in the ordinary course of
business;
(xi) contracts or commitments, including
royalty agreements, .with any employee, director, officer, Major Stockholder or
affiliate of Seller;
(xii) contracts or commitments limiting the
freedom of Seller to compete in any line of business or in any geographic area
or with any Person;
(xiii) other agreements, contracts and
commitments which in any case involve payments or receipts of more than $5,000;
and
(xiv) any other agreements, contracts and
commitments material to the Business.
3.12.2 Seller has delivered to Purchaser complete and
correct copies of all written Material Contracts, together with all amendments
thereto, and accurate descriptions of all oral Material Contracts, listed on
such Schedule 3.12 or required to be listed thereon. Such Material Contracts are
in full force and effect and there does not exist thereunder any material
default or event or condition which, after notice or lapse of time or both,
would constitute a material default thereunder by Seller or, to the knowledge of
Seller, Suarez, Royce or Simms, by any other party thereto.
3.12.3 Except as set forth in Schedule 3.12 hereto,
no consent by any third party is required under any of the Material Contracts as
a result of or in connection with the execution, delivery and performance of any
of the Basic Agreements or the consummation of the transactions contemplated
thereby. Seller has no outstanding powers of attorney, except powers of attorney
relating to representation before governmental agencies or given in connection
with qualification to conduct business in another jurisdiction.
3.13 BROKERS, FINDERS, ETC. Except as set forth in Schedule
3.13, all negotiations relating to this Agreement and the transactions
contemplated hereby have been carried on without the intervention of any Person
acting on behalf of Seller in such manner as to give rise to any claim against
Purchaser for any brokerage or finder's commission, fee or similar compensation.
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3.14 CUSTOMERS AND SUPPLIERS. Attached as Schedule 3.14 hereto
is a complete and correct list of each customer of Seller who accounted for
purchases from Seller in excess of $5,000 during the twelve-month period ending
December 31, 1997, and, (ii) each vendor and supplier of Seller who accounted
for sales to Seller in connection with the Business in excess of $5,000 during
the twelve-month period ending December 31, 1997. To the knowledge of Seller,
Suarez, Royce or Simms, no single source of supply of any product or service
required in connection with the operation of the Business has threatened to
cease supplying such product or service either before or after the Closing.
3.15 PATENTS, ETC.
3.15.1 Attached as Schedule 3.15 hereto is a complete
and correct list of all patents, trademarks, servicemarks, trade names,
registered user names and copyrights, and applications for registration of the
foregoing, included in the Intellectual Property. Except as set forth on such
Schedule 3.15, the Intellectual Property is owned by Seller and Seller has no
actual knowledge that any Intellectual Property is not valid or in full force
and effect and Seller has not received any notice or claim that any of the
Intellectual Property is invalid or unenforceable by it. The Intellectual
Property and Know How which are owned by Seller are owned free and clear of any
material license, sub-license, agreement, right, understanding, judgment, order,
decree, stipulation, lien, charge or encumbrance other than those disclosed on
Schedule 3.15 which individually or in the aggregate might have a materially
adverse effect on Purchaser's operation of the Business. To the knowledge of
Seller, Suarez, Royce or Simms, the rights being transferred to Purchaser
pursuant to this Agreement constitute all such rights necessary to conduct the
Business as currently conducted. None of the Intellectual Property or any of the
technology covered thereby or any of the Know-How has been misappropriated from
any Person. To knowledge of Seller, Suarez, Royce or Simms, Seller is not
infringing upon or otherwise acting adversely to the Intellectual Property owned
by any other Person, and there is no claim or action by any Person pending, or
to the knowledge of Seller, Suarez, Royce or Simms, threatened, with respect
thereto.
3.15.2 Except as set forth on Schedule 3.15, Seller,
Suarez, Royce and Simms have no knowledge of any infringement or improper use by
any third party of the Intellectual Property or the Know-How, and there is no
action or proceeding instituted by Seller pending in which an act constituting
an infringement of any of the rights to the Intellectual Property or Know-How
was alleged to have been committed by a third party. Seller has not waived, nor
has Seller, by the failure to either exercise reasonable and customary business
practices or take reasonable business efforts, caused any waiver to occur as to
any rights to the Intellectual Property and Know-How so as to have the effect of
making Purchaser unable to operate the Business as currently conducted by Seller
or of allowing any other Person to compete more effectively with Purchaser (or
its subsidiaries) than it now does with Seller.
3.15.3 Schedule 3.15 hereto accurately discloses all
licenses, sublicenses or agreements relating to (i) the use by third parties of
the Intellectual Property and the Know-How, or (ii) the use thereof by Seller
pursuant to a license or sublicense agreement with a third
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party. Except as set forth in Schedule 3.15, Seller is not in default and Seller
has no knowledge that any third party is in material default under any such
license, sublicense or agreement.
3.16 NO GUARANTIES. Except as set forth in Schedule 3.16 none
of the obligations or liabilities of the Business or of Seller incurred in
connection with its operation of the Business is guaranteed by or subject to a
similar contingent obligation of any other Person, firm or corporation, nor has
Seller guaranteed or become subject to a similar contingent obligation in
respect of the obligations or liabilities of any other Person, firm or
corporation.
3.17 RECEIVABLES. All of the Seller's receivable and
work-in-process ("WIP") constituting Assets (including accounts receivable and
loans receivable) have arisen only from bona fide transactions in the ordinary
course of business. To the knowledge of Seller, Suarez, Royce or Simms, all of
the receivable aged 90 days or less are collectible in full and none are subject
to any claims of set-off or reduction. Schedule 3.17 hereto accurately lists as
of the close of business on January 31, 1998, all receivable of Seller and WIP
(which schedule will be promptly updated after Closing to reflect receivable and
WIP as of Closing), the amount owing and the aging of such receivable, the
amount billable for WIP and the name and last known address of the party from
whom such receivable and eventual payment of such WIP is and will be owing. No
security exists for the payment of any receivable. To the knowledge of Seller,
Suarez, Royce or Simms, all WIP will mature into collectible accounts receivable
for which full payment will be received after the Closing.
3.18 ABSENCE OF CERTAIN BUSINESS PRACTICES. Neither Seller nor
any officer, employee or agent of Seller, nor any other Person acting on their
behalf, has, directly or indirectly, within the past five years given or agreed
to give any gift or similar benefit to any customer, supplier, governmental
employee or other Person who is or may be in a position to help or hinder the
Business (or assist Seller in connection with any actual or proposed transaction
relating to the Business) which (i) might subject any Seller to any damage or
penalty in any civil, criminal or governmental litigation or proceeding, (ii) if
not given, might have had an adverse effect on the assets, business or
operations of the Business as reflected in the financial statements described in
Section 3.5, (iii) if not continued in the future, might adversely affect the
Business' assets, business, operations or prospects or which might subject
Seller to suit or penalty in any private or governmental litigation or
proceeding, (iv) was intended for any of the purposes described in Section
162(c) of the Code, or (v) was for the establishment or maintenance of any
concealed fund or concealed bank account.
3.19 DISCLOSURE. No representation or warranty by Seller,
Suarez, Royce or Simms contained in this Agreement nor any statement or
certificate furnished or to be furnished by Seller, Suarez, Royce or Simms to
Purchaser or its representatives in connection herewith or pursuant hereto
contains or will contain any untrue statement of a material fact, or knowingly
omits or will omit to state any material fact required to make the statements
herein or therein contained not misleading. Except as described in this
Agreement or in any schedules hereto, there is no fact (other than matters of a
general economic or political nature which do not uniquely affect the Business)
known to Seller, Suarez, Royce or Simms which might reasonably be expected to
have a material adverse effect on the business, assets, properties, operations
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(financial or other) or prospects of the Business. The representations and
warranties contained in this Section 3 or elsewhere in this Agreement or any
document delivered pursuant hereto shall not be affected or deemed waived by
reason of the fact that Purchaser and/or its representatives knew or should have
known that any such representation or warranty is or might be inaccurate in any
respect.
3.20 TERRITORIAL RESTRICTIONS. Other than as to the
"Smalltalk" line of products as restricted under Seller's agreement with IC&C
Gmbh, Seller is not restricted by any written agreement or understanding with
third parties from carrying on the Business anywhere in the world.
3.21 EMPLOYEES AND EMPLOYEE BENEFIT PLANS. Schedule 3.21 lists
each pension retirement, profit-sharing, deferred compensation, bonus or other
incentive plan, or program arrangement, agreement or other understanding, or
medical, vision, dental or other health plan, or life insurance or disability
plan, or any other employee benefit plan, including, without limitation, any
"employee benefit plan" as defined in Section 3(3) of the Employee Retirement
Income Security Act of 1974, as amended ("ERISA"), to which Seller contributes
or is a party or is bound or under which it may have liability and under which
employees or former employees (or their beneficiaries) are eligible to
participate or derive a benefit ("Employee Benefit Plans"). Seller has delivered
to Purchaser true, correct and complete copies of all Employee Benefit Plans. A
list of all of Seller's employees and their current levels of compensation are
set forth on Schedule 3.21.
3.22 INSURANCE. Schedule 3.22 sets forth a complete and
correct list and description of all of the policies of liability, property,
workers' compensation and other forms of insurance or bonds carried by Seller
for the benefit of or in connection with the Assets or the Business.
3.23 CONDUCT OF BUSINESS. Since December 31, 1997, Seller has
conducted the Business only in the ordinary course and consistent with its prior
practice and has maintained, kept and preserved the assets and properties of the
Business in good condition and repair in accordance with prior practices and has
used its best efforts (i) to preserve the business and organization of the
Business intact, (ii) to keep available to any prospective purchaser of the
Business the services of the Seller's employees and (iii) to preserve for any
prospective Purchaser the goodwill of the Seller's suppliers, customers, and
others having business dealing or relations with the Seller. Since January 1,
1998, Seller has not taken any action to modify or changes in any material
respect the pricing policies as to its services.
3.24 NO DISTRIBUTION. Seller agrees that it will be acquiring
the shares of Series A Convertible Preferred Stock for investment and other than
with respect to its stockholders incidental to Seller's redemption of its
stockholders' shares or Seller's liquidation, not with a view to resale,
fractionalization, disposition or distribution of all or any part thereof.
Seller is aware that neither the shares of Series A Convertible Preferred Stock
nor the shares of Common Stock issuable upon conversion thereof (the "Conversion
Shares") have been registered under the Securities Act of 1933, as amended (the
"Act") or the securities laws of any state and that the
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same cannot be sold, transferred, pledged or conveyed unless registered under
the Act or the applicable laws of any state unless exempt from such registration
requirements. Seller has been provided such information it has requested
pertaining to Purchaser and has been given the opportunity to obtain additional
information necessary to verify the accuracy of the information received.
4. REPRESENTATIONS AND WARRANTIES OF PURCHASER. Purchaser represents
and warrants to Seller as follows:
4.1 ORGANIZATION, STANDING AND QUALIFICATION. Purchaser is a
corporation duly organized, validly existing and in good standing under the laws
of Delaware, has all requisite corporate power and authority to enter into this
Agreement and the Basic Agreements to which it will be a party, and to carry out
the transactions contemplated by this Agreement, to carry on its business as now
being conducted and to own, lease or operate its properties. Purchaser is duly
qualified, licensed or domesticated and in good standing in each of the
jurisdictions where the nature of its activities conducted in connection with
its business or the character of the properties owned, leased or operated by it
in connection with its business requires such qualification, licensing or
domestication. Purchaser has delivered to Seller true and complete copies of its
Certificate of Incorporation and By-laws, as amended and in effect.
4.2 ORGANIZATION, STANDING AND QUALIFICATION OF SUBSIDIARY. In
the event that Purchaser assigns its rights, duties and obligations hereunder to
a wholly-owned subsidiary (the "Subsidiary"), Subsidiary will be duly organized,
validly existing and in good standing under the laws of Delaware, will have all
requisite corporate power and authority to enter into this Agreement and the
Basic Agreements to which it will be a party, and to carry out the transactions
contemplated by this Agreement, to carry on its business as now being conducted
and to own, lease or operate its properties. Subsidiary will be duly qualified,
licensed or domesticated and in good standing in each of the jurisdictions where
the nature of its activities conducted in connection with its business or the
character of the properties owned, leased or operated by it in connection with
its business will require such qualification, licensing or domestication.
Subsidiary will deliver to Seller true and complete copies of its Certificate of
Incorporation and By-laws, as amended and in effect.
4.3 AUTHORIZATION AND APPROVAL OF AGREEMENT. All proceedings
or corporate action required to be taken by Purchaser (and Subsidiary) relating
to the execution and delivery of this Agreement and the Basic Agreements and the
consummation of the transactions contemplated hereby and thereby shall have been
taken at or prior to the Closing.
4.4 EXECUTION, DELIVERY AND PERFORMANCE OF AGREEMENTS;
AUTHORITY. The execution, delivery and performance of this Agreement by
Purchaser (and Subsidiary) and the Basic Agreements by Purchaser (and
Subsidiary) will not, with or without the giving of notice or the passage of
time, or both, conflict with, result in a default, right to accelerate or loss
of rights under, result in the creation of any lien, charge or encumbrance
pursuant to, any provision of Purchaser's (and Subsidiary's) Certificate of
Incorporation or By-laws or any franchise, mortgage, deed of trust, lease,
license, agreement, understanding, law, rule or regulation or any
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order, judgment or decree to which Purchaser (and Subsidiary) is a party or by
which Purchaser (and Subsidiary) may be bound or affected. Purchaser (and
Subsidiary) has the full power and authority to enter into the Basic Agreements
and to carry out the transactions contemplated therein. All proceedings required
to be taken by Purchaser (and Subsidiary) to authorize the execution, delivery
and performance of this Agreement, the Basic Agreements and the agreements
relating hereto will have been taken by the Closing. This Agreement and the
Basic Agreements constitute the legal valid and binding obligations of Purchaser
enforceable against Purchaser (and Subsidiary) in accordance with their terms.
4.5 BROKERS, FINDERS, ETC. All negotiations relating to this
Agreement and the transactions contemplated hereby have been carried on without
the intervention of any Person acting on behalf of Purchaser in such manner as
to give rise to any valid claim against Seller for any brokerage or finder's
commission, fee or similar compensation.
4.6 AUTHORIZATION. The execution of this Agreement and the
other Basic Agreements, the issuance of the shares of Series A Convertible
Preferred Stock to Seller and the issuance of shares of Common Stock upon
conversion of the shares of Series A Convertible Preferred Stock shall have been
duly authorized by Purchaser, and the Agreement and the other Basic Agreements
when executed and delivered to Seller pursuant hereto will constitute the valid
and binding obligations of Purchaser enforceable against Purchaser in accordance
with their terms.
4.7 LITIGATION. There is no legal action, suit, arbitration,
governmental investigation or other legal or administrative proceeding, nor any
order, decree or judgment in progress, pending or in effect, or to the knowledge
of Purchaser threatened against or relating to Purchaser in connection with or
relating to the transactions contemplated by this Agreement, and Purchaser does
not know, nor has any reason to be aware, of any basis for the same.
4.8 CAPITALIZATION. Immediately prior to the Closing, the
authorized capital stock of Purchaser shall consist of:
(a) PREFERRED STOCK. (i) A total of 6,000,000 shares
of Series A Convertible Preferred Stock, par value $.001 per share, of which
266,796 shares have been designated Series A-1 Convertible Preferred Stock none
of which are issued and outstanding.
(ii) A total of 5,000,000 shares of Series B
Convertible Preferred Stock, par value $.001 per share, of which 1,000,000
shares have been designated Series B-1 Convertible Preferred Stock, of which
none, are issued and outstanding.
(iii) A total of 5,000,000 shares of Series
Convertible Preferred Stock, par value $.001 per share, none of which are issued
and outstanding.
(b) COMMON STOCK. A total of 20,000,000 shares of
Common Stock, par value $.01 per share, of which 7,665,000 shares are issued and
outstanding.
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(c) OPTIONS, WARRANTS, ETC. There are no outstanding
options, warrants or other rights or securities which constitute or which can be
exercised for or convertible into shares of Purchaser's stock, and Purchaser has
not entered into any agreement or made any commitment to complete any such
transaction other than those relating to warrants to be issued in connection
with any debt financing to be used to purchase the Assets hereunder. The
Purchaser's capitalization as of the Closing is as set forth on the
capitalization table attached hereto as Schedule 4.8.
(d) CAPITAL CONTRIBUTION. The amount of $1,067,183
has been paid as capital to Purchaser for the Series A-1 Convertible Preferred
Stock referred to in subsection (a)(i) of this Section 4.8.
4.9 VALID ISSUANCE. The Shares upon issuance will be duly and
validly issued, fully paid and non-assessable, free of any preemptive rights or
rights of first refusal. These shares of Common Stock issuable upon conversion
of the Shares will be duly and validly issued, fully paid and nonassessable and
free of preemptive rights or rights of first refusal.
4.10 CERTAIN SOFTWARE. Purchaser agrees and acknowledges that
the Assets do not include, and nothing in this Agreement or otherwise grants or
transfers any rights of any nature whatsoever to Purchaser in, any copyrightable
works or original authorship (including but not limited to computer programs,
technical specifications, documentation, manuals, business plans and product
literature), ideas, know-how, processes, compilations of information, or other
intellectual property relating to Advance for JAVA.
5. COVENANTS OF SELLER. In the event this Agreement is executed prior
to the Closing, the following covenants shall apply:
5.1 AFFIRMATIVE COVENANTS AS TO THE BUSINESS. On and after the
date of this Agreement and until the Closing Date or the date, if any, on which
this Agreement is earlier terminated and abandoned pursuant to Section 7 hereof
(the "Termination Date"), Seller shall:
(a) conduct its operations according to its ordinary
and usual course of business consistent with past practice; and
(b) use its best efforts to preserve intact its
business organization and goodwill, to keep available the services of its
officers and directors, and to maintain satisfactory relationships with
suppliers, distributors, licensors, licensees, customers, employees and others
having business relationships with it.
5.2 NEGATIVE COVENANTS AS TO THE BUSINESS. Without limiting the
generality of the foregoing, and except for actions to be taken in connection
with any of the transactions contemplated by this Agreement, and except for the
exercise of any outstanding stock options of Seller, without the prior written
consent of Purchaser, Seller shall not, on or after the date of this Agreement
and until the earlier of the Closing Date or the Termination Date:
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(a) declare or pay any cash dividends on its
outstanding shares of capital stock;
(b) merge with, consolidate with, sell its assets to
or acquire substantially all the assets or capital stock of, any other
corporation or Person, or enter into any other transaction not in the ordinary
and usual course of its business;
(c) incur any indebtedness for borrowed money or
guarantee any such indebtedness or issue or sell any debt securities or
guarantee any debt securities of others, except that Seller may incur
indebtedness consistent with prior practice;
(d) make any direct or indirect redemption, purchase
or other acquisition of any of its capital stock;
(e) make any capital expenditures in excess of
$5,000;
(f) create or amend any pension or profit sharing
plan, bonus, deferred compensation, death benefit, or retirement plan, or any
other fringe benefit plan or program;
(g) amend its articles of incorporation or by-laws,
as amended to the date of this Agreement;
(h) issue any shares of its capital stock, effect any
stock split or otherwise change its capitalization as it exists on the date of
this Agreement;
(i) grant, confer or award any options, warrants,
conversion rights or other rights, not existing on the date of this Agreement,
to acquire any shares of its capital stock;
(j) enter into any agreement or make any undertaking
which could be violated, or create obligations which could be accelerated, as a
result of changes or developments or the absence of changes or developments in,
the business, assets, earnings, operations or condition, financial or otherwise,
of any other party hereto;
(k) make any material changes in any of its
respective management employment arrangements; or
(l) enter into any commitments involving payments by
or to Seller in excess of $5,000;
5.3 ACCESS TO INFORMATION AND CUSTOMERS. Seller shall (i)
afford to Purchaser and to its officers, employees, accountants, counsel and
other authorized representatives reasonable access, throughout the period prior
to the earlier of the Closing Date or the Termination Date, to its properties,
books and records; (ii) use its best efforts to cause its representatives to
furnish to Purchaser and to its authorized representatives such additional
financial and operating data and other information as to its business and
properties as Purchaser
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or its duly authorized representatives may from time to time reasonably request;
and (iii) afford Purchaser and its representatives reasonable access, throughout
the period prior to the earlier of the Closing Date or the Termination Date, to
its present and potential customers, and Purchaser and its authorized
representatives shall have the right to contact such customers and conduct such
due diligence investigation relating to customer relations as Purchaser deems
reasonably necessary or appropriate.
5.4 ACQUISITION PROPOSALS. Seller shall not, directly or
indirectly, through any officer, director, agent, representative (including,
without limitation, investment bankers, attorneys and accountants) or otherwise,
(i) solicit, initiate or encourage submission of inquiries, proposals or offers
from any Person, corporation, partnership or other entity or group other than
Purchaser (a "Third Party"), relating to any acquisition or purchase of all or a
portion of the assets of, or any equity interest in, Seller; or (ii) participate
in any discussions or negotiations regarding, or furnish to any Third Party any
information with respect to, or otherwise cooperate in any way with, or assist
or participate in, facilitate or encourage, any effort or attempt by any Third
Party to do or seek any of the foregoing. Seller shall promptly notify Purchaser
if any such proposal or offer, or any inquiry or contact with any Third Party
with respect thereto, is made, and shall in any such notice set forth in
reasonable detail the identity of the Third Party and the terms and conditions
of such inquiry, proposal or offer.
5.5 PUBLIC ANNOUNCEMENTS. On or after the date of this
Agreement and until the earlier of the Closing Date or the Termination Date,
other than as required to obtain any document or agreement required under
Section 6.1.6 of this Agreement, Seller shall not furnish any written
communication to its customers, creditors or to the public generally if the
subject matter thereof relates to the transactions contemplated by this
Agreement without the prior approval of Purchaser as to the content thereof;
provided, however, that the foregoing shall not be deemed to prohibit any
disclosure required by any applicable law or by any governmental authority
having jurisdiction over such matters.
5.6 NOTIFICATION OF CERTAIN MATTERS. Seller shall give prompt
notice to Purchaser and Purchaser shall give prompt notice to Seller, of (i) the
occurrence, or failure to occur, of any event which occurrence of failure would
be likely to cause any representation or warranty of Seller contained in this
Agreement to be untrue or inaccurate in the Closing Date; and (ii) any material
failure of Seller, or of any officer, director, employee or agent of Seller, to
comply with or satisfy any covenant, condition or agreement to be complied with
or satisfied by it under this Agreement.
5.7 BEST EFFORTS. Seller agrees to use its best efforts to
take, or cause to be taken, all actions, and to do, or cause to be done, all
things reasonably necessary, proper or advisable to consummate and make
effective the transactions contemplated by this Agreement, including, without
limitation, obtaining all authorizations, consents, waivers and approvals as may
be required.
5.8 EXECUTION OF ADDITIONAL DOCUMENTS. Seller will at any
time, and from time to time after the Closing Date, upon request of Purchaser,
execute, acknowledge and deliver
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all such further deeds, assignments, transfers, conveyances, powers of attorney
and assurances, and take all such further action, as may be required to carry
out the intent of this Agreement, and to transfer and vest title to any Asset
being transferred hereunder, and to protect the right, title and interest in and
enjoyment of all of the Assets sold, granted, assigned, transferred, delivered
and conveyed pursuant to this Agreement; provided, however, that this Agreement
shall be effective regardless of whether any such additional documents are
executed.
6. CONDITIONS OF CLOSING.
6.1 PURCHASER'S CONDITIONS OF CLOSING. The obligation of
Purchaser to purchase and pay for the Assets and to assume the liabilities and
obligations set forth herein shall be subject to and conditioned upon the
satisfaction at the Closing of each of the following conditions:
6.1.1 All representations and warranties of Seller
contained in this Agreement and the Schedules hereto shall be true and correct
at and as of the Closing Date and Seller shall have performed all agreements and
covenants and satisfied all conditions on its part to be performed or satisfied
by the Closing Date pursuant to the terms of this Agreement, and Purchaser shall
have received a certificate of an authorized officer of Seller dated the Closing
Date to such effect;
6.1.2 There shall have been no material adverse
change since the date of the Unaudited Balance Sheet in the financial condition,
business or affairs of Seller, and Seller shall not have suffered any material
loss (whether or not insured) by reason of physical damage caused by fire,
earthquake, accident or other calamity which substantially affects the value of
its assets, properties or business, and Purchaser shall have received a
certificate of the principal financial officer of Seller dated the Closing Date
to such effect;
6.1.3 Seller shall have delivered to Purchaser a
Certificate of the Secretary of State (or other authorized public official) of
Seller's jurisdiction of incorporation certifying as of a date reasonably close
to the Closing Date that Seller has filed all required reports, paid all
required fees and taxes, and is, as of such date, in good standing and
authorized to transact business as a domestic corporation;
6.1.4 Seller shall have executed and delivered the
Escrow Agreement to Purchaser and the Escrow Agent;
6.1.5 Purchaser shall have received from Bodman,
Longley & Dahling, LLP, counsel for Seller, an opinion, dated the Closing Date,
in form and substance satisfactory to Purchaser and its counsel in the form
attached hereto as Exhibit C;
6.1.6 Seller shall have obtained all authorizations,
consents, waivers and approvals as may be required in connection with the
assignment of those contracts, agreements, licenses, leases, sales orders,
purchase orders and other commitments to be assigned to Purchaser pursuant to
this Agreement;
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6.1.7 Seller shall have executed and delivered the
Bill of Sale, and Assignment Agreement to Purchaser in the form attached hereto
as Exhibit D;
6.1.8 Suarez shall have executed for the benefit of
Purchaser a Non-Competition Agreement in the form attached hereto as Exhibit E;
6.1.9. Purchaser shall have determined to its
reasonable satisfaction that the amount required to satisfy the Obligations does
not exceed $1,800,000;
6.1.10 Suarez and Purchaser shall have executed,
contingent on Closing, a lease for the premises at 538 N. Division, Ann Arbor,
Michigan in the form attached hereto as Exhibit F;
6.1.11 Purchaser shall have obtained such employment
agreements which it deems appropriate for current key employees of Seller other
than Suarez;
6.1.12 Seller shall have delivered to Purchaser a
certificate of its corporate secretary certifying:
(a) Resolution of its stockholders and Board
of Directors authorizing execution of this Agreement and the execution,
performance and delivery of all agreements, documents and transactions
contemplated hereby; and
(b) The incumbency of its officers executing
this Agreement and all agreements and documents contemplated hereby;
6.1.13 Neither any investigation of Seller by
Purchaser, nor the Schedules attached hereto or any supplement thereto nor any
other document delivered to Purchaser as contemplated by this Agreement, shall
have revealed any facts or circumstances which, in the sole and exclusive
judgment of Purchaser and regardless of the cause thereof, reflect in an adverse
way on Seller or its financial condition, assets, liabilities (absolute,
accrued, contingent or otherwise), reserves, business, operations or prospects.
6.1.14 The approval and all consents from third
parties and governmental agencies required to consummate the transactions
contemplated hereby shall have been obtained;
6.1.15 No suit, action, investigation, inquiry or
other proceeding by any governmental body or other Person or legal or
administrative proceeding shall have been instituted or threatened which
questions the validity or legality of the transactions contemplated hereby; and
6.1.16 As of the Closing, there shall be no effective
injunction, writ, preliminary restraining order or any order of any nature
issued by a court of competent jurisdiction directing that the transactions
provided for herein or any of them not be
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consummated as so provided or imposing any conditions on the consummation of the
transactions contemplated hereby, which is unduly burdensome on Purchaser.
6.2 SELLER'S CONDITIONS OF CLOSING. The obligation of Seller
to sell, grant, convey, assign, transfer and deliver the assets shall be subject
to and conditioned upon the satisfaction at the Closing of each of the following
conditions:
6.2.1 All representations and warranties of Purchaser
contained in this Agreement shall be true and correct at and as of the Closing
Date and Purchaser shall have performed all agreements and covenants and
satisfied all conditions on its part to be performed or satisfied by the Closing
Date pursuant to the terms of this Agreement, and Seller shall have received a
certificate of Purchaser dated the Closing Date to such effect.
6.2.2 Purchaser shall have effected payment of the
Purchase Price (less the Escrow Fund) in accordance with the prior written
instructions of Seller, including the delivery of the certificates representing
the shares of Series A-1 Convertible Preferred Stock ;
6.2.3 Purchaser shall have executed the Escrow
Agreement and delivered to the Escrow Agent the funds and Shares subject
thereto;
6.2.4 Purchaser shall have executed and delivered the
Bill of Sale, Assignment and Assumption Agreement to Seller;
6.2.5 Purchaser shall have delivered to Seller a
certificate of its corporate Secretary certifying:
(a) Resolutions of its Board of Directors
authorizing execution of this Agreement and the execution, performance and
delivery of all agreements, documents and transactions contemplated hereby; and
(b) The incumbency of its officers executing
this Agreement and all agreements and documents contemplated hereby.
6.2.6 The approval and all consents from third
parties and governmental agencies required to consummate the transactions
contemplated hereby shall have been obtained;
6.2.7 No suit, action, investigation, inquiry or
other proceeding by any governmental body or other Person or legal or
administrative proceeding shall have been instituted or threatened which
questions the validity or legality of the transactions contemplated hereby; and
6.2.8 As of the Closing, there shall be no effective
injunction, writ, preliminary restraining order or any order of any nature
issued by a court of competent jurisdiction directing that the transactions
provided for herein or any of them not be
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consummated as so provided or imposing any conditions on the consummation of the
transactions contemplated hereby, which is unduly burdensome on Seller.
6.2.9 Purchaser shall have executed and delivered to
Suarez, a license in the form attached hereto as Exhibit G, whereby Purchaser
will grant to Suarez, his affiliates and related corporations (collectively, the
"Licensee") a perpetual, worldwide license to use the pending patent commonly
referred to as "JADE" to incorporate such technology into Licensee's products,
to further develop such technology, to sublicense such technology to the extent
that it is incorporated into Licensee's products, and to assign and fully
transfer such license to any third party upon the sale of substantially all of
the assets of Licensee, or the stock sale or merger of Licensee.
7. TERMINATION AND ABANDONMENT.
7.1 REASONS FOR TERMINATION. Anything herein or elsewhere to
the contrary notwithstanding, this Agreement may be terminated and abandoned at
any time after the date of this Agreement but not later than the Closing:
7.1.1 by the mutual consent of Seller and Purchaser;
or
7.1.2 by Purchaser at any time after April 30, 1998
if, by that date, the conditions set forth in Section 6.1 of this Agreement
shall not have been fulfilled or waived; or
7.1.3 by Seller at any time after April 30, 1998 if,
by that date, the conditions set forth in Section 6.2 of this Agreement shall
not have been fulfilled or waived; or
7.1.4 by Purchaser at any time if any investigation
of Seller by Purchaser, or any Schedule hereto or any other document delivered
to Purchaser as contemplated by this Agreement, shall have revealed any facts or
circumstances which, in the sole and exclusive judgment of Purchaser and
regardless of the cause thereof, reflect in an adverse way on Seller or its
financial condition, assets, liabilities (absolute, contingent or otherwise),
reserves, business, operations or prospects; or
7.1.5 by Purchaser or by Seller at any time if there
has been a material breach of any representation or warranty made by the other
party herein or in any certificate or other document delivered pursuant hereto
or if there has been any failure by the other party to perform in all material
respects all obligations or to comply with all covenants on its part to be
performed hereunder; or
7.2 PROCEDURE UPON AND EFFECT OF TERMINATION. In the event of
any termination and abandonment pursuant to Section 7.1 of this Agreement,
written notice thereof shall forthwith be given to the other party and the
transactions contemplated by this Agreement shall thereupon be terminated and
abandoned, without further action by Purchaser or Seller , and there shall be no
liability on the part of Seller or Purchaser or their respective officers,
directors or shareholders, except for the
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provisions of Section 3.9 of this Agreement or except for the material breach of
any representation, warranty or covenant contained herein that is within the
control of the party in breach.
8. INDEMNIFICATION.
8.1 INDEMNIFICATION BY SELLER, SUAREZ, ROYCE AND SIMMS. Upon
the terms and subject to the conditions set forth in Section 8.3 hereof and this
Section 8.1, Seller, Suarez, Royce and Simms agree to indemnify and hold
Purchaser harmless against, and will reimburse Purchaser on demand for, any
payment, loss, cost, expense, or claim (including reasonable attorney's fees and
reasonable costs or expenses of investigation incurred in defending against such
payment, loss, costs or expense or claim therefor) made or incurred by or
asserted against Purchaser at any time after the Closing Date in respect of:
(a) any and all liabilities or obligations of Seller,
or claims against or imposed on Purchaser, of any nature (whether accrued,
absolute, contingent or otherwise and whether a contractual, tax or other type
of liability, obligation or claim) not assumed by Purchaser pursuant to this
Agreement; and
(b) any and all damage or deficiency resulting from
any omission, misrepresentation, breach of warranty , representation or
nonfulfillment of any term, provision, covenant or agreement on the part of
Seller, Suarez, Royce or Simms, as the case may be, contained in this Agreement,
or from any misrepresentation in, or omission from, any certificate or other
instrument furnished or to be furnished to Purchaser pursuant to this Agreement.
8.2 INDEMNIFICATION BY PURCHASER. Upon the terms and subject
to the conditions set forth in Section 8.3 hereof and this Section 8.2,
Purchaser agrees to indemnify and hold Seller harmless against, and will
reimburse Seller on demand for, any payment, loss, cost or expense (including
reasonable attorney's fees and reasonable costs of investigation incurred in
defending against such payment, loss, cost or expense or claim therefor) made or
incurred by or asserted against Seller at any time after the Closing Date in
respect of any omission, misrepresentation, breach of representation or
warranty, or nonfulfillment of any term, provision, covenant or agreement on the
part of Purchaser contained in this Agreement, or from any misrepresentation in,
or omission from, any certificate or other instrument furnished or to be
furnished to Seller pursuant to this Agreement.
8.3 CONDITIONS OF INDEMNIFICATION. With respect to any actual
or potential claim, any written demand, the commencement of any action, or the
occurrence of any other event which involves any matter or related series of
matters (a "Claim") against which a party hereto is indemnified (the
"Indemnified Party") by the other party (the "Indemnifying Party") under Section
8.1 or 8.2 hereof:
8.3.1 Promptly after the Indemnified Party first
receives written documents pertaining to the Claim, or if such Claim does not
involve a third party Claim (a "Third Party Claim"), promptly after the
Indemnified Party first has actual knowledge of such Claim, the Indemnified
Party shall give notice to the Indemnifying Party of such Claim in
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reasonable detail and stating the amount involved, if known, together with
copies of any such written documents.
8.3.2 The Indemnifying Party shall have no obligation
to indemnify the Indemnified Party with respect to any Claim if (i) the
Indemnified Party fails to give the notice with respect thereto in accordance
with Section 8.3.1 hereof, or (ii) the notice with respect thereto is not given
on or before the third anniversary of the Closing Date.
8.3.3 If the Claim involves a Third Party Claim, then
the Indemnifying Party shall have the right, at its sole cost, expense and
ultimate liability regardless of the outcome, and through counsel of its choice
(which counsel shall be reasonably satisfactory to the Indemnified Party), to
litigate, defend, settle or otherwise attempt to resolve such Third Party Claim;
provided, however, that if in the Indemnified Party's reasonable judgment a
conflict of interest may exist between the Indemnified Party and the
Indemnifying Party with respect to such Third Party Claim, the Indemnified Party
shall be entitled to select counsel of its own choosing, reasonably satisfactory
to the Indemnifying Party, in which event the Indemnifying Party may elect, at
any time and at the Indemnified Party's sole cost, expense and ultimate
liability, regardless of the outcome, and through counsel of its choice, to
litigate, defend, settle or otherwise attempt to resolve such Third Party Claim.
If the Indemnified Party so elects (for reasons other than the Indemnifying
Party's failure or refusal to provide a defense to such Third Party Claim), the
then Indemnifying Party shall have no obligation to indemnify the Indemnified
Party with respect to such Third Party Claim, but such disposition will be
without prejudice to any other right the Indemnified Party may have to
indemnification under Section 8.1 or 8.2 hereof, regardless of the outcome of
such Third Party Claim. If the Indemnifying Party fails or refuses to provide a
defense to any Third Party Claim, then the Indemnified Party shall have the
right to undertake the defense, compromise or settlement of such Third Party
Claim, through counsel of its choice, on behalf of and for the account and at
the risk of the Indemnifying Party, and the Indemnifying Party shall be
obligated to pay the costs, expenses and attorney's fees incurred by the
Indemnified Party in connection with such Third Party Claim. In any event,
Purchaser and Seller shall fully cooperate with any such litigation, defense,
settlement or other attempted resolution.
8.3.4 Notwithstanding anything to the contrary
herein, no payment with respect to any Claim or Claims shall be made to the
extent such Claim or Claims do not exceed, singularly or in the aggregate, Fifty
Thousand Dollars ($50,000); provided, however, such limitation with respect to
Section 8.1 shall not apply to any Third Party Claim which Brophy & Kielb or any
successor thereof asserts. At such time that any Claim or Claims exceed,
singularly or in the aggregate, Fifty Thousand Dollars ($50,000), then the
obligation of an Indemnifying Party hereunder shall arise in connection with any
such excess.
8.3.5 In no event will the total of ail Claims for
which indemnification is sought under Section 8.1 or Section 8.2 exceed One
Million Four Hundred Thousand Dollars ($1,400,000) (the "Cap"); provided,
however, such limitation with respect to Section 8.1 shall not apply to any
Third Party Claim which Brophy & Kielb or any successor thereof asserts. In no
event shall Purchaser's right to obtain indemnification, or any other direct or
indirect payment
25
<PAGE>
from Suarez, Royce and Simms under Section 8.1 for any Claim be in excess of the
percentages of such Claim set forth on Schedule 8.3.5 hereof. Notwithstanding
anything contained in the Agreement to the contrary, Purchaser's right to obtain
indemnification from Suarez, Royce and Simms for Claims under Section 8.1 is
limited as follows: (a) as to Claims against Suarez, 76.92% of any one Claim and
76.92% of the Cap for the aggregate of all Claims during the entire
indemnification period and (b) as to Claims against each of Simms or Royce
11.54% of any one Claim and 11.54% of the Cap for the aggregate of all Claims
during the entire indemnification.
8.4 REMEDY OF PURCHASER. Whenever Purchaser is the Indemnified
Party, Purchaser shall have the right to obtain satisfaction of its indemnified
claim from the Escrow Fund in accordance with and subject to the terms of the
Escrow Agreement.
9. MISCELLANEOUS.
9.1 NOTICES. Any notice, consent, approval, request, demand or
other communication required or permitted hereunder must be in writing to be
effective and shall be deemed delivered and received (i) if personally delivered
including by a nationally recognized overnight delivery service such as FedEx,
or if delivered by telex or telecopy with electronic confirmation when actually
received by the party to whom sent, or (ii) if delivered by mail (whether
actually received or not), at the close of business on the third business day
next following the day when placed in the federal mail, postage prepaid,
certified or registered mail, return receipt requested, addressed as follows:
If to Purchaser: AppNet of Michigan, Inc.
AppNet Systems, Inc.
Suite 940
8000 Towers Crescent Drive
Vienna, Virginia 22182
Attn.: President
Fax:
-------------------
Copy to Mark J. Wishner
Michaels, Wishner & Bonner, PC
1140 Connecticut Avenue, NW
Washington, DC 20036
Fax: (202) 857-0634
E-Mail: [email protected]
If to Seller: Arbor Intelligent Systems, Inc.
c/o Ronald Suarez
506 North State Street
Ann Arbor, Michigan 48104
Fax: (734) 769-6351
E-Mail: [email protected]
26
<PAGE>
and
Arbor Intelligent Systems, Inc.
c/o Bob Simms
3590 Edgewood Park Drive
Commerce, Michigan 48382
Fax: (734) 996-4241
E-Mail: [email protected]
Copy to: Susan M. Kornfield
Bodman, Longley & Dahling, LLP
110 Miller
Suite 300
Ann Arbor, Michigan 48104
Fax: (734) 930-2494
E-Mail: [email protected]
(or to such other address as any party shall specify by written notice so
given).
9.2 INCIDENTAL ("PIGGYBACK") REGISTRATION RIGHTS. a) If the
Purchaser at any time (except with respect to the Purchaser's initial public
offering) proposes to register any of its Common Stock under the Act for sale to
the public (except with respect to registration statements on Forms S-4, S-8,
any forms replacing such forms, or any other form not available for registering
shares of Common Stock for sale to the public), each such time it will give
written notice to Seller or the holders of the Conversion Shares and Series A-1
Convertible Preferred Stock (the "Holders"), as the case may be, of its
intention so to do. Upon the written request of any Holder, given within 15 days
after receipt of any such notice, to register any of the Holder's Conversion
Shares (which request shall state the intended method of disposition thereof),
the Purchaser will use its best efforts to cause the Conversion Shares as to
which registration shall have been so requested to be included in the
registration statement proposed to be filed by the Purchaser, all to the extent
requisite to permit the sale or other disposition by the Holder (in accordance
with its written request) of such Conversion Shares. In the event that any
registration pursuant to this Section 9.2 shall be, in whole or in part, an
underwritten public offering of Common Stock, any request by a Holder pursuant
to this Section 9.2 to register Conversion Shares shall be subject to the
Holder's participation in such underwriting on the same terms and conditions as
the shares of Common Stock otherwise being sold through underwriters under such
registration. If, in connection with any registration under this Section 9.2 ,
the managing underwriters advise the Purchaser in writing that in their opinion
the number of shares requested to be included in such registration exceeds the
number which can be sold in an orderly manner in such offering within a price
range acceptable to the Purchaser, the Purchaser will include in such
registration (x) first, all shares the Purchaser proposes to register for which
consideration was paid in cash therefore, and (y) second, all other shares
requested to be included in such registration, pro rata among the holders of
such shares on the basis of the number of shares requested to be registered by
each such holder. Notwithstanding anything to the contrary contained in this
Section 9.2, in the event that there is a firm commitment underwritten offering
27
<PAGE>
of shares of the Purchaser pursuant to a registration covering any shares of
Common Stock and a Holder does not elect to sell all of that Holder's Conversion
Shares to the underwriters of the Purchaser's shares in connection with such
offering, such Holder shall refrain from selling any Conversion Shares not so
sold during the period of distribution of the Purchaser's shares by such
underwriters and the period in which the underwriting syndicate participates in
the aftermarket; PROVIDED, HOWEVER that such Holder shall, in any event, be
entitled to sell Conversion Shares commencing on the 180th day after the
effective date of such registration statement.
(b) All expenses incurred in complying with this
Section 9.2, including, without limitation, all registration and filing fees,
printing expenses, fees and disbursements of counsel and independent public
accountants for the Purchaser, fees of the National Association of Securities
Dealers, Inc., transfer taxes, fees of transfer agents and registrars, costs of
insurance and the fees and expenses of counsel for the Purchaser, but excluding
any Selling Expenses, are herein called "Registration Expenses". All
underwriting discounts and selling commissions applicable to the sale of shares
are herein called "Selling Expenses". The Purchaser will pay all Registration
Expenses in connection with each registration statement filed pursuant to
Section 9.2 hereof. In connection with each registration statement filed
pursuant to Section 9.2 hereof, each Holder will pay all Selling Expenses
directly related to that Holder's shares.
9.3 BINDING EFFECT; BENEFITS. This Agreement shall be binding
upon and shall inure to the benefit of the parties hereto and their respective
successors and assign. Notwithstanding anything contained in this Agreement to
the contrary, nothing in this Agreement, expressed or implied, is intended to
confer on any Person other than the parties hereto or their respective
successors and assigns any rights, remedies, obligations or liabilities under or
by reason of this Agreement.
9.4 ENTIRE AGREEMENT. This Agreement, together with the
Exhibits, Schedules and other documents contemplated hereby, constitute the
final written expression of all of the agreements between the parties, and is a
complete and exclusive statement of those terms. It supersedes all
understandings and negotiations concerning the matters specified herein. Any
representations, promises, warranties or statements made by any party that
differ in any way from the terms of this written Agreement, and the Exhibits,
Schedules and other documents contemplated hereby, shall be given no force or
effect. The parties specifically represent, each to the other, that there are no
additional or supplemental agreements between them related in any way to the
matters herein contained unless specifically included or referred to herein. No
addition to or modification of any provision of this Agreement shall be binding
upon any party unless made in writing and signed by all parties except that in
the event that Seller assigns the shares of Series A-1 Convertible Preferred
Stock to its stockholders any amendment of this Agreement shall be effective
when made in writing and signed by Purchaser and the holders of a majority of
the issued and outstanding Conversion Shares issued and issuable upon conversion
of the Series A-1 Convertible Preferred Stock issued to Purchaser hereunder.
9.5 GOVERNING LAW. THIS AGREEMENT, AND ALL QUESTIONS RELATING
TO ITS VALIDITY, INTERPRETATION, PERFORMANCE AND ENFORCEMENT (INCLUDING, WITHOUT
LIMITATION, PROVISIONS CONCERNING
28
<PAGE>
LIMITATIONS OF ACTION), SHALL BE GOVERNED BY AND CONSTRUED IN ACCORDANCE WITH
THE LAWS OF MICHIGAN (EXCLUSIVE OF THE CONFLICT OF LAW PROVISIONS THEREOF)
APPLICABLE TO AGREEMENTS MADE AND TO BE PERFORMED ENTIRELY WITHIN SUCH SATE.
9.6 SURVIVAL. All of the terms, conditions, covenants,
agreements warranties, and representations contained in this Agreement shall
survive, in accordance with their terms, delivery by Purchaser of the
consideration to be given by it hereunder and delivery by Seller of the
consideration to be given by them hereunder, and shall survive the execution
hereof and the Closing hereunder.
9.7 COUNTERPARTS. This Agreement may be executed in any number
of counterparts, each of which shall be deemed an original but all of which
shall constitute one and the same instrument; but in making proof of this
Agreement, it shall not be necessary to produce or account for more than one
such counterpart. It is not necessary that each party hereto execute the same
counterpart, so long as identical counterparts are executed by all parties.
9.8 HEADINGS. Headings of the Sections of this Agreement are
for the convenience of the parties only, and shall be given no substantive or
interpretive effect whatsoever.
9.9 WAIVERS. Any party hereto may, by written notice to the
other party hereto, (i) extend the time for the performance of any of the
obligations or other actions of the other party under this Agreement, (ii) waive
any inaccuracies in the representations or warranties of the other party
contained in this Agreement or in any document delivered pursuant to this
Agreement; (iii) waive compliance with any of the conditions or covenants of the
other party contained in this Agreement; or (iv) waive performance of any of the
obligations of the other party under this Agreement; provided, however, the
waiver of any condition to Closing by Purchaser or Seller shall not affect
Purchaser's or Seller's right to obtain indemnification hereunder. Except as
provided in the preceding sentence, no action taken pursuant to this Agreement,
including without limitation any investigation by or on behalf of any party,
shall be deemed to constitute a waiver by the party taking such action of
compliance with any presentations, warranties, covenants or agreements contained
in this Agreement. The waiver by any party hereto of a breach of any provisions
hereunder shall not operate or be construed as a waiver of any prior or
subsequent breach of the same or any other provision hereunder.
9.10 MERGER OF DOCUMENTS. This Agreement and all agreements
and documents contemplated hereby constitute one agreement and are
interdependent upon each other in all respects.
9.11 INCORPORATION OF EXHIBITS AND SCHEDULES. All Exhibits and
Schedules attached hereto are by this reference incorporated herein and made a
part hereof for all purposes as if fully set forth herein.
29
<PAGE>
9.12 SEVERABILITY. If for any reason whatsoever, any one or
more of the provisions of this Agreement shall be held or deemed to be illegal,
inoperative, unenforceable or invalid as applied to any particular case or in
all cases, such circumstances shall not have the effect of rendering such
provision illegal, inoperative, unenforceable or invalid in any other case or of
rendering any of the other provisions of this Agreement illegal, inoperative,
unenforceable or invalid. Furthermore, in lieu of each illegal, invalid,
unenforceable or inoperative provision, there shall be added automatically, as
part of this Agreement, a provision similar in terms of such illegal, invalid,
unenforceable or inoperative provision as may be possible and as shall be legal,
valid, enforceable and operative.
9.13 ASSIGNABILITY. Except as to the Purchaser's right to
assign its rights hereunder to a wholly-owned subsidiary (other than its duties
and obligations as to the Series A Convertible Preferred Stock), neither this
Agreement nor any of the parties' rights hereunder shall be assignable by any
party hereto without the prior written consent of the other parties hereto;
provided, however, that Purchaser's, or its successors or assigns, rights
hereunder may be assigned or otherwise transferred, in whole or in part, without
Seller's consent (i) to any successor by merger or consolidation, (ii) to any
bank or other financial institution, or to any individual, partnership,
corporation or other entity, providing any financing to Purchaser, its
successors or assigns, or (iii) to any individual, partnership, corporation or
other entity deriving title from Purchaser or its successors or assigns to all
or substantially all of the Assets as constituted on the date of any such
transfer. Any assignment of any of the Shares issued to Purchaser shall be made
subject to all rights and obligations pertaining to such Shares in accordance
with the provisions of the Basic Agreements.
9.14 REFERENCES. The use of the words "hereof," "herein,"
"hereunder," and words of similar import shall refer to this entire Agreement,
and not to any particular article, section, subsection, clause, or paragraph of
this Agreement, unless the context clearly indicates otherwise.
IN WITNESS WHEREOF, the parties have executed this Agreement and
caused the same to be duly delivered on their behalf on the day and year
hereinabove first set forth.
SELLER:
ARBOR INTELLIGENT SYSTEMS, INC.
By: /s/ Robert Simms
--------------------------------
Robert Simms
30
<PAGE>
PURCHASER:
APPNET SYSTEMS, INC.
By: /s/ Ken S. Bajaj
--------------------------------
Ken S. Bajaj
APPNET OF MICHIGAN, INC.
By: /s/ Ken S. Bajaj
--------------------------------
Ken S. Bajaj
/s/ Ronald Suarez
-----------------------------------
Ronald Suarez
/s/ Robert Simms
-----------------------------------
Robert Simms
/s/ Robert Royce
-----------------------------------
Robert Royce
31
<PAGE>
Exhibit 10.3
- --------------------------------------------------------------------------------
MERGER AGREEMENT
by and among
APPNET SYSTEMS, INC.,
(Buyer)
SSC ACQUISITION SUB #1, INC.,
(Newco)
SOFTWARE SERVICES CORPORATION,
(SSC)
and
THE SHAREHOLDERS OF SOFTWARE SERVICES CORPORATION
(collectively, Sellers)
Dated as of July 31, 1998
- --------------------------------------------------------------------------------
<PAGE>
TABLE OF CONTENTS
Page
1. DEFINITIONS...............................................................1
2. THE MERGER................................................................7
(a) The Merger.........................................................7
(b) Effective Time of the Merger.......................................8
(c) Certificate of Incorporation.......................................8
(d) Bylaws.............................................................8
(e) Directors and Officers of Surviving Corporation....................8
(f) Effect of the Merger...............................................8
(g) Conversion of Shares...............................................9
(h) Purchase Price.....................................................9
(i) Net Worth Adjustment..............................................10
(j) Dissenting Shares.................................................10
(k) The Closing.......................................................10
(l) Deliveries at the Closing.........................................10
(m) Shareholders' Representative......................................11
(n) Escrow Arrangements...............................................12
3. REPRESENTATIONS AND WARRANTIES CONCERNING THE TRANSACTION...............12
(a) Representations and Warranties of each Seller.....................12
(i) Authorization of Transaction................................12
(ii) Noncontravention...........................................13
(iii) Broker's Fees.............................................13
(iv) Investment.................................................13
(v) SSC Shares..................................................13
(vi) Disclosure.................................................14
(b) Representations and Warranties of the Buyer and Newco.............14
(i) Organization of the Buyer and Newco.........................14
(ii) Authorization of Transaction...............................14
(iii) Noncontravention..........................................14
(iv) Brokers' Fees..............................................15
(v) Investment..................................................15
(vi) Buyer's and Newco's Capitalization.........................15
(vii) Financial Statements......................................15
(viii) Undisclosed Liabilities..................................16
(ix) Tangible Assets............................................16
(x) Litigation..................................................16
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(xi) Guaranties................................................16
(xii) Environment, Health, and Safety...........................17
(xiii) Legal Compliance.........................................18
(xiv) Disclosure................................................19
4. REPRESENTATIONS AND WARRANTIES CONCERNING SELLING CORPORATION............19
(a) Organization, Qualification, and Corporate Power..................20
(b) Capitalization....................................................20
(c) Noncontravention..................................................20
(d) Subsidiaries......................................................21
(e) Financial Statements..............................................21
(f) Events Subsequent to the Most Recent Fiscal Year End..............21
(g) Undisclosed Liabilities...........................................24
(h) Tax Matters.......................................................24
(i) Tangible Assets...................................................26
(j) Owned Real Property...............................................26
(k) Intellectual Property.............................................26
(l) Real Property Leases..............................................27
(m) Contracts.........................................................28
(n) Notes and Accounts Receivable.....................................29
(o) Powers of Attorney................................................29
(p) Insurance.........................................................29
(q) Litigation........................................................30
(r) Employees.........................................................30
(s) Employee Benefits.................................................31
(t) Guaranties........................................................32
(u) Environment, Health, and Safety...................................32
(v) Legal Compliance..................................................33
(w) Certain Business Relationships with SSC...........................34
(x) Brokers' Fees.....................................................34
(y) Disclosure........................................................35
5. PRE-CLOSING COVENANTS....................................................35
(a) General...........................................................35
(b) Notices and Consents..............................................35
(c) Operation of Business.............................................35
(d) Preservation of Business..........................................35
(e) Access............................................................35
(f) Notice of Developments; Delivery of Disclosure Schedules..........36
(g) Exclusivity.......................................................36
(h) Cancellation of Options, Bonus Programs and Phantom
Stock Plans.....................................................36
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<PAGE>
6. ADDITIONAL COVENANTS.....................................................37
(a) General...........................................................37
(b) Litigation Support................................................37
(c) Transition........................................................37
(d) Confidentiality...................................................38
(e) Termination of Bank Facilities; Release of Guaranties.............38
(f) Monitoring Information............................................38
(g) Landlords' Consents...............................................38
(h) Additional Tax Matters............................................39
(i) Covenant Not to Compete...........................................39
(j) Right to Attend Board Meetings....................................39
(k) Reorganization Intent.............................................40
(l) Initial Public Offering...........................................40
(m) Sale of Buyer.....................................................40
7. CONDITIONS TO OBLIGATIONS TO CLOSE.......................................41
(a) Conditions to Obligation of the Buyer.............................41
(b) Conditions to Obligations of the Sellers..........................44
8. REMEDIES FOR BREACHES OF THIS AGREEMENT..................................46
(a) Survival..........................................................46
(b) Indemnification Provisions for Benefit of the Buyer...............46
(c) Indemnification Provisions for Benefit of the Sellers.............48
(d) Matters Involving Third Parties...................................48
(e) Exclusive Remedy..................................................49
(f) Payment; General Right of Offset..................................49
(g) Other Indemnification Provisions..................................49
(h) Arbitration with Respect to Certain Indemnification Matters.......49
9. TERMINATION..............................................................50
(a) Termination of Agreement..........................................50
(b) Effect of Termination.............................................51
10. MISCELLANEOUS...........................................................51
(a) [Reserved]........................................................51
(b) Press Releases and Announcements..................................51
(c) No Third-Party Beneficiaries......................................51
(d) Entire Agreement..................................................51
(e) Succession and Assignment.........................................51
(f) Facsimile/Counterparts............................................52
(g) Descriptive Headings..............................................52
(h) Notices...........................................................52
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(i) Governing Law.....................................................53
(j) Amendments and Waivers............................................54
(k) Severability......................................................54
(l) Expenses..........................................................54
(m) Construction......................................................54
(n) Incorporation of Exhibits, Annexes, and Schedules.................54
(o) Specific Performance..............................................55
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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 Employment Agreement with Reinelt
Exhibit F Joinder to the Registration Agreement
Exhibit G Form of Opinion of Sellers' Legal Counsel
Exhibit H Form of Opinion of Buyer's Legal Counsel
Exhibit I Form of Option Cancellation Agreement
ANNEXES AND TABLES
Annex I List of SSC Shareholders
Annex II Buyer's Capitalization Schedule and Charter
Annex III Exceptions to Representations and Warranties of Sellers
Annex IV Exceptions to Representations and Warranties of Buyer
Annex V Persons Bound by Non-Competition Covenant
Annex VI List of Optionholders
SCHEDULES
Allocation Schedule
Sellers' and SSC's Disclosure Schedule
Buyer's Disclosure Schedule
Adjustments to EBIT Schedule
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MERGER AGREEMENT
This MERGER AGREEMENT ("Agreement") is entered into as of the 31st
day of July, 1998, by and among APPNET SYSTEMS, INC., a Delaware corporation
(the "Buyer"), SSC ACQUISITION SUB #1, a Delaware corporation and wholly owned
subsidiary of Buyer ("Newco"), SOFTWARE SERVICES CORPORATION, a Michigan
corporation ("SSC"), and THE SHAREHOLDERS OF SSC 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."
SSC and Newco are sometimes referred to herein as the "Constituent
Corporations." If the context so requires, references herein to SSC 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 SSC.
This Agreement contemplates a transaction in which SSC will merge
with and into Newco, with Newco being the surviving corporation, and the shares
of capital stock of SSC 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(i) below.
"Adjusted EBIT of SSC" shall mean SSC's earnings before gain
on sale of investment in an Affiliate and before interest and taxes in
accordance with GAAP, as adjusted for certain non-recurring costs listed on the
Adjustments to EBIT Schedule 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 forms the reasonable basis
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 Preferred Stock" means the Buyer's Class B Preferred
Stock, par value $.01 per share, liquidation value $1,000 per share.
"Buyer's Shares" means collectively the shares of Buyer Common
Stock and Buyer Preferred 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.
"Closing" has the meaning set forth in Section 2(k) below.
"Closing Date" has the meaning set forth in Section 2(k)
below.
"Closing Determination" has the meaning set forth in Section
2(i) below.
"Code" means the Internal Revenue Code of 1986, as amended.
"Confidential Information" means all confidential information
and trade secrets of SSC 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 which (i) was or becomes generally
available to the public other than as a result of a its disclosure by the
receiving party, (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 the source of such information was not bound by a confidentiality
agreement with Buyer or SSC 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.
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"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 whereby
SSC provides computer support or project services and/or related consulting
services to a third party during the 1998 fiscal year of SSC.
"Deferred Intercompany Transaction" has the meaning set forth
in Treas. Reg. ss.1.1502-13.
"DGCL" has the meaning set forth in Section 2(a) below.
"Disclosure Schedule" has the meaning set forth in Section 4
below.
"Dissenting Shares" has the meaning set forth in Section 2(j)
below.
"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).
"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 Key Bank, N.A..
"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(n).
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"Escrow Sum" has the meaning specified in Section 2(n).
"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.
"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 the
Company for borrowed money or other interest-bearing indebtedness; (ii) capital
lease obligations of the Company; (iii) obligations of the Company to pay the
deferred purchase or acquisition price for goods or services, 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 the
Company or secured by an Encumbrance on the Company's property; (v) indebtedness
of the Company under extended credit terms of more than 60 days from vendors
provided to the Company; and (vi) transaction costs of the Company and/or
Sellers associated with this Agreement or the transactions contemplated hereby
that are paid by the Company, including without limitation, the following: (a)
the unpaid balance of the obligation of SSC to Robert Sims under the Termination
of Employment Agreement dated April 29, 1997, (b) the unpaid balance of the
obligation of SSC to KeyCorp Leasing, Ltd. under Lease # 10452 and Lease #
10453, both dated March 21, 1996, and (c) the obligation to DeBellas & Co., Inc.
with respect to the transactions contemplated by this Agreement but excluding
the Key Bank, N.A. revolving credit line.
"GAAP" means generally accepted accounting principles,
consistently applied, as in effect from time to time.
"Gross Revenues" means the gross revenue of SSC as normally
calculated on the Financial Statements as calculated in accordance with GAAP.
"Indemnified Party" has the meaning set forth in Section 8(d)
below. "Indemnifying Party" has the meaning set forth in Section 8(d) below.
"Initial Public Offering" shall mean the first underwritten
public offering of Buyer's 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
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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).
"Key Employees" has the meaning set forth in Section
7(a)(viii) below.
"Knowledge" means, with respect to each Seller, information
which is actually 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 SSC, actual knowledge 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.
"Material" has the meaning set forth in Section 4 below.
"MBCL" 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.
"Minimum Net Worth" has the meaning set forth in Section 2(i)
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 SSC" means the total assets of SSC less the
total liabilities of SSC (including the Key Bank, N.A. revolving credit line),
determined in accordance with GAAP, consistently applied and on the accrual
method of accounting. In calculating the total assets of SSC, no material
increase in the intangible assets of SSC (which intangible assets do not include
accounts receivable or work-in-process) since December 31, 1997 shall be
included in calculating the Net Worth of SSC without the written consent of
Buyer.
"Newco" has the meaning set forth in the preface above.
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"Ordinary Course of Business" means the ordinary course of
business consistent with past custom and practice (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(b)
below.
"Registration Agreement" means that certain Registration
Agreement dated June 29, 1998 by and among Buyer and the stockholders of Buyer.
"Reinelt Deferred Compensation Agreement" means that certain
Amended and Restated Deferred Compensation Agreement dated September 1, 1992 by
and between Jack G. Reinelt and SSC, as amended.
"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 capital lease arrangements, and
(g) other liens arising in the Ordinary Course of Business and not incurred in
connection with the borrowing of money.
"SSC" has the meaning set forth in the preface above.
"SSC's Business" means the business of providing computer
support or project services to, writing custom software for, and implementing
related consulting services for business customers.
"SSC Optionholders" means the holders of options for the
purchase of SSC Shares listed on the Allocation Schedule hereto.
"SSC Options" means all the agreements between SSC and those
persons listed on the Allocation Schedule hereto related to the issuance of SSC
Shares.
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"SSC Shares" means all outstanding shares of the common stock,
no par value per share, of SSC.
"Sellers" has the meaning set forth in the preface above.
"Sellers' Representative" has the meaning set forth in the
Section 2(m) 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,
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.
2. The Merger
(a) The Merger. At the Effective Time (as defined below), SSC
shall be merged with and into Newco (the "Merger") and the separate existence of
SSC 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
"Software Services Corporation"; provided, that such name is available in
Delaware, and the Surviving Corporation shall operate as "Software Services
Corporation" in the State of Michigan. The Merger shall have the effects set
forth in the
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Michigan Business Corporation Laws (the "MBCL") and the General Corporation Law
of the State of Delaware ("DGCL").
(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 the State of the State of Michigan and
the Secretary of State of the State of Delaware 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 MBCL and DGCL 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 the State of the Michigan and the Secretary of
State of the State of Delaware or such other times and dates as the parties
shall agree should be specified in the Merger Documents (the "Effective Time").
(c) Certificate of Incorporation. The Certificate of
Incorporation of Newco in effect at the time of the Merger shall be the
Certificate of Incorporation of the Surviving Corporation, until thereafter
amended as provided thereunder and in the DGCL.
(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 Certificate of Incorporation and
the DGCL.
(e) Directors and Officers of Surviving Corporation.
(i) The directors of Newco at the Effective Time 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
Certificate of Incorporation and Bylaws of the Surviving
Corporation, or as otherwise provided by law.
(ii) The officers of SSC 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
Certificate 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 MBCL and DGCL. 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 SSC 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, $.01 par value per share.
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(g) Conversion of Shares. At the Effective Time, by virtue of
the Merger and without any action on the part of the Sellers:
(i) Each SSC Share issued and outstanding immediately
prior to the Effective Time (other than SSC Shares as to which the
holders thereof shall have properly exercised appraisal rights under
the MBCL, if any) shall be converted into the right to receive in
cash and Buyer's Shares its Allocable Portion of the Purchase Price
(as hereinafter defined).
(ii) Each SSC Share held in the treasury of SSC
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
SSC Shares at the Effective Time.
(h) Purchase Price. The purchase price for SSC Shares shall be
composed of the Cash Portion of the Purchase Price and the Stock Portion of the
Purchase Price. The Buyer agrees to pay to the Sellers and the SSC Optionholders
in the aggregate the sum of (i) $10,900,000 (to be reduced dollar for dollar by
the sum of (A) the payments made by SSC to cancel the stock options described in
Section 5(h); (B) the amount of any outstanding Funded Indebtedness; (C) the
$2,437,050 payable to Jack G. Reinelt pursuant to the Reinelt Deferred
Compensation Agreement; and (D) the Net Worth adjustment, if any, made pursuant
to Section 2(i) below) in cash (the "Cash Portion of the Purchase Price") and
(ii) $12,000,000 in Buyer's Shares, consisting of an aggregate of 3,953,227
shares of Buyer Common Stock and 11,580 shares of Buyer Preferred Stock as set
forth in the Allocation Schedule attached hereto (to be reduced by 118,225
shares of Buyer Common Stock issuable to Jack G. Reinelt pursuant to the Reinelt
Deferred Compensation Agreement) (the "Stock Portion of the Purchase Price") in
exchange for the SSC Shares to be purchased by Buyer pursuant to the terms
hereof and the SSC Options to be canceled. Ninety percent (90%) 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. Ten percent (10%) 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(n) for satisfaction of Sellers' indemnification
obligations specified in Article VIII. The Stock Portion of the Purchase Price
shall be issued by Buyer to Sellers at the Closing by the delivery of Buyer'
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 a restricted stock
purchase agreement in the form attached hereto as Exhibit D. The sum of the Cash
Portion of the Purchase Price and the Stock Portion of the Purchase Price 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.
Cash will be paid in lieu of any fractional shares which would otherwise be
issued in accordance with this Agreement. In no event will the sum of the (i)
Cash Portion of the Purchase Price, (ii) the cash paid for fractional shares and
(iii) the cash paid for Dissenting Shares in accordance with this Agreement
exceed 50% of the total consideration paid by Buyer hereunder.
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(i) 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 SSC is less than $1,900,000 (the "Minimum Net Worth") as
of the Closing Date. The Net Worth of SSC as of the Closing Date shall initially
be determined prior to the Closing Date by SSC in good faith within two business
days prior to the Closing Date (the "Closing Determination"). Following the
Closing Date, the Net Worth of SSC 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 and the SSC Optionholders shall
pay to Buyer by wire transfer 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.
(j) Dissenting Shares. Notwithstanding anything in this
Agreement to the contrary, SSC Shares which are issued and outstanding
immediately prior to the Effective Time and which are held by stockholders who
have not voted such SSC Shares in favor of the Merger and who shall have
delivered a written demand for appraisal of such Shares in the manner provided
in the MBCL (the "Dissenting Shares") shall not be converted into or be
exchangeable for the right to receive the consideration provided above, unless
and until such holder shall have failed to perfect or shall have effectively
withdrawn or lost his right to appraisal and payment under the MBCL. If such
holder shall have so failed to perfect or shall have effectively withdrawn or
lost such right, his SSC Shares shall thereupon be deemed to have been converted
into and to have become exchangeable for, at the Effective Time, the right to
receive the consideration provided herein.
(k) 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
September 30, 1998.
(l) 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 SSC Shares, endorsed in blank or
accompanied by duly executed assignment documents, (iv) the Buyer will deliver
to the Sellers and the SSC Optionholders the consideration specified in Section
2(h) above as may be adjusted after the Closing pursuant to Sections 2(i) above
and Section 2(o) below, and (v) the SSC Optionholders shall each deliver to the
Buyer the Option Cancellation Agreements required by Section 7(a) below, if
applicable.
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(m) 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
Hayden H. Harris 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,
Thomas S. Porter 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 SSC 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
disproportionate measure compared to any other Seller; (D) remedies
available at law for any breach of the provisions of this Section
2(m) are inadequate; therefore,
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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(m); (E) the provisions
of this Section 2(m) 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 fees and
expenses incurred by the Sellers' Representative shall be paid by
the Sellers.
(n) Escrow Arrangements. Pursuant to the Escrow Agreement to
be entered into among the Sellers, Buyer and the Escrow Agent, 10% of the Cash
Portion of the Purchase Price shall be delivered to the Escrow Agent at Closing
in immediately available funds. Such monies (which, together with all interest
accrued thereon, is hereinafter referred to as the "Escrow Sum") shall be held
pursuant to the terms of the Escrow Agreement for payment from such Escrow Sum
of the amounts, if any, owing by the Sellers to Buyer pursuant to the
indemnification provisions of Article VIII below. At the conclusion of the
period ending on the first anniversary of the Closing Date (such period being
referred to herein as the "Escrow Period"), such 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)):
(i) Authorization of Transaction. The Seller has full
power and authority to execute and deliver this Agreement and to
perform its obligations hereunder and this Agreement has been duly
executed and delivered by the Seller. This Agreement constitutes the
valid and legally binding obligation of the Seller, enforceable in
accordance with its 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
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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. Except for fees payable to DeBellas
& Co., Inc., 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) SSC Shares. The Seller holds of record and owns
beneficially the number of SSC 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 SSC Shares are free
and clear of any restrictions on transfer (other than any
restrictions under the Securities Act and state securities laws),
claims, Taxes, Security Interests, options, warrants, rights,
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 SSC (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 SSC.
(vi) Disclosure. The representations and warranties
contained in this Section 3(a) as amended, modified and/or
supplemented by Annex III do not contain any untrue statement of a
fact or omit to state any Material fact necessary in
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order to make the statements and information contained in this
Section 3(a) not misleading.
(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 IV
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 to perform
its obligations hereunder and this Agreement has been duly executed
and delivered by the Buyer and Newco. This Agreement constitutes the
valid and legally binding obligation of the Buyer and Newco,
enforceable in accordance with its 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, 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
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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
SSC Shares with a view to or for sale in connection with any
distribution thereof within the meaning of the Securities Act.
(vi) Buyer's and Newco's Capitalization. The authorized
capital stock of Buyer consists of (a) 53,000,000 shares of common
stock, (b) 96,621 shares of Class A preferred stock, and (c) 11,580
shares of the Class B preferred stock. The issued and outstanding
shares of and the holders of record of the Common Stock and of the
Class A Preferred Stock are as set forth in Annex II, and as of the
date hereof, there are no issued and outstanding shares of Class B
Preferred Stock. All of the Buyer's issued and outstanding Buyer
Shares have been duly authorized, are validly issued, fully paid,
and nonassessable. The authorized capital stock of Newco consists of
1,000 shares of common stock, of which 1,000 are issued and
outstanding. All of the issued and outstanding shares of Newco
capital stock have been authorized, are validly issued, fully paid
and nonassessable, and are held of record by Buyer.
(vii) Financial Statements. Attached hereto as Exhibit B
are the following Buyer financial statements (collectively the
"Financial Statements"): unaudited consolidated balance sheet and
statement of income and changes in stockholder's equity as of and
for the six month period ended June 30, 1998 for Buyer. 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 Buyer as of such dates, and are consistent with the
books and records of Buyer (which books and records are correct and
complete), subject to normal adjustments upon audit and the absence
of footnotes.
(viii) Undisclosed Liabilities. Except as set forth on
Section 3(b)(viii) of the Disclosure Schedule hereto, Buyer does not
have any Material Liability (and there is no Basis for any present
or future charge, complaint, action, suit, proceeding, hearing,
investigation, claim, or demand against Buyer 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 $5,000, except for (i) Liabilities set forth on the face of
Buyer's June 30, 1998 Balance Sheet, and (ii) Liabilities described
on Schedule 3(b)(viii) of the Disclosure Schedule and (iii)
Liabilities which have arisen after June 30, 1998 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).
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(ix) Tangible Assets. Buyer owns or leases substantially
all tangible assets necessary for the conduct of its businesses as
presently conducted and as presently proposed to be conducted. To
the Knowledge of the Buyer, each such tangible asset is free from
Material defects (patent and 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.
(x) Litigation. Section 3(b)(x) of the Buyer's
Disclosure Schedule sets forth each instance in which Buyer (i) is
subject to any unsatisfied judgment, order, decree, stipulation,
injunction, or charge or (ii) is a party or, to the Knowledge of the
Buyer, 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 3(b)(x) of the
Disclosure Schedule, no matter listed thereon could reasonably be
expected, individually, to result in a Material adverse effect to
Buyer. Buyer has no reason to believe that any such charge,
complaint, action, suit, proceeding, hearing, or investigation may
be brought or threatened against Buyer.
(xi) Guaranties. Buyer 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 Buyer is subject based on the acts or omissions
of its employees, subcontractors and other agents performing
services for Buyer in the Ordinary Course of Business (of which
Buyer has no Knowledge of any claim for actual liability therefor).
(xii) Environment, Health, and Safety.
(A) To the Knowledge of the Buyer, Buyer has
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.
(B) Buyer has no Liability (and to the Knowledge
of the Buyer there is no Basis for any present or future
charge, complaint, action, suit, proceeding, hearing,
investigation, claim, or demand against SSC 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.
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(C) To the Knowledge of the Buyer, Buyer does not
have any Material Liability (and Buyer has not exposed any
employee to any substance or condition that could form the
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 Buyer
giving rise to any Liability) for any illness of or personal
injury to any employee.
(D) To the Knowledge of the Buyer, Buyer 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.
(xiii) Legal Compliance. Except as it would not,
individually or in the aggregate, have a Material adverse effect:
(A) Buyer has complied with all laws (including
rules and regulations thereunder) of federal, state, local,
and foreign governments (and all agencies thereof). No charge,
complaint, action, suit, proceeding, hearing, investigation,
claim, demand, or notice has been filed or commenced against
Buyer which is currently pending and alleges any failure to
comply with any such law or regulation
(B) Buyer 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.
(C) To the Knowledge of the Buyer, Buyer has not
violated in any respect or received a notice or charge
asserting any violation
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of the Sherman Act, the Clayton Act, the Robinson-Patman Act,
or the Federal Trade Act, each as amended.
(D) Buyer has not:
(1) made or agreed to make any contribution,
payment, or gift of funds or property to any
governmental official, employee, or agent where either
the contribution, payment, or gift or the purpose
thereof was illegal under the laws of any federal,
state, local, or foreign jurisdiction;
(2) 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
(3) 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.
(E) To the Knowledge of the Buyer, Buyer 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).
(F) Buyer has possession of all records and
documents it was required to retain under all applicable laws
(including rules and regulations thereunder).
(xiv) Disclosure. To the Knowledge of Buyer, the
representations and warranties contained in this Section 3(b) as
amended, modified and/or supplemented by Annex IV do not contain any
untrue statement of a fact or omit to state any Material fact
necessary in order to make the statements and information contained
in this Section 3(b) not misleading.
4. Representations and Warranties Concerning SSC. 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 a material adverse change from information
previously provided to the Buyer, Buyer shall
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be entitled to terminate this Agreement (without any liability whatsoever to
SSC) by written notice delivered to SSC 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 SSC with respect to such event or
matter, when taken together with all other related losses that may reasonably be
expected to occur to SSC as a result of any such events or matters, would exceed
$50,000 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, or reasonably likely
to be paid or incurred, or diminution's in value or reduction in benefits or
rights of any kind or character (whether or not known or asserted before the
date of this Agreement, fixed or unfixed, conditional or unconditional, choate
or inchoate, liquidated or unliquidated, secured or unsecured, accrued,
absolute, contingent or otherwise) that are reasonably likely to occur,
including without limitation, penalties, interest on any amount payable to a
third party as a result of the foregoing, and any reasonable legal or other
expenses reasonably expected to be incurred in connection with defending any
demands, claims, actions or causes of action that, if adversely determined,
could reasonably be expected to result in losses, and all amounts paid in
settlement of claims or actions; 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 such Customer Contract or Agreement produced or is expected
to produce $150,000 of Net Service 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. SSC 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, SSC 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. SSC 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. Section 4(a) of the Disclosure Schedule
lists the directors and officers of SSC. The Sellers have delivered to the Buyer
correct and complete copies of the charter and bylaws of SSC (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 SSC are
correct and complete in all Material respects. SSC is not in default under or in
violation of any provision of its charter or bylaws.
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(b) Capitalization. The entire authorized capital stock of SSC
consists of 10,000,000 shares of common stock, of which 5,667,000 are issued and
outstanding, 48,000 are subject to issuance pursuant to vested options, 178,000
are subject to issuance pursuant to unvested options and 924,000 are reserved
for issuance pursuant to future option grants. All of the issued and outstanding
SSC 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 SSC is a party or which are
binding upon SSC 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 SSC. There are no voting trusts,
proxies, or any other agreements or understandings with respect to the voting of
the capital stock of SSC.
(c) Noncontravention. 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 SSC is subject or any provision of the
charter or bylaws of SSC, except to the extent any such violation does not or
could not result in a Material adverse effect on SSC, 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, or other arrangement to which SSC
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
to the extent any such conflict or breach or default does not result in a
Material adverse effect on SSC. SSC 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. SSC has no Subsidiaries.
(e) Financial Statements. Attached hereto as Exhibit B are the
following SSC financial statements (collectively the "Financial Statements"):
consolidated 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, 1995 and 1996 and consolidated audited balance sheet and statement
of income, changes in stockholder's equity, and cash flow as of and for the
fiscal year ended December 31, 1997 (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 six month period ended
June 30, 1998 for SSC (the "Stub Period End"). 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 SSC as of such dates, and are consistent with the books
and records of SSC (which
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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 the Most Recent Fiscal Year End.
Since December 31, 1997, except as set forth on the Disclosure Schedule, there
has not been any Material adverse change in the assets, Liabilities, business,
financial condition, operations, results of operations, or future prospects of
SSC. Without limiting the generality of the foregoing since that date except as
set forth on the Disclosure Schedule:
(i) SSC 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) SSC 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) SSC has not accelerated, terminated, modified, or
canceled any contract, lease, sublease, license or sublicense (or
series of related contracts, leases, subleases, licenses and
sublicenses) to which SSC is a party or by which it is bound other
than in the Ordinary Course of Business;
(iv) no party has notified SSC of any acceleration,
termination modification 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) SSC has not imposed any Security Interest upon any
of its Material assets, tangible or intangible;
(vi) Except as set forth in Section 4(f) - (vi) of the
Disclosure Schedule, SSC has not made any capital expenditure (or
series of related capital expenditures) involving more than $50,000
in the aggregate, or outside the Ordinary Course of Business;
(vii) SSC 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 $35,000 in the aggregate;
(viii) SSC has not created, incurred, assumed, or
guaranteed any indebtedness (including capitalized lease
obligations) involving more than $30,000 individually or in the
aggregate or outside the Ordinary Course of Business;
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(ix) SSC has not delayed or postponed (beyond its normal
practice) the payment of any accounts payable and other Liabilities;
(x) SSC has not canceled, compromised, waived, or
released any right or claim (or series of related rights and claims)
either involving more than $25,000 or outside the Ordinary Course of
Business;
(xi) SSC has not granted any license or sublicense of
any rights under or with respect to any Intellectual Property except
any such license or sublicense as was granted in the Ordinary Course
of Business as "work for hire" under Customer Contracts and
Agreements;
(xii) there has been no change made or authorized in the
charter or bylaws of SSC, 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, SSC 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 (including upon
conversion or exercise) any of its capital stock;
(xiv) except as set forth in Section 4(f) - (xiv) of the
Disclosure Schedule, SSC 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) SSC has not made any consulting or other payment to
the Sellers other than in the Ordinary Course of Business;
(xvi) SSC has not experienced any damage, destruction or
loss involving more than $35,000 (whether or not covered by
insurance) to its property;
(xvii) SSC 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) SSC 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) SSC has not entered into any employment contract
other than in the Ordinary Course of Business or collective
bargaining agreement, written or oral, or modified in any material
respect the terms of any existing such contract or
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agreement with any of its full-time staff employees other than in
the Ordinary Course of Business;
(xx) SSC 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) SSC has not granted an increase in the base
compensation, nor has SSC 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) SSC has not other than in the Ordinary Course of
Business 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;
(xxiii) SSC 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) SSC has not made or pledged to make any Material
charitable or other capital contribution outside the Ordinary Course
of Business;
(xxv) there has not been any other occurrence, event,
incident, action, failure to act, or transaction outside the
Ordinary Course of Business involving SSC; and
(xxvi) SSC 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, SSC 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 SSC 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 $5,000, except for (i)
Liabilities set forth on the face of the Stub Period 1998 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).
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(h) Tax Matters. Except as set forth on Exhibit 4(h) of the
Disclosure Schedule,
(i) SSC 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 SSC (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 Balance Sheet. SSC 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 SSC 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 SSC that arose in
connection with any failure (or alleged failure) to pay any Tax,
other than for Taxes that are not yet due which are accrued for
since the Most Recent Fiscal Year End.
(ii) SSC 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 SSC has properly reflected the status of all employees and
independent contractors in connection 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 SSC
have received, nor do any of them 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 SSC either (A) claimed or
raised by any authority in writing or (B) as to which the Sellers or
the officers of SSC or employees responsible for Tax matters of SSC
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 SSC 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.
The Sellers have 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 SSC since December 31, 1990.
(iv) SSC 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) SSC has not filed a consent under Code Sec. 341(f)
concerning collapsible corporations. SSC 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 SSC under Code Sec.
280G. SSC has not been a United States real property
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holding corporation within the meaning of Code Sec. 897(c)(2) during
the applicable period specified in Code Sec. 897(c)(1)(A)(ii). SSC
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. SSC is not
a party to any Tax allocation or sharing agreement. SSC 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 SSC 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 tax,
or excess charitable contribution allocable to SSC; and (B) the
amount of any deferred gain or loss allocable to SSC arising out of
any Deferred Intercompany Transaction.
(vii) The unpaid Taxes of SSC 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. SSC owns or leases substantially all
tangible assets necessary for the conduct of its businesses as presently
conducted and as presently proposed to be conducted. To the Knowledge of the
Sellers, each such tangible asset is free from Material defects (patent and
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. SSC does not own nor does it have any
interest in any real property or improvements thereon (other than the leases
disclosed in Section 4(j) of the Disclosure Schedule, and the leasehold
improvements relating to the same) nor does SSC 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(j) 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 SSC. SSC has furnished Buyer with
copies of all license agreements to which SSC is a party, either as
licensor or licensee, with respect to any Intellectual Property. SSC
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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 the SSC's business, in its
business as presently conducted or currently proposed to be
conducted without the payment of any royalty or similar payment, and
SSC is not infringing on any Intellectual Property right of others,
and neither SSC nor Sellers have Knowledge of any infringement by
others of any such rights owned by SSC.
(ii) All licenses set forth on Section 4(k) of the
Disclosure Schedule are valid and binding obligations of SSC, and to
the Knowledge of the Sellers and SSC, of the other parties thereto,
and enforceable against SSC, and to the Knowledge of the Sellers and
SSC, the other parties thereto in accordance with their respective
terms, except for the Equitable Exceptions. SSC owns and possesses
all right, title and interest in and to, or has the right to use
pursuant to a valid license, all Intellectual Property necessary for
the operation of the business of SSC as presently conducted.
(iii) All personnel, including employees, agents,
consultants, and contractors, who have contributed to or
participated in the conception and development of any Intellectual
Property have executed the nondisclosure agreements the current form
of which is set forth in Section 4(k) of the Disclosure Schedule and
either (1) have been party to a written agreement with SSC that has
accorded SSC full, effective, exclusive and original ownership of
all material Intellectual Property, or (2) have executed appropriate
instruments of assignment in favor of SSC as assignee that have
conveyed to SSC full, effective, and exclusive ownership of all
material Intellectual Property.
(iv) The Sellers have 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) held by SSC, 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
Intellectual Property used in, or otherwise necessary for the
conduct of, the business of SSC as heretofore conducted: (A) the
identified owner possesses all right, title, and interest in and to
the item; (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 any of the Sellers or
officers (and employees with responsibility for Intellectual
Property matters) of SSC, is threatened which challenges the
legality, validity, enforceability, use, or ownership of the item;
and (D) SSC has not agreed to indemnify any person or entity for or
against any interference, infringement, misappropriation, or other
conflict with respect to the item.
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(v) SSC has been making and will continue to make
diligent and good faith efforts to ensure that none of the Material
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 SSC in the conduct of its 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 twentieth and
twenty-first centuries and (ii) date-related data in connection with
any valid date in the twentieth and twenty-first centuries.
(l) Real Property Leases. Section 4(l) of the Disclosure
Schedule lists and describes briefly all real property leased or subleased to
SSC. The Sellers have 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) SSC is not and, to the Knowledge of Sellers, 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) SSC has not, and to the Knowledge of the Sellers 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) SSC has not assigned, transferred, conveyed,
mortgaged, deeded in trust, or encumbered any interest in the
leasehold or subleasehold; and
(vii) to the Knowledge of SSC and the Sellers after due
inquiry, 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 SSC 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 $35,000 per annum;
(ii) any written agreement (or group of related written
agreements) for the furnishing or receipt of services which SSC
reasonably projects will involve more than the sum of $150,000 per
annum;
(iii) any written agreement concerning a partnership or
joint venture;
(iv) any written agreement (or group of related written
agreement) under which it has created, incurred, assumed, or
guaranteed (or may create, incur, assume, or guarantee) indebtedness
(including capitalized lease obligations) involving more than
$35,000 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 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 $150,000 per annum
or not entered into in the Ordinary Course of Business.
The Sellers have 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, 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 Equitable
Exceptions, (C) SSC is not, nor to the Knowledge of Sellers is any other party,
in breach or default, and no event has occurred which to the Knowledge of the
Sellers with notice or lapse of time would constitute a breach or default or
permit termination, modification, or acceleration, under the written
arrangement; and (D) SSC has not, nor to the Knowledge of Sellers has any other
party, repudiated any provision of the written arrangement. SSC 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
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terms of this Section 4(m). Except as set forth in Section 4(m) of the
Disclosure Schedule, to the knowledge of SSC and the Sellers, no unfilled
Customer Contract or Agreement obligating SSC to perform services will result in
a loss to SSC upon completion of performance. Except as set forth in Section
4(m) of the Disclosure Schedule, SSC 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 SSC are reflected properly on its books and records, are valid
receivables and to the Knowledge of Sellers and SSC 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 SSC.
(o) Powers of Attorney. There are no outstanding powers of
attorney executed on behalf of SSC.
(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 SSC 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 material retroactive premium
adjustments or other loss sharing arrangements.
With respect to each such insurance policy: (A) the policy is legal,
valid, binding, and enforceable and in full force and effect; (B) the policy
will continue to be legal, valid, binding, and enforceable and in full force and
effect on identical terms immediately following the Closing Date; (C) SSC 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) SSC has not and to the
Knowledge of Sellers and SSC, no other party to the policy has repudiated any
provision thereof. SSC has been covered during the past three years by
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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, SSC 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 SSC (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 the directors and officers (and employees with
responsibility for litigation matters) of SSC, 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 SSC. Neither the Sellers nor any of the directors or
the officers (or employees with responsibility for litigation matters) of SSC
has any reason to believe that any such charge, complaint, action, suit,
proceeding, hearing, or investigation may be brought or threatened against SSC.
(r) Employees. To the Knowledge of the Sellers and SSC, no key
employee or full-time group of employees has any plans to terminate employment
with SSC. SSC 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. SSC has not committed any
unfair labor practice. None of the Sellers nor any officer of SSC has any
Knowledge of any organizational effort presently being made or threatened by or
on behalf of any labor union with respect to employees of SSC.
(s) Employee Benefits. Section 4(s) of the Disclosure Schedule
lists all Employee Benefit Plans that SSC maintains or to which SSC contributes
for the benefit of any current or former employee of SSC.
(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.
(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 SSC. All premiums or other payments which are due for
all periods ending on or
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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,
and that nothing has occurred since the receipt of such letter that
would materially 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 directors and officers (and employees with
responsibility for employee benefits matters) of SSC, 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 the directors and officers (and
employees with responsibility for employee benefits matters) of SSC,
threatened. Neither the Sellers nor any of the directors or the
officers (or employees with responsibility for litigation matters)
of SSC has any Knowledge of any Basis for any such charge,
complaint, action, suit, proceeding, hearing, investigation, claim,
or demand.
(vii) The Sellers have 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.
SSC 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. SSC has not
incurred, and neither the Sellers nor any of the directors or the officers (or
employees with responsibility for litigation matters) of SSC has any reason to
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expect that SSC 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 SSC and the Controlled Group of Corporations which includes SSC maintains
or ever has maintained or to which any of them contributes, ever has
contributed, or ever has been required to contribute. SSC 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. 162(k)).
(t) Guaranties. SSC 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 SSC is subject based on
the acts or omissions of its employees, subcontractors and other agents
performing services for SSC in the Ordinary Course of Business (of which SSC has
no Knowledge of any claim for actual liability therefor).
(u) Environment, Health, and Safety.
(i) To the Knowledge of the Sellers, SSC 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) SSC has no Liability (and to the Knowledge of the
Sellers there is no Basis for any present or future charge,
complaint, action, suit, proceeding, hearing, investigation, claim,
or demand against SSC 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) To the Knowledge of the Sellers, SSC does not have
any Material Liability (and SSC has not exposed any employee to any
substance or condition that could form the 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 SSC giving rise to any Liability) for any illness
of or personal injury to any employee.
(iv) To the Knowledge of the Sellers, SSC 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
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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) SSC has complied with all laws (including rules and
regulations thereunder) of federal, state, local, and foreign
governments (and all agencies thereof). No charge, complaint,
action, suit, proceeding, hearing, investigation, claim, demand, or
notice has been filed or commenced against SSC which is currently
pending and alleges any failure to comply with any such law or
regulation.
(ii) SSC 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) To the Knowledge of the Sellers, SSC 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) SSC has not:
(A) made or agreed to make any contribution,
payment, or gift of funds or property to any governmental
official, employee, or agent 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.
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(v) To the Knowledge of the Sellers, SSC 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) SSC 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 SSC. 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
SSC 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 the
business of SSC.
(x) Brokers' Fees. Except for payments to DeBellas & Co.,
Inc., which shall be deemed to be Funded Indebtedness, SSC 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.
(y) Disclosure. To the Knowledge of the Sellers, the
representations and warranties contained in this Section 4 as amended, modified
and/or supplemented by the Disclosure Schedules do not contain any untrue
statement of a fact or omit to state any Material fact necessary in order to
make the statements and information contained in this Section 4 not misleading.
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 SSC 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 SSC to take any additional action) that may be necessary,
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
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forth herein or in the Disclosure Schedule, neither Party will (and Sellers will
not cause or permit SSC 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, the
Sellers will cause SSC 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, licensors,
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 SSC) 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 SSC mutually
agreed to by Buyer and the Sellers' Representative.
(f) Notice of Developments; Delivery of Disclosure Schedules.
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. The Parties understand that the Disclosure Schedule has not
been delivered by Sellers as of the date of this Agreement. Sellers shall
deliver to Buyer the Disclosure Schedule provided in Section 4 hereof on or
prior to August 7, 1998. Upon receipt thereof, Buyer shall have five (5)
business days to accept or reject the Disclosure Schedule at Buyer's sole
discretion. In the event that Buyer rejects the Disclosure Schedule, Buyer shall
be entitled to terminate this Agreement (without any liability whatsoever to
Sellers or SSC) by written notice delivered to the Shareholders' Representative
within five (5) business days after receipt of the Disclosure Schedule. Except
for the right of the Sellers to update any Disclosure Schedule as provided in
Section 4 hereof, no disclosure by any Party pursuant to this Section 5(f) shall
be deemed to amend or supplement Annex III or the Disclosure Schedule or to
prevent or cure any misrepresentation, breach of warranty, and/or breach of
covenant.
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(g) Exclusivity. The Sellers will not (and the Sellers will
not cause or permit SSC to) (i) solicit, initiate, or encourage the submission
of any 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 SSC 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 of Options, Bonus Programs and Phantom Stock
Plans. SSC shall have provided for the cancellation, at or prior to the Closing,
of all SSC stock options, deferred bonus programs or phantom equity plans. The
amounts payable for the cancellation of the SSC Options and Reinelt Deferred
Compensation Agreement will be a reduction of the Cash Portion of the Purchase
Price pursuant to Section 2(h), will be funded by Buyer to SSC at Closing and
will be paid by SSC to the recipients at Closing. 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., SSC) 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. In addition, each of the SSC Optionholders shall have
received options at the Closing for the purchase of the Buyer's Common Stock
(the "Buyer Options") for all SSC Options which would have vested after February
1999 (the "Unvested SSC Options"). The Buyer Options shall be in an aggregate
amount equal to the number of shares of Buyer Common Stock that would have been
issued to the SSC Optionholders if all the Unvested SSC Options had become
vested as of the Closing Date. The exercise price for the Buyer Options shall be
$.1055 per share and the Buyer Options shall become exercisable by the SSC
Optionholders in accordance with the original vesting schedule for the Unvested
SSC Options, all in accordance with the terms and conditions of Buyer's stock
option plan to be adopted by Buyer prior to the Closing Date.
6. Additional Covenants. The Parties further covenant and agree as
follows:
(a) 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 therefor under
Section 8 below). The Sellers 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 SSC; 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.
(b) 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
SSC, 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).
(c) 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 SSC from
maintaining the same business relationships with SSC after the Closing for a
period of twenty-four (24) months thereafter as it maintained with SSC prior to
the Closing. The Sellers will refer all customer inquiries relating to SSC's
Business to the Buyer and/or SSC from and after the Closing for a period of
twenty-four (24) months thereafter.
(d) 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, 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(d). 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 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. The foregoing provisions shall not apply to any
Confidential Information which is generally available to the public immediately
prior to the time of disclosure.
(e) Termination of Bank Facilities; Release of Guaranties.
Sellers shall take all reasonable best efforts necessary to (i) retire all of
SSC's outstanding bank indebtedness and (ii) fully, completely and
unconditionally release and/or substitute Buyer or SSC at or prior to Closing as
guarantor for the Sellers on all banking facilities of SSC or other guarantees.
(f) Monitoring Information. Prior to the Closing each Party
shall deliver such information to the other Party as may reasonably be requested
by Buyer or Sellers.
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(g) Landlords' Consents. Sellers shall cause SSC on or before
the Closing Date 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.
(h) 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 SSC
to the extent such records and information pertain to events occurring on or
prior to the Closing Date; therefore, Buyer agrees to cause SSC 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.
(i) Covenant Not to Compete. For a period of four (4) years
from and after the Closing Date, the Sellers' Representative 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 SSC's Business from
any customer of SSC, (iii) request or advise any customer of SSC to withdraw,
curtail or cancel such customer's business with SSC, or (iv) solicit for
employment any person employed by SSC at any time within the two (2) year 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 any Seller who directly or indirectly functions in the capacity
of a general partner or similar capacity for a venture capital fund (including,
without limitation, the Enterprise Development Fund) shall not solely by reason
thereof be deemed to engage in the business of any company in which that fund is
invested. For purposes of this Agreement, the Parties have agreed to allocate
$50,000 of the Purchase Price to the covenant not to compete contained in this
Section 6(i).
(j) Right to Attend Board Meetings. Until the earlier of (i)
consummation of the Buyer's initial public offering of its common stock under
the Securities Act of 1933 or (ii) the fifth anniversary of the Closing Date,
the Sellers' Representative shall have the right to attend and to participate in
discussions (but not vote at) each meeting of the Board of Directors of the
Buyer. The Buyer shall deliver notice to the Sellers' Representative of the time
and place of each such meeting in the same manner and at the same time as it
shall send such notice to its Directors. The Buyer shall also provide to the
Sellers' Representative copies of all notices, reports, minutes and consents of
the Board of Directors and each Committee of the Board of Directors and at the
same time and manner as they are provided to its Directors. The Buyer shall
reimburse the Sellers' Representative for reasonable travel and related costs
incurred
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in attending each such meeting of the Board of Directors. The Sellers'
Representative, as a condition to such attendance and participation, shall be
subject to and shall abide by all restrictions of confidentiality and
nondisclosure as are imposed upon the Directors of the Buyer with respect to
information disclosed at any meeting of the Board of Directors or Committee of
the Buyer. As applicable, the Chairman of the Board of Directors may require
that the Sellers' Representative absent himself from part or all of any meeting
of the Board of Directors if and to the extent that the subject matter of
discussion raises questions which would present a conflict of interest for the
Sellers' Representative in his capacity as representative of the Sellers or
which addresses information which is competitively sensitive when evaluated in
light of other investments or affiliations of the Sellers' Representative.
(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).
In no event will the sum of the (i) Cash Portion of the Purchase Price, (ii) the
cash paid for fractional shares and (iii) the cash paid for Dissenting Shares in
accordance with this Agreement exceed 50% of the total consideration paid by
Buyer hereunder.
(l) Initial Public Offering. In the event of an Initial Public
Offering, the Buyer shall take all actions necessary to consummate either a
reorganization, exchange or recapitalization of its capital stock such that the
Buyer Preferred Stock issued to the Sellers is either (i) converted into Buyer
Common Stock at a conversion price equal to the liquidation value of each share
of Buyer Preferred Stock divided by the initial public offering price per share
of Buyer Common Stock or (ii) at the Buyer's option, receives the same
consideration per share paid to the holders of the Buyer's Class A Preferred
Stock. Sellers and Buyer each agree to take all necessary and desirable actions
reasonably requested by the underwriters of such Initial Public Offering in
connection with the consummation of such reorganization, exchange and/or the
recapitalization, including the obligation to vote for, consent to and raise no
objections against the Initial Public Offering and the reorganization, exchange
and/or recapitalization; provided, however, that (i) the resulting securities
reflect and are consistent with the relative rights and preferences among the
outstanding classes of securities set forth in the Buyer's Fourth Amended and
Restated Certificate of Incorporation and such recapitalization, reorganization
or exchange is otherwise fair and reasonable to the Buyer and the holders of
each class of the Buyer's equity securities taking into account each of the
relative rights and preferences; and (ii) each share of the Buyer's Class B
Preferred Stock shall receive the same consideration per share or, if an option
is provided, the same options, as the holders of the Buyer's Class A Preferred
Stock are provided in the Initial Public Offering. Prior to the Closing Date,
Buyer shall cause GTCR Golder Rauner, L.L.C. to agree to be bound by the terms
and conditions of this Section 6(l) as if it were a Party to this Agreement.
(m) Sale of Buyer. In the event of an Approved Sale (as such
term is defined in Section 5(a) of the Stockholders Agreement), the Buyer shall
take all actions necessary
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to either (a) cause the purchaser in such Approved Sale to purchase all
outstanding shares of Buyer Preferred Stock at a price per share in cash not
less than the liquidation value per share of the Buyer's Class B Preferred Stock
or (b) cause the purchaser in such Approved Sale to purchase all outstanding
shares of Buyer Preferred Stock issued to the Sellers at the same consideration
per share paid to the holders of the Buyer's Class A Preferred Stock in such
Approved Sale. Sellers and Buyer each agree to take all necessary and desirable
actions reasonably requested in order to vote for, consent to and raise no
objections against the Approved Sale; provided, however, that each share of the
Buyer's Class B Preferred Stock shall receive the same consideration per share
or, if an option is provided, the same options, as the holders of the Buyer's
Class A Preferred Stock are provided in the Approved Sale. Prior to the Closing
Date, Buyer shall cause GTCR Golder Rauner, L.L.C. to agree to be bound by the
terms and conditions of this Section 6(m) as if it were a Party to this
Agreement.
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) SSC 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 SSC Shares or SSC (and no such judgment, order,
decree, stipulation, injunction, or charge shall be in effect);
(v) the Sellers shall have delivered to the Buyer a
certificate (without qualification as to knowledge or Materiality or
otherwise) to the effect that
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each of the conditions specified above in Section 7(a)(i)-(iv) is
satisfied in all respects;
(vi) the acquisition by the Buyer of SSC Shares shall
represent one hundred percent (100%) of the issued and outstanding
capital stock of SSC and all of such SSC 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 SSC 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 Funded Indebtedness secured by such assets;
(viii) 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;
(ix) the Buyer and SSC shall have received from Jack G.
Reinelt an executed employment agreement in the form and substance
attached hereto as Exhibit E;
(x) 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;
(xi) the Buyer shall have received the resignations,
effective as of the Closing, of each director of SSC prior to the
Closing and the termination of any consulting or management
agreements with EDM, Inc. or its Affiliates;
(xii) the Buyer shall be satisfied that the Net Worth of
SSC on the Stub Period End equaled or exceeded $1,900,000 or an
appropriate adjustment shall have been made to the Purchase Price as
provided in Section 2(i);
(xiii) the Buyer shall be satisfied that the Gross
Revenues of SSC during the fiscal year ended December 31, 1997
equaled or exceeded $13,297,710 and during the twelve month period
ended on the Stub Period End equaled or exceeded $14,000,000;
(xiv) the Buyer shall be satisfied that the Adjusted
EBIT of SSC during the fiscal year ended December 31, 1997 equaled
or exceeded $648,900 and during the twelve month period ended on the
Stub Period End equaled or exceeded $1,470,000;
(xv) the Buyer shall be satisfied in its sole discretion
with the results of its continuing legal, financial and business due
diligence investigations of
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SSC, all of which shall be final and completed to Buyer's
satisfaction prior to Closing;
(xvi) no material adverse change shall have occurred in
SSC's Business or its future prospects;
(xvii) Sellers shall have caused SSC to cancel each
outstanding phantom stock, deferred bonus or option plan, if any,
and all outstanding SSC Options shall have been canceled pursuant to
the Option Cancellation Agreement in the form of Exhibit I hereto
(individually a "Option Cancellation Agreement" and collectively the
"Option Cancellation Agreements"), with the cost of such
cancellation being a reduction of the Cash Portion of the Purchase
Price pursuant to Section 2(h) (such reduction to be funded by the
Buyer to SSC at the Closing and paid by SSC to the SSC Optionholders
at the Closing);
(xviii) 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;
(xix) subject to Section (7)(b)(xiii), all liens and
Security Interests securing debts of SSC 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;
(xx) no unsatisfied liens for the failure to pay Taxes
of any nature whatsoever shall exist against SSC, or against or in
any way affecting any SSC Share;
(xxi) the Sellers shall and SSC shall have caused all of
SSC's officers, directors and/or Key Employees of SSC to, have
repaid in full all debts and other obligations, if any, owed to SSC;
(xxii) the Buyer shall have received from SSC the
Financial Statements;
(xxiii) all appropriate corporate and shareholder
authorizations of SSC shall have been obtained;
(xxiv) since December 31, 1997, SSC 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;
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(xxv) except as set forth on the Disclosure Schedule,
since December 31, 1997, SSC shall not have transferred, conveyed,
disposed of and/or sold any of Material assets, except in the
Ordinary Course of Business;
(xxvi) all Intellectual Property created or developed by
any Seller and any other current employee of SSC that has been used
historically by SSC or is being used currently by SSC (other than
"work for hire" which has been developed by SSC for a customer and
continues to be used by SSC in the performance of continuing
services for that customer) shall be one hundred percent (100%)
owned by SSC as of the Closing Date;
(xxvii) the Buyer and Newco shall have received from the
Sellers an opinion of counsel in the form and substance set forth as
Exhibit G hereto; and
(xxviii) at least ninety-five percent (95%) of all
shareholders of SSC 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;
(iv) the Buyer shall have satisfied SSC's obligation
under the Reinelt Deferred Compensation Agreement by payment of
$2,437,050 to Jack G. Reinelt and by issuance of 118,225 shares of
the Buyer Common Stock to Jack G. Reinelt.
(v) the Buyer, to the extent of the reduction in the
Cash Portion of the Purchase Price in Section 2(h)(i)(A), shall have
provided funding to SSC
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sufficient to fund the payments required to the SSC Optionholders to
satisfy and secure the cancellation of the SSC Options and shall
have issued to the SSC Optionholders the Buyer Options.
(vi) 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);
(vii) 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;
(viii) 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;
(ix) 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;
(x) Jack G. Reinelt shall have received from the Buyer
an executed employment agreement, in the form and substance attached
hereto as Exhibit E;
(xi) the Sellers' Representative shall be satisfied in
its sole discretion with the results of its continuing legal,
financial and business due diligence investigations of Buyer,
including without limitation, the final terms and conditions of the
Buyer's Class B Preferred Stock, all of which shall be final and
completed to Buyer's satisfaction prior to Closing;
(xii) no material adverse change shall have occurred in
Buyer's Business or its future prospects;
(xiii) the Buyer shall have provided funding to SSC to
pay in full the Revolving Credit Loan with Key Bank, N.A.;
(xiv) 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;
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(xv) the Sellers shall have received from Buyer and
Newco an opinion of counsel in the form and substance set forth as
Exhibit H hereto; and
(xvi) 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 in Section 4(h) above) shall survive the
Closing hereunder (even if the Buyer knew or had reason to know of any
misrepresentation or breach of warranty at the time of the Closing) and continue
in full force and effect for a period of two (2) 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 (even if the damaged Party knew
or had reason to know of any misrepresentation or breach of warranty or covenant
at the time of the Closing) and continue in full force and effect for a period
of five (5) years thereafter, except as otherwise provided elsewhere in this
Agreement.
(b) Indemnification Provisions for Benefit of the Buyer.
(i) In the event the Sellers 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 $250,000 threshold (at which point the Sellers will be
obligated to indemnify the Buyer from and against all such aggregate
indemnifiable losses including losses in excess of a $100,000
threshold) 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
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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(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 representatives 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 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 SSC arising under Reg. ss.1.1502-6
(because SSC 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 SSC also was a
member of the Affiliated Group).
(iv) 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.
(v) The Sellers agree to indemnify the Buyer from and
against the entirety of any brokerage fees or investment banking
commissions due by Sellers or SSC by reason of the transactions
contemplated by this Agreement, excluding only the fees payable to
DeBellas & Co., Inc. which shall be deemed to be Funded
Indebtedness.
(vi) The Parties shall make appropriate adjustments for
tax benefits in determining the liability of the Sellers under this
Section 8.
(c) Indemnification Provisions for Benefit of the Sellers. In
the event the Buyer breaches any of its representations, warranties, and
covenants contained herein, and provided that the particular representation,
warranty, or covenant survives the Closing and that the Sellers make a written
claim for indemnification against the Buyer pursuant to Section 10(h) below
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within the applicable survival period, then the Buyer agrees to indemnify the
Sellers from and against the entirety of any Adverse Consequences in excess of
$250,000 threshold (at which point the Buyer will be obligated to indemnify the
Sellers from and against all such aggregate indemnifiable losses including
losses relating back to the first dollar) the Sellers may suffer through and
after the date of the claim for indemnification (including any Adverse
Consequences the Sellers 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 limitation set forth above shall not
apply to the liability of Buyer with respect to Adverse Consequences resulting
from or attributable to intentional fraud or willful misconduct by the Buyer.
(d) 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
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statements relating to or submitted in connection with the defense of the third
party claim, and timely notices of, and the right to participate in (as an
observer) any hearing or other court proceeding relating to the third party
claim.
(e) Exclusive Remedy. The Parties acknowledge and agree that
the foregoing indemnification provisions in this Section 8 shall be the
exclusive remedy of the Parties for any breach of the representations,
warranties and covenants of the Parties contained in this Agreement.
(f) Payment; General Right of Offset. The Indemnifying Parties
shall promptly pay to the Indemnified Party as may be entitled to indemnity
hereunder in cash the amount of any Adverse Consequences to which such
Indemnified Party may become entitled to 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
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 may become entitled to
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 fair market value or (B) the value
stated in Section 2(h)).
(g) 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(d), 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.
(h) 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 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
-48-
<PAGE>
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 ANN ARBOR/DETROIT 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 September 30, 1998
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 pursuant to Section 5(f) hereof; or
(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 September 30, 1998 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).
-49-
<PAGE>
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 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
-50-
<PAGE>
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 SSC or the Sellers:
Hayden H. Harris, Sellers' Representative
c/o Enterprise Development Fund
425 North Main
Ann Arbor, Michigan 48104
Tel: (734) 663-3213
Fax: (734) 663-7356
with a copy to:
James R. Beuche
Hooper, Hathaway, Price, Beuche & Wallace
126 South Main
Ann Arbor, Michigan 48104
Tel: (734) 662-4426
Fax: (734) 662-9559
If to the Buyer:
c/o AppNet Systems, Inc.
6700A Rockledge Drive
Suite 525
Bethesda, Maryland 20817
Attn: Terrence M. McManus
Tel: (301) 581-2470
Fax: (301) 581-2488
-51-
<PAGE>
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 DELAWARE WITHOUT GIVING EFFECT TO
ANY CHOICE OF LAW OR CONFLICT OF LAW PROVISION OR RULE (WHETHER OF THE STATE OF
DELAWARE OR ANY OTHER JURISDICTION) THAT WOULD CAUSE THE APPLICATION OF THE LAWS
OF ANY JURISDICTION OTHER THAN THE STATE OF DELAWARE.
(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 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.
-52-
<PAGE>
(l) Expenses. Each of the Parties and SSC 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 SSC's expenses shall be
included as Funded Indebtedness. The Sellers acknowledge and agree that SSC 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.
-53-
<PAGE>
IN WITNESS WHEREOF, the Parties hereto have executed this Agreement
as of the date first above written.
BUYER:
APPNET SYSTEMS, INC.
By: /s/ Terrence M. McManus
--------------------------------------
Name: Terrence M. McManus
-------------------------------
Title: Vice President, Secretary
and Treasurer
-------------------------------
NEWCO:
SSC ACQUISITION SUB #1, INC.
By: /s/ Terrence M. McManus
--------------------------------------
Name: Terrence M. McManus
-------------------------------
Title: Vice President, Secretary
and Treasurer
-------------------------------
SSC:
SOFTWARE SERVICES CORPORATION
By: /s/ Hayden H. Harris
--------------------------------------
Name: Hayden H. Harris
Title: Chairman
-54-
<PAGE>
SELLERS:
/s/ Allen H. Alley
-----------------------------------------
Allen H. Alley
/s/ Mary L. Campbell
-----------------------------------------
Mary L. Campbell
/s/ David J. Cortright
-----------------------------------------
David J. Cortright
/s/ Tim A. Duff
-----------------------------------------
Tim A. Duff
/s/ Hayden H. Harris
-----------------------------------------
Hayden H. Harris
/s/ Steven R. Kemp
-----------------------------------------
Steven R. Kemp
/s/ Thomas S. Porter
-----------------------------------------
Thomas S. Porter
/s/ Jack G. Reinelt
-----------------------------------------
Jack G. Reinelt
-55-
<PAGE>
/s/ Scott O. Sarasin
-----------------------------------------
Scott O. Sarasin
/s/ Robert Sims
-----------------------------------------
Robert Sims
-56-
<PAGE>
Exhibit 10.4
- --------------------------------------------------------------------------------
MERGER AGREEMENT
by and among
APPNET SYSTEMS, INC.,
(Buyer)
NMP ACQUISITION SUB #1, INC.,
(Newco)
NEW MEDIA PUBLISHING, INC.,
(NMP)
and
THE SHAREHOLDERS OF NMP
(collectively, Sellers)
Dated as of October 2, 1998
- --------------------------------------------------------------------------------
<PAGE>
TABLE OF CONTENTS
<TABLE>
<CAPTION>
Page
<S> <C>
1. Definitions................................................................1
2. The Merger.................................................................8
(a) The Merger............................................................8
(b) Effective Time of the Merger..........................................8
(c) Certificate 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.................................................10
(j) Net Worth Adjustment.................................................13
(k) Dissenting Shares....................................................13
(l) The Closing..........................................................13
(m) Deliveries at the Closing............................................13
(n) Shareholders' Representative.........................................14
(o) Escrow Arrangements..................................................15
3. Representations and Warranties Concerning the Transaction.................16
(a) Representations and Warranties of each Seller........................16
(i) Authorization of Transaction....................................16
(ii) Noncontravention...............................................16
(iii) Broker's Fees.................................................16
(iv) Investment.....................................................17
(v) NMP Shares......................................................17
(b) Representations and Warranties of the Buyer and Newco................17
(i) Organization of the Buyer and Newco.............................17
(ii) Authorization of Transaction...................................18
(iii) Noncontravention..............................................18
(iv) Brokers' Fees..................................................18
(v) Investment......................................................18
(vi) Buyer's and Newco's Capitalization.............................18
(vii) Financial Statements..........................................19
(viii) Tangible Assets..............................................19
(ix) Certain Business Relationships with Buyer........................
4. Representations and Warranties Concerning Selling Corporation.............19
(a) Organization, Qualification, and Corporate Power.....................20
(b) Capitalization.......................................................20
(c) Noncontravention.....................................................21
(d) Subsidiaries.........................................................21
(e) Financial Statements.................................................21
(f) Events Subsequent to the Stub Period End.............................22
(g) Undisclosed Liabilities..............................................24
</TABLE>
-i-
<PAGE>
<TABLE>
<CAPTION>
<S> <C>
(h) Tax Matters..........................................................25
(i) Tangible Assets......................................................26
(j) Owned Real Property..................................................26
(k) Intellectual Property................................................26
(l) Real Property Leases.................................................28
(m) Contracts............................................................28
(n) Notes and Accounts Receivable........................................30
(o) Powers of Attorney...................................................30
(p) Insurance............................................................30
(q) Litigation...........................................................31
(r) Employees............................................................31
(s) Employee Benefits....................................................31
(t) Guaranties...........................................................33
(u) Environment, Health, and Safety......................................33
(v) Legal Compliance.....................................................34
(w) Certain Business Relationships with NMP..............................35
(x) Brokers' Fees........................................................35
(y) Disclosure...........................................................35
5. Pre-Closing Covenants.....................................................35
(a) General..............................................................35
(b) Notices and Consents.................................................35
(c) Operation of Business................................................35
(d) Preservation of Business.............................................36
(e) Access...............................................................36
(f) Notice of Developments; Delivery of Disclosure Schedules.............36
(g) Exclusivity..........................................................36
(h) Cancellation of Options, Bonus Programs and Phantom Stock Plans......36
6. Additional Covenants......................................................37
(a) General..............................................................37
(b) Litigation Support...................................................37
(c) Transition...........................................................37
(d) Confidentiality......................................................38
(e) Termination of Bank Facilities; Release of Guaranties................38
(f) Monitoring Information...............................................38
(g) Landlords' Consents..................................................38
(h) Additional Tax Matters...............................................39
(i) Covenant Not to Compete..............................................39
(j) Reorganization Intent................................................39
(k) Conduct During Earned Payout Periods.................................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) Indemnification Provisions for Benefit of the Sellers................46
</TABLE>
-ii-
<PAGE>
<TABLE>
<CAPTION>
<S> <C>
(d) Matters Involving Third Parties......................................47
(e) Exclusive Remedy.....................................................47
(f) Payment; General Right of Offset.....................................48
(g) 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............................................50
(f) Facsimile/Counterparts...............................................50
(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
</TABLE>
-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 Employment Agreement
Exhibit F Joinder to the Registration Agreement
Exhibit G Form of Opinion of Sellers' Legal Counsel
Exhibit H Form of Opinion of Buyer's Legal Counsel
Exhibit I Form of Option Cancellation Agreement
Exhibit J Form of Buyer Option Agreement
Exhibit K Form of Earnout Note
ANNEXES AND TABLES
Annex I Determination of Earned Payout Amount
Annex II Buyer's Capitalization Schedule and Charter
Annex III Exceptions to Representations and Warranties of Sellers
Annex IV Exceptions to Representations and Warranties of Buyer
Annex V List of Optionholders and Conversion Schedule
SCHEDULES
Allocation Schedule
Sellers' and NMP's Disclosure Schedule
Buyer's Disclosure Schedule
Adjustments to EBIT Schedule
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<PAGE>
MERGER AGREEMENT
This MERGER AGREEMENT ("Agreement") is entered into as of the 2nd
day of October, 1998, by and among APPNET SYSTEMS, INC., a Delaware corporation
(the "Buyer"), NMP ACQUISITION SUB #1, INC., a Delaware corporation and wholly
owned subsidiary of Buyer ("Newco"), NEW MEDIA PUBLISHING, INC., a Virginia
corporation ("NMP"), and THE SHAREHOLDERS OF NMP 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."
NMP and Newco are sometimes referred to herein as the "Constituent
Corporations." If the context so requires, references herein to NMP 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 NMP.
This Agreement contemplates a transaction in which NMP will merge
with and into Newco, with Newco being the surviving corporation, and the shares
of capital stock of NMP 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 NMP during Earned Payout Period" shall
mean the adjusted earnings before interest, taxes and depreciation and
amortization of NMP as determined in accordance with GAAP on the accrual basis
of accounting during the Earned Payout Period as determined by Annex I attached
hereto.
"Adjusted EBIT of NMP" shall mean NMP's earnings before
interest and taxes in accordance with GAAP on the accrual basis of accounting,
as adjusted for certain non-recurring costs listed on the Adjustments to EBIT
Schedule 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,
<PAGE>
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.
"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).
"Applicable Percentage" has the meaning set forth in Section
2(i) below.
"Basis" means any past or present fact, situation,
circumstance, status, condition, activity, practice, plan, occurrence, event,
incident, action, failure to act, or transaction that forms the reasonable basis
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.
"Buyer Options" means the options for the purchase of the
shares of Buyer Common Stock which are issued to the NMP Optionholders in
exchange for all outstanding NMP Options pursuant to this Agreement. A form of
option agreement for the issuance of Buyer Options is attached as Exhibit J 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)(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 NMP 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,
-2-
<PAGE>
including related forms and manuals; provided, that the Confidential Information
shall not include information which (i) was or becomes generally available to
the public other than as a result of a its disclosure by the receiving party,
(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 the source of such
information was not bound by a confidentiality agreement with Buyer or NMP 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.
"Contingent Cash Payment" has the meaning set forth in Section
2(h) below.
"Controlled Group of Corporations" has the meaning set forth
in Code Sec. 1563.
"Conversion Value" means the difference between (i) the
product of (a) the number of outstanding Buyer Options issued pursuant to
Section 5(h) of this Agreement and (b) $3.00, and (ii) the aggregate price
payable upon exercise of all outstanding Buyer Options issued pursuant to this
Agreement.
"Customer Contract or Agreement" means any agreement whereby
NMP provides marketing, strategy, hosting, programming, creative or project
management services and/or related consulting services in NMP's Business to a
third party during the 1998 fiscal year of NMP.
"Deferred Intercompany Transaction" has the meaning set forth
in Treas. Reg. ss.1.1502-13.
"DGCL" has the meaning set forth in Section 2(a) below.
"Disclosure Schedule" has the meaning set forth in Section 4
below.
"Dissenting Shares" has the meaning set forth in Section 2(k)
below.
"Earned Payout Amount" has the meaning set forth in Section
2(i) below.
"Earned Payout Period" means the period from October 1, 1998
through September 30, 1999.
"Earnout Notes" has the meaning set forth in Section 2(i).
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"Earnout Shares" has the meaning set forth in Section 2(i).
"EBITDA to Revenue Percentage" has the meaning set forth in
Section 2(i) below.
"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).
"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 Crestar Bank, N.A.
"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.
"Fiduciary" has the meaning set forth in ERISA Sec. 3(21).
"Financial Statements" has the meaning set forth in Section
4(e) below.
"Founders" means collectively Jonathan T. Hallett, Jeffrey J.
Hallett and Clifford W. Chapman, Jr.
"Funded Indebtedness" means all (i) indebtedness of NMP for
borrowed money or other interest-bearing indebtedness; (ii) capital lease
obligations of NMP (other than
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those payable to Capital Bank (formerly Knight Financial Corp.) as reflected on
the Most Recent Financial Statements); (iii) obligations of NMP to pay the
deferred purchase or acquisition price for goods or services, 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 NMP or
secured by an Encumbrance on NMP's property; (v) indebtedness of NMP under
extended credit terms of more than 60 days from vendors provided to NMP
(excluding any operating leases); and (vi) transaction costs of NMP and/or
Sellers associated with this Agreement or the transactions contemplated hereby
that are paid by NMP.
"GAAP" means United States generally accepted accounting
principles, consistently applied, as in effect from time to time.
"Gross Revenues" means the gross revenue of NMP 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.
"Indemnifying Party" has the meaning set forth in Section 8(d)
below.
"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).
"Knowledge" means, (a) with respect to each Seller,
information which is actually known by such Seller and (b) with respect to
Newco, Buyer or NMP, actual 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.
"Material" has the meaning set forth in Section 4 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 NMP" means the total assets of NMP less the
total liabilities of NMP (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 NMP, no material increase in the intangible assets of NMP since
December 31, 1997 shall be included in calculating the Net Worth of NMP without
the mutual consent of Buyer and NMP.
"Net Service Revenues" means the Gross Revenues of NMP for any
period less (i) all bad debt expense for such period; and (ii) any revenues from
the sale of any assets of NMP during such period outside the Ordinary Course of
Business.
"Newco" has the meaning set forth in the preface above.
"NMP" has the meaning set forth in the preface above.
"NMP's Business" means the business of providing computer
network and internet or intranet related integration and design support or
project services to, writing custom software for, and implementing related
consulting services for, business customers.
"NMP Common Shares" means all outstanding shares of the common
stock, no par value per share, of NMP.
"NMP Optionholders" means the holders of options for the
purchase of NMP Common Shares listed on the Allocation Schedule hereto.
"NMP Options" means all the agreements between NMP and those
persons listed on the Allocation Schedule hereto related to the issuance of NMP
Common Shares.
"NMP Preferred Shares" means all outstanding shares of the
preferred stock, no par value per share, of NMP.
"NMP Shares" means collectively, the NMP Common Shares and NMP
Preferred Shares.
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"Outside Investor" means Columbia NMP Investors, L.L.C.
"Ordinary Course of Business" means the ordinary course of
business consistent with past custom and practice (including with respect to
quantity and frequency).
"Option Cancellation Agreement" has the meaning set forth in
Section 7(a) herein.
"Other Sellers" means the Founders and Roger M. Craver.
"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(b)
below.
"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 capital lease arrangements, and
(g) other liens arising in the Ordinary Course of Business and not incurred in
connection with the borrowing of money.
"Sellers" has the meaning set forth in the preface above.
"Sellers' Representatives" has the meaning set forth in the
Section 2(n) below.
"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.
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"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,
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.
"VSCA" has the meaning set forth in Section 2(a) below.
2. The Merger.
(a) The Merger. At the Effective Time (as defined below), NMP
shall be merged with and into Newco (the "Merger") and the separate existence of
NMP 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 "NMP, Inc."; provided, that such name is available in Delaware, and
the Surviving Corporation shall operate as "NMP, Inc." in the Commonwealth of
Virginia. The Merger shall have the effects set forth in the Virginia Stock
Corporation Act (the "VSCA") and the General Corporation Law of the State of
Delaware ("DGCL").
(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 State Corporation Commission of the Commonwealth of
Virginia and the Secretary of State of the State of Delaware 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,
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the relevant provisions of the VSCA and DGCL 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 Stock Corporation Commission of the
Commonwealth of Virginia and the Secretary of State of the State of Delaware or
such other times and dates as the parties shall agree should be specified in the
Merger Documents (the "Effective Time").
(c) Certificate of Incorporation. The Certificate of
Incorporation of Newco in effect at the time of the Merger shall be the
Certificate of Incorporation of the Surviving Corporation, until thereafter
amended as provided thereunder and in the DGCL.
(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 Certificate of Incorporation and
the DGCL.
(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, Thomas Davidson
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 Certificate 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
Certificate 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 VSCA and DGCL. 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 NMP 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, $.01 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:
(i) Each NMP Share issued and outstanding immediately
prior to the Effective Time (other than NMP Shares as to which the
holders thereof shall have properly exercised appraisal rights under
the VSCA, if any) shall be converted
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into the right to receive in cash and Buyer's Shares its portion of
the Purchase Price (as hereinafter defined) for NMP Common Shares
and NMP Preferred Shares (as applicable).
(ii) Each NMP Share held in the treasury of NMP
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
NMP Shares at the Effective Time.
(h) Purchase Price. The purchase price for NMP Shares shall be
composed of (i) the Cash Portion of the Purchase Price; (ii) the Stock Portion
of the Purchase Price; (iii) the Contingent Cash Payment (as defined below); and
(iv) the Earned Payout Amount. The Buyer agrees to pay to the Sellers in the
aggregate the sum of (i) $9,000,000 (to be reduced dollar for dollar by the sum
of (A) 75% of the Conversion Value of the NMP Options described in Section 5(h);
(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) $9,500,000 in Buyer's Shares, consisting
of an aggregate of 3,166,667 shares of Buyer Common Stock as set forth in the
Allocation Schedule attached hereto (the "Stock Portion of the Purchase Price");
(iii) a contingent cash payment of up to $500,000 to be paid to Sellers as
provided in Section 2(o) below (the "Contingent Cash Payment"); and (iv) the
Earned Payout Amount as determined pursuant to Section 2(i) below, in exchange
for the NMP Shares to be purchased by Buyer pursuant to the terms hereof. 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 to Sellers' accounts 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 Contingent Cash Payment, 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 present value (discounted from
January 15, 2000 to the Effective Time at the rate of 5.41% per
annum compounded semi-annually) of (i) the product of (A)
$14,000,000 and (B) the applicable percentage determined on the
chart attached to Annex I hereto (the "Applicable Percentage") based
on the amount,
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if any, by which (1) the Adjusted EBITDA of NMP for the Earned
Payout Period as a percentage of Gross Revenues (the "EBITDA to
Revenues Percentage") meets or exceeds 10% and (2) the Gross
Revenues of NMP for the Earned Payout Period meets or exceeds
$7,000,000; provided, however, that in no event will the Earned
Payout Amount exceed $14,000,000. The Applicable Percentage on Annex
I hereto shall be determined by rounding the actual Gross Revenues
of NMP for the Earned Payout Period and the actual EBITDA to
Revenues Percentage for the Earned Payout Period down to the nearest
percentage or number on the chart attached to Annex I; provided,
however, that (A) to the extent that actual Gross Revenues of NMP
exceed the threshold amount for the Applicable Percentage, then the
Applicable Percentage shall be increased by an amount equal to the
product of (x) the quotient obtained by dividing (1) the total
amount by which Gross Revenues exceed the minimum for such
Applicable Percentage by (2) $425,000 and (y) the percentage
increase in the Applicable Percentage if NMP had achieved the next
highest level of Gross Revenues of NMP from the Gross Revenues of
NMP determined above and (B) to the extent that actual EBITDA to
Revenues Percentage exceeds the threshold percentage for the
Applicable Percentage, then the Applicable Percentage shall be
increased by an amount equal to the product of (x) the quotient
obtained by dividing (1) the total percentage amount by which EBITDA
to Revenues Percentage exceeds the minimum for such Applicable
Percentage (expressed as a decimal) by (2) two (2) percent and (y)
the percentage increase in the Applicable Percentage if NMP had
achieved the next highest level of EBITDA to Revenues Percentage
from the EBITDA to Revenues Percentage amount determined above. An
example of this calculation is attached to Annex I hereto.
(ii) The Buyer shall pay interest on the Earned Payout
Amount equal to the difference between (A) the Earned Payout Amount
determined in accordance with the preceding paragraph but without
discounting from January 15, 2000 to the Effective Time (the "Gross
Payout Amount") and (B) the Earned Payout Amount. Such interest
shall be payable in cash at the same time as the Earned Payout
Amount is paid.
(iii) 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 60% of the Earned Payout
Amount and the Stock Portion of the Earnout shall be 40% 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) $3.00.
(iv) The Cash Portion of the Earned Payout Amount, if
any, shall be payable by Buyer (A) in cash to the Outside Investor
by wire transfer or other delivery of immediately available funds to
an account or accounts designated
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by the Outside Investor and (B) in a combination of (1) 50% in cash
to the Other Sellers by wire transfer or other delivery of
immediately available funds to an account or accounts designated by
the Other Sellers and (2) 50% by delivery of the Earnout Notes (as
hereinafter defined) to the Other Sellers, in each case on or prior
to January 15, 2000 (but not prior to January 1, 2000). The Earnout
Shares, if any, shall be payable on or prior to January 15, 2000
(but not prior to January 1, 2000) (A) to the Outside Investor by
the delivery of the certificates representing such shares and (B) to
the Other Sellers in a combination of (1) 50% in Earnout Shares by
the delivery of the certificates representing such shares to the
Other Sellers and (2) 50% in Earnout Notes deliverable to the Other
Sellers payable in Earnout Shares.
(v) The Earned Payout Amount shall be determined by AA
in accordance with the terms of this Agreement and Annex I hereto.
(vi) The Cash Portion of the Earned Payout Amount
payable to the Other Sellers shall be paid on or prior to January
15, 2000 (but not prior to January 1, 2000) as follows: (A) 50% in
cash and (B) 50% in the form of one-year promissory notes which bear
interest at the rate of 9% per annum in the form of Exhibit K hereto
(the "Earnout Notes").
(vii) The Earnout Shares payable to the Other Sellers
shall be payable as follows: (A) 50% by delivery of certificates on
or prior to January 15, 2000 (but not prior to January 1, 2000) and
(B) 50% on the first anniversary thereof upon payment of the Earnout
Notes by delivery of the Earnout Shares to the Sellers.
(viii) The payment of the Earned Payout Amount (in both
cash and in Earnout Notes) to (A) a Founder shall be contingent on
such Founder's not resigning from employment with the Surviving
Corporation without Good Reason (as defined in the applicable
Employment Agreement) or such Founder not being terminated by the
Surviving Corporation or Buyer for Cause (as defined in the
applicable Employment Agreement) prior to October 2, 1999 and (B)
Roger Craver shall be contingent on his not willfully failing to
abide by the material terms of his consulting and noncompete
agreement with the Surviving Corporation prior to October 2, 1999.
In addition, the final payment of the Earnout Notes (in both cash
and in Earnout Notes) in January 2001 to an Other Seller shall also
be subject to the same contingencies described in the preceding
sentence through October 1, 2000 as specified in the Earnout Notes.
Notwithstanding anything to the contrary contained in this Section
2(i)(viii), the parties hereto agree that the payment of the Earned
Payout Amount shall be treated as a contingent payment of purchase
price for tax purposes.
(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
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Worth of NMP is less than $1,300,000 (the "Minimum Net Worth") as of the Closing
Date. The Net Worth of NMP as of the Closing Date shall initially be determined
prior to the Closing Date by NMP in good faith within two business days prior to
the Closing Date (the "Closing Determination"). Following the Closing Date, the
Net Worth of NMP 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' Representatives 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 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. Up to $50,000 of such payment may be effected as a reduction in
the Contingent Cash Payment at the election of the Sellers' Representatives.
(k) Dissenting Shares. Notwithstanding anything in this
Agreement to the contrary, NMP Shares which are issued and outstanding
immediately prior to the Effective Time and which are held by stockholders who
have not voted such NMP Shares in favor of the Merger and who shall have
delivered a written demand for appraisal of such Shares in the manner provided
in the VSCA (the "Dissenting Shares") shall not be converted into or be
exchangeable for the right to receive the consideration provided above, unless
and until such holder shall have failed to perfect or shall have effectively
withdrawn or lost his right to appraisal and payment under the VSCA. If such
holder shall have so failed to perfect or shall have effectively withdrawn or
lost such right, his NMP Shares shall thereupon be deemed to have been converted
into and to have become exchangeable for, at the Effective Time, the right to
receive the consideration provided herein.
(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
October 16, 1998.
(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 NMP Shares, endorsed in blank or
accompanied by duly executed assignment documents, (iv) the Buyer will deliver
to the Sellers and the NMP Optionholders the consideration specified in Section
2(h) above as may be adjusted after the Closing pursuant to Sections 2(j) above
and Section 2(o) below, (v) the NMP Optionholders shall each deliver to the
Buyer the Option Cancellation Agreements required by Section 7(a)(xviii) below,
if applicable, and
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(vi) the Buyer will deliver to each of the NMP Optionholders an executed option
agreement at the vesting schedule, grant amount and exercise price set forth on
Annex VI attached hereto.
(n) Sellers' Representatives.
(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
Jonathan T. Hallett and Karl Khoury as their representatives (the
"Sellers' Representatives").
(ii) The Sellers hereby authorize the Sellers'
Representatives (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 either of the Sellers'
Representatives dies, becomes legally incapacitated or resigns from
such position, Philip Herget, in the case of Karl Khoury, and
Jeffrey Hallett, in the case of Jonathan T. Hallett, shall fill any
vacancy and shall be deemed to be the Sellers' Representatives for
all purposes of this Agreement; however, no change in the Sellers'
Representatives shall be effective until Buyer is given notice of
such change by the Sellers.
(iv) All decisions and actions by the Sellers'
Representatives 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' Representatives.
(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' Representatives as to any
actions required or permitted to be taken by the Sellers or the
Sellers' Representatives 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'
Representatives; (B) all actions, decisions and instructions of the
Sellers' Representatives shall be conclusive and binding upon all of
the Sellers; no Seller shall have any cause of action against Buyer
or NMP 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' Representatives; and no Seller shall have any cause
of action against the Sellers' Representatives for any action taken,
decision made or instruction given by the Sellers' Representatives
under this Agreement, except for fraud, gross negligence or willful
breach of this Agreement by the Sellers' Representatives; (C) the
Sellers'
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Representatives 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' Representatives in a
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' Representatives 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' Representatives shall be paid by the Sellers pro rata
in proportion to their percentage interest in NMP at Closing.
(o) Escrow Arrangements. Pursuant to the terms and conditions
of the Escrow Agreement to be entered into among the Sellers' Representatives,
Buyer and the Escrow Agent, the Buyer shall deposit $500,000 in cash in an
escrow account with 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 to be
retained by Buyer pursuant to the indemnification provisions of Article VIII
below as well as to secure Buyer's obligation to make the Contingent Cash
Payment to Sellers. At the conclusion of the period ending on the first
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 as the Contingent Cash Payment. In addition, when and as the
Contingent Cash Payment is paid to the Sellers, Buyer shall also pay Sellers
interest on the amount of such payment, calculated at the rate of 5.41% per
annum, compounded semi-annually, for the period from the Effective Time to the
date of payment. The Contingent Cash Payment (plus interest thereon as provided
in this subsection) shall be allocated among the Sellers as provided in the
Allocation Schedule. All interest generated by the Escrow Sum with the Escrow
Agent shall be paid to Buyer or utilized to satisfy the interest payable by
Buyer on the Contingent Cash Payment. 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)):
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(i) Authorization of Transaction. The Seller has full
power and authority to execute and deliver this Agreement and to
perform its obligations hereunder and this Agreement has been duly
executed and delivered by the Seller. This Agreement constitutes the
valid and legally binding obligation of the Seller, enforceable in
accordance with its 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) NMP Shares. The Seller holds of record and owns
beneficially the number of NMP Common Shares and/or NMP 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 NMP Shares are free and clear of any restrictions on
transfer (other than any restrictions under the Securities
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Act and state securities laws), claims, Taxes, Security Interests,
options, warrants, rights, 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 NMP (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 NMP.
(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 IV
attached hereto. Annex IV 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 Annex IV indicates a material adverse
change from information previously provided to the Sellers, Sellers shall be
entitled to terminate this Agreement (without any liability whatsoever to NMP or
Sellers) by written notice delivered to Buyer following receipt of such updated
Annex IV. Nothing in Annex IV shall be deemed adequate to disclose an exception
to a representation or warranty made herein, however, unless Annex IV identifies
the exception with reasonable particularity and describes the relevant facts in
reasonable detail as the context requires. For purposes hereof, the definition
of "Material" in Section 4 shall be utilized with respect to the use of Material
in this Section 3 (but with all references to NMP deemed to be references to the
Buyer).
(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 to perform
its obligations hereunder and this Agreement has been duly executed
and delivered by the Buyer and Newco. This Agreement constitutes the
valid and legally binding obligation of the Buyer and Newco,
enforceable in accordance with its 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).
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(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, 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
NMP Shares with a view to or for sale in connection with any
distribution thereof within the meaning of the Securities Act.
(vi) Buyer's and Newco's Capitalization. The authorized
capital stock of Buyer consists of (a) 75,000,000 shares of common
stock, (b) 96,621 shares of Class A preferred stock, and (c) 20,000
shares of the Class B preferred stock. The issued and outstanding
shares of and the holders of record of the Common Stock and of the
Class A Preferred Stock are as set forth in Annex II, and as of the
date hereof, there are no issued and outstanding shares of Class B
Preferred Stock. All of the Buyer's issued and outstanding Buyer
Shares have been duly authorized, are validly issued, fully paid,
and nonassessable. The authorized capital stock of Newco consists of
1,000 shares of common stock, of which 1,000 are issued and
outstanding. All of the issued and outstanding shares of Newco
capital stock have been authorized, are validly issued, fully paid
and nonassessable, and are held beneficially and of record by Buyer.
(vii) Financial Statements. Attached hereto as Exhibit B
are the following Buyer financial statements (collectively the
"Financial Statements"): unaudited consolidated balance sheet and
statement of income and changes in stockholder's equity as of and
for the six month period ended June 30, 1998 for Buyer. 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 Buyer as of such dates, and are consistent with the
books and records of Buyer (which books and records are correct
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and complete), subject to normal adjustments upon audit and the
absence of footnotes.
(viii) Tangible Assets. Buyer owns or leases
substantially all tangible assets necessary for the conduct of its
businesses as presently conducted and as presently proposed to be
conducted. To the Knowledge of the Buyer, each such tangible asset
is free from Material defects (patent and 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.
(ix) Certain Business Relationships with Buyer. Except
as set forth in Annex IV attached hereto, neither GTCR Fund VI, L.P.
nor its related funds has been involved in any business arrangement
or relationship with Buyer within the past twelve (12) months other
than service relationships in the Ordinary Course of Business and
venture capital investments, and neither GTCR Fund VI, L.P. nor its
related funds owns any material property or right, tangible or
intangible, which is used in the business of the Buyer.
4. Representations and Warranties Concerning NMP. NMP represents and
warrants 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
an adverse change from information previously provided to the Buyer, Buyer shall
be entitled to terminate this Agreement (without any liability whatsoever to
NMP) by written notice delivered to NMP 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 NMP with respect to such event or
matter, when taken together with all other related losses that may reasonably be
expected to occur to NMP as a result of any such events or matters, would exceed
$75,000 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, or reasonably likely
to be paid or incurred, or diminution's in value or reduction in benefits or
rights of any kind or character (whether or not known or asserted before the
date of this Agreement, fixed or unfixed, conditional or unconditional, choate
or inchoate, liquidated or unliquidated, secured or unsecured, accrued,
absolute, contingent or otherwise) that are reasonably likely to occur,
including without limitation, penalties, interest on any amount payable to a
third party as a result of the foregoing, and any reasonable legal or other
expenses reasonably expected to be
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<PAGE>
incurred in connection with defending any demands, claims, actions or causes of
action that, if adversely determined, could reasonably be expected to result in
losses, and all amounts paid in settlement of claims or actions; 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 such Customer
Contract or Agreement produced or is expected to produce $150,000 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. NMP 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, NMP is duly authorized to conduct business and
is in good standing under the laws of the Commonwealth of Virginia, which is the
only jurisdiction in which the nature of its businesses or the ownership or
leasing of its properties requires such qualification. NMP 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. Section 4(a) of the Disclosure
Schedule lists the directors and officers of NMP. NMP has delivered to the Buyer
correct and complete copies of the charter and bylaws of NMP (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 NMP are
correct and complete in all Material respects. NMP is not in default under or in
violation of any provision of its charter or bylaws.
(b) Capitalization. The entire authorized capital stock of NMP
consists of (i) 8,550,000 shares of common stock, no par value, of which
5,000,000 are issued and outstanding, 13,860 are subject to issuance pursuant to
vested options, 407,093 are subject to issuance pursuant to unvested options and
714,290 are reserved for issuance pursuant to future option grants and (ii)
1,450,000 shares of preferred stock, no par value, of which 1,428,570 are issued
and outstanding. All of the issued and outstanding NMP 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 NMP is a party or which are binding upon NMP 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 NMP. Except as provided in the Stock Purchase Agreement dated March 5, 1998
between NMP and Columbia NMP Investors, LLC, the Investor Rights Agreement dated
March 5, 1998 or the Amended and Restated Articles of Incorporation of NMP,
there are no voting trusts, proxies, or any other agreements or understandings
with respect to the voting of the capital stock of NMP.
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<PAGE>
(c) Noncontravention. 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 NMP is subject or any provision of the
charter or bylaws of NMP, except to the extent any such violation does not or
could not result in a Material adverse effect on NMP, 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, or other arrangement to which NMP
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). NMP
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. NMP has no Subsidiaries.
(e) Financial Statements. Attached hereto as Exhibit B are the
following NMP 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, 1995 and 1996
and audited balance sheet and statement of income, changes in stockholder's
equity, and cash flow as of and for the fiscal year ended December 31, 1997 (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 six month period ended June 30, 1998 for NMP (the "Stub Period End").
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 NMP as of such dates, and
are consistent with the books and records of NMP (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 the Stub Period End. Since June 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 of NMP. Without limiting the
generality of the foregoing since June 30, 1998 except as set forth on the
Disclosure Schedule:
(i) NMP 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) NMP 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;
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<PAGE>
(iii) NMP has not accelerated, terminated, modified, or
canceled any contract, lease, sublease, license or sublicense (or
series of related contracts, leases, subleases, licenses and
sublicenses) to which NMP is a party or by which it is bound other
than in the Ordinary Course of Business;
(iv) no party has notified NMP of any acceleration,
termination modification 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) NMP has not imposed any Security Interest upon any
of its Material assets, tangible or intangible;
(vi) Except as set forth in Section 4(f) - (vi) of the
Disclosure Schedule, NMP has not made any capital expenditure (or
series of related capital expenditures) involving more than $50,000
in the aggregate, or outside the Ordinary Course of Business;
(vii) NMP 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 $35,000 in the aggregate;
(viii) NMP has not created, incurred, assumed, or
guaranteed any indebtedness (including capitalized lease
obligations) involving more than $30,000 individually or in the
aggregate or outside the Ordinary Course of Business;
(ix) NMP 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) NMP has not canceled, compromised, waived, or
released any right or claim (or series of related rights and claims)
either involving more than $25,000 or outside the Ordinary Course of
Business;
(xi) NMP has not granted any license or sublicense of
any rights under or with respect to any Intellectual Property except
any such license or sublicense as was granted in the Ordinary Course
of Business as "work for hire" under Customer Contracts and
Agreements;
(xii) there has been no change made or authorized in the
charter or bylaws of NMP, other than in connection with this
Agreement and the transactions contemplated hereby;
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(xiii) except as set forth in Section 4(f) - (xiii) of
the Disclosure Schedule, NMP 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 (including upon
conversion or exercise) any of its capital stock;
(xiv) except as set forth in Section 4(f) - (xiv) of the
Disclosure Schedule, NMP 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) NMP has not made any consulting or other payment to
the Sellers other than in the Ordinary Course of Business;
(xvi) NMP has not experienced any damage, destruction or
loss involving more than $35,000 (whether or not covered by
insurance) to its property;
(xvii) NMP 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) NMP 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) NMP 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) NMP 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) NMP has not granted an increase in the base
compensation, nor has NMP 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) NMP 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;
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(xxiii) NMP 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) NMP has not made or pledged to make any Material
charitable or other capital contribution outside the Ordinary Course
of Business;
(xxv) there has not been any other occurrence, event,
incident, action, failure to act, or transaction outside the
Ordinary Course of Business involving NMP; and
(xxvi) NMP 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, NMP 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 NMP 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 $5,000, 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 Exhibit 4(h) of the
Disclosure Schedule,
(i) NMP 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 NMP (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. NMP currently
is not the beneficiary of any extension of time within which to file
any Tax Return except for an extension of time to file Form 1120 for
the year ended December 31, 1997 (an adequate reserve for which has
been reflected on the Stub Period End Balance Sheet). No claim has
ever been made by any taxing authority in a jurisdiction where NMP
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 NMP 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 accrued since the Most Recent Fiscal Year End.
(ii) NMP 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 NMP has properly
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reflected the status of all employees and independent contractors in
connection therewith as required by applicable Tax law.
(iii) Neither Sellers nor any of the officers of NMP
have received, nor do any of them 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 NMP either (A) claimed or
raised by any authority in writing or (B) as to which the Sellers or
the officers of NMP or employees responsible for Tax matters of NMP
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 NMP 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.
NMP 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 NMP
since December 31, 1990.
(iv) NMP 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) NMP has not filed a consent under Code Sec. 341(f)
concerning collapsible corporations. NMP 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 NMP under Code Sec.
280G. NMP 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). For all
positions for which disclosure is necessary to avoid a substantial
understatement of federal income Tax within the meaning of Code Sec.
6662, NMP has disclosed such positions on its federal income Tax
Returns. NMP is not a party to any Tax allocation or sharing
agreement. NMP 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.
(vi) Section 4(h) of the Disclosure Schedule sets forth
the following information with respect to NMP 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): the amount of any net operating loss, net
capital loss, unused investment or other credit, unused foreign tax,
or excess charitable contribution allocable to NMP.
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(vii) The unpaid Taxes of NMP 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. NMP owns or leases substantially all
tangible assets necessary for the conduct of NMP's Business as presently
conducted and as presently proposed to be conducted. To the Knowledge of NMP,
each such tangible asset is free from Material defects (patent and 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. NMP does not own nor does it have any
interest in any real property or improvements thereon (other than the leases
disclosed in Section 4(j) of the Disclosure Schedule, and the leasehold
improvements relating to the same) nor does NMP 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(j) 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 NMP. NMP has furnished Buyer with
copies of all license agreements to which NMP is a party, either as
licenser or licensee, with respect to any Intellectual Property. NMP
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 the NMP's Business, in its
business as presently conducted or currently proposed to be
conducted without the payment of any royalty or similar payment
(other than as provided in the license agreements furnished to Buyer
and listed on Section 4(k) of the Disclosure Schedule), and NMP is
not infringing on any Intellectual Property right of others, and NMP
has no Knowledge of any infringement by others of any such rights
owned by NMP.
(ii) All licenses set forth on Section 4(k) of the
Disclosure Schedule are valid and binding obligations of NMP, and to
the Knowledge of NMP, of the other parties thereto, and enforceable
against NMP, and to the Knowledge of NMP, the other parties thereto
in accordance with their respective terms, except for the Equitable
Exceptions. NMP owns and possesses all right, title and interest in
and to, or has the right to use pursuant to a valid license, all
Intellectual Property necessary for the operation of the business of
NMP as presently conducted.
(iii) All personnel, including employees, agents,
consultants, and contractors, who have contributed to or
participated in the conception and development of any Intellectual
Property have executed the nondisclosure agreements listed on
Section 4(k) of the Disclosure Schedule, which agreement
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provides that such persons have accorded NMP full, effective,
exclusive and original ownership of all material Intellectual
Property and have conveyed to NMP full, effective, and exclusive
ownership of all material Intellectual Property.
(iv) NMP has have 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) held by NMP, 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 Intellectual Property used in, or
otherwise necessary for the conduct of, the business of NMP as
heretofore conducted which is owned by, or to the Knowledge of NMP,
by a third party: (A) the identified owner possesses all right,
title, and interest in and to the item; (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 NMP, is threatened which challenges the legality,
validity, enforceability, use, or ownership of the item; and (D) NMP
has not agreed to indemnify any person or entity for or against any
interference, infringement, misappropriation, or other conflict with
respect to the item.
(v) None of the Material 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 NMP in the
conduct of NMP'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 twentieth and twenty-first
centuries and (ii) date-related data in connection with any valid
date in the twentieth and twenty-first centuries.
(l) Real Property Leases. Section 4(l) of the Disclosure
Schedule lists and describes briefly all real property leased or subleased to
NMP. NMP 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, assuming NMP obtains receipt of any consents necessary for
the transactions contemplated hereby:
(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;
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(iii) NMP is not and, to the Knowledge of NMP, 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) NMP has not, and to the Knowledge of NMP 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) NMP 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.
(m) Contracts. Section 4(m) of the Disclosure Schedule lists
the following contracts, agreements, Customer Contracts or Agreements and other
written arrangements to which NMP 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 $35,000 per annum;
(ii) any written agreement (or group of related written
agreements) for the furnishing or receipt of services which NMP
reasonably projects will involve more than the sum of $150,000 per
annum or $250,000 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
agreement) under which it has created, incurred, assumed, or
guaranteed (or may create, incur, assume, or guarantee) indebtedness
(including capitalized lease obligations) involving more than
$35,000 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 or
subcontractors in the Ordinary Course of Business;
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(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 $150,000 per annum
or not entered into in the Ordinary Course of Business.
NMP 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, 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
assuming NMP obtains receipt of any consents necessary for the transactions
contemplated hereby, (C) NMP is not, nor to the Knowledge of NMP is any other
party, in breach or default, and no event has occurred which to the Knowledge of
NMP with notice or lapse of time would constitute a breach or default or permit
termination, modification, or acceleration, under the written arrangement; and
(D) NMP has not, nor to the Knowledge of NMP has any other party, repudiated any
provision of the written arrangement. NMP 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 NMP
to perform services will result in a loss to NMP upon completion of performance.
Except as set forth in Section 4(m) of the Disclosure Schedule, NMP 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 NMP are reflected properly on its books and records, are valid
receivables and to the Knowledge of NMP 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 NMP.
(o) Powers of Attorney. There are no outstanding powers of
attorney executed on behalf of NMP.
(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 NMP 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;
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(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 material retroactive premium
adjustments or other loss sharing arrangements.
With respect to each such insurance policy: (A) the policy is legal,
valid, binding, and enforceable and in full force and effect; (B) the policy
will continue to be legal, valid, binding, and enforceable and in full force and
effect on identical terms immediately following the Closing Date; (C) NMP 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) NMP has not and to the
Knowledge of NMP, no other party to the policy has repudiated any provision
thereof. NMP 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, NMP 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 NMP (i) is subject to any unsatisfied judgment,
order, decree, stipulation, injunction, or charge or (ii) is a party or, to the
Knowledge of NMP, 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
NMP. NMP has no reason to believe that any such charge, complaint, action, suit,
proceeding, hearing, or investigation may be brought or threatened against NMP.
(r) Employees. To the Knowledge of NMP, no non-clerical
employee or any full-time group of employees has any plans to terminate
employment with NMP. NMP 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. NMP has not committed
any unfair labor practice. NMP has no Knowledge of any organizational effort
presently being made or threatened by or on behalf of any labor union with
respect to employees of NMP.
(s) Employee Benefits. Section 4(s) of the Disclosure Schedule
lists all Employee Benefit Plans that NMP maintains or to which NMP contributes
for the benefit of any current or former employee of NMP.
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(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.
(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 NMP. 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,
and that nothing has occurred since the receipt of such letter that
would materially 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 NMP
(including employees with responsibility for employee benefits
matters) of NMP, 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
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the directors and officers (and employees with responsibility for
employee benefits matters) of NMP, threatened. Neither the Sellers
nor any of the directors or the officers (or employees with
responsibility for litigation matters) of NMP has any Knowledge of
any Basis for any such charge, complaint, action, suit, proceeding,
hearing, investigation, claim, or demand.
(vii) NMP 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.
NMP 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. NMP has not
incurred, and neither the Sellers nor any of the directors or the officers (or
employees with responsibility for litigation matters) of NMP has any reason to
expect that NMP 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 NMP and the Controlled Group of Corporations which includes NMP maintains
or ever has maintained or to which any of them contributes, ever has
contributed, or ever has been required to contribute. NMP 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. 162(k)).
(t) Guaranties. NMP 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 NMP is subject based on
the acts or omissions of its employees, subcontractors and other agents
performing services for NMP in the Ordinary Course of Business (of which NMP has
no Knowledge of any claim for actual liability therefor).
(u) Environment, Health, and Safety.
(i) NMP 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) NMP has no Material Liability (and to the Knowledge
of NMP there is no Basis for any present or future charge,
complaint, action, suit, proceeding, hearing, investigation, claim,
or demand against NMP giving rise to any Liability) under the
Occupational Safety and Health Act, as amended, or any other
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law (or rule or regulation thereunder) of any federal, state, local,
or foreign government (or agency thereof) concerning employee health
and safety.
(iii) NMP does not have any Material Liability (and NMP
has not exposed any employee to any substance or condition that
could form the 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 NMP giving
rise to any Liability) for any illness of or personal injury to any
employee.
(iv) NMP 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) NMP 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 NMP which is
currently pending and alleges any failure to comply with any such
law or regulation.
(ii) NMP 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) NMP 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.
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(iv) NMP has not:
(A) made or agreed to make any contribution,
payment, or gift of funds or property to any governmental
official, employee, or agent 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) To the Knowledge of NMP, NMP has filed in a timely
manner all material 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) NMP 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 NMP. 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
NMP 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 NMP's
Business.
(x) Brokers' Fees. NMP 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.
(y) Disclosure. The representations and warranties contained
in this Section 4 as amended, modified and/or supplemented by the Disclosure
Schedules do not contain any untrue statement of a fact or omit to state any
Material fact necessary in order to make the statements and information
contained in this Section 4 not misleading.
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
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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 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 that may be necessary, 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 NMP 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, NMP
will 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 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' Representatives,
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 NMP mutually
agreed to by Buyer and the Sellers' Representatives.
(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 NMP or Buyer to update any Disclosure Schedule as
provided in Section 4 hereof, no disclosure by any Party pursuant to this
Section 5(f) shall be deemed to amend or supplement Annex III or the
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Disclosure Schedule or to prevent or cure any misrepresentation, breach of
warranty, and/or breach of covenant.
(g) Exclusivity. Until such time as this Agreement is
terminated in accordance with Section 9 herein, NMP and the Sellers will not (i)
solicit, initiate, or encourage the submission of any 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 NMP 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. NMP shall have provided for the cancellation, at or prior
to the Closing, of all NMP stock option plans, deferred bonus programs or
phantom equity plans. The outstanding NMP Options will be exchanged for Buyer
Options that will be delivered by Buyer to the NMP Optionholders at Closing. The
number of Buyer Options to be issued and the exercise prices therefor shall be
as set forth on Annex V hereto. All Buyer Options will utilize the same vesting
schedule as the canceled NMP Options. In conjunction with the cancellation of
the NMP Options, all eligible employees who have not executed customary NMP
employee non-disclosure 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., NMP) 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 Covenants. The Parties further covenant and agree as
follows:
(a) 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 therefor under
Section 8 below). NMP acknowledges and agrees 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 NMP; 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.
(b) 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, 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 NMP, each of the other Parties will cooperate with
him or it and his, her or its counsel in
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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).
(c) Transition. The Founders 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 NMP from
maintaining the same business relationships with NMP after the Closing for a
period of twenty-four (24) months thereafter as it maintained with NMP prior to
the Closing. The Founders will refer all customer inquiries relating to NMP's
Business to the Buyer and/or NMP from and after the Closing for a period of
twenty-four (24) months thereafter.
(d) 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, 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(d). 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 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. The foregoing provisions shall not apply to any
Confidential Information which is generally available to the public immediately
prior to the time of disclosure.
(e) Termination of Bank Facilities; Release of Guaranties.
Sellers shall take all reasonable best efforts necessary to (i) retire all of
NMP's outstanding bank indebtedness and (ii) fully, completely and
unconditionally release and/or substitute Buyer or NMP at or prior to Closing as
guarantor for the Sellers on all leases of NMP or other guarantees.
(f) Monitoring Information. Prior to the Closing, each Party
shall deliver such information to the other Party as may reasonably be requested
by Buyer, NMP or Sellers.
(g) Landlords' Consents. On or before the Closing Date, NMP
shall 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.
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(h) 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 NMP
to the extent such records and information pertain to events occurring on or
prior to the Closing Date; therefore, Buyer agrees to cause NMP 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.
(i) Covenant Not to Compete. For a period of three (3) years
from and after the Closing Date, the Founders will agree not to compete with
NMP's Business as provided in the Employment Agreement with each of the Founders
in the form of Exhibit E hereto. For purposes of this Agreement, the Parties
have agreed to allocate $50,000 of the Purchase Price and the payment of the
Earnout Notes to the covenants not to compete contained in the Employment
Agreements.
(j) 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).
(k) 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 NMP's Business, including the setting of
goals and review of budgets and performance. The Founders further agree, during
the Earned Payout Period, not to allow NMP to cut staff, capital expenditures
and general and administrative expenses or take other actions that are not
consistent with NMP's prior practices and/or prudent business practices, and
Founders agree not and not to allow NMP to engage in any activity in order to
increase current year profits of the business of NMP at the expense of the
longer term growth of the business of NMP. During the Earned Payout Period, the
Buyer agrees that it will not (i) unreasonably require that the business of NMP
be operated substantially different as it was prior to the Merger except in so
far as the prior practices of NMP 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 NMP's services, (B) the level of compensation of
NMP's full-time corporate employees or (C) the level NMP'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 NMP's business.
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(l) AppNet Options. Within seven (7) days after the Closing,
the Buyer shall deliver to certain employees of NMP mutually selected by Ken
Bajaj and Jon Hallett, stock options covering 111,500 shares of Buyer Common
Stock at an exercise price of $3.00 per share.
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) NMP 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 NMP Shares or NMP (and no such judgment, order,
decree, stipulation, injunction, or charge shall be in effect);
(v) NMP 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;
(vi) the acquisition by the Buyer of NMP Shares shall
represent one hundred percent (100%) of the issued and outstanding
capital stock of NMP and all of such NMP Shares shall be free and
clear of any Security Interests or other liens, claims or
encumbrances of any nature whatsoever;
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(vii) the Sellers shall have purchased any personal use
assets (e.g., automobiles) from NMP 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 Funded Indebtedness secured by such assets;
(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 NMP shall have received from Jonathan
T. Hallett, Jeffrey J. Hallett and Clifford W. Chapman, Jr. an
executed employment agreement in the form and substance attached
hereto as 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 NMP 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 NMP on the Stub Period End equaled or exceeded $1,300,000 or an
appropriate adjustment shall have been made to the Purchase Price as
provided in Section 2(i);
(xiv) the Buyer shall be satisfied that the Net Service
Revenues of NMP during the fiscal year ended December 31, 1997
equaled or exceeded $2,900,000 and during the six month period ended
on the Stub Period End equaled or exceeded $2,100,000;
(xv) the Buyer shall be satisfied that the Adjusted EBIT
of NMP during the fiscal year ended December 31, 1997 equaled or
exceeded $360,000 or 12.3% of Net Service Revenues for such fiscal
year and during the six month period ended on the Stub Period End
equaled or exceeded $31,500 or 1.5% of Net Service Revenues for such
period;
(xvi) the Buyer shall be satisfied in its sole
discretion with the results of its continuing legal, financial and
business due diligence investigations of NMP, all of which shall be
final and completed to Buyer's satisfaction prior to Closing;
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(xvii) no Material adverse change shall have occurred in
NMP's Business or its future prospects;
(xviii) Sellers shall have caused NMP to cancel each
outstanding phantom stock, deferred bonus or option plan, if any,
and all outstanding NMP Options shall have been canceled pursuant to
the Option Cancellation Agreement in the form of Exhibit I hereto;
(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
NMP 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 NMP (other than liens
for Taxes not yet due and payable and Taxes the payment of which are
being contested by NMP in good faith to the extent reserved against
in the Financial Statements), or against or in any way affecting any
NMP Share;
(xxii) the Sellers shall and NMP shall have caused all
of NMP's officers, directors and/or key employees of NMP to, have
repaid in full all debts and other obligations, if any, owed to NMP;
(xxiii) the Buyer shall have received from NMP the
Financial Statements;
(xxiv) all appropriate corporate and shareholder
authorizations of NMP shall have been obtained;
(xxv) since December 31, 1997, NMP 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, NMP shall not have transferred, conveyed,
disposed of and/or sold any of 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 NMP that has been
used historically by NMP or is being used currently by NMP (other
than "work for hire" which has been developed by NMP for a customer
and continues to be used by NMP in the
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performance of continuing services for that customer) shall be one
hundred percent (100%) owned by NMP as of the Closing Date;
(xxviii) the Buyer and Newco shall have received from
NMP 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 NMP 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;
(iv) the Buyer shall have issued the Buyer Options to
the NMP Optionholders to satisfy and secure the cancellation of the
NMP Options;
(v) 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);
(vi) 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;
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(vii) Sellers shall have received from the Buyer an
executed Escrow Agreement in the form and substance set forth as
Exhibit A attached hereto;
(viii) 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;
(ix) 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;
(x) Jonathan T. Hallett, Jeffrey J. Hallett and Clifford
W. Chapman, Jr. shall have received from the Buyer an executed
employment agreement, in the form and substance attached hereto as
Exhibit E;
(xi) 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;
(xii) the Sellers shall be satisfied in their sole
discretion with the results of its continuing legal, financial and
business due diligence investigations of Buyer, all of which shall
be final and completed to Sellers' satisfaction prior to Closing;
(xiii) the Sellers' Representatives shall have received,
in form and substance reasonably satisfactory to him or her, an
opinion of Hunton & Williams to the effect that, for federal income
tax purposes, the Merger will qualify as a "reorganization" under
Section 368(a) of the Code;
(xiv) the Sellers shall have received from Buyer and
Newco an opinion of counsel in the form and substance set forth as
Exhibit H hereto; and
(xv) 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' Representatives 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 in Section 4(h) above) shall survive the
Closing hereunder (even if the Buyer knew or had reason to know of any
misrepresentation or breach of warranty at the time of the Closing) and continue
in full force and effect for a period ending on March 31, 2001. All of the
representations and warranties of
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the Buyer shall survive the Closing hereunder and continue in full force and
effect for a period ending on March 31, 2001. 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 (even if the damaged Party knew or had reason
to know of any misrepresentation or breach of warranty or covenant 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.
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(b) Indemnification Provisions for Benefit of the Buyer.
(i) In the event NMP 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,
without affecting the right of contribution which such Sellers shall
have among themselves with respect to this Section 8(b), 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 $50,000 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 25% of the actual Purchase Price paid
to Sellers (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 by the Sellers and (b) in (i)
above (but not (ii) 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 25% of
the portion of the Purchase Price actually received by such Seller
(other than in the case of intentional fraud by such Seller and
other than the breach by a Seller of his/her individual
representatives 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 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, subject to
the limitations set forth in Section 8(b)(i) above, 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
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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 transfer Taxes which may become due and
owing by reason of the transactions contemplated by this Agreement.
(iv) The Sellers agree to indemnify the Buyer from and
against the entirety of any brokerage fees or investment banking
commissions due by Sellers or NMP by reason of the transactions
contemplated by this Agreement.
(v) The Parties shall make appropriate adjustments for
tax and insurance benefits in determining the liability of the
Sellers under this Section 8.
(c) Indemnification Provisions for Benefit of the Sellers. In
the event the Buyer breaches any of its representations, warranties, and
covenants contained herein, and provided that the particular representation,
warranty, or covenant survives the Closing and that the Sellers make a written
claim for indemnification against the Buyer pursuant to Section 10(h) below
within the applicable survival period, then the Buyer agrees to indemnify the
Sellers from and against the entirety of any Adverse Consequences in excess of
$50,000 threshold (at which point the Buyer will be obligated to indemnify the
Sellers from and against all such aggregate indemnifiable losses including
losses relating back to the first dollar) up to a maximum of $2,000,000, the
Sellers may suffer through and after the date of the claim for indemnification
(including any Adverse Consequences the Sellers 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 limitation set
forth above shall not apply to the liability of Buyer with respect to Adverse
Consequences resulting from or attributable to intentional fraud by the Buyer.
(d) 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
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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 timely notices of, and the right to participate in (as an observer)
any hearing or other court proceeding relating to the third party claim.
(e) 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.
(f) Payment; General Right of Offset. The Indemnifying Parties
shall promptly pay to the Indemnified Party as may be entitled to indemnity
hereunder in cash the amount of any Adverse Consequences to which such
Indemnified Party may become entitled to by reason of the provisions of Section
2 or Section 8 of this Agreement. Such amount of Adverse Consequences shall be
due and payable upon the earlier of (i) 30 days after written notice of an
indemnification claim by the Indemnified Party and such claim has not been
disputed by the Indemnifying Parties or their representatives (in the case of
Sellers) in writing; (ii) 10 days after Indemnifying Parties' have agreed in
writing that such amount of Adverse Consequences is their obligation; and (iii)
10 days after written notice of an order from the arbitrator(s) retained in
accordance with Section 8(h) below requiring the Indemnified Parties to pay such
amount to the Indemnified Party. 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 first seek
indemnification payments through offset against the Contingent Cash Payment and
the Earned Payout Amount, after an indemnification claim has been made therefor,
for 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 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
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surrendered Stock valued at the greater of (A) such Stock's then fair market
value (as determined in good faith by the Buyer's Board of Directors) or (B) the
value stated in Section 2(h)).
(g) 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(d), 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.
(h) 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 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:
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<PAGE>
(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 October 16, 1998 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
(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 October 16, 1998 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).
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<PAGE>
(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 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:
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<PAGE>
If to NMP or the Sellers:
Jonathan T. Hallett, President and Sellers' Representative
NMP, Inc.
306 North Washington Street
Falls Church, Virginia 22046
Tel: (703) 534-7201
Fax: (703) 538-6713
and to:
Karl Khoury, Sellers' Representative
c/o Columbia Capital
201 N. Union Street
Alexandria, Virginia 22314
Tel: (703) 519-3581
Fax: (703) 519-3033
with a copy to:
Hunton & Williams
751 Pinnacle Dr.
Suite 1700
McLean, Virginia 22102
Attn: Michael Lincoln, Esq.
Tel: (703) 714-7446
Fax: (703) 714-7410
If to the Buyer:
AppNet Systems, Inc.
6700A Rockledge Drive
Suite 525
Bethesda, Maryland 20817
Attn: Jack Pearlstein
Tel: (301) 581-2490
Fax: (301) 581-2488
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<PAGE>
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 COMMONWEALTH OF VIRGINIA WITHOUT GIVING
EFFECT TO ANY CHOICE OF LAW OR CONFLICT OF LAW PROVISION OR RULE (WHETHER OF THE
COMMONWEALTH OF VIRGINIA OR ANY OTHER JURISDICTION) THAT WOULD CAUSE THE
APPLICATION OF THE LAWS OF ANY JURISDICTION OTHER THAN THE COMMONWEALTH OF
VIRGINIA.
(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 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.
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<PAGE>
(l) Expenses. Each of the Parties and NMP 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 NMP's expenses shall be
included as Funded Indebtedness. The Sellers acknowledge and agree that NMP 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/ Terrence M. McManus
--------------------------------------
Name: Terrence M. McManus
-------------------------------
Title: Vice President, Secretary
-------------------------------
and Treasurer
-------------------------------
NEWCO:
NMP ACQUISITION SUB #1, INC.
By: /s/ Terrence M. McManus
--------------------------------------
Name: Terrence M. McManus
-------------------------------
Title: Vice President, Secretary
-------------------------------
and Treasurer
-------------------------------
NMP:
NEW MEDIA PUBLISHING, INC.
By: /s/ Jonathan Hallett
--------------------------------------
Name: Jonathan Hallett
-------------------------------
Title: President
-------------------------------
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<PAGE>
SELLERS:
/s/ Jonathan T. Hallett
-----------------------------------------
Jonathan T. Hallett
/s/ Jeffrey J. Hallett
-----------------------------------------
Jeffrey J. Hallett
/s/ Clifford W. Chapman, Jr.
-----------------------------------------
Clifford W. Chapman, Jr.
/s/ Roger M. Craver
-----------------------------------------
Roger M. Craver
COLUMBIA NMP INVESTORS, L.L.C.,
a Virginia limited liability company
By: Columbia Capital Corporation
Its: Managing Member
By: /s/ Neil P. Byrne
--------------------------------------
Neil P. Byrne
Vice President
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<PAGE>
EXHIBIT 10.5
================================================================================
AGREEMENT AND PLAN OF MERGER
dated as of September 17, 1998
================================================================================
<PAGE>
TABLE OF CONTENTS
Page
1. DEFINITIONS ................................................................1
2. MERGER .....................................................................5
2.1 The Merger.............................................................5
2.2 Closing................................................................5
2.3 Effective Time.........................................................5
2.4 Certificate of Incorporation and Bylaws of the Surviving Corporation...5
2.5 Directors and Officers of the Surviving Corporation....................5
2.6 Authorized Capital Stock of the Surviving Corporation..................6
2.7 Effect of the Merger...................................................6
2.8 Further Assurances.....................................................6
3. CONVERSION OF SHARES........................................................6
3.1 Conversion of Capital Stock............................................6
3.2 Delivery of Merger Consideration......................................11
3.3 Withholding...........................................................11
4. REPRESENTATIONS AND WARRANTIES OF SELLER...................................12
4.1 Organization..........................................................12
4.2 Power and Authority...................................................12
4.3 Authority for Agreement...............................................12
4.4 No Violation to Result................................................13
4.5 Capitalization........................................................13
4.6 Financial Statements..................................................14
4.7 Liabilities and Obligations...........................................15
4.8 Adverse Changes.......................................................15
4.9 Employee Matters......................................................15
4.10 Taxes.................................................................17
4.11 Subsidiaries..........................................................18
4.12 Property..............................................................18
4.13 Contracts.............................................................19
4.14 Government Contracts..................................................19
4.15 Litigation............................................................21
4.16 Compliance with Laws..................................................21
4.17 Environmental and Safety Matters......................................21
4.18 Customers; Suppliers..................................................23
4.19 Insurance.............................................................23
4.20 Intellectual Property.................................................23
4.21 Accounts Receivable...................................................26
4.22 Inventory.............................................................26
4.23 Related Party Transactions............................................26
4.24 Brokers...............................................................26
5. REPRESENTATIONS AND WARRANTIES OF APPNET AND SUB...........................26
<PAGE>
5.1 Due Organization......................................................27
5.2 Power and Authority...................................................27
5.3 Authority for Agreement...............................................27
5.4 No Violation to Result................................................27
5.5 Brokers and Agents....................................................27
5.6 Capitalization........................................................28
5.7 Shares Issued in Merger...............................................28
5.8 Litigation............................................................28
6. COVENANTS .................................................................28
6.1 Access to Properties and Records......................................29
6.2 Confidentiality.......................................................29
6.3 Interim Covenants of Century..........................................30
6.4 No Solicitation.......................................................32
6.5 Notification of Certain Matters.......................................33
6.6 Tax Returns; Sales, Use and Transfer Taxes............................33
6.7 Regulatory and Other Approvals........................................33
6.8 Intentionally deleted.................................................33
6.9 Reasonable Efforts....................................................33
6.10 Management of the Surviving Corporation...............................33
6.11 High Performance Organization.........................................34
6.12 Benefits Plans........................................................34
6.13 Stockholder Vote......................................................34
6.14 Stockholder Meeting...................................................34
6.15 Errors and Omissions Insurance........................................34
7. CONDITIONS PRECEDENT TO OBLIGATIONS OF APPNET AND SUB......................35
7.1 Representations and Warranties True at the Closing Date...............35
7.2 Performance...........................................................35
7.3 Stockholder Approval..................................................35
7.4 Agreements with Employees.............................................35
7.5 No Litigation.........................................................35
7.6 No Material Adverse Change............................................36
7.7 Certificates..........................................................36
7.8 AppNet's Review.......................................................36
7.9 Governmental, Regulatory and Other Consents and Approvals.............36
7.10 Delivery of Good Standing Certificates; Corporate Resolutions.........36
7.11 Financial Terms.......................................................36
7.12 Payment of Loans......................................................37
7.13 Purchase of Personal Use Items........................................37
7.14 Intentionally Deleted.................................................37
7.15 Stockholders Agreement and Registration Agreement.....................38
7.16 Dissenting Shares.....................................................38
7.17 Accredited Investors..................................................38
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<PAGE>
8. CONDITIONS PRECEDENT TO OBLIGATIONS OF CENTURY.............................38
8.1 Representations and Warranties True as of the Closing Date............38
8.2 AppNet's and Sub's Performance........................................38
8.3 No Litigation.........................................................38
8.4 Certificates..........................................................39
8.5 Governmental, Regulatory and Other Consents and Approvals.............39
8.6 Delivery of Good Standing Certificates; Corporate Resolutions.........39
8.7 Stockholder Approval..................................................39
8.8 Dissenting Shares.....................................................39
8.9 AppNet's Review.......................................................39
9. INDEMNIFICATION ...........................................................39
9.1 General Indemnification...............................................39
9.2 Indemnification Procedures............................................41
9.3 Right to Setoff.......................................................42
9.4 Release...............................................................43
10.NONCOMPETITION ............................................................43
10.1 Prohibited Activities.................................................43
10.2 Damages...............................................................44
10.3 Reasonable Restraint..................................................44
10.4 Severability; Reformation.............................................45
10.5 Independent Covenant..................................................45
10.6 Materiality...........................................................45
11.GENERAL ...................................................................45
11.1 Termination..........................................................45
11.2 Effect of Termination................................................46
11.3 Cooperation..........................................................46
11.4 Successors and Assigns...............................................47
11.5 Entire Agreement.....................................................47
11.6 Counterparts.........................................................47
11.7 Expenses.............................................................47
11.8 Specific Performance; Remedies Not Exclusive.........................47
11.9 Notices..............................................................48
11.10 Governing Law........................................................49
11.11 Arbitration..........................................................49
11.12 Survival of Representations, Warranties and Covenants................49
11.13 Miscellaneous........................................................50
11.14 Severability.........................................................52
11.15 Absence of Third Party Beneficiary Rights............................52
11.16 Mutual Drafting......................................................52
11.17 Further Representations..............................................52
11.18 Amendment; Waiver....................................................52
11.19 Gender...............................................................52
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<PAGE>
11.20 Headings.............................................................53
11.21 Public Disclosure....................................................53
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<PAGE>
AGREEMENT AND PLAN OF MERGER
THIS AGREEMENT AND PLAN OF MERGER (together with the schedules and
exhibits attached hereto, the "Agreement") is entered into effective for all
purposes and in all respects as of September 17, 1998, by and among (i) APPNET
SYSTEMS, INC., a Delaware corporation ("AppNet"), (ii) APPNET/CENTURY, INC., a
Delaware corporation and a wholly-owned subsidiary of AppNet ("Sub"), (iii)
CENTURY COMPUTING, INCORPORATED, a Delaware corporation ("Century"), and (iv)
those individuals listed on Schedule 1 attached hereto (collectively, the "Major
Stockholders") [the Major Stockholders and Century are hereinafter sometimes
collectively referred to as "Seller"].
WHEREAS, the Boards of Directors of AppNet and Sub have each determined
that it is advisable and in the best interests of their respective stockholders
to consummate, and have approved, the business combination transaction provided
for herein in which Sub would merge with and into Century and Century would
become a wholly-owned subsidiary of AppNet (the "Merger") and the Board of
Directors of Century has approved the execution and delivery of this Agreement;
and
WHEREAS, AppNet, Sub, Century and the Major Stockholders desire to make
certain representations, warranties and agreements in connection with the Merger
and to set forth conditions to the Merger.
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 are hereby acknowledged, the parties hereto, intending to
be legally bound, hereby agree as follows:
1. DEFINITIONS
Defined Terms. As used herein, the terms defined below shall have the
following meanings. Any of these terms, unless the context otherwise requires,
may be used in the singular or plural depending on the reference.
"Affiliate" shall mean as to any party, any Person which directly or
indirectly, is in control of, is controlled by, or is under common control with,
such party, including any person who would be treated as a member of a
controlled group under Section 414 of the Internal Revenue Code of 1986, as
amended (the "Code"), and any officer or director of such party and, as to a
party who is a natural person, such person's spouse, parents, siblings and
lineal descendants. For purposes of this definition, an entity shall be deemed
to be "controlled by" a Person if the Person possesses, directly or indirectly,
power either to (i) vote ten percent (10%) or more of the securities (including
convertible securities) having ordinary voting power or (ii) direct or cause the
direction of the management or policies of such entity whether by contract or
otherwise.
<PAGE>
"AppNet Common Stock" shall mean the $.0005 par value per share
common stock of AppNet.
"Business" shall mean the business of Century or AppNet, as the case
may be, as it is presently being conducted, as it has been conducted in the past
and how it is proposed to be conducted in the future.
"Cash Amount" shall mean (x) $30,000,000 minus (y) the sum of (i)
the Permitted Payments plus (ii) the Note Amount plus (iii) the Option Amount;
provided, however, that if the Cash Amount is greater than $22,000,000, then the
Cash Amount shall be equal to $22,000,000 and the Stock Amount shall be equal to
(x) $30,000,000 minus (y) the sum of (i) $22,000,000 plus (ii) the Permitted
Payments plus (iii) the Note Amount plus (iv) the Option Amount. If the Cash
Amount is not greater than $22,000,000, then the Stock Amount shall be equal to
$0.
"Cash Merger Consideration" shall mean the sum of all Cash Per Share
Amounts.
"Contract" shall mean a note, bond, mortgage, contract, license,
lease, sublease, covenant, commitment, power of attorney, proxy, indenture, or
other agreement or arrangement, oral or written, to which Century is a party or
by which Century or any of its assets or property is bound, other than
Government Contracts.
"Conversion Ratio" shall mean (x) the Option Amount divided by $3
divided by (y) the total number of shares of Century Common Stock subject to
options at the Effective Time.
"Debt Merger Consideration" shall mean the sum of all Debt Per Share
Amounts.
"Dissenting Shares" shall mean shares of Century Common Stock held
by any stockholder or stockholders who properly exercise (including timely
perfection and timely compliance with all other requirements under Section 262
of the DGCL, as defined in Section 2.1 hereof) appraisal rights under the DGCL
with respect to such shares.
"Encumbrance" shall mean any claim, lien, pledge, option, charge,
easement, security interest, right-of-way, encumbrance, mortgage or other right.
"GAAP" shall mean United States generally accepted accounting
principles, consistently applied.
"Government" shall mean any agency or instrumentality of the United
States of America, any state or territory or subdivision thereof or any foreign
country and any agency or instrumentality of any of the foregoing.
"Government Contracts" shall mean any contracts between Century and
the Government, including, without limitation, any grants, cooperative
agreements and other transactions between Century and the Government, and any
contract to which Century is a party
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<PAGE>
where the Government is the ultimate customer; provided, however, that Intelsat
shall not be deemed to be a Government Contract.
"Governmental or Regulatory Authority" shall mean any court,
tribunal, arbitrator, authority (including any quasi-governmental authority),
agency, commission, official or other instrumentality of the United States, any
foreign country or any domestic or foreign state, county, city or other
political subdivision.
"Intellectual Property Rights" shall mean all (i) patents, patent
applications, patent disclosures and inventions, (ii) trademarks, service marks,
trade dress, trade names, logos and corporate names and registrations and
applications for registration thereof together with all of the goodwill
associated therewith, (iii) copyrights (registered or unregistered) and
copyrightable works and registrations and applications for registration thereof,
(iv) mask works and registrations and applications for registration thereof, (v)
computer software, data, data bases and documentation thereof, (vi) trade
secrets and other confidential information (including, without limitation,
ideas, 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
official and marketing plans and customer and supplier lists and information),
(vii) other intellectual property rights, (viii) "technical data" as defined in
48 Code of Federal Regulations, Chapter 1, and (ix) copies and tangible
embodiments thereof (in whatever form or medium).
"Knowledge of Century" means the best knowledge of the following
persons of Century, after such inquiry by such persons into the matters
represented to such knowledge standard as is intended reasonably to verify the
accuracy of such matters: Mark Allen, Charles Butterfield, Norm Engelberg, Don
Link, Phil Miller, Barbara Mallory, John McBeth, and Charles Shaw.
"Knowledge of the Major Stockholders" means the best knowledge of
the Major Stockholders after such inquiry by the Major Stockholders into the
matters represented to such knowledge standard as is intended reasonably to
verify the accuracy of such matters.
"Legal Requirement" shall mean (i) with respect to any Person, any
judgment, decree, injunction, order, writ or ruling to or by which such person
is a party or is bound, or (ii) any law, ordinance, statute, rule, regulation,
code or other requirement of any Federal, state, municipal or other
governmental, administrative or judicial body, agency or authority or the common
law.
"Liabilities" shall mean, without limitation, any direct or indirect
liability, indebtedness, guaranty, endorsement, claim, loss, damage, deficiency,
cost, expense, obligation or responsibility, either accrued, absolute,
contingent, mature, unmature or otherwise and whether known or unknown, fixed or
unfixed, choate or inchoate, liquidated or unliquidated, secured or unsecured.
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<PAGE>
"Material Adverse Effect" shall mean a material adverse effect on
(i) the assets, the business or the condition (financial or otherwise),
properties, liabilities, reserves, working capital, earnings, technology,
prospects or relations with customers, suppliers, distributors, employees or
regulators, or (ii) the right or ability to consummate the transactions
contemplated hereby.
"Material Contract" means any contract involving the receipt or
payment by Century of $25,000 or more or any other contract which, if not
complied with or which, if defaulted by any party thereto, could result in a
Material Adverse Effect (other than as the result of a claim by a third party
not in privity to such contract).
"Merger Consideration" shall mean the sum of the Cash Merger
Consideration and the Debt Merger Consideration and any Stock Merger
Consideration.
"Net Worth" shall mean with regard to Century total assets
(excluding intangible assets) of Century less total liabilities of Century
determined in accordance with GAAP.
"Net Worth Target" shall mean $1,145,921, assuming the payment of
the Sprinkle and the Pre-Closing Distribution (as such terms are defined
herein).
"Note Amount" shall mean $2,000,000.
"Option Amount" shall mean (x) $30,000,000 minus the Permitted
Payments multiplied by (y) a fraction whose numerator is the total number of
shares of Century Common Stock subject to options at the Effective Time and
whose denominator is 462,282.
"Person" shall mean any person, limited liability company,
partnership, trust, corporation, business, group, Government or other entity.
"Permitted Payments" shall mean the sum of (x) $1,000,000 (the
"Sprinkle"), which shall be distributed to employees of Century immediately
prior to the Effective Time (to the extent that such payment is actually made),
plus (y) the amount of transaction costs paid or incurred by Century prior to
the Closing that causes Century's Net Worth to fail to meet the Net Worth
Target, plus (z) $5,500.
"Reducible Amounts" shall mean the Cash Amount and the Option
Amount.
"Stock Merger Consideration" shall mean the sum of all Stock Per
Share Amounts.
"Stockholders" shall mean the record owners of all of the issued and
outstanding shares of Century Common Stock as of the Effective Time.
"Tax" or "Taxes" shall mean all federal, state, local, foreign and
other taxes, assessments or other Government charges, including, without
limitation, income, estimated income, business, occupation, franchise, property,
sales, transfer, use, employment, commercial
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rent or withholding taxes, including interest, penalties and additions in
connection therewith for which Century or the Stockholders may be liable.
"Tax Return" means any return, report, information return or other
document (including any related or supporting information) with respect to
Taxes.
2. MERGER
2.1. The Merger. Upon the terms and subject to the conditions of this
Agreement, at the Effective Time (as defined in Section 2.3), Sub shall be
merged with and into Century in accordance with the General Corporation Law of
the State of Delaware (the "DGCL"). At the Effective Time, the separate
corporate existence of Sub shall cease and Century shall continue as the
surviving corporation in the Merger (the "Surviving Corporation"). Sub and
Century are sometimes referred to herein as the "Constituent Corporations." As a
result of the Merger, the outstanding shares of capital stock of the Constituent
Corporations shall be converted or cancelled in the manner provided in Section
3.1 hereof.
2.2. Closing. The closing of the Merger (the "Closing") will take place at
the offices of Tucker, Flyer & Lewis, 1615 L Street, N.W., Suite 400,
Washington, D.C. 20036, at 10:00 a.m., local time, on the second business day
(the "Closing Date") following satisfaction or waiver of the conditions set
forth in Sections 7 and 8 hereof, unless another date, time or place is agreed
to in writing by the parties hereto.
2.3. Effective Time. On the Closing Date, a certificate of merger (the
"Certificate of Merger") in the form attached hereto as Exhibit A, shall be
executed by the Constituent Corporations and thereafter AppNet shall promptly
deliver the Certificate of Merger or cause the same to be delivered to the
Secretary of State of the State of Delaware (the "Delaware Secretary") for
filing, as provided in Section 252 of the DGCL. The Merger shall become
effective at the time of the acceptance of the filing of the Certificate of
Merger by the Delaware Secretary (such time being referred to herein as the
"Effective Time").
2.4. Certificate of Incorporation and Bylaws of the Surviving Corporation.
At the Effective Time, (i) the Certificate of Incorporation of Sub as in effect
immediately prior to the Effective Time shall be the Certificate of
Incorporation of the Surviving Corporation, and (ii) the Bylaws of Sub as in
effect immediately prior to the Effective Time shall be the Bylaws of the
Surviving Corporation until thereafter amended as provided by law, the
Certificate of Incorporation of the Surviving Corporation and such Bylaws.
2.5. Directors and Officers of the Surviving Corporation.
(a) The directors of Sub immediately prior to the Effective Time
shall, from and after the Effective Time, be the directors of the Surviving
Corporation until their successors shall have been duly elected or appointed and
qualified or until their earlier death, resignation or removal in accordance
with the Surviving Corporation's Certificate of Incorporation and Bylaws.
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(b) The officers of Century immediately prior to the Effective Time
shall, from and after the Effective Time, be the officers of the Surviving
Corporation until their successors shall have been duly elected or appointed and
qualified or until their earlier death, resignation or removal in accordance
with the Surviving Corporation's Certificate of Incorporation and Bylaws.
2.6. Authorized Capital Stock of the Surviving Corporation. The Surviving
Corporation shall be authorized to issue one thousand (1,000) shares of common
stock, $0.01 par value (the "Surviving Corporation Common Stock").
2.7. Effect of the Merger. Subject to terms of this Agreement, the effect
of the Merger shall be as provided in the applicable provisions of the DGCL.
2.8. Further Assurances. Each party hereto will, either prior to or after
the Effective Time, execute such further documents, instruments, deeds, bills of
sale, assignments and assurances and take such further actions as may reasonably
be requested by one or more of the others to consummate the Merger, to vest the
Surviving Corporation with full title to all assets, properties, privileges,
rights, approvals, immunities and franchises of either of the Constituent
Corporations or to effect the other purposes of this Agreement.
3. CONVERSION OF SHARES
3.1. Conversion of Capital Stock. At the Effective Time, by virtue of the
Merger and without any action on the part of the holder thereof:
(a) Capital Stock of Sub. Each issued and outstanding share of the
common stock, par value $0.01 per share, of Sub ("Sub Common Stock") shall be
converted into and become one (1) fully paid and nonassessable share of common
stock, par value $0.01 per share of the Surviving Corporation. Each certificate
representing outstanding shares of Sub Common Stock shall at the Effective Time
represent an equal number of shares of Surviving Corporation Common Stock.
(b) Cancellation of Treasury Stock. All shares of common stock, par
value $0.01 per share, of Century ("Century Common Stock"), that are held by
Century as treasury stock shall be canceled and retired and shall cease to exist
and no capital stock of AppNet or other consideration shall be delivered in
exchange therefor.
(c) Payment for Century Common Stock.
(i)(A) Each issued and outstanding share of Century Common
Stock (other than Dissenting Shares and shares to be canceled in accordance with
Section 3.1(b)), shall by virtue of the Merger and without any action on the
part of the holder thereof, be converted into the right to receive, without
interest, (i) the Cash Per Share Amount and (ii) the Debt Per Share Amount and
(iii) the Stock Per Share Amount. The Debt Per Share Amount shall be represented
by a Certificate of Beneficial Interest, in the form of Exhibit B attached
hereto ("Certificate of Beneficial Interest"), in that certain Subordinated
Convertible Promissory Note,
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in the form attached hereto as Exhibit C (the "Note"), whose original principal
amount shall be the Note Amount. The Debt Per Share Amount shall be equal to (x)
the Note Amount divided by (y) the total number of shares of Century Common
Stock outstanding at the Effective Time. The Cash Per Share Amount shall be
equal to (x) the Cash Amount divided by (y) the total number of shares of
Century Common Stock outstanding at the Effective Time. No Stock Per Share
Amount shall be payable unless the Stock Amount is greater than $0. In the event
Stock Per Share Amount is payable, the Stock Per Share Amount shall be equal to
(x) the Stock Amount divided by (y) the total number of shares of Century Common
Stock outstanding at the Effective Time. Notwithstanding the foregoing, in no
event shall the sum of the Option Amount and the Stock Amount be less than
$6,000,000. In the event that the sum of the Option Amount and the Stock Amount
would be less than $6,000,000, the Stock Amount shall be increased such that the
sum of the Option Amount and the Stock Amount shall equal $6,000,000, and the
Cash Amount shall be reduced by a like amount such that the total of the Cash
Amount, the Option Amount and the Stock Amount, in the aggregate, remains the
same.
(B) (1) The following examples are intended to illustrate the
foregoing principles and the definitions set forth in Section 1. Assume that, as
Century has represented, on the date of the signing of this Agreement, there are
359,379 shares of Century Common Stock outstanding and 102,903 shares of Century
Common Stock subject to options. Assume further that the Permitted Payments
total $1,155,500, of which $1,000,000 is the "Sprinkle," $150,000 is used to pay
transaction costs and such payment causes Century to fail to satisfy the Net
Worth Target, and $5,500 is used to purchase additional insurance. The total
amount payable in connection with the Merger is reduced, therefore, to
$28,844,500 ($30,000,000 minus $1,155,500).
(2) Assume further that no options to purchase shares of
Century Common Stock are exercised prior to the Effective Time. On the basis of
the foregoing assumptions:
o the Option Amount would be $6,420,725 ((x) $28,844,500
multiplied by (y) 0.222597895),
o the Cash Amount would be $20,423,775 ((x) $30,000,000
minus (y) $9,576,225),
o the Stock Amount would be $0 (because the Cash Amount
did not exceed $22,000,000),
o the Cash Per Share Amount would be $56.831 ((x)
$20,423,775 divided by (y) 359,379),
o the Debt Per Share Amount would be $5.5652 ((x)
$2,000,000 divided by (y) 359,379), and
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o no Stock Per Share Amount would be payable (because the
Stock Amount was $0).
(3) As an additional example, assume that options to
purchase 5,000 shares of Century Common Stock are exercised between the signing
of this Agreement and the Effective Time. In that case, and on the basis of the
assumptions set forth in Section 3.1(c)(i)(B)(1):
o the number of shares of Century Common Stock outstanding
at the Effective Time would be 364,379,
o the number of shares of Century Common Stock subject to
option would be 97,903,
o the Option Amount would be $6,108,745 ((x) $28,844,500
multiplied by (y) 0.211782),
o the Cash Amount would be $20,735,755 ((x) $30,000,000
minus (y) $9,264,245),
o the Stock Amount would be $0 (because the Cash Amount
did not exceed $22,000,000),
o the Cash Per Share Amount would be $56.9071 ((x)
$20,735,755 divided by (y) 364,379),
o the Debt Per Share Amount would be $5.4888 ((x)
$2,000,000 divided by (y) 364,379), and
o no Stock Per Share Amount would be payable (because the
Stock Amount was $0).
(4) As a final example, assume that options to purchase
80,000 shares of Century Common Stock are exercised between the signing of this
Agreement and the Effective Time. In that case, and on the basis of the
assumptions set forth in Section 3.1(c)(i)(B)(1):
o the number of shares of Century Common Stock outstanding
at the Effective Time would be 439,379,
o the number of shares of Century Common Stock subject to
option would be 22,903,
o the Option Amount would be $1,429,055 ((x) $28,844,500
multiplied by (y) 0.0495434),
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o the Cash Amount would be $22,000,000 (because (x)
$30,000,000 minus (y) $4,584,555 would yield a number
greater than $22,000,000),
o the Stock Amount would be $3,415,445 ((x) $30,000,000
minus (y) $26,584,555),
o the Cash Per Share Amount would be $50.0707 ((x)
$22,000,000 divided by (y) 439,379),
o the Debt Per Share Amount would be $4.5519 ((x)
$2,000,000 divided by (y) 439,379), and
o the Stock Per Share Amount would be $7.7733 ((x)
$3,415,445 divided by (y) 439,379);
however, since the sum of the Option Amount and the Stock Amount ($1,429,055 +
$3,415,445 = $4,844,500) is less than $6,000,000, the Stock Amount shall be
increased such that the sum of the Option Amount and the Stock Amount shall
equal $6,000,000, and the Cash Amount shall be reduced by a like amount such
that the total of the Cash Amount, the Option Amount and the Stock Amount, in
the aggregate, remains the same, leaving the following adjusted result:
o the Option Amount would be $1,429,055 (unchanged),
o the Stock Amount would be $4,570,945 (an increase of
$1,155,500 such that the sum of the Option Amount and
the Stock Amount equal $6,000,000), and
o the Cash Amount would be $20,844,500 (a decrease of
$1,155,500 such that the total of the Cash Amount, the
Option Amount and the Stock Amount, in the aggregate,
remains the same).
(ii) Any Stock Per Share Amount shall be paid in shares of
AppNet Common Stock valued at a price of $3.00 per share. No fractional shares
of AppNet Common Stock shall be issued, but in lieu thereof each holder of
shares of Century Common Stock who would otherwise be entitled to receive a
fraction of a share of AppNet Common Stock shall receive from AppNet an amount
of cash equal to $3.00 multiplied by the fraction of a share of AppNet Common
Stock to which such holder would otherwise be entitled.
(iii) The Cash Merger Consideration, the Debt Merger
Consideration, and any Stock Merger Consideration shall be delivered to each
Stockholder following the Effective Time as set forth on Schedule 3.1(c) hereof.
All shares of Century Common Stock converted in accordance with this Section
3.1(c) shall no longer be outstanding and shall automatically be canceled and
retired and shall cease to exist, and each holder of a certificate representing
any such shares shall cease to have any rights with respect thereto, except the
right to receive cash in the amount set forth on Schedule 3.1(c), a Certificate
of Beneficial Interest in the principal amount set forth on Schedule 3.1(c), and
certificates representing the number of
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shares of AppNet Common Stock set forth on Schedule 3.1(c), upon the surrender
of such certificate representing shares of Century Common Stock in accordance
with Section 3.2 or, with respect to the Dissenting Shares, the right to receive
appraisal rights in accordance with the DGCL.
(d) Century Incentive Stock Options. AppNet shall assume options
issued pursuant to Century's Incentive Stock Option Plan in such manner that
each stock option under Century's Incentive Stock Option Plan outstanding as of
the Effective Time ("Century Stock Options") shall, by virtue of the Merger and
without any action on the part of the holder thereof, be converted into an
option to purchase shares of AppNet Common Stock (an "AppNet Stock Option"),
with the number of shares of AppNet Common Stock subject to each such AppNet
Stock Option equal to (x) the Conversion Ratio multiplied by (y) the number of
shares of Century Common Stock subject to the Century Stock Option being
converted into such AppNet Stock Option. The term within which a holder of an
AppNet Stock Option may exercise such option shall be equal to the term of the
Century Stock Option that was converted into such AppNet Stock Option. The
exercise price for each share of AppNet Common Stock subject to AppNet Stock
Options shall be determined for each Century Stock Option being converted to an
AppNet Stock Option. For each such AppNet Stock Option, the exercise price for
each share of AppNet Common Stock subject to such AppNet Stock Option shall be
equal to (x) the exercise price for the Century Stock Option being converted to
the AppNet Stock Option divided by (y) the Conversion Ratio. As an example of
the foregoing, if the Option Amount is equal to $6,420,725 and 102,903 shares of
Century Common Stock are subject to Century Stock Options at the Effective Time,
then:
o the Conversion Ratio would be 20.7986 ((x) 2,140,241
divided by (y) 102,903),
o an option to purchase 100 shares of Century Common Stock
would be converted into an option to purchase 2080
shares of AppNet Common Stock, and
o if the Century Stock Option had an exercise price of
$5.25 per share, such Century Stock Option would convert
into an AppNet Stock Option with an exercise price of
$0.2524 per share ((x) $5.25 divided by (y) 20.7986).
The AppNet Stock Options shall be delivered to the holders of
Century Stock Options following the Effective Time as set forth on Schedule
3.1(d) hereof. All shares of AppNet Common Stock to be delivered upon the
exercise of any such assumed stock options shall be bound by and subject to the
provisions of that certain AppNet Stockholders' Agreement dated June 29, 1998
and Registration Agreement dated June 29, 1998 and, after the Effective Time,
each person exercising any AppNet Stock Option shall be deemed a party to the
AppNet Stockholders' Agreement and Registration Agreement as if they had
actually signed such agreement and shall for all purposes and in all respects be
bound by, and enjoy the benefits of, its terms and conditions.
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3.2. Delivery of Merger Consideration.
(a) At the Closing, each holder of a certificate representing issued
and outstanding shares of record of Century Common Stock immediately prior to
the Effective Time (other than the Dissenting Shares) shall surrender such
certificate to AppNet and AppNet shall deliver, by wire transfer of immediately
available funds, to an escrow account at NationsBank, N.A. (or such other escrow
agent as Century shall designate prior to the Effective Time), on behalf of all
Stockholders, the aggregate amount to which such persons are entitled under
Section 3.1(c)(i) hereof, after giving effect to any Tax withholdings that
AppNet is obligated, under applicable Legal Requirements, to make; and (ii)
shall deliver to such record holder a Certificate of Beneficial Interest in the
Note in the principal amount to which such record holder is entitled pursuant to
Section 3.1(c)(ii) hereof.
(b) No transfers of Century Common Stock shall be made on the stock
transfer books of the Surviving Corporation at or after the Closing. No exercise
of Century Stock Options shall be honored at or after the Closing. Until such
certificates are surrendered, each certificate shall be deemed to evidence only
the right to receive the Merger Consideration or, with respect to the Dissenting
Shares, the right to receive appraisal rights in accordance with the DGCL, upon
such surrender in accordance with the terms and conditions set forth herein.
(c) All cash paid and any shares of AppNet Common Stock and
Certificates of Beneficial Interest delivered upon the surrender for exchange of
certificates evidencing Century Common Stock in accordance with the terms and
conditions hereof shall be deemed to have been issued or paid in full
satisfaction of all rights pertaining to such shares of Century Common Stock.
3.3. Withholding. AppNet shall be entitled to deduct and withhold from the
Cash Merger Consideration otherwise payable pursuant to this Agreement to any
Stockholder such amounts as AppNet is required to deduct and withhold with
respect to the payment of the Merger Consideration under the Code or any
provision of state, local or foreign Tax law; provided, however, that AppNet
shall not make any such deduction or withholding unless it is obligated, under
applicable Legal Requirements, to do so. To the extent that such amounts are so
withheld by AppNet, such withheld amounts shall be treated for all purposes of
this Agreement as having been paid to the holder of the shares of Century Common
Stock in respect of which such deduction and withholding was made by AppNet.
4. REPRESENTATIONS AND WARRANTIES OF SELLER
To induce AppNet and Sub to enter into this Agreement and to consummate
the transactions contemplated by this Agreement, Century and the Major
Stockholders, jointly and severally, each represents and warrants to AppNet and
Sub, as of the date hereof and as of the Closing Date, as set forth below:
4.1. Organization. Century is a corporation duly organized, validly
existing and in good standing under the laws of the State of Delaware. Century
is duly authorized and
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qualified to do business under all applicable laws, regulations, ordinances and
orders of public authorities to carry on its business in the places and in the
manner as now conducted, except where the failure to be so authorized or
qualified would not have a Material Adverse Effect on the business, operations,
affairs, prospects, properties, assets, profits or condition (financial or
otherwise) of Century.
4.2. Power and Authority. Century has all requisite corporate power and
authority to own, lease and operate its properties and to conduct its Business
as presently conducted and as proposed to be conducted and is duly qualified or
licensed as a foreign corporation in good standing in each jurisdiction in which
the character of its properties or the nature of its business activities
requires such qualification, except where the failure to be so qualified or
licensed would not have a Material Adverse Effect on Century.
4.3. Authority for Agreement. The execution and delivery of this Agreement
and the consummation of the transactions contemplated hereby have been
authorized by the Board of Directors of Century. Upon receipt of approval of
this Agreement and the transactions contemplated hereby by the Stockholders of
Century, the execution, delivery and performance of this Agreement and the
consummation of the transactions contemplated hereby will have been authorized
by all requisite corporate action on the part of Century. Century has full
corporate power, authority and legal right to enter into this Agreement and to
consummate the transactions contemplated hereby. The Major Stockholders have the
legal capacity to enter into this Agreement and to consummate the transactions
contemplated hereby. This Agreement has been duly executed and delivered by each
of the Major Stockholders and is a legal, valid and binding obligation of the
Major Stockholders enforceable against the Major Stockholders in accordance with
its terms, except as enforceability may be limited by applicable bankruptcy,
insolvency, reorganization, moratorium or other similar laws affecting the
enforcement of creditors' rights in general. This Agreement has been duly
executed and delivered by Century and is a legal, valid and binding obligation
of Century, enforceable against Century in accordance with its terms, except as
enforceability may be limited by applicable bankruptcy, insolvency,
reorganization, moratorium or other similar laws affecting the enforcement of
creditors' rights in general.
4.4. No Violation to Result. Except as set forth on Schedule 4.4, the
execution, delivery and performance of this Agreement and the consummation of
the transactions contemplated hereby and the fulfillment of the terms hereof:
(i) are not in violation or breach of, do not conflict with or constitute a
default under, and will not accelerate or permit the acceleration of the
performance required by, any of the terms of the Certificate of Incorporation or
Bylaws of Century or any Material Contract to which Century or the Major
Stockholders is a party or which affects Century; (ii) will not be an event
which, after notice or lapse of time or both, will result in any such violation,
breach, conflict, default, or acceleration; (iii) will not result in a violation
under any law, judgment, decree, order, rule, regulation, permit or other legal
requirement of any Governmental or Regulatory Authority, court or arbitration
tribunal whether federal, state, provincial, municipal or local (within the U.S.
or otherwise) at law or in equity, and applicable to Century; and (iv) will not
result in the creation or imposition of any Encumbrance in favor of any Person
upon any of the properties or assets of Century.
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4.5. Capitalization.
(a) Schedule 4.5 sets forth, with respect to Century, (i) the number
of authorized shares of each class of its capital stock, (ii) the number of
issued and outstanding shares of each class of its capital stock and the record
owner thereof, and (iii) the number of shares of each class, if any, which are
held in treasury. All of the issued and outstanding shares of capital stock of
Century (A) have been duly authorized and validly issued and are fully paid and
non-assessable, (B) were issued in compliance with all applicable state and
federal laws and (C) were not issued in violation of any preemptive rights or
rights of first refusal. Except as set forth on Schedule 4.5, no preemptive
rights or rights of first refusal exist with respect to the shares of capital
stock of Century, and no such rights arise by virtue of or in connection with
the transactions contemplated hereby. Except as set forth on Schedule 4.5, there
are no outstanding or authorized rights, options, warrants, convertible
securities, subscription rights, conversion rights, exchange rights or other
agreements or commitments of any kind that could require Century to issue or
sell any shares of its Common Stock (or securities convertible into or
exchangeable for shares of its Common Stock). Except as set forth on Schedule
4.5, there are no outstanding stock appreciation, phantom stock, profit
participation or other similar rights with respect to Century. To the Knowledge
of Century and the Major Stockholders, and except as set forth on Schedule 4.5,
there are no proxies, voting rights or other agreements or understandings with
respect to the voting or transfer of the capital stock of Century. Except as set
forth in Schedule 4.5, Century is not obligated to redeem or otherwise acquire
any of its outstanding shares of capital stock.
(b) Except as set forth on Schedule 4.5, the Stockholders are the
record holders of the issued and outstanding shares of capital stock of Century,
and on the date hereof to the actual knowledge without inquiry of Century and
the Major Stockholders, and at the Effective Time, to the Knowledge of Century
and the Major Stockholders, the Stockholders own such shares as are set forth on
Schedule 4.5 free and clear of any mortgage, security interest, pledge,
hypothecation, assignment, deposit arrangement, Encumbrance, lien (statutory or
otherwise), charge, preference, priority or other security agreement, option,
warrant, attachment, right of first refusal, preemptive right, conversion, put,
call or other claim or right, restriction on transfer (other than restrictions
imposed by federal and state securities laws), or preferential arrangement of
any kind or nature whatsoever (including any restriction on the transfer of any
assets, any conditional sale or other title retention agreement, any financing
lease involving substantially the same economic effect as any of the foregoing
and the filing of any financing statement under the Uniform Commercial Code or
comparable law of any jurisdiction).
4.6. Financial Statements.
(a) Schedule 4.6 includes true, complete and correct copies of (i)
the audited balance sheets of Century as of the end of the periods identified on
Schedule 4.6 (such dates being the end of Century's three (3) most recently
completed fiscal years), and audited statements of income, cash flows and
stockholders' equity for each of its three (3) most recently completed fiscal
years (collectively, the "Annual Financials"), and (ii) true, complete and
correct copies of Century's unaudited interim balance sheet (the "Current
Balance Sheet") as of August 2, 1998 (the
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"Balance Sheet Date") and Century's statement of income for the seven (7) months
ended August 2, 1998 (collectively, the "Interim Financials" and together with
the Annual Financials, the "Financial Statements"). Except as set forth on
Schedule 4.6, the Financial Statements have been prepared in accordance with
GAAP consistently applied (subject, in the case of the Interim Financials, to
normal year-end audit adjustments, which individually or in the aggregate will
not be material). Each of the balance sheets included in the Financial
Statements presents fairly the financial condition of Century as of the dates
indicated thereon, and each of the statements of income, cash flows and
stockholders' equity included in the Financial Statements presents fairly the
results of its operations for the periods indicated thereon. Except for the
change in Interim Statement vacation accrual policy effective January 1, 1998,
during the periods covered by the Financial Statements and since the Balance
Sheet Date, there has been no material change in Century's accounting policies.
Except as set forth on Schedule 4.6, there are no material, special or
non-recurring items of income or expense during the periods covered by the
Financial Statements and the balance sheets included in the Financial Statements
do not reflect any write-up or revaluation increasing the book value of any
assets, except as specifically disclosed in the notes thereto.
(b) The books and records, minute books, stock record books
(including separate minutes or written consents in lieu of meetings), and other
records of Century, all of which have been made available to AppNet, are
complete and correct and have been maintained in accordance with sound business
practices. The minute book(s) (including separate minutes or written consents in
lieu of meetings) of Century, all of which have been made available to AppNet,
contains accurate and complete records of all meetings held of, and corporate
action taken by, the Stockholders, the Board of Directors, and committees of the
Board of Directors of Century, and no meeting of any such stockholders, Board of
Directors, or committee has been held for which minutes have not been prepared
as of the date hereof and are not contained in such minute book (including
separate minutes or written consents in lieu of meetings).
4.7. Liabilities and Obligations.
(a) Except as disclosed on Schedule 4.7(a), there are no Liabilities
or obligations of Century, other than: (i) those Liabilities reflected on the
Current Balance Sheet and not previously paid or discharged; and (ii) those
Liabilities incurred after the Balance Sheet Date arising in the ordinary course
of business, which were incurred consistent with past practice under any
contract, commitment or agreement specifically disclosed on any schedule to this
Agreement.
(b) Schedule 4.7(b) sets forth a summary description of all advance
payments or deposits held by Century and reflected in the Financial Statements
and the related obligations thereunder.
4.8. Adverse Changes. Except as set forth on Schedule 4.8, from August 2,
1998: (i) there has been no change in the condition (financial or otherwise),
Business, net worth, assets, properties, Liabilities or obligations (fixed,
contingent, known, unknown or otherwise) of Century which has had a Material
Adverse Effect, and there has been no occurrence,
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circumstance or combination thereof which might reasonably be expected to result
in any such Material Adverse Effect before the Closing Date; (ii) Century has
not declared or paid any dividend or distribution in respect of the capital
stock, or any direct or indirect redemption, purchase or other acquisition of
any of the capital stock of Century (other than the matters described in Section
6.3 (m)) and (iii) Century has complied with all of the covenants set forth in
Section 6.3, to the same extent as if this Agreement had been executed on August
2, 1998.
4.9. Employee Matters.
(a) All employee benefit plans, programs, policies and arrangements
(whether formal or informal, written or unwritten, and whether maintained for
the benefit of a single individual or more than one individual) maintained or
contributed to by Century for the benefit of any current or former employee of
Century or in which such employees are entitled to participate are listed in
Schedule 4.9(a) (the "Benefit Plans"). With respect to each Benefit Plan, true,
correct and complete copies of all of the following documents, if applicable,
will be delivered or made available to AppNet substantially prior to the Closing
Date: (i) all plan documents and amendments thereto; (ii) all written
descriptions of any oral plans or policies; (iii) all trust agreements; (iv) all
annuity contracts, insurance policies or contracts and service agreements; (v)
the three (3) most recent Forms 5500 and any financial statements attached
thereto; (vi) the most recent actuarial and valuation report; (vii) the most
recent IRS determination letter; (viii) the most recent summary plan
description; (ix) and copies of all nondiscrimination testing for the last three
(3) years. Except as set forth on Schedule 4.9(a), each Benefit Plan and the
administration thereof complies, and has at all times complied, with the terms
of such Benefit Plan and with the requirements of all applicable law, including,
without limitation, the Employee Retirement Income Security Act of 1974, as
amended ("ERISA"), and the Internal Revenue Code of 1986, as amended (the
"Code"). Except as set forth on Schedule 4.9(a), each Benefit Plan intended to
qualify under Section 401(a) of the Code so qualifies, and each trust which
forms a part of any such Benefit Plan is exempt from taxation under Section
501(a) of the Code. No Benefit Plan subject to Part 3 of Title I of ERISA has
incurred any "accumulated funding deficiency" within the meaning of Section 302
of ERISA or Section 412 of the Code. No liability has been incurred or is
expected to be incurred under Title IV of ERISA to any party with respect to any
Benefit Plan, or any other plan presently or heretofore maintained or
contributed to by Century, any predecessor to Century, or any entity that is or
at any time was a member of a controlled group, as defined in Section
412(n)(6)(B) of the Code, which includes or included Century ("Controlled Group
Member"). Neither Century, nor any Controlled Group Member has incurred any
liability for any Tax imposed under Sections 4971 through 4980B of the Code or
civil liability under Sections 502(i) or (l) of ERISA. The "amount of unfunded
benefit liabilities" within the meaning of Section 4001(a)(18) of ERISA does not
exceed zero with respect to any Benefit Plan subject to Title IV of ERISA. No
Benefit Plan is a "multiemployer plan" within the meaning of Section 3(37) of
ERISA. Except as set forth on Schedule 4.9(a), no Benefit Plan provides health
or death benefit coverage to any employee or his spouse or dependents beyond the
termination of an employee's employment, except as required by Part 6 of Subpart
B of Title I of ERISA or Section 4980B of the Code. No "reportable event"
(within the meaning of Section 4043 of ERISA) has occurred with respect to any
Benefit Plan or any plan maintained by a Controlled Group Member since the
effective date
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of said Section 4043. Century has no liability (whether actual,
contingent or otherwise) with respect to any employee benefit plan or
arrangement sponsored or maintained by a Controlled Group Member. No suit,
actions or other litigation (excluding claims for benefits incurred in the
ordinary course of plan activities) have been brought against or with respect to
any Benefit Plan, and no suit, action, or other litigation is threatened by,
against, or relating to any Benefit Plan and to Century's Knowledge there is no
fact that could form the basis for any such suit, action or litigation. No
"prohibited transaction" within the meaning of Sections 406 or 407 of ERISA or
Section 4975 of the Code has occurred with respect to any Benefit Plan. No
Benefit Plan is presently under audit or examination by the IRS, the Department
of Labor, or any other Governmental or Regulatory Authority, and no matters are
pending with respect to any Benefit Plan under the IRS Voluntary Compliance
Resolution program, its Closing Agreement Program, or any other similar program.
All contributions to Benefit Plans that were required to be made under such
Benefit Plans will have been made as of the Balance Sheet Date, and all benefits
accrued under any unfunded Benefit Plan will have been paid, accrued or
otherwise adequately reserved in accordance with GAAP as of such date, and
Century will have performed by the Closing Date any obligations required to be
performed as of such date under all Benefit Plan. No Benefit Plan contains any
term or provision or is subject to any law that would prohibit the transactions
contemplated by this Agreement, or that would give rise to the vesting of
benefits, payments, or liabilities as a result of the transactions contemplated
by this Agreement, except to the extent that full vesting is required under any
tax-qualified Benefit Plan under Section 411 of the Code.
(b) Schedule 4.9(b) contains a complete and correct list of all
employees of Century as of the date hereof and the 1998 compensation paid or
payable to each such employee. Except as set forth in Schedule 4.9(b), (i) the
terms of employment or engagement of all directors, officers, employees, agents,
consultants and professional advisers of Century are such that their employment
or engagement may be terminated upon not more than thirty days' notice given at
any time and without liability for payment of compensation or damages other than
payment for salary and benefits accrued through the date of termination, (ii)
there are no severance payments which are or could become payable by Century to
any director, officer or other employee of Century under the terms of any oral
or written agreement or commitment or any law, custom, trade or practice, and
(iii) there are no agreements, contracts or commitments, oral or written,
between Century and any employee, consultant or independent contractor.
(c) Century is not bound by or subject to (and none of its assets or
properties are bound by or subject to) any arrangement with any labor union. No
employees of Century are or ever have been represented by any labor union or
covered by any collective bargaining agreement while employed by Century and no
campaign to establish such representation is in progress. There is no pending or
threatened labor dispute involving Century and any group of their employees nor
has Century experienced any labor interruptions. Except as set forth in Schedule
4.16, Century is and has been in compliance with all applicable laws respecting
employment and employment practices, terms and conditions of employment, and
wages and hours, including without limitation any such laws regarding employment
documentation, minimum wage and hours, workers' compensation, family and medical
leave, the Immigration Reform and Control Act, and occupational safety and
health requirements, and Century has not
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engaged in any unfair labor practice. All persons classified by Century as
independent contractors do satisfy and have satisfied the requirements of law to
be so classified, and Century has fully and accurately reported their
compensation on IRS Forms 1099 when required to do so.
4.10. Taxes. Century has filed or caused to be filed with the appropriate
Governmental or Regulatory Authority any and all Tax Returns, with respect to
Taxes required to be filed by it as of the date hereof, or requests for
extensions to file Tax Returns which have been filed have been timely filed or
granted and have not expired, and all such Tax Returns are true, complete and
accurate in all respects, except to the extent that such failures to file, have
extensions granted that remain in effect or be complete and accurate in all
respects, as applicable, individually or in the aggregate, would not have a
Material Adverse Effect on Century. Century has paid all Taxes shown as due,
claimed to be due by any Governmental or Regulatory Authority, or accruable with
respect to periods through the Closing Date except for such taxes as (i) are
fully reserved for in the Current Balance Sheet or (ii) were incurred after the
Balance Sheet Date in the ordinary course of business and are not due and
payable as of the Closing Date. No deficiencies for any Taxes have been proposed
against Century that are not adequately reserved for in the Current Balance
Sheet. No requests for waivers or comparable consents with respect to the time
to assess any Taxes against Century have been granted or are pending, except for
requests with respect to such Taxes that have been adequately reserved for in
the Current Balance Sheet. Century has complied in all respects with all
applicable laws, rules and regulations relating to the payment and withholding
of Taxes (including, without limitation, withholding of Taxes pursuant to
Sections 1441 and 1442 of the Code or similar provisions under any foreign laws
and withholding with respect to employee wages) and has, within the time and
manner prescribed by law, withheld and paid over to the proper Governmental or
Regulatory Authority all amounts required to be withheld and paid over under all
applicable laws. No federal, state, local or foreign audits or other
administrative proceedings or court proceedings ("Audits") exist or have been
initiated with regard to any Taxes or Tax Returns of Century, and Century has
not received any notice that such an Audit is pending or threatened with respect
to any Taxes due from or with respect to Century or any Tax Return filed or
required to be filed by or with respect to Century. Century is not a party to,
is not bound by, and has no obligation under, any tax sharing agreement, tax
indemnification agreement or similar contract or arrangement.
4.11. Subsidiaries. Century has no debt, equity or other investment or
interest in any Person and is not a party to any joint venture agreement with
any Person. Century has no commitments to contribute to the capital of, make
loans to or share losses of, any Person.
4.12. Property.
(a) Century neither has ever owned nor now owns any real property.
Schedule 4.12(a) sets forth an accurate and complete list of all real property
and leaseholds of real property leased by Century or to which Century may have
any ownership or leasehold rights, except for temporary off-site storage
arrangements terminable without penalty upon 60 days notice (collectively, the
"Facilities"). Except as otherwise disclosed on Schedule 4.12(a), to the
Knowledge of Century and the Knowledge of the Major Stockholders, (i) there are
no outstanding written or oral leases, rights to occupancy, or tenancies of any
kind (including
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tenancies by sufferance and/or holdover tenancies arising under
expired written or oral leases) covering or in any way affecting the Facilities
or any part or parts thereof; (ii) no person, firm or corporation other than
Century has any rights (including rights arising under an installment contract,
option to purchase, easement, right-of-way, or otherwise) with respect to the
Facilities or any part thereof; and (iii) there have been no improvements to,
construction on, work done at, and/or services or material supplied to, the
Facilities or any part or parts thereof for which payment in full has not been
made and which might give rise to mechanic's liens or other lien rights, except
in the ordinary course of business. All leases set forth on Schedule 4.12(a) are
in full force and effect and constitute valid and binding agreements of Century
and, to the knowledge of Century, the other parties thereto in accordance with
their respective terms.
(b) Schedule 4.12(b) sets forth an accurate list of all owned and
leased personal property with an original purchase price in excess of $1,000
purchased on or after January 1, 1996 (i) as of the Balance Sheet Date, or (ii)
acquired since the Balance Sheet Date, including in each case true, complete and
correct copies of leases for equipment and also including an indication as to
which assets are currently owned, or were formerly owned, by any current or
former stockholders of Century or business or personal Affiliates of Century or
any current or former stockholder of Century. All of the vehicles and other
material machinery and equipment listed on Schedule 4.12(b) are in good working
order and condition, ordinary wear and tear excepted. All fixed assets used by
Century that are material to the operation of the Business are either owned by
Century or leased under an agreement listed on Schedule 4.12(b).
(c) Century has good and marketable title to its assets, free and
clear of any and all Encumbrances and defects in title. Century's assets, taken
together, are adequate for the operation of the Business as it is being
currently conducted.
4.13. Contracts. Schedule 4.13 constitutes an accurate and complete list
of each Material Contract. Each Contract is in full force and effect, is a
valid, binding and enforceable obligation by or against Century and the other
parties thereto, and no event has occurred which constitutes or, with the giving
of notice or passage of time, or both, would constitute, a default or breach
thereunder. Prior to the Closing Date, Century will deliver or will cause to be
delivered or will make available to AppNet correct and complete copies of each
Material Contract and all amendments thereto. To the Knowledge of Century, no
other party to any Contract is in default thereunder. Except as set forth on
Schedule 4.13, there exists no restrictive covenants of any nature whatsoever in
any of the Contracts. Except as set forth in Schedule 4.13, Century does not
project a loss on any of the Contracts.
4.14. Government Contracts.
(a) Schedule 4.14 sets forth a complete and accurate list of
Century's Government Contracts in effect at any time during the three (3)-year
period ending on the date of this Agreement (the "Century Government
Contracts"). All Century Government Contracts have been made available to AppNet
prior to the date hereof. Except for the pending 1996 incurred cost audit by
DCAA, with respect to the Century Government Contracts, there is no current
pending or, to Century's and the Major Stockholders' Knowledge, threatened,
formal or informal,
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administrative or agency-level dispute, claim, protest, appeal or proceeding to
which Century is a party before, nor a current formal or informal,
administrative or agency-level claim, pending protest, appeal or lawsuit
(including, without limitation, any qui tam suit by Century) pending or, to
Century's and the Major Stockholder's Knowledge, threatened against, any
Governmental or Regulatory Authority or to which a Governmental or Regulatory
Authority is a party. Century has not received a cure notice or a show cause
notice advising Century that it was in default or would, if it failed to take
remedial action, be in default under any Century Government Contract. All
amounts previously charged to or presently carried as chargeable by Century to
any cost-reimbursable Century Government Contract have been or will be
reasonable, allowable, and allocable to each such Century Government Contract.
There exists no basis for a claim of any liability by Century as a result of
cost and pricing data submitted to the Government. Century has not submitted any
inaccurate, untruthful, or misleading cost or pricing data, certification, bid,
proposal, report, claim, or any other information to the Government. No Century
Government Contract has been terminated for default or for the convenience of
the Government. Except as set forth on Schedule 4.14, neither Century nor the
Major Stockholders has information that any option with respect to any Century
Government Contract will not be exercised or that any Century Government
Contract or subcontract of Century will be terminated, cancelled, or will
otherwise come to an end, other than through the expiration of such contract
after the completion of all work contemplated thereunder (including any work
contemplated to be done during any option period). Century has received no
requests with respect to any Century Government Contract for equitable
adjustment or claims (other than routine invoices) pending with the Government.
Except as set forth in Schedule 4.14, neither Century nor the Major Stockholders
has been notified of any deductions from unpaid invoices with respect to any
Century Government Contract. Neither Century nor the Major Stockholders has been
notified of any warranty claims with respect to any Century Government Contract.
There have been no unfavorable past performance assessments, evaluations, or
ratings with respect to any Century Government Contract. Century has not
violated the Service Contract Act, or failed to pay any compensation required by
it with respect to any Century Government Contract. There exist no assignments
of claims with respect to the Century Government Contracts, whether pursuant to
the Assignment of Claims Act or otherwise.
(b) Century has not been suspended or debarred from bidding on
contracts or subcontracts for the Government, nor has any such suspension or
debarment action been threatened or commenced. There is not a valid basis, nor
specific circumstances which with the passage of time would become a basis, for
Century's suspension or debarment from bidding on contracts or subcontracts for
the Government. Except as set forth on Schedule 4.14, Century has not been, nor
is it now being, audited or investigated by the General Accounting Office (or
any other Congressional agency), the General Services Administration, the
Defense Contract Audit Agency, the Defense Contract Administrative Service, the
Department of Labor, the Department of Treasury, or the inspector general or
auditor general or similar functionary of the Government, nor has any such audit
or investigation been threatened. No employee or Affiliate of Century, or to the
Knowledge of Century, no agent, consultant or representative of Century, is in
receipt or possession of any competitor or Government proprietary or procurement
sensitive information under circumstances where there is reason to believe that
such receipt or possession is unlawful or unauthorized. Except as set forth on
Schedule 4.14, Century has never received an official
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investigative inquiry or subpoena from the Government. Century has never filed a
Cost Accounting Standards disclosure statement and has never been required by
any Legal Requirement or Governmental or Regulatory Authority to file a Cost
Accounting Standards disclosure statement. Century has properly disclosed all of
its contingent fee agreements with respect to its Government sales and marketing
efforts. Century has not misused or disclosed (i) any subcontractor or team
member proprietary or confidential information, (ii) any classified information,
or (iii) any records subject to the Privacy Act (5 U.S.C. ss. 552a). Century is
not aware of any violation of (A) the Certificate of Procurement Integrity, (B)
the Procurement Integrity Act, or (C) any statutory, regulatory, contractual or
ethical requirement of Government contractors, in any such case by Century.
(c) Except as set forth on Schedule 4.14, there are no restrictions
on Century's use of techniques, skills, know-how or methodologies employed in
the performance of any Contract or Government Contract. Except as set forth on
Schedule 4.14, there are no restrictions on Century re-selling or re-licensing
its computer software products to other than Government end-user customers.
(d) Except as set forth on Schedule 4.14, Century has no Government
Contracts that were awarded pursuant to a "small business set-aside," as that
term is commonly used in Government Contracting.
(e) Except as set forth on Schedule 4.14, Century does not project a
loss on any fixed price Government Contract.
4.15. Litigation. Except as set forth in Schedule 4.15, there is no
litigation, suit, proceeding, action, claim, demand or investigation, at law or
in equity, pending or to the Knowledge of Century and the Major Stockholders
threatened against or affecting Century before any court, agency, authority or
arbitration tribunal, including, without limitation, any product liability,
workers' compensation or wrongful dismissal claims, or claims, actions, suits,
demands or proceedings relating to toxic materials, hazardous substances,
pollution or the environment. To the Knowledge of Century and the Major
Stockholders, there are no facts that would likely result in any such
litigation, suit, proceeding, action, claim or investigation. Century is not
subject to or in default with respect to any notice, order, writ, injunction or
decree of any court, agency, authority or arbitration tribunal.
4.16. Compliance with Laws. Except as set forth in Schedule 4.16, Century
has complied and is currently in compliance, in all material respects, with all
laws, regulations, rules, orders, permits, judgments, decrees and other
requirements and policies imposed by any Governmental or Regulatory Authority
applicable to it, its properties or the operation of its business. Century has
not received any notice or citation for noncompliance with any of the foregoing,
and there exists no condition, situation or circumstance, nor has there existed
such a condition, situation or circumstance, which, after notice or lapse of
time, or both, would constitute noncompliance with or give rise to future
liability with regard to any of the foregoing. Century has all licenses,
permits, approvals, qualifications or the like, from any Government,
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Governmental or Regulatory Authority or any third party necessary for the
conduct of Century's Business and all such items are in full force and effect.
4.17. Environmental and Safety Matters.
(a) For purposes of this Agreement, the term "Environmental and
Safety Requirements" shall mean all federal, state, local and foreign statutes,
regulations, ordinances and other provisions having the force or effect of law,
all judicial and administrative orders and determinations, all contractual
obligations and all common law, in each case concerning public health and
safety, worker health and safety and pollution or protection of the environment
(including, without limitation, all those relating to the presence, use,
production, generation, handling, transport, treatment, storage, disposal,
distribution, labeling, testing, processing, discharge, Release, threatened
Release, control or cleanup of any hazardous or otherwise regulated materials,
substances or wastes, chemical substances or mixtures, pesticides, pollutants,
contaminants, toxic chemicals, petroleum products or byproducts, asbestos,
polychlorinated biphenyls, noise or radiation); "Release" shall have the meaning
set forth in CERCLA (as defined below); and "Environmental Lien" shall mean any
Lien, whether recorded or unrecorded, in favor of any Governmental or Regulatory
Authority, relating to any liability of Century arising under any Environmental
and Safety Requirements.
(b) Except as set forth on Schedule 4.17:
(i) Century has complied with and is currently in compliance
with all Environmental and Safety Requirements, and Century has not received any
oral or written notice, report or information regarding any Liabilities (whether
accrued, absolute, contingent, unliquidated or otherwise) or any corrective,
investigatory or remedial obligations arising under Environmental and Safety
Requirements which relate to Century or any of its properties or facilities.
(ii) Without limiting the generality of the foregoing, Century
has obtained and complied with, and is currently in compliance with, all
permits, licenses and other authorizations that may be required pursuant to any
Environmental and Safety Requirements for the occupancy of its properties or
facilities or the operation of their businesses. A list of all such permits,
licenses and other authorizations which are material to Century is set forth on
Schedule 4.17 attached hereto.
(iii) Neither this Agreement nor the consummation of the
transactions contemplated by this Agreement shall impose any obligations on
Century or otherwise for site investigation or cleanup, or notification to or
consent of any Governmental or Regulatory Authorities or third parties under any
Environmental and Safety Requirements (including, without limitation, any so
called "transaction-triggered" or "responsible property transfer" laws and
regulations).
(iv) Century has not treated, stored, disposed of, arranged
for or permitted the disposal of, transported, handled or Released any substance
(including, without limitation, any hazardous substance), or owned, occupied or
operated any facility or property, so
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as to give rise to Liabilities of Century for response costs, natural resource
damages or attorneys fees pursuant to the Comprehensive Environmental Response,
Compensation and Liability Act of 1980, as amended ("CERCLA"), or any other
Environmental and Safety Requirements.
(v) Without limiting the generality of the foregoing, no
facts, events or conditions relating to the past or present properties,
facilities or operations of Century shall prevent, hinder or limit continued
compliance by Century with Environmental and Safety Requirements, give rise to
any corrective, investigatory or remedial obligations on the part of Century
pursuant to Environmental and Safety Requirements or give rise to any other
Liabilities (whether accrued, absolute, contingent, unliquidated or otherwise)
on the part of Century pursuant to Environmental and Safety Requirements
(including, without limitation, those Liabilities relating to onsite or offsite
Releases or threatened Releases of hazardous materials, substances or wastes,
personal injury, property damage or natural resources damage).
(vi) Century has not, either expressly or by operation of law,
assumed or undertaken any material liability or corrective, investigatory or
remedial obligation of any other Person relating to any Environmental and Safety
Requirements.
(vii) To the Knowledge of Century and the Major Stockholders,
no Environmental Lien has attached to any property, leased or operated by
Century.
4.18. Customers; Suppliers.
(a) Except as set forth in Schedule 4.18(a), no single customer
accounted for more than 5% of Century's revenues for the fiscal year ended
December 31, 1997 or for the period January 1, 1998 through August 2, 1998. No
customer listed on Schedule 4.18(a) (a "Significant Customer") has canceled or
otherwise terminated or threatened to cancel or otherwise terminate its
relationship with Century, or during such periods has materially decreased its
usage or purchase of Century's services or products. Except as set forth in
Schedule 4.18(a), no Significant Customer has notified Century that it has any
plan or intention to terminate, cancel or otherwise materially modify its
relationship with Century or materially decrease or limit its usage, purchase or
distribution of the services or products of Century other than the expiration of
such contract after the completion of all work contemplated thereunder
(including any work contemplated to be done during any option period).
(b) The relationships of Century with its suppliers are good
commercial working relationships and, except as set forth on Schedule 4.18(b),
no supplier has during the last twelve months terminated or threatened to
terminate, its relationship with Century or has during the last twelve (12)
months decreased or limited or threatened to decrease or limit, its services,
supplies or materials to Century. Except with respect to products that Century
is reselling pursuant to "reseller agreements," no supplier is a sole source of
supply of any good or service to Century. Century does not have any knowledge
that any of the suppliers intends to terminate or otherwise modify adversely to
Century its relationship with Century or to decrease or limit its services,
supplies or materials to Century.
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4.19. Insurance. Schedule 4.19 sets forth an accurate list of all
insurance policies carried by Century (all of which policies remain in full
force and effect) and all insurance loss runs or workers' compensation claims,
in each case to the extent such loss runs or workers' compensation claims have
been received for the past two (2) policy years. Century has made available to
AppNet true, complete and correct copies of all current insurance policies of
Century, all of which are in full force and effect. All premiums due and payable
under all such policies have been paid and Century is otherwise in full
compliance with the terms of such policies (or other policies providing
substantially similar insurance coverage). Such policies of insurance are of the
type and in amounts customarily carried by persons conducting businesses similar
to that of Century. Neither Century nor the Major Stockholders know of any
threatened termination of, or material premium increase with respect to, any of
such policies by the insurance company.
4.20. Intellectual Property.
(a) Century owns, or possesses valid written licenses to use all
patents, trademarks, trade names, service marks, copyrights, and any
applications therefor, maskworks, net lists, schematics, technology, know-how,
computer software programs and applications and tangible or intangible
proprietary information and material that are used or proposed to be used in the
Business of Century as currently conducted or as proposed to be conducted by
Century (the "Company Intellectual Property Rights"). Schedule 4.20(a) lists all
patents, trademarks, trade names, service marks, copyrights, and applications
therefor owned by Century, and specifies the jurisdictions in which the such
patents, trademarks, trade names, service marks and copyrights are issued or
registered or in which an application for such issuance and registration has
been filed, including the respective registration or application numbers and the
names of all registered owners. The filings in respect of all such registrations
and applications for patents, trademarks, trade names, service marks, and
copyrights are in good standing, are held solely in the name of Century as the
exclusive owner of all rights therein, and all necessary steps have been taken
to maintain such filings and to prosecute the applications in a timely manner.
(b) Schedule 4.20(b) lists all licenses, sublicenses and other
agreements to which Century is a party and pursuant to which any person is
authorized to use any patents, trademarks, trade names, service marks and
copyrights of Century (and includes any patents, trademarks, trade names,
service marks and copyrights of Century and includes the identity of all parties
thereto other than non-exclusive product licenses and sublicenses granted by
Century in the ordinary course of business). Century is authorized to use in the
manner used by Century any third party patents, trademarks or copyrights
(including software) (the "Company Third Party Intellectual Property Rights")
which are incorporated in, are, or form a part of, any of Century's products or
services. Except as set forth on Schedule 4.20(b), Century is not, nor will it
be as a result of the execution and delivery of this Agreement or the
performance of its obligations hereunder, in violation of any license,
sublicense or agreement described on Schedule 4.20(b) or by which it is
authorized to use Company Third Party Intellectual Property Rights.
(c) No claims with respect to Company Intellectual Property Rights,
any trade secrets of Century, or Company Third Party Intellectual Property
Rights to the extent arising out
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of any use, reproduction or distribution of such of Company Third Party
Intellectual Property Rights by or through Century, have been asserted or are
threatened by any person, nor, except as set out on Schedule 4.20(c), does
Century know of any valid grounds for any bona fide claims (i) to the effect
that the manufacture, sale, licensing or use of any product or service, as now
used, sold or licensed or proposed for use, sale or license by Century infringes
any copyright, patent, trademark, service mark, trade secret or any other
intellectual property right; (ii) against the use by Century of any trademarks,
trade names, trade secrets, copyrights, patents, technology, know-how or
computer software programs and applications used in Century's Business as
currently conducted or as proposed to be conducted by Century; (iii) challenging
the ownership, validity or effectiveness of any of Company Intellectual Property
Rights or other trade secrets of Century; or (iv) challenging Century's license
or legally enforceable right to use, or the validity or effectiveness of Company
Third Party Intellectual Property Rights.
(d) Century has entered into all necessary agreements and obtained
all necessary rights to acquire Company Third Party Intellectual Property
Rights. All agreements relating to Company Third Party Intellectual Property
Rights are in full force and effect for the term set forth in each such
agreement.
(e) All registered trademarks, service marks and copyrights held by
Century are valid and subsisting. To the Knowledge of Century and the Major
Stockholders, there is no unauthorized use, disclosure, infringement or
misappropriation of any of Company Intellectual Property Rights, any trade
secrets of Century, or any of Company Third Party Intellectual Property Rights
to the extent licensed by or through Century, by any third party, including any
employee or former employee of Century. Except as set out on Schedule 4.20(e),
(i) Century has not been sued or charged in writing as a defendant in any claim,
suit, action or proceeding which involves a claim or infringement of any patent,
trademarks, service marks, copyrights or violation of any trade secret or other
proprietary right of any third party; (ii) to the Knowledge of Century and the
Major Stockholders, there is no basis for any such charge or claim; and (iii) to
the Knowledge of Century and the Major Stockholders, there is not any
infringement liability with respect to, or infringement or violation by, Century
of any patent, trademark, service mark, copyright, trade secret or other
proprietary right of another.
(f) Except as set forth in Schedule 4.20(f), no Company Intellectual
Property Rights, trade secrets of Century or Company Third Party Intellectual
Property Rights are subject to any outstanding order, judgment, decree,
stipulation or agreement restricting in any manner the licensing thereof by
Century. Except for contracts licensing Century's products executed in the
ordinary course of business and in accordance with Century's past practices,
Century has not entered into any agreement to indemnify any other person against
any charge of infringement of any Company Intellectual Property Rights. Each
current and former officer of, employee of, and since January 1, 1997, each
consultant to, Century has executed and delivered to Century a non-disclosure
agreement, or consultant agreement, respectively, in Century's standard forms
substantially as set forth in Schedule 4.20(f) hereto regarding the protection
of such confidential or proprietary information and the assignments of
inventions to Century; copies of all such agreements have been delivered to
AppNet. Century is not and never has been engaged in any
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dispute or litigation with an employee or former employee regarding matters
pertaining to intellectual property or assignment of inventions.
(g) Century has used its best efforts to enforce an adequate trade
secret protection program through contractual agreements with officers,
employees, developers, consultants and other persons dealing with their
businesses. To the knowledge of Century, there has been no material violation of
such program by any Person.
(h) The Company Intellectual Property Rights, at no additional net
cost to AppNet (or Century, after the Effective Date), and without human
intervention will:
(i) include year 2000 date conversion and capabilities
including, but not limited to, date data century
recognition; calculations which accommodate same century
and multi-century formulas and date values; correct sort
ordering; and date data interface values that reflect
the century;
(ii) automatically compensate for and manage and manipulate
data involving dates, including single century formulas
and multi-century formulas, and will not cause an
abnormal abort within the application or result in the
generation of incorrect values or invalid outputs
involving such dates;
(iii) provide that all date related user interface
functionalities and data fields include the indication
of the correct century;
(iv) provide that all date related software to software or
application to application data interface
functionalities will include the indication of the
correct century; and
(v) provide that all date processing by the Company
Intellectual Property Rights will include four-digit
date format and recognize and correctly process dates
for leap years.
4.21. Accounts Receivable. The accounts receivable of Century arose in the
ordinary course of business from bona fide transactions and are not subject to
any setoff, counterclaim or defense. The accounts receivable (both billed and
unbilled) shall be fully collectible in accordance with their terms, subject to
any applicable reserves on the Current Balance Sheet.
4.22. Inventory. All items of inventory and supplies consist of items of a
quality, quantity and condition usable and saleable in the ordinary course of
the business of Century and for the purpose for which they are intended, without
discount or reduction and conform to generally accepted standards in the
industry of which Century is a part. The value of each item of inventory and
supplies reflected on the Financial Statements was, in each instance, valued at
the lower of cost or market value and based on the ordinary course of the
business consistent with the historical valuation policy of Century and is not
subject to any write-down or write-off.
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4.23. Related Party Transactions. Schedule 4.23 sets forth all
arrangements, Liabilities, agreements and contracts in effect as of the date
hereof among Century and (i) any Person who is an officer, director or Affiliate
of Century, any relative of any of the foregoing or any entity of which any of
the foregoing is an Affiliate, or (ii) any Person who acquired Century Common
Stock in a private placement.
4.24. Brokers. Except for NationsBanc Montgomery Securities LLC ("NMS"),
the payment of whose fee shall be the responsibility of the Stockholders
pursuant to Section 11.7 hereof, no Person has or will have, as a result of the
transactions contemplated by this Agreement, any right, interest or claim
against or upon Century for any commission, fee or other compensation payable as
a finder or broker because of any act or omission by Century or the
Stockholders.
5. REPRESENTATIONS AND WARRANTIES OF APPNET AND SUB
To induce Century and the Major Stockholders to enter into this Agreement
and to consummate the transactions contemplated hereby, AppNet and Sub each
represents and warrants to Century, as of the date hereof and as of the Closing
Date, as set forth below:
5.1. Due Organization. Each of AppNet and Sub is a corporation duly
organized, validly existing and in good standing under the laws of the State of
Delaware. AppNet is duly authorized and qualified to do business under all
applicable laws, regulations, ordinances and orders of public authorities to
carry on its business in the places and in the manner as now conducted, except
where the failure to be so authorized or qualified would not have a Material
Adverse Effect on the business, operations, affairs, prospects, properties,
assets, profits or condition (financial or otherwise) of AppNet.
5.2. Power and Authority. Each of AppNet and Sub has all requisite
corporate power and authority to own, lease and operate its respective
properties and to conduct its respective Business as presently conducted and as
proposed to be conducted and is duly qualified or licensed as a foreign
corporation in good standing in each jurisdiction in which the character of its
respective properties or the nature of its respective business activities
requires such qualification, except where the failure to be so qualified or
licensed would not have a Material Adverse Effect on AppNet.
5.3. Authority for Agreement. The execution, delivery and performance of
this Agreement and the consummation of the transactions contemplated hereby have
been authorized by all requisite corporate action on the part of AppNet and Sub.
Each of AppNet and Sub has full corporate power, authority and legal right to
enter into this Agreement and to consummate the transactions contemplated
hereby. This Agreement has been duly executed and delivered by AppNet and Sub
and is a legal, valid and binding obligation of AppNet and Sub enforceable
against AppNet and Sub, respectively, in accordance with its terms, except as
enforceability may be limited by applicable bankruptcy, insolvency,
reorganization, moratorium or other similar laws affecting the enforcement of
creditors' rights in general.
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5.4. No Violation to Result. The execution, delivery and performance of
this Agreement and the consummation of the transactions contemplated hereby and
the fulfillment of the terms hereof: (i) are not in violation or breach of, do
not conflict with or constitute a default under, and will not accelerate or
permit the acceleration of the performance required by, any of the terms of the
Certificate of Incorporation or Bylaws of AppNet or Sub or any contract to which
AppNet or Sub is a party or which affects AppNet or Sub; (ii) will not be an
event which, after notice or lapse of time or both, will result in any such
violation, breach, conflict, default, or acceleration; (iii) will not result in
a violation under any law, judgment, decree, order, rule, regulation, permit or
other legal requirement of any Governmental or Regulatory Authority, court or
arbitration tribunal whether federal, state, provincial, municipal or local
(within the U.S. or otherwise) at law or in equity, and applicable to AppNet or
Sub; and (iv) will not result in the creation or imposition of any Encumbrance
in favor of any Person upon any of the properties or assets of AppNet or Sub.
5.5. Brokers and Agents. Except for Foxhall Capital, no Person has or will
have, as a result of the transactions contemplated by this Agreement, any right,
interest or claim against or upon AppNet or Sub for any commission, fee or other
compensation payable as a finder or broker because of any act or omission by
AppNet or Sub.
5.6. Capitalization. Schedule 5.6 sets forth, with respect to AppNet, (i)
the number of authorized shares of each class of its capital stock, (ii) the
number of issued and outstanding shares of each class of its capital stock and
the record owner thereof, and (iii) the number of shares of each class, if any,
which are held in treasury. Except as set forth on Schedule 5.6, no preemptive
right or rights of first refusal exist with respect to the shares of capital
stock of AppNet, and no such rights arise by virtue of or in connection with the
transactions contemplated hereby. Except as set forth on Schedule 5.6, there are
no outstanding or authorized rights, options, warrants, convertible securities,
subscription rights, conversion rights, exchange rights or other agreements or
commitments of any kind that could require AppNet to issue or sell any shares of
its capital stock (all of the foregoing, the "AppNet Issuance Agreements").
Schedule 5.6 sets forth the identity of the holder of each AppNet Issuance
Agreement, the type of agreement to which such holder is a party, the class and
number of shares of capital stock subject to each such agreement, and the
exercise price or conversion price, or other similar information concerning the
consideration such holder is required to tender in exchange for such shares of
the capital stock of AppNet. Schedule 5.6 identifies each agreement pursuant to
which any of GTCR Golder Rauner, L.L.C. ("GTCR"), Smart Technology, L.L.C.
("Smart Technology"), and their respective Affiliates, has acquired shares of
the capital stock of AppNet. There are no outstanding stock appreciation,
phantom stock, profit participation or other similar rights with respect to
AppNet. Except as set forth on Schedule 5.6, AppNet is not obligated to redeem
or otherwise acquire any of its outstanding shares of capital stock.
5.7. Shares Issued in Merger. All of the shares of capital stock of AppNet
to be issued in connection with the Merger, upon issuance and delivery by AppNet
to the persons entitled thereto and receipt by AppNet of the consideration
therefor, will (i) be duly authorized and validly issued and fully paid and
non-assessable, (ii) subject to the truth and accuracy of
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the information to be provided pursuant to Section 6.14(c), and 7.17 hereof and
the satisfaction of all conditions to Closing, have been issued by AppNet in
compliance with all applicable state and federal laws, and (iii) not have been
issued in violation of any preemptive rights or rights of first refusal.
5.8. Litigation. Except as set forth in Schedule 5.8, there is no
litigation, suit, proceeding, action, claim, demand or investigation, at law or
in equity, pending or to the best knowledge of AppNet threatened against or
affecting AppNet before any court, agency, authority or arbitration tribunal,
including, without limitation, any product liability, workers' compensation or
wrongful dismissal claims, or claims, actions, suits, demands or proceedings
relating to toxic materials, hazardous substances, pollution or the
environmental. AppNet is not subject to or in default with respect to any
notice, order, writ, injunction or decree of any court, agency, authority or
arbitration tribunal.
6. COVENANTS
6.1. Access to Properties and Records.
(a) Century shall afford to the officers, employees, attorneys,
accountants and other authorized representatives of AppNet and Sub, free and
full access to all of Century's assets, properties, books and records and
employees in order to afford AppNet and Sub as full an opportunity of review,
examination and investigation as they shall desire to make of the affairs of
Century, and AppNet and Sub shall be permitted to make extracts from, or take
copies of, such books, records (including the stock record and minute books) or
other documentation as may be reasonably necessary. Century shall furnish or
cause to be furnished to AppNet and Sub such reasonable financial and operating
data and other information about Century's Business, properties and assets which
any of the respective officers, employees, attorneys, accountants or other
authorized representatives of AppNet and Sub may request; provided that AppNet
and Sub and their agents shall not unreasonably interfere with the operations of
Century's Business. No information or knowledge obtained in any investigation
pursuant to this Section 6.1 shall affect or be deemed to modify any
representation or warranty contained herein or the conditions to the obligations
of the parties to consummate the transactions contemplated by this Agreement.
(b) AppNet and Sub shall afford to the officers, employees,
attorneys, accountants and other authorized representatives of Century, free and
full access to all of AppNet's and Sub's assets, properties, books and records
and employees in order to afford Century as full an opportunity of review,
examination and investigation as they shall desire to make of the affairs of
AppNet and Sub, and Century shall be permitted to make extracts from, or take
copies of, such books, records (including the stock record and minute books) or
other documentation thereof as may be reasonably necessary. AppNet and Sub shall
furnish or cause to be furnished to Century such reasonable financial and
operating data and other information about AppNet's and Sub's Business,
properties and assets which any of the respective officers, employees,
attorneys, accountants or other authorized representatives of Century may
request; provided that Century and its agents shall not unreasonably interfere
with the operations of AppNet's and Sub's Business. No information or knowledge
obtained in any investigation
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pursuant to this Section 6.1 shall affect or be deemed to modify any
representation or warranty contained herein or the conditions to the obligations
of the parties to consummate the transactions contemplated by this Agreement.
6.2. Confidentiality.
(a) Century and the Major Stockholders recognize and acknowledge
that they have in the past, currently have, and in the future may possibly have,
access to certain confidential information of Century and/or AppNet and Sub,
such as lists of customers, operational policies, and pricing and cost policies,
that are valuable, special and unique assets of Century's or AppNet's and Sub's
respective businesses. Century and the Major Stockholders agree that they will
not disclose confidential information with respect to Century and/or AppNet and
Sub to any Person for any purpose or reason whatsoever (except to authorized
representatives of Century, AppNet and Sub and to counsel and other advisers,
provided that such advisors (other than counsel) agree to the confidentiality
provisions of this Section 6.2), unless (i) such information becomes known to
the public generally through no fault of Century or the Major Stockholders, (ii)
disclosure is required by law or the order of any Governmental or Regulatory
Authority under color of law, or (iii) the disclosing party reasonably believes
that such disclosure is required in connection with the defense of a lawsuit
against the disclosing party or for certification or state licensure purposes;
provided, that prior to disclosing any information pursuant to clauses (ii) or
(iii) above, Century or the Major Stockholders, shall, if possible, give prior
written notice thereof to AppNet and Sub and provide AppNet and Sub with the
opportunity to contest such disclosure.
(b) Each of AppNet and Sub agrees that prior to the Closing it will
not disclose confidential information with respect to Century and/or the Major
Stockholders to any Person, for any purpose or reason whatsoever (except to
authorized representatives of AppNet and Sub, Century, and/or the Major
Stockholders and to counsel and other advisers, provided that such advisors
(other than counsel) agree to the confidentiality provisions of this Section
6.2), unless (i) such information becomes known to the public generally through
no fault of AppNet or Sub, (ii) disclosure is required by law or the order of
any Governmental or Regulatory Authority under color of law, or (iii) AppNet or
Sub reasonably believes that such disclosure is required in connection with the
defense of a lawsuit against AppNet or Sub for certification or state licensure
purposes; provided, that prior to disclosing any information pursuant to clauses
(ii) or (iii) above, AppNet and Sub, shall, if possible, give prior written
notice thereof to Century and/or the Major Stockholders and provide Century
and/or the Major Stockholders with the opportunity to contest such disclosure.
6.3. Interim Covenants of Century. From the date of this Agreement until
the Closing Date, except to the extent expressly permitted by this Agreement or
otherwise consented to by an instrument in writing signed by AppNet, Century
shall (i) keep Century's Business and organization intact and shall not take or
permit to be taken or do or suffer to be done anything other than in the
ordinary course of its business as the same is presently being conducted, (ii)
use its reasonable best efforts to keep available the services of its directors,
officers, employees, independent contractors and agents and retain and maintain
good relationships with its clients
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and maintain the Facilities in good condition, (iii) perform its obligations
under the Material Contracts and Government Contracts and (iv) maintain the
goodwill and reputation associated with its Business. Without limiting the
generality of the foregoing, Century shall not:
(a) Adopt or propose any change in its Certificate of Incorporation
or Bylaws;
(b) Merge or consolidate with any other entity or acquire a material
amount of assets of any other entity;
(c) Issue or sell any stock, bonds, or other securities of which
Century is the issuer or grant, issue or change any stock options, warrants or
other rights to purchase securities of Century;
(d) Amend any term of any outstanding security of Century;
(e) Purchase, sell, lease or dispose of or make any contract for the
purchase, sale, lease or disposition of or subject to lien or security interest
or any other Encumbrance any of its properties or assets, other than in the
ordinary and usual course of its business, consistent with the representations
and warranties contained herein, and not in breach of any of the provisions of
this Section 6, in each case for a consideration at least equal to the fair
value of such property or asset;
(f) Grant any salary increase to, or increase the draw of, any of
its officers, directors, employees or agents, or enter into any new, or amend or
alter any existing, employment, bonus, incentive compensation, deferred
compensation, profit sharing, retirement, severance, pension, stock option,
group insurance, death benefit or other fringe benefit plan, trust agreement or
other similar or dissimilar arrangement, or any employment or consulting
agreement except consistent with past compensation practices;
(g) Without AppNet's prior written consent, which consent shall not
be unreasonably withheld, incur any bank indebtedness or borrowings, whether or
not in the ordinary course of its business, or issue any commercial paper;
(h) Without AppNet's prior written consent, which consent shall not
be unreasonably withheld, enter into any leases of real property or any material
leases of equipment and machinery;
(i) Without AppNet's prior written consent, which consent shall not
be unreasonably withheld, enter into any contract, (i) which would be required
to be listed on Schedule 4.13 as a Contract or on Schedule 4.14 as a Century
Government Contract had it been entered into prior to the date hereof; or (ii)
in which any Affiliate of Century or any of the Stockholders has any beneficial
interest;
(j) Redeem, purchase or otherwise acquire, directly or indirectly,
any shares of its capital stock or debt securities or any option, warrant or
other right to purchase or acquire any such shares;
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(k) Create, incur or assume any liability or indebtedness, except in
the ordinary course of business consistent with past practices; or postpone or
defer the creation, incurrence, or assumption of any liability or indebtedness
that would otherwise be created, incurred or assumed in the ordinary course of
business absent the execution of this Agreement;
(l) Pay or apply any of its assets to the direct or indirect
payment, discharge, satisfaction or reduction of any amount, directly or
indirectly, to or for the benefit of Century or any Affiliate thereof except for
payments to Century's Affiliates in accordance with past practice, provided that
any such transaction is on terms no less favorable to Century than terms
generally available with third parties in arm's length transactions;
(m) Declare or pay any dividend, or make any distribution (whether
in cash, stock or property) in respect of its capital stock whether now or
hereafter outstanding, or split, combine or reclassify any of its capital stock
or issue or authorize the issuance of any other securities in respect of, in
lieu of or in substitution for shares of its capital stock, or purchase, redeem
or otherwise acquire or retire for value any shares of its capital stock
(provided, however, that Century may, prior to Closing, distribute to the
Stockholders an amount not to exceed $604,079 in the aggregate (the "Pre-Closing
Distribution"));
(n) Acquire or negotiate for the acquisition of (by merger,
consolidation, purchase of a substantial portion of assets or otherwise) any
business or the start-up of any new business, or otherwise acquire or agree to
acquire any assets that are material, individually or in the aggregate, to
Century;
(o) Without AppNet's prior written consent, commit a breach of or
amend or terminate any Contract, Government Contract, permit, license or other
right; or
(p) Enter into any other transaction (i) that is not negotiated at
arm's length with a third party not affiliated with Century or any officer,
director of Century or the Stockholders, (ii) outside the ordinary course of
business consistent with past practice or (iii) prohibited hereunder.
Notwithstanding the foregoing, Century shall be permitted to (1) pay the fees
and expenses of NMS and Winthrop, Stimson, Putnam & Roberts (which amount shall
reduce the Cash Merger Consideration on a dollar-for-dollar basis to the extent
that such payments result in Century's Net Worth failing to meet or exceed the
Net Worth Target), (2) amend its bylaws in the manner contemplated hereby, (3)
amend its incentive stock option plan and accelerate the vesting of all
outstanding options under such plan, (4) issue stock to option holders who
exercise their options to purchase shares of Century stock prior to the Closing,
(5) lease additional space in the building it currently occupies in connection
with the due diligence process for this transaction, (6) enter into new
employment contracts with all of its employees in a form approved by AppNet, (7)
increase the amount of its insurance coverage as approved by AppNet and (8)
distribute the Sprinkle to employees of Century.
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6.4. No Solicitation. Neither Century (its officers or directors), the
Major Stockholders, nor any agent or any representative thereof, shall during
the period commencing on the date of this Agreement and ending with the earlier
to occur of the Closing or the termination of this Agreement in accordance with
its terms, directly or indirectly: (a) solicit, encourage or initiate the
submission of proposals or offers from any person or entity for, (b) participate
in any discussions pertaining to, or (c) furnish any information to any Person,
other than AppNet or Sub and, relating to, any acquisition or purchase of all or
a material amount of the assets of, or any equity interest in, Century or a
merger, consolidation or business combination involving Century. If Century or
any of the Major Stockholders receives any unsolicited offer or proposal
relating to any of the above, Century or the Major Stockholders shall
immediately notify AppNet thereof, and provide to AppNet all information
relating thereto, including a copy of such offer or proposal, the identity of
the party making such offer or proposal and the specific terms of such offer or
proposal.
6.5. Notification of Certain Matters. Century shall give prompt notice to
AppNet of (a) the occurrence or non-occurrence of any event the occurrence or
non-occurrence of which would be likely to cause any representation or warranty
of Century or the Major Stockholders contained herein to be untrue or inaccurate
in any material respect at or prior to the Closing Date and (b) any material
failure of Century or the Major Stockholders to comply with or satisfy any
covenant, condition or agreement to be complied with or satisfied by Century or
the Major Stockholders hereunder. The delivery of any notice pursuant to this
Section 6.5 shall not, without the express written consent of AppNet, be deemed
to (A) modify the representations or warranties hereunder of Century or the
Major Stockholders, (B) modify the conditions set forth in Section 7 hereof or
(C) limit or otherwise affect the remedies available hereunder to AppNet.
6.6. Tax Returns; Sales, Use and Transfer Taxes. AppNet, Century and the
Major Stockholders shall cooperate fully, as and to the extent reasonably
requested by the other party, in connection with the filing of Tax Returns and
any audit, litigation or other proceeding with respect to Taxes. Such
cooperation shall include the retention and (upon reasonable request) the
provision of records and information which are reasonably relevant to any such
audit, litigation or other proceeding.
6.7. Regulatory and Other Approvals. Subject to the terms and conditions
of this Agreement, each of Century and AppNet will proceed diligently and in
good faith to, as promptly as practicable, (a) obtain all consents, approvals or
actions of, make all filings with and give all notices to Governmental or
Regulatory Authorities or any other public or private third parties required of
AppNet or Century to consummate the Merger and the other matters contemplated
hereby, and (b) provide such other information and communications to such
Governmental or Regulatory Authorities or other public or private third parties
as the other party or such Governmental or Regulatory Authorities or other
public or private third parties may reasonably request in connection therewith.
6.8. Intentionally deleted.
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6.9. Reasonable Efforts. Subject to the terms and conditions of this
Agreement, each of the parties hereto agrees to use all reasonable efforts
promptly to take, or cause to be taken, all actions and do or cause to be done,
all things necessary, proper or advisable under applicable laws and regulations
to consummate and make effective the transactions contemplated by this Agreement
including the satisfaction of all conditions thereto.
6.10. Management of the Surviving Corporation.
(a) From and after the Closing, until the date that is three years
after the Closing Date, AppNet shall take all actions necessary to cause John
McBeth, Charles Shaw and Mark Allen to be elected as directors of the Surviving
Corporation (the Board of Directors shall have a minimum of seven directors),
unless such parties have their employment by the Surviving Corporation
terminated for cause.
(b) From and after the Closing, until the earlier of (1) the date
that is three years after the Closing Date and (2) the date that the following
persons cease to be employed by the Surviving Corporation, AppNet shall take all
actions necessary to cause John McBeth to be elected President and CEO of the
Surviving Corporation and to cause Mark Allen, Don Link, Barbara Mallory, and
Charles Shaw to be elected Vice Presidents of the Surviving Corporation, unless
such parties have their employment by the Surviving Corporation terminated for
cause.
6.11. High Performance Organization. The Surviving Corporation may
continue to work with Dr. Lee Thayer on its high performance initiative
identified by the President and CEO of the Surviving Corporation.
6.12. Benefits Plans. The benefit plans set forth on Schedule 4.9(a) shall
remain in place until December 31, 1998.
6.13. Stockholder Vote. Simultaneously with the execution hereof, the
Major Stockholders shall execute and deliver to AppNet an irrevocable proxy, in
a form acceptable to AppNet, to vote all of their respective shares of Century
Common Stock in favor of the approval of this Agreement, the consummation of the
Merger and the other transactions contemplated herein.
6.14. Stockholder Meeting. The Board of Directors of Century shall (a)
promptly call a special meeting of its shareholders for the purpose of obtaining
(i) the approval of the Merger and the adoption of this Agreement and (ii) the
amendment of Century's bylaws to remove the stock transfer restrictions; (b)
take such actions as are necessary to terminate Century's current stockholders'
agreements and circulate a Joinder prepared by AppNet to subject the AppNet
Common Stock delivered hereunder, or upon exercise of the AppNet Stock Options
to AppNet's Stockholders' Agreement and Registration Agreement; (c) prepare all
required proxy and disclosure materials, which materials shall comply with all
requirements of the DGCL and applicable state and federal securities law and
which materials shall be subject to the approval
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of AppNet; and (d) recommend to the stockholders of Century the approval of the
items identified in clause (a) above.
6.15. Errors and Omissions Insurance. Prior to the Effective Time, Century
shall purchase errors and omissions insurance with a policy limit of $10
million. Such policy shall be valid for the period ending December 31, 1998 and
shall name Century as the insured. Effective January 1, 1999, the Surviving
Corporation shall purchase errors and omissions insurance with a policy limit of
$10 million. Such policy shall be valid for the period ending December 31, 1999
and shall name the Surviving Corporation as the insured.
7. CONDITIONS PRECEDENT TO OBLIGATIONS OF APPNET AND SUB
The obligations of AppNet and Sub to consummate the transactions
contemplated by this Agreement are subject to the satisfaction or partial or
complete waiver (in AppNet's sole and absolute discretion), at or before the
Closing Date, of the following conditions:
7.1. Representations and Warranties True at the Closing Date. All of the
representations and warranties of Century and the Major Stockholders contained
in this Agreement shall be true, correct and complete on and as of the Closing
Date with the same effect as though such representations and warranties had been
made on and as of such date, except to the extent affected by the transactions
contemplated hereby. Notwithstanding the foregoing, Century shall be permitted
to update the Schedules attached hereto to reflect any changes between the date
of execution hereof and the Closing Date, provided, however, that AppNet shall
not be required to consummate the transactions contemplated hereby should the
updates to such Schedules not be acceptable to AppNet, in its sole and absolute
discretion.
7.2. Performance. All of the terms, covenants, agreements and conditions
of this Agreement to be complied with, performed or satisfied by Century and/or
the Major Stockholders on or before the Closing Date shall have been duly
complied with, performed or satisfied by the Closing Date.
7.3. Stockholder Approval.
(a) This Agreement and the Merger shall have been approved by the
requisite vote or action of the Stockholders under the DGCL and Century's
Certificate of Incorporation and Bylaws.
(b) Century's current stockholders' agreements shall have been
terminated.
(c) Century's bylaws shall have been amended to modify certain stock
transfer restrictions (in form acceptable to AppNet).
7.4. Agreements with Employees. All employees of Century shall have
executed and delivered employment and/or non-competition/non-disclosure
agreements, in the form attached
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hereto as Exhibit E1. In addition, those senior managers of Century designated
by AppNet shall have executed and delivered Senior Management Agreements in the
form attached hereto as Exhibit E2.
7.5. No Litigation. No temporary restraining order, preliminary or
permanent injunction or other order issued by any court of competent
jurisdiction or other legal or regulatory restraint or provision challenging the
transactions contemplated hereunder or limiting or restricting the conduct or
operation of the Business of Century following the transactions shall be in
effect, nor shall any proceeding brought by an administrative agency or
commission or other Governmental or Regulatory Authority or other
instrumentality, domestic or foreign, seeking any of the foregoing be pending.
There shall be no action, suit, claim or proceeding of any nature pending or
threatened, against any of the Stockholders, Century, AppNet or Sub, their
respective properties or any of their officers or directors (as applicable),
that could have a Material Adverse Effect on Century.
7.6. No Material Adverse Change. There shall have been, between the
Balance Sheet Date and the Closing Date, no change in the Business, financial
condition or prospects of Century which would have a Material Adverse Effect on
Century.
7.7. Certificates. Century and the Major Stockholders shall have furnished
AppNet with such certificates of the officers of Century and others to evidence
compliance with the conditions set forth in this Section 7 as may be reasonably
requested by AppNet.
7.8. AppNet's Review. AppNet shall be fully satisfied in its sole and
absolute discretion with the results of its review of, and its other due
diligence investigations with respect to, the Business, operations, affairs,
prospects, properties, assets, existing and potential liabilities, obligations,
profits or condition (financial or otherwise) of Century; provided, however,
that this condition shall be deemed to be fully satisfied unless AppNet delivers
notice to Century by noon, Washington, D.C. time, on September 21, 1998, that
this condition has not been satisfied.
7.9. Governmental, Regulatory and Other Consents and Approvals. All
consents, approvals and actions of, filings with and notices to any Governmental
or Regulatory Authority or any other public or private third parties required of
the Major Stockholders, AppNet, Sub or Century to consummate the Merger and the
other matters contemplated hereby shall have been obtained.
7.10. Delivery of Good Standing Certificates; Corporate Resolutions.
AppNet shall have received certificates of good standing with respect to Century
issued by Delaware and any other jurisdiction in which Century is required to be
qualified in order to conduct business. AppNet shall have received copies of the
resolutions of the Stockholders and Century approving the Merger and the other
transactions contemplated herein, certified by the appropriate corporate
officers.
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7.11. Financial Terms. AppNet shall have verified to its satisfaction the
following with respect to Century: (i) sales, net of bad debt expense, for
Century's most recent fiscal year ending December 31, 1997, shall have been no
less than $10,751,512, and for the 12-month period ending as of the last day of
the month immediately preceding the Closing (the "Interim Period") shall be no
less than $12.0 million; (ii) earnings before interest and taxes ("EBIT") for
Century's most recent fiscal year shall have been no less than $1,401,846 (or
13.0% of sales, net of bad debt expense, for such fiscal year), and EBIT for the
Interim Period shall be no less than 13.0% of sales for the Interim Period;
(iii) Century's Net Worth as of the Closing shall be no less than the Net Worth
Target; and (iv) except for indebtedness incurred for the purpose of making the
Permitted Payments and the Pre-Closing Distribution, Century shall have no
outstanding long-term or short-term indebtedness to banks, the stockholders, or
other financial institutions and creditors as of the Closing (in each case
including the current portions of such indebtedness, but excluding trade
payables, accrued current payroll expenses in an amount consistent with
Century's past practices and other ordinary course accounts payable); provided,
however, that AppNet may, in its sole discretion, waive the foregoing condition
in whole or in part and, in such case, the Reducible Amounts shall be reduced by
the amount of any such indebtedness of Century (including principal and accrued
interest, costs and fees, but excluding any indebtedness incurred for the
purpose of making the Permitted Payments and the Pre-Closing Distribution) that
is outstanding as of Closing, such reduction to be allocated ratably between the
Cash Amount and the Option Amount. In the event that any of the conditions in
Section 7.11(i) through (iii) above are not fully satisfied, AppNet, Century and
the Major Stockholders shall attempt in good faith to negotiate a reduction in
the Cash Merger Consideration to reflect the impact of such failed condition on
AppNet's valuation of Century (which reduction shall be allocated ratably
between the Reducible Amounts); provided, however, that AppNet shall nonetheless
have the right, exercisable in its sole discretion, to treat any such failed
condition as a basis for not proceeding with the Merger. For the purpose of
determining whether Century satisfies the conditions specified in Sections
7.11(i) through (iii), no adjustment shall be made to Century's Financial
Statements or financial results for changes shown on Schedule 7.11.
7.12. Payment of Loans. With the exception of any loans to employees under
Century's Home Computer Benefit Program (the maximum outstanding amount of all
such loans not to exceed $30,000 in the aggregate) and one hardship loan to an
employee with a principal balance of no more than $1,655.45, all notes
receivable from the Stockholders, other Affiliates of Century, and employees of
Century shall have been repaid in full in accordance with their terms.
7.13. Purchase of Personal Use Items. The Stockholders shall have
purchased any personal use assets (e.g., automobiles) from Century at a purchase
price equal to the greater of the net book value of such assets as of Closing or
the outstanding indebtedness secured by such assets. Cell phones and pagers
purchased by Century for use by its officers and employees are not personal use
assets within the meaning of this section.
7.14. Intentionally Deleted.
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7.15. Stockholders Agreement and Registration Agreement. Century, the
Stockholders and Century's option holders shall have executed such agreements as
shall be necessary to subject the AppNet Common Stock to be delivered to the
Stockholders and Century's option holders hereunder to be subject to AppNet's
Stockholders Agreement and Registration Agreement.
7.16. Dissenting Shares. The total number of Dissenting Shares shall be no
greater than 5% of the number of shares of Century Common Stock issued and
outstanding immediately prior to the Effective Time.
7.17. Accredited Investors. Century shall have received and provided to
AppNet properly executed Accredited Investor Questionnaires from the holders of
Century Common Stock or Century Stock Options such that at the Effective Time
Century shall not have more than 35 stockholders or option holders who are not
Accredited Investors (as defined in Rule 501 of Regulation D promulgated under
the Securities Act of 1933, as amended).
8. CONDITIONS PRECEDENT TO OBLIGATIONS OF CENTURY
The obligations of Century to consummate the transactions contemplated by
this Agreement are subject to the satisfaction or partial or complete waiver (in
Century's sole and absolute discretion), at or before the Closing Date, of the
following conditions:
8.1. Representations and Warranties True as of the Closing Date. All of
the representations and warranties of AppNet and Sub contained in this Agreement
shall be true, correct and complete on and as of the Closing Date with the same
effect as though such representations and warranties had been made on and as of
such date, except to the extent affected by the transactions contemplated
hereby.
8.2. AppNet's and Sub's Performance. All of the terms, covenants,
agreements and conditions of this Agreement to be complied with, performed or
satisfied by AppNet and Sub on or before the Closing Date shall have been duly
complied with, performed or satisfied by the Closing Date.
8.3. No Litigation. No temporary restraining order, preliminary or
permanent injunction or other order issued by any court of competent
jurisdiction or other legal or regulatory restraint or provision challenging the
transactions contemplated hereunder or limiting or restricting the conduct or
operation of the Business of AppNet, Sub or Century following the transactions
shall be in effect, nor shall any proceeding brought by an administrative agency
or commission or other Governmental or Regulatory Authority seeking any of the
foregoing be pending. There shall be no action, suit, claim or proceeding of any
nature pending or threatened, against Century, AppNet or Sub, their respective
properties or any of its officers or directors, that could have a Material
Adverse Effect on Century.
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8.4. Certificates. AppNet shall have furnished Century and the Major
Stockholders with such certificates of the officers of AppNet and others to
evidence compliance with the conditions set forth in this Section 8 as may be
reasonably requested by the Major Stockholders.
8.5. Governmental, Regulatory and Other Consents and Approvals. All
consents, approvals and actions of, filings with and notices to any Governmental
or Regulatory Authority or any other public or private third parties required of
AppNet, AppNet or Century to consummate the Stock Purchase and the other matters
contemplated hereby shall have been obtained.
8.6. Delivery of Good Standing Certificates; Corporate Resolutions.
Century shall have received certificates of good standing with respect to AppNet
and Sub issued by Delaware and any other jurisdiction in which AppNet or Sub is
required to conduct business. Century shall have received copies of the
resolutions of AppNet and Sub approving the Merger and the other transactions
contemplated herein, certified by the appropriate corporate officers.
8.7. Stockholder Approval. The performance of this Agreement and the
consummation of the transactions contemplated hereby shall have been adopted by
the requisite vote of the Stockholders under the DGCL and Century's Certificate
of Incorporation and Bylaws.
8.8. Dissenting Shares. The total number of Dissenting Shares shall be no
greater than 5% of the number of shares of Century Common Stock issued and
outstanding immediately prior to the Effective Time.
8.9. Century's Review. Century shall be fully satisfied in its sole and
absolute discretion with the results of its review of, and its other due
diligence investigations with respect to, the Business, operations, affairs,
prospects, properties, assets, existing and potential liabilities, obligations,
profits or condition (financial or otherwise) of AppNet and Sub; provided,
however, that this condition shall be deemed to be fully satisfied unless
Century delivers notice to AppNet by noon, Washington, D.C. time, on September
21, 1998, that this condition has not been satisfied.
9. INDEMNIFICATION
9.1. General Indemnification.
(a) Each of Century and the Major Stockholders, jointly and
severally, covenants and agrees to indemnify, defend, protect and hold harmless
AppNet and Sub, and their respective officers, directors, employees,
stockholders, assigns, successors and affiliates (individually, a "Buyer Party"
and collectively, the "Buyer Parties") from, against and in respect of all
liabilities, losses, claims, damages, punitive damages, causes of actions,
lawsuits, administrative proceedings (including informal proceedings),
investigations, audits, demands, assessments, adjustments, judgments, settlement
payments, deficiencies, penalties, fines, excise
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taxes, interest (including interest from the date of such damages) and costs and
expenses (including, without limitation, reasonable attorneys' fees and
disbursements of every kind, nature and description) (collectively, "Damages")
suffered, sustained, incurred or paid by the Buyer Parties, in any action or
proceeding between Century and all or any of the Major Stockholders and the
Buyer Parties or between the Buyer Parties and a third party, in connection
with, resulting from or arising out of, directly or indirectly: (i) the
inaccuracy of any representation or the breach of any warranty set forth in
Section 4 of this Agreement; (ii) the nonfulfillment of any covenant or
agreement on the part of Century or the Major Stockholders set forth in this
Agreement or in any agreement or certificate executed and delivered by Century
or the Major Stockholders pursuant to this Agreement or in the transactions
contemplated hereby; (iii) any and all Taxes which are (A) imposed on the
Stockholders or any member (other than Century) of the consolidated, unitary or
combined group which includes or included Century, that AppNet, or Century pay
or otherwise satisfy in whole or in part; and (B) imposed on Century in respect
of its income, business, property or operations or for which Century may
otherwise be liable (x) for any taxable period ending on or prior to the Closing
Date, or (y) resulting by reason of the several liability of Century pursuant to
Treasury Regulations Section 1.1502-6 or any analogous state, local or foreign
law or regulation or by reason of Century having been a member of any
consolidated, combined or unitary group on or prior to the Closing Date; (iv) a
cost disallowance proposed by the Defense Contract Audit Agency or the National
Library of Medicine in any audit for periods ending prior to the Effective Time;
(v) Government Contract Liability (as such term is defined herein); and (vi) the
business, operations or assets of Century on or before the Closing Date (except
as otherwise disclosed in the Financial Statements or the Schedules to this
Agreement) or the actions of Century's directors, officers, shareholders,
employees or agents before the Closing Date.
(b) AppNet and Sub covenant and agree to indemnify, defend, protect
and hold harmless (i) any Major Stockholder and his or her respective assigns,
successors and affiliates and (ii) Century and its respective officers,
directors, employees, stockholders, assigns, successors and affiliates
(individually, a "Seller Party" and collectively, the "Seller Parties") from,
against and in respect of all Damages suffered, sustained, incurred or paid by
the Seller Parties, in any action or proceeding between the Seller Parties and
the Buyer Parties or between the Seller Parties and a third party, in connection
with, resulting from or arising out of, directly or indirectly: (i) the
inaccuracy of any representation or the breach of any warranty set forth in
Section 5 of this Agreement; and (ii) the nonfulfillment of any covenant or
agreement on the part of AppNet and Sub set forth in this Agreement or in any
agreement or certificate executed and delivered by AppNet or Sub or pursuant to
this Agreement or in the transactions contemplated hereby.
(c) Notwithstanding the foregoing provisions of Section 9.1(a) and
(b), if Closing occurs, (i) Century shall not be an Indemnifying Party (as
defined below) or otherwise be subject to the indemnification and other
obligations contained in Section 9.1(a), and the Major Stockholders, if Closing
occurs, hereby waive any right to contribution, reimbursement or other right to
recovery that they might otherwise have against Century in connection with any
such indemnification or other obligations, and (ii) Century shall not be deemed
a party to any of the representations, warranties or covenants made by it
pursuant to this Agreement or any certificate,
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document or instrument in connection herewith, and, if Closing occurs, the Major
Stockholders hereby waive any right to contribution, reimbursement or other
right to recovery that they might otherwise have against Century in connection
with any such representations, warranties or covenants, and (iii) Century shall
be deemed to be a Buyer Party.
9.2. Indemnification Procedures. All claims or demands for indemnification
under this Section 9 ("Claims") shall be asserted and resolved as follows:
(a) In the event a Buyer Party or a Seller Party (an "Indemnified
Party") has a Claim against the other party (an "Indemnifying Party") hereunder
which does not involve a Claim being asserted against or sought to be collected
by a third party, the Indemnified Party shall with reasonable promptness send a
Claim Notice (as defined in Section 9.2(b)) with respect to such Claim to the
Indemnifying Party. If the Indemnifying Party does not notify the Indemnified
Party within the Notice Period (as defined in Section 9.2(b)) that the
Indemnifying Party disputes such Claim, the amount of such Claim shall be
conclusively deemed a liability of the Indemnifying Party hereunder. In case the
Indemnifying Party shall object in writing to any Claim made in accordance with
this Section 9.2(a), the Indemnified Party shall have fifteen (15) days to
respond in a written statement to the objection of the Indemnifying Party. If
after such fifteen (15)-day period there remains a dispute as to any Claims, the
parties shall attempt in good faith for thirty (30) days to agree upon the
rights of the respective parties with respect to each of such Claims. If the
parties should so agree, a memorandum setting forth such agreement shall be
prepared and signed by both parties. If no such agreement can be reached after
good faith negotiation, either the Indemnified Party or the Indemnifying Party
may adjudicate such claim in accordance with the terms of Section 11.11 hereof.
(b) In the event that any Claim for which an Indemnifying Party
would be liable to an Indemnified Party hereunder is asserted against an
Indemnified Party by a third party, the Indemnified Party shall with reasonable
promptness notify the Indemnifying Party of such Claim, specifying the nature of
such claim and the amount or the estimated amount thereof to the extent then
feasible (which estimate shall not be conclusive of the final amount of such
Claim) (the "Claim Notice"). The Indemnifying Party shall have fifteen (15) days
from the receipt of the Claim Notice (the "Notice Period") to notify the
Indemnified Party (i) whether or not the Indemnifying Party disputes the
Indemnifying Party's liability to the Indemnified Party hereunder with respect
to such Claim and (ii) if the Indemnifying Party does not dispute such
liability, whether or not the Indemnifying Party desires, at the sole cost and
expense of the Indemnifying Party, to defend against such Claim. In the event
that the Indemnifying Party notifies the Indemnified Party within the Notice
Period that the Indemnifying Party does not dispute the Indemnifying Party's
obligation to indemnify hereunder and desires to defend the Indemnified Party
against such Claim and except as hereinafter provided, the Indemnifying Party
shall have the right to defend by appropriate proceedings, which proceedings
shall be promptly settled or prosecuted by the Indemnifying Party to a final
conclusion; provided that, unless the Indemnified Party otherwise agrees in
writing, the Indemnifying Party may not settle any matter (in whole or in part)
unless such settlement includes a complete and unconditional release of the
Indemnified Party. If the Indemnified Party desires to participate in, but not
control, any such defense or settlement, the Indemnified Party may do so at the
Indemnified Party's sole cost and
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expense. If the Indemnifying Party elects not to defend the Indemnified Party
against such Claim, whether by failure of the Indemnifying Party to give the
Indemnified Party timely notice as provided above or otherwise, then the
Indemnified Party, without waiving any rights against the Indemnifying Party,
may settle or defend against any such Claim in the Indemnified Party's sole
discretion and the Indemnified Party shall be entitled to recover from the
Indemnifying Party the amount of any settlement or judgment and, on an ongoing
basis, all indemnifiable costs and expenses of the Indemnified Party with
respect thereto, including interest from the date such costs and expenses were
incurred.
(c) Notwithstanding the provisions of Section 9.2(b), if at any
time, in the reasonable opinion of the Indemnified Party, notice of which shall
be given in writing to the Indemnifying Party, any such Claim seeks relief which
could have a Material Adverse Effect on any Indemnified Party, the Indemnified
Party shall have the right to control or assume (as the case may be) the defense
of any such Claim and the amount of any judgment or settlement and the
reasonable costs and expenses of defense shall be included as part of the
indemnification obligations of the Indemnifying Party hereunder; provided,
however, that the Indemnified Party may not settle or compromise any such Claim
without the prior written consent of the Indemnifying Party (which consent shall
not be unreasonably withheld). If the Indemnified Party should elect to exercise
such right, the Indemnifying Party shall have the right to participate in, but
not control, the defense of such claim or demand at the sole cost and expense of
the Indemnifying Party. Notwithstanding any limits on liability provided for
elsewhere in this Agreement, in the event that the Indemnifying Party does not
consent to a proposed settlement or compromise, for any reason, and the Claim is
ultimately determined to be in excess of such proposed settlement or compromise,
the Indemnifying Party shall be liable to the Indemnified Party for the entire
Claim. For purposes of this section, a Claim which seeks relief which could have
a Material Adverse Effect on any Indemnified Party shall be defined as a Claim
for Damages in an amount in excess of the limits on the Indemnifying Party's
indemnification obligations hereunder.
(d) Nothing herein shall be deemed to prevent the Indemnified Party
from making a Claim, and an Indemnified Party may make a Claim hereunder, for
potential or contingent Claims or demands provided the Claim Notice sets forth
the specific basis for any such potential or contingent claim or demand to the
extent then feasible and the Indemnified Party has reasonable grounds to believe
that such a claim or demand may be made.
9.3. Right to Setoff. In the event Century or the Major Stockholders shall
be in breach of any representation, warranty, covenant or shall have an
indemnification obligation to AppNet, AppNet shall be permitted to seek
satisfaction of such amounts through an offset against the Note. No limitation
or such right of offset shall otherwise affect AppNet's rights hereunder or
otherwise. In the event the Note is, in accordance with its terms, converted
into AppNet Common Stock, such shares shall at the time of, and as a condition
to, such conversion be pledged to AppNet as security for the Major Stockholders'
obligations to AppNet under this Agreement pursuant to a Security Agreement
(Pledge), in the form attached hereto as Exhibit F. The remedy of offset shall
be in addition to and not in limitation of any injunctive relief or other rights
or remedies to which AppNet is or may be entitled at law or equity, under this
Agreement.
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9.4. Release. Effective as of Closing, the Major Stockholders hereby
irrevocably waive and release Century of, from and against any and all claims or
causes of actions for Damages that they may have, have had or may at any time on
or before Closing have against Century.
10. NONCOMPETITION
10.1. Prohibited Activities.
(a) For the period commencing with Closing and ending on the third
(3rd) year anniversary of Closing, Charles Butterfield, Paul Butterfield, Norman
Engelberg, and Philip Miller shall not, individually or collectively, for any
reason whatsoever, directly or indirectly:
(i) sell a product or service on which such individual worked,
prior to the time at which his employment by Century terminated, to any Person
that is either (A) purchasing that product or service at that time from AppNet
or any Affiliate of AppNet or (B) known to him to be actively considering
purchasing that product or service from AppNet or an Affiliate of AppNet;
(ii) while employed by or consulting for any other Person,
work on any product or service on which such individual worked prior to the time
at which his employment by Century terminated, if his new employer is selling
that product or service to any Person who is either (A) purchasing that product
or service from AppNet or any Affiliate of AppNet or (B) known to him to be
actively considering purchasing that product or service from AppNet or an
Affiliate of AppNet;
(iii) call upon any Person who is, at that time, an employee
of AppNet or its Affiliates for the purpose or with the intent of enticing such
employee away from or out of the employ of AppNet or its Affiliates; or
(iv) publish any statement or make any statement (under any
circumstances reasonably likely to become public) critical of AppNet or its
Affiliates, or in any way adversely affecting or otherwise maligning the
reputation of AppNet or its Affiliates.
For purposes of the foregoing, an individual shall be deemed to have worked on a
product or service prior to the time at which his employment by Century
terminated if he worked on a bid or proposal involving the product or service
while employed by Century.
(b) For the period commencing with Closing and ending on the third
(3rd) year anniversary of Closing, none of John McBeth, Mark Allen, or Charles
Shaw shall, for any reason whatsoever, directly or indirectly, for himself,
herself or on behalf of or in conjunction with any other Person:
(i) engage as a stockholder, officer, director, owner,
partner, joint venturer, or in a managerial capacity, whether as an employee,
independent contractor,
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consultant or advisor, in any business selling any products or services in
direct competition with AppNet or its Affiliates (a "Competing Business");
provided, however, each of the Stockholders shall not be precluded from the
ownership of securities of corporations that are listed on a national securities
exchange or traded in the national over-the-counter market in an amount that
shall not exceed one percent (1%) of the outstanding shares of any such
corporation;
(ii) call upon any Person who is, at that time, an employee of
AppNet or its Affiliates for the purpose or with the intent of enticing such
employee away from or out of the employ of AppNet or its Affiliates;
(iii) call upon any Person who or that is, at that time, or
has been, within one (1) year prior to that time, a customer of AppNet or its
Affiliates for the purpose of soliciting or selling products or services in
competition with AppNet or its Affiliates; or
(iv) publish any statement or make any statement (under any
circumstances reasonably likely to become public) critical of AppNet or its
Affiliates, or in any way adversely affecting or otherwise maligning the
reputation of AppNet or its Affiliates.
10.2. Damages. Because of the difficulty of measuring economic losses to
AppNet and its Affiliates as a result of a breach of the foregoing covenant, and
because of the immediate and irreparable damage that could be caused to AppNet
and its Affiliates for which it would have no other adequate remedy, the Major
Stockholders agree that the foregoing covenant may be enforced by AppNet in the
event of breach by any of the Major Stockholders, in addition to, but not in
lieu of, any other available remedies, by injunctions and restraining orders and
other equitable remedies.
10.3. Reasonable Restraint. It is agreed by the parties that the foregoing
covenants in this Section 10 impose a reasonable restraint on the Major
Stockholders in light of the activities and business of AppNet and its
Affiliates on the date of the execution of this Agreement and the current plans
of AppNet and its Affiliates; but it is also the intent of the parties, that
such covenants be construed and enforced in accordance with the changing
activities and business of AppNet and its Affiliates throughout the term of this
covenant.
10.4. Severability; Reformation. The covenants in this Section 10 are
severable and separate, and the unenforceability of any specific covenant shall
not affect the provisions of any other covenant. Moreover, in the event any
court of competent jurisdiction shall determine that the scope, time or
territorial restrictions set forth are unreasonable, then it is the intention of
the parties that such restrictions be enforced to the fullest extent which the
court deems reasonable, and the Agreement shall thereby be reformed.
10.5. Independent Covenant. All of the covenants in this Section 10 shall
be construed as an agreement independent of any other provision in this
Agreement, and the existence of any claim or cause of action of any of the Major
Stockholders against AppNet or an Affiliate thereof, whether predicated on this
Agreement or otherwise, shall not constitute a defense to the enforcement by
AppNet of such covenants. It is understood by the parties hereto that the
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covenants contained in this Section 10 are essential elements of this Agreement
and that, but for the agreement of the Major Stockholders to comply with such
covenants, AppNet would not have agreed to enter into this Agreement. The Major
Stockholders and AppNet have independently consulted with their respective
counsel and have been advised concerning the reasonableness and propriety of
such covenants with specific regard to the nature of the business conducted by
AppNet. The Major Stockholders hereby agrees that all covenants contained in
this Section 10 are reasonable and valid and waives all defenses to the strict
enforcement hereof by AppNet. The covenants contained in this Section 10 hereof
shall not be affected by any breach of any other provision hereof by any party
hereto and shall have no effect if the transactions contemplated by this
Agreement are not performed.
10.6. Materiality. Each of the Major Stockholders hereby agrees that the
covenants set forth in this Section 10 are a material and substantial part of
the transactions contemplated by this Agreement.
11. GENERAL
11.1. Termination. This Agreement may be terminated at any time prior to
the Closing Date:
(a) by mutual consent of the Boards of Directors of AppNet and
Century;
(b) by Century, on the one hand, or by AppNet, on the other hand, if
the Closing shall not have occurred on or before October 31, 1998; provided that
the right to terminate this Agreement under this Section 11.1(b) shall not be
available to either party whose material misrepresentation, breach of warranty
or failure to fulfill any obligation under this Agreement has been the cause of,
or resulted in, the failure of the Closing to occur on or before such date;
(c) by Century, on the one hand, or by AppNet, on the other hand, if
there is or has been a material breach, failure to fulfill or default on the
part of the other party of any of the representations and warranties contained
herein or in the due and timely performance and satisfaction of any of the
covenants, agreements or conditions contained herein, and the curing of such
default shall not have been made or shall not reasonably be expected to occur
before the Closing Date; or
(d) by Century, on the one hand, or by AppNet, on the other hand, if
there shall be a final nonappealable order of a federal or state court in effect
preventing the consummation of the transactions contemplated by this Agreement;
or there shall be any action taken, or any statute, rule, regulation or order
enacted, promulgated or issued or deemed applicable to the transactions by any
governmental entity which would make the consummation of the transactions
illegal.
11.2. Effect of Termination. In the event of the termination of this
Agreement pursuant to Section 11.1, this Agreement shall forthwith become void,
and there shall be no
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liability or obligation on the part of any party hereto or its officers,
directors or stockholders. Notwithstanding the foregoing sentence, (i) the
provisions of this Section 11, Section 9, Section 6.2(a) (except for Century's
obligation to keep information regarding Century confidential thereunder) and
Section 6.2(b) shall remain in full force and effect and survive any termination
of this Agreement; (ii) each party shall remain liable for any intentional
breach of this Agreement prior to its termination; and (iii) in the event of
termination of this Agreement pursuant to Section 11.1(c), then notwithstanding
the provisions of Section 11.7, the breaching party (if such breach was in
effect as of the date hereof) shall be liable to the other party to the extent
of the expenses incurred by such other party in connection with this Agreement
and the transactions contemplated by this Agreement, as well as any damages in
accordance with applicable law.
11.3. Cooperation.
(a) Century, on the one hand, and AppNet, on the other hand, shall
each deliver or cause to be delivered to the other on the Closing Date, and at
such other times and places as shall be reasonably agreed to, such additional
instruments as the other may reasonably request for the purpose of carrying out
this Agreement. In connection therewith, if required, each of AppNet and Century
will execute any documentation reasonably required by AppNet's or Century's
independent certified public accountants (in connection with such accountant's
audit of AppNet or Century). Each of Century and AppNet will also cooperate and
use their reasonable efforts to have their respective officers and employees
cooperate with AppNet and Century, as the case may be, on and after the Closing
Date in furnishing information, accounting records, evidence, testimony and
other assistance in connection with any Tax return filing obligations, audits,
actions, proceedings, arrangements or disputes of any nature.
(b) Should agreements for services (including agreements relating to
administrative and accounting services) be necessary for either Century or
AppNet to operate independently, the parties will discuss such agreements in
good faith.
11.4. Successors and Assigns. This Agreement shall inure to the benefit of
and be binding upon Century and the Major Stockholders and their respective
successors and assigns; provided, however, that Century and the Major
Stockholders may not make any assignment of this Agreement or any interest
herein without the prior written consent of AppNet. This Agreement or any of the
severable rights and obligations inuring to the benefit or to be performed by
AppNet hereunder may be assigned by AppNet to a third party, in whole or in
part, and to the extent so assigned, Century and the Major Stockholders hereby
recognize said assignee as the party-in-interest with respect to the rights and
obligations assigned and agrees to look solely to said assignee for the purpose
of conferring benefits, or requiring performance of obligations, assigned to it
by AppNet. Except as provided herein, nothing herein expressed or implied is
intended or shall be construed to confer upon or give to any person, firm or
corporation, other than the parties hereto and their respective successors and
assigns, any rights or remedies under or by reason of this Agreement.
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11.5. Entire Agreement. This Agreement (which includes the schedules and
exhibits hereto), sets forth the entire understanding of the parties hereto with
respect to the transactions contemplated hereby and thereby. This Agreement
shall not be amended or modified except by a written instrument duly executed by
each of the parties hereto. Any and all previous agreements and understandings
between or among the parties regarding the subject matter hereof, whether
written or oral, are superseded by this Agreement.
11.6. Counterparts. This Agreement may be executed in any number of
counterparts and any party hereto may execute any such counterpart, each of
which when executed and delivered shall be deemed to be an original and all of
which counterparts taken together shall constitute but one and the same
instrument. This Agreement shall become binding when one or more counterparts
taken together shall have been executed and delivered (which deliveries may be
by telefax) by the parties.
11.7. Expenses. AppNet has and shall pay the fees, expenses and
disbursements of AppNet and its brokers, agents, representatives, accountants
and counsel incurred in connection with the subject matter of this Agreement.
Except as otherwise provided, the Stockholders have paid and shall pay the fees,
expenses and disbursements of Century and the Stockholders and each of their
respective brokers, agents, representatives, financial advisors, accountants and
counsel incurred in connection with the subject matter of this Agreement. To the
extent that Century has not received a release from all such brokers, agents,
representatives, accountants and counsel for such fees, expenses and
disbursements, AppNet shall have the authority to pay the same at Closing and
reduce the Cash Merger Consideration by the amount of such payments (but in the
case of the payment to NMS only to the extent that such payments result in
Century's Net Worth failing to meet or exceed the Net Worth Target).
11.8. Specific Performance; Remedies Not Exclusive. Each party hereto
acknowledges that the other parties shall be irreparably harmed and that there
shall be no adequate remedy at law for any violation by any of them of any of
the covenants or agreements contained in this Agreement, including, without
limitation, the confidentiality obligations set forth in Section 6.2(a) and (b)
and the noncompetition provisions set forth in Section 10. It is accordingly
agreed that, in addition to, but not in lieu of, any other remedies which may be
available upon the breach of any such covenants or agreements, each party hereto
shall have the right to obtain injunctive relief to restrain a breach or
threatened breach of, or otherwise to obtain specific performance of, the other
parties' covenants and agreements contained in this Agreement. Except as
otherwise provided herein, all rights and remedies of the parties under this
Agreement shall be cumulative, and the exercise of one or more rights or
remedies will not preclude the exercise of any other right or remedy available
under this Agreement (including the Annexes hereto) or applicable law.
11.9. Notices. Any notice, request, claim, demand, waiver, consent,
approval or other communication which is required or permitted hereunder shall
be in writing and shall be deemed given if delivered personally or sent by
registered or certified mail, postage prepaid, return receipt requested, or by
nationally recognized overnight courier service, as follows:
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<PAGE>
If to AppNet to:
AppNet Systems, Inc.
6700 Rockledge Drive, Suite 525
Bethesda, Maryland 20817
Attn: Ken S. Bajaj, President
with a required copy to:
Tucker, Flyer & Lewis
1615 L Street, N.W., Suite 400
Washington, D.C. 20036
Attn: Arthur E. Cirulnick, Esq.
If to Century or the Major Stockholders to:
Century Computing, Incorporated
8101 Sandy Spring Road
Laurel, Maryland 20707
Attn: John T. McBeth, President and CEO
with a required copy to:
Winthrop, Stimson, Putnam & Roberts
1133 Connecticut Avenue, N.W.
Washington, D.C. 20036
Attn: Michael J. Levitin, Esq.
and a required copy to:
Paul Butterfield
13798 Lakeside Drive
Clarksville, MD 21209
and a required copy to:
Charles Butterfield
9501 Footprint Place
Columbia, MD 21045
and a required copy to:
Norman Engelberg
6621 Rising Waves Way
Columbia, MD 21044
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<PAGE>
or to such other address as the person to whom notice is to be given may have
specified in a notice duly given to the sender as provided herein. Such notice,
request, claim, demand, waiver, consent, approval or other communication shall
be deemed to have been given as of the date so delivered, telefaxed, mailed or
dispatched and, if given by any other means, shall be deemed given only when
actually received by the addressees.
11.10. Governing Law. This Agreement shall be governed by and construed,
interpreted and enforced in accordance with, the laws of the State of Maryland
(without regard to its laws relating to choice-of-law or conflicts-of-law).
11.11. Arbitration. Any unresolved dispute or controversy arising under or
in connection with this Agreement arising after the Closing shall be settled
exclusively by a three (3) person arbitration panel, with such arbitration
proceeding conducted in accordance with the rules of the American Arbitration
Association then in effect. The arbitrators shall not have the authority to add
to, detract from, or modify any provision hereof nor to award punitive damages
to any injured party. A decision by a majority of the arbitration panel shall be
final and binding. Judgment may be entered on the arbitrators' award in any
court having jurisdiction. The arbitration proceeding shall be held in Bethesda,
Maryland. Notwithstanding the foregoing, the parties shall be entitled to seek
injunctive or other equitable relief from any court of competent jurisdiction,
without the need to resort to arbitration.
11.12. Survival of Representations, Warranties and Covenants. All
representations, warranties and covenants made by either party in or pursuant to
this Agreement or in any document delivered pursuant hereto shall survive the
Closing.
11.13. Miscellaneous.
(a) Notwithstanding anything contained in Section 9 to the contrary,
there shall be no liability for indemnification under Section 9, (i) unless the
aggregate amount of Damages exceeds $100,000, or (ii) to the extent that an
Indemnified Party has suffered, incurred, sustained or become subject to,
Damages by reason of all such claims in excess of $1.5 million and no
Indemnifying Party (and for the purpose of this sentence, all Seller Parties
shall be considered one and the same Indemnifying Party) shall be obligated to
pay more than $1,500,000 under Section 9 (the "General Cap"). For Damages which
the Buyer Parties suffer, incur, sustain or become subject to, by reason of a
cost disallowance proposed by the Defense Contract Audit Agency or the National
Library of Medicine in any audit for periods ending prior to the Effective Time
or which the Buyer Parties suffer, incur, sustain or become subject to, for the
reasons set forth in Section 9.1(a)(iii), the General Cap shall be inapplicable;
instead, for such Damages there shall be liability for indemnification under
Section 9 up to the aggregate Merger Consideration plus the Option Amount (minus
the value of any AppNet Stock Options issued upon the conversion of Century
Stock Options in connection with the Merger if such AppNet Stock Options have
expired without being exercised). For Damages which the Buyer Parties suffer,
incur, sustain or become subject to, by reason of any other Liability of Century
under any Government Contract for acts or omissions that occurred prior to the
Effective Time
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<PAGE>
("Government Contract Liability"), the General Cap shall be inapplicable;
instead, for such Damages there shall be liability for indemnification under
Section 9 up to $2.5 million. Notwithstanding anything contained in Section 9 or
11.13, (x) the obligation of the Seller Parties to pay up to $2.5 million in
respect of Government Contract Liability shall be in addition to the Seller
Parties' obligation to pay up to $1.5 million in respect of liabilities falling
within the General Cap, (y) the Buyer Parties may pursue claims for Government
Contract Liability in excess of $2.5 million but only if and to the extent that
the Buyer Parties have not been paid $1.5 million under the General Cap, and (z)
the amount that the Seller Parties are obligated to pay under the General Cap
shall be reduced by one dollar for each dollar in excess of $2.5 million that
the Buyer Parties recover in excess of $2.5 million.
(b) Notwithstanding anything contained in Section 9 to the contrary,
the indemnification obligations under Section 9 shall terminate as follows: (i)
indemnification obligations relating to a cost disallowance proposed by the
Defense Contract Audit Agency or the National Library of Medicine in any audit
for periods ending prior to the Effective Time shall terminate thirty days
following the date when such audit is completed, the contract is closed, and
final payment in respect of such contract has been received, and upon the
completion of the cost audit, (ii) indemnification obligations relating to the
reasons set forth in Section 9.1(a)(iii) shall terminate at the expiration of
the applicable statute of limitation for any such Governmental or Regulatory
Authority asserting a claim against the Surviving Corporation (provided,
however, there shall be no indemnification beyond the expiration of the initial
statute of limitations in the event that a Buyer Party has extended the statute
of limitations), (iii) indemnification obligations with respect to a breach of
Section 4.20(h) shall terminate on July 1, 2000, and (iv) all other
indemnification obligations shall terminate on the first anniversary of the
Effective Time; provided, however, that any indemnification obligation which
would otherwise terminate in accordance with clauses (i), (ii), (iii) or (iv)
above will continue to survive if a Claim Notice shall have been timely given
under Section 9 on or prior to such termination date, but only with respect to
the specific Claim described in such Claim Notice and only until such Claim has
been satisfied or otherwise resolved pursuant to Section 9.
(c) Notwithstanding anything in Section 9 to the contrary, except
for the unpaid balance of the Note (or the shares into which such balance is
convertible) which is available for offset against indemnification obligations
in their entirety pursuant to Section 9.3, including, without limitation,
amounts due to Century stockholders other than the Major Stockholders, the
indemnification obligations of each Major Stockholder shall be limited to the
following percentage of the indemnification obligations: Mark Allen, 4.67%;
Charles Butterfield, 22.66%; Paul Butterfield, 22.79%; Norman Engelberg, 16.33%;
John McBeth, 24.78%; Philip Miller, 2.45%; and Charles Shaw, 6.32%.
(d) The indemnification provisions of Section 9 shall constitute the
sole and exclusive remedy of the parties hereto for any inaccuracy, untruth,
incompleteness or other breach of any representation or warranty contained in or
made pursuant to this Agreement or for any breach of or failure to perform any
covenant or agreement made in this Agreement (other than a claim based upon
fraud or for injunctive relief under Section 10), and the parties each waive any
other remedy, which they or any other person entitled to indemnification
hereunder
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<PAGE>
may have at law or in equity with respect thereto. The amount of Damages
suffered by any person entitled to indemnification shall be reduced by an amount
equal to any insurance recovery received by such person with respect to such
Damages; provided, however, that no Indemnified Party shall be obligated to
pursue or continue to pursue any payment pursuant to the terms of any insurance
policy and the Indemnifying Party shall be subrogated to an Indemnified Party's
claims under such policy. The Indemnified Party shall execute and deliver such
documents as the Indemnifying Party may reasonably request to evidence such
subrogation and to assist the Indemnifying Party in any claim in respect of such
insurance policy at the expense of the Indemnifying Party.
(e) In the event that any Stockholder shall exercise his or her
appraisal rights under DGCL Section 262, the Major Stockholders shall have the
right to control the defense of such appraisal proceeding as if such proceeding
was a Claim for which the Major Stockholders are the Indemnifying Parties.
One-half of the cost of such appraisal proceeding and any amount which the
Surviving Corporation shall be required to pay with respect to any Dissenting
Shares shall be paid directly by the Major Stockholders and one-half of the cost
of such appraisal proceeding and any amount which the Surviving Corporation
shall be required to pay with respect to any Dissenting Shares shall be Damages
hereunder where AppNet and the Surviving Corporation are Buyer Parties entitled
to indemnification from the Major Stockholders.
(f) So long as either or both of John McBeth and Barbara Mallory are
employed by Century, and so long as the Seller Parties are obligated to
indemnify under this Agreement for liability in respect of contracts between
Century and customers that are Governments or units thereof, John McBeth or
Barbara Mallory, so long as such person is then employed by Century, shall
control relations between Century and each customer of Century that both (i) is
a Government or a unit thereof and (ii) is a party to a contract for which the
Seller Parties are obligated to indemnify the Buyer Parties under this
Agreement. So long as either or both of John McBeth and Barbara Mallory are
employed by Century, and so long as the Seller Parties are obligated to
indemnify under Section 9.1(a)(iii) of this Agreement, John McBeth or Barbara
Mallory, so long as such person is them employed by Century along with AppNet's
Chief Financial Officer, shall control relations between Century and the
Internal Revenue Service in respect of matters subject to such indemnification.
11.14. Severability. If any provision of this Agreement or the application
thereof to any person or circumstances is held invalid or unenforceable in any
jurisdiction, the remainder hereof, and the application of such provision to
such person or circumstances in any jurisdiction, shall not be affected thereby,
and to this end the provisions of this Agreement shall be severable. The
preceding sentence is in addition to and not in place of the severability
provisions in Section 10.4.
11.15. Absence of Third Party Beneficiary Rights. No provision of this
Agreement is intended, nor will be interpreted, to provide or create any third
party beneficiary rights or any other rights of any kind in any client,
customer, affiliate, shareholder, employee or partner of any party hereto or any
other person or entity.
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<PAGE>
11.16. Mutual Drafting. This Agreement is the mutual product of the
parties hereto, and each provision hereof has been subject to the mutual
consultation, negotiation and agreement of each of the parties, and shall not be
construed for or against any party hereto.
11.17. Further Representations. Each party to this Agreement acknowledges
and represents that it has been represented by its own legal counsel in
connection with the transactions contemplated by this Agreement, with the
opportunity to seek advice as to its legal rights from such counsel. Each party
further represents that it is being independently advised as to the tax or
securities consequences of the transactions contemplated by this Agreement and
is not relying on any representation or statements made by the other party as to
such tax and securities consequences.
11.18. Amendment; Waiver. This Agreement may be amended by the parties
hereto at any time by execution of an instrument in writing signed on behalf of
each of the parties hereto. Any extension or waiver by any party of any
provision hereto shall be valid only if set forth in an instrument in writing
signed on behalf of such party.
11.19. Gender. Unless the context clearly indicates otherwise, where
appropriate the singular shall include the plural and the masculine shall
include the feminine or neuter, and vice versa, to the extent necessary to give
the terms defined herein and/or the terms otherwise used in this Agreement the
proper meanings.
11.20. Headings. The headings and other captions in this Agreement are for
convenience and reference only and shall not be used in interpreting, construing
or enforcing any of the provisions of this Agreement.
11.21. Public Disclosure. Prior to the Closing Date, neither party shall
make any disclosure (whether or not in response to an inquiry) of the subject
matter of this Agreement unless previously approved by Century and AppNet.
Nothing in this Section 11.21 or in Section 6.2 shall restrict Century's ability
to call the meeting of stockholders contemplated by Section 7.3 or to reveal the
existence of this Agreement to Century's employees at the time Century gives
notice of such stockholders' meeting.
[EXECUTION PAGE FOLLOWS]
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IN WITNESS WHEREOF, the parties hereto have executed this Stock Purchase
Agreement as of the day and year first above written.
APPNET:
APPNET SYSTEMS, INC.
By: /s/ Ken Bajaj
------------------------------
Name: Ken Bajaj
------------------------------
Title: Chief Executive Officer
------------------------------
SUB:
APPNET/CENTURY, INC.
By: /s/ Ken Bajaj
------------------------------
Name: Ken Bajaj
------------------------------
Title: Chief Executive Officer
------------------------------
Century:
CENTURY COMPUTING, INCORPORATED
By: /s/ John T. McBeth
------------------------------
Name: John T. McBeth
------------------------------
Title: President and CEO
------------------------------
MAJOR STOCKHOLDERS:
/s/ Charles Butterfield /s/ Paul Butterfield
- -------------------------------- ------------------------------------
Charles Butterfield Paul Butterfield
/s/ Norman Engelberg /s/ John McBeth
- ---------------------------------- ------------------------------------
Norman Engelberg John McBeth
/s/ Philip Miller /s/ Charles Shaw
- ---------------------------------- ------------------------------------
Philip Miller Charles Shaw
/s/ Mark Allen
- ----------------------------------
Mark Allen
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<PAGE>
SCHEDULES
Schedule 1 Major Stockholders
Schedule 3.1(c) Cash Merger Consideration and Debt Merger Consideration
Schedule 3.1(d) AppNet Stock Options to be delivered to the holders of Century
Stock Options
Schedule 4.4 Violations of Agreements
Schedule 4.5 Stock of Century
Schedule 4.6 Financial Statements
Schedule 4.7(a) Liabilities
Schedule 4.7(b) Advance Payments or Deposits
Schedule 4.8 Adverse Changes
Schedule 4.9(a) Benefit Plans
Schedule 4.9(b) List of Employees
Schedule 4.12(a) Real Property
Schedule 4.12(b) Personal Property
Schedule 4.13 Material Contracts
Schedule 4.14 Government Contracts
Schedule 4.15 Violations of Law; Litigation
Schedule 4.16 Noncompliance List
Schedule 4.17 Environmental Disclosure
Schedule 4.18(a) Significant Customers
Schedule 4.18(b) Suppliers Who Have Threatened Termination
Schedule 4.19 Insurance
Schedule 4.20(a) Company Intellectual Property Rights
Schedule 4.20(b) Licenses to Use Century Intellectual Property
Schedule 4.20(c) Third Party Intellectual Property Claims
Schedule 4.20(e) Unauthorized Intellectual Property Use
Schedule 4.20(f) Century Nondisclosure Agreement
Schedule 4.23 Related Party Transactions
Schedule 5.6 Stock of AppNet
Schedule 5.8 Litigation (AppNet)
Schedule 7.11 Agreed-upon Adjustments
EXHIBITS
Exhibit A Form of Certificate of Merger
Exhibit B Form of Certificate of Beneficial Interest
Exhibit C Form of Subordinated Convertible Promissory Note
Exhibit D Intentionally Deleted
Exhibit E1 Form of Employment Agreement; Form of Non-Competition/Non-
Disclosure Agreement
Exhibit E2 Form of Senior Management Agreement
Exhibit F Form of Security Agreement (Pledge)
<PAGE>
Exhibit 10.6
STOCK PURCHASE AGREEMENT
by and among
APPNET SYSTEMS, INC.,
(Buyer)
RESEARCH & PLANNING, INC.,
(RPI)
and
THE SHAREHOLDERS OF RESEARCH & PLANNING, INC.
(collectively, Sellers)
Dated as of October 20, 1998
<PAGE>
TABLE OF CONTENTS
Page
1. DEFINITIONS................................................................1
2. PURCHASE AND SALE OF RPI SHARES............................................6
(a) Basic Transaction.................................................6
(b) Purchase Price....................................................6
(c) Adjusted Net Worth of RPI Adjustment..............................7
(c) The Closing.......................................................7
(d) Deliveries at the Closing.........................................8
3. REPRESENTATIONS AND WARRANTIES OF EACH SELLER..............................8
(a) Authorization of Transaction...............................8
(b) Noncontravention...........................................9
(c) Broker's Fees..............................................9
(d) RPI Shares.................................................9
Representations and Warranties of the Buyer...........................9
(a) Organization of the Buyer..................................9
(b) Authorization of Transaction..............................10
(c) Noncontravention..........................................10
(d) Brokers' Fees.............................................11
(e) Investment................................................11
(f) Buyer's Capitalization....................................11
(g) Buyer Shares..............................................11
(i) Financial Statements......................................11
(j) Undisclosed Liabilities...................................12
(k) Litigation................................................12
(l) Contracts........................................................12
5. REPRESENTATIONS AND WARRANTIES CONCERNING RPI.............................13
(a) Organization, Qualification, and Corporate Power.................14
(b) Capitalization...................................................14
(c) Noncontravention.................................................14
(d) Subsidiaries.....................................................15
(e) Financial Statements.............................................15
(f) Events Subsequent to the Most Recent Fiscal Year End.............15
(g) Undisclosed Liabilities..........................................17
(h) Tax Matters......................................................17
(i) Tangible Assets..................................................18
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<PAGE>
(j) Owned Real Property..............................................18
(k) Intellectual Property............................................19
(l) [Reserved].......................................................19
(m) Contracts........................................................19
(n) Notes and Accounts Receivable....................................20
(o) Powers of Attorney...............................................20
(p) Insurance........................................................21
(q) Litigation.......................................................21
(r) Employees........................................................21
(s) Employee Benefits................................................21
(t) Guaranties.......................................................23
(u) Environment, Health, and Safety..................................23
(v) Legal Compliance.................................................23
(w) Certain Business Relationships with RPI..........................24
(x) Brokers' Fees....................................................24
6. COVENANTS.................................................................24
(a) General..........................................................24
(b) Litigation Support...............................................24
(c) Additional Tax Matters...........................................25
(d) Covenant Not to Compete..........................................25
(e) Section 338(h)(10) Election......................................25
(g) Employment Agreements............................................27
(h) Incentive Compensation Program...................................27
(i) Option Grants....................................................28
(k) Confidentiality..................................................28
7. CLOSING DELIVERIES........................................................28
(a) Closing Deliveries of the Sellers and RPI........................28
(b) Closing Deliveries of the Buyer..................................29
8. REMEDIES FOR BREACHES OF THIS AGREEMENT...................................30
(a) Survival.........................................................30
(b) Indemnification Provisions for Benefit of the Buyer..............31
(c) Indemnification Provisions for Benefit of the Sellers............34
(d) Matters Involving Third Parties..................................35
(e) Exclusive Remedy.................................................36
(f) Payment..........................................................36
(g) Arbitration with Respect to Certain Indemnification Matters......37
9. MISCELLANEOUS.............................................................38
(a) Press Releases and Announcements.................................38
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(b) No Third-Party Beneficiaries.....................................38
(c) Entire Agreement.................................................38
(d) Succession and Assignment........................................38
(e) Facsimile/Counterparts...........................................38
(f) Descriptive Headings.............................................39
(g) Notices..........................................................39
(h) Governing Law....................................................41
(i) Amendments and Waivers...........................................41
(j) Severability.....................................................41
(k) Expenses.........................................................42
(l) Construction.....................................................42
(m) Incorporation of Exhibits, Annexes, and Schedules................42
(n) Specific Performance.............................................42
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LIST OF EXHIBITS, ANNEXES AND SCHEDULES
EXHIBITS
Exhibit A Form of Equity Subscription Agreement
Exhibit B RPI Financial Statements
Exhibit C Joinder to Stockholders Agreement
Exhibit D Form of Seller Employment Agreement
Exhibit E Form of Buyer's Subordinated Notes
Exhibit F Joinder to the Registration Agreement
Exhibit G-1 Form of Legal Opinion of Sellers and R&P's Legal Counsel
Exhibit G-2 Form of Legal Opinion of Buyer's Legal Counsel
Exhibit H Buyer Financial Statements
Exhibit I Form of Stock Option Agreement
SCHEDULES
Closing Determination
Allocation Schedule
Buyer's Capitalization Schedule
Sellers' and RPI's Disclosure Schedule
Option Allocation Schedule
VLP Allocation Schedule
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<PAGE>
STOCK PURCHASE AGREEMENT
This STOCK PURCHASE AGREEMENT ("Agreement") is entered into as of
the 20th day of October, 1998, by and among APPNET SYSTEMS, INC., a Delaware
corporation (the "Buyer"), RESEARCH & PLANNING, INC., a Massachusetts
corporation ("RPI"), and Thomas H. Rauh and William Rosenfeld (collectively, the
"Sellers"). The Buyer, RPI and the Sellers are referred to herein individually
as a "Party" and collectively as the "Parties."
Recitals
A. The Sellers collectively own all of the outstanding capital stock
of RPI.
B. This Agreement contemplates a transaction in which the Buyer will
purchase from the Sellers and the Sellers will sell to the Buyer all of the
outstanding capital stock of RPI.
Agreement
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.
"Adjusted Net Worth of RPI" means, for the purposes set forth in
Section 2(c) the total assets of RPI less the total liabilities of RPI,
calculated in accordance with GAAP applied on a consistent basis with RPI's past
practice; provided, however, that in calculating the Adjusted Net Worth of RPI,
(i) no material increase in the intangible assets of RPI
(which intangible assets do not include accounts receivable or work-in-process)
since June 30, 1998 shall be included in calculating the Adjusted Net Worth of
RPI without the written consent of Buyer, and
(ii) net profits for the month in which the Closing Date
occurs shall be calculated on a pro-rata basis by multiplying the aggregate
amount of net profits at the close of such month by a fraction, the denominator
of which shall be the total number of business days in such month and the
numerator of which shall be the number of business days in the period from and
including the first day of such month through and including the day before the
Closing Date; and
(iii) no impacts of the following matters shall be included:
(A) the transactions contemplated by this Agreement
(except with respect to the payment of expenses in accordance with Section
9(k)),
<PAGE>
(B) the conversion by RPI to a "C" corporation from an
"S" corporation for tax purposes,
(C) the conversion by RPI to the accrual basis of tax
accounting from the cash basis of tax accounting, or
(D) the making of any election under Section 338(h)(10)
of the Code (including the prerequisite election under Section 338 of the Code)
and any similar state law provisions in all applicable states which permit
corporations to make such elections pursuant to Section 6(e).
"Adverse Consequences" means all damages from complaints, actions,
suits, proceedings, claims, demands, judgments, orders, decrees, injunctions,
penalties, fines, amounts paid in settlement, liabilities, obligations, taxes,
liens and losses, and all reasonable fees and expenses reasonably incurred in
connection therewith, including all reasonable attorneys' fees and court costs
reasonably incurred.
"Affiliate" has the meaning set forth in Rule 12b-2 of the
regulations promulgated under the Securities Exchange Act of 1934, as amended.
"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 forms the reasonable basis 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 Financial Statements" has the meaning set forth in Section
4(h) below.
"Buyer's Shares" means the 2,000,000 shares of Buyer Common Stock
which are to be issued to the Sellers pursuant to this Agreement.
"Buyer's Subordinated Notes" means the notes of Buyer substantially
in the form of Exhibit E attached hereto.
"Cash Portion of the Purchase Price" has the meaning set forth in
Section 2(b) below.
"Closing" has the meaning set forth in Section 2(d) below.
"Closing Date" has the meaning set forth in Section 2(d) below.
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"Code" means the Internal Revenue Code of 1986, as amended.
"Confidential Information" means all confidential information and
trade secrets of RPI including, without limitation, the identity, lists or
descriptions of any customers, referral sources or organizations; financial
statements 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, however, that the
Confidential Information shall not include information which (i) was or becomes
generally available to the public other than as a result of a its wrongful
disclosure by the receiving party, (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 the 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 the source of such information is not known to such receiving
party to be bound by a confidentiality agreement or otherwise prohibited from
transmitting the information to the receiving party by a contractual, legal or
fiduciary obligation known to such receiving party, or (iv) which is required to
be and actually is disclosed by operation of law.
"Controlled Group of Corporations" has the meaning set forth in Code
Sec. 1563, as modified by Code sec. 414(b).
"Customer Contract or Agreement" means any agreement whereby RPI
provides computer or software implementation or support or project service
and/or related information technology consulting services to a third party.
"Deferred Intercompany Transaction" has the meaning set forth in
Treas. Reg. ss.1.1502-13.
"Disclosure Schedule" means the Disclosure Schedule setting forth
the Sellers' exceptions to the representations and warranties set forth in
Sections 3 and 5 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).
"Equitable Exceptions" shall have the meaning set forth in Section
3(a)(i) below.
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"ERISA" means the Employee Retirement Income Security Act of 1974,
as amended.
"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.
"Fiduciary" has the meaning set forth in ERISA Sec. 3(21).
"Funded Indebtedness" means all (i) indebtedness of RPI for borrowed
money or other interest-bearing indebtedness; (ii) capital lease obligations of
RPI; (iii) obligations of RPI to pay the deferred purchase or acquisition price
for goods or services, other than trade accounts payable or accrued expenses in
the ordinary course of business on no more than 90 day payment terms; and (iv)
indebtedness of others guaranteed by RPI or secured by an Security Interest on
RPI's property, other than endorsements of negotiable instruments (such as
checks from payors of the Company's accounts receivables) in the Ordinary Course
of Business.
"GAAP" means generally accepted accounting principles, consistently
applied, as in effect from time to time.
"Indemnified Party" has the meaning set forth in Section 8(d) below.
"Indemnifying Party" has the meaning set forth in Section 8(d)
below.
"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, research and
development information, drawings, specifications, designs, plans, technical
data, copyrightable works, and customer and supplier lists and information, (e)
other proprietary rights, and (f) copies and tangible embodiments thereof (in
whatever form or medium).
"Key Employees" means Sam Sliman and Rich Labbadia.
"Knowledge" means (a) with respect to each Seller, information which
is actually known by such Seller and (b) with respect to RPI, actual knowledge
of the Sellers.
"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), excluding any liability for
Taxes.
"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
5(e) below.
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"Multiemployer Plan" has the meaning set forth in ERISA Sec. 3(37).
"Notes Portion of the Purchase Price" has the meaning set forth in
Section 2(b) below.
"Ordinary Course of Business" means the ordinary course of business
consistent with past custom and practice.
"Party" has the meaning set forth in the preface above.
"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(b) below.
"Registration Agreement" means that certain Registration Agreement
dated June 29, 1998 by and among Buyer and the stockholders of Buyer.
"RPI" has the meaning set forth in the preface above.
"RPI's Business" means the business of providing computer support or
project services to, writing custom software for, and implementing related
consulting services for business customers.
"RPI Financial Statements" has the meaning set forth in Section 5(e)
below.
"RPI Shares" means all outstanding shares of the common stock, $.10
par value per share, of RPI.
"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 capital lease arrangements, and (g) other liens
arising in the Ordinary Course of Business and not incurred in connection with
the borrowing of money.
"Sellers" has the meaning set forth in the preamble above.
"Stock Portion of the Purchase Price" has the meaning set forth in
Section 2(b) below.
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"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 5(e) 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, 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.
"VLP Plan" means RPI's VLP incentive compensation plan.
2. Purchase and Sale of RPI Shares
(a) Basic Transaction. On the terms and subject to the
conditions of this Agreement, the Buyer agrees to purchase from each Sellers,
and each Seller agrees to sell to the Buyer, all of his respective RPI Shares
for the consideration specified below in this Section 2.
(b) Purchase Price. The purchase price for RPI Shares (the
"Purchase Price") shall be composed of the Cash Portion of the Purchase Price,
the Stock Portion of the Purchase Price and the Notes Portion of the Purchase
Price, each as defined below. The Buyer agrees to pay to the Sellers in the
aggregate the sum of (i) $13,500,000, subject to any adjustment, if any, made
pursuant to paragraph (c) below, in cash (the "Cash Portion of the Purchase
Price"); (ii) 2,000,000 shares of Buyer Common Stock (the "Stock Portion of the
Purchase Price"); and (iii) Buyer's Subordinated Notes in substantially the form
of Exhibit E hereto and with an aggregate principal amount of $1,000,000 (the
"Notes Portion of the Purchase Price"). The Cash Portion of the Purchase Price,
the Stock Portion of the Purchase Price and the Notes Portion of the Purchase
Price shall be paid or issued by Buyer to Sellers at the Closing by the delivery
to the Sellers of immediately available funds, certificates representing Buyer's
Shares and Buyer's Subordinated Notes, in the respective amounts set forth on
the Allocation Schedule next to such Seller's name.
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Each acquirer of Buyer's Shares shall enter into an Equity Subscription
Agreement in the form attached hereto as Exhibit A. Cash will be paid in lieu of
any fractional shares which would otherwise be issued in accordance with this
Agreement.
(c) Adjusted Net Worth of RPI Adjustment. The Cash Portion of
the Purchase Price shall be adjusted downward on a dollar-for-dollar basis by
the amount by which the Adjusted Net Worth of RPI is less than $1,300,000 (the
"Minimum Net Worth") as of the close of business on the day prior to the Closing
Date. The Adjusted Net Worth of RPI as of the close of business on the day prior
to Closing Date shall initially be determined by the Sellers and RPI in good
faith prior to the Closing Date and attached hereto as a Schedule (, as so
attached the "Closing Determination") and, if necessary, the Cash Portion of the
Purchase Price shall be adjusted at the Closing in accordance with the Closing
Determination. Following the Closing Date, the Adjusted Net Worth of RPI as of
the close of business on the day prior to Closing Date shall be determined by
Arthur Andersen ("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 object 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 an
objection is raised by Sellers, the parties will negotiate in good faith to
achieve a mutually satisfactory resolution; provided, however, if such a
resolution cannot be reached within thirty (30) days from receipt of the AA
Determination, the parties may proceed to arbitrate the issue pursuant to the
procedures set forth in Section 8(g)(ii) below. If no objection is made (or, if
an objection was made but the dispute is resolved), Sellers shall pay to Buyer
by wire transfer 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 receipt of the AA Determination (or, if an objection was made but
the dispute is resolved, then within ten (10) days after the date on which the
parties resolved such dispute). If the AA Determination shows that the deduction
made on the Closing Date against the Cash Portion of the Purchase Price as a
result of the Closing Determination was greater than the adjustment to be made
as a result of the AA Determination, the Buyer shall pay the Sellers by wire
transfer the difference within ten (10) days after the receipt of the AA
Determination. At Buyer's option, Buyer may effect any such adjustment in its
favor against the Buyer Subordinated Notes by allowing each Seller to surrender
a portion of the Buyer Subordinated Notes held by such Seller (valued at the
principal amount thereof that is surrendered plus all accrued but unpaid
interest thereon).
(d) The Closing. The closing of the transactions contemplated
by this Agreement (the "Closing") shall take place at the offices of Hogan &
Hartson L.L.P. in Washington, D.C. commencing at 9:00 a.m. local time upon the
execution and delivery of this Agreement by each of the Parties hereto, or such
other date as the Buyer and the Sellers may mutually determine (the "Closing
Date").
(e) 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
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certificates representing all of his RPI Shares, endorsed in blank or
accompanied by duly executed assignment documents, and (iv) the Buyer will
deliver to the Sellers the consideration specified in Section 2(b) above.
(e) Transfer Taxes. The Sellers shall pay any state transfer
taxes arising solely from the transfer of the RPI Shares to the Buyer. For
avoidance of doubt, the Sellers shall not be obligated to pay any state
transfer, sales, use or other similar taxes arising from the transfer of the RPI
Shares to Buyer that are attributable to or incurred in connection with any
election under Section 338(h)(10) of the Code (including the prerequisite
election under Section 338 of the Code) or any similar state law provisions in
any applicable states which permit corporations to make such elections made
pursuant to Section 6(e) hereof.
3. Representations and Warranties of each Seller . Each Seller,
severally and not jointly, represents and warrants to the Buyer that the
statements set forth in this Section 3 are correct and complete as follows as of
the date of this Agreement, except as set forth in the Disclosure Schedule
delivered by the Sellers and RPI to the Buyer on the date hereof and initialed
by the parties:
(a) Authorization of Transaction. The Seller has full power
and authority to execute and deliver this Agreement, his joinder to
Stockholders Agreement, his joinder to Registration Agreement and his
Equity Subscription Agreement and to perform his obligations hereunder and
thereunder. This Agreement, his joinder to Stockholders Agreement, his
joinder to Registration Agreement and his Equity Subscription Agreement
have been duly executed and delivered by the Seller. This Agreement, his
joinder to Stockholders Agreement, his joinder to Registration Agreement
and his Equity Subscription Agreement constitute the valid and legally
binding obligations of the Seller, enforceable in accordance with their
terms, except that (i) 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 (ii) 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 clauses (i) and (ii) 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, his joinder to
Stockholders Agreement, his joinder to Registration Agreement (other than
those required under the Securities Act and any applicable state
securities laws) and his Equity Subscription Agreement.
(b) Noncontravention. Neither the execution and the delivery
of this Agreement, his joinder to Stockholders Agreement, his joinder to
Registration Agreement and his Equity Subscription Agreement by the
Seller, nor the consummation of the transactions contemplated hereby or
thereby by the Seller, will (A) violate any statute,
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regulation, rule, judgment, order, decree, stipulation, or injunction of
any government, governmental agency or court to which the Seller is
subject or (B) except as set forth in Section 3(b) of the Disclosure
Schedule, conflict with, result in a breach of, constitute a default
under, or require any notice under, any material contract, lease,
sublease, license, sublicense, franchise, permit, indenture, agreement or
instrument representing indebtedness for borrowed money to which the
Seller is a party or by which he is bound, or under any Security Interest
to which his RPI Shares are subject.
(c) Broker's Fees. Except for payments to Wallace Willmore
Cromwell & Co., LLC, which shall be borne by RPI, the 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.
(d) RPI Shares. The Seller holds of record and owns
beneficially the number of RPI Shares set forth next to his name in
Section 3(d) of the Disclosure Schedule, free and clear of any
restrictions on transfer (other than any restrictions under the Securities
Act and state securities laws), Security Interests, options, and warrants.
The Seller is not a party to (or has otherwise waived all rights under)
any option, warrant, right, contract, or other agreement or commitment
providing for the disposition or acquisition of any capital stock of RPI
(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 RPI.
4. Representations and Warranties of the Buyer. The Buyer hereby
represents and warrants to the Sellers that the statements contained in this
Section 4 are correct and complete as of the date of this Agreement.
(a) Organization of the Buyer. The Buyer and each of its
existing Subsidiaries as of the date hereof (i.e., AppNet of Maryland,
Inc. ("AMD"), AppNet of Michigan, Inc. ("AMI"), Software Services
Corporation ("SSC"), New Media Publishing, Inc. ("NMP") and Century
Computing, Incorporated ("Century"), each a wholly-owned Subsidiary of
Buyer, and AppNet Commerce Systems, Inc. ("ACSI"), a 50%-owned Subsidiary
of Buyer) is a corporation duly organized, validly existing, and in good
standing under the laws of its jurisdiction of incorporation. Buyer owns
of record and beneficially all, in the case of AMD, AMI, SSC, NMP and
Century or 50% in the case of ACSI, of the outstanding capital stock of
each of such Subsidiaries. The Buyer and each of such Subsidiaries is duly
authorized to conduct business and is in good standing under the laws of
each jurisdiction in which the nature of its businesses or the ownership
or leasing of its properties requires such qualification, except where the
failure to be so qualified would not have a material adverse effect on the
assets, liabilities, business, financial condition or results of operation
of the Buyer (a "Material Adverse Effect on Buyer"). The Buyer and each
Subsidiary of the Buyer 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. The Buyer has delivered to the Sellers correct and
complete copies of the charter and
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bylaws of the Buyer (as amended to date). The Buyer is not in default
under or in violation of any provision of its charter or bylaws.
(b) Authorization of Transaction. The Buyer has full power and
authority (including full corporate power and authority) to execute and
deliver this Agreement, the Buyer's Subordinated Notes, the joinder to
Stockholders Agreement, the joinder to Registration Agreement and the
Equity Subscription Agreements and to perform its obligations hereunder
and thereunder. This Agreement, the Buyer's Subordinated Notes, the
joinder to Stockholders Agreement, the joinder to Registration Agreement
and the Equity Subscription Agreements have been duly executed and
delivered by the Buyer. This Agreement, the Buyer's Subordinated Notes,
the joinder to Stockholders Agreement, the joinder to Registration
Agreement and the Equity Subscription Agreements constitute the valid and
legally binding obligations of the Buyer, enforceable in accordance with
their terms and conditions except for the Equitable Exceptions. The Buyer
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 to consummate the transactions contemplated by this
Agreement, the Buyer's Subordinated Notes, the joinder to Stockholders
Agreement, the joinder to Registration Agreement (other than those
required under the Securities Act and any applicable state securities
laws) or the Equity Subscription Agreements.
(c) Noncontravention. Neither the execution and the delivery
of this Agreement, the Buyer's Subordinated Notes, the joinder to
Stockholders Agreement, the joinder to Registration Agreement and the
Equity Subscription Agreements by the Buyer, nor the consummation of the
transactions contemplated hereby or thereby by the Buyer, will (i) violate
any statute, regulation, rule, judgment, order, decree, stipulation or
injunction, of any government, governmental agency, or court to which the
Buyer or any of its Subsidiaries is subject, except to the extent that
such violation does not or would not result in a Material Adverse Effect
on Buyer; or (ii) violate any provision of the certificate of
incorporation or bylaws of the Buyer; or (iii) 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 material 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 any of its Subsidiaries is a party
or by which the Buyer or any of its Subsidiaries is bound or to which any
of the assets of the Buyer or any of its Subsidiaries is subject; or (iv)
other than in connection with or as required by Buyer's senior secured
credit facility with BankBoston, N.A., result in the creation or
imposition of any Security Interest on any asset of the Buyer or any of
its Subsidiaries.
(d) Brokers' Fees. Except for payments to Training Dynamics
Institute, Inc., which shall be borne by Buyer, neither the Buyer nor any
of its Subsidiaries 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 or RPI
could become liable or obligated.
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(e) Investment. The Buyer is not acquiring RPI Shares with a
view to or for sale in connection with any distribution thereof within the
meaning of the Securities Act.
(f) Buyer's Capitalization. Buyer's authorized, issued and
outstanding capital stock (including options and warrants) as of the date
hereof is as set forth in the Buyer's Capitalization Schedule attached
hereto ("Buyer's Cap Schedule"). All of the issued and outstanding shares
of Buyer's capital stock (including the issued and outstanding shares of
Buyer Common Stock) have been duly authorized and validly issued and are
fully paid and nonassessable, and have not been issued in violation of any
preemptive, first refusal or other subscription rights of any stockholder
of the Buyer or any other person. Except as set forth in the Buyer's Cap
Schedule, there are no outstanding or authorized options, warrants,
rights, contracts, rights to subscribe, conversion rights, or other
agreements or commitments to which the Buyer is a party or which are
binding upon the Buyer providing for the issuance, disposition, or
acquisition of any of its capital stock. There are no outstanding or
authorized stock appreciation, phantom stock, or similar rights with
respect to the Buyer. Except for the Stockholder's Agreement, there are no
voting trusts, proxies, or any other agreements or understandings with
respect to the voting of the capital stock of the Buyer.
(g) Buyers Shares. The Buyers Shares to be issued to Sellers
pursuant to this Agreement have been duly authorized and, when issued in
accordance with the terms and conditions of this Agreement and the Equity
Subscription Agreement, will be validly issued, fully paid, and
nonassessable and will not have been issued in violation of any
preemptive, first refusal or other subscription rights of any stockholder
of the Buyer or any other person. The Buyers Shares to be issued to
Sellers pursuant to this Agreement will not be subject to any restrictions
imposed by or through the Buyer, other than restrictions imposed by the
Securities Act and any applicable state securities laws or pursuant to the
Stockholders Agreement or the Registration Agreement.
(h) Financial Statements. Attached hereto as Exhibit H are the
following Buyer financial statements ("collectively, the "Buyer Financial
Statements"): (A) unaudited consolidated balance sheet and statement of
income and changes in stockholders' equity as of and for the nine-month
period ended August 31, 1998 for Buyer and its Subsidiaries, and (B)
consolidated balance sheet of each of Software Services Corporation and
Arbor Intelligent Systems, Inc. as at December 31, 1997, and consolidated
statements of income of each of Software Services Corporation and Arbor
Intelligent Systems, Inc. for the fiscal year then ended. The Buyer
Financial Statements have been prepared in accordance with GAAP applied on
a consistent basis throughout the periods covered thereby and fairly
present the financial condition of Buyer or one of its Subsidiaries (as
the case may be) as of such dates, and are consistent with the books and
records of Buyer or one of its Subsidiaries (as the case may be) (which
books and records are correct and complete), subject to normal adjustments
upon audit and the absence of footnotes. The Buyer has delivered to the
Sellers the unaudited pro forma combined balance sheet and
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unaudited pro forma statement of operations of Buyer and its Subsidiaries
as of and for the eight months ended August 31, 1998.
(i) Undisclosed Liabilities Neither the Buyer nor any of its
Subsidiaries has any Funded Indebtedness, Taxes or other Liability (and
there is no Basis for any present or future charge, complaint, action,
suit, proceeding, hearing, investigation, claim, or demand against Buyer
giving rise to any Liability) which is individually in excess of $25,000,
except for (i) Liabilities set forth on the face of Buyer's Financial
Statements or the unaudited pro forma combined balance sheet of Buyer and
its Subsidiaries as of August 31, 1998 delivered as set forth above in
Section 4(h), and (ii) Liabilities which have arisen after the date of the
pro forma combined balance sheet in the Ordinary Course of Business of the
Buyer and its Subsidiaries (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).
(j) Litigation Neither Buyer nor any of its Subsidiaries (i)
is subject to any unsatisfied judgment, order, decree, stipulation,
injunction, or charge or (ii) is a party or, to the Knowledge of Buyer and
the directors and officers (and employees with responsibility for
litigation matters) of Buyer, 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.
(k) Contracts. The Buyer has delivered to the Sellers a
correct and complete copy of the material transaction documents and/or
closing binders for each of the following written arrangements:
(i) the equity purchase transaction, together with all
related stockholder and registration agreements entered into by the
parties in connection therewith, pursuant to that certain Purchase
Agreement dated as of June 29, 1998, among Buyer, GTCR Golder
Rauner, LLC and the other stockholders of Buyer, in each case as
amended or supplemented to date (including instruments pursuant to
which other parties have become parties to such agreements);
(ii) Buyer's senior credit facility pursuant to that
certain Revolving Credit Agreement dated as of August 25, 1998 among
Buyer, BankBoston, N.A. and the other lending institutions set forth
on Schedule 1 thereto, and BankBoston, N.A., as Agent, as amended or
supplemented to date, which facility was terminated on October 13,
1998 and replaced with the arrangements described in clause (vi)
below;
(iii) Buyer's acquisition, through SSC Acquisition Sub
#1, Inc., a wholly-owned Subsidiary formed for such purpose, and
merger with Software Services Corporation ("SSC"), pursuant to that
certain Merger Agreement dated as of July 31, 1998, among such
Subsidiary, SSC and the stockholder of SSC, as amended or
supplemented to date;
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(iv) Buyer's acquisition, through NMP Acquisition Sub
#1, Inc., a wholly-owned subsidiary formed for such purpose, and
merger with New Media Publishing, Inc. ("NMP"), pursuant to that
certain Merger Agreement dated as of October 2, 1998, among such
Subsidiary, NMP and the shareholders of NMP, as amended or
supplemental to date; and
(v) Buyer's acquisition, through AppNet/Century, Inc. a
wholly-owned Subsidiary formed for such purpose, and merger with and
into Century Computing, Incorporated ("Century") on October 13,
1998, pursuant to that certain Merger Agreement dated as of
September 17, 1998, among such Subsidiary, Century and the
shareholders of Century, as amended or supplemented to date.
(vi) Buyer's senior credit facilities, pursuant to (A)
that certain $20,000,000 demand note dated October 13, 1998 issued
by Buyer in favor of BankBoston, N.A., (B) that certain $20,000,000
demand note dated October 13, 1998 issued by Buyer in favor of
Harris Trust and Savings Bank, and (C) related guaranties issued in
favor of such banks by GTCR Fund VI, L.P.
With respect to each such written arrangement: (x) the written
arrangement is legal, valid, binding, enforceable, and in full force and
effect, subject to the Equitable Exceptions; (y) the Buyer or its
Subsidiary that is a party to such agreement or arrangement is not, nor to
the Knowledge of Buyer, 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 permit termination, modification, or acceleration,
under the written arrangement; and (z) the Buyer and its Subsidiaries have
not and, to the Knowledge of Buyer, no other party has, repudiated any
provision of the written arrangement. Each of the acquisitions of
businesses by Buyer or its Subsidiaries contemplated by the agreements set
forth in clauses (iii), (iv) and (v) has been consummated.
5. Representations and Warranties Concerning RPI. 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 5 are correct and complete as of the date of this
Agreement, except as set forth in the Disclosure Schedule delivered by RPI to
the Buyer on the date hereof and initialed by the Parties (the "Disclosure
Schedule").
(a) Organization, Qualification, and Corporate Power. RPI is a
corporation duly organized, validly existing, and in good standing under the
laws of the Commonwealth of Massachusetts. Except as disclosed in Section 5(a)
of the Disclosure Schedule, RPI is duly authorized to conduct business and is in
good standing under the laws of each jurisdiction in which the nature of its
businesses or the ownership or leasing of its properties requires such
qualification, except for those jurisdictions where the failure to be so
qualified would not have a material adverse effect on the assets, Liabilities,
business, financial condition or results of operations of RPI (a "Material
Adverse Effect on RPI"). RPI 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. Section 5(a) of the Disclosure Schedule lists the directors and
officers of RPI in
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office prior to the Closing. The Sellers have delivered to the Buyer correct and
complete copies of the charter and bylaws of RPI (as amended to date). The
Sellers have delivered to Buyer correct and complete copies of 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 RPI. RPI is not in default under
or in violation of any provision of its charter or bylaws.
(b) Capitalization. The entire authorized capital stock of RPI
consists of 100,000 shares of common stock, of which 10,000 are issued and
outstanding. All of the issued and outstanding RPI Shares have been duly
authorized, are validly issued, fully paid, and nonassessable, and are held of
record by the Sellers. There are no outstanding or authorized options, warrants,
rights, contracts, rights to subscribe, conversion rights, or other agreements
or commitments to which RPI is a party or which are binding upon RPI providing
for the issuance, disposition, or acquisition of any of its capital stock. There
are no outstanding or authorized stock appreciation, phantom stock, or similar
rights with respect to RPI. There are no voting trusts, proxies, or any other
agreements or understandings with respect to the voting of the capital stock of
RPI that have not been, or are not being, terminated in connection with the
transactions contemplated by this Agreement.
(c) Noncontravention. Except as disclosed on the Disclosure
Schedule, neither the execution and the delivery of this Agreement by RPI, nor
the consummation of the transactions contemplated hereby by RPI, will (i)
violate any statute, regulation, rule, judgment, order, decree, stipulation or
injunction of any government, governmental agency, or court to which RPI is
subject, except to the extent any such violation does not or would not result in
a Material Adverse Effect on RPI, or (ii) violate any provision of the charter
or bylaws of RPI, or (iii) 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
material contract, lease, sublease, license, sublicense, franchise, permit,
indenture, agreement or mortgage for borrowed money, instrument of indebtedness,
Security Interest, or other arrangement to which RPI 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). RPI 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. RPI has no Subsidiaries.
(e) Financial Statements. Attached hereto as Exhibit B are the
following RPI financial statements (collectively the "RPI Financial
Statements"): (i) the unaudited balance sheets and statements of income and
retained earnings and cash flows of RPI as of and for the fiscal years ended
December 31, 1996 and 1997 (with December 31, 1997 constituting the "Most Recent
Fiscal Year End") which have been reviewed by Moody, Cavanaugh & Company, LLP,
(ii) the unaudited balance sheet and income statement of RPI as of and for the
six months ended June 30, 1998, and (iii) the unaudited balance sheet and income
statement of RPI as of and for the nine months ended September 30, 1998 (the
"Stub Period
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End"). The RPI Financial Statements have been prepared in accordance with GAAP
applied on a consistent basis throughout the periods covered thereby, fairly
present the financial condition of RPI as of such dates, and are consistent with
the books and records of RPI (which books and records are correct and complete
in all material respects), subject in the case of interim financial statements
to normal adjustments upon review or audit and the absence of footnotes.
(f) Events Subsequent to the Most Recent Fiscal Year End.
Since December 31, 1997, except as set forth on the Disclosure Schedule, there
has not been any material adverse change in the assets, Liabilities, business,
financial condition, or results of operations of RPI. Without limiting the
generality of the foregoing since that date, except as set forth on the
Disclosure Schedule:
(i) RPI has not entered into any lease or sublease
either involving more than $25,000 or outside the Ordinary Course of
Business;
(ii) no party has notified RPI in writing of any
termination or cancellation of any outstanding Customer Contract or
Agreement that generated more than $250,000 of revenues during 1997
or the first six months of 1998;
(iii) RPI has not imposed any Security Interest upon any
of its material assets, tangible or intangible;
(iv) RPI has not made any capital expenditure (or series
of related capital expenditures) either involving more than $50,000
individually or $250,000 in the aggregate, or outside the Ordinary
Course of Business;
(v) RPI 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 $50,000 in the aggregate;
(vi) RPI has not created, incurred, assumed, or
guaranteed any indebtedness (including capitalized lease
obligations) involving more than $25,000 individually or in the
aggregate or outside the Ordinary Course of Business;
(vii) RPI has not delayed or postponed (beyond its
normal practice) the payment of any accounts payable and other
Liabilities;
(viii) RPI has not canceled, compromised, waived, or
released any right or claim (or series of related rights and claims)
either involving more than $50,000 or outside the Ordinary Course of
Business;
(ix) there has been no change made or authorized in the
charter or bylaws of RPI, other than in connection with this
Agreement and the transactions contemplated hereby;
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(x) RPI 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,
other than as disclosed in the RPI Financial Statements or as
contemplated by this Agreement;
(xi) RPI has not made any consulting or other payment or
distribution to the Sellers, other than as disclosed in the RPI
Financial Statements or as contemplated by this Agreement;
(xii) RPI has not experienced any damage, destruction or
loss involving more than $50,000 (whether or not covered by
insurance) to its property;
(xiii) RPI has not made any loan to, or entered into any
other transaction with, any of the Sellers or any of its other
employees giving rise to any claim or right on its part against the
person or on the part of such person against it;
(xiv) RPI has not entered into any written employment
contract other than in the Ordinary Course of Business or collective
bargaining agreement, 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;
(xv) RPI 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);
(xvi) RPI has not granted an increase in the base
compensation, nor has RPI made any payments or promises or
commitments to make any other payments (other than salary and
reimbursement of customary expenses), to any of the Sellers,
including without limitation bonuses (other than distributions
pursuant to the VLP Plan in the Ordinary Course of Business);
(xvii) RPI 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;
(xviii) RPI has not made any other change in employment
terms for any of its directors, officers, and full-time staff
employees;
(xix) RPI has not made or pledged to make any charitable
or other capital contribution outside the Ordinary Course of
Business; and
(xx) RPI has not entered into any agreement committing
to any of the foregoing.
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(g) Undisclosed Liabilities. RPI does not have any Liability
(and, to Sellers' knowledge, there is no basis for any present or future charge,
complaint, action, suit, proceeding, hearing, investigation, claim or demand
against RPI giving rise to any Liability) which is individually in excess of
$25,000, except for (i) Liabilities set forth on the face of the Stub Period
Balance Sheet, (ii) Liabilities described on Disclosure Schedule, (iii)
Liabilities which have arisen in connection with this Agreement and the
transactions contemplated hereby, and (iv) 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 Exhibit 5(h) of the
Disclosure Schedule,
(i) RPI has filed all Tax Returns that it was required
to file. All such Tax Returns were correct and complete in all
material respects. All Taxes shown as due on any Tax Return of RPI
based on operations through the Stub Period End have been paid or
accrued on the Stub Period Balance Sheet. RPI currently is not the
beneficiary of any extension of time within which to file any Tax
Return. No claim has ever been made in writing by any taxing
authority in a jurisdiction where RPI 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 RPI that arose in
connection with any failure (or alleged failure) to pay any Tax,
other than for Taxes that are not yet due which are accrued for
since the Most Recent Fiscal Year End.
(ii) RPI 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.
(iii) Neither Sellers nor any of the officers of RPI
have received any written 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 RPI either (A) to the Knowledge of RPI, claimed or
raised by any authority in writing or (B) as to which the Sellers
have Knowledge based upon personal contact with any agent of such
authority. The Disclosure Schedule lists all federal, state, local,
and foreign income Tax Returns filed with respect to RPI 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. The Sellers have 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 RPI since December
31, 1990.
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(iv) RPI 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) RPI has not filed a consent under Code Sec. 341(f)
concerning collapsible corporations. Immediately prior to the sale
of the RPI Shares pursuant to this Agreement, RPI will be a "Small
business corporation" (as defined in Section 1361(b) of the Code but
without regard to paragraph (1)(C) thereof). Each Seller is a United
States person within the meaning of Section 7701(a)(30) of the Code.
RPI is not a party to any Tax allocation or sharing agreement. RPI
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).
(vi) The Company has made a valid election under Section
1362 of the Code and any corresponding state or local provisions to
be an S corporation within the meaning of Section 1361 of the Code
for all taxable years (or portions thereof) beginning on or after
June 1, 1987, and no such S election has been terminated (whether
voluntarily, involuntarily or inadvertently, including, without
limitation, by taking any action defined in Section 1362(d) of the
Code) since such date, other than in connection with the
transactions contemplated by this Agreement.
(i) Tangible Assets. RPI owns or leases substantially all
tangible assets necessary for the conduct of its businesses as presently
conducted and as presently proposed to be conducted. Each such tangible asset is
in good operating condition and repair (subject to normal wear and tear).
(j) Real Property Interests. RPI does not own nor does it have
any interest in any real property or improvements thereon (other than the leases
disclosed in the Disclosure Schedule, and the leasehold improvements (subject to
any lease provision concerning the ownership of leasehold improvements) relating
to the same) nor does RPI 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 those real property leases disclosed in the Disclosure
Schedule (the "RPI Leases"). Sellers have delivered to the Buyer correct and
complete copies of the RPI Leases, each of which is a legal, valid, binding and
enforceable obligation of RPI (subject to the Equitable Exceptions). RPI is not
and, to the Knowledge of Sellers, no other party to the RPI Leases is in breach
or default of the terms thereof, nor has RPI nor, to the Knowledge of Sellers,
any other party, repudiated any material provision thereof. Except as set forth
in the Disclosure Schedule, RPI has not assigned, transferred, conveyed,
mortgaged or encumbered any portion of RPI's leasehold interest in the RPI
Leases.
(k) Intellectual Property.
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(i) The Disclosure Schedule sets forth a list and brief
description of all trademarks, service marks, copyrights and
registrations and applications for registration thereof owned by
RPI. RPI has good title to or the right to use (pursuant to valid
licenses or similar rights) all the Intellectual Property necessary
for the conduct of the RPI's business as presently conducted, and
neither RPI nor Sellers have Knowledge of any infringement by RPI on
any Intellectual Property right of others, and neither RPI nor
Sellers have Knowledge of any infringement by others of any such
rights owned by RPI. RPI's licensing arrangements in respect of any
third party-owned Intellectual Property do not require RPI to pay
royalties or similar payments, except as set forth in the Disclosure
Schedule.
(ii) 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 RPI necessary for the conduct of the RPI's
business as presently conducted have executed the nondisclosure
agreements set forth in the Disclosure Schedule.
(iii) All of the material 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 necessary for RPI's internal
business operations will not malfunction, will not cease to
function, will not generate incorrect data, and will not produce
incorrect results when processing, providing, and/or receiving (i)
date-related data into and between the twentieth and twenty-first
centuries and (ii) date-related data in connection with any valid
date in the twentieth and twenty-first centuries.
(l) [Reserved]
(m) Contracts. The Disclosure Schedule lists the following
written contracts, agreements, and other written arrangements to which RPI is a
party:
(i) any written agreement (or group of related written
agreements) for the lease of personal property from or to a third
party providing for lease payments in excess of $25,000 per annum;
(ii) any written Customer Contract or Agreement (or
group of related written Customer Contract or Agreements) which
involved revenues for RPI during the fiscal year ended December 31,
1997 or the six months ended June 30, 1998 of more than the sum of
$250,000;
(iii) any written partnership or joint venture
agreement;
(iv) any written agreement (or group of related written
agreement) under which it has created, incurred, assumed, or
guaranteed (or may create, incur, assume, or guarantee) indebtedness
(including capitalized lease
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obligations) involving more than $25,000 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 RPI not to compete
with another party;
(vi) any written arrangement with any of its directors,
officers, or employees, or any of its Affiliates; and
(vii) any other written arrangement (or group of related
written arrangements) either involving more than $100,000 per annum.
The Sellers have delivered or made available to the Buyer a correct and
complete copy of each written arrangement listed in the Disclosure Schedule in
response to this Section 5(m). With respect to each written arrangement so
listed: (A) the written arrangement is legal, valid, binding and enforceable
obligation of RPI, subject to the Equitable Exceptions; (B) RPI is not, nor to
the Knowledge of Sellers is any other party, in material breach or default, and
no event has occurred which with notice or lapse of time would constitute a
material breach or default or permit termination, modification, or acceleration,
under the written arrangement; and (C) RPI has not, nor to the Knowledge of
Sellers has any other party, repudiated any provision of the written
arrangement. To the Knowledge of the Sellers, RPI has not been notified in
writing that any of its customers intends either to dispute charges under or
terminate early any material Customer Contract or Agreement.
(n) Notes and Accounts Receivable. All notes and accounts
receivable of RPI (i) are reflected properly on its books and records, (ii) were
acquired in the Ordinary Course of Business and (iii) to the Knowledge of the
Sellers, are not subject to material setoffs or counterclaims and are
collectible in accordance with their terms in the Ordinary Course of Business,
subject to either the reserve for bad debts set forth on the face of the Stub
Period Balance Sheet or an appropriate reserve for bad debts to be determined in
the Ordinary Course of Business consistent with past practice.
(o) Powers of Attorney. There are no outstanding powers of
attorney executed on behalf of RPI.
(p) Insurance. 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 RPI has been a party, a named insured, or
otherwise the beneficiary of coverage at any time within the past three (3)
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;
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(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 material retroactive premium
adjustments or other loss sharing arrangements.
With respect to each such insurance policy: (A) RPI is not in breach or
default (including with respect to the payment of premiums or the giving of
notices), and, to the Knowledge of the Sellers, 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 (B) no
party to the policy has repudiated any provision thereof in writing. Except as
set forth in the Disclosure Schedule, RPI has been covered during the past three
(3) years by insurance in scope and amount customary and reasonable for the
business in which it was engaged during such period.
(q) Litigation. The Disclosure Schedule sets forth each
instance in which RPI (i) is subject to any unsatisfied judgment, order, decree,
or injunction, or (ii) is a party or, to the Knowledge of the Sellers, is
threatened to be made a party to any complaint, action, suit, proceeding, or, to
the Knowledge of the Sellers, investigation of or in any court or quasi-judicial
or administrative agency of any federal, state, local, or foreign jurisdiction
or before any arbitrator.
(r) Employees. To the Knowledge of the Sellers, no key
employee has any plans to terminate employment with RPI. RPI 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. The Sellers have no Knowledge of any organizational effort
presently being made or threatened by or on behalf of any labor union with
respect to employees of RPI.
(s) Employee Benefits. The Disclosure Schedule lists all
Employee Benefit Plans that RPI maintains or to which RPI contributes for the
benefit of any current or former employee of RPI.
(i) Each Employee Benefit Plan (and each related trust
or insurance contract) complies in form and in operation in all
material 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 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 that is a group plan as defined in Section 5000(b)(1)
of the Code.
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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 RPI. 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 favorable determination
letter from the Internal Revenue Service, and that nothing has
occurred since the receipt of such letter that would materially
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.
(vi) There have been no non-exempt Prohibited
Transactions with respect to any Employee Benefit Plan. No Fiduciary
has incurred 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, or proceeding 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, threatened.
(vii) The Sellers have 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.
RPI does not contribute to, has never contributed to, nor ever has been
required to contribute to any Multiemployer Plan or any Employee Pension Benefit
Plan subject to Title IV of ERISA. RPI 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. RPI is not a guarantor nor is it otherwise
liable for any Liability or obligation (including indebtedness) of any other
person, except for endorsements of negotiable instruments (such as checks from
payors of RPI's accounts receivables) by RPI in the Ordinary Course of Business.
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<PAGE>
(u) Environment, Health, and Safety. To the Knowledge of the
Sellers, RPI has 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, or proceeding has been filed or commenced against RPI alleging any failure
to comply with any such law or regulation.
(v) Legal Compliance. Except as it would not, individually or
in the aggregate, have a Material Adverse Effect on RPI:
(i) RPI has complied with all laws (including rules and
regulations thereunder) of federal, state, local, and foreign
governments (and all agencies thereof).
(ii) RPI has complied with all applicable laws
(including rules and regulations thereunder) relating to the
employment of labor, employee civil rights, hiring of engaging
non-United States citizens, and equal employment opportunities.
(iii) RPI 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) RPI has not:
(A) made or agreed to make any contribution,
payment, or gift of funds or property to any governmental
official, employee, or agent 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) RPI 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).
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(vi) RPI 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 RPI. Except as set
forth in the Disclosure Schedule, neither the Sellers nor any of their
respective Affiliates has been involved in any business arrangement or
relationship with RPI within the past twelve (12) months other than customary
employment relationships, and neither the Sellers nor any of their respective
Affiliates owns any material property or right, tangible or intangible, which is
used in the business of RPI.
(x) Brokers' Fees. Except for payments to Wallace Willmore
Cromwell & Co., LLC, which shall be borne by RPI, RPI 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.
6. Covenants. The Parties covenant and agree as follows:
(a) 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 therefor under
Section 8 below).
(b) 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, 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 RPI, each of the other Parties will cooperate with
him or it and his 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).
(c) Additional Tax Matters. The Buyer shall cause RPI (at
RPI's sole cost and expense) to file with the appropriate governmental
authorities all Tax Returns required to be filed by it for any taxable period
ending prior to the Closing Date and RPI shall remit any Taxes due by RPI (net
of any paid estimated taxes, credits or prepaid taxes in respect of such Taxes)
in respect of such Tax Returns; provided, however, that Buyer shall provide
Sellers with at least sixty (60) days to review any such Tax Returns prior to
their filing (such review to be at Sellers' sole cost and expense) and if such
Sellers determine that there is a dispute, Sellers shall submit such objection
in accordance with the notice procedures set forth in Section 8(i). 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 RPI to the extent such records and information pertain to
events occurring on or prior to the Closing Date; therefore, Buyer shall cause
RPI to (A) to properly retain and maintain such records for a period of seven
(7)
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years from the date the Tax Returns for the year in which the Closing occurs are
filed or until six (6) months after 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.
(d) Covenant Not to Compete. For a period of three (3) years
from the Closing Date, each Seller will not, directly or indirectly, as
principal, agent, trustee or through the agency of any corporation, partnership,
or association, (i) own, manage, control, participate in, render services for,
or in any manner engage in any activity or business competing with RPI's
Business in the United States of America, (ii) service or solicit any business
competing with RPI's Business from any customer of RPI, (iii) request or advise
any customer of RPI to withdraw, curtail or cancel such customer's business with
RPI, or (iv) knowingly solicit for employment any person employed by RPI at any
time within the one-year 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. For purposes of this
Agreement, the Parties have agreed to allocate to each Seller $25,000 of the
Purchase Price to the covenant not to compete contained in this Section 6(d).
(e) Section 338(h)(10) Election. If in Buyer's sole discretion
such an election is deemed to be desirable, Sellers and Buyer shall join in
making a timely election (but in no event later than the 15th day of the ninth
full calendar month after the month in which the Closing Date occurs) under
Section 338(h)(10) of the Code (including the prerequisite election under
Section 338 of the Code) and any similar state law provisions in all applicable
states which permit corporations to make such elections, with respect to the
sale and purchase of the RPI Shares pursuant to this Agreement, and, at the
expense of Buyer, each party shall provide the others all necessary information
to permit such elections to be made. If Buyer decides to make such elections:
(i) Buyer shall notify Sellers in writing of such
decision at least ninety (90) days before such elections are to be
made, and Buyer and Sellers shall, as promptly as practicable
following the receipt of such notification and at the expense of
Buyer, take all actions necessary and appropriate (including filing
such forms, returns, schedules and other documents as may be
required) to effect and preserve timely elections; provided,
however, that Buyer shall be the party responsible for preparing and
filing the forms, returns, schedules and other documents necessary
for making an effective and timely election;
(ii) Notwithstanding anything to the contrary in this
Agreement and in addition to the Purchase Price and any other
amounts payable by Buyer to Sellers pursuant to this Agreement or
otherwise, Buyer shall pay to each Seller prior to, and as a
condition to, making such elections an additional amount (a
"Gross-Up Payment") such that after payment by such Seller of all
Taxes
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(including Taxes which would arise as a result of such elections,
any interest, penalties or additions thereto imposed with respect to
any Taxes, and the acceleration of any Tax Liability), including any
Taxes imposed upon the Gross-Up Payment, upon the transactions
contemplated by this Agreement after giving effect to such
elections, such Seller retains an amount at least equal to the
amount such Seller would have retained, after the imposition of
Taxes on the Purchase Price, if such elections were not made. If the
Gross-Up Payment paid at the time of such elections is subsequently
determined to exceed the amount required hereunder, such Seller
shall repay to Buyer the excess portion of the Gross-Up Payment at
the time that the amount of such excess is finally determined. If
the Gross-Up Payment paid at the time of such elections is
subsequently determined to be less than the amount required
hereunder, Buyer shall make an additional Gross-Up Payment in
respect of such shortfall (plus any interest, penalties and
additions payable by such Seller with respect to such excess) at the
time that the amount of such shortfall is finally determined. Buyer
and Sellers shall each reasonably cooperate with the others in
connection with the determination of the amount of the Gross-Up
Payment and any administrative or judicial proceedings concerning
the existence or amount of Tax Liabilities. Buyer and Sellers shall
act together in good faith to determine and agree upon the amount of
such Gross-Up Payment. In the event that Buyer and the Sellers are
unable to agree as to the amount of such Gross-Up Payment, Sellers'
reasonable positions with respect to such Gross-Up Payment shall
control. Buyer will bear all costs and expenses of Sellers
(including legal and accounting fees, and including costs and
expenses relating to the preparation and filing by Sellers of their
Tax Returns and any amendments thereto, the determination of the
amount of any Gross-Up Payments, and the resolution of any disputes
either among the Parties or with third parties (including the
Internal Revenue Service and other governmental or tax authorities))
incurred in connection with and as a result of such elections and
the ramifications thereof. All amounts payable to or on behalf of a
Seller pursuant to this Section 6(e) shall be made by wire transfer
of federal or other immediately available funds to a bank account
designated by such Seller.
(iii) In connection with such elections, within sixty
(60) days following the receipt of the notification contemplated by
Section 6(e)(i), Buyer and Sellers shall act together in good faith
to determine and agree upon the "deemed sale price" to be allocated
to each asset of RPI in accordance with Treasury Regulation Section
1.338(h)(10)-1(f) and the other regulations under Section 338 of the
Code. Notwithstanding the generality of the immediately preceding
sentence, Buyer and the Sellers agree that an aggregate of $50,000
shall be allocated to the covenants not to compete contained in
Section 6(d) hereof, and the balance of the "deemed sale price"
shall be allocated to the fixed assets, goodwill and other
intangible assets of RPI. The parties acknowledge that the per share
fair market value of the Stock Portion of the Purchase Price for all
purposes is $3.00 per share and Buyer and Sellers agree that all Tax
Returns filed by such parties and RPI shall reflect such value, and
no party will take a position inconsistent therewith in connection
with
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any Tax Return, audit or otherwise. Both Buyer and the Sellers shall
report the tax consequences of the transactions contemplated by this
Agreement consistently with such allocations and shall not take any
position inconsistent with such allocations in any Tax Return or
otherwise. In the event that Buyer and the Sellers are unable to
agree as to such allocations, Buyer's reasonable positions with
respect to such allocations shall control.
(iv) Notwithstanding anything to the contrary in this
Agreement, the Sellers shall not be liable to Buyer, RPI or any
other person for, and Buyer and RPI shall indemnify and hold
harmless the Sellers from and against, any Adverse Consequences,
Taxes or other costs attributable to such election, or the inability
of Buyer to make such election, which arise from a failure on the
part of RPI to qualify as an "S corporation" for federal and/or
state income tax purposes.
(g) Employment Agreements. At the Closing, Buyer and each
Seller shall enter into an employment agreement in substantially the form
attached hereto as Exhibit D (each, a "Seller Employment Agreement").
(h) Incentive Compensation Program. Subject to the following
proviso, Buyer and RPI shall maintain in existence, and perform in a manner
consistent with RPI's past practices, the VLP Plan as in existence on the date
hereof; provided, however, that:
(i) amounts available for distribution pursuant to the
VLP Plan during such period shall be calculated, and shall be distributed, as
set forth on the VLP Plan Schedule attached hereto, which schedule shows
post-Closing allocation as follows: AppNet 150/Rauh 25/Rosenfeld 25/Other
Employees 55.31;
(ii) the Sellers shall be entitled to participate in the
post-Closing VLP Plan through December 31, 1998, after which time they shall
participate in the Buyer's bonus or incentive compensation program for senior
management as determined by the Board of Directors of RPI at such time and from
time to time in accordance with Buyer's policies; and
(iii) the non-Seller employees of RPI who currently
participate in the VLP Plan as of the Closing Date, together with any new
employees which the President of RPI deems appropriate to participate in the VLP
Plan after the Closing Date (after consultation with such person to whom the
President of RPI reports as designated from time to time by the Chairman of the
Board of Directors of RPI), shall be entitled to participate in the post-Closing
VLP Plan though the second anniversary of the Closing Date at which time it
shall either
(A) terminate if the President of RPI and the
Buyer mutually agree on an adequate replacement incentive bonus compensation
plan in advance of such second anniversary of the Closing Date, or
(B) be extended through the third anniversary of
the Closing Date, at which time the VLP Plan shall terminate altogether.
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(i) Option Grants. Within fifteen (15) days of the Closing
Date, Buyer shall issue options (with four (4) year vesting and an exercise
price of $3.00 per share of Buyer Common Stock) to purchase 160,000 shares of
Buyer Common Stock to the persons and in the amounts set forth on the Option
Allocation Schedule attached hereto, which options shall be represented and
governed by option agreements in substantially the form of Exhibit I hereto (the
"Buyer Option Agreements").
(j) Confidentiality. The Sellers will treat and hold as such
all the Confidential Information and refrain from using any of the Confidential
Information, except in connection with this Agreement, for a period of three (3)
years from the Closing. 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(j). 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.
7. Closing Deliveries.
(a) Closing Deliveries of the Sellers and RPI. At the Closing,
RPI and the Sellers, as appropriate, shall perform and deliver the following,
subject to waiver by the Buyer:
(i) each Seller shall deliver the certificate(s)
representing his RPI Shares, all of which shall be free and clear of
any Security Interests;
(ii) each Seller shall deliver an executed joinder to
the Stockholders Agreement in the form set forth as Exhibit C
hereto;
(iii) each Seller shall deliver an executed Seller
Employment Agreement;
(iv) each Seller shall deliver an executed joinder to
the Registration Agreement in the form set forth as Exhibit F
hereto;
(v) each director of RPI shall deliver his respective
resignation as a director of RPI, which shall be effective as of the
Closing;
(vi) each Seller shall deliver an executed Equity
Subscription Agreement in the form of Exhibit A hereto;
(vii) RPI shall deliver full releases of record, to the
reasonable satisfaction of the Buyer, of all Security Interests
securing indebtedness of RPI which have been paid in full prior to
or at the Closing, and shall deliver termination statements relating
to all Uniform Commercial Code financing statements covering such
indebtedness;
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(viii) the Sellers and all of RPI's officers, directors,
employees and Affiliates shall deliver evidence of repayment in full
in accordance with their terms all debts and other obligations, if
any, owed to RPI;
(ix) RPI shall deliver documentation confirming that all
appropriate corporate and shareholder authorizations of RPI have
been obtained;
(x) each of the Key Employees shall deliver an executed
employment agreement with RPI in form and substance satisfactory to
the Buyer; and
(xi) the Sellers and RPI shall deliver an opinion of
counsel in the form and substance set forth in Exhibit G-1 attached
hereto.
(b) Closing Deliveries of the Buyer. At the Closing, Buyer
shall perform and deliver the following, subject to waiver by the Sellers:
(i) Buyer shall pay to each Seller the Cash Portion of
the Purchase Price payable to such Seller, which payment shall be
made by wire transfer of federal or other immediately available
funds to a bank account designated by such Seller at least two
business days before the Closing Date;
(ii) Buyer shall deliver to each Seller the Stock
Portion of the Purchase Price payable to such Seller by delivery of
a validly issued certificate representing the Buyer's Shares payable
to such Seller, which Buyer's Shares shall be free and clear of all
Security Interests;
(iii) Buyer shall deliver to each Seller the Notes
Portion of the Purchase Price payable to such Seller by delivery of
a validly issued Buyer's Subordinated Note in the principal amount
set forth on the Allocation Schedule with respect to such Seller,
which Buyer's Subordinated Note shall be free and clear of all
Security Interests;
(iv) Buyer shall deliver to the Sellers a joinder to the
Stockholders Agreement in the form set forth as Exhibit C hereto
duly executed by Buyer and any other parties thereto;
(v) Buyer shall deliver to each Seller a Seller
Employment Agreement duly executed by Buyer;
(vi) Buyer shall deliver to the Sellers a joinder to the
Registration Agreement in the form set forth as Exhibit F hereto
duly executed by Buyer and any other parties thereto;
(vii) Buyer shall deliver to each Seller an Equity
Subscription Agreement in the form of Exhibit A hereto duly executed
by Buyer;
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<PAGE>
(viii) Buyer shall deliver to the Sellers documentation
confirming that all appropriate corporate and shareholder
authorizations of Buyer have been obtained; and
(ix) Buyer shall deliver an opinion of counsel in form
and substance set forth in Exhibit G-2 attached hereto.
8. Remedies for Breaches of This Agreement.
(a) Survival. All of the representations and warranties of the
Sellers contained in Sections 3 and 5 and of the Buyer contained in Section 4
above shall survive the Closing hereunder and continue in full force and effect
for a period of two (2) years thereafter, except for (i) the representations and
warranties of the Sellers contained in Section 5(h) (Taxes), which shall survive
until three months after the expiration of the relevant federal or state statute
of limitations with respect thereto and (ii) the representations and warranties
of the Sellers contained in Section 3(d) and of the Buyer contained in Section
4(g), which shall survive the Closing indefinitely. The other representations,
warranties, and covenants of the Parties contained in this Agreement shall
survive the Closing and continue in full force and effect for a period of seven
(7) years thereafter, except as otherwise provided elsewhere in this Agreement.
(b) Indemnification Provisions for Benefit of the Buyer.
(i) Subject to the limitations set forth in Section
8(b)(iv), in the event (x) the Sellers breach any of their
representations and warranties set forth in Section 5, (y) the
particular representation or warranty breached survives the Closing
and (z) the Buyer makes a written claim for indemnification against
the Sellers pursuant to Section 8(g) (i) below within the applicable
survival period for such representation or warranty, the Sellers,
jointly and severally, shall indemnify the Buyer from and against
any Adverse Consequences the Buyer suffers resulting from, arising
out of, relating to, or caused by any such misrepresentation or
breach of warranty by the Sellers.
(ii) Subject to the limitations set forth in Section
8(b)(iv), in the event (x) a Seller breaches any of its several
representations and warranties set forth in Section 3 or any of its
several covenants set forth in this Agreement, (y) the particular
representation, warranty or covenant breached survives the Closing
and (z) the Buyer makes a written claim for indemnification against
such Seller pursuant to Section 8(g)(i) below within the applicable
survival period for such representation, warranty or covenant, such
Seller, severally and not jointly, shall indemnify the Buyer from
and against any Adverse Consequences the Buyer suffers resulting
from, arising out of, relating to, or caused by any such
misrepresentation or breach of warranty or covenant by such Seller.
(iii) Subject to the limitations set forth in Section
8(b)(iv), if (x) it is determined by a final, nonappealable order in
connection with any government or judicial proceeding to which RPI
or either of the Sellers is a party that RPI's
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S corporation election pursuant to Section 1362 of the Code was not
validly in effect for any period after such election was purportedly
made and before the Closing and (y) the Buyer makes a written claim
for indemnification against the Sellers pursuant to Section 8(g)(i)
below within the applicable survival period for the indemnity set
forth in this Section 8(b)(iii), the Sellers, jointly and severally,
shall indemnify RPI from and against any federal or state income tax
liability on the earnings of RPI for periods prior to the Closing
during which RPI's S corporation election pursuant to Section 1362
of the Code was not validly in effect that is actually imposed on
RPI as a result of such invalid election; provided, however, Sellers
shall not be liable to Buyer for any Adverse Consequences, Taxes or
other costs attributable to any earnings, income or gain of RPI
which arise or result from any election under Section 338(h)(10) of
the Code (including the prerequisite election under Section 338 of
the Code) and any similar state law provisions in any applicable
states which permit corporations to make such elections with respect
to the sale and purchase of the RPI Shares pursuant to this
Agreement, or the inability of Buyer to make such elections.
(iv) Notwithstanding anything to the contrary in this
Agreement:
(A) The Sellers shall not have any obligation to
indemnify the Buyer from and against any Adverse Consequences
resulting from, arising out of, relating to, or caused by any
misrepresentation or breach of warranty or covenant of the
Sellers set forth in this Agreement if the Buyer had actual
knowledge of the misrepresentation or breach of warranty, or
any Basis therefor which is disclosed or contained in any
written information (including any due diligence materials or
other written communications) provided by RPI or Sellers (or
their attorneys, accountants, agents or representatives) to
Buyer (or its attorneys, accountants, agents or
representatives), at or before the time of the Closing, in
which case Buyer shall be prohibited from making any claim for
indemnification for such misrepresentation or breach of
warranty.
(B) Buyer shall not make any individual claim for
indemnification for any misrepresentation or breach of
warranty unless such individual claim caused Adverse
Consequences of more than $25,000 (exclusive of any costs,
fees or expenses of investigating or pursuing such individual
claim).
(C) The Sellers shall not have any obligation to
indemnify the Buyer from and against any Adverse Consequences
resulting from, arising out of, relating to, or caused by any
misrepresentation, breach of warranty or covenant of the
Sellers set forth in this Agreement unless and until the
aggregate amount of the indemnifiable Adverse Consequences to
the Buyer by reason of all misrepresentations or breaches of
warranty or covenant by the Sellers
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<PAGE>
exceeds $250,000, in which case the Sellers shall be obligated
to indemnify the Buyer only for the aggregate indemnifiable
Adverse Consequences in excess of $150,000, subject to the
limitation set forth in Section 8(b)(iv)(D).
(D) The Sellers shall only have an obligation to
indemnify the Buyer from and against any Adverse Consequences
resulting from, arising out of, relating to, or caused by any
misrepresentation or breach of warranty or covenant of the
Sellers set forth in this Agreement up to the aggregate amount
of $5,000,000; provided, however, that with respect to any
claim for indemnification by the Buyer for a Seller's
misrepresentation or breach of warranty under Section 3(d),
the limitation set forth in this Section 8(b)(iv)(D) shall not
apply to such Seller but each Seller's obligation to indemnify
the Buyer from and against any Adverse Consequences shall be
limited to an amount equal to the portion of the Purchase
Price received by such Seller; and provided further, however,
that with respect to any claim for indemnification by the
Buyer under Section 8(b)(iii) of this Agreement, the
limitation set forth in this Section 8(b)(iv)(D) shall not
apply but each Seller's obligation to indemnify the Buyer from
and against any Adverse Consequences shall be limited to an
amount equal to the aggregate distributions such Seller
actually received from RPI as a stockholder of RPI with
respect to the period during which RPI's S corporation
election pursuant to Section 1362 of the Code was not validly
in effect.
(E) Each Seller shall satisfy any indemnification
obligation to the Buyer first by surrendering to the Buyer all
or a portion of the Buyer Subordinated Notes held by such
Seller, which shall be valued at the principal amount thereof
that is surrendered plus all accrued but unpaid interest
thereon, and, second, in each Seller's sole and absolute
discretion, by (i) paying cash to the Buyer, (ii) transferring
to the Buyer all or a portion of the Buyer's Shares held by
such Seller, which shall be valued at the higher of $3.00 per
Buyer's Share or the "fair market value" per Buyer's Share
(which "fair market value" shall be determined in the manner
set forth in this Section 8(b)(iv)(E)), or (iii) any
combination thereof. For purposes of this Section 8(b)(iv)(E)
only, the "fair market value" per Buyer's Share shall be
determined by valuing Buyer and its Subsidiaries as a whole,
with the per Buyer's Share amounts being calculated on a fully
diluted basis (taking into account the exercise prices of all
options, warrants and other securities exercisable for or
convertible into shares of Buyer's capital stock). In all
cases, the determination of "fair market value" shall be made
without consideration of (x) the lack of an actively trading
public market for the Buyer Common Stock or other equity
securities, (y) differences in the voting rights accompanying
shares of the Buyer Common Stock or other equity securities,
and (z) any discount for holdings of less than a majority or
controlling interest of the outstanding capital stock of the
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Buyer. The "fair market value" of the Buyer and its
Subsidiaries as a whole shall be determined by agreement of
the Buyer and the Sellers from whom indemnification is being
sought. If the Buyer and such Sellers do not agree on the
"fair market value" of the Buyer and its Subsidiaries as a
whole within 15 days of the date on which the Buyer or such
Sellers requests that such a determination be made, such fair
market value shall be determined by an independent investment
banking firm chosen by the Buyer and such Sellers. The Buyer
shall cooperate fully in the determination of the "fair market
value" of the Buyer and its Subsidiaries as a whole, whether
such determination is to be made by agreement or by an
independent investment banking firm, including giving such
Sellers or such firm full access to the books, records and
management of the Buyer and its subsidiaries and providing
them with such other information as they may reasonably
request in connection with such determination. All expenses of
the chosen independent investment banking firm banking firm
shall be borne by the Buyer.
(F) The obligations of the Sellers for
indemnification under this Section 8(b) shall terminate on the
second anniversary of the Closing Date, except (i) as to
matters as to which the Buyer has made a claim for indemnity
on or prior to such date, which shall survive the expiration
of such period until such claim is finally resolved and any
obligations with respect thereto are fully satisfied; (ii)
with respect to any claim for indemnification pursuant to
either Section 8(b)(i) in respect of a misrepresentations or
breach of the warranties set forth in Section 5(h) (Taxes)
only, or Section 8(b)(iii) of this Agreement, which shall
terminate three months after the expiration of the relevant
federal or state statute of limitations except as to matters
as to which any indemnified party has made a claim for
indemnification on or prior to such date in which case the
right to indemnification with respect thereto shall survive
the expiration of such period until such claim is finally
resolved and any obligations with respect thereto are fully
satisfied; and (iii) with respect to any misrepresentation or
breach of warranty under Section 3(d), which shall survive the
Closing indefinitely.
(G) If Buyer pursues any claim for indemnification
under this Section 8(b) for which Sellers are jointly and
severally liable, Buyer must pursue such claim against all
Sellers in the same manner.
(H) Sellers shall not have any obligation to
indemnify or otherwise compensate Buyer from and against any
Adverse Consequence (including, but not limited to, the loss
of anticipated or desired Tax benefits) resulting from,
arising out of, relating to, or caused by an invalid election,
or the inability of Buyer to make an election, under Section
338(h)(10) of the Code (including the prerequisite election
under Section
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<PAGE>
338 of the Code) and any similar state law provisions in any
applicable states which permit corporations to make such
elections with respect to the sale and purchase of the RPI
Shares pursuant to this Agreement (including, but not limited
to, an invalid election due to the failure of RPI to qualify
as an "S corporation").
(v) The Parties shall make appropriate adjustments for
tax benefits in determining the liability of the Sellers under this
Section 8(b).
(c) Indemnification Provisions for Benefit of the Sellers.
(i) In the event (x) the Buyer breaches any of its
representations, warranties or covenants set forth in this
Agreement, (y) the particular representation, warranty or covenant
breached survives the Closing and (z) the Sellers make a written
claim for indemnification against the Buyer pursuant to Section
8(g)(i) below within the applicable survival period for such
representation, warranty or covenant, the Buyer shall indemnify the
Sellers from and against the entirety of any Adverse Consequences in
excess of a $250,000 threshold (at which point the Buyer will be
obligated to indemnify the Sellers from and against all such
aggregate indemnifiable losses in excess of $150,000 the Sellers
actually suffer (or are reasonably likely to suffer through and
after the date of the claim for indemnification and after the end of
the applicable survival period in respect thereto) resulting from,
arising out of, relating to, in the nature of, or caused by the
breach; provided, however, that Buyer shall not have any obligation
to indemnify the Sellers 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, warranty or covenant of
Buyer in this Agreement in excess of $2,500,000 (after which point
Buyer shall have no obligation to indemnify Sellers from and against
further such Adverse Consequences); provided, however, that with
respect to any claim for indemnification by Sellers for the Buyer's
breach of its covenants under Section 6(e), none of the limitations
set forth in this Section 8(c)(i) shall apply and Buyer's
obligations to so indemnify the Sellers from and against any Adverse
Consequences shall be unlimited.
(ii) The Buyer shall indemnify the Sellers from and
against the entirety of all Taxes created from and the conversion by
RPI to the accrual basis of tax accounting from the cash basis of
tax accounting.
(iii) The Buyer shall indemnify the Sellers from and
against the entirety of all Adverse Consequences, Taxes or other
costs attributable to the earnings, income and gains of RPI which
arise or result from any election under Section 338(h)(10) of the
Code (including the prerequisite election under Section 338 of the
Code) and any similar state law provisions in any applicable states
which permit corporations to make such elections with respect to the
sale and
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purchase of the RPI Shares pursuant to this Agreement, or the
inability of Buyer to make such elections.
(iv) The Parties shall make appropriate adjustments for
tax benefits in determining the liability of the Buyer under this
Section 8(c).
(d) 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 Adverse Consequences; 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 an actual 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 prior
written consent of the Indemnifying Party, 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, (A) the Indemnified Party may defend
himself or itself against the matter with counsel of its choice, (B) the
Indemnifying Party may retain separate co-counsel at its sole cost and expense,
(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 prior
written consent of the Indemnifying Party, 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). 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
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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 timely notices of, and the right to participate in
(as an observer) any hearing or other court proceeding relating to the
third-party claim.
(e) Exclusive Remedy. The Parties acknowledge and agree that
the foregoing indemnification provisions in this Section 8 shall be the
exclusive remedy of the Parties for any breach of the representations,
warranties and covenants of the Parties contained in this Agreement.
(f) Payment. Promptly after the final resolution of any
disputes relating to a claim for indemnification pursuant to this Section 8, the
Indemnifying Parties shall pay to the Indemnified Party as may be entitled to
indemnity hereunder in cash the amount of any Adverse Consequences to which such
Indemnified Party may become entitled to by reason of the provisions of Section
8 of this Agreement.
(g) Notice of Claims; Arbitration with Respect to Certain
Indemnification Matters.
(i) A party seeking indemnification under this Section 8 shall
promptly notify the party against whom indemnification is sought in
writing of the assertion or discovery of any fact upon which the
Indemnified Party intends to base a claim for indemnification
hereunder. Such notice shall set forth the amount of the claim and
specify the alleged Basis of the claim. The delay or failure of any
party to provide notice hereunder shall not in any way limit
indemnification rights hereunder except to the extent that the
Indemnifying Party shall have been materially adversely affected by
such delay or failure. The Parties shall attempt to resolve all
disputes with respect to claims for indemnification pursuant to this
Section 8 within ninety (90) days of receipt by the Indemnifying
Parties of the notice contemplated by the first sentence of this
Section 8(g)(i). If the Parties are unable to resolve such disputes
within such period, any Party may submit such disputes to
arbitration in accordance with Section 8(g)(ii).
(ii) 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 HEREIN BY
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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. Miscellaneous.
(a) Press Releases and Announcements. No Party shall issue any
press release or public announcement relating to the subject matter of this
Agreement or the transactions contemplated hereby prior 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 that is required by law or regulation (in which case, prior to making
the disclosure, the disclosing Party will (i) advise the other Parties of the
circumstances requiring disclosure and the form and substance of the proposed
disclosure, (ii) provide the other Parties with an opportunity to comment on the
proposed disclosure and (iii) use its best efforts to obtain the other Parties
approval of the form and substance of the proposed disclosure).
(b) 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.
(c) 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.
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(d) 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 or its rights, interests, or obligations hereunder without the prior
written approval of the Buyer and the Sellers; provided, however, that the Buyer
may assign (i) any or all of its rights and interests hereunder to a
wholly-owned Subsidiary (in any or all of which cases the Buyer nonetheless
shall remain liable and responsible for the performance of all of its respective
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.
(e) 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 shall execute an original of this Agreement as well as any
facsimile, telecopy or other reproduction hereof.
(f) 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.
(g) 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 RPI:
Research & Planning, Inc.
One Broadway
9th Floor
Cambridge, MA 02142
Attn.: Thomas H. Rauh, President
Tel: (617) 528-9700
Fax: (617) 547-0380
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with a copy to:
Testa, Hurwitz & Thibeault, LLP
High Street Tower
125 High Street
Boston, MA 02110
Attn.: Mark H. Burnett, Esq.
Tel: (617) 248-7000
Fax: (617) 248-7100
If to Thomas H. Rauh:
Thomas H. Rauh
2 Prides Circle
Andover, MA 01810
Tel: (978) 475-1592
Fax: (978) 475-8930
with a copy to:
Testa, Hurwitz & Thibeault, LLP
High Street Tower
125 High Street
Boston, MA 02110
Attn.: Mark H. Burnett, Esq.
Tel: (617) 248-7000
Fax: (617) 248-7100
If to William L. Rosenfeld:
William L. Rosenfeld
34 Moreland Avenue
Lexington, MA 02173
Tel: (781) 862-7480
Fax: (781) 862-8978
with a copy to:
Testa, Hurwitz & Thibeault, LLP
High Street Tower
125 High Street
Boston, MA 02110
Attn.: Mark H. Burnett, Esq.
Tel: (617) 248-7000
Fax: (617) 248-7100
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If to the Buyer:
c/o AppNet Systems, Inc.
6700A Rockledge Drive
Suite 525
Bethesda, Maryland 20817
Attn.: Toby Toboccowala
Tel: (301) 581-2470
Fax: (301) 581-2488
with a copy to:
Hogan & Hartson L.L.P.
555 Thirteenth Street, NW
Washington, D.C. 20004
Attn.: J. Hovey Kemp, Esq.
Tel: (202) 637-5623
or
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.
(h) 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 DELAWARE WITHOUT GIVING EFFECT TO
ANY CHOICE OF LAW OR CONFLICT OF LAW PROVISION OR RULE (WHETHER OF THE STATE OF
DELAWARE OR ANY OTHER JURISDICTION) THAT WOULD CAUSE THE APPLICATION OF THE LAWS
OF ANY JURISDICTION OTHER THAN THE STATE OF DELAWARE.
(i) 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.
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<PAGE>
(j) 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 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.
(k) Expenses. The Buyer will bear its own costs and expenses
(including legal and accounting fees and expenses and investment banking fees)
incurred in connection with this Agreement and the transactions contemplated
hereby. RPI will bear the costs and expenses (including legal and accounting
fees and expenses and investment banking fees) incurred by RPI and the Sellers
in connection with this Agreement and any of the transactions contemplated
hereby.
(l) 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.
(m) 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.
(n) 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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[THIS SPACE INTENTIONALLY LEFT BLANK]
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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/ Terrence M. McManus
--------------------------------
Name: Terrence M. McManus
---------------------------
Title: Senior Vice President,
Secretary and Treasurer
---------------------------
RPI:
RESEARCH & PLANNING, INC.
By: /s/ Thomas H. Rauh
--------------------------------
Thomas H. Rauh
President
SELLERS:
/s/ Thomas H. Rauh
-----------------------------------
Thomas H. Rauh
/s/ William L. Rosenfeld
-----------------------------------
William L. Rosenfeld
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EXHIBIT 10.7
================================================================================
STOCK PURCHASE AGREEMENT
dated as of November 25, 1998
================================================================================
<PAGE>
TABLE OF CONTENTS
Page
1. DEFINITIONS..............................................................1
2. PURCHASE AND SALE OF SHARES..............................................3
2.1 Stock Purchase.....................................................3
2.2 Consideration for Purchase of Shares...............................4
2.3 Post-Closing Adjustment............................................5
3. CLOSING .................................................................6
3.1 Time and Place of the Closing......................................6
3.2 Procedure at Closing...............................................6
4. REPRESENTATIONS AND WARRANTIES OF KODIAK AND THE STOCKHOLDERS............7
4.1 Organization.......................................................7
4.2 Power and Authority................................................7
4.3 Authority for Agreement............................................7
4.4 No Violation to Result.............................................8
4.5 Capitalization.....................................................8
4.6 Financial Statements...............................................9
4.7 Liabilities and Obligations........................................9
4.8 Adverse Changes...................................................10
4.9 Employee Matters..................................................10
4.10 Taxes.............................................................12
4.11 Subsidiaries......................................................13
4.12 Property..........................................................13
4.13 Contracts.........................................................14
4.14 Government Contracts..............................................14
4.15 Litigation........................................................14
4.16 Compliance with Laws..............................................14
4.17 Environmental and Safety Matters..................................14
4.18 Customers; Suppliers..............................................16
4.19 Insurance.........................................................16
4.20 Intellectual Property.............................................16
4.21 Accounts Receivable...............................................19
4.22 Inventory.........................................................19
4.23 Related Party Transactions........................................19
4.24 Brokers...........................................................19
4.25 Accredited Investors; Investment Intent...........................20
4.26 Disclosure........................................................20
5. REPRESENTATIONS AND WARRANTIES OF APPNET................................21
5.1 Due Organization..................................................21
5.2 Power and Authority...............................................21
5.3 Authority for Agreement...........................................21
<PAGE>
5.4 No Violation to Result............................................22
5.5 Brokers and Agents................................................22
5.6 Capitalization....................................................22
5.7 Shares............................................................23
5.8 Notes.............................................................23
6. COVENANTS ..............................................................23
6.1 Access to Properties and Records..................................23
6.2 Confidentiality...................................................24
6.3 Interim Covenants of Kodiak.......................................25
6.4 No Solicitation...................................................27
6.5 Notification of Certain Matters...................................27
6.6 Tax Returns; Sales, Use and Transfer Taxes........................27
6.7 Regulatory and Other Approvals....................................29
6.8 Termination of Profit Sharing Plan................................29
6.9 Reasonable Efforts................................................29
6.10 Section 338(h)(10) Election.......................................29
6.11 Advances..........................................................35
6.12 Payment of Retention Bonuses......................................35
7. CONDITIONS PRECEDENT TO OBLIGATIONS OF APPNET...........................35
7.1 Representations and Warranties True at the Closing Date...........35
7.2 Performance.......................................................35
7.3 Agreements with Employees.........................................35
7.4 No Litigation.....................................................35
7.5 No Material Adverse Change........................................36
7.6 Certificates......................................................36
7.7 Opinion of Counsel................................................36
7.8 Financing.........................................................36
7.9 AppNet's Review...................................................36
7.10 Governmental, Regulatory and Other Consents and Approvals.........36
7.11 Delivery of Good Standing Certificates; Corporate Resolutions.....36
7.12 Financial Terms...................................................37
7.13 Payment of Loans..................................................37
7.14 Purchase of Personal Use Items....................................37
7.15 Termination of Shareholders' Agreement............................37
7.16 Delivery of Stock Pledge Agreement................................37
7.17 Stockholders Agreement and Registration Agreement.................37
7.18 Resignations......................................................38
7.19 Termination of 401(k) Plan........................................38
7.20 Reimbursement for Professional Fees...............................38
7.21 Release...........................................................38
8. CONDITIONS PRECEDENT TO OBLIGATIONS OF KODIAK...........................38
8.1 Representations and Warranties True as of the Closing Date........38
8.2 AppNet's Performance..............................................38
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8.3 No Litigation.....................................................38
8.4 Certificates......................................................39
8.5 Governmental, Regulatory and Other Consents and Approvals.........39
8.6 Delivery of Good Standing Certificates; Corporate Resolutions.....39
8.7 Kodiak's Review...................................................39
8.8 Opinion of Counsel................................................39
8.9 No Material Adverse Change........................................39
8.10 Senior Management Agreements......................................39
9. INDEMNIFICATION.........................................................39
9.1 General Indemnification...........................................40
9.2 Indemnification Procedures........................................41
9.3 Right to Setoff...................................................43
9.4 Release...........................................................43
10. NONCOMPETITION..........................................................43
10.1 Prohibited Activities.............................................43
10.2 Damages...........................................................44
10.3 Reasonable Restraint..............................................44
10.4 Severability; Reformation.........................................44
10.5 Independent Covenant..............................................44
10.6 Materiality.......................................................45
10.7 Termination of NonCompete.........................................45
11. GENERAL ................................................................45
11.1 Termination.......................................................45
11.2 Effect of Termination.............................................46
11.3 Cooperation.......................................................46
11.4 Successors and Assigns............................................46
11.5 Entire Agreement..................................................47
11.6 Counterparts......................................................47
11.7 Expenses..........................................................47
11.8 Specific Performance; Remedies Not Exclusive......................47
11.9 Notices...........................................................47
11.10 Governing Law.....................................................49
11.11 Arbitration.......................................................49
11.12 Survival of Representations, Warranties and Covenants.............49
11.13 Miscellaneous.....................................................49
11.14 Severability......................................................50
11.15 Absence of Third Party Beneficiary Rights.........................50
11.16 Mutual Drafting...................................................50
11.17 Further Representations...........................................50
11.18 Amendment; Waiver.................................................51
11.19 Gender............................................................51
11.20 Headings..........................................................51
11.21 Public Disclosure.................................................51
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11.22 Audit by Stockholders' Accountants................................51
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STOCK PURCHASE AGREEMENT
THIS STOCK PURCHASE AGREEMENT (together with the schedules and exhibits
attached hereto, this "Agreement") is entered into effective for all purposes
and in all respects as of November 25, 1998, by and among (i) APPNET SYSTEMS,
INC., a Delaware corporation ("AppNet"), (ii) THE KODIAK GROUP, INC., a
Massachusetts corporation ("Kodiak"), and (iii) those individuals listed on
Schedule 1 attached hereto (collectively, the "Stockholders").
WHEREAS, the Stockholders are the record and beneficial owners of all of
the issued and outstanding shares (the "Shares") of Common Stock of Kodiak, par
value of $0.01 per share (the "Common Stock"); and
WHEREAS, AppNet desires to purchase all of the Shares from Stockholders,
and the Stockholders desire to sell and transfer the Shares to AppNet, on the
terms and conditions hereinafter set forth (the "Stock Purchase").
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 are hereby acknowledged, the parties hereto, intending to
be legally bound, hereby agree as follows:
1. DEFINITIONS
1.1 Defined Terms. As used herein, the terms defined below shall have the
following meanings. Any of these terms, unless the context otherwise requires,
may be used in the singular or plural depending on the reference.
"AAA Distribution" shall have the meaning set forth on Exhibit F
attached hereto.
"Affiliate" shall mean as to any party, any Person which directly or
indirectly, is in control of, is controlled by, or is under common control with,
such party, including any person who would be treated as a member of a
controlled group under Section 414 of the Internal Revenue Code of 1986, as
amended (the "Code"), and any officer or director of such party and, as to a
party who is a natural person, such person's spouse, parents, siblings and
lineal descendants. For purposes of this definition, an entity shall be deemed
to be "controlled by" a Person if the Person possesses, directly or indirectly,
power either to (i) vote ten percent (10%) or more of the securities (including
convertible securities) having ordinary voting power or (ii) direct or cause the
direction of the management or policies of such entity whether by contract or
otherwise.
"AppNet Common Stock" shall mean the $.0005 par value per share
common stock of AppNet.
"Business" shall mean the business of Kodiak or AppNet, as the case
may be, as it is presently being conducted, as it has been conducted in the past
and how it is proposed to be conducted in the future.
<PAGE>
"Contract" shall mean a note, bond, mortgage, contract, license,
lease, sublease, covenant, commitment, power of attorney, proxy, indenture, or
other agreement or arrangement, oral or written, to which Kodiak is a party or
by which Kodiak or any of its assets or property is bound, other than Government
Contracts.
"Encumbrance" shall mean any claim, lien, pledge, option, charge,
easement, security interest, right-of-way, encumbrance, mortgage or other right.
"GAAP" shall mean United States generally accepted accounting
principles, consistently applied.
"Government" shall mean any agency or instrumentality of the United
States of America, any state or territory or subdivision thereof or any foreign
country and any agency or instrumentality of any of the foregoing.
"Government Contracts" shall mean any contracts between Kodiak and
the Government, including, without limitation, any grants, cooperative
agreements and other transactions between Kodiak and the Government, and any
contract to which Kodiak is a party where the Government is the ultimate
customer.
"Governmental or Regulatory Authority" shall mean any court,
tribunal, arbitrator, authority (including any quasi-governmental authority),
agency, commission, official or other instrumentality of the United States, any
foreign country or any domestic or foreign state, county, city or other
political subdivision.
"Intellectual Property Rights" shall mean all (i) patents, patent
applications, patent disclosures and inventions, (ii) trademarks, service marks,
trade dress, trade names, logos and corporate names and registrations and
applications for registration thereof together with all of the goodwill
associated therewith, (iii) copyrights (registered or unregistered) and
copyrightable works and registrations and applications for registration thereof,
(iv) mask works and registrations and applications for registration thereof, (v)
computer software, data, data bases and documentation thereof, (vi) trade
secrets and other confidential information (including, without limitation,
ideas, 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
official and marketing plans and customer and supplier lists and information),
(vii) other intellectual property rights, (viii) "technical data" as defined in
48 Code of Federal Regulations, Chapter 1, and (ix) copies and tangible
embodiments thereof (in whatever form or medium).
"Legal Requirement" shall mean (i) with respect to any Person, any
judgment, decree, injunction, order, writ or ruling to or by which such person
is a party or is bound, or (ii) any law, ordinance, statute, rule, regulation,
code or other requirement of any Federal, state, municipal or other
governmental, administrative or judicial body, agency or authority or the common
law.
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<PAGE>
"Liabilities" shall mean, without limitation, any direct or indirect
liability, indebtedness, guaranty, endorsement, claim, loss, cost, expense or
obligation, either accrued, absolute, contingent, mature, unmature or otherwise
and whether known or unknown, fixed or unfixed, choate or inchoate, liquidated
or unliquidated, secured or unsecured.
"Material Adverse Effect" shall mean a material adverse effect on
(i) the assets, the business or the condition (financial or otherwise),
properties, liabilities, reserves, working capital, earnings, technology,
prospects or relations with customers, suppliers, distributors, employees or
regulators, or (ii) the right or ability to consummate the transactions
contemplated hereby.
"Material Contract" means any contract involving the receipt or
payment by Kodiak of $10,000 or more or any other contract which, if not
complied with or which, if defaulted by any party thereto, could result in a
Material Adverse Effect.
"Net Worth" shall mean, with regard to Kodiak, total assets
(excluding intangible assets in excess of $83,488) of Kodiak less total
liabilities of Kodiak determined in accordance with GAAP taking into account
Kodiak's status as an S Corporation and not taking into account any (i) accrued
Tax liability of Kodiak attributable to any Section 338(h)(10) Election made
under Section 6.10 or (ii) liability for Taxes resulting from the change, after
AppNet's purchase of the Stockholders' Shares, in Kodiak's method of tax
accounting and reporting from a cash to an accrual basis.
"Permitted Distributions" shall mean distributions by Kodiak to the
Stockholders as set forth on Exhibit F hereof.
"Person" shall mean any person, limited liability company,
partnership, trust, corporation, business, group, Government or other entity.
"Tax" or "Taxes" shall mean all federal, state, local, foreign and
other taxes, assessments or other Government charges, including, without
limitation, income, estimated income, business, occupation, franchise, property,
sales, transfer, use, employment, commercial rent or withholding taxes,
including interest, penalties and additions in connection therewith for which
Kodiak or the Stockholders may be liable.
"Tax Distribution" shall have the meaning set forth on Exhibit F
attached hereto.
"Tax Return" means any return, report, information return or other
document (including any related or supporting information) with respect to
Taxes.
2. PURCHASE AND SALE OF SHARES
2.1. Stock Purchase. On the basis of the representations, warranties,
covenants and agreements and subject to the satisfaction or waiver of the
conditions set forth herein, each of the Stockholders agrees to and will sell,
transfer, assign and deliver to AppNet on the Closing Date (as defined in
Section 3.1) good and marketable title to all of the Shares owned by each of the
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<PAGE>
Stockholders, free and clear of all liens, claims, restrictions or encumbrances
of any kind whatsoever, and AppNet agrees to and will purchase and accept from
the Stockholders all of the Shares owned by each of the Stockholders. The Shares
constitute and will constitute as of the Closing Date all of the issued and
outstanding shares of Common Stock.
2.2.1 Consideration for Purchase of Shares. In consideration for the
transfer, sale and delivery to AppNet of all of the issued and outstanding
Shares, AppNet will pay to the Stockholders, in accordance with their pro rata
share of the outstanding share ownership of Kodiak as set forth on Schedule 1
(the "Pro Rata Shares"), the following amounts (in the aggregate, the "Purchase
Price"), subject to (a) increase pursuant to Section 6.10 for any Section 338
Adjustment and (b) reduction pursuant to Sections 2.2.2, 2.3 and 7.12,
consisting of:
(a) $11,370,000 in cash payable at the Closing (as defined in
Section 3.1), subject to adjustment as provided herein (the "Cash Payment");
(b) Subordinated Convertible Promissory Notes (the "Notes") to be
dated as of the Closing Date, in the aggregate principal sum of $2,000,000, all
in form and substance substantially identical to Exhibit A attached hereto;
(c) An aggregate of 562,500 shares of common stock of AppNet (the
"AppNet Stock"). At the Closing, the Stockholders shall pledge an aggregate of
125,000 shares of the AppNet Stock (the "Pledged Stock") as security for the
Stockholders' obligations to AppNet under this Agreement pursuant to a Stock
Pledge Agreement in the form attached hereto as Exhibit B (the "Stock Pledge
Agreement"); and
(d) Except as otherwise specified in this Section 2.2.1(d), in the
event that during the three-year period commencing on the Closing Date (the
"Three-Year Sale/Licensing Period"), (i) Kodiak sells, in whole or in part,
Kodiak's "EDI CONTROL/400" or "STAR" products (sometimes collectively referred
to herein as the "Kodiak Products"), the Stockholders shall receive 75% of the
proceeds of such sale or transfer (net of all transaction-related expenses),
and/or (ii) Kodiak licenses the Kodiak Products, the Stockholders shall be paid
75% of the licensing revenues (net of all direct development, sales, marketing
and administrative expenses incurred after the Closing), received during the
Three-Year Sale/Licensing Period (the portion of such net sale and licensing
proceeds payable to the Stockholders are collectively referred to herein as
"Contingent Proceeds"), in accordance with Schedule 2.2.1(d). All payments due
to the Stockholders under this Section 2.2.1(d) shall be made within 30 days
after the end of the quarter in which payment shall be received by Kodiak (or
its successor). In the event of a merger of Kodiak or a sale of all or
substantially all of the stock of Kodiak or all or substantially all of Kodiak's
assets (an "Entity Sale") prior to the end of the Three-Year Sale/Licensing
Period: (a) the Stockholders (i) shall have no right to receive a portion of the
sale proceeds allocated to the Kodiak Products , but (ii) shall retain the
rights to have the terms of this Section 2.2.1(d) remain in effect for the
remainder of the Three-Year Sale/Licensing Period as to the acquirer by a merger
or purchaser of such stock or assets (the "Third-Party Purchaser"); and (b)
AppNet shall, prior to any such sale, provide the Stockholders with the
Third-Party Purchaser's agreement to be bound by the terms of this Section
2.2.1(d). If AppNet shall give an Election Notice under Section
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6.10, the additional amounts shall be payable to the Stockholders as provided in
Section 6.10(k). In the event that Kodiak does not sell or license the Kodiak
Products during the Three-Year Sale/Licensing Period, the Stockholders shall not
be entitled to any Contingent Proceeds. There shall be no payment of Contingent
Proceeds in excess of an aggregate maximum of $4,000,000.
2.2.2 The Purchase Price has been calculated based upon several
factors, including the assumption that the Net Worth of Kodiak as of the Closing
will be equal to or greater than $1,993,865 minus (a) the Permitted
Distributions and (b) $250,000 of bonus payments to employees of Kodiak (the
"Retention Bonuses") to be accrued by Kodiak prior to Closing (but not to be
paid until approximately one year after the Closing Date) (the "Adjusted Net
Value") as of the Closing. If on the Closing Financial Certificate (as defined
in Section 7.12), the Net Worth of Kodiak is less than the Adjusted Net Value,
the Purchase Price to be delivered to the Stockholders may, at AppNet's
election, be reduced either (i) at the Closing by the difference between the
Adjusted Net Value and the Net Worth set forth on the Closing Financial
Certificate (which reduction shall be in cash as a reduction of the Cash
Payment) or (ii) after completion of the Post-Closing Audit (as defined in
Section 2.3).
2.3 Post-Closing Adjustment.
(a) Within one hundred twenty (120) days following the Closing Date,
AppNet shall cause Arthur Andersen ("AppNet's Accountant") to audit Kodiak's
books to determine the accuracy of the information set forth on the Closing
Financial Certificate (the "Post-Closing Audit"). The parties acknowledge and
agree that for purposes of determining the Net Worth of Kodiak as of the Closing
Date, the value of the assets of Kodiak shall, except with the prior written
consent of AppNet, be calculated as provided in the last sentence of Section
7.12 and in accordance with GAAP taking into account Kodiak's status as an S
Corporation. The Stockholders shall cooperate and shall use their reasonable
efforts to cause the officers and employees of Kodiak to cooperate with AppNet
and AppNet's Accountant after the Closing Date in furnishing information,
documents, evidence and other assistance to AppNet's Accountant to facilitate
the completion of the Post-Closing Audit within the aforementioned time period.
In the event that AppNet's Accountant determines that the actual Net Worth of
Kodiak as of the Closing Date was less than the Net Worth set forth on the
Closing Financial Certificate, AppNet shall deliver a written notice (the
"Financial Adjustment Notice") to the Stockholders setting forth (i) the
determination made by AppNet's Accountant of the actual Net Worth of Kodiak (the
"Actual Company Net Worth"), (ii) the Purchase Price that would have been
payable at Closing pursuant to Sections 2.2.1 and 2.2.2 had the Actual Company
Net Worth been reflected on the Closing Financial Certificate, and (iii) the
amount by which the Cash Payment would have been reduced at Closing had the
Actual Company Net Worth been used in the calculations pursuant to Sections
2.2.1 and 2.2.2 (the "Adjustment"). The Purchase Price Adjustment shall take
account of the reduction, if any, to the Purchase Price already taken pursuant
to Section 2.2.2.
(b) The Stockholders shall have thirty (30) days from the receipt of
the Financial Adjustment Notice to notify AppNet if the Stockholders dispute
such Financial Adjustment Notice. If AppNet has not received notice of such a
dispute within such 30-day period, AppNet shall be entitled to receive from the
Stockholders the Adjustment, in cash, on the
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thirtieth day after receipt of the Financial Adjustment Notice. If, however, the
Stockholders have delivered notice of such a dispute to AppNet within such
30-day period, then AppNet and the Stockholders shall, by mutual agreement,
select an independent accounting firm that has not represented any of the
parties hereto within the preceding two (2) years to review Kodiak's books, the
Closing Financial Certificate and Financial Adjustment Notice (and related
information) to determine the amount, if any, of the Adjustment. Such
independent accounting firm shall be confirmed by the Stockholders and AppNet
within five (5) days of its selection, unless there is an actual conflict of
interest. The independent accounting firm shall make its determination and give
AppNet and the Stockholders notice of its determination of the Adjustment, if
any, within thirty (30) days of its selection. The determination of the
independent accounting firm shall be final and binding on the parties hereto,
and upon such determination, AppNet shall be entitled to receive from the
Stockholders the Adjustment, in cash. The costs of the independent accounting
firm shall be borne by the parties in direct proportion to the amount of the
difference between each party's determination of Kodiak's Net Worth at Closing
and the determination of the independent accounting firm, or equally by AppNet
and the Stockholders in the event that the determination by the independent
accounting firm is equidistant between the Net Worth set forth on the Closing
Financial Certificate and the Actual Company Net Worth. If any Adjustment is
determined by the independent accounting firm to be due, the Adjustment shall be
payable to AppNet in cash by the Stockholders within 30 days after such
determination.
3. CLOSING
3.1 Time and Place of the Closing. The closing of the Stock Purchase and
the consummation of the other transactions contemplated by this Agreement (the
"Closing") shall take place at the offices of Tucker, Flyer & Lewis, a
professional corporation, at 1615 L Street, N.W., Suite 400, Washington, D.C.
20036, as soon as practicable after all conditions to the Closing shall have
been satisfied or waived, or at such other time and date as the parties hereto
may mutually agree, which date shall be referred to as the "Closing Date."
3.2 Procedure at Closing. On the Closing Date, the parties agree to take
the following steps listed below (provided, however, that upon their completion
all such steps shall be deemed to have occurred simultaneously):
(a) The Stockholders and Kodiak shall deliver to AppNet the closing
documents specified in Section 7.
(b) AppNet shall deliver to the Stockholders the closing documents
specified in Section 8.
(c) The Stockholders shall deliver to AppNet certificates in valid
form representing all of the Shares, duly endorsed by the Stockholders in blank
or accompanied by a duly executed stock power in order to convey good and
marketable title to all of the Shares, free and clear of all liens, claims,
restrictions or encumbrances of any kind whatsoever.
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(d) AppNet shall pay the Cash Payment by wire transfer of
immediately available funds to accounts designated by the Stockholders.
(e) AppNet shall deliver the Notes to the Stockholders.
(f) AppNet shall deliver the AppNet Stock to the Stockholders.
4. REPRESENTATIONS AND WARRANTIES OF KODIAK AND THE STOCKHOLDERS.
To induce AppNet to enter into this Agreement and to consummate the
transactions contemplated by this Agreement, Kodiak and the Stockholders,
jointly and severally, each represents and warrants to AppNet, as of the date
hereof and as of the Closing Date, as set forth below:
4.1 Organization. Kodiak is a corporation duly organized, validly existing
and in good standing under the laws of the Commonwealth of Massachusetts. Kodiak
is duly authorized and qualified to do business under all applicable laws,
regulations, ordinances and orders of public authorities to carry on its
business in the places and in the manner as now conducted, except where the
failure to be so authorized or qualified would not have a Material Adverse
Effect on Kodiak.
4.2 Power and Authority. Kodiak has all requisite corporate power and
authority to own, lease and operate its properties and to conduct its Business
as presently conducted and as proposed to be conducted and is duly qualified or
licensed as a foreign corporation in good standing in each jurisdiction in which
the character of its properties or the nature of its business activities
requires such qualification, except where the failure to be so qualified or
licensed would not have a Material Adverse Effect on Kodiak.
4.3 Authority for Agreement. The execution, delivery and performance of
this Agreement and the consummation of the transactions contemplated hereby have
been authorized by all requisite corporate action on the part of Kodiak. Kodiak
has full corporate power, authority and legal right to enter into this Agreement
and to consummate the transactions contemplated hereby. The Stockholders have
the legal capacity to enter into this Agreement and to consummate the
transactions contemplated hereby. This Agreement has been duly executed and
delivered by each of the Stockholders and is a legal, valid and binding
obligation of the Stockholders enforceable against the Stockholders in
accordance with its terms, except as enforceability may be limited by applicable
bankruptcy, insolvency, reorganization, moratorium or other similar laws
affecting the enforcement of creditors' rights in general. This Agreement has
been duly executed and delivered by Kodiak and is a legal, valid and binding
obligation of Kodiak, enforceable against Kodiak in accordance with its terms,
except as enforceability may be limited by applicable bankruptcy, insolvency,
reorganization, moratorium or other similar laws affecting the enforcement of
creditors' rights in general.
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4.4 No Violation to Result. Except as set forth on Schedule 4.4, the
execution, delivery and performance of this Agreement and the consummation of
the transactions contemplated hereby and the fulfillment of the terms hereof:
(i) are not in violation or breach of, do not conflict with or constitute a
default under, and will not accelerate or permit the acceleration of the
performance required by, any of the terms of the Articles of Organization or
Bylaws of Kodiak or any Contract to which Kodiak or the Stockholders is a party
or which affects Kodiak; (ii) will not be an event which, after notice or lapse
of time or both, will result in any such violation, breach, conflict, default,
or acceleration; (iii) will not result in a violation under any law, judgment,
decree, order, rule, regulation, permit or other legal requirement of any
Governmental or Regulatory Authority, court or arbitration tribunal, whether
federal, state, provincial, municipal or local (within the U.S. or otherwise),
at law or in equity, and applicable to Kodiak; and (iv) will not result in the
creation or imposition of any Encumbrance in favor of any Person upon any of the
properties or assets of Kodiak.
4.5 Capitalization.
(a) Schedule 4.5 sets forth, with respect to Kodiak, (i) the number
of authorized shares of each class of its capital stock, (ii) the number of
issued and outstanding shares of each class of its capital stock and the record
owner thereof, and (iii) the number of shares of each class, if any, which are
held in treasury. All of the issued and outstanding shares of capital stock of
Kodiak (A) have been duly authorized and validly issued and are fully paid and
non-assessable, (B) were issued in compliance with all applicable state and
federal laws and (C) were not issued in violation of any preemptive rights or
rights of first refusal. No preemptive rights or rights of first refusal exist
with respect to the shares of capital stock of Kodiak, and no such rights arise
by virtue of or in connection with the transactions contemplated hereby. There
are no outstanding or authorized rights, options, warrants, convertible
securities, subscription rights, conversion rights, exchange rights or other
agreements or commitments of any kind that could require Kodiak to issue or sell
any shares of its Common Stock (or securities convertible into or exchangeable
for shares of its Common Stock). There are no outstanding stock appreciation,
phantom stock, profit participation or other similar rights with respect to
Kodiak. There are no proxies, voting rights or other agreements or
understandings with respect to the voting or transfer of the capital stock of
Kodiak. Except as set forth on Schedule 4.5, Kodiak is not obligated to redeem
or otherwise acquire any of its outstanding shares of capital stock.
(b) Except as set forth on Schedule 4.5, the Stockholders are the
sole legal and beneficial holders of the issued and outstanding shares of
capital stock of Kodiak, and the Stockholders own such shares as are set forth
on Schedule 4.5 free and clear of any mortgage, security interest, pledge,
hypothecation, assignment, deposit arrangement, Encumbrance, lien (statutory or
otherwise), charge, preference, priority or other security agreement, option,
warrant, attachment, right of first refusal, preemptive right, conversion, put,
call or other claim or right, restriction on transfer, or preferential
arrangement of any kind or nature whatsoever (including any restriction on the
transfer of any assets, any conditional sale or other title retention agreement,
any financing lease involving substantially the same economic effect as any of
the foregoing and the filing of any financing statement under the Uniform
Commercial Code or comparable law of any jurisdiction).
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4.6 Financial Statements.
(a) Schedule 4.6 includes true, complete and correct copies of (i)
(A) the compiled balance sheet of Kodiak for the 1995 fiscal year, the reviewed
balance sheet of Kodiak for the 1996 fiscal year and the related statements of
income, cash flows and retained earnings for the 1995 and 1996 fiscal years and
(B) the audited balance sheet of Kodiak for the 1997 fiscal year and related
statements of income, cash flows and retained earnings for the 1997 fiscal year
(collectively, the "Annual Financials"), and (ii) true, complete and correct
copies of Kodiak's unaudited interim balance sheet (the "Current Balance Sheet")
as of September 30, 1998 (the "Balance Sheet Date") and Kodiak's related
statement of income, cash flow and retained earnings for the nine (9) months
ended September 30, 1998 (collectively, the "Interim Financials" and together
with the Annual Financials, the "Financial Statements"). The Financial
Statements have been prepared in accordance with GAAP (subject, in the case of
the Interim Financials, to normal year-end audit adjustments, which individually
or in the aggregate will not be material, except for any adjustments to reflect
the repayment of professional and brokers' fees paid by Kodiak in connection
with the transaction contemplated by this Agreement and the absence of
footnotes). Each of the balance sheets included in the Financial Statements
presents fairly the financial condition of Kodiak as of the dates indicated
thereon, and each of the statements of income, cash flows and retained earnings
included in the Financial Statements presents fairly the results of its
operations for the periods indicated thereon. Except as set forth on Schedule
4.6, during the periods covered by the Financial Statements and since the
Balance Sheet Date, there has been no material change in Kodiak's accounting
policies. There are no material, special or non-recurring items of income or
expense during the periods covered by the Financial Statements and the balance
sheets included in the Financial Statements do not reflect any write-up or
revaluation increasing the book value of any assets, except as specifically
disclosed in the notes thereto.
(b) The books and records, minute books, stock record books, and
other records of Kodiak, all of which have been made available to AppNet, are
complete and correct and have been maintained in accordance with sound business
practices. The minute book(s) of Kodiak, all of which have been made available
to AppNet, contains accurate and complete records of all meetings held of, and
corporate action taken by, the Stockholders, the Board of Directors, and
committees of the Board of Directors of Kodiak, and no meeting of any such
stockholders, Board of Directors, or committee has been held for which minutes
have not been prepared as of the date hereof and are not contained in such
minute book.
4.7 Liabilities and Obligations.
(a) Except as disclosed on Schedule 4.7(a), there are no Liabilities
of Kodiak, other than: (i) those Liabilities reflected on the Current Balance
Sheet and not previously paid or discharged; (ii) the Liabilities to be incurred
by Kodiak for the payment of the Retention Bonuses, which will be paid in
accordance with Section 6.12; (iii) those Liabilities incurred after the Balance
Sheet Date arising in the ordinary course of business, which were incurred
consistent with past practice under any contract, commitment or agreement
specifically disclosed on any schedule to this Agreement; and (iv) Liabilities
to the Stockholders for the Stockholders' Loans (as defined in Section 6.11).
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(b) Schedule 4.7(b) sets forth a summary description of all advance
payments or deposits held by Kodiak and reflected in the Financial Statements
and the related obligations thereunder.
4.8 Adverse Changes. From December 31, 1997, except as otherwise disclosed
on the Interim Financials or Schedule 4.8: (i) there has been no change in the
condition (financial or otherwise), Business, net worth, assets, properties,
Liabilities of Kodiak which has had or is likely to have a Material Adverse
Effect, and there has been no occurrence, circumstance or combination thereof
which might reasonably be expected to result in any such Material Adverse Effect
before or after the Closing Date; (ii) Kodiak has not declared or paid any
dividend or distribution in respect of the capital stock, or any direct or
indirect redemption, purchase or other acquisition of any of the capital stock
of Kodiak (except for the Tax Distribution, the distributions set forth on
Schedule 4.8 and the AAA Distribution), and (iii) Kodiak has complied with all
of the covenants set forth in Section 6.3(a), (e), (f), (j), (k), (l), (m), (p)
and (q), to the same extent as if this Agreement had been executed on December
31, 1997.
4.9 Employee Matters.
(a) All employee benefit plans, programs, policies and arrangements
(whether formal or informal, written or unwritten, and whether maintained for
the benefit of a single individual or more than one individual) maintained or
contributed to by Kodiak for the benefit of any current or former employee of
Kodiak or in which such employees are entitled to participate are listed in
Schedule 4.9(a) (the "Benefit Plans"). With respect to each Benefit Plan, true,
correct and complete copies of all of the following documents, if applicable,
will be delivered or made available to AppNet substantially prior to the Closing
Date: (i) all plan documents and amendments thereto; (ii) all written
descriptions of any oral plans or policies; (iii) all trust agreements; (iv) all
annuity contracts, insurance policies or contracts and service agreements; (v)
the three (3) most recent Forms 5500 and any financial statements attached
thereto; (vi) the most recent actuarial and valuation report; (vii) the most
recent IRS determination letter; (viii) the most recent summary plan
description; and (ix) copies of all nondiscrimination testing for the last three
(3) years. Except as set forth on Schedule 4.9(a), each Benefit Plan and the
administration thereof complies, and has at all times complied, with the terms
of such Benefit Plan and with the requirements of all applicable law, including,
without limitation, the Employee Retirement Income Security Act of 1974, as
amended ("ERISA"), and the Internal Revenue Code of 1986, as amended (the
"Code"). Except as set forth on Schedule 4.9(a), each Benefit Plan intended to
qualify under Section 401(a) of the Code so qualifies, and each trust which
forms a part of any such Benefit Plan is exempt from taxation under Section
501(a) of the Code. No Benefit Plan subject to Part 3 of Title I of ERISA has
incurred any "accumulated funding deficiency" within the meaning of Section 302
of ERISA or Section 412 of the Code. No liability has been incurred or is
expected to be incurred under Title IV of ERISA to any party with respect to any
Benefit Plan, or any other plan presently or heretofore maintained or
contributed to by Kodiak, any predecessor to Kodiak, or any entity that is or at
any time was a member of a controlled group, as defined in Section 412(n)(6)(B)
of the Code, which includes or included Kodiak ("Controlled Group Member").
Neither Kodiak, nor any Controlled Group
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Member has incurred any liability for any Tax imposed under Sections 4971
through 4980B of the Code or civil liability under Sections 502(i) or (l) of
ERISA. The "amount of unfunded benefit liabilities" within the meaning of
Section 4001(a)(18) of ERISA does not exceed zero with respect to any Benefit
Plan subject to Title IV of ERISA. No Benefit Plan is a "multiemployer plan"
within the meaning of Section 3(37) of ERISA. No Benefit Plan provides health or
death benefit coverage to any employee or his spouse or dependents beyond the
termination of an employee's employment, except as required by Part 6 of Subpart
B of Title I of ERISA or Section 4980B of the Code. No "reportable event"
(within the meaning of Section 4043 of ERISA) has occurred with respect to any
Benefit Plan or any plan maintained by a Controlled Group Member since the
effective date of said Section 4043. Kodiak has no liability (whether actual,
contingent or otherwise) with respect to any employee benefit plan or
arrangement sponsored or maintained by a Controlled Group Member. No suit,
actions or other litigation (excluding claims for benefits incurred in the
ordinary course of plan activities) have been brought against or with respect to
any Benefit Plan, and no suit, action, or other litigation is threatened by,
against, or relating to any Benefit Plan and Kodiak does not have any knowledge
of any fact that could form the basis for any such suit, action or litigation.
No "prohibited transaction" within the meaning of Sections 406 or 407 of ERISA
or Section 4975 of the Code has occurred with respect to any Benefit Plan. No
Benefit Plan is presently under audit or examination by the IRS, the Department
of Labor, or any other Governmental or Regulatory Authority, and no matters are
pending with respect to any Benefit Plan under the IRS Voluntary Compliance
Resolution program, its Closing Agreement Program, or any other similar program.
All contributions to Benefit Plans that were required to be made under such
Benefit Plans will have been made as of the Balance Sheet Date, and all benefits
accrued under any unfunded Benefit Plan will have been paid, accrued or
otherwise adequately reserved in accordance with GAAP as of such date, and
Kodiak will have performed by the Closing Date any obligations required to be
performed as of such date under all Benefit Plans. No Benefit Plan contains any
term or provision or is subject to any law that would prohibit the transactions
contemplated by this Agreement, or that would give rise to the vesting of
benefits, payments, or liabilities as a result of the transactions contemplated
by this Agreement, except to the extent that full vesting is required under any
tax-qualified Benefit Plan under Section 411 of the Code.
(b) Schedule 4.9(b) contains a complete and correct list of all
employees of Kodiak as of the date hereof and the 1998 compensation paid or
payable to each such employee. Except as set forth in Schedule 4.9(b), (i) the
terms of employment or engagement of all directors, officers, employees, agents,
consultants and professional advisers of Kodiak are such that their employment
or engagement may be terminated upon not more than two weeks' notice given at
any time and without liability for payment of compensation or damages (excluding
a claim for wrongful termination after the Closing), (ii) there are no severance
payments which are or could become payable by Kodiak to any director, officer or
other employee of Kodiak under the terms of any oral or written agreement or
commitment or any law or custom, trade or practice of Kodiak, and (iii) there
are no agreements, contracts or commitments, oral or written, between Kodiak and
any employee, consultant or independent contractor.
(c) Kodiak is not bound by or subject to (and none of its assets or
properties are bound by or subject to) any arrangement with any labor union. No
employees of Kodiak are
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or ever have been represented by any labor union or covered by any collective
bargaining agreement while employed by Kodiak and no campaign to establish such
representation is in progress. There is no pending or threatened labor dispute
involving Kodiak and any group of their employees nor has Kodiak experienced any
labor interruptions. Kodiak is and has been in compliance with all applicable
laws respecting employment and employment practices, terms and conditions of
employment, and wages and hours, including without limitation any such laws
regarding employment documentation, minimum wage and hours, workers'
compensation, family and medical leave, the Immigration Reform and Control Act,
and occupational safety and health requirements, and Kodiak has not engaged in
any unfair labor practice. All persons classified by Kodiak as independent
contractors do satisfy and have satisfied the requirements of law to be so
classified, and Kodiak has fully and accurately reported their compensation on
IRS Forms 1099 when required to do so.
(d) Prior to Closing, unless otherwise agreed to by AppNet, Kodiak
agrees to take any and all steps necessary in order to cease all accruals of
benefits or contributions under each Benefit Plan, to terminate each Benefit
Plan as of the Closing Date, and to distribute to the participants of each
Benefit Plan their accrued benefits thereunder, in accordance with the terms of
each Benefit Plan and all applicable laws including, without limitation, the
provisions of Section 401(k)(10) of the Code.
4.10 Taxes. Kodiak has, since its incorporation, been an S corporation
within the meaning of Section 1361 of the Code. Kodiak does not have a net
unrealized built-in gain (within the meaning of Section 1374(d)(1) of the Code,
applying the principles of Section 1374(d)(8), or recognized built-in gain
subject to carryover pursuant to Section 1374(d)(2)(B)) which would be subject
to tax under Section 1374(a) of the Code if all of the assets of Kodiak were
sold for an amount equal to their fair market value. Kodiak has filed or caused
to be filed with the appropriate Governmental or Regulatory Authority any and
all Tax Returns required to be filed by it as of the date hereof, or requests
for extensions to file such Tax Returns have been timely filed or granted and
have not expired. All such Tax Returns are true, complete and accurate in all
respects. Kodiak has paid all Taxes shown as due, claimed to be due by any
Governmental or Regulatory Authority, or accruable with respect to periods
through the Closing Date except for such taxes as (i) are fully reserved for in
the Current Balance Sheet or (ii) were incurred after the Balance Sheet Date in
the ordinary course of business and are not due and payable as of the Closing
Date. No deficiencies for any Taxes have been proposed against Kodiak that are
not adequately reserved for in the Current Balance Sheet. No requests for
waivers or comparable consents with respect to the time to assess any Taxes
against Kodiak have been granted or are pending, except for requests with
respect to such Taxes that have been adequately reserved for in the Current
Balance Sheet. Kodiak has complied in all respects with all applicable laws,
rules and regulations relating to the payment and withholding of Taxes
(including, without limitation, withholding of Taxes pursuant to Sections 1441
and 1442 of the Code or similar provisions under any foreign laws and
withholding with respect to employee wages) and has, within the time and manner
prescribed by law, withheld and paid over to the proper Governmental or
Regulatory Authority all amounts required to be withheld and paid over under all
applicable laws. No federal, state, local or foreign audits or other
administrative proceedings or court proceedings ("Audits") exist or have been
initiated with regard to any Taxes
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or Tax Returns of Kodiak, and Kodiak has not received any notice that such an
Audit is pending or threatened with respect to any Taxes due from or with
respect to Kodiak or any Tax Return filed or required to be filed by or with
respect to Kodiak. Kodiak is not a party to, is not bound by, and has no
obligation under, any tax sharing agreement, tax indemnification agreement or
similar contract or arrangement.
4.11 Subsidiaries. Kodiak has no debt, equity or other investment or
interest in any Person or any strategic alliance with any Person. Kodiak has no
commitments to contribute to the capital of, make loans to or share losses of,
any Person.
4.12 Property.
(a) Kodiak neither has ever owned nor now owns any real property.
Schedule 4.12(a) sets forth an accurate and complete list of all leaseholds of
real property leased by Kodiak (collectively, the "Facilities"). Except as
otherwise disclosed on Schedule 4.12(a), (i) there are no outstanding written or
oral leases, rights to occupancy, or tenancies of any kind (including tenancies
by sufferance and/or holdover tenancies arising under expired written or oral
leases) covering or in any way affecting the Facilities or any part or parts
thereof; (ii) no person, firm or corporation other than Kodiak has any rights
(including rights arising under an installment contract, option to purchase,
easement, right-of-way, or otherwise) with respect to the Facilities or any part
thereof; and (iii) there have been no improvements to, construction on, work
done at, and/or services or material supplied to, the Facilities or any part or
parts thereof for which payment in full has not been made and which might give
rise to mechanic's liens or other lien rights, except in the ordinary course of
business. All leases set forth on Schedule 4.12(a) are in full force and effect
and constitute valid and binding agreements of Kodiak and, to the knowledge of
Kodiak, the other parties thereto in accordance with their respective terms.
(b) Schedule 4.12(b) sets forth an accurate list of all Kodiak owned
and leased personal property (i) as of the Balance Sheet Date, or (ii) acquired
since the Balance Sheet Date, including in each case true, complete and correct
copies of leases for equipment and also including an indication as to which
assets are currently owned, or were formerly owned, by any current or former
stockholders of Kodiak or business or personal Affiliates of Kodiak or any
current or former stockholder of Kodiak. All of the vehicles and other material
machinery and equipment listed on Schedule 4.12(b) are in good working order and
condition, ordinary wear and tear excepted. All fixed assets used by Kodiak that
are material to the operation of the Business are either owned by Kodiak or
leased under an agreement listed on Schedule 4.12(b).
(c) Except as set forth on Schedule 4.12(c), Kodiak has good and
marketable title to its assets, free and clear of any and all Encumbrances and
defects in title. Kodiak's assets, taken together, are adequate for the
operation of the Business as it is being currently conducted.
4.13 Contracts. Schedule 4.13 constitutes an accurate and complete list
of each Material Contract. Each Contract is in full force and effect, is a
valid, binding and enforceable obligation by or against Kodiak and the other
parties thereto, and no event has occurred which constitutes or, with the giving
of notice or passage of time, or both, would constitute, a default or breach
thereunder. Prior to the Closing Date, Kodiak will deliver or will cause to be
delivered or
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will make available to AppNet correct and complete copies of each Material
Contract and all amendments thereto. To the knowledge of Kodiak, no other party
to any Contract is in default thereunder. None of the non-Material Contracts
contain any restrictive covenants limiting the ability of Kodiak or any
Affiliate of Kodiak to conduct its business. Kodiak will not experience a loss
on any of the Contracts.
4.14 Government Contracts. Kodiak is not, and has never been, a party to
any Government Contract.
4.15 Litigation. Except as set forth in Schedule 4.15, there is no
litigation, suit, proceeding, action, claim, demand or investigation, at law or
in equity, pending or to the knowledge of Kodiak and the Stockholders threatened
against or affecting Kodiak before any court, agency, authority or arbitration
tribunal, including, without limitation, any product liability, workers'
compensation or wrongful dismissal claims, or claims, actions, suits, demands or
proceedings relating to toxic materials, hazardous substances, pollution or the
environment. To the knowledge of Kodiak and the Stockholders, there are no facts
that would likely result in any such litigation, suit, proceeding, action, claim
or investigation. Kodiak is not subject to or in default with respect to any
notice, order, writ, injunction or decree of any court, agency, authority or
arbitration tribunal.
4.16 Compliance with Laws. Except as set forth in Schedule 4.16, Kodiak
has complied and is currently in compliance, in all material respects, with all
laws, regulations, rules, orders, permits, judgments, decrees and other
requirements and policies imposed by any Governmental or Regulatory Authority
applicable to it, its properties or the operation of its business. Kodiak has
not received any notice or citation for noncompliance with any of the foregoing,
and there exists no condition, situation or circumstance, nor has there existed
such a condition, situation or circumstance, which, after notice or lapse of
time, or both, would constitute noncompliance with or give rise to future
liability with regard to any of the foregoing. Kodiak has all licenses, permits,
approvals, qualifications or the like, from any Government, Governmental or
Regulatory Authority or any third party necessary for the conduct of Kodiak's
Business and all such items are in full force and effect.
4.17 Environmental and Safety Matters.
(a) For purposes of this Agreement, the term "Environmental and
Safety Requirements" shall mean all federal, state, local and foreign statutes,
regulations, ordinances and other provisions having the force or effect of law,
all judicial and administrative orders and determinations, all contractual
obligations and all common law, in each case concerning public health and
safety, worker health and safety and pollution or protection of the environment
(including, without limitation, all those relating to the presence, use,
production, generation, handling, transport, treatment, storage, disposal,
distribution, labeling, testing, processing, discharge, Release, threatened
Release, control or cleanup of any hazardous or otherwise regulated materials,
substances or wastes, chemical substances or mixtures, pesticides, pollutants,
contaminants, toxic chemicals, petroleum products or byproducts, asbestos,
polychlorinated biphenyls, noise or radiation); "Release" shall have the meaning
set forth in CERCLA (as
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defined below); and "Environmental Lien" shall mean any lien, whether recorded
or unrecorded, in favor of any Governmental or Regulatory Authority, relating to
any liability of Kodiak arising under any Environmental and Safety Requirements.
(b) Except as set forth on Schedule 4.17:
(i) Kodiak has complied with and is currently in compliance
with all Environmental and Safety Requirements, and Kodiak has not received any
oral or written notice, report or information regarding any Liabilities or any
corrective, investigatory or remedial obligations arising under Environmental
and Safety Requirements which relate to Kodiak or any of its properties or
facilities.
(ii) Without limiting the generality of the foregoing, Kodiak
has obtained and complied with, and is currently in compliance with, all
permits, licenses and other authorizations that may be required pursuant to any
Environmental and Safety Requirements for the occupancy of its properties or
facilities or the operation of their businesses. A list of all such permits,
licenses and other authorizations which are material to Kodiak is set forth on
Schedule 4.17 attached hereto.
(iii) Neither this Agreement nor the consummation of the
transactions contemplated by this Agreement shall impose any obligations on
Kodiak for site investigation or cleanup, or notification to or consent of any
Governmental or Regulatory Authorities or third parties under any Environmental
and Safety Requirements (including, without limitation, any so called
"transaction-triggered" or "responsible property transfer" laws and
regulations).
(iv) Kodiak has not treated, stored, disposed of, arranged for
or permitted the disposal of, transported, handled or Released any substance
(including, without limitation, any hazardous substance), or owned, occupied or
operated any facility or property, so as to give rise to Liabilities of Kodiak
for response costs, natural resource damages or attorneys fees pursuant to the
Comprehensive Environmental Response, Compensation and Liability Act of 1980, as
amended ("CERCLA"), or any other Environmental and Safety Requirements.
(v) Without limiting the generality of the foregoing, no
facts, events or conditions relating to the past or present properties,
facilities or operations of Kodiak shall prevent, hinder or limit continued
compliance with Environmental and Safety Requirements, give rise to any
corrective, investigatory or remedial obligations pursuant to Environmental and
Safety Requirements or give rise to any other Liabilities pursuant to
Environmental and Safety Requirements (including, without limitation, those
Liabilities relating to onsite or offsite Releases or threatened Releases of
hazardous materials, substances or wastes, personal injury, property damage or
natural resources damage).
(vi) Kodiak has not, either expressly or by operation of law,
assumed or undertaken any material liability or corrective, investigatory or
remedial obligation of any other Person relating to any Environmental and Safety
Requirements.
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(vii) No Environmental Lien has attached to any property
leased or operated by Kodiak.
4.18 Customers; Suppliers.
(a) Except as set forth in Schedule 4.18(a), no single customer
accounted for more than 5% of Kodiak's revenues for the fiscal year ended
December 31, 1997 or for the period January 1, 1998 through September 30, 1998.
Except as set forth in Schedule 4.18(a) or as specifically provided in the
Contract with each customer listed on Schedule 4.18(a) (a "Significant
Customer"), no Significant Customer has canceled or otherwise terminated or
threatened to cancel or otherwise terminate its relationship with Kodiak since
January 1, 1998, or during such periods has materially decreased its usage or
purchase of Kodiak's services or products. To the knowledge of Kodiak and the
Stockholders, no Significant Customer has any plan or intention to terminate,
cancel or otherwise materially modify its relationship with Kodiak or materially
decrease or limit its usage, purchase or distribution of the services or
products of Kodiak.
(b) The relationships of Kodiak with its suppliers are good
commercial working relationships and, except as set forth on Schedule 4.18(b),
no supplier has during the last twelve months terminated, or threatened to
terminate its relationship with Kodiak or has during the last twelve (12) months
decreased or limited, or threatened to decrease or limit, its services, supplies
or materials to Kodiak. No supplier is a sole source of supply of any good or
service to Kodiak. Kodiak does not have any knowledge that any of the suppliers
intends to terminate or otherwise modify adversely to Kodiak its relationship
with Kodiak or to decrease or limit its services, supplies or materials to
Kodiak.
4.19 Insurance. Schedule 4.19 sets forth an accurate list of all insurance
policies carried by Kodiak (all of which policies remain in full force and
effect) and all insurance loss runs or workers' compensation claims. Kodiak has
made available to AppNet true, complete and correct copies of all current
insurance policies of Kodiak, all of which are in full force and effect. All
premiums due and payable under all such policies have been paid and Kodiak is
otherwise in full compliance with the terms of such policies (or other policies
providing substantially similar insurance coverage). Such policies of insurance
are of the type and in amounts customarily carried by persons conducting
businesses similar to that of Kodiak. Neither Kodiak nor the Stockholders know
of any threatened termination of, or material premium increase with respect to,
any of such policies.
4.20 Intellectual Property.
(a) Kodiak owns, or possesses valid written licenses to use, all
patents, trademarks, trade names, service marks, copyrights, and any
applications therefor, maskworks, net lists, schematics, technology, know-how,
computer software programs and applications and tangible or intangible
proprietary information and material that are used or proposed to be used in the
Business of Kodiak as currently conducted or as proposed to be conducted by
Kodiak (the "Company Intellectual Property Rights"). Schedule 4.20(a) lists all
Company
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Intellectual Property Rights owned by Kodiak, and specifies the jurisdictions in
which the Company Intellectual Property Rights are issued or registered or in
which an application for such issuance and registration has been filed,
including the respective registration or application numbers and the names of
all registered owners. The filings in respect of all such registrations and
applications are in good standing, are held solely in the name of Kodiak as the
exclusive owner of all rights therein, and all necessary steps have been taken
to maintain such filings and to prosecute the applications in a timely manner.
(b) Schedule 4.20(b) lists (i) all licenses, sublicenses and other
agreements to which Kodiak is a party and pursuant to which any person is
authorized to use any Company Intellectual Property Rights or any trade secret
material to Kodiak (and includes the identity of all parties thereto other than
non-exclusive product licenses and sublicenses granted by Kodiak in the ordinary
course of business); and (ii) all licenses, sublicenses and other agreements as
to which Kodiak is a party and pursuant to which Kodiak is authorized to use any
third party patents, trademarks or copyrights (including software) which are
incorporated in, are, or form a part of, any of Kodiak's products or services,
or other trade secrets of a third party in or as to any product or service
(collectively, the "Company Third Party Intellectual Property Rights"), and
includes the identity of all parties thereto, a description of the nature and
subject matter thereof, the applicable royalty and the term thereof. Kodiak is
authorized to use, in the manner used by Kodiak, the Company Third Party
Intellectual Property Rights. Except as set forth on Schedule 4.20(b), Kodiak is
not, nor will it be as a result of the execution and delivery of this Agreement
or the performance of its obligations hereunder, in violation of any license,
sublicense or agreement described on Schedule 4.20(b) or by which it is
authorized to use Company Third Party Intellectual Property Rights.
(c) No claims with respect to Company Intellectual Property Rights,
any trade secrets of Kodiak, or Company Third Party Intellectual Property Rights
to the extent arising out of any use, reproduction or distribution of such of
Company Third Party Intellectual Property Rights by or through Kodiak, have been
asserted or are threatened by any person, nor, except as set out on Schedule
4.20(c), does Kodiak or any of the Stockholders know of any valid grounds for
any bona fide claims (i) to the effect that the manufacture, sale, licensing or
use of any product or service, as now used, sold or licensed or proposed for
use, sale or license by Kodiak infringes any copyright, patent, trademark,
service mark, trade secret or any other intellectual property right; (ii)
against the use by Kodiak of any trademarks, trade names, trade secrets,
copyrights, patents, technology, know-how or computer software programs and
applications used in Kodiak's Business as currently conducted or as proposed to
be conducted by Kodiak; (iii) challenging the ownership, validity or
effectiveness of any of Company Intellectual Property Rights or other trade
secrets of Kodiak; or (iv) challenging Kodiak's license or legally enforceable
right to use, or the validity or effectiveness of, Company Third Party
Intellectual Property Rights.
(d) Kodiak has entered into all necessary agreements and obtained
all necessary rights to acquire Company Third Party Intellectual Property
Rights. All agreements relating to Company Third Party Intellectual Property
Rights are in full force and effect for the term set forth in each such
agreement.
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(e) All registered trademarks, service marks and copyrights held by
Kodiak are valid and subsisting. There is no unauthorized use, disclosure,
infringement or misappropriation of any of Company Intellectual Property Rights,
any trade secrets of Kodiak, or any of Company Third Party Intellectual Property
Rights to the extent licensed by or through Kodiak, by any third party,
including any employee or former employee of Kodiak. Except as set out on
Schedule 4.20(e), (i) Kodiak has not been sued or charged in writing as a
defendant in any claim, suit, action or proceeding which involves a claim or
infringement of any patent, trademarks, service marks, copyrights or violation
of any trade secret or other proprietary right of any third party; (ii) there is
no basis for any such charge or claim; and (iii) there is not any infringement
liability with respect to, or infringement or violation by, Kodiak of any
patent, trademark, service mark, copyright, trade secret or other proprietary
right of another.
(f) No Company Intellectual Property Rights, trade secrets of Kodiak
or Company Third Party Intellectual Property Rights are subject to any
outstanding order, judgment, decree, stipulation or agreement restricting in any
manner the licensing thereof by Kodiak. Except for contracts licensing Kodiak's
products executed in the ordinary course of business and in accordance with
Kodiak's past practices (all of which are listed in Schedule 4.13), Kodiak has
not entered into any agreement to indemnify any other person against any charge
of infringement of any Company Intellectual Property Rights. Except as set forth
on Schedule 4.20(f), each current and former officer of, employee of, and each
consultant to, Kodiak has executed and delivered to Kodiak a non-disclosure
agreement, or consultant agreement, respectively, in Kodiak's standard forms
substantially as set forth in Schedule 4.20(f) hereto regarding the protection
of such confidential or proprietary information and the assignments of
inventions to Kodiak; copies of all such agreements have been delivered to
AppNet. Kodiak is not and never has been engaged in any dispute or litigation
with an employee or former employee regarding matters pertaining to intellectual
property or assignment of inventions.
(g) Kodiak has used its best efforts to enforce an adequate trade
secret protection program through contractual agreements with officers,
employees, developers, consultants and other persons dealing with their
businesses. To the knowledge of Kodiak, there has been no material violation of
such program by any Person.
(h) The Company Intellectual Property Rights, at no additional cost
to AppNet (or Kodiak, after the Closing Date), and without human intervention
will:
(i) include year 2000 date conversion and capabilities
including, but not limited to, date data century
recognition; calculations which accommodate same century
and multi-century formulas and date values; correct sort
ordering; and date data interface values that reflect
the century;
(ii) automatically compensate for and manage and manipulate
data involving dates, including single century formulas
and multi-century formulas, and will not cause an
abnormal abort within the
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application or result in the generation of incorrect
values or invalid outputs involving such dates;
(iii) provide that all date related user interface
functionalities and data fields include the indication
of the correct century;
(iv) provide that all date related software to software or
application to application data interface
functionalities will include the indication of the
correct century; and
(v) provide that all date processing by the Company
Intellectual Property Rights will include four-digit
date format and recognize and correctly process dates
for leap years.
4.21 Accounts Receivable. The accounts receivable of Kodiak arose in the
ordinary course of business from bona fide transactions and are not subject to
any setoff, counterclaim or defense. Except as set forth on Schedule 4.21, the
accounts receivable (both billed and unbilled) shall be fully collectible in
accordance with their terms, subject to any applicable reserves on the Current
Balance Sheet.
4.22 Inventory. All items of inventory and supplies consist of items of a
quality, quantity and condition usable and saleable in the ordinary course of
the business of Kodiak and for the purpose for which they are intended, without
discount or reduction and conform to generally accepted standards in the
industry of which Kodiak is a part. The value of each item of inventory and
supplies reflected on the Financial Statements was, in each instance, valued at
the lower of cost or market value and based on the ordinary course of the
business consistent with the historical valuation policy of Kodiak and is not
subject to any write-down or write-off.
4.23 Related Party Transactions. Schedule 4.23 sets forth all
arrangements, Liabilities, agreements and contracts in effect as of the date
hereof among Kodiak and (i) any Person who is an officer, director or Affiliate
of Kodiak, any relative of any of the foregoing or any entity of which any of
the foregoing is an Affiliate, or (ii) any Person who acquired Kodiak Common
Stock in a private placement.
4.24 Brokers. Except as disclosed in Schedule 4.24, no Person has or will
have, as a result of the transactions contemplated by this Agreement, any right,
interest or claim against or upon Kodiak for any commission, fee or other
compensation payable as a finder or broker because of any act or omission by
Kodiak or the Stockholders. The Stockholders shall be fully responsible for and
shall pay all such commissions, fees and other compensation due to, and shall
deliver to AppNet at Closing a release from, the party disclosed on Schedule
4.24.
4.25 Accredited Investors; Investment Intent.
(a) AppNet has made available to each Stockholder, during the course
of this transaction and prior to the delivery of the AppNet Stock, the Notes and
the shares of AppNet Common Stock into which the Notes are convertible
(together, the "Securities"), the opportunity
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to ask questions of and receive answers from any of the officers of AppNet
concerning the terms and conditions of the offering, and to obtain any documents
or additional information necessary to verify the information provided to each
Stockholder or otherwise relative to the financial data and business of AppNet,
to the extent that such parties possessed such information or could acquire it
without unreasonable effort or expense, and all such questions, if asked, have
been answered satisfactorily and all such documents, if examined, have been
found to be fully satisfactory.
(b) Each Stockholder understands and acknowledges that (i) such
Stockholder must bear the economic risk of such Stockholder's investment in the
Securities; (ii) the Securities have not been registered under the Securities
Act of 1933, as amended (the "1933 Act") or any state securities laws and are
being offered and sold in reliance upon exemptions provided in the 1933 Act and
state securities laws for transactions not involving any public offering and,
therefore, cannot be resold or transferred unless they are subsequently
registered under the 1933 Act and applicable state laws or unless an exemption
from such registration is available; (iii) such Stockholder is purchasing the
Securities for investment purposes only for such Stockholder's own account and
not with any view toward a distribution thereof; (iv) no Stockholder has any
contract, undertaking, agreement or arrangement with any person to sell,
transfer or pledge to such person or anyone else any of the Securities which
such Stockholder hereby subscribes to purchase or any part thereof, and no
Stockholder has any present plans to enter into any such contract, undertaking,
agreement or arrangement; (v) there will be no public market for the Securities;
and (vi) each Stockholder understands that AppNet is not obligated to comply
with any reporting requirements under the Securities Exchange Act of 1934, as
amended, and that AppNet makes no representation or warranty that it will
disseminate to the public any current financial or other information concerning
itself, as is required by Rule 144 promulgated under the 1933 Act as one of the
conditions of its availability.
(c) Each Stockholder has evaluated the risks of investing in the
Securities, and has determined that the Securities are a suitable investment for
such Stockholder. Each Stockholder can bear the economic risk of this investment
and can afford a complete loss of such Stockholder's investment.
(d) Each Stockholder is knowledgeable and experienced in evaluating
investments and experienced in financial and business matters, and is capable of
evaluating the merits and risks of investing in the Securities. The aggregate
amount of the investments of each Stockholder in, and each Stockholder's
commitments to, all similar investments that are illiquid is reasonable in
relation to such Stockholder's net worth.
(e) Each of Larry M. Chernicoff, William D. Middlebrook and Anthony
G. Silvanic is a resident of the Commonwealth of Massachusetts and Bryan P.
Ducharme is a resident of the Commonwealth of Virginia. No Stockholder has any
present intention of becoming a resident of any other state or jurisdiction
prior to the Closing Date.
(f) Each Stockholder is an "Accredited Investor" as such term is
defined in Rule 501 of Regulation D promulgated under the 1933 Act in order to
qualify for the purchase of
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the Securities. Any information which each Stockholder has heretofore furnished
to AppNet with respect to such Stockholder is correct and complete as of the
date of this Agreement.
4.26 Disclosure. No representation or warranty by Kodiak and the
Stockholders contained in this Agreement, and no representation, warranty or
statement contained in any list, certificate, Schedule or other instrument,
document, agreement or writing furnished or to be furnished to, or made with,
AppNet pursuant hereto or in connection with the negotiation, execution or
performance hereof, contains or will contain any untrue statement of a material
fact or omits or will omit to state any material fact necessary to make any
statement herein or therein not misleading. Kodiak and the Stockholders do not
have knowledge of any changes reasonably expected to occur within one (1) year
from the date of this Agreement to any of Kodiak, Kodiak's relations with
employees, Kodiak's relations with customers, Kodiak's competitive situation or
Kodiak's relations with suppliers, or action of any Governmental or Regulatory
Authority or laws affecting Kodiak.
5. REPRESENTATIONS AND WARRANTIES OF APPNET
To induce Kodiak and the Stockholders to enter into this Agreement and to
consummate the transactions contemplated hereby, AppNet represents and warrants
to Kodiak and the Stockholders, as of the date hereof and as of the Closing
Date, as set forth below:
5.1 Due Organization. AppNet is a corporation duly organized, validly
existing and in good standing under the laws of the State of Delaware.
5.2 Power and Authority. AppNet has all requisite corporate power and
authority to own, lease and operate its properties and to conduct its Business
as presently conducted and as proposed to be conducted and is duly qualified or
licensed as a foreign corporation in good standing in each jurisdiction in which
the character of its properties or the nature of its business activities
requires such qualification, except where the failure to be so qualified or
licensed would not have a Material Adverse Effect on AppNet.
5.3 Authority for Agreement. The execution, delivery and performance of
this Agreement and the consummation of the transactions contemplated hereby have
been authorized by all requisite corporate action on the part of AppNet. AppNet
has full corporate power, authority and legal right to enter into this Agreement
and to consummate the transactions contemplated hereby. This Agreement has been
duly executed and delivered by AppNet and is a legal, valid and binding
obligation of AppNet enforceable against AppNet in accordance with its terms,
except as enforceability may be limited by applicable bankruptcy, insolvency,
reorganization, moratorium or other similar laws affecting the enforcement of
creditors' rights in general.
5.4 No Violation to Result. The execution, delivery and performance of
this Agreement and the consummation of the transactions contemplated hereby and
the fulfillment of the terms hereof: (i) are not in violation or breach of, do
not conflict with or constitute a default under, and will not accelerate or
permit the acceleration of the performance required by, any of
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the terms of the Certificate of Incorporation or Bylaws of AppNet or any
contract to which AppNet is a party or which affects AppNet; (ii) will not be an
event which, after notice or lapse of time or both, will result in any such
violation, breach, conflict, default, or acceleration; (iii) will not result in
a violation under any law, judgment, decree, order, rule, regulation, permit or
other legal requirement of any Governmental or Regulatory Authority, court or
arbitration tribunal, whether federal, state, provincial, municipal or local
(within the U.S. or otherwise), at law or in equity, and applicable to AppNet;
and (iv) will not result in the creation or imposition of any Encumbrance in
favor of any Person upon any of the properties or assets of AppNet.
5.5 Brokers and Agents. No Person has or will have, as a result of the
transactions contemplated by this Agreement, any right, interest or claim
against or upon AppNet for any commission, fee or other compensation payable as
a finder or broker because of any act or omission by AppNet.
5.6 Capitalization. Schedule 5.6 sets forth, with respect to AppNet, (i)
the number of authorized shares of each class of its capital stock, (ii) the
number of issued and outstanding shares of each class of its capital stock and
the record owner thereof, and (iii) the number of shares of each class, if any,
which are held in treasury. Except as set forth on Schedule 5.6, no preemptive
right or rights of first refusal exist with respect to the shares of capital
stock of AppNet, and no such rights arise by virtue of or in connection with the
transactions contemplated hereby. Except as set forth on Schedule 5.6, there are
no outstanding or authorized rights, options, warrants, convertible securities,
subscription rights, conversion rights, exchange rights or other agreements or
commitments of any kind that could require AppNet to issue or sell any shares of
its capital stock (all of the foregoing, the "AppNet Issuance Agreements").
Schedule 5.6 sets forth the identity of the holder of each AppNet Issuance
Agreement, the type of agreement to which such holder is a party, the class and
number of shares of capital stock subject to each such agreement, and the
exercise price or conversion price, or other similar information concerning the
consideration such holder is required to tender in exchange for such shares of
the capital stock of AppNet. Schedule 5.6 identifies each agreement pursuant to
which any of GTCR Golder Rauner, L.L.C. ("GTCR"), Smart Technology, L.L.C.
("Smart Technology"), and their respective Affiliates, has acquired shares of
the capital stock of AppNet. There are no outstanding stock appreciation,
phantom stock, profit participation or other similar rights with respect to
AppNet. Except as set forth on Schedule 5.6, AppNet is not obligated to redeem
or otherwise acquire any of its outstanding shares of capital stock.
5.7 Shares. All of the shares of capital stock of AppNet to be issued
pursuant to Section 2.2.1(c) and upon conversion of the Notes, upon issuance and
delivery by AppNet to the persons entitled thereto will (i) be duly authorized
and validly issued and fully paid and non-assessable, (ii) subject to the truth
and accuracy of the information to be provided pursuant to Section 4.25 hereof
and the satisfaction of all conditions to Closing, have been issued by AppNet in
compliance with all applicable state and federal laws, and (iii) not have been
issued in violation of any preemptive rights or rights of first refusal.
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5.8 Notes. Neither the Notes nor the AppNet Common Stock to which the
Notes are convertible are part of an issue or series of issues which are readily
tradeable in an established securities market as defined in Treasury Regulation
Section 15A.453-1(e)(4)(ii) through (iv), nor has AppNet issued any other
obligations or securities of a comparable character which are readily tradeable
in an established securities market.
6. COVENANTS.
6.1 Access to Properties and Records.
(a) Kodiak shall afford to the officers, employees, attorneys,
accountants and other authorized representatives of AppNet, free and full access
to all of Kodiak's assets, properties, books and records and employees in order
to afford AppNet as full an opportunity of review, examination and investigation
as they shall desire to make of the affairs of Kodiak, and AppNet shall be
permitted to make extracts from, or take copies of, such books, records
(including the stock record and minute books) or other documentation as may be
reasonably necessary. Kodiak shall furnish or cause to be furnished to AppNet
such reasonable financial and operating data and other information about
Kodiak's Business, properties and assets which any of the respective officers,
employees, attorneys, accountants or other authorized representatives of AppNet
may request; provided that AppNet and its agents shall not unreasonably
interfere with the operations of Kodiak's Business.
(b) AppNet shall afford to the officers, employees, attorneys,
accountants and other authorized representatives of Kodiak and the Stockholders,
free and full access to all of AppNet's and its subsidiaries' assets,
properties, books and records and employees in order to afford Kodiak and the
Stockholders as full an opportunity of review, examination and investigation as
they shall desire to make of the affairs of AppNet and its subsidiaries, and
Kodiak and the Stockholders shall be permitted to make extracts from, or take
copies of, such books, records (including the stock record and minute books) or
other documentation thereof as may be reasonably necessary. AppNet shall furnish
or cause to be furnished to Kodiak and the Stockholders such reasonable
financial and operating data and other information about AppNet's and its
subsidiaries' Business, properties and assets which any of the respective
officers, employees, attorneys, accountants or other authorized representatives
of Kodiak and the Stockholders may request; provided that Kodiak and the
Stockholders and their agents shall not unreasonably interfere with the
operations of AppNet's and its subsidiaries' Business.
(c) No information or knowledge obtained in any investigation
pursuant to this Section 6.1 shall affect or be deemed to modify any
representation or warranty contained herein or the conditions to the obligations
of the parties to consummate the transactions contemplated by this Agreement;
provided, however, that in the event any party hereto brings a claim for breach
of representation or warranty, the party who made such representation or
warranty may successfully defend against such claim if that party can prove by
clear and convincing evidence that the party asserting such claim had actual
knowledge at Closing that such representation or warranty was false.
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6.2 Confidentiality.
(a) Kodiak and the Stockholders recognize and acknowledge that they
have in the past, currently have, and in the future may possibly have, access to
certain confidential information of Kodiak and/or AppNet, such as lists of
customers, operational policies, and pricing and cost policies, that are
valuable, special and unique assets of Kodiak's or AppNet's respective
businesses. Kodiak and the Stockholders agree that they will not disclose
confidential information with respect to Kodiak and/or AppNet to any Person for
any purpose or reason whatsoever (except to authorized representatives of
Kodiak, the Stockholders, AppNet and to counsel and other advisers, provided
that such advisors (other than counsel) agree to the confidentiality provisions
of this Section 6.2), unless (i) such information becomes known to the public
generally through no fault of Kodiak or the Stockholders, (ii) disclosure is
required by law or the order of any Governmental or Regulatory Authority under
color of law, or (iii) the disclosing party reasonably believes that such
disclosure is required in connection with the defense of a lawsuit against the
disclosing party or for certification or state licensure purposes; provided,
that prior to disclosing any information pursuant to clauses (ii) or (iii)
above, Kodiak or the Stockholders, shall, if possible, give prior written notice
thereof to AppNet and provide AppNet with the opportunity to contest such
disclosure.
(b) AppNet agrees that prior to the Closing it will not disclose
confidential information with respect to Kodiak and/or the Stockholders to any
Person, for any purpose or reason whatsoever (except to authorized
representatives of AppNet, Kodiak, and/or the Stockholders and to counsel and
other advisers, provided that such advisors (other than counsel) agree to the
confidentiality provisions of this Section 6.2), unless (i) such information
becomes known to the public generally through no fault of AppNet, (ii)
disclosure is required by law or the order of any Governmental or Regulatory
Authority under color of law, or (iii) AppNet reasonably believes that such
disclosure is required in connection with the defense of a lawsuit against
AppNet or for certification or state licensure purposes; provided, that prior to
disclosing any information pursuant to clauses (ii) or (iii) above, AppNet,
shall, if possible, give prior written notice thereof to Kodiak and/or the
Stockholders and provide Kodiak and/or the Stockholders with the opportunity to
contest such disclosure.
6.3 Interim Covenants of Kodiak. From the date of this Agreement until the
Closing Date, except to the extent expressly permitted by this Agreement or
otherwise consented to by an instrument in writing signed by AppNet, Kodiak
shall (i) keep Kodiak's Business and organization intact and shall not take or
permit to be taken or do or suffer to be done anything other than in the
ordinary course of its business as the same is presently being conducted, (ii)
use its reasonable best efforts to keep available the services of its directors,
officers, employees, independent contractors and agents and retain and maintain
good relationships with its clients and maintain the Facilities in good
condition, (iii) perform its obligations under the Contracts and (iv) maintain
the goodwill and reputation associated with its Business. Without limiting the
generality of the foregoing, Kodiak shall not, without the prior written consent
of AppNet:
(a) Adopt or propose any change in its Articles of Organization or
Bylaws;
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(b) Merge or consolidate with any other entity or acquire a material
amount of assets of any other entity;
(c) Issue or sell any stock, bonds, or other securities of which
Kodiak is the issuer or grant, issue or change any stock options, warrants or
other rights to purchase securities of Kodiak;
(d) Amend any term of any outstanding security of Kodiak;
(e) Sell, lease or dispose of or make any contract for the sale,
lease or disposition of or subject to lien or security interest or any other
Encumbrance any of its properties or assets, other than in the ordinary and
usual course of its business, consistent with the representations and warranties
contained herein, and not in breach of any of the provisions of this Section 6,
in each case for a consideration at least equal to the fair value of such
property or asset;
(f) Except for the Permitted Distributions and the Retention
Bonuses, grant any salary increase to, or increase the draw of any of its
officers, directors, employees or agents, or enter into any new, or amend or
alter any existing, employment, bonus, incentive compensation, deferred
compensation, profit sharing, retirement, severance, pension, stock option,
group insurance, death benefit or other fringe benefit plan, trust agreement or
other similar or dissimilar arrangement, or any employment or consulting
agreement except consistent with past compensation practices;
(g) Incur any bank indebtedness or borrowings, whether or not in the
ordinary course of its business, or issue any commercial paper;
(h) Enter into any leases of real property or any material leases of
equipment and machinery;
(i) Enter into any contract, (i) which would be required to be
listed on Schedule 4.13 as a Contract had it been entered into prior to the date
hereof (except for Contracts entered into in the ordinary course of business
consistent with prior practice); or (ii) in which any Affiliate of Kodiak or any
of the Stockholders has any beneficial interest;
(j) Redeem, purchase or otherwise acquire, directly or indirectly,
any shares of its capital stock or debt securities or any option, warrant or
other right to purchase or acquire any such shares, or declare or pay any
dividend or other distribution (whether in cash, stock or other property) with
respect to its capital stock;
(k) Create, incur or assume any liability or indebtedness, except in
the ordinary course of business consistent with past practices; or postpone or
defer the creation, incurrence, or assumption of any liability or indebtedness
that would otherwise be created, incurred or assumed in the ordinary course of
business absent the execution of this Agreement;
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(l) Pay or apply any of its assets to the direct or indirect
payment, discharge, satisfaction or reduction of any amount, directly or
indirectly, to or for the benefit of Kodiak or any Affiliate thereof except for
(i) payments to Kodiak's Affiliates in accordance with past practice, provided
that any such transaction is on terms no less favorable to Kodiak than terms
generally available with third parties in arm's length transactions and (ii)
payment in full of the outstanding balance of the loan from Berkshire Bank to
Kodiak described in Item 1 of Schedule 4.12(c);
(m) Declare or pay any dividend, or make any distribution (whether
in cash, stock or property) in respect of its capital stock whether now or
hereafter outstanding (except for the Tax Distribution and the AAA
Distribution), or split, combine or reclassify any of its capital stock or issue
or authorize the issuance of any other securities in respect of, in lieu of or
in substitution for shares of its capital stock, or purchase, redeem or
otherwise acquire or retire for value any shares of its capital stock;
(n) Acquire or negotiate for the acquisition of (by merger,
consolidation, purchase of a substantial portion of assets or otherwise) any
business or the start-up of any new business, or otherwise acquire or agree to
acquire any assets that are material, individually or in the aggregate, to
Kodiak;
(o) Commit a breach of or terminate any Contract, permit, license or
other right; or amend any Contract (other than in the ordinary course of
business consistent with prior practice);
(p) Enter into any other transaction (i) that is not negotiated at
arm's length with a third party not affiliated with Kodiak or any officer,
director of Kodiak or the Stockholders, (ii) outside the ordinary course of
business consistent with past practice or (iii) prohibited hereunder; or
(q) Fail to maintain its status as an S corporation for federal and
state income tax purposes.
6.4 No Solicitation. Neither Kodiak (its officers or directors), the
Stockholders, nor any agent or any representative thereof, shall during the
period commencing on the date of this Agreement and ending with the earlier to
occur of the Closing or the termination of this Agreement in accordance with its
terms, directly or indirectly: (a) solicit, encourage or initiate the submission
of proposals or offers from any person or entity for, (b) participate in any
discussions pertaining to, or (c) furnish any information to any Person, other
than AppNet, relating to, any acquisition or purchase of all or a material
amount of the assets of, or any equity interest in, Kodiak or a merger,
consolidation or business combination involving Kodiak. If Kodiak or any of the
Stockholders receives any unsolicited offer or proposal relating to any of the
above, Kodiak or the Stockholders shall immediately notify AppNet thereof, and
provide to AppNet all information relating thereto, including a copy of such
offer or proposal, the identity of the party making such offer or proposal and
the specific terms of such offer or proposal.
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6.5 Notification of Certain Matters.
(a) Kodiak shall give prompt notice to AppNet of (a) the occurrence
or non-occurrence of any event the occurrence or non-occurrence of which would
be likely to cause any representation or warranty of Kodiak or the Stockholders
contained herein to be untrue or inaccurate in any material respect at or prior
to the Closing Date and (b) any material failure of Kodiak or the Stockholders
to comply with or satisfy any covenant, condition or agreement to be complied
with or satisfied by Kodiak or the Stockholders hereunder. The delivery of any
notice pursuant to this Section 6.5(a) shall not, without the express written
consent of AppNet, be deemed to (A) modify the representations or warranties
hereunder of Kodiak or the Stockholders, (B) modify the conditions set forth in
Section 7 hereof or (C) limit or otherwise affect the remedies available
hereunder to AppNet.
(b) AppNet shall give prompt notice to the Stockholders of (a) the
occurrence or non-occurrence of any event the occurrence or non-occurrence of
which would be likely to cause any representation or warranty of AppNet
contained herein to be untrue or inaccurate in any material respect at or prior
to the Closing Date and (b) any material failure of AppNet to comply with or
satisfy any covenant, condition or agreement to be complied with or satisfied by
AppNet hereunder. The delivery of any notice pursuant to this Section 6.5(b)
shall not, without the express written consent of the Stockholders, be deemed to
(A) modify the representations or warranties hereunder of AppNet, (B) modify the
conditions set forth in Section 8 hereof or (C) limit or otherwise affect the
remedies available hereunder to the Stockholders.
6.6 Tax Returns; Sales, Use and Transfer Taxes.
(a) AppNet, Kodiak and the Stockholders shall cooperate fully, as
and to the extent reasonably requested by the other party, in connection with
the filing of Tax Returns and any audit, litigation or other proceeding with
respect to Taxes. Such cooperation shall include the retention and (upon
reasonable request) the provision of records and information which are
reasonably relevant to any such audit, litigation or other proceeding.
(b) Except as otherwise specified in Section 6.10, the Stockholders,
at their sole cost shall be responsible for preparing all initial income Tax
Returns of Kodiak first due after the Closing Date with respect to all taxable
periods ending on or before the Closing Date (the "Pre-Closing Tax Returns").
The Stockholders shall deliver each of the Pre-Closing Tax Returns to AppNet not
later than the earlier of (A) March 15, 1999 or (B) 30 days prior to the date
that each such Pre-Closing Tax Return is required to be filed with the relevant
Governmental or Regulatory Authority (taking into account any applicable
extension thereof, which Kodiak and AppNet shall apply for if requested to do so
by the Stockholders). All Pre-Closing Tax Returns shall be prepared correctly in
accordance with all relevant laws governing the preparation thereof, reflecting
positions consistent with positions reflected in prior Tax Returns filed by
Kodiak, and Kodiak shall not make any change in method of accounting or election
in the Pre-Closing Tax Returns having an effect on any subsequent taxable period
without the consent of AppNet. Upon AppNet's receipt from the Stockholders of
any Pre-Closing Tax Return, AppNet shall review such Pre-Closing Tax Return and,
if AppNet shall
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have any objection to such Pre-Closing Tax Return on the ground that it does not
comply with the provisions of this Section 6.6(b), AppNet shall give notice of
such objection to the Stockholders not later than ten days prior to the due date
of such Pre-Closing Tax Return. Unless notice of such objection shall have been
given in accordance with the preceding sentence, AppNet shall (i) cause such
Pre-Closing Tax Return to be executed and filed with the appropriate
Governmental or Regulatory Authority, (ii) cause Kodiak to pay the tax imposed
at the corporate level (and not the shareholder level), and (iii) provide each
of the Stockholders with a copy of such Pre-Closing Tax Return as filed and with
confirmation of the filing thereof and the payment of any tax due thereon,
provided that such payment shall not be in derogation of AppNet's right to
indemnification, if any, under this Agreement with respect to Kodiak's liability
for such Tax. If AppNet provides notice of objection pursuant to this Section
6.6(b) to any position reflected in a Pre-Closing Tax Return, AppNet and the
Stockholders shall each reasonably cooperate with the others in an attempt to
resolve any dispute regarding the reporting positions to be reflected on such
Tax Return, and if such dispute cannot be so resolved, procedures similar to
those described in Section 6.10 shall be used to submit such dispute to an
independent Big Five accounting firm.
(c) Except as may be required to reflect the effect of any
338(h)(10) Election, AppNet shall not cause or permit Kodiak to file an amended
income Tax Return for any period ended on or prior to the Closing Date without
the prior consent of each of the Stockholders, which consent shall not be
unreasonably withheld.
(d) Each Stockholder shall promptly give notice to AppNet, and
AppNet and Kodiak shall promptly give notice to each Stockholder, of any notice
of audit or proposed adjustment of a Pre-Closing Tax Return, each shall keep the
other parties hereto apprised of any correspondence, communications or
proceedings related to such audit or proposed adjustment and AppNet shall be
authorized by the Stockholders, and the Stockholders shall be authorized by
AppNet and Kodiak, to participate in any proceedings involving such Pre-Closing
Tax Return before the relevant Governmental or Regulatory Authority to the
extent that the outcome of such audit or proposed adjustment may reasonably
affect Kodiak's Tax liabilities or the Tax liabilities of any of the
Stockholders, as the case may be.
6.7 Regulatory and Other Approvals. Subject to the terms and conditions of
this Agreement, each of Kodiak and AppNet will proceed diligently and in good
faith to, as promptly as practicable, (a) obtain all consents, approvals or
actions of, make all filings with and give all notices to Governmental or
Regulatory Authorities or any other public or private third parties required of
AppNet, Kodiak or the Stockholders to consummate the Stock Purchase and the
other matters contemplated hereby, and (b) provide such other information and
communications to such Governmental or Regulatory Authorities or other public or
private third parties as the other party or such Governmental or Regulatory
Authorities or other public or private third parties may reasonably request in
connection therewith.
6.8 Termination of Profit Sharing Plan . Promptly following receipt of a
written request from AppNet, Kodiak and the Stockholders shall take all action
necessary to terminate Kodiak's 401(k) profit sharing plan (the "401(k) Plan")
effective immediately prior to the Closing.
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6.9 Reasonable Efforts. Subject to the terms and conditions of this
Agreement, each of the parties hereto agrees to use all reasonable efforts
promptly to take, or cause to be taken, all actions and do or cause to be done,
all things necessary, proper or advisable under applicable laws and regulations
to consummate and make effective the transactions contemplated by this Agreement
including the satisfaction of all conditions thereto.
6.10 Section 338(h)(10) Election. If in AppNet's sole discretion such
elections are deemed to be desirable, the Stockholders and AppNet shall, subject
to Section 6.10(a) and Section 6.10(b), join in making a timely election (but in
no event later than the 15th day of the ninth full calendar month after the
month in which the Closing Date occurs) under Section 338(h)(10) of the Code and
Treasury Regulation Section 1.338(h)(10)-1(d)(2) and elections under any similar
state law provisions in all applicable states which permit corporations to make
such elections, with respect to the sale and purchase of the Shares pursuant to
this Agreement (all such federal and state income tax elections are collectively
referred to herein as the "338(h)(10) Election"), and each party shall provide
the others all necessary information to permit the 338(h)(10) Election to be
made. If AppNet decides to make the 338(h)(10) Election:
(a) AppNet shall give the Stockholders notice of AppNet's decision to make
the 338(h)(10) Election (an "Election Notice"), which shall be accompanied by
AppNet's proposed allocation of the "deemed sale price" to each asset of Kodiak
in accordance with Treasury Regulation Section 1.338(h)(10)-1(f) and the other
regulations under Section 338 of the Code, no later than sixty (60) days before
the 338(h)(10) Election is to be made. If AppNet shall give an Election Notice
in accordance with the preceding sentence, AppNet and the Stockholders shall, as
promptly as practicable following the Stockholders' receipt of the Election
Notice, take all actions necessary and appropriate (including the preparation
and filing of such forms, returns, schedules and other documents as may be
required) to effect, preserve, or perfect a timely 338(h)(10) Election;
provided, however, that (i) AppNet shall be solely responsible for, and shall
pay all costs and expenses (including professional fees) in connection with, the
preparation and filing of the forms, returns, schedules and other documents
necessary for making any 338(h)(10) Election and (ii) the Stockholders shall not
be obligated to join in such 338(h)(10) Election unless AppNet shall first have
paid to each Stockholder, in cash, an estimate, determined in accordance with
Section 6.10(b) through Section 6.10(f), of the sum of (i) the Section 338
Stockholder Increase (as defined in Section 6.10(b)) and (ii) the Gross-Up Tax
Amount (as defined in Section 6.10(d)) (together, the "Section 338 Adjustment
Amount").
(b) As used herein, "Section 338 Stockholder Increase" shall mean, with
respect to each Stockholder, the amount by which -
(i) the present value (using the interest rate specified by
Section 6.10(c)(v)), on the date the estimate of the Section
338 Adjustment Amount shall be paid by AppNet, of the total
federal and state income tax (plus all applicable interest,
penalties and additions to tax determined under principles set
forth in Section 6.10(c)(vi)) that will be payable by such
Stockholder with respect
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to the sale of such Stockholder's Shares to AppNet if the
338(h)(10) Election is made
exceeds
(ii) the present value (using the interest rate specified by
Section 6.10(c)(v)) on such date of the total federal and
state income tax (plus all applicable interest, penalties and
additions to tax determined under principles set forth in
Section 6.10(c)(vi)) that would have been payable by such
Stockholder had the 338(h)(10) Election not been made.
(c) For purposes of computing the estimate of the Section 338 Stockholder
Increase required by subparagraphs (i) and (ii) of Section 6.10(b):
(i) It shall be assumed that the sale of such Stockholder's Shares
(or the deemed sale of assets of Kodiak and distribution of
the deemed sale proceeds in liquidation to the Stockholders,
as the case may be) is reported on the installment basis for
federal income tax purposes (pursuant to Section 453 of the
Code) and for state income tax purposes only to the extent
that the relevant state permits (or would permit) installment
reporting with respect to such sale without any requirement
that a bond or other security be posted as a condition of such
reporting (except that, if any Stockholder shall have elected,
prior to the date on which the Election Notice shall have been
given, to post a bond or other security with any state and
report such sale on the installment basis in such state, then
it shall be assumed that installment reporting will be used
for such Stockholder for all purposes in such state).
(ii) It shall be assumed that there will be no change after the
date on which the Election Notice shall have been given (the
"Election Notice Date") that would affect the provisions of,
or rates of tax under, any applicable federal or state income
tax laws for any taxable year beginning after December 31,
1998.
(iii) It shall be assumed that there will be no change after the
Election Notice Date in the state(s) in which such Stockholder
shall be required to pay income tax (by reason of change of
such Stockholder's domicile or residence) on the Purchase
Price during each of the years in which any payment (or deemed
payment) for such Stockholder's Shares pursuant to this
Agreement shall be received.
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(iv) It shall be assumed that no payment (except for any payment
that shall have already been made, or can be calculated with
certainty, as of the Election Notice Date) shall be received
by such Stockholder pursuant to Section 2.2.1(d), relating to
the payment of Contingent Proceeds to the Stockholders, as
part of the Purchase Price.
(v) The present value of any future tax obligations of the
Stockholder shall be calculated using the annual Applicable
Federal Rate for short-term obligations in effect as of the
date the estimate of the Section 338 Adjustment Amount shall
be paid to the Stockholder.
(vi) Federal and state income tax considered to be payable by the
Stockholder shall include interest, penalties and additions to
tax ("Additional Amounts"), but only to the extent that such
Additional Amounts are incurred by the Stockholder as a result
of delay in filing or payment solely and directly attributable
to changes in filing or payment obligations incident to the
making of the Section 338(h)(10) Election (assuming for this
purpose that all other filing and payment obligations have
been duly and timely complied with by the Stockholder, that
payment of Additional Amounts that are excusable for
reasonable cause will be waived under the principles of
Treasury Regulation Section 1.338-1(f), and that payment of
any additional federal and state income taxes due as a result
of the 338(h)(10) Election is made by the Stockholder on the
date that the estimate of the Section 338 Adjustment Amount is
paid to the Stockholder).
(d) As used herein, "Gross-Up Tax Amount" shall mean, with respect
to each Stockholder, the total federal and state income tax (plus interest,
penalties and additions to tax determined under principles set forth in Section
6.10(c)(vi)) that will be payable by such Stockholder on the portion of the
adjusted Purchase Price consisting of the Section 338 Stockholder Increase.
(e) As soon as practicable (and in any event within ten days) after
AppNet shall have given an Election Notice in accordance with Section 6.10(a),
the Stockholders shall, at AppNet's sole expense, engage a single accounting
firm (the "Stockholders' Accountants") to determine (i) the amount of the
Section 338 Stockholder Increase for each Stockholder and (ii) the amount of the
Gross-Up Tax Amount for each Stockholder. Notice of the estimate of the Section
338 Adjustment Amount for each Stockholder shall be given by the Stockholders to
AppNet within 40 days after the Election Notice shall have been given, which
shall be accompanied by an explanation, and appropriate backup, of the amounts
so determined, and shall, subject to Section 6.10(g), be final and binding on
both AppNet and the Stockholders unless, within twenty (20) days after notice of
such determination shall have been given to AppNet, AppNet shall give notice (a
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"Dispute Notice") to the Stockholders setting forth (i) the fact that AppNet
disputes the amounts determined by the Stockholders' Accountants, (ii) the
amount in dispute (the "Disputed Amount"), and (iii) an explanation of the basis
for the dispute. If AppNet shall give a Dispute Notice in accordance with the
preceding sentence, then, notwithstanding the provisions of Section 6.10(a),
AppNet shall pay the Disputed Amount, on or before the time specified in Section
6.10(a) for the payment of the estimate of the Section 338 Adjustment Amount, to
Cain, Hibbard, Myers & Cook, P.C. (the "Escrow Agent"), to be held in escrow
until the dispute raised in the Dispute Notice about the Stockholders'
Accountants' determination of the Section 338 Stockholder Increase and/or the
Gross-Up Tax Amount shall have been resolved pursuant to Section 6.10(f). If
AppNet shall (A) pay the Disputed Amount to the Escrow Agent pursuant to this
Section 6.10(e) and (B) pay to the Stockholders, in accordance with Section
6.10(a), the entire undisputed balance of the estimated Section 338 Adjustment
Amount for each Stockholder, AppNet shall be deemed to have satisfied the
requirements of subparagraph (ii) of Section 6.10(a) and all of the Stockholders
shall be obligated to join in the 338(h)(10) Election notwithstanding the
payment to the Stockholders of less than the entire estimated Section 338
Adjustment Amount determined by the Stockholders' Accountants with respect to
each Stockholder. If any Stockholder does not timely provide notice to AppNet of
his or her estimated Section 338 Adjustment Amount within 40 days of timely
delivery of the Election Notice, the Stockholders shall be obligated to join in
the 338(h)(10) Election notwithstanding the nonpayment of the estimated Section
338 Adjustment Amount to such delinquent Stockholder, and AppNet shall be
obligated to pay the estimated Section 338 Adjustment Amount to such delinquent
Stockholder (or the Escrow Agent in the case of a dispute) not later than 20
days after notice to AppNet of the determination of such Stockholder's estimated
Section 338 Adjustment Amount (treating, for purposes of the computations
thereof, the date of the filing of the 338 Election as the payment date of the
estimated Section 338 Adjustment Amount to such Stockholder).
(f) If a Dispute Notice shall be given by AppNet in accordance with
Section 6.10(e), AppNet and the Stockholders shall each reasonably cooperate
with the others in an attempt to resolve the dispute as to whether AppNet or the
Stockholders shall be entitled to the Disputed Amount. In the event that AppNet
and the Stockholders shall be unable to agree as to the disposition of the
Disputed Amount within thirty (30) days after the Dispute Notice shall have been
given, AppNet and the Stockholders shall immediately appoint from among the "Big
Five" public accounting firms an accounting firm that shall not have been
engaged for any purpose by AppNet, Kodiak, any Affiliate of AppNet or any of the
Stockholders within the then previous three years (the "Section 338 Arbiter"),
and the Section 338 Arbiter shall, within thirty (30) days after its engagement,
resolve the dispute about the proper disposition of the Disputed Amount under
the provisions of Section 6.10(b), Sections 6.10(c) and 6.10(d) in a written
report delivered to AppNet, the Stockholders and the Escrow Agent, which
resolution shall, subject to Section 6.10(g), be final and binding on both
AppNet and the Stockholders. Upon receipt of the report of the Section 338
Arbiter, AppNet and the Stockholders shall provide the Escrow Agent with joint
written instructions, consistent with such report, as to the release from escrow
of the Disputed Amount and all accrued interest thereon. The Section 338 Arbiter
shall be provided with all available information reasonably necessary to make
its determination and shall have full access to all books and records of Kodiak
and the Tax Returns and workpapers of the Stockholders. The fees and other costs
of the Section 338 Arbiter shall be allocated among the Stockholders and AppNet
in inverse
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proportion to the proportion in which the Disputed Amount shall be distributed
by the Escrow Agent to AppNet and the Stockholder.
(g) If the Section 338 Adjustment Amount payable to any of the
Stockholders by AppNet shall subsequently be finally determined (by audit or
otherwise) to be more or less than the estimated Section 338 Adjustment Amount
paid to such Stockholder pursuant to Sections 6.10(a) and (e), the appropriate
party shall remit to the other party the amount of such excess or deficit, as
the case may be, within thirty (30) days after the Stockholders and AppNet shall
receive notice of such final determination. AppNet and the Stockholders shall
each reasonably cooperate with the others in connection with the determination
of the amount of the Section 338 Adjustment Amount and any administrative or
judicial proceedings concerning the existence or amount of Taxes. Each
Stockholder shall promptly give notice to AppNet, and AppNet shall promptly give
notice to each Stockholder, of any subsequent adjustment to Tax liability which
is relevant to the determination of the Section 338 Adjustment Amount, and
AppNet shall be authorized by such Stockholder, and each Stockholder shall be
authorized by AppNet, to participate in any proceedings involving such Tax
before the relevant Governmental or Regulatory Authority, and failure to give
such notice and permit such participation shall result in a waiver of any rights
of the breaching party to further adjustment of the Section 338 Adjustment
Amount with respect to such Stockholder.
(h) In connection with the 338(h)(10) Election, AppNet and the
Stockholders shall act together in good faith to determine and agree upon (as
soon as practicable, and in any event, within ten days after AppNet shall have
given an Election Notice in accordance with Section 6.10(a)) the "deemed sale
price" to be allocated to each asset of Kodiak in accordance with Treasury
Regulation Section 1.338(h)(10)-1(f) and the other regulations under Section 338
of the Code. For purposes of computing the deemed sale price, each share of
AppNet stock delivered under Section 2.2.1(c) shall be treated as having a fair
market value of $4.00 per share on the Closing Date, or such lower amount as
AppNet shall reasonably determine to be correct. Notwithstanding the generality
of the first sentence of this Section 6.10(h), AppNet and the Stockholders agree
that an aggregate of $50,000 shall be allocated to the covenants not to compete
contained in Section 10 hereof, and the balance of the "deemed sale price" shall
be allocated to the fixed assets, goodwill and other intangible assets of
Kodiak. If the 338(h)(10) Election shall be made, both AppNet and the
Stockholders shall report the tax consequences of the transactions contemplated
by this Agreement consistently with such allocations and shall not take any
position inconsistent with such allocations in any Tax Return or otherwise. In
the event that AppNet and the Stockholders shall be unable to agree as to the
computation of the deemed sale price or such allocations, AppNet's reasonable
positions with respect to such matters shall control.
(i) Kodiak and the Stockholders shall not be in breach of the
representations and warranties contained in Sections 4.6, 4.7 and 4.10 as a
result of any increased Tax liability caused by the 338(h)(10) Election;
provided, however, that the liability of Kodiak and the Stockholders for any
other breach of such representations or warranties, including, without
limitation, inaccuracy of Tax reserves, other than as a result of the 338(h)(10)
Election, shall remain unaffected by the 338(h)(10) Election.
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(j) Notwithstanding anything to the contrary in this Agreement,
AppNet shall indemnify and hold harmless the Stockholders from and against any
Damages (as defined in Section 9.1), Taxes or other costs (including
professional fees) resulting from or arising out of any audit of the
Stockholders and/or Kodiak in connection with the 338(h)(10) Election, but only
to the extent such Damages, Taxes or costs relate to the 338(h)(10) Election,
and only to the extent that such Damages, Taxes or other costs were not already
taken into account in the determination of the Section 338 Adjustment Amount.
(k) Notwithstanding anything to the contrary in this Agreement,
AppNet shall pay to each of the Stockholders, at the time of each payment
pursuant to Section 2.2.1(d) (each a "Software-Related Payment"), an additional
payment (determined under principles and procedures described in Section
6.10(b), (c) and (d) other than Section 6.10(c)(iv), (v) and (vi)) equal to the
sum of:
(i) the amount by which -
(A) the total federal and state income tax payable by
such Stockholder with respect to the Software-Related Payment
exceeds
(B) the total federal and state income tax that would
have been payable by such Stockholder with respect to the
Software-Related Payment had the 338(h)(10) Election not been made;
and
(ii) the total federal and state income tax that will be
payable by such Stockholder with respect to the additional payment described in
subparagraph (i) of this Section 6.10(k).
6.11 Cash Advances. At the Closing, each of the Stockholders shall loan to
Kodiak from the AAA Distribution $37,500 (or a total of $150,000, collectively
the "Stockholders' Loans") to be used for working capital. The Stockholders'
Loans shall be repayable from time to time, without interest, as funds become
available from operations, with any outstanding balance to be paid no later than
ninety (90) days after the Closing Date.
6.12 Payment of Retention Bonuses. On the date specified by the
Stockholders (by notice given at least 30 days prior to the specified payment
date) but in no event later than the first anniversary of the Closing, AppNet
shall pay or cause Kodiak to pay the entire amount of the Retention Bonuses to
Kodiak employees.
7. CONDITIONS PRECEDENT TO OBLIGATIONS OF APPNET.
The obligations of AppNet to consummate the transactions contemplated by
this Agreement are subject to the satisfaction or partial or complete waiver (in
AppNet's sole and absolute discretion), at or before the Closing Date, of the
following conditions:
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7.1 Representations and Warranties True at the Closing Date. All of the
representations and warranties of Kodiak and the Stockholders contained in this
Agreement shall be true, correct and complete on and as of the Closing Date with
the same effect as though such representations and warranties had been made on
and as of such date, except for those representations and warranties which by
their terms are made as of a specific date which shall be true, correct and
complete on and as of such date.
7.2 Performance. All of the terms, covenants, agreements and conditions of
this Agreement to be complied with, performed or satisfied by Kodiak and/or the
Stockholders on or before the Closing Date shall have been duly complied with,
performed or satisfied by the Closing Date.
7.3 Agreements with Employees. All employees of Kodiak shall have executed
and delivered employment and/or non-competition/non-disclosure agreements, in
the form attached hereto as Exhibit C1. In addition, those key employees of
Kodiak designated by AppNet and listed on Schedule 7.3 shall have executed and
delivered Employment Agreements, in the form attached hereto as Exhibit C2, and
each of the Stockholders shall have executed and delivered a Senior Management
Agreement in the form attached hereto as Exhibit C3.
7.4 No Litigation. No temporary restraining order, preliminary or
permanent injunction or other order issued by any court of competent
jurisdiction or other legal or regulatory restraint or provision challenging the
transactions contemplated hereunder or limiting or restricting the conduct or
operation of the Business of AppNet or Kodiak following the transactions shall
be in effect, nor shall any proceeding brought by an administrative agency or
commission or other Governmental or Regulatory Authority or other
instrumentality, domestic or foreign, seeking any of the foregoing be pending.
There shall be no action, suit, claim or proceeding of any nature pending or
threatened, against any of the Stockholders, Kodiak or AppNet, their respective
properties or any of their officers or directors, that could have a Material
Adverse Effect on Kodiak or AppNet.
7.5 No Material Adverse Change. There shall have been, between the Balance
Sheet Date and the Closing Date, no change in the Business, financial condition
or prospects of Kodiak which would have a Material Adverse Effect on Kodiak.
7.6 Certificates. Kodiak and the Stockholders shall have furnished AppNet
with such certificates of the Stockholders, the officers of Kodiak and others to
evidence compliance with the conditions set forth in this Section 7 as may be
reasonably requested by AppNet.
7.7 Opinion of Counsel. AppNet shall have received an opinion of counsel
to Kodiak and the Stockholders in form attached hereto as Exhibit D.
7.8 Financing. AppNet shall have secured all financing necessary to pay
the Cash Payment on terms satisfactory to AppNet.
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7.9 AppNet's Review. AppNet shall be fully satisfied in its sole and
absolute discretion with the results of its review of, and its other due
diligence investigations with respect to, the Business, operations, affairs,
prospects, properties, assets, existing and potential liabilities, obligations,
profits or condition (financial or otherwise) of Kodiak.
7.10 Governmental, Regulatory and Other Consents and Approvals. All
consents, approvals and actions of, filings with and notices to any Governmental
or Regulatory Authority or any other public or private third parties required of
the Stockholders, AppNet or Kodiak to consummate the Stock Purchase and the
other matters contemplated hereby shall have been obtained.
7.11 Delivery of Good Standing Certificates; Corporate Resolutions. AppNet
shall have received certificates of good standing with respect to Kodiak issued
by the Massachusetts, Virginia, Illinois, Connecticut, Colorado and California
Secretaries of State. AppNet shall have received copies of the resolutions of
Kodiak approving the Stock Purchase and the other transactions contemplated
herein, certified by the appropriate corporate officers.
7.12 Financial Terms. AppNet shall have received a certificate (the
"Closing Financial Certificate"), dated as of the Closing Date, signed on behalf
of Kodiak and by each Stockholder, stating that: (i) sales, net of bad debt
expense, for Kodiak's most recent fiscal year ending December 31, 1997, shall
have been no less than $3.4 million, and for the nine-month period ending as of
September 30, 1998 (the "Interim Period") shall be no less than $4.2 million;
(ii) earnings before interest, taxes, depreciation and amortization ("EBITDA")
for Kodiak's most recent fiscal year shall have been no less than $536,000 (or
15.8% of sales, net of bad debt expense, for such fiscal year), and EBITDA
(without reduction for the Retention Bonus) for the Interim Period shall be no
less than 26.8% of sales for the Interim Period; (iii) Kodiak's Net Worth as of
the Closing shall be no less than the Adjusted Net Value; and (iv) Kodiak shall
have no outstanding long-term or short-term indebtedness to banks, stockholders,
or other financial institutions and creditors as of the Closing (in each case
including the current portions of such indebtedness, but excluding trade
payables, obligations under capitalized leases and other ordinary course
accounts payable); provided, however, that AppNet may, in its sole discretion,
waive the foregoing condition in whole or in part and, in such case, the
Purchase Price shall be reduced by the amount of any such indebtedness of Kodiak
(including principal and accrued interest, costs and fees). In calculating
Kodiak's Net Worth as of the Closing, any intangible assets in excess of $83,488
shall be excluded.
7.13 Payment of Loans. All notes receivable from the Stockholders, other
Affiliates of Kodiak, and employees of Kodiak shall have been repaid in full in
accordance with their terms.
7.14 Purchase of Personal Use Items. The Stockholders shall have purchased
any personal use assets (e.g., automobiles) from Kodiak at a purchase price
equal to the greater of the net book value of such assets as of Closing or the
outstanding indebtedness secured by such assets.
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7.15 Termination of Kodiak Shareholders Agreement. The Stockholders shall
deliver to AppNet evidence of termination of that certain Shareholders Agreement
between the Stockholders and Kodiak dated August 7, 1996.
7.16 Delivery of Stock Pledge Agreement. AppNet shall have received the
Stock Pledge Agreement, together with stock powers executed in blank,
representing the shares of AppNet Stock subject to the Stock Pledge Agreement.
7.17 Stockholders Agreement and Registration Agreement. The Stockholders
shall have executed such agreements as shall be necessary to subject the AppNet
Stock to be delivered to the Stockholders hereunder and to be delivered to the
Stockholders upon conversion of the Notes to AppNet's Stockholders Agreement and
Registration Agreement.
7.18 Resignations. Each of the Stockholders have executed and delivered
resignations as directors of Kodiak, effective as of the Closing Date, and Bryan
P. Ducharme shall have executed and delivered his resignation as Treasurer of
Kodiak, effective as of the Closing Date.
7.19 Termination of 401(k) Plan. If AppNet requests that the 401(k) Plan
be terminated pursuant to Section 6.8, the Stockholders shall deliver evidence
of such termination, effective prior to the Closing Date.
7.20 Reimbursement for Professional Fees. Prior to Closing, the
Stockholders shall reimburse Kodiak for the following professional fees: (a)
$50,000 paid by Kodiak to Carreden Group, Inc. and (b) $6,610 paid by Kodiak to
Riley, Haddad, Lombardi & Clairmont (collectively, the "Professional Fees").
7.21 Release. The Stockholders shall deliver the release from the party
set forth on Schedule 4.24, as required pursuant to Section 4.24.
8. CONDITIONS PRECEDENT TO OBLIGATIONS OF KODIAK AND THE STOCKHOLDERS
The obligations of Kodiak and the Stockholders to consummate the
transactions contemplated by this Agreement are subject to the satisfaction or
partial or complete waiver (in Kodiak's and the Stockholders' sole and absolute
discretion), at or before the Closing Date, of the following conditions:
8.1 Representations and Warranties True as of the Closing Date. All of the
representations and warranties of AppNet contained in this Agreement shall be
true, correct and complete on and as of the Closing Date with the same effect as
though such representations and warranties had been made on and as of such date,
except for those representations and warranties which by their terms are made as
of a specific date which shall be true, correct and complete on and as of such
date.
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8.2 AppNet's Performance. All of the terms, covenants, agreements and
conditions of this Agreement to be complied with, performed or satisfied by
AppNet on or before the Closing Date shall have been duly complied with,
performed or satisfied by the Closing Date.
8.3 No Litigation. No temporary restraining order, preliminary or
permanent injunction or other order issued by any court of competent
jurisdiction or other legal or regulatory restraint or provision challenging the
transactions contemplated hereunder or limiting or restricting the conduct or
operation of the Business of AppNet or its subsidiaries or Kodiak following the
transactions shall be in effect, nor shall any proceeding brought by an
administrative agency or commission or other Governmental or Regulatory
Authority or other instrumentality, domestic or foreign seeking any of the
foregoing be pending. There shall be no action, suit, claim or proceeding of any
nature pending or threatened, against Kodiak or AppNet or its subsidiaries,
their respective properties or any of their officers or directors, that could
have a Material Adverse Effect on Kodiak, AppNet or its subsidiaries.
8.4 Certificates. AppNet shall have furnished Kodiak and the Stockholders
with such certificates of the officers of AppNet and others to evidence
compliance with the conditions set forth in this Section 8 as may be reasonably
requested by the Stockholders.
8.5 Governmental, Regulatory and Other Consents and Approvals. All
consents, approvals and actions of, filings with and notices to any Governmental
or Regulatory Authority or any other public or private third parties required of
AppNet, the Stockholders or Kodiak to consummate the Stock Purchase and the
other matters contemplated hereby shall have been obtained.
8.6 Delivery of Good Standing Certificates; Corporate Resolutions. Kodiak
shall have received certificates of good standing with respect to AppNet issued
by Delaware and any other jurisdiction in which AppNet is required to be
qualified to conduct business. Kodiak shall have received copies of the
resolutions of AppNet approving the Stock Purchase and the other transactions
contemplated herein, certified by the appropriate corporate officers.
8.7 Kodiak's Review. Kodiak shall be fully satisfied in its sole and
absolute discretion with the results of its review of, and its other due
diligence investigations with respect to, the Business, operations, affairs,
prospects, properties, assets, existing and potential liabilities, obligations,
profits or condition (financial or otherwise) of AppNet; provided, however, that
this condition shall be deemed to be fully satisfied unless Kodiak delivers
notice by the date hereof that this condition has not been satisfied.
8.8 Opinion of Counsel. The Stockholders shall have received an opinion of
counsel to AppNet in the form attached hereto as Exhibit E.
8.9 No Material Adverse Change. Since the date of this Agreement, there
shall have been no change in the Business, financial condition or prospects of
AppNet which would have a Material Adverse Effect on AppNet.
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8.10 Senior Management Agreements. AppNet shall have consented to Kodiak
executing and delivering the Senior Management Agreements in the form attached
hereto as Exhibit C3.
9. INDEMNIFICATION.
9.1 General Indemnification.
(a) Kodiak and each of the Stockholders, jointly and severally,
covenants and agrees to indemnify, defend, protect and hold harmless AppNet and
its officers, directors, employees, stockholders, assigns, successors and
affiliates (individually, a "Buyer Party" and collectively, the "Buyer Parties")
from, against and in respect of all liabilities, losses, claims, damages,
punitive damages, causes of actions, lawsuits, administrative proceedings
(including informal proceedings), investigations, audits, demands, assessments,
adjustments, judgments, settlement payments, deficiencies, penalties, fines,
excise taxes, interest (including interest from the date of such damages) and
costs and expenses (including, without limitation, reasonable attorneys' fees
and disbursements of every kind, nature and description) (collectively,
"Damages") suffered, sustained, incurred or paid by the Buyer Parties, in any
action or proceeding between Kodiak and all or any of the Stockholders and the
Buyer Parties or between the Buyer Parties and a third party, in connection
with, resulting from or arising out of, directly or indirectly: (i) the
inaccuracy of any representation or the breach of any warranty set forth in this
Agreement or certificates delivered on the part of Kodiak or the Stockholders in
connection with the Closing; (ii) the nonfulfillment of any covenant or
agreement on the part of Kodiak or the Stockholders set forth in this Agreement
or in any agreement or certificate executed and delivered by Kodiak or the
Stockholders pursuant to this Agreement or in the transactions contemplated
hereby; (iii) any and all benefits accrued under the Benefit Plans or
multiemployer plans as of the Closing Date and any and all other liabilities
arising out of, or in connection with the operation of the Benefit Plans or
multiemployer plans through the Closing Date; (iv) any and all liabilities under
the Environmental and Safety Requirements in connection with or arising out of
Releases that occurred on or prior to the Closing Date; (v) failure of Kodiak or
any Kodiak employee prior to the Closing Date to maintain all licenses, permits,
approvals and qualifications from any Government or Government Regulatory
Authority; (vi) any and all Taxes (other than as a result of AppNet's actions
pursuant to Section 6.10 hereof ) which are imposed on Kodiak in respect of its
income, business, property or operations or for which Kodiak may otherwise be
liable for any taxable period ending on or prior to the Closing Date; and (vii)
the business, operations or assets of Kodiak on or before the Closing Date
(except as otherwise disclosed in the Financial Statements or the Schedules to
this Agreement) or the actions of Kodiak's directors, officers, shareholders,
employees or agents before the Closing Date.
(b) AppNet covenants and agrees to indemnify, defend, protect and
hold harmless (i) any Stockholder and his or her assigns, successors and
affiliates and (ii) Kodiak and its officers, directors, employees, stockholders,
assigns, successors and affiliates (individually, a "Seller Party" and
collectively, the "Seller Parties") from, against and in respect of all Damages
suffered, sustained, incurred or paid by the Seller Parties, in any action or
proceeding between the Seller Parties and the Buyer Parties or between the
Seller Parties and a third party, in
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connection with, resulting from or arising out of, directly or indirectly: (i)
the inaccuracy of any representation or the breach of any warranty set forth in
this Agreement or certificates delivered on the part of AppNet in connection
with the Closing; (ii) the nonfulfillment of any covenant or agreement on the
part of AppNet set forth in this Agreement or in any agreement or certificate
executed and delivered by AppNet or pursuant to this Agreement or in the
transactions contemplated hereby and (iii) any claims of third parties against
the Stockholders arising out of or based upon an occurrence (1) happening after
the Closing Date, (2) not involving a negligent or willful act of any of the
Stockholders, and (3) which is asserted against a Stockholder in his capacity as
former stockholder of Kodiak; provided, however, that this Section 9.1(b)(iii)
shall not apply to any claims asserted against any Stockholder in his capacity
as a current or former director or officer of Kodiak (which claims shall be
treated in the manner specified in the Kodiak Articles of Organization and
bylaws and the AppNet Certificate of Incorporation and bylaws, as the case may
be).
(c) Notwithstanding the foregoing provisions of Section 9.1(a) and
(b), if Closing occurs, (i) Kodiak shall not be an Indemnifying Party (as
defined below) or otherwise be subject to the indemnification and other
obligations contained in Section 9.1(a), and the Stockholders, if Closing
occurs, hereby waive any right to contribution, reimbursement or other right to
recovery that they might otherwise have against Kodiak in connection with any
such indemnification or other obligations, and (ii) Kodiak shall be deemed to be
a Buyer Party.
9.2. Indemnification Procedures. All claims or demands for indemnification
under this Section 9 ("Claims") shall be asserted and resolved as follows:
(a) In the event a Buyer Party or a Seller Party (an "Indemnified
Party") has a Claim against the other party (an "Indemnifying Party") hereunder
which does not involve a Claim being asserted against or sought to be collected
by a third party, the Indemnified Party shall with reasonable promptness send a
Claim Notice (as defined in Section 9.2(b)) with respect to such Claim to the
Indemnifying Party. If the Indemnifying Party does not notify the Indemnified
Party within the Notice Period (as defined in Section 9.2(b)) that the
Indemnifying Party disputes such Claim, the amount of such Claim shall be
conclusively deemed a liability of the Indemnifying Party hereunder. In case the
Indemnifying Party shall object in writing to any Claim made in accordance with
this Section 9.2(a), the Indemnified Party shall have thirty (30) days to
respond in a written statement to the objection of the Indemnifying Party. If
after such thirty (30)-day period there remains a dispute as to any Claims, the
parties shall attempt in good faith for thirty (30) days to agree upon the
rights of the respective parties with respect to each of such Claims. If the
parties should so agree, a memorandum setting forth such agreement shall be
prepared and signed by both parties. If no such agreement can be reached after
good faith negotiation, either the Indemnified Party or the Indemnifying Party
may arbitrate such claim in accordance with the terms of Section 11.11 hereof.
(b) In the event that any Claim for which an Indemnifying Party
would be liable to an Indemnified Party hereunder is asserted against an
Indemnified Party by a third party, the Indemnified Party shall with reasonable
promptness notify the Indemnifying Party of such Claim, specifying the nature of
such claim and the amount or the estimated amount thereof to the
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extent then feasible (which estimate shall not be conclusive of the final amount
of such Claim) (the "Claim Notice"). The Indemnifying Party shall have thirty
(30) days from the receipt of the Claim Notice (the "Notice Period") to notify
the Indemnified Party (i) whether or not the Indemnifying Party disputes the
Indemnifying Party's liability to the Indemnified Party hereunder with respect
to such Claim and (ii) if the Indemnifying Party does not dispute such
liability, whether or not the Indemnifying Party desires, at the sole cost and
expense of the Indemnifying Party, to defend against such Claim. In the event
that the Indemnifying Party notifies the Indemnified Party within the Notice
Period that the Indemnifying Party does not dispute the Indemnifying Party's
obligation to indemnify hereunder and desires to defend the Indemnified Party
against such Claim and except as hereinafter provided, the Indemnifying Party
shall have the right to defend by appropriate proceedings, which proceedings
shall be promptly settled or prosecuted by the Indemnifying Party to a final
conclusion; provided that, unless the Indemnified Party otherwise agrees in
writing, the Indemnifying Party may not settle any matter (in whole or in part)
unless such settlement includes a complete and unconditional release of the
Indemnified Party. If the Indemnified Party desires to participate in, but not
control, any such defense or settlement, the Indemnified Party may do so at the
Indemnified Party's sole cost and expense. If the Indemnifying Party elects not
to defend the Indemnified Party against such Claim, whether by failure of the
Indemnifying Party to give the Indemnified Party timely notice as provided above
or otherwise, then the Indemnified Party, without waiving any rights against the
Indemnifying Party, may settle or defend against any such Claim in the
Indemnified Party's sole discretion and the Indemnified Party shall be entitled
to recover from the Indemnifying Party the amount of any settlement or judgment
and, on an ongoing basis, all indemnifiable costs and expenses of the
Indemnified Party with respect thereto, including interest from the date such
costs and expenses were incurred.
(c) Notwithstanding the provisions of Section 9.2(b), if at any
time, in the reasonable opinion of the Indemnified Party, notice of which shall
be given in writing to the Indemnifying Party, any such Claim seeks relief which
could have a Material Adverse Effect on any Indemnified Party (if AppNet shall
be the Indemnified Party "Material Adverse Effect" shall mean a Claim, which
individually, or when aggregated with all other Claims, is in excess of
$2,500,000), the Indemnified Party shall have the right to control or assume (as
the case may be) the defense of any such Claim and the amount of any judgment or
settlement and the reasonable costs and expenses of defense shall be included as
part of the indemnification obligations of the Indemnifying Party hereunder;
provided, however, that the Indemnified Party may not settle or compromise any
such claim without the prior written consent of the Indemnifying Party (which
consent shall not be unreasonably withheld). If the Indemnified Party should
elect to exercise such right, the Indemnifying Party shall have the right to
participate in, but not control, the defense of such claim or demand at the sole
cost and expense of the Indemnifying Party. Notwithstanding any limits on
liability provided for elsewhere in this Agreement, in the event that the
Indemnifying Party does not consent to a proposed settlement or compromise, for
any reason, and the Claim is ultimately determined to be in excess of such
proposed settlement or compromise, the Indemnifying Party shall be liable to the
Indemnified Party for the entire Claim.
(d) Nothing herein shall be deemed to prevent the Indemnified Party
from making a Claim, and an Indemnified Party may make a Claim hereunder, for
potential or
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contingent Claims or demands provided the Claim Notice sets forth the specific
basis for any such potential or contingent claim or demand to the extent then
feasible and the Indemnified Party has reasonable grounds to believe that such a
claim or demand may be made. In the event any such Claim is made pursuant to
this Section 9.2(d), the Indemnified Party making such Claim shall promptly send
written notice of the facts and circumstances and details of such Claim to the
Indemnifying Party as they develop and become available to the Indemnified
Party.
9.3. Right to Setoff. In the event Kodiak or the Stockholders shall be in
breach of any representation, warranty, covenant or shall have an
indemnification obligation to AppNet, AppNet shall be permitted to seek
satisfaction of such amounts through an offset against the Notes and the
Contingent Proceeds. No limitation on such right of offset shall otherwise
affect AppNet's rights hereunder or otherwise. In the event the Note is, in
accordance with its terms, converted into AppNet Common Stock, such shares shall
at the time of, and as a condition to, such conversion be pledged to AppNet (and
shall become part of the Pledged Stock under the Stock Pledge Agreement) as
security for the Stockholders' obligations to AppNet under this Agreement and
shall be held pursuant to the terms of the Stock Pledge Agreement. The remedy of
offset shall be in addition to and not in limitation of any injunctive relief or
other rights or remedies to which AppNet is or may be entitled at law or equity,
under this Agreement.
9.4. Release. Effective as of Closing, the Stockholders hereby irrevocably
waive and release Kodiak of, from and against any and all claims or causes of
actions for Damages that they may have, have had or may at any time on or before
Closing have against Kodiak.
10. NONCOMPETITION.
10.1. Prohibited Activities.
(a) For the period commencing with Closing and ending on the fifth
(5th) year anniversary of Closing, none of the Stockholders shall, for any
reason whatsoever, directly or indirectly, for himself, herself or on behalf of
or in conjunction with any other Person:
(i) engage as a stockholder, officer, director, owner,
partner, joint venturer, or in a managerial capacity, whether as an employee,
independent contractor, consultant or advisor, in any business selling any
products or services in direct competition with Kodiak, AppNet or their
Affiliates (a "Competing Business"); provided, however, each of the Stockholders
shall not be precluded from the ownership of securities of corporations that are
listed on a national securities exchange or traded in the national
over-the-counter market in an amount that shall not exceed one percent (1%) of
the outstanding shares of any such corporation;
(ii) call upon any Person who is, at that time, or was within
one (1) year prior to that time, an employee of Kodiak, AppNet or their
Affiliates for the purpose or with the intent of enticing such employee away
from or out of the employ of AppNet or its Affiliates;
(iii) call upon any Person who or that is, at that time, or
has been, within one (1) year prior to that time, a customer of Kodiak, AppNet
or their Affiliates for the
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purpose of soliciting or selling products or services in competition with
Kodiak, AppNet or their Affiliates;
(iv) publish any statement or make any statement (under any
circumstances reasonably likely to become public) critical of Kodiak, AppNet or
their Affiliates, or in any way adversely affecting or otherwise maligning the
reputation of Kodiak, AppNet or their Affiliates; or
(v) accept any offer of employment from any customer of Kodiak
who or that is, at that time, or was within the two (2) year period prior to
that time, (A) a customer of Kodiak or (B) a prospective customer of Kodiak
which Kodiak contacted regarding the provision of services and which prospective
customer responded to Kodiak by agreeing to discuss such potential provision of
services.
; provided, however, that, notwithstanding any limitation contained in Section
10.1(a)(i), after the fourth (4th) anniversary of the Closing Date, the
limitations contained in Section 10.1(a)(i) will no longer apply to AppNet or
its Affiliates, other than Kodiak or any Affiliate of AppNet for which the
Stockholder is providing substantial services at that time.
10.2. Damages. Because of the difficulty of measuring economic losses to
AppNet and its Affiliates as a result of a breach of the foregoing covenants,
and because of the immediate and irreparable damage that could be caused to
Kodiak, AppNet and its Affiliates for which it would have no other adequate
remedy, the Stockholders agree that the foregoing covenants may be enforced by
Kodiak or AppNet in the event of breach by any of the Stockholders, in addition
to, but not in lieu of, any other available remedies, by injunctions and
restraining orders and other equitable remedies.
10.3. Reasonable Restraint. It is agreed by the parties that the foregoing
covenants in this Section 10 impose a reasonable restraint on the Stockholders
in light of the activities and business of Kodiak, AppNet and their Affiliates
on the date of the execution of this Agreement and the current plans of Kodiak,
AppNet and their Affiliates; but it is also the intent of the parties, that such
covenants be construed and enforced in accordance with the changing activities
and business of Kodiak, AppNet and their Affiliates throughout the term of this
covenant.
10.4. Severability; Reformation. The covenants in this Section 10 are
severable and separate, and the unenforceability of any specific covenant shall
not affect the provisions of any other covenant. Moreover, in the event any
court of competent jurisdiction shall determine that the scope, time or
territorial restrictions set forth are unreasonable, then it is the intention of
the parties that such restrictions be enforced to the fullest extent which the
court deems reasonable, and the Agreement shall thereby be reformed.
10.5. Independent Covenant. All of the covenants in this Section 10 shall
be construed as an agreement independent of any other provision in this
Agreement, and the existence of any claim or cause of action of any of the
Stockholders against Kodiak, AppNet or an Affiliate
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thereof, whether predicated on this Agreement or otherwise, shall not constitute
a defense to the enforcement by AppNet of such covenants. It is understood by
the parties hereto that the covenants contained in this Section 10 are essential
elements of this Agreement and that, but for the agreement of the Stockholders
to comply with such covenants, AppNet would not have agreed to enter into this
Agreement. The Stockholders and AppNet have independently consulted with their
respective counsel and have been advised concerning the reasonableness and
propriety of such covenants with specific regard to the nature of the business
conducted by AppNet. The Stockholders hereby agree that all covenants contained
in this Section 10 are reasonable and valid and waive all defenses to the strict
enforcement hereof by AppNet. The covenants contained in this Section 10 hereof
shall not be affected by any breach of any other provision hereof by any party
hereto and shall have no effect if the transactions contemplated by this
Agreement are not performed.
10.6. Materiality. Each of the Stockholders hereby agrees that the
covenants set forth in this Section 10 are a material and substantial part of
the transactions contemplated by this Agreement.
10.7. Termination of NonCompete. In the event that AppNet defaults in its
obligations under the Notes, the covenant contained in Section 10.1(a)(i) is
hereby terminated; provided, however, that if AppNet has exercised its right to
setoff pursuant to Section 9.3 and it is determined that AppNet did not properly
exercise such setoff right, in whole or in part, the covenants in Section
10.1(a)(i) shall remain in full force and effect if AppNet repays to the
Stockholders all amounts not paid due to such setoff within thirty (30) days of
a final, non-appealable determination that AppNet's exercise of its setoff right
was improper.
11. GENERAL
11.1. Termination. This Agreement may be terminated at any time prior to
the Closing Date:
(a) by mutual consent of the Boards of Directors of AppNet and
Kodiak;
(b) by Kodiak, on the one hand, or by AppNet, on the other hand, if
the Closing shall not have occurred on or before December 15, 1998; provided
that the right to terminate this Agreement under this Section 11.1(b) shall not
be available to either party whose material misrepresentation, breach of
warranty or failure to fulfill any obligation under this Agreement has been the
cause of, or resulted in, the failure of the Closing to occur on or before such
date;
(c) by Kodiak, on the one hand, or by AppNet, on the other hand, if
there is or has been a material breach, failure to fulfill or default on the
part of the other party of any of the representations and warranties contained
herein or in the due and timely performance and satisfaction of any of the
covenants, agreements or conditions contained herein, and the curing of such
default shall not have been made or shall not reasonably be expected to occur
before the Closing Date; or
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(d) by Kodiak, on the one hand, or by AppNet, on the other hand, if
there shall be a final nonappealable order of a federal or state court in effect
preventing the consummation of the transactions contemplated by this Agreement;
or there shall be any action taken, or any statute, rule, regulation or order
enacted, promulgated or issued or deemed applicable to the transactions by any
governmental entity which would make the consummation of the transactions
illegal.
11.2. Effect of Termination. In the event of the termination of this
Agreement pursuant to Section 11.1, this Agreement shall forthwith become void,
and there shall be no liability or obligation on the part of any party hereto or
its officers, directors or stockholders. Notwithstanding the foregoing sentence,
(i) the provisions of this Section 11, Section 6.2(a) (except for Kodiak's
obligation to keep information regarding Kodiak confidential thereunder) and
Section 6.2(b) shall remain in full force and effect and survive any termination
of this Agreement; (ii) each party shall remain liable for any intentional
breach of this Agreement prior to its termination; and (iii) in the event of
termination of this Agreement pursuant to Section 11.1(c), then notwithstanding
the provisions of Section 11.7, the breaching party (if such breach was in
effect as of the date hereof) shall be liable to the other party to the extent
of the expenses incurred by such other party in connection with this Agreement
and the transactions contemplated by this Agreement, as well as any damages in
accordance with applicable law.
11.3. Cooperation. Kodiak and the Stockholders, on the one hand, and
AppNet, on the other hand, shall each deliver or cause to be delivered to the
other on the Closing Date, and at such other times and places as shall be
reasonably agreed to, such additional instruments as the other may reasonably
request for the purpose of carrying out this Agreement. In connection therewith,
if required, each of AppNet, Kodiak and the Stockholders will execute any
documentation reasonably required by AppNet's or Kodiak's independent certified
public accountants (in connection with such accountant's audit of AppNet or
Kodiak). Each of Kodiak and AppNet will also cooperate and use their reasonable
efforts to have their respective officers and employees cooperate with AppNet
and Kodiak, as the case may be, on and after the Closing Date in furnishing
information, accounting records, evidence, testimony and other assistance in
connection with any Tax return filing obligations, audits, actions, proceedings,
arrangements or disputes of any nature.
11.4. Successors and Assigns. This Agreement shall inure to the benefit of
and be binding upon the parties hereto and their respective successors, assigns,
heirs and personal representatives; provided, however, that Kodiak and the
Stockholders may not make any assignment of this Agreement or any interest
herein (other than the right to assign rights to receive payments due hereunder
to family members or trusts for family members) without the prior written
consent of AppNet. This Agreement or any of the severable rights and obligations
inuring to the benefit or to be performed by AppNet hereunder may be assigned by
AppNet prior to the Closing Date, to any Affiliate of AppNet and, after the
Closing Date, to any Affiliate of AppNet or to any entity which merges with or
into AppNet or Kodiak or to which AppNet may sell all or substantially all of
the stock or assets of Kodiak, and to the extent so assigned, Kodiak and the
Stockholders hereby recognize said assignee as the party-in-interest with
respect to the
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rights and obligations assigned and agrees to look solely to said assignee for
the purpose of conferring benefits, or requiring performance of obligations,
assigned to it by AppNet.
11.5. Entire Agreement. This Agreement (which includes the schedules and
exhibits hereto), sets forth the entire understanding of the parties hereto with
respect to the transactions contemplated hereby and thereby. This Agreement
shall not be amended or modified except by a written instrument duly executed by
each of the parties hereto. Any and all previous agreements and understandings
between or among the parties regarding the subject matter hereof, whether
written or oral, are superseded by this Agreement.
11.6. Counterparts. This Agreement may be executed in any number of
counterparts and any party hereto may execute any such counterpart, each of
which when executed and delivered shall be deemed to be an original and all of
which counterparts taken together shall constitute but one and the same
instrument. This Agreement shall become binding when one or more counterparts
taken together shall have been executed and delivered (which deliveries may be
by telefax) by the parties.
11.7. Expenses. AppNet has and shall pay the fees, expenses and
disbursements of AppNet and its brokers, agents, representatives, accountants
and counsel incurred in connection with the subject matter of this Agreement.
The Stockholders have paid and shall pay the fees, expenses and disbursements of
Kodiak and the Stockholders and each of their respective brokers, agents,
representatives, financial advisors, accountants and counsel incurred in
connection with the subject matter of this Agreement.
11.8. Specific Performance; Remedies Not Exclusive. Each party hereto
acknowledges that the other parties shall be irreparably harmed and that there
shall be no adequate remedy at law for any violation by any of them of any of
the covenants or agreements contained in this Agreement, including, without
limitation, the confidentiality obligations set forth in Section 6.2(a) and (b)
and the noncompetition provisions set forth in Section 10. It is accordingly
agreed that, in addition to, but not in lieu of, any other remedies which may be
available upon the breach of any such covenants or agreements, each party hereto
shall have the right to obtain injunctive relief to restrain a breach or
threatened breach of, or otherwise to obtain specific performance of, the other
parties' covenants and agreements contained in this Agreement. All rights and
remedies of the parties under this Agreement shall be cumulative, and the
exercise of one or more rights or remedies will not preclude the exercise of any
other right or remedy available under this Agreement (including the Annexes
hereto) or applicable law.
11.9. Notices. Any notice, request, claim, demand, waiver, consent,
approval or other communication which is required or permitted hereunder shall
be in writing and shall be deemed given if (1) delivered personally, or (2) sent
by registered or certified mail, postage prepaid, return receipt requested, or
(3) by nationally recognized overnight courier service, or (4) transmitted by
telefax with a confirming copy sent by a nationally recognized overnight courier
service, as follows:
If to AppNet to:
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AppNet Systems, Inc.
6700 Rockledge Drive, Suite 525
Bethesda, Maryland 20817
Attn: Ken S. Bajaj, President
Fax No: 301-581-2488
with a required copy to:
Tucker, Flyer & Lewis
1615 L Street, N.W., Suite 400
Washington, D.C. 20036
Attn: Arthur E. Cirulnick, Esq.
Fax No: 202-429-3231
If to Kodiak or the Stockholders to:
The Kodiak Group, Inc.
66 West Street
P.O. Box 2578
Pittsfield, Massachusetts 01201
Attn: Larry M. Chernicoff, President
Fax No: 413-499-5234
with a required copy to:
Cain, Hibbard, Myers & Cook
66 West Street
Pittsfield, Massachusetts 01201
Attn: C. Jeffrey Cook, Esq.
Fax No: 413-443-7694
and with an additional copy to:
Lemery & Reid, P.C.
10 Railroad Place
Fifth Floor
Saratoga Springs, New York 12866
Attn: Robert J. May, Jr., Esq.
Fax. No: 518-581-8823
or to such other address as the person to whom notice is to be given may have
specified in a notice duly given to the sender as provided herein. Such notice,
request, claim, demand, waiver, consent, approval or other communication shall
be deemed to have been given as of the date so personally delivered, mailed,
telefaxed (with an original thereof by overnight delivery), or sent
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by overnight courier and, if given by any other means, shall be deemed given
only when actually received by the addressees. Notice by counsel shall, for
purposes of this Section 11. 9, be deemed notice from the party represented by
such counsel.
11.10. Governing Law.. This Agreement shall be governed by and construed,
interpreted and enforced in accordance with, the laws of the State of Delaware
(without regard to its laws relating to choice-of-law or conflicts-of-law).
11.11. Arbitration. Any unresolved dispute or controversy arising under or
in connection with this Agreement arising after the Closing shall be settled
exclusively by a three (3) person arbitration panel selected in accordance with
the American Arbitration Association (the "AAA") Commercial Arbitration Rules
(the "CA Rules") from the Information Technology Panel (the "ITP") established
by the Philadelphia Regional Office of the AAA, with such arbitration proceeding
conducted in accordance with the CA Rules then in effect. In the event that the
ITP is not yet formed, the arbitration panel shall consist of individuals who
have significant experience in the information technology industry. The
arbitrators shall not have the authority to add to, detract from, or modify any
provision hereof. A decision by a majority of the arbitration panel shall be
final and binding. Judgment may be entered on the arbitrators' award in any
court having jurisdiction. The arbitration proceeding shall be held in
Wilmington, Delaware. Notwithstanding the foregoing, the parties shall be
entitled to seek injunctive or other equitable relief from any court of
competent jurisdiction, without the need to resort to arbitration.
11.12. Survival of Representations, Warranties and Covenants. All
representations, warranties and covenants made by either party in or pursuant to
this Agreement or in any document delivered pursuant hereto shall survive for
two (2) years after the Closing; provided, however, that (i) in the event of
fraud, by any party, the representations and warranties of that party shall
survive the Closing for an indefinite period, and (ii) the representations and
warranties in Sections 4.5 or 4.10 shall survive until the expiration of the
applicable statute of limitations, or if there is no applicable statute of
limitations, such representations and warranties shall survive indefinitely.
Notwithstanding the foregoing, if a Claim Notice is sent pursuant to Section
9.2(a) or (b), the representation, warranty or covenant with respect to which
such Claim Notice is sent shall survive until the resolution of the Claim to
which such Claim Notice relates, or such longer period as provided in
subsections (i) and (ii) hereof.
11.13. Miscellaneous.
(a) Notwithstanding anything contained in Section 9 to the contrary,
there shall be no liability for indemnification under Section 9, (i) unless and
to the extent the aggregate amount of Damages exceeds $100,000, and (ii), to the
extent that an Indemnified Party has suffered, incurred, sustained, or become
subject to, Damages by reason of all such claims in excess of $2.5 million, no
Indemnifying Party (and for the purpose of this sentence, all Seller Parties
shall be considered one and the same Indemnifying Party) shall be obligated to
pay more than $2.5 million under Section 9 (the "Indemnity Cap"); provided,
however, that the Indemnity Cap shall not apply in the event that liability for
indemnification arises out of or in connection
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with the breach of any representations and warranties contained in Sections 4.5
or 4.10 for any amounts payable pursuant to Section 2.3.
(b) The indemnification provisions of Section 9 shall constitute the
sole and exclusive remedy of the parties hereto for any inaccuracy, untruth,
incompleteness or other breach of any representation or warranty contained in or
made pursuant to this Agreement or for any breach of or failure to perform any
covenant or agreement made in this Agreement (other than a claim based upon
fraud or for injunctive relief under Section 10), and the parties each waive any
other remedy, which they or any other person entitled to indemnification
hereunder may have at law or in equity with respect thereto. The amount of
Damages suffered by any person entitled to indemnification shall be reduced by
an amount equal to any insurance recovery received by such person with respect
to such Damages; provided, however, that no Indemnified Party shall be obligated
to pursue, beyond the submission of a statement of claim with appropriate
supporting material, or continue to pursue any payment pursuant to the terms of
any insurance policy and the Indemnifying Party shall be subrogated to an
Indemnified Party's claims under such policy. The Indemnified Party shall
execute and deliver such documents as the Indemnifying Party may reasonably
request to evidence such subrogation and to assist the Indemnifying Party in any
claim in respect of such insurance policy at the expense of the Indemnifying
Party.
11.14. Severability. If any provision of this Agreement or the application
thereof to any person or circumstances is held invalid or unenforceable in any
jurisdiction, the remainder hereof, and the application of such provision to
such person or circumstances in any jurisdiction, shall not be affected thereby,
and to this end the provisions of this Agreement shall be severable. The
preceding sentence is in addition to and not in place of the severability
provisions in Section 10.4.
11.15. Absence of Third Party Beneficiary Rights. Except as expressly
provided herein, no provision of this Agreement is intended, nor will be
interpreted, to provide or create any third party beneficiary rights or any
other rights of any kind in any client, customer, affiliate, shareholder,
employee or partner of any party hereto or any other person or entity.
11.16. Mutual Drafting. This Agreement is the mutual product of the
parties hereto, and each provision hereof has been subject to the mutual
consultation, negotiation and agreement of each of the parties, and shall not be
construed for or against any party hereto.
11.17. Further Representations. Each party to this Agreement acknowledges
and represents that it has been represented by its own legal counsel in
connection with the transactions contemplated by this Agreement, with the
opportunity to seek advice as to its legal rights from such counsel. Each party
further represents that it is being independently advised as to the tax or
securities consequences of the transactions contemplated by this Agreement and
is not relying on any representation or statements made by the other party as to
such tax and securities consequences.
11.18. Amendment; Waiver. This Agreement may be amended by the parties
hereto at any time by execution of an instrument in writing signed on behalf of
each of the parties hereto.
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Any extension or waiver by any party of any provision hereto shall be valid only
if set forth in an instrument in writing signed on behalf of such party.
11.19. Gender. Unless the context clearly indicates otherwise, where
appropriate the singular shall include the plural and the masculine shall
include the feminine or neuter, and vice versa, to the extent necessary to give
the terms defined herein and/or the terms otherwise used in this Agreement the
proper meanings.
11.20. Headings. The headings and other captions in this Agreement are for
convenience and reference only and shall not be used in interpreting, construing
or enforcing any of the provisions of this Agreement.
11.21. Public Disclosure. Prior to the Closing Date, neither party shall
make any disclosure (whether or not in response to an inquiry) of the subject
matter of this Agreement unless previously approved by Kodiak and AppNet.
11.22 Audit by Stockholders' Accountants. AppNet shall cooperate and shall
use its reasonable efforts to cause the officers and employees of Kodiak and
AppNet to cooperate with the Stockholders' independent accountants (the
"Stockholders' Audit Accountants") after the Closing Date in furnishing
information, documents, evidence and other assistance to the
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Stockholders' Audit Accountants to facilitate the completion of the
Stockholders' Audit Accountants' audit of the books of Kodiak for the period
from January 1, 1998 through the Closing Date.
[EXECUTION PAGE FOLLOWS]
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IN WITNESS WHEREOF, the parties hereto have executed this Stock Purchase
Agreement as of the day and year first above written.
APPNET:
APPNET SYSTEMS, INC.
By: /s/ Toby Tobaccowala
-----------------------------------
Name: Toby Tobaccowala
---------------------------------
Title: Senior Vice President
--------------------------------
KODIAK:
THE KODIAK GROUP, INC.
By: /s/ Larry Chernicoff
-----------------------------------
Name: Larry Chernicoff
---------------------------------
Title: President
--------------------------------
STOCKHOLDERS:
/s/ Larry M. Chernicoff
--------------------------------------
Larry M. Chernicoff
/s/ Bryan P. Ducharme
--------------------------------------
Bryan P. Ducharme
/s/ William D. Middlebrook
--------------------------------------
William D. Middlebrook
/s/ Anthony G. Silvanic
--------------------------------------
Anthony G. Silvanic
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SCHEDULES
Schedule 1 Stockholders
Schedule 2.2.1(d) Contingent Proceeds
Schedule 4.4 No Violation
Schedule 4.5 Stock of Kodiak
Schedule 4.6 Financial Statements
Schedule 4.7(a) Liabilities and Obligations
Schedule 4.7(b) Advance Payments or Deposits
Schedule 4.8 Adverse Changes
Schedule 4.9(a) Benefit Plans
Schedule 4.9(b) List of Employees
Schedule 4.11 Subsidiaries
Schedule 4.12(a) Real Property
Schedule 4.12(b) Personal Property
Schedule 4.12(c) Encumbrances
Schedule 4.13 Contracts
Schedule 4.15 Litigation
Schedule 4.16 Noncompliance List
Schedule 4.17 Environmental Disclosure
Schedule 4.18(a) Significant Customers
Schedule 4.18(b) Suppliers Who Have Threatened Termination
Schedule 4.19 Insurance
Schedule 4.20(a) Company Intellectual Property Rights
Schedule 4.20(b) Licenses to Use Kodiak Intellectual Property
Schedule 4.20(c) Third Party Intellectual Property Claims
Schedule 4.20(e) Unauthorized Intellectual Property Use
Schedule 4.20(f) Kodiak Nondisclosure Agreement
Schedule 4.21 Accounts Receivable
Schedule 4.23 Related Party Transactions
Schedule 4.24 Brokers
Schedule 5.6 AppNet Capitalization
Schedule 7.3 Key Employees
EXHIBITS
Exhibit A Form of Subordinated Convertible Promissory Notes
Exhibit B Form of Stock Pledge Agreement
Exhibit C1 Form of Employment Agreement; Form of
Non-Competition/Non-Disclosure Agreement
Exhibit C2 Form of Employment Agreement
Exhibit C3 Form of Senior Management Agreement
Exhibit D Form of Opinion of Kodiak's and the Stockholder's Counsel
Exhibit E Form of Opinion of AppNet's Counsel
<PAGE>
================================================================================
STOCK PURCHASE AGREEMENT
dated as of December 23, 1998
================================================================================
<PAGE>
TABLE OF CONTENTS
Page
1. DEFINITIONS..............................................................1
1.1 Defined Terms.......................................................1
2. PRE-CLOSING TRANSACTIONS; STOCK PURCHASE.................................4
2.1 Pre-Closing Loans...................................................4
2.2 Contribution of the Loan............................................4
2.3 Stock Purchase......................................................4
2.4 Consideration for Purchase of Shares................................4
2.5 Post-Closing Adjustment.............................................5
3. CLOSING .................................................................6
3.1 Time and Place of the Closing.......................................6
3.2 Procedure at Closing................................................6
3.3 Intentionally Omitted...............................................6
3.4 Capital Contributions...............................................7
3.5 Note for the Benefit of Key Employees...............................7
4. REPRESENTATIONS AND WARRANTIES OF I33 AND THE STOCKHOLDERS...............7
4.1 Organization........................................................7
4.2 Power and Authority.................................................7
4.3 Authority for Agreement.............................................7
4.4 No Violation to Result..............................................8
4.5 Capitalization......................................................8
4.6 Financial Statements................................................9
4.7 Liabilities and Obligations.........................................9
4.8 Adverse Changes....................................................10
4.9 Employee Matters...................................................10
4.10 Taxes..............................................................12
4.11 Subsidiaries.......................................................13
4.12 Property...........................................................13
4.13 Contracts..........................................................14
4.14 Government Contracts...............................................14
4.15 Litigation.........................................................14
4.16 Compliance with Laws...............................................14
4.17 Environmental and Safety Matters...................................15
4.18 Customers; Suppliers...............................................16
4.19 Insurance..........................................................16
4.20 Intellectual Property..............................................17
4.21 Accounts Receivable................................................19
4.22 Inventory..........................................................19
4.23 Related Party Transactions.........................................19
4.24 Brokers............................................................19
4.25 Intentionally Omitted..............................................19
<PAGE>
4.26 Intentionally Omitted..............................................19
4.27 Accredited Investors; Investment Intent............................19
4.28 Intentionally Omitted..............................................21
4.29 Disclosure.........................................................21
5. REPRESENTATIONS AND WARRANTIES OF APPNET................................21
5.1 Due Organization...................................................21
5.2 Power and Authority................................................21
5.3 Authority for Agreement............................................21
5.4 No Violation to Result.............................................21
5.5 Brokers and Agents.................................................22
5.6 Capitalization.....................................................22
6. COVENANTS...............................................................22
6.1 Access to Properties and Records...................................22
6.2 Confidentiality....................................................23
6.3 Interim Covenants of I33...........................................24
6.4 No Solicitation....................................................26
6.5 Notification of Certain Matters....................................26
6.6 Tax Return Preparation, Filing and Payment.........................26
6.7 Regulatory and Other Approvals.....................................28
6.8 Benefits Plans.....................................................28
6.9 Reasonable Efforts.................................................28
6.10 Stock Options......................................................28
6.11 Payment of Certain Obligations.....................................28
6.12 Section 338(h)(10) Election........................................29
7. CONDITIONS PRECEDENT TO OBLIGATIONS OF APPNET...........................35
7.1 Representations and Warranties True at the Closing Date............35
7.2 Performance........................................................35
7.3 Intentionally Omitted..............................................35
7.4 Agreements with Employees..........................................35
7.5 No Litigation......................................................35
7.6 No Material Adverse Change.........................................36
7.7 Certificates.......................................................36
7.8 Opinion of Counsel.................................................36
7.9 Financing..........................................................36
7.10 AppNet's Review....................................................36
7.11 Governmental, Regulatory and Other Consents and Approvals..........36
7.12 Delivery of Good Standing Certificates; Corporate Resolutions......36
7.13 Financial Terms....................................................36
7.14 Payment of Loans...................................................37
7.15 Purchase of Personal Use Items.....................................37
7.16 Stockholders Agreement and Registration Agreement..................37
7.17 Release............................................................37
7.18 Exercise of Option.................................................37
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7.19 Accrual of Employee Bonus..........................................37
7.20 Resignations.......................................................37
7.21 Termination of Lease...............................................38
7.22 Software Licensing.................................................38
8. CONDITIONS PRECEDENT TO OBLIGATIONS OF I33 AND THE STOCKHOLDERS.........38
8.1 Representations and Warranties True as of the Closing Date.........38
8.2 AppNet's Performance...............................................38
8.3 No Litigation......................................................38
8.4 Certificates.......................................................38
8.5 Governmental, Regulatory and Other Consents and Approvals..........38
8.6 Delivery of Good Standing Certificates; Corporate Resolutions......39
8.7 No Material Adverse Change.........................................39
8.8 Opinion of Counsel.................................................39
8.9 Loan...............................................................39
9. INDEMNIFICATION.........................................................39
9.1 General Indemnification............................................39
9.2 Indemnification Procedures.........................................41
9.3 Right to Setoff....................................................43
9.4 Release............................................................43
10. NONCOMPETITION..........................................................43
10.1 Prohibited Activities..............................................43
10.2 Damages............................................................44
10.3 Reasonable Restraint...............................................44
10.4 Severability; Reformation..........................................44
10.5 Independent Covenant...............................................44
10.6 Materiality........................................................44
11. GENERAL ................................................................45
11.1 Termination.......................................................45
11.2 Effect of Termination.............................................45
11.3 Cooperation.......................................................45
11.4 Successors and Assigns............................................46
11.5 Entire Agreement..................................................46
11.6 Counterparts......................................................46
11.7 Expenses..........................................................46
11.8 Specific Performance; Remedies Not Exclusive......................46
11.9 Notices...........................................................47
11.10 Governing Law.....................................................48
11.11 Arbitration.......................................................48
11.12 Survival of Representations, Warranties and Covenants.............48
11.13 Severability......................................................48
11.14 Absence of Third Party Beneficiary Rights.........................49
11.15 Mutual Drafting...................................................49
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11.16 Further Representations...........................................49
11.17 Amendment; Waiver.................................................49
11.18 Gender............................................................49
11.19 Headings..........................................................49
11.20 Public Disclosure.................................................49
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STOCK PURCHASE AGREEMENT
THIS STOCK PURCHASE AGREEMENT (together with the schedules and exhibits
attached hereto, this "Agreement") is entered into effective for all purposes
and in all respects as of December 23, 1998, by and among (i) APPNET SYSTEMS,
INC., a Delaware corporation ("AppNet"), (ii) I33 COMMUNICATIONS CORP., a New
York corporation ("I33"), and (iii) those individuals listed on Schedule 1
attached hereto (collectively, the "Stockholders").
WHEREAS, the Stockholders will be, at the time of the Closing, the record
and beneficial owners of all of the issued and outstanding shares (the "Shares")
of Common Stock of I33, par value of $0.01 per share (the "Common Stock"); and
WHEREAS, AppNet desires to purchase all of the Shares from Stockholders,
and the Stockholders desire to sell and transfer the Shares to AppNet, on the
terms and conditions hereinafter set forth (the "Stock Purchase").
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 are hereby acknowledged, the parties hereto, intending to
be legally bound, hereby agree as follows:
1. DEFINITIONS
1.1. Defined Terms. As used herein, the terms defined below shall have the
following meanings. Any of these terms, unless the context otherwise requires,
may be used in the singular or plural depending on the reference.
"Affiliate" shall mean as to any party, any Person which directly or
indirectly, is in control of, is controlled by, or is under common control with,
such party, including any person who would be treated as a member of a
controlled group under Section 414 of the Internal Revenue Code of 1986, as
amended (the "Code"), and any officer or director of such party and, as to a
party who is a natural person, such person's spouse, parents, siblings and
lineal descendants. For purposes of this definition, an entity shall be deemed
to be "controlled by" a Person if the Person possesses, directly or indirectly,
power either to (i) vote ten percent (10%) or more of the securities (including
convertible securities) having ordinary voting power or (ii) direct or cause the
direction of the management or policies of such entity whether by contract or
otherwise.
"AppNet Common Stock" shall mean the $.0005 par value per share
common stock of AppNet.
"Business" shall mean the business of I33 or AppNet, as the case may
be, as it is presently being conducted.
<PAGE>
"Cash Amount" shall mean $10,300,000 minus the sum of (a) the
Working Capital Contribution and (b) the Option Exercise Price.
"Contract" shall mean a note, bond, mortgage, contract, license,
lease, sublease, covenant, commitment, power of attorney, proxy, indenture, or
other agreement or arrangement, oral or written, to which I33 is a party or by
which I33 or any of its assets or property is bound, other than Government
Contracts.
"Employee Bonuses" shall mean an aggregate of $1,780,000 of 1998
year-end bonuses to be paid to employees of I33 (including I33's share of
payroll taxes on such bonuses) as set forth on Schedule 6.11; provided, however
no Employee Bonuses shall be paid to either Drew Rayman or Enno Vandermeer.
"Employee Note" shall mean a subordinated convertible promissory
note in the aggregate amount of $1,000,000, reduced in the manner and payable on
the terms set forth in Section 3.5.
"Encumbrance" shall mean any claim, lien, pledge, option, charge,
easement, security interest, right-of-way, encumbrance, mortgage or other right.
"GAAP" shall mean United States generally accepted accounting
principles, consistently applied.
"Government" shall mean any agency or instrumentality of the United
States of America, any state or territory or subdivision thereof or any foreign
country and any agency or instrumentality of any of the foregoing.
"Government Contracts" shall mean any contracts between I33 and the
Government, including, without limitation, any grants, cooperative agreements
and other transactions between I33 and the Government, and any contract to which
I33 is a party where the Government is the ultimate customer.
"Governmental or Regulatory Authority" shall mean any court,
tribunal, arbitrator, authority (including any quasi-governmental authority),
agency, commission, official or other instrumentality of the United States, any
foreign country or any domestic or foreign state, county, city or other
political subdivision.
"Intellectual Property Rights" shall mean all (i) patents, patent
applications, patent disclosures and inventions, (ii) trademarks, service marks,
trade dress, trade names, logos and corporate names and registrations and
applications for registration thereof together with all of the goodwill
associated therewith, (iii) copyrights (registered or unregistered) and
copyrightable works and registrations and applications for registration thereof,
(iv) mask works and registrations and applications for registration thereof, (v)
computer software, data, data bases and documentation thereof, (vi) trade
secrets and other confidential information (including, without limitation,
ideas, formulas, compositions, inventions (whether patentable or unpatentable
and whether or not reduced to practice), know-how, manufacturing and production
processes and
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techniques, research and development information, drawings, specifications,
designs, plans, proposals, technical data, copyrightable official and marketing
plans and customer and supplier lists and information), (vii) other intellectual
property rights, (viii) "technical data" as defined in 48 Code of Federal
Regulations, Chapter 1, and (ix) copies and tangible embodiments thereof (in
whatever form or medium).
"Legal Requirement" shall mean (i) with respect to any Person, any
judgment, decree, injunction, order, writ or ruling to or by which such person
is a party or is bound, or (ii) any law, ordinance, statute, rule, regulation,
code or other requirement of any Federal, state, municipal or other
governmental, administrative or judicial body, agency or authority or the common
law.
"Liabilities" shall mean, without limitation, any direct or indirect
liability, indebtedness, guaranty, endorsement, claim, loss, damage, deficiency,
cost, expense, obligation or responsibility, either accrued, absolute,
contingent, mature, unmature or otherwise and whether known or unknown, fixed or
unfixed, choate or inchoate, liquidated or unliquidated, secured or unsecured.
"Material Adverse Effect" shall mean a material adverse effect on
(i) the assets, the business or the condition (financial or otherwise),
properties or liabilities taken as a whole, or (ii) the right or ability to
consummate the transactions contemplated hereby.
"Material Contract" means any Contract involving the receipt or
payment by I33 of $10,000 or more or any other Contract which, if not complied
with or which, if defaulted by any party thereto, could result in a Material
Adverse Effect on I33.
"Net Worth" shall mean, with regard to I33, total assets of I33 less
total liabilities of I33 determined in accordance with GAAP, subject to the
terms of the last sentence of Section 7.13, without, however, taking into
account any accrued Tax liability of I33 attributable to any Section 338(h)(10)
Election made under Section 6.12, accrued Professional Fees, Employee Bonuses,
the amounts due under the Employee Note, the Loan, the payment of the Option
Exercise Price or the post-Closing contribution of the Loan, the Permitted Loans
or the Working Capital Contribution.
"Option Exercise Price" shall mean the amount payable by I33 to
Barbara Colasuonno ("Colasuonno") pursuant to Section 2.1 hereof.
"Person" shall mean any person, limited liability company,
partnership, trust, corporation, business, group, Government or other entity.
"Professional Fees" shall mean legal, accounting and investment
banking fees incurred in connection with the transactions contemplated hereby to
the persons listed on Schedule 1(b) not to exceed $1,000,000 in the aggregate,
payable by I33 on the Closing Date.
"Tax" or "Taxes" shall mean all federal, state, local, foreign and
other taxes, assessments or other Government charges, including, without
limitation, income, estimated
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income, business, occupation, franchise, property, sales, transfer, use,
employment, commercial rent or withholding taxes, including interest, penalties
and additions in connection therewith.
"Tax Return" means any return, report, information return or other
document (including any related or supporting information) required to be
supplied, or actually supplied, to a Governmental or Regulatory Authority with
respect to Taxes.
"Working Capital Contribution" shall mean AppNet's post-Closing
contribution to the capital of I33, of the amount set forth in and as such term
is defined in Section 3.4.
2. PRE-CLOSING TRANSACTIONS; STOCK PURCHASE
2.1. Pre-Closing Loan. As soon as practicable after all conditions to the
Closing (as defined in Section 3.1) shall have been satisfied or waived and
immediately prior to the Closing, AppNet shall make a loan to I33 (the "Loan")
in an amount requested by I33 which is equal to the Option Exercise Price
payable by I33 to acquire from Colasuonno all of her right, title and interest
in 25 shares of the Common Stock of I33 under that certain Stock Option
Agreement attached to Schedule 2.1 (the "Option Agreement"). I33 shall
immediately apply the proceeds of the Loan to pay the Option Exercise Price.
2.2. Contribution of the Loan. Immediately following the Closing, AppNet
shall contribute the Loan to the capital of I33.
2.3. Stock Purchase. On the basis of the representations, warranties,
covenants and agreements and subject to the satisfaction or waiver of the
conditions set forth herein, each of the Stockholders agrees to and will sell,
transfer, assign and deliver to AppNet on the Closing Date (as defined in
Section 3.1) good and marketable title to all of the Shares owned by such
Stockholder, free and clear of all liens, claims, restrictions or encumbrances
of any kind whatsoever, and AppNet agrees to and will purchase and accept from
the Stockholders all of the Shares owned by each of the Stockholders. The Shares
will constitute as of the Closing Date all of the issued and outstanding shares
of Common Stock.
2.4. Consideration for Purchase of Shares. In consideration for the
transfer, sale and delivery to AppNet of all of the issued and outstanding
Shares, AppNet will pay to the Stockholders, in accordance with their pro rata
share of the outstanding share ownership of I33 as of the Closing Date as set
forth on Schedule 1 (the "Pro Rata Shares"), the following amounts (in the
aggregate, the "Purchase Price"), subject to (a) increase pursuant to Section
6.12 for any Section 338 Adjustment Amount and (b) reduction pursuant to
Sections 2.4(d), 2.5 and 7.13, consisting of:
(a) The Cash Amount payable at the Closing, subject to adjustment as
provided herein;
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(b) Subordinated Convertible Promissory Notes (the "$3.5 Million
Notes") to be dated as of the Closing Date, in the aggregate principal sum of
$3,500,000, all in form and substance substantially identical to Exhibit A
attached hereto;
(c) Subordinated Convertible Promissory Notes (the "$6.8 Million
Notes") to be dated as of the Closing Date, in the aggregate principal sum of
$6,800,000, all in form and substance substantially identical to Exhibit B
attached hereto;
(d) The Purchase Price has been calculated based upon several
factors, including the assumption that the Net Worth of I33 will be equal to or
greater than $1,000,000 as of the Closing. If on the Closing Financial
Certificate (as defined in Section 7.13), the Net Worth of I33 is less than
$1,000,000, the Cash Amount to be delivered to the Stockholders may, at AppNet's
election, be reduced (as to each Stockholder in accordance with his Pro Rata
Share) by the difference between $1,000,000 and the Net Worth set forth on the
Closing Financial Certificate either (i) at the Closing or (ii) after completion
of the Post-Closing Audit (as defined in Section 2.5).
2.5. Post-Closing Adjustment.
(a) Within one hundred twenty (120) days following the Closing Date,
AppNet shall cause Arthur Andersen LLP ("AppNet's Accountant") to audit I33's
books to determine the accuracy of the information set forth on the Closing
Financial Certificate (the "Post-Closing Audit"). The Stockholders shall
cooperate and shall use their reasonable efforts to cause the officers and
employees of I33 to cooperate with AppNet and AppNet's Accountant after the
Closing Date in furnishing information, documents, evidence and other assistance
to AppNet's Accountant to facilitate the completion of the Post-Closing Audit
within the aforementioned time period. In the event that AppNet's Accountant
determines that the Net Worth of I33 as of the Closing Date was less than the
amount set forth as the Net Worth of I33 on the Closing Financial Certificate,
AppNet shall deliver a written notice (the "Financial Adjustment Notice") to the
Stockholders setting forth (i) the determination made by AppNet's Accountant of
the Net Worth of I33 (the "Audited Company Net Worth"), (ii) the Purchase Price
that would have been payable at Closing pursuant to Section 2.4 had the Audited
Company Net Worth been reflected on the Closing Financial Certificate, and (iii)
the amount, if any, by which the Cash Amount would have been reduced at Closing
had the Audited Company Net Worth been used in the calculations pursuant to
Section 2.4 (the "Adjustment"). The Adjustment shall take account of the
reduction, if any, to the Purchase Price already taken pursuant to Section
2.4(d).
(b) The Stockholders shall have thirty (30) days from the receipt of
the Financial Adjustment Notice to notify AppNet if the Stockholders dispute
such Financial Adjustment Notice. If AppNet has not received notice of such a
dispute within such 30-day period, AppNet shall be entitled to receive from the
Stockholders, in accordance with their Pro Rata Shares, the Adjustment, in cash,
on the thirtieth day after receipt of the Financial Adjustment Notice. If,
however, the Stockholders have delivered notice of such a dispute to AppNet
within such 30-day period, then AppNet's Accountant shall select an independent
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accounting firm that has not represented any of the parties hereto within the
preceding two (2) years to review I33's books, the Closing Financial Certificate
and Financial Adjustment Notice (and related information) to determine the
amount, if any, of the Adjustment. Such independent accounting firm shall be
confirmed by the Stockholders and AppNet within five (5) days of its selection,
unless there is an actual conflict of interest. The independent accounting firm
shall make its determination of the Adjustment, if any, within thirty (30) days
of its selection. The determination of the independent accounting firm shall be
final and binding on the parties hereto, and upon such determination, AppNet
shall be entitled to receive from the Stockholders, in accordance with their Pro
Rata Shares, the Adjustment, in cash. The costs of the independent accounting
firm shall be borne by the party (either AppNet or the Stockholders as a group)
whose determination of I33's Net Worth at Closing was further from the
determination of the independent accounting firm, or equally by AppNet and the
Stockholders in the event that the determination by the independent accounting
firm is equidistant between the Net Worth set forth on the Closing Financial
Certificate and the Audited Company Net Worth. If any Adjustment is determined
by the independent accounting firm to be due, the Adjustment shall be payable to
AppNet in cash by the Stockholders, in accordance with their Pro Rata Shares,
within five (5) days after such determination, or, at AppNet's election on or
after the sixth day after such determination, in its sole and absolute
discretion, AppNet shall offset the Adjustment against the $3.5 Million Notes,
in accordance with the Stockholder's Pro Rata Share, and in accordance with the
terms of the $3.5 Million Notes; provided, however, that compliance with the
procedures set forth in this Section 2.5 shall be deemed to be compliance with
the thirty day notice required prior to such offset. AppNet shall promptly,
after such offset, notify the Stockholders of the amount which was offset.
3. CLOSING
3.1. Time and Place of the Closing. The closing of the Stock Purchase and
the consummation of the other transactions contemplated by this Agreement (the
"Closing") shall take place at the offices of Kronish Lieb Weiner & Hellman LLP,
at 1114 Avenue of the Americas, New York, NY 10036, as soon as practicable after
all conditions to the Closing shall have been satisfied or waived, or at such
other time and date as the parties hereto may mutually agree, which date shall
be referred to as the "Closing Date."
3.2. Procedure at Closing. On the Closing Date, the parties agree to take
the following steps listed below (provided, however, that upon their completion
all such steps shall be deemed to have occurred simultaneously):
(a) The Stockholders and I33 shall deliver to AppNet the closing
documents specified in Section 7.
(b) AppNet shall deliver to the Stockholders the closing documents
specified in Section 8.
(c) The Stockholders shall deliver to AppNet certificates in valid
form representing all of the Shares, duly endorsed by the Stockholders in blank
or accompanied by
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duly executed stock powers in order to convey good and marketable title to all
of the Shares, free and clear of all liens, claims, restrictions or encumbrances
of any kind whatsoever.
(d) AppNet shall pay the Cash Amount by wire transfer of immediately
available funds to accounts designated by the Stockholders.
(e) AppNet shall deliver the $3.5 Million Notes and the $6.8 Million
Notes (together, the "Notes") to the Stockholders.
3.3. Intentionally Omitted. .
3.4. Capital Contributions. Immediately following the Closing, AppNet
shall contribute up to $1,000,000 to I33 for the purpose of satisfying I33's
obligation to pay the Professional Fees and $1,780,000 to I33 for working
capital purposes (the aggregate amount of such capital contributions, the
"Working Capital Contribution").
3.5. Note for the Benefit of Key Employees. At the Closing, AppNet shall
deliver to a trust for the benefit of current and future employees of I33, a
promissory note in the form set forth in Exhibit C in the aggregate amount of
$1,000,000 (reduced by any payroll and related taxes imposed on I33 and/or
AppNet), representing potential bonus payments to those employees. Upon payment
of the Employee Note, AppNet shall be entitled to deduct and withhold from such
payments such amount as AppNet and/or I33 is required to deduct and withhold
with respect to such bonus payments under the Code or any provision of state,
local or foreign Tax law.
4. REPRESENTATIONS AND WARRANTIES OF I33 AND THE STOCKHOLDERS
To induce AppNet to enter into this Agreement and to consummate the
transactions contemplated by this Agreement, I33 and the Stockholders, jointly
and severally, subject to the limitations set forth in Section 9.1(e), represent
and warrant to AppNet, as of the date hereof and as of the Closing Date, as set
forth below:
4.1. Organization. I33 is a corporation duly organized, validly existing
and in good standing under the laws of the State of New York.
4.2. Power and Authority. I33 has all requisite corporate power and
authority to own, lease and operate its properties and to conduct its Business.
I33 is duly qualified or licensed as a foreign corporation in good standing in
each jurisdiction in which the character of its properties or the nature of its
business activities requires such qualification, except where the failure to be
so qualified or licensed would not have a Material Adverse Effect on I33.
4.3. Authority for Agreement. The execution, delivery and performance of
this Agreement and the consummation of the transactions contemplated hereby have
been authorized by all requisite corporate action on the part of I33. I33 has
full corporate power, authority and
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legal right to enter into this Agreement and to consummate the transactions
contemplated hereby. Each of the Stockholders has the legal capacity to enter
into this Agreement and to consummate the transactions contemplated hereby. This
Agreement has been duly executed and delivered by each of the Stockholders and
is a legal, valid and binding obligation of each of the Stockholders enforceable
against each of the Stockholders in accordance with its terms, except as
enforceability may be limited by applicable bankruptcy, insolvency,
reorganization, moratorium or other similar laws affecting the enforcement of
creditors' rights in general. This Agreement has been duly executed and
delivered by I33 and, assuming the due authorization, execution and delivery by
AppNet of this Agreement, this Agreement is a legal, valid and binding
obligation of I33, enforceable against I33 in accordance with its terms, except
as enforceability may be limited by applicable bankruptcy, insolvency,
reorganization, moratorium or other similar laws affecting the enforcement of
creditors' rights in general.
4.4. No Violation to Result. The execution, delivery and performance of
this Agreement and the consummation of the transactions contemplated hereby and
the fulfillment of the terms hereof: (i) are not in violation or breach of, do
not conflict with or constitute a default under the Certificate of Incorporation
or Bylaws of I33 or any Contract to which I33 or either of the Stockholders is a
party, (ii) will not accelerate or permit the acceleration of the performance on
the part of I33 required by any of the terms of any Contract to which I33 is a
party or which affects I33; (iii) will not be an event which, after notice or
lapse of time or both, will result in any such violation, breach, conflict,
default, or acceleration; (iv) will not result in a violation under any law,
judgment, decree, order, rule, regulation, permit or other legal requirement of
any Governmental or Regulatory Authority, court or arbitration tribunal whether
federal, state, provincial, municipal or local (within the U.S. or otherwise),
at law or in equity, which is applicable to I33; and (v) will not result in the
creation or imposition of any Encumbrance in favor of any Person upon any of the
properties or assets of I33.
4.5. Capitalization.
(a) Schedule 4.5 sets forth, with respect to I33, (i) the number of
authorized shares of each class of its capital stock, (ii) the number of issued
and outstanding shares of each class of its capital stock and the record owner
thereof, and (iii) the number of shares of each class, if any, which are held in
treasury. All of the issued and outstanding shares of capital stock of I33 (A)
have been duly authorized and validly issued and are fully paid and
non-assessable, (B) were issued in compliance with all applicable state and
federal laws and (C) were not issued in violation of any preemptive rights or
rights of first refusal. No preemptive rights or rights of first refusal exist
with respect to the shares of capital stock of I33, and no such rights arise by
virtue of or in connection with the transactions contemplated hereby. There are
no outstanding or authorized rights, options, warrants, convertible securities,
subscription rights, conversion rights, exchange rights or other agreements or
commitments of any kind that could require I33 to issue or sell any shares of
its Common Stock (or securities convertible into or exchangeable for shares of
its Common Stock). Except as provided in the Option Agreement, there are no
outstanding stock appreciation, phantom stock, profit participation or other
similar rights with respect to I33, and no proxies, voting rights or other
agreements or understandings with respect
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to the voting or transfer of the capital stock of I33. Except as provided in the
Option Agreement, I33 is not obligated to redeem or otherwise acquire any of its
outstanding shares of capital stock.
(b) Except as set forth in Schedule 4.5, the Stockholders are the
sole legal and beneficial holders of the issued and outstanding shares of
capital stock of I33, and the Stockholders own such shares as are set forth
opposite their respective names on Schedule 4.5 free and clear of any mortgage,
security interest, pledge, hypothecation, assignment, deposit arrangement,
Encumbrance, lien (statutory or otherwise), charge, preference, priority or
other security agreement, option, warrant, attachment, right of first refusal,
preemptive right, conversion, put, call or other claim or right, restriction on
transfer, or preferential arrangement of any kind or nature whatsoever
(including any restriction on the transfer of any assets, any conditional sale
or other title retention agreement, any financing lease involving substantially
the same economic effect as any of the foregoing and the filing of any financing
statement under the Uniform Commercial Code or comparable law of any
jurisdiction).
4.6. Financial Statements.
(a) Schedule 4.6 includes true, complete and correct copies of (i)
the audited balance sheets of I33 as of the end of the periods ended December
31, 1997 and June 30, 1998 and audited statements of income, cash flows and
retained earnings for such periods (collectively, the "Annual Financials"), and
(ii) true, complete and correct copies of I33's unaudited interim balance sheet
(the "Current Balance Sheet") as of November 30, 1998 (the "Balance Sheet Date")
and I33's statement of income, cash flow and retained earnings for the eleven
(11) months ended November 30, 1998 (collectively, the "Interim Financials" and
together with the Annual Financials, the "Financial Statements"). The Financial
Statements have been prepared in accordance with GAAP consistently applied
(subject, in the case of the Interim Financials, to normal year-end audit
adjustments, which individually or in the aggregate will not be material, and
the absence of footnotes), except for the failure to record a corporate tax
liability for 1997 attributable to the failure set forth on Schedule 4.10 not in
excess of $200,000. Each of the balance sheets included in the Financial
Statements presents fairly the financial condition of I33 as of the dates
indicated thereon, and each of the statements of income, cash flows and retained
earnings included in the Financial Statements presents fairly the results of its
operations for the periods indicated thereon, except for the failure to record a
corporate tax liability for 1997 attributable to the failure set forth on
Schedule 4.10 not in excess of $200,000. During the periods covered by the
Financial Statements and since the Balance Sheet Date, there has been no
material change in I33's accounting policies. There are no material, special or
non-recurring items of income or expense during the periods covered by the
Financial Statements and the balance sheets included in the Financial Statements
do not reflect any write-up or revaluation increasing the book value of any
assets, except as specifically disclosed in the notes thereto.
(b) The books and records, minute books, stock record books, and
other records of I33, all of which have been made available to AppNet, are
complete and correct and have been maintained in accordance with sound business
practices (except for the failure to maintain current corporate minutes and for
the failure to record a corporate tax liability for 1997 attributable to the
failure set forth on Schedule 4.10 not in excess of $200,000).
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4.7. Liabilities and Obligations.
(a) Except as disclosed on Schedule 4.7(a), there are no Liabilities
or obligations of I33, other than: (i) those Liabilities reflected on the
Current Balance Sheet and not paid or discharged prior to the Closing Date; (ii)
those Liabilities incurred after the Balance Sheet Date arising in the ordinary
course of business or which were incurred under any contract, commitment or
agreement specifically disclosed on any schedule to this Agreement; (iii) the
Permitted Loans; (iv) the obligation to pay the Option Exercise Price pursuant
to the Stock Option Agreement; and (v) the obligation to pay the Professional
Fees.
(b) Schedule 4.7(b) sets forth a summary description of all advance
payments or deposits held by I33 and reflected in the Financial Statements and
the related obligations thereunder.
4.8. Adverse Changes. Except as set forth on Schedule 4.8, from June 30,
1998: (i) there has been no change in the condition (financial or otherwise),
Business, net worth, assets, properties, Liabilities or obligations (fixed,
contingent, known, unknown or otherwise) of I33 which has had or is likely to
have a Material Adverse Effect on I33, and there has been no event in the
conduct of the Business of I33 which might reasonably be expected to result in
any such Material Adverse Effect before or after the Closing Date; (ii) I33 has
not declared or paid any dividend or distribution in respect of the capital
stock, or any direct or indirect redemption, purchase or other acquisition of
any of the capital stock of I33, except for the payment of the Option Exercise
Price to be paid immediately prior to Closing, and (iii) I33 has complied with
all of the covenants set forth in Section 6.3, to the same extent as if this
Agreement had been executed on June 30, 1998.
4.9. Employee Matters.
(a) All employee benefit plans, programs, policies and arrangements
(whether formal or informal, written or unwritten, and whether maintained for
the benefit of a single individual or more than one individual) maintained or
contributed to by I33 for the benefit of any current or former employee of I33
or in which such employees are entitled to participate are listed in Schedule
4.9(a) (the "Benefit Plans"). With respect to each Benefit Plan, true, correct
and complete copies of all of the following documents, if applicable, will be
delivered or made available to AppNet substantially prior to the Closing Date:
(i) all plan documents and amendments thereto; (ii) all written descriptions of
any oral plans or policies; (iii) all trust agreements; (iv) all annuity
contracts, insurance policies or contracts and service agreements; (v) the three
(3) most recent Forms 5500 and any financial statements attached thereto; (vi)
the most recent actuarial and valuation report; (vii) the most recent IRS
determination letter; (viii) the most recent summary plan description; and (ix)
copies of all nondiscrimination testing for the last three (3) years. Except as
set forth on Schedule 4.9(a), each Benefit Plan and the administration thereof
complies, and has at all times complied, with the terms of such Benefit Plan and
with the requirements of all applicable law, including, without limitation, the
Employee Retirement Income Security Act of 1974, as amended ("ERISA"), and the
Internal Revenue Code of 1986, as amended (the "Code"). Except as set forth on
Schedule 4.9(a), each Benefit Plan
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intended to qualify under Section 401(a) of the Code so qualifies, and each
trust which forms a part of any such Benefit Plan is exempt from taxation under
Section 501(a) of the Code. No Benefit Plan subject to Part 3 of Title I of
ERISA has incurred any "accumulated funding deficiency" within the meaning of
Section 302 of ERISA or Section 412 of the Code. No liability has been incurred
or is expected to be incurred under Title IV of ERISA by any party with respect
to any Benefit Plan, or any other plan presently or heretofore maintained or
contributed to by I33, any predecessor to I33, or any entity that is or at any
time was a member of a controlled group, as defined in Section 412(n)(6)(B) of
the Code, which includes or included I33 ("Controlled Group Member"). Neither
I33, nor any Controlled Group Member has incurred any liability for any Tax
imposed under Sections 4971 through 4980B of the Code or civil liability under
Sections 502(i) or (l) of ERISA. The "amount of unfunded benefit liabilities"
within the meaning of Section 4001(a)(18) of ERISA does not exceed zero with
respect to any Benefit Plan subject to Title IV of ERISA. No Benefit Plan is a
"Multiemployer Plan" within the meaning of Section 3(37) of ERISA. No Benefit
Plan provides health or death benefit coverage to any employee or his spouse or
dependents beyond the termination of an employee's employment, except as
required by Part 6 of Subpart B of Title I of ERISA or Section 4980B of the
Code. No "reportable event" (within the meaning of Section 4043 of ERISA) has
occurred with respect to any Benefit Plan or any plan maintained by a Controlled
Group Member since the effective date of said Section 4043. I33 has no liability
(whether actual, contingent or otherwise) with respect to any employee benefit
plan or arrangement sponsored or maintained by a Controlled Group Member. No
suit, actions or other litigation (excluding claims for benefits incurred in the
ordinary course of plan activities) have been brought against or with respect to
any Benefit Plan, and no suit, action, or other litigation is threatened by,
against, or relating to any Benefit Plan and I33 does not have any knowledge of
any fact that could form the basis for any such suit, action or litigation. No
"prohibited transaction" within the meaning of Sections 406 or 407 of ERISA or
Section 4975 of the Code has occurred with respect to any Benefit Plan. No
Benefit Plan is presently under audit or examination by the IRS, the Department
of Labor, or any other Governmental or Regulatory Authority, and no matters are
pending with respect to any Benefit Plan under the IRS Voluntary Compliance
Resolution program, its Closing Agreement Program, or any other similar program.
All contributions to Benefit Plans that were required to be made under such
Benefit Plans will have been made as of the Balance Sheet Date, and all benefits
accrued under any unfunded Benefit Plan will have been paid, accrued or
otherwise adequately reserved in accordance with GAAP as of such date, and I33
will have performed by the Closing Date any obligations required to be performed
as of such date under all Benefit Plans. No Benefit Plan contains any term or
provision or is subject to any law that would prohibit the transactions
contemplated by this Agreement, or that would give rise to the vesting of
benefits, payments, or liabilities as a result of the transactions contemplated
by this Agreement, except to the extent that full vesting is required under any
tax-qualified Benefit Plan under Section 411 of the Code.
(b) Schedule 4.9(b) contains a complete and correct list of all
employees of I33 as of the date hereof and the current compensation rate payable
to each such employee. Except as set forth in Schedule 4.9(b), (i) the terms of
employment or engagement of all directors, officers, employees, agents,
consultants and professional advisers of I33 are such that their employment or
engagement may be terminated upon not more than two weeks' notice given
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at any time and without liability for payment of compensation or damages, (ii)
there are no severance payments which are or could become payable by I33 to any
director, officer or other employee of I33 under the terms of any oral or
written agreement or commitment or any law, custom, trade or practice, and (iii)
there are no agreements, contracts or commitments, oral or written, between I33
and any employee, consultant or independent contractor.
(c) I33 is not bound by or subject to (and none of its assets or
properties are bound by or subject to) any arrangement with any labor union. No
employees of I33 are or ever have been represented by any labor union or covered
by any collective bargaining agreement while employed by I33, and, to I33's
knowledge, no campaign to establish such representation is in progress. There is
no pending or threatened labor dispute involving I33 and any group of their
employees nor has I33 experienced any labor interruptions. I33 is and has been
in compliance with all applicable laws respecting employment and employment
practices, terms and conditions of employment, and wages and hours, including
without limitation any such laws regarding employment documentation, minimum
wage and hours, workers' compensation, family and medical leave, the Immigration
Reform and Control Act, and occupational safety and health requirements, and I33
has not engaged in any unfair labor practice. All persons classified by I33 as
independent contractors do satisfy and have satisfied the requirements of law to
be so classified, and I33 has fully and accurately reported their compensation
on IRS Forms 1099 when required to do so.
4.10. Taxes. Except as provided in Schedule 4.10:
(a) I33 has, since January 1, 1997, been an S corporation within the
meaning of Section 1361 of the Code and has been validly treated in a similar
manner for purposes of the income tax law of all states in which it has been
subject to taxation in which such treatment is legally available by election or
otherwise. I33 has filed or caused to be filed with the appropriate Governmental
or Regulatory Authority any and all Tax Returns required to be filed by it as of
the date hereof, or requests for extensions to file Tax Returns which have been
filed have been timely filed or granted and have not expired, and all such Tax
Returns are true, complete and accurate in all material respects, except to the
extent that such failures to file, have extensions granted that remain in effect
or be complete and accurate in all respects, as applicable, individually or in
the aggregate, would not have a Material Adverse Effect on I33. I33 has paid all
Taxes shown as due, claimed to be due by any Governmental or Regulatory
Authority, or accruable or properly owed with respect to periods through the
Closing Date except for such Taxes as (i) are fully reserved for in the Current
Balance Sheet, (ii) are attributable to any Section 338(h)(10) Election, or
(iii) were incurred after the Balance Sheet Date in the ordinary course of
business and are not due and payable as of the Closing Date. No deficiencies for
any Taxes have been proposed against I33 that are not adequately reserved for in
the Current Balance Sheet. No requests for waivers or comparable consents with
respect to the time to assess any Taxes against I33 have been granted or are
pending, except for requests with respect to such Taxes that have been
adequately reserved for in the Current Balance Sheet. I33 has complied in all
respects with all applicable laws, rules and regulations relating to the payment
and withholding of Taxes (including, without limitation, withholding of Taxes
pursuant to Sections 1441 and 1442 of the Code or similar provisions under any
foreign laws and withholding with respect to employee
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wages) and has, within the time and manner prescribed by law, withheld and paid
over to the proper Governmental or Regulatory Authority all amounts required to
be withheld and paid over under all applicable laws. No federal, state, local or
foreign audits or other administrative proceedings or court proceedings
("Audits") exist or have been initiated with regard to any Taxes or Tax Returns
of I33, and I33 has not received any notice that such an Audit is pending or
threatened with respect to any Taxes due from or with respect to I33 or any Tax
Return filed or required to be filed by or with respect to I33. Except as
provided in the Option Agreement, I33 is not a party to, is not bound by, and
has no obligation under, any tax sharing agreement, tax indemnification
agreement or similar contract or arrangement.
(b) I33 has delivered to AppNet complete and accurate copies of all
filed federal income Tax Returns of I33 relating to taxable years beginning
prior to the Closing Date, and all examination reports and statements of
assessment or deficiency issued regarding to such Tax Returns, and has delivered
or made available to AppNet complete and accurate copies of all other filed Tax
Returns of I33, together with all related examination reports and statements of
assessment or deficiency for all periods beginning prior to the Closing Date.
(c) I33 has not been informed by any Governmental or Regulatory
Authority that such authority believes that I33 was required to file any Tax
Return that has not been filed.
(d) I33 has not filed an election, consent or agreement under
Section 341(f) of the Code, and none of the assets of I33 are subject to an
election under Section 341(f) of the Code.
(e) I33 has no liability for the Taxes of any other person either as
a transferee under Section 6901 of the Code, or any similar provision of state,
local or foreign law, as a successor, or by contract or otherwise.
(f) Neither I33 nor any predecessor has ever been included or
required to be included, on any affiliated, consolidated, combined or unitary
Tax Return.
(g) I33 will not be required to include any amounts in income for
taxable years ending after the Closing Date pursuant to Section 481(a) of the
Code or any similar provision of state or local law by reason of a change in
accounting method occurring in a taxable year ending on or before the Closing
Date, and none of I33 nor the Stockholders has any knowledge that any
Governmental or Regulatory Authority has proposed any change in method of
accounting that would require inclusion of such amounts.
(h) I33 has not been a United States real property holding
corporation within the meaning of Section 897(c)(2) of the Code during the
applicable period specified in Section 897(c)(1)(A)(ii) of the Code.
4.11. Subsidiaries. I33 has no debt, equity or other investment or
interest in any Person or any strategic alliance with any Person. I33 has no
commitments to contribute to the capital of, make loans to or share losses of,
any Person.
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4.12. Property.
(a) I33 has never owned any real property. Schedule 4.12(a) sets
forth an accurate and complete list of all leases of real property leased by I33
(collectively, the "Facilities"). Except as otherwise disclosed on Schedule
4.12(a), (i) there are no outstanding written or oral leases, rights to
occupancy, or tenancies of any kind (including tenancies by sufferance and/or
holdover tenancies arising under expired written or oral leases) covering or in
any way affecting the Facilities or any part or parts thereof; (ii) no person,
firm or corporation other than I33 has any rights (including rights arising
under an installment contract, option to purchase, easement, right-of-way, or
otherwise) with respect to the Facilities or any part thereof; and (iii) there
have been no improvements to, construction on, work done at, and/or services or
material supplied to, the Facilities or any part or parts thereof for which
payment in full has not been made and which might give rise to mechanic's liens
or other lien rights with respect to the Facilities, except in the ordinary
course of business. All leases set forth on Schedule 4.12(a) are in full force
and effect and constitute valid and binding agreements of I33 and, to the
knowledge of I33, the other parties thereto in accordance with their respective
terms.
(b) Schedule 4.12(b) sets forth an accurate list of all I33 owned
and leased personal property (i) as of the Balance Sheet Date, or (ii) acquired
since the Balance Sheet Date, including in each case true, complete and correct
copies of leases for equipment and also including an indication as to which
assets are currently owned, or were formerly owned, by any current or former
stockholders of I33. All of the vehicles and other material machinery and
equipment listed on Schedule 4.12(b) are in good working order and condition,
ordinary wear and tear excepted. All fixed assets used by I33 that are material
to the operation of the Business, as it is presently being conducted, are either
owned by I33 or leased under an agreement listed on Schedule 4.12(b).
(c) Except as set forth on Schedule 4.12(c), I33 has good and
marketable title to its owned assets, free and clear of any and all Encumbrances
and defects in title. I33's assets, taken together, are adequate for the
operation of the Business as it is being currently conducted.
4.13. Contracts. Schedule 4.13 constitutes an accurate and complete list
of each Material Contract. Each Contract is in full force and effect, is a
valid, binding and enforceable obligation by or against I33 and, to the
knowledge of I33, the other parties thereto, and, except as disclosed on
Schedule 4.13, no event has occurred which constitutes or, with the giving of
notice or passage of time, or both, would constitute, a default or breach
thereunder. Prior to the Closing Date, I33 will deliver or will cause to be
delivered or will make available to AppNet correct and complete copies of each
Material Contract and all amendments thereto. Except as set forth on Schedule
4.13, there exists no restrictive covenants limiting the ability of I33 or any
Affiliate thereof to conduct its business.
4.14. Government Contracts. I33 is not, and has never been, a party to any
Government Contracts.
4.15. Litigation. Except as set forth in Schedule 4.15, there is no
litigation, suit, proceeding, action, claim, demand or investigation, at law or
in equity, pending or to the
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knowledge of I33 and the Stockholders threatened against or adversely affecting
I33 before any court, agency, authority or arbitration tribunal, including,
without limitation, any product liability, workers' compensation or wrongful
dismissal claims, or claims, actions, suits, demands or proceedings relating to
toxic materials, hazardous substances, pollution or the environment. To the
knowledge of I33 and the Stockholders, there are no facts that would likely
result in any such litigation, suit, proceeding, action, claim or investigation.
I33 is not subject to or in default with respect to any notice, order, writ,
injunction or decree of any court, agency, authority or arbitration tribunal.
4.16. Compliance with Laws. Except as set forth in Schedule 4.16 or
Schedule 4.10, I33 has complied and is currently in compliance with all laws,
regulations, rules, orders, permits, judgments, decrees and other requirements
and policies imposed by any Governmental or Regulatory Authority applicable to
it, its properties or the operation of its business. I33 has not received any
notice or citation for noncompliance with any of the foregoing, and there exists
no condition, situation or circumstance, nor has there existed such a condition,
situation or circumstance, which, after notice or lapse of time, or both, would
constitute noncompliance with or give rise to future liability with regard to
any of the foregoing. I33 has all licenses, permits, approvals, qualifications
or the like, from any Government, Governmental or Regulatory Authority or any
third party necessary for the conduct of I33's Business, as it is presently
being conducted, and all such items are in full force and effect, except as
disclosed in this Agreement.
4.17. Environmental and Safety Matters.
(a) For purposes of this Agreement, the term "Environmental and
Safety Requirements" shall mean all federal, state, local and foreign statutes,
regulations, ordinances and other provisions having the force or effect of law,
all judicial and administrative orders and determinations, all contractual
obligations and all common law, in each case concerning public health and
safety, worker health and safety and pollution or protection of the environment
(including, without limitation, all those relating to the presence, use,
production, generation, handling, transport, treatment, storage, disposal,
distribution, labeling, testing, processing, discharge, Release, threatened
Release, control or cleanup of any hazardous or otherwise regulated materials,
substances or wastes, chemical substances or mixtures, pesticides, pollutants,
contaminants, toxic chemicals, petroleum products or byproducts, asbestos,
polychlorinated biphenyls, noise or radiation); "Release" shall have the meaning
set forth in CERCLA (as defined below); and "Environmental Lien" shall mean any
lien, whether recorded or unrecorded, in favor of any Governmental or Regulatory
Authority, relating to any liability of I33 arising under any Environmental and
Safety Requirements.
(b) Except as set forth on Schedule 4.17:
(i) I33 has complied with and is currently in compliance with
all Environmental and Safety Requirements, and I33 has not received any oral or
written notice, report or information regarding any Liabilities (whether
accrued, absolute, contingent, unliquidated or otherwise) or any corrective,
investigatory or remedial obligations arising under Environmental and Safety
Requirements which relate to I33 or any of its properties or facilities.
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(ii) Without limiting the generality of the foregoing, I33 has
obtained and complied with, and is currently in compliance with, all permits,
licenses and other authorizations that may be required pursuant to any
Environmental and Safety Requirements for the occupancy of its properties or
facilities or the operation of their businesses. A list of all such permits,
licenses and other authorizations which are material to I33 is set forth on
Schedule 4.17 attached hereto.
(iii) Neither this Agreement nor the consummation of the
transactions contemplated by this Agreement shall impose any obligations on I33
or otherwise for site investigation or cleanup, or notification to or consent of
any Governmental or Regulatory Authorities or third parties under any
Environmental and Safety Requirements (including, without limitation, any so
called "transaction-triggered" or "responsible property transfer" laws and
regulations).
(iv) I33 has not treated, stored, disposed of, arranged for or
permitted the disposal of, transported, handled or Released any substance
(including, without limitation, any hazardous substance), or owned, occupied or
operated any facility or property, so as to give rise to Liabilities of I33 for
response costs, natural resource damages or attorneys fees pursuant to the
Comprehensive Environmental Response, Compensation and Liability Act of 1980, as
amended ("CERCLA"), or any other Environmental and Safety Requirements.
(v) Without limiting the generality of the foregoing, to I33's
knowledge, no facts, events or conditions relating to the past or present
properties, facilities or operations of I33 prevent, hinder or limit continued
compliance with Environmental and Safety Requirements, give rise to any
corrective, investigatory or remedial obligations pursuant to Environmental and
Safety Requirements or give rise to any other Liabilities (whether accrued,
absolute, contingent, unliquidated or otherwise) pursuant to Environmental and
Safety Requirements (including, without limitation, those Liabilities relating
to onsite or offsite Releases or threatened Releases of hazardous materials,
substances or wastes, personal injury, property damage or natural resources
damage).
(vi) I33 has not, either expressly or by operation of law,
assumed or undertaken any material liability or corrective, investigatory or
remedial obligation of any other Person relating to any Environmental and Safety
Requirements.
(vii) To the knowledge of I33, no Environmental Lien has
attached to any property leased or operated by I33.
4.18. Customers; Suppliers.
(a) Except as set forth in Schedule 4.18(a), no single customer
accounted for more than 5% of I33's revenues for the fiscal year ended December
31, 1997 or for the period January 1, 1998 through September 30, 1998. Except as
set forth on Schedule 4.18(a), no customer listed on Schedule 4.18(a) (a
"Significant Customer") has canceled or otherwise terminated or threatened to
cancel or otherwise terminate its relationship with I33, or during such periods
has materially decreased its usage or purchase of I33's services or products. To
I33's
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knowledge, no Significant Customer has any plan or intention to terminate,
cancel or otherwise materially modify its relationship with I33 or materially
decrease or limit its usage, purchase or distribution of the services or
products of I33.
(b) The relationships of I33 with its suppliers are good commercial
working relationships and, except as set forth on Schedule 4.18(b), no supplier
has during the last twelve months terminated or threatened to terminate, its
relationship with I33 or has during the last twelve (12) months decreased or
limited or threatened to decrease or limit, its services, supplies or materials
to I33. No supplier is a sole source of supply of any good or service to I33.
I33 does not have any knowledge that any of the suppliers intends to terminate
or otherwise modify adversely to I33 its relationship with I33 or to decrease or
limit its services, supplies or materials to I33.
4.19. Insurance. Schedule 4.19 sets forth an accurate list of all
insurance policies carried by I33 (all of which policies remain in full force
and effect) and all insurance loss runs or workers' compensation claims. I33 has
made available to AppNet true, complete and correct copies of all current
insurance policies of I33, all of which are in full force and effect. All
premiums due and payable under all such policies have been paid and I33 has not
received any notice of default or non-compliance with the terms of such policies
(or other policies providing substantially similar insurance coverage). Neither
I33 nor the Stockholders know of any threatened termination of, or material
premium increase with respect to, any of such policies.
4.20. Intellectual Property.
(a) Except as set forth on Schedule 4.20(a), I33 owns, or possesses
valid written licenses to use all patents, trademarks, trade names, service
marks, copyrights, and any applications therefor, maskworks, net lists,
schematics, technology, know-how, computer software programs and applications
and tangible or intangible proprietary information and material that are used in
the Business of I33 (the "Company Intellectual Property Rights"). Schedule
4.20(a) lists all Company Intellectual Property Rights owned by I33, and
specifies the jurisdictions in which the Company Intellectual Property Rights
are issued or registered or in which an application for such issuance and
registration has been filed, including the respective registration or
application numbers and the names of all registered owners. The filings in
respect of all such registrations and applications are in good standing, are
held solely in the name of I33 as the exclusive owner of all rights therein, and
all necessary steps have been taken to maintain such filings and to prosecute
the applications in a timely manner.
(b) Schedule 4.20(b) lists (i) all licenses, sublicenses and other
agreements to which I33 is a party and pursuant to which any person is
authorized to use any Company Intellectual Property Rights or any trade secret
material to I33 (and includes the identity of all parties thereto other than
non-exclusive product licenses and sublicenses granted by I33 in the ordinary
course of business); and (ii) all licenses, sublicenses and other agreements as
to which I33 is a party and pursuant to which I33 is authorized to use any third
party patents, trademarks or copyrights (including software) which are
incorporated in, are, or form a part of, any of I33's products or services, or
other trade secrets of a third party in or as to any product or service
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(collectively, the "Company Third Party Intellectual Property Rights"), and
includes the identity of all parties thereto, a description of the nature and
subject matter thereof, the applicable royalty and the term thereof. I33 is
authorized to use, in the manner used by I33, the Company Third Party
Intellectual Property Rights. Except as set forth on Schedule 4.20(b), I33 is
not, nor will it be as a result of the execution and delivery of this Agreement
or the performance of its obligations hereunder, in violation of any license,
sublicense or agreement described on Schedule 4.20(b) or by which it is
authorized to use Company Third Party Intellectual Property Rights.
(c) No claims with respect to Company Intellectual Property Rights,
any trade secrets of I33, or Company Third Party Intellectual Property Rights to
the extent arising out of any use, reproduction or distribution of such of
Company Third Party Intellectual Property Rights by or through I33, have been
asserted or are threatened by any person, nor, except as set out on Schedule
4.20(c), does I33 or any of the Stockholders know of any valid grounds for any
bona fide claims (i) to the effect that the manufacture, sale, licensing or use
of any product or service, as now used, sold or licensed or proposed for use,
sale or license by I33 infringes any copyright, patent, trademark, service mark,
trade secret or any other intellectual property right; (ii) against the use by
I33 of any trademarks, trade names, trade secrets, copyrights, patents,
technology, know-how or computer software programs and applications used in
I33's Business; (iii) challenging the ownership, validity or effectiveness of
any of Company Intellectual Property Rights or other trade secrets of I33; or
(iv) challenging I33's license or legally enforceable right to use, or the
validity or effectiveness of any Company Third Party Intellectual Property
Rights.
(d) Except as set forth on Schedule 4.20(d), I33 has entered into
all necessary agreements and obtained all necessary rights to acquire Company
Third Party Intellectual Property Rights. All agreements relating to Company
Third Party Intellectual Property Rights are in full force and effect for the
term set forth in each such agreement.
(e) All registered trademarks, service marks and copyrights held by
I33 are valid and subsisting. To I33's knowledge, there is no unauthorized use,
disclosure, infringement or misappropriation of any of Company Intellectual
Property Rights, any trade secrets of I33, or any of Company Third Party
Intellectual Property Rights to the extent licensed by or through I33, by any
third party, including any employee or former employee of I33. Except as set out
on Schedule 4.20(e), (i) I33 has not been sued or charged in writing as a
defendant in any claim, suit, action or proceeding which involves a claim or
infringement of any patent, trademarks, service marks, copyrights or violation
of any trade secret or other proprietary right of any third party; (ii) there is
no basis for any such charge or claim; and (iii) there is not any infringement
liability with respect to, or infringement or violation by, I33 of any patent,
trademark, service mark, copyright, trade secret or other proprietary right of
another.
(f) No Company Intellectual Property Rights, trade secrets of I33 or
Company Third Party Intellectual Property Rights are subject to any outstanding
order, judgment, decree, stipulation or agreement restricting in any manner the
licensing thereof by I33. Except for contracts licensing I33's products executed
in the ordinary course of business and in accordance with I33's past practices
(all of which contracts are listed on Schedule 4.13), I33 has not entered
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into any agreement to indemnify any other person against any charge of
infringement of any Company Intellectual Property Rights. Except as set forth on
Schedule 4.20(f), I33 is not and never has been engaged in any dispute or
litigation with an employee or former employee regarding matters pertaining to
intellectual property or assignment of inventions.
(g) Intentionally Omitted.
(h) The Company Intellectual Property Rights, at no additional cost
to AppNet (or I33, after the Closing Date), and without human intervention will:
(i) include year 2000 date conversion and capabilities
including, but not limited to, date data century
recognition; calculations which accommodate same century
and multi-century formulas and date values; correct sort
ordering; and date data interface values that reflect
the century;
(ii) automatically compensate for and manage and manipulate
data involving dates, including single century formulas
and multi-century formulas, and will not cause an
abnormal abort within the application or result in the
generation of incorrect values or invalid outputs
involving such dates;
(iii) provide that all date related user interface
functionalities and data fields include the indication
of the correct century;
(iv) provide that all date related software to software or
application to application data interface
functionalities will include the indication of the
correct century; and
(v) provide that all date processing by the Company
Intellectual Property Rights will include four-digit
date format and recognize and correctly process dates
for leap years.
4.21. Accounts Receivable. The accounts receivable of I33 arose in the
ordinary course of business from bona fide transactions and are not subject to
any setoff, counterclaim or defense. The accounts receivable (both billed and
unbilled) shall be fully collectible in accordance with their terms, subject to
any applicable reserves as of the Closing Date.
4.22. Inventory. All items of inventory and supplies of I33 consist of
items of a quality, quantity and condition usable and saleable in the ordinary
course of the business of I33 and for the purpose for which they are intended,
without discount or reduction, and conform to generally accepted standards in
the industry of which I33 is a part. The value of each item of inventory and
supplies reflected on the Financial Statements was, in each instance, valued at
the lower of cost or market value and based on the ordinary course of the
business consistent with the historical valuation policy of I33 and is not
subject to any write-down or write-off.
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4.23. Related Party Transactions. Schedule 4.23 sets forth all
arrangements, Liabilities, agreements and contracts in effect as of the date
hereof among I33 and (i) any Person who is an officer, director or Affiliate of
I33, any relative of any of the foregoing or any entity of which any of the
foregoing is an Affiliate, or (ii) any Person who acquired the Common Stock of
I33 in a private placement.
4.24. Brokers. Except as set forth on Schedule 4.24, no Person has or will
have, as a result of the transactions contemplated by this Agreement, any right,
interest or claim against or upon I33 or, to the knowledge of I33 or the
Stockholders, against or upon AppNet, for any commission, fee or other
compensation payable as a finder or broker because of any act or omission by I33
or the Stockholders. Except for the Professional Fees, which shall be paid at
the Closing by I33, the Stockholders shall be fully responsible for the payment
of all such commissions, fees and other compensation and shall deliver to AppNet
at Closing a release from the party disclosed on Schedule 4.24.
4.25. Intentionally Omitted
4.26. Intentionally Omitted
4.27. Accredited Investors; Investment Intent.
(a) AppNet has made available to each Stockholder, during the course
of this transaction and prior to the delivery of the Notes and the shares of
AppNet Common Stock into which the Notes are convertible (together, the
"Securities"), the opportunity to ask questions of and receive answers from any
of the officers of AppNet concerning the terms and conditions of the offering,
and to obtain any documents or additional information necessary to verify the
information provided to each Stockholder or otherwise relative to the financial
data and business of AppNet, to the extent that such parties possessed such
information or could acquire it without unreasonable effort or expense, and all
such questions, if asked, have been answered satisfactorily and all such
documents, if examined, have been found to be fully satisfactory.
(b) Each Stockholder understands and acknowledges that (i) such
Stockholder must bear the economic risk of such Stockholder's investment in the
Securities; (ii) the Securities have not been registered under the Securities
Act of 1933, as amended (the "1933 Act") or any state securities laws and are
being offered and sold in reliance upon exemptions provided in the 1933 Act and
state securities laws for transactions not involving any public offering and,
therefore, cannot be resold or transferred unless they are subsequently
registered under the 1933 Act and applicable state laws or unless an exemption
from such registration is available; (iii) such Stockholder is purchasing the
Securities for investment purposes only for such Stockholder's own account and
not with any view toward a distribution thereof; (iv) no Stockholder has any
contract, undertaking, agreement or arrangement with any person to sell,
transfer or pledge to such person or anyone else any of the Securities which
such Stockholder hereby subscribes to purchase or any part thereof, and no
Stockholder has any present plans to enter into any such contract, undertaking,
agreement or arrangement; (v) there will be no public market for the Securities;
and (vi) each Stockholder understands that AppNet is not obligated to comply
with any reporting requirements under the Securities Exchange Act of 1934, as
amended,
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and that AppNet makes no representation or warranty that it will disseminate to
the public any current financial or other information concerning itself, as is
required by Rule 144 promulgated under the 1933 Act as one of the conditions of
its availability.
(c) Each Stockholder has evaluated the risks of investing in the
Securities, and has determined that the Securities are a suitable investment for
such Stockholder. Each Stockholder can bear the economic risk of this investment
and can afford a complete loss of such Stockholder's investment.
(d) Each Stockholder is knowledgeable and experienced in evaluating
investments and experienced in financial and business matters, and is capable of
evaluating the merits and risks of investing in the Securities.
(e) Each Stockholder hereby represents that such Stockholder is a
resident of the State of New York. No Stockholder has any present intention of
becoming a resident of any other state or jurisdiction.
(f) Each Stockholder is an "Accredited Investor" as such term is
defined in Rule 501 of Regulation D promulgated under the 1933 Act in order to
qualify for the purchase of the Securities. Any information which each
Stockholder has heretofore furnished to AppNet with respect to such Stockholder
is correct and complete as of the date of this Agreement.
4.28. Intentionally Omitted.
4.29. Disclosure. No representation or warranty by I33 and the
Stockholders contained in this Agreement, and no representation, warranty or
statement by I33 or the Stockholders contained in any list, certificate,
schedule or other instrument, document, agreement or writing furnished or to be
furnished to, or made with, AppNet pursuant hereto or in connection with the
negotiation, execution or performance hereof, contains or will contain any
untrue statement by I33 or the Stockholders of a material fact or omits or will
omit to state any material fact necessary to make any statement of I33 or the
Stockholders herein or therein not misleading.
5. REPRESENTATIONS AND WARRANTIES OF APPNET
To induce I33 and the Stockholders to enter into this Agreement and to
consummate the transactions contemplated hereby, AppNet represents and warrants
to I33 and the Stockholders, as of the date hereof and as of the Closing Date,
as set forth below:
5.1. Due Organization. AppNet is a corporation duly organized, validly
existing and in good standing under the laws of the State of Delaware.
5.2. Power and Authority. AppNet has all requisite corporate power and
authority to own, lease and operate its properties and to conduct its Business.
AppNet is duly qualified or licensed as a foreign corporation in good standing
in each jurisdiction in which the character of its properties or the nature of
its business activities requires such qualification, except where the failure to
be so qualified or licensed would not have a Material Adverse Effect on AppNet.
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5.3. Authority for Agreement. The execution, delivery and performance of
this Agreement and the consummation of the transactions contemplated hereby have
been authorized by all requisite corporate action on the part of AppNet. AppNet
has full corporate power, authority and legal right to enter into this Agreement
and to consummate the transactions contemplated hereby. This Agreement has been
duly executed and delivered by AppNet and, assuming the due authorization,
execution and delivery by I33 and the Stockholders of this Agreement, this
Agreement is a legal, valid and binding obligation of AppNet enforceable against
AppNet, in accordance with its terms, except as enforceability may be limited by
applicable bankruptcy, insolvency, reorganization, moratorium or other similar
laws affecting the enforcement of creditors' rights in general.
5.4. No Violation to Result. The execution, delivery and performance of
this Agreement and the consummation of the transactions contemplated hereby and
the fulfillment of the terms hereof: (i) are not in violation or breach of, do
not conflict with or constitute a default under, and will not accelerate or
permit the acceleration of the performance required by, any of the terms of the
Certificate of Incorporation or Bylaws of AppNet or any contract to which AppNet
is a party or which affects AppNet; (ii) will not be an event which, after
notice or lapse of time or both, will result in any such violation, breach,
conflict, default, or acceleration; (iii) will not result in a violation under
any law, judgment, decree, order, rule, regulation, permit or other legal
requirement of any Governmental or Regulatory Authority, court or arbitration
tribunal whether federal, state, provincial, municipal or local (within the U.S.
or otherwise), at law or in equity, and applicable to AppNet; and (iv) will not
result in the creation or imposition of any Encumbrance in favor of any Person
upon any of the properties or assets of AppNet.
5.5. Brokers and Agents. No Person has or will have, as a result of the
transactions contemplated by this Agreement, any right, interest or claim
against or upon AppNet or, to the knowledge of AppNet, against or upon I33 or
the Stockholders (other than as disclosed in Section 4.24) for any commission,
fee or other compensation payable as a finder or broker because of any act or
omission by AppNet.
5.6. Capitalization. Schedule 5.6 sets forth, with respect to AppNet, (i)
the number of authorized shares of each class of its capital stock, (ii) the
number of issued and outstanding shares of each class of its capital stock and
the record owner thereof, and (iii) the number of shares of each class, if any,
which are held in treasury. Except as set forth on Schedule 5.6, no preemptive
right or rights of first refusal exist with respect to the shares of capital
stock of AppNet, and no such rights arise by virtue of or in connection with the
transactions contemplated hereby. Except as set forth on Schedule 5.6, there are
no outstanding or authorized rights, options, warrants, convertible securities,
subscription rights, conversion rights, exchange rights or other agreements or
commitments of any kind that could require AppNet to issue or sell any shares of
its capital stock (all of the foregoing, the "AppNet Issuance Agreements").
Schedule 5.6 sets forth the identity of the holder of each AppNet Issuance
Agreement, the type of agreement to which such holder is a party, the class and
number of shares of capital stock subject to each such agreement, and the
exercise price or conversion price, or other similar information concerning the
consideration such holder is required to tender in exchange for such shares of
the capital stock of AppNet. Schedule 5.6
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identifies each agreement pursuant to which any of GTCR Golder Rauner, L.L.C.
("GTCR"), Smart Technology, L.L.C. ("Smart Technology"), and their respective
Affiliates, has acquired shares of the capital stock of AppNet. There are no
outstanding stock appreciation, phantom stock, profit participation or other
similar rights with respect to AppNet. Except as set forth on Schedule 5.6,
AppNet is not obligated to redeem or otherwise acquire any of its outstanding
shares of capital stock.
6. COVENANTS
6.1. Access to Properties and Records.
(a) I33 shall afford to the officers, employees, attorneys,
accountants and other authorized representatives of AppNet, free and full access
to all of I33's assets, properties, books and records and employees in order to
afford AppNet as full an opportunity of review, examination and investigation as
they shall desire to make of the affairs of I33, and AppNet shall be permitted
to make extracts from, or take copies of, such books, records (including the
stock record and minute books) or other documentation as may be reasonably
necessary. I33 shall furnish or cause to be furnished to AppNet such reasonable
financial and operating data and other information about I33's Business, as it
is presently being conducted, as it has been conducted in the past and as it is
proposed to be conducted in the future, properties and assets which any of the
officers, employees, attorneys, accountants or other authorized representatives
of AppNet may reasonably request; provided that AppNet and its agents shall not
unreasonably interfere with the operations of I33's Business. No information or
knowledge obtained in any investigation pursuant to this Section 6.1 shall
affect or be deemed to modify any representation or warranty contained herein or
the conditions to the obligations of the parties to consummate the transactions
contemplated by this Agreement.
(b) AppNet shall afford to the officers, employees, attorneys,
accountants and other authorized representatives of I33, access to such of
AppNet's assets, properties, books and records and employees in order to afford
I33 as full an opportunity of review, examination and investigation as they
shall reasonably request of the affairs of AppNet, and I33 shall be permitted to
make extracts from, or take copies of, such books, records (including the stock
record and minute books) or other documentation thereof as may be reasonably
necessary. AppNet shall furnish or cause to be furnished to I33 such reasonable
financial and operating data and other information about AppNet's Business, as
it is presently being conducted, as it has been conducted in the past and as it
is proposed to be conducted in the future, properties and assets which any of
the respective officers, employees, attorneys, accountants or other authorized
representatives of I33 may reasonably request; provided that I33 and its agents
shall not unreasonably interfere with the operations of AppNet's Business. No
information or knowledge obtained in any investigation pursuant to this Section
6.1 shall affect or be deemed to modify any representation or warranty contained
herein or the conditions to the obligations of the parties to consummate the
transactions contemplated by this Agreement.
6.2. Confidentiality.
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(a) I33 and the Stockholders recognize and acknowledge that they
have in the past, currently have, and in the future may possibly have, access to
certain confidential information of I33 and/or AppNet, such as lists of
customers, operational policies, and pricing and cost policies, that are
valuable, special and unique assets of I33's or AppNet's respective businesses.
I33 and the Stockholders agree that they will not disclose confidential
information with respect to I33 (except in the ordinary course of business)
and/or AppNet to any Person for any purpose or reason whatsoever (except to
authorized representatives of I33, AppNet and to counsel and other advisers,
provided that such advisors (other than counsel) agree to the confidentiality
provisions of this Section 6.2), unless (i) such information becomes known to
the public generally through no fault of I33 or the Stockholders, (ii)
disclosure is required by law or the order of any Governmental or Regulatory
Authority under color of law, or (iii) the disclosing party reasonably believes
that such disclosure is required in connection with the prosecution of a lawsuit
against AppNet, or the defense of a lawsuit against the disclosing party or for
certification or state licensure purposes; provided, that prior to disclosing
any information pursuant to clauses (ii) or (iii) above, I33 or the
Stockholders, shall, if possible, give prior written notice thereof to AppNet
and provide AppNet with the opportunity to contest such disclosure.
(b) AppNet recognizes and acknowledges that it has in the past,
currently has, and in the future may possibly have, access to certain
confidential information of I33, such as lists of customers, operational
policies, and pricing and cost policies that are valuable, special and unique
assets of I33's business. AppNet agrees that prior to the Closing it will not
disclose confidential information with respect to I33 and/or the Stockholders to
any Person, for any purpose or reason whatsoever (except to authorized
representatives of AppNet, I33, and/or the Stockholders and to counsel and other
advisers, provided that such advisors (other than counsel) agree to the
confidentiality provisions of this Section 6.2), unless (i) such information
becomes known to the public generally through no fault of AppNet, (ii)
disclosure is required by law or the order of any Governmental or Regulatory
Authority under color of law, or the (iii) AppNet reasonably believes that such
disclosure is required in connection with the prosecution of a lawsuit against
I33 or the Stockholders, or the defense of a lawsuit against AppNet or for
certification or state licensure purposes; provided, that prior to disclosing
any information pursuant to clauses (ii) or (iii) above, AppNet, shall, if
possible, give prior written notice thereof to I33 and the Stockholders and
provide I33 and the Stockholders with the opportunity to contest such
disclosure.
6.3. Interim Covenants of I33. From the date of this Agreement until the
Closing Date, except to the extent expressly permitted by this Agreement or
otherwise consented to by an instrument in writing signed by AppNet, I33 shall
(i) keep I33's Business, as it is presently being conducted and as it is
proposed to be conducted in the future, and organization intact and shall not
take or permit to be taken or do or suffer to be done anything other than in the
ordinary course of its business as the same is presently being conducted, (ii)
use its reasonable best efforts to keep available the services of its directors,
officers, employees, independent contractors and agents and retain and maintain
good relationships with its clients and maintain the Facilities in good
condition, (iii) perform its obligations under the Contracts and Government
Contracts and (iv) maintain the goodwill and reputation associated with its
Business, as it is presently being
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conducted and how it is proposed to be conducted in the future. Without limiting
the generality of the foregoing, I33 shall not, without the prior written
consent of AppNet:
(a) Adopt or propose any change in its Certificate of Incorporation
or Bylaws;
(b) Merge or consolidate with any other entity or acquire a material
amount of assets of any other entity;
(c) Issue or sell any stock, bonds, or other securities of which I33
is the issuer or grant, issue or change any stock options, warrants or other
rights to purchase securities of I33;
(d) Amend any term of any outstanding security of I33;
(e) Sell, lease or dispose of or make any contract for the sale,
lease or disposition of or subject to lien or security interest or any other
Encumbrance any of its properties or assets, other than in the ordinary and
usual course of its business, consistent with the representations and warranties
contained herein, and not in breach of any of the provisions of this Section 6;
(f) Except as set forth on Schedule 6.3 and the payment of the
Employee Bonuses, grant any salary increase to, or increase the draw of, any of
its officers, directors, employees or agents, or enter into any new, or amend or
alter any existing, employment, bonus, incentive compensation, deferred
compensation, profit sharing, retirement, severance, pension, stock option,
group insurance, death benefit or other fringe benefit plan, trust agreement or
other similar or dissimilar arrangement, or any employment or consulting
agreement except consistent with past compensation practices;
(g) Incur any bank indebtedness or borrowings, whether or not in the
ordinary course of its business, or issue any commercial paper;
(h) Except as set forth on Schedule 6.3, enter into any leases of
real property or any material leases of equipment and machinery;
(i) Except in the ordinary course of business or as disclosed in
this Agreement, enter into any contract, (i) which would be required to be
listed on Schedule 4.13 as a Material Contract had it been entered into prior to
the date hereof; or (ii) in which any Affiliate of I33 or any of the
Stockholders has any beneficial interest;
(j) Except as set forth on Schedule 6.3, redeem, purchase or
otherwise acquire, directly or indirectly, any shares of its capital stock or
debt securities or any option, warrant or other right to purchase or acquire any
such shares, or declare or pay any dividend or other distribution (whether in
cash, stock or other property) with respect to its capital stock;
(k) Except as set forth on Schedule 6.3, create, incur or assume any
liability or indebtedness, except in the ordinary course of business consistent
with past practices; or postpone or defer the creation, incurrence, or
assumption of any liability or indebtedness that
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would otherwise be created, incurred or assumed in the ordinary course of
business absent the execution of this Agreement;
(l) Pay or apply any of its assets to the direct or indirect
payment, discharge, satisfaction or reduction of any obligation, directly or
indirectly, to or for the benefit of I33 or any Affiliate thereof except for
payments to I33's Affiliates in accordance with past practice;
(m) Split, combine or reclassify any of its capital stock or issue
or authorize the issuance of any other securities in respect of, in lieu of or
in substitution for shares of its capital stock;
(n) Acquire or negotiate for the acquisition of (by merger,
consolidation, purchase of a substantial portion of assets or otherwise) any
business or the start-up of any new business, or otherwise acquire or agree to
acquire any assets that are material, individually or in the aggregate, to I33;
(o) Amend or terminate any Contract, Government Contract, permit,
license or other right; or
(p) Enter into any other transaction (i) that is not negotiated at
arm's length with a third party affiliated with I33 or any officer or director
of I33 or the Stockholders, (ii) outside the ordinary course of business
consistent with past practice or (iii) prohibited hereunder.
6.4. No Solicitation. Neither I33 (its officers or directors), the
Stockholders, nor any agent or any representative thereof, shall during the
period commencing on the date of this Agreement and ending with the earlier to
occur of the Closing or the termination of this Agreement in accordance with its
terms, directly or indirectly: (a) solicit, encourage or initiate the submission
of proposals or offers from any person or entity for, (b) participate in any
discussions pertaining to, or (c) furnish any information to any Person, other
than AppNet, relating to, any acquisition or purchase of all or a material
amount of the assets of, or any equity interest in, I33 or a merger,
consolidation or business combination involving I33. If I33 or any of the
Stockholders receives any unsolicited offer or proposal relating to any of the
above, I33 or the Stockholders shall immediately notify AppNet thereof, and
provide to AppNet all information relating thereto, including a copy of such
offer or proposal, the identity of the party making such offer or proposal and
the specific terms of such offer or proposal.
6.5. Notification of Certain Matters. I33 shall give prompt notice to
AppNet of (a) the occurrence or non-occurrence of any event the occurrence or
non-occurrence of which would be likely to cause any representation or warranty
of I33 or the Stockholders contained herein to be untrue or inaccurate in any
material respect at or prior to the Closing Date and (b) any material failure of
I33 or the Stockholders to comply with or satisfy any covenant, condition or
agreement to be complied with or satisfied by I33 or the Stockholders hereunder.
AppNet shall give prompt notice to I33 of (a) the occurrence or non-occurrence
of any event the occurrence or non-occurrence of which would be likely to cause
any representation or warranty of AppNet contained herein to be untrue or
inaccurate in any material respect at or prior to the Closing Date
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and (b) any material failure of AppNet to comply with or satisfy any covenant,
condition or agreement to be complied with or satisfied by AppNet hereunder. The
delivery of any notice pursuant to this Section 6.5 shall not, without the
express written consent of the receiving party, be deemed to (A) modify the
representations or warranties hereunder, (B) modify the conditions set forth in
Sections 7 or 8 hereof, as the case may be, or (C) limit or otherwise affect the
remedies available hereunder to any party hereto.
6.6. Tax Return Preparation, Filing and Payment.
(a) The Stockholders shall prepare or cause to be prepared the
income Tax Returns of I33 for all taxable periods ending on or before the
Closing Date (other than a return for a taxable period both beginning and ending
on the Closing Date), which shall be delivered to AppNet for review and comment
no later than 30 days prior to the required filing dates of such Tax Returns
(without regard to extensions).
(b) AppNet shall (i) prepare or cause to be prepared all Tax Returns
of I33 other than those referred to in Section 6.6(a) which are due after the
Closing Date, (ii) timely file or cause to be filed all Tax Returns which are
required to be filed by I33 after the Closing Date, and (iii) timely pay or
cause to be paid all Taxes shown to be due on all such Tax Returns which are so
filed; provided that such payment obligation shall not be in derogation of any
claim for indemnification to which AppNet may be entitled as a result of the
incurrence of such Tax liability pursuant to Section 9 of this Agreement. In the
case of any Tax Return of I33 prepared under this Section 6.6(b) for any period
which includes the Closing Date, not less than 30 days before the date any such
Tax Return is filed, AppNet shall provide a copy of such Tax Return to the
Stockholders for review and comment.
(c) All Tax Returns prepared pursuant to Section 6.6(a) or (b) which
include any period through the Closing Date shall be made, to the extent
permitted by law, in a manner consistent with prior practice with respect to the
Tax Returns of I33 and with the terms of this Agreement, provided that Tax
Returns prepared pursuant to Section 6.6(a) shall not adopt or change any method
of accounting or make any election which would be binding on I33 for taxable
years beginning on or after the Closing Date unless consented to by AppNet.
AppNet shall not cause or permit I33 at any time to take a tax position
inconsistent with the provisions of this Agreement except to the extent required
by law (based upon the opinion of AppNet's counsel) after consultation with the
Stockholders.
(d) Taxes payable by I33 with respect to Tax Returns for periods
which include the Closing Date shall be allocated to the portion of the taxable
period ending on the Closing Date on a closing of the books or specific
identification basis if reasonably possible, and otherwise shall be deemed to be
allocable to such portion of the period in an amount equal to the amount of such
Tax for the entire taxable period multiplied by a fraction the numerator of
which is the number of days in the taxable period ending on the Closing Date and
the denominator of which is the number of days in the entire taxable period.
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(e) In the event that there is a disagreement among the parties as
to the computations of Tax liability to be shown in any Tax Return of I33
required to be filed by or on behalf of I33 after the Closing Date which are
described in Section 6.6(a) or the last sentence of Section 6.6(b), the parties
shall attempt to resolve their differences in good faith. If they cannot reach
complete agreement within fifteen (15) days, each party shall select a Tax
expert from their outside accounting firm or law firm knowledgeable in the area
of the dispute, and such experts shall attempt to resolve the differences. Each
party shall be responsible for the costs and fees of its expert. If the experts
are unable to reach an agreement, the matter shall be submitted to binding
arbitration in accordance with Section 11.11 hereof. If such dispute cannot be
resolved prior to the last date permitted for timely filing of such Tax Return,
any return prepared pursuant to Section 6.6(b) shall be filed as may be directed
by AppNet, but shall be promptly amended to conform to any later resolution of
such dispute, and any return prepared pursuant to Section 6.6(a) shall be filed
reflecting any position reasonably requested by the Stockholders, provided that
a reporting position shall be considered to be reasonably requested by the
Stockholders unless I33's signing return preparer advises that such position
does not have a reasonable basis (within the meaning of Section 6662 of the
Code), in which case such items shall be reflected in I33's Tax Return as
requested by the Stockholders only if tax counsel selected jointly by the
Stockholders and AppNet advises such return preparer in writing that such
position does have a reasonable basis, and that the position is not an adoption
or change in method of accounting or election that would have binding continuing
effect on I33 in succeeding taxable years, and the Stockholders shall indemnify
and hold AppNet and I33 harmless from and against any Damages (as defined in
Section 9.1), Taxes or other costs (including professional fees) resulting from
or arising out of any audit of I33 in connection with such reporting position.
(f) AppNet, I33 and the Stockholders shall cooperate fully, as and
to the extent reasonably requested by the other party, in connection with the
filing of Tax Returns and any audit, litigation or other proceeding with respect
to Taxes. Such cooperation shall include the retention and (upon reasonable
request) the provision of records and information which are reasonably relevant
to any such audit, litigation or other proceeding.
6.7. Regulatory and Other Approvals. Subject to the terms and conditions
of this Agreement, each of I33 and AppNet will proceed diligently and in good
faith to, as promptly as practicable, (a) obtain all consents, approvals or
actions of, make all filings with and give all notices to Governmental or
Regulatory Authorities or any other public or private third parties required of
AppNet, I33 or the Stockholders to consummate the Stock Purchase and the other
matters contemplated hereby, and (b) provide such other information and
communications to such Governmental or Regulatory Authorities or other public or
private third parties as the other party or such Governmental or Regulatory
Authorities or other public or private third parties may reasonably request in
connection therewith.
6.8. Benefits Plans. Prior to Closing, if requested by AppNet, I33 agrees
to take any and all steps necessary in order to cease all accruals of benefits
or contributions under each Benefit Plan, to terminate each Benefit Plan as of
the Closing Date, and to distribute to the participants of each Benefit Plan
their accrued benefits thereunder, in accordance with the terms
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of each Benefit Plan and all applicable laws including, without limitation, the
provisions of Section 401(k)(10) of the Code.
6.9. Reasonable Efforts. Subject to the terms and conditions of this
Agreement, each of the parties hereto agrees to use all reasonable efforts
promptly to take, or cause to be taken, all actions and do or cause to be done,
all things necessary, proper or advisable under applicable laws and regulations
to consummate and make effective the transactions contemplated by this Agreement
including the satisfaction of all conditions thereto.
6.10. Stock Options. At the Closing, AppNet shall grant to Nathan Foreman
fully-vested incentive stock options under AppNet's Incentive Stock Option Plan
to purchase 220,000 shares of AppNet's Common Stock at a price of $4.50 per
share. In addition to such grant to Nathan Foreman, options to purchase 300,000
shares of AppNet Common Stock shall be made available promptly after the Closing
Date for issuance to key employees of I33 at a price of $4.50 per share, as
determined by the President of I33 in accordance with AppNet's policies, and
authorized and issued under the terms of AppNet's Incentive Stock Option Plan.
None of these options may be granted to the Stockholders.
6.11. Payment of Certain Obligations. Immediately following the Closing,
AppNet shall cause I33 to pay the Professional Fees and to repay the Permitted
Loans (as defined in Section 7.13), and to pay any Employee Bonuses which had
not been paid prior to Closing.
6.12. Section 338(h)(10) Election. If in AppNet's sole discretion such
elections are deemed to be desirable, the Stockholders shall, subject to Section
6.12(a), execute promptly upon presentation by AppNet such documents as are
necessary to join in or perfect any elections that AppNet may desire make under
Section 338(h)(10) of the Code and Treasury Regulation Section
1.338(h)(10)-1(d)(2) and similar state law provisions in all applicable states
which permit corporations to make such elections, with respect to the sale and
purchase of the Shares pursuant to this Agreement (all such federal and state
income tax elections are collectively referred to herein as the "Section
338(h)(10) Election"). If AppNet desires to cause the Section 338(h)(10)
Election to be made, AppNet will have the sole responsibility for assuring that
such elections are validly and timely made. The Stockholders will cooperate with
AppNet and promptly make available on AppNet's reasonable request any
information necessary for AppNet's evaluation of whether to make the Section
338(h)(10) election and for completion of such elections. If AppNet decides that
it may be desirable to make the Section 338(h)(10) Election:
(a) AppNet shall give the Stockholders notice of AppNet's desire to
make the Section 338(h)(10) Election (an "Election Notice"), which shall be
accompanied by AppNet's proposed allocation of the "deemed sale price" to each
asset of I33 in accordance with Treasury Regulation Section 1.338(h)(10)-1(f)
and the other regulations under Section 338 of the Code, no later than sixty
(60) days before the Section 338(h)(10) Election is to be made. If AppNet shall
give an Election Notice in accordance with the preceding sentence, and AppNet
determines to make the Section 338(h)(10) election, AppNet shall advise the
Stockholders, as promptly as practicable of those actions that AppNet reasonably
considers necessary and appropriate for the Stockholders to take (including the
execution and filing of such forms, returns, schedules and
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other documents as may be required) to effect, preserve, or perfect a timely
Section 338(h)(10) Election. The Stockholders agree to take such actions so
advised by AppNet pursuant to the preceding sentence, provided that (i) AppNet
shall be solely responsible for, and shall pay all costs and expenses (including
professional fees) incurred by the Stockholders or anyone else at the request of
AppNet in connection with the preparation and filing of the forms, returns,
schedules and other documents necessary for making any Section 338(h)(10)
Election and (ii) the Stockholders shall not be obligated to join in such
Section 338(h)(10) Election unless AppNet shall first have paid to each
Stockholder, in cash, an estimate, determined in accordance with Section 6.12(b)
through Section 6.12(h), of the sum of (i) the Section 338 Stockholder Increase
(as defined in Section 6.12(b)) and (ii) the Gross-Up Tax Amount (as defined in
Section 6.12(f)) (together, the "Section 338 Adjustment Amount").
(b) As used herein, "Section 338 Stockholder Increase" shall mean,
with respect to each Stockholder, the amount by which -
(i) the present value (using the interest rate specified by
Section 6.12(d)(ii)), on the date the estimate of the Section 338 Adjustment
Amount shall be paid by AppNet, of the total federal and state income tax (plus
all applicable interest, penalties and additions to tax determined under
principles set forth in Section 6.12(d)(iii)) that will be payable by such
Stockholder with respect to the sale of such Stockholder's Shares to AppNet if
the Section 338(h)(10) Election is made exceeds.
(ii) the present value (using the interest rate specified by
Section 6.12(d)(ii)) on such date of the total federal and state income tax
(plus all applicable interest, penalties and additions to tax determined under
principles set forth in Section 6.12(d)(iii)) that would have been payable by
such Stockholder had the Section 338(h)(10) Election not been made (the "Base
Case").
(c) For purposes of computing the Base Case:
(i) It shall be assumed that, had the Section 338 Election not
been made, the Stockholders would have recognized capital gain and no ordinary
income (except for interest on the Notes) on the sale of their shares.
(ii) It shall be assumed that the Stockholders would have been
entitled to report the sale of their Shares on the installment basis for federal
income tax purposes (pursuant to Section 453 of the Code) and for state income
tax purposes to the extent that the relevant state permits (or would permit)
installment reporting .
(d) For purposes of calculating the Section 338 Stockholder Increase
for any Stockholder:
(i) The tax referred to in subparagraphs (i) and (ii) of
Section 6.12(b) will be calculated on a stand-alone basis solely with respect to
the items of income attributable to the Stockholder's ownership and disposition
of the Stockholder's Shares without regard to any
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other items on such Stockholder's Tax Return and assuming that such Stockholder
pays tax on ordinary income at the highest marginal income tax rate applicable
to individuals in the jurisdiction in which such income is taxable.
(ii) The present value of any future tax obligations of a
Stockholder shall be calculated using the annual Applicable Federal Rate for
short-term obligations in effect as of the date the estimate of the Section 338
Adjustment Amount shall be paid to the Stockholder.
(iii) Federal and state income tax considered to be payable by
a Stockholder shall include interest, penalties and additions to tax
("Additional Amounts"), but only to the extent that such Additional Amounts are
incurred by the Stockholder as a result of delay in filing or payment caused by
acceleration in the required filing date and/or an increase in the amount
required to be paid as of any date incident to the making of the Section
338(h)(10) Election (assuming for this purpose that all other filing and payment
obligations have been duly and timely complied with by the Stockholder, that
payment of Additional Amounts that are excusable for reasonable cause will be
waived under the principles of Treasury Regulation Section 1.338-1(f), and that
payment of any additional federal and state income taxes due as a result of the
Section 338(h)(10) Election is made by the Stockholder five business days after
the date that the estimate of the Section 338 Adjustment Amount is paid to the
Stockholder).
(e) Solely for purposes of computing the estimate of the Section 338
Stockholder Increase required to be paid by Section 6.12(a) and not for purposes
of computing any adjustments to the estimated Section 338 Stockholder Increase
under Section 6.12(i):
(i) It shall be assumed that the deemed sale of assets of I33
and distribution of the deemed sale proceeds in liquidation to the Stockholders,
will be reported on the installment basis for federal income tax purposes
(pursuant to Section 453 of the Code) and for state income tax purposes.
(ii) It shall be assumed that there will be no change after
the date that notice of the estimate of the Section 338 Adjustment Amount is
given to AppNet under Section 6.12(g) hereof (the "Estimate Notice Date") that
would affect the provisions of, or rates of tax under, any applicable federal or
state income tax laws for any taxable year beginning after December 31, 1998.
(iii) It shall be assumed that there will be no change after
the Estimate Notice Date in the state(s) in which such Stockholder shall be
required to pay income tax (by reason of change of such Stockholder's domicile
or residence) on the Purchase Price during each of the years in which any
payment (or deemed payment) for such Stockholder's Shares pursuant to this
Agreement shall be received.
(f) As used herein, "Gross-Up Tax Amount" shall mean, with respect
to each Stockholder, the total federal and state income tax (plus interest,
penalties and additions to tax determined under principles set forth in Section
6.12(d)(iii)) that will be payable by such
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Stockholder on the Section 338 Adjustment Amount, i.e., the Gross-Up Tax Amount
will include taxes incurred on the payment until the Stockholder is made whole
on an after-tax basis.
(g) As soon as practicable (and in any event within ten days) after
AppNet shall have given an Election Notice in accordance with Section 6.12(a),
the Stockholders shall, at AppNet's sole expense, engage a single accounting
firm (the "Stockholders' Accountants") to estimate (i) the amount of the Section
338 Stockholder Increase for each Stockholder and (ii) the amount of the
Gross-Up Tax Amount for each Stockholder. Notice of the estimate of the Section
338 Adjustment Amount for each Stockholder shall be given by the Stockholders to
AppNet within 40 days after the Election Notice shall have been given, which
shall be accompanied by an explanation, and appropriate backup, of the amounts
so determined, and shall, subject to Section 6.12(i), be final and binding on
both AppNet and the Stockholders unless, within twenty (20) days after notice of
such determination shall have been given to AppNet, AppNet shall give notice (a
"Dispute Notice") to the Stockholders setting forth (i) the fact that AppNet
disputes the estimated amounts determined by the Stockholders' Accountants, (ii)
the amount in dispute (the "Disputed Amount"), and (iii) an explanation of the
basis for the dispute. If AppNet shall give a Dispute Notice in accordance with
the preceding sentence, then, notwithstanding the provisions of Section 6.12(a),
AppNet may pay the Disputed Amount, on or before the time specified in Section
6.12(a) for the payment of the estimate of the Section 338 Adjustment Amount, to
Kronish Lieb Weiner & Hellman LLP (the "Escrow Agent"), to be held in escrow
until the dispute raised in the Dispute Notice about the Stockholders'
Accountants' determination of the Section 338 Stockholder Increase and/or the
Gross-Up Tax Amount shall have been resolved pursuant to Section 6.12(h). If
AppNet shall (A) pay the Disputed Amount to the Escrow Agent pursuant to this
Section 6.12(g) and (B) pay to the Stockholders, in accordance with Section
6.12(a), the entire undisputed balance of the estimated Section 338 Adjustment
Amount for each Stockholder, AppNet shall be deemed to have satisfied the
requirements of subparagraph (ii) of Section 6.12(a) and all of the Stockholders
shall be obligated to join in the Section 338(h)(10) Election notwithstanding
the payment to the Stockholders of less than the entire estimated Section 338
Adjustment Amount determined by the Stockholders' Accountants with respect to
each Stockholder. If any Stockholder does not timely provide notice to AppNet of
his or her estimated Section 338 Adjustment Amount within 40 days of timely
delivery of the Election Notice, the Stockholders shall be obligated to join in
the Section 338(h)(10) Election notwithstanding the nonpayment of the estimated
Section 338 Adjustment Amount to such delinquent Stockholder, and AppNet shall
be obligated to pay the estimated Section 338 Adjustment Amount to such
delinquent Stockholder (or the Escrow Agent in the case of a dispute) not later
than 20 days after notice to AppNet of the determination of such Stockholder's
estimated Section 338 Adjustment Amount (treating, for purposes of the
computations thereof, the date of the filing of the Section 338(h)(10) Election
as the payment date of the estimated Section 338 Adjustment Amount to such
Stockholder).
(h) If a Dispute Notice shall be given by AppNet in accordance with
Section 6.12(e), AppNet and the Stockholders shall each reasonably cooperate
with the others in an attempt to resolve the dispute as to whether AppNet or the
Stockholders shall be entitled to the Disputed Amount. In the event that AppNet
and the Stockholders shall be unable to agree as to the disposition of the
Disputed Amount within thirty (30) days after the Dispute Notice shall
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have been given, AppNet and the Stockholders shall immediately appoint from
among the "Big Five" public accounting firms an accounting firm that shall not
have been engaged for any purpose by AppNet, I33, any Affiliate of AppNet or any
of the Stockholders within the then previous three years (the "Section 338
Arbiter"), and the Section 338 Arbiter shall, within thirty (30) days after its
engagement, resolve the dispute about the proper disposition of the Disputed
Amount under the provisions of Sections 6.12(b) through 6.12(f) in a written
report delivered to AppNet, the Stockholders and the Escrow Agent, which
resolution shall, subject to Section 6.12(i), be final and binding on both
AppNet and the Stockholders. Upon receipt of the report of the Section 338
Arbiter, AppNet and the Stockholders shall provide the Escrow Agent with joint
written instructions, consistent with such report, as to the release from escrow
of the Disputed Amount and all accrued interest thereon. The Section 338 Arbiter
shall be provided with all available information reasonably necessary to make
its determination and shall have full access to all books and records of I33 and
the Tax Returns and workpapers of the Stockholders. The fees and other costs of
the Section 338 Arbiter shall be allocated among the Stockholders and AppNet in
inverse proportion to the proportion in which the Disputed Amount shall be
distributed by the Escrow Agent to AppNet and the Stockholder.
(i) If the Section 338 Adjustment Amount payable to any of the
Stockholders by AppNet shall subsequently be determined to be more or less than
the estimated Section 338 Adjustment Amount paid to such Stockholder pursuant to
Sections 6.12(a) and 6.12(g) by reason of a variation of the final determination
of such Stockholder's tax liability by audit or otherwise from the assumptions
used in the computing the estimated Section 338 Adjustment Amount (including
changes to the amount, character, timing of recognition, applicable tax rate,
and method of calculation, except to the extent that such assumptions or methods
are fixed by Sections 6.12(c)(i) and 6.12(d)(i)), the appropriate party shall
remit to the other party the amount of such excess or deficit, as the case may
be, within thirty (30) days after the Stockholders and AppNet shall receive
notice of such final determination. AppNet and the Stockholders shall each
reasonably cooperate with the others in connection with the determination of the
amount of the Section 338 Adjustment Amount and any administrative or judicial
proceedings concerning the existence or amount of taxes relevant to the
determination of the Section 338 Adjustment Amount. If it is finally determined
that any Stockholder's tax payments after a Section 338(h)(10) Election are
required to be made earlier than they were assumed to have been required to be
made when calculating the estimated Section 338 Stockholder Increase for such
Stockholder (the "Accelerated Tax Payments"), AppNet shall make an interest-free
loan to such Stockholder in an amount equal to the Accelerated Tax Payments
which will be required to be repaid on the date the Stockholder would have been
required to pay the corresponding tax had the Section 338(h)(10) election not
been made. Each Stockholder shall promptly give notice to AppNet, and AppNet
shall promptly give notice to each Stockholder, of any subsequent adjustment or
proposed adjustment to Tax liability (by audit or otherwise) which is relevant
to the determination of the Section 338 Adjustment Amount, and AppNet shall be
authorized by such Stockholder, and each Stockholder shall be authorized by
AppNet, to participate in any proceedings involving such Tax before the relevant
Governmental or Regulatory Authority. Failure to give such notice and permit
such participation shall result in a waiver of any rights of the breaching party
to further adjustment of the Section 338 Adjustment Amount with respect to such
Stockholder; provided, however, that in the case of a proceeding that may
increase the Tax
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liability of a Stockholder, such Stockholder shall nevertheless have a right to
further adjustment of the Section 338 Adjustment Amount with respect to such
increase if such Stockholder pays the Tax liability in question from his own
resources and provides AppNet with notice of such payment and an opportunity to
commence a refund proceeding on the Stockholder's behalf with respect to such
Tax. Any payment made pursuant to this section 6.12(i) or deemed made to the
Shareholders as a result of an interest-free loan made pursuant to this section
6.12(i) shall include an amount that will make the recipient whole on an
after-tax basis, after taking into account the payments made hereunder and
computed on a stand-alone basis using the principles in section 6.12(d)(1).
AppNet and the Stockholders agree that if an administrative or judicial contest
shall arise, the adverse resolution of which would require a payment under this
Section 6.12(i) or Section 6.12(m), and if the payer acknowledges in writing
that it would be obliged to make such payment if the issue is resolved
adversely, the payer shall control the resolution of such contest, provided,
however, that the payer shall have no right to participate in the resolution of
any other contested items on the payee's Tax Return or to compromise any such
other item in the course of settling a disputed item the contest of which the
payer controls.
(j) In connection with the Section 338(h)(10) Election, AppNet and
the Stockholders shall act together in good faith to determine and agree upon
(as soon as practicable, and in any event, within ten days after AppNet shall
have given an Election Notice in accordance with Section 6.12(a)) the "deemed
sale price" to be allocated to each asset of I33 in accordance with Treasury
Regulation Section 1.338(h)(10)-1(f) and the other regulations under Section 338
of the Code. Notwithstanding the generality of the first sentence of this
Section 6.12(j), AppNet and the Stockholders agree that an aggregate of $50,000
shall be allocated to the covenants not to compete contained in Section 10
hereof, and the balance of the "deemed sale price" shall be allocated to the
fixed assets, goodwill and other intangible assets of I33. If the Section
338(h)(10) Election shall be made, both AppNet and the Stockholders shall report
the tax consequences of the transactions contemplated by this Agreement
consistently with such allocations and shall not take any position inconsistent
with such allocations in any Tax Return or otherwise. In the event that AppNet
and the Stockholders shall be unable to agree as to the computation of the
deemed sale price or such allocations, AppNet's reasonable positions with
respect to such matters shall control.
(k) I33 and the Stockholders shall not be in breach of the
representations and warranties contained in Sections 4.6, 4.7 and 4.10 as a
result of any increased Tax liability caused by the Section 338(h)(10) Election
or as a result of any increased Tax liability caused by a determination that a
Section 338(h)(10) Election has not or cannot be properly made, except as a
result of the failure to maintain I33's S corporation status from January 1,
1997 to the date immediately preceding the date of the exercise of the option
under the Option Agreement; provided, however, that the liability of I33 and the
Stockholders for any other breach of such representations or warranties,
including, without limitation, inaccuracy of Tax reserves, other than as a
result of the Section 338(h)(10) Election, shall remain unaffected by the
Section 338(h)(10) Election.
(l) Each Stockholder agrees to report the effects of the Section
338(h)(10) Election on his Tax Returns as reasonably requested by AppNet, either
on his originally filed Tax
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Return if such return has not been filed as of the date of such request and is
not otherwise due to be filed within 30 days of such request, and otherwise on
an amended Tax Return, provided that a reporting position shall be considered to
be reasonably requested by AppNet unless the Stockholder's signing return
preparer advises that such position does not have a reasonable basis (within the
meaning of Section 6662 of the Code), in which case the Stockholder shall be
required to report such item as requested by AppNet only if tax counsel selected
jointly by the Stockholder and AppNet advises such return preparer in writing
that such position does have a reasonable basis, or may be legally asserted by
amended Tax Return or otherwise.
(m) Notwithstanding anything to the contrary in this Agreement,
AppNet shall indemnify and hold the Stockholders harmless (on an after-tax basis
computed on a stand-alone basis using the principles provided for under Section
6.12(d)(i)) from and against any Damages (as defined in Section 9.1), Taxes or
other costs (including professional fees) resulting from or arising out of any
audit of the Stockholders and/or I33 in connection with the Section 338(h)(10)
Election, but only to the extent such Damages, Taxes or costs were related to
the Section 338(h)(10) Election, and only to the extent that such Damages, Taxes
or other costs were not already taken into account in the determination of the
Section 338 Adjustment Amount.
(n) In the event that AppNet is required to make any payments to the
Stockholders pursuant to this Section 6.12, and in the further event that the
Section 338(h)(10) Election gives rise to any increased tax liability to
Colasuonno, AppNet shall pay or cause I33 to pay Colasuonno an amount determined
under the principles of this Section 6.12 as is necessary to cause her to be in
the same after-tax economic position as of the Section 338(h)(10) Election had
not been made. As a condition precedent to such obligation, Colasuonno shall
have the Stockholders' Accountants make the determination set forth in Section
6.12(e) with respect to her resulting tax liability arising from the Section
338(h)(10) Election. AppNet shall make any payments to Colasuonno in the manner
and time comparable to that contemplated in this Section 6.12, including,
without limitation, the escrow provisions set forth in Section 6.12(g), and such
payments shall be adjusted thereafter pursuant to the dispute resolution
procedure set forth in Section 6.12(h).
7. CONDITIONS PRECEDENT TO OBLIGATIONS OF APPNET
The obligations of AppNet to consummate the transactions contemplated by
this Agreement are subject to the satisfaction or partial or complete waiver (in
AppNet's sole and absolute discretion), at or before the Closing Date, of the
following conditions:
7.1. Representations and Warranties True at the Closing Date. All of the
representations and warranties of I33 and the Stockholders contained in this
Agreement shall be true and correct on and as of the Closing Date with the same
effect as though such representations and warranties had been made on and as of
such date, except for those representations and warranties which by their terms
are made as of a specific date which shall be true and correct on and as of such
date.
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7.2. Performance. All of the terms, covenants, agreements and conditions
of this Agreement to be complied with, performed or satisfied by I33 and/or the
Stockholders on or before the Closing Date shall have been duly complied with,
performed or satisfied by the Closing Date.
7.3. Intentionally Omitted
7.4. Agreements with Employees. The Stockholders shall have executed and
delivered Senior Management Agreements in the form attached hereto as Exhibit
D1. All other employees of I33 shall have executed and delivered non-disclosure
agreements, in the form attached hereto as Exhibit D2, or other employment
agreements acceptable to AppNet.
7.5. No Litigation. No temporary restraining order, preliminary or
permanent injunction or other order issued by any court of competent
jurisdiction or other legal or regulatory restraint or provision challenging the
transactions contemplated hereunder or limiting or restricting the conduct or
operation of the Business of AppNet or I33 following the transactions shall be
in effect, nor shall any proceeding brought by an administrative agency or
commission or other Governmental or Regulatory Authority or other
instrumentality, domestic or foreign, seeking any of the foregoing be pending.
There shall be no action, suit, claim or proceeding of any nature pending or
threatened, against any of the Stockholders, I33 or AppNet, their respective
properties or any of their officers or directors, that could reasonably be
expected to have a Material Adverse Effect on I33 or AppNet.
7.6. No Material Adverse Change. There shall have been, between the
Balance Sheet Date and the Closing Date, no change in the Business, financial
condition or prospects of I33 which has a Material Adverse Effect on I33.
7.7. Certificates. I33 and the Stockholders shall have furnished AppNet
with such certificates of the officers of I33 and others to evidence compliance
with the conditions set forth in this Section 7 as may be reasonably requested
by AppNet.
7.8. Opinion of Counsel. AppNet shall have received an opinion of counsel
to I33 in form and substance reasonably acceptable to AppNet.
7.9. Financing. AppNet shall have secured all financing necessary to pay
the Cash Payment on terms satisfactory to AppNet.
7.10. AppNet's Review. AppNet shall be fully satisfied in its sole and
absolute discretion with the results of its review of, and its other due
diligence investigations with respect to, the Business, operations, affairs,
prospects, properties, assets, existing and potential liabilities, obligations,
profits or condition (financial or otherwise) of I33.
7.11. Governmental, Regulatory and Other Consents and Approvals. All
consents, approvals and actions of, filings with and notices to any Governmental
or Regulatory Authority or any other public or private third parties required of
the Stockholders, AppNet, or I33 to
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consummate the Stock Purchase and the other matters contemplated hereby shall
have been obtained, including, without limitation, the consent of Michael
Friedman Publishing Group, Inc. with respect to I33's sublease of the Seventh
Floor at 15 West 26th Street, New York, NY.
7.12. Delivery of Good Standing Certificates; Corporate Resolutions.
AppNet shall have received a certificate of good standing with respect to I33
issued by the State of New York. AppNet shall have received copies of the
resolutions of I33 approving this Agreement and the other transactions
contemplated herein, certified by the appropriate corporate officers.
7.13. Financial Terms. AppNet shall have received a certificate (the
"Closing Financial Certificate"), dated as of the Closing Date, signed on behalf
of I33 and by each Stockholder, stating that: (i) sales, net of bad debt
expense, for I33's fiscal year ended December 31, 1997, were no less than
$2,600,000, and for the nine-month period ended September 30, 1998 (the "Interim
Period") were no less than $4,600,000; (ii) earnings before interest and taxes
("EBIT") for I33's fiscal year ended December 31, 1997 were no less than
$170,000 (or 6.53% of sales, net of bad debt expense, for such fiscal year), and
EBIT for the Interim Period was no less than 15% of sales for the Interim
Period; (iii) I33's Net Worth as of the Closing is no less than $1,000,000; and
(iv) except for short term loans (not to exceed $500,000 plus interest) to be
satisfied out of the Working Capital Contribution (the "Permitted Loans"), I33
has no outstanding long-term or short-term indebtedness to banks, stockholders,
or other financial institutions and creditors as of the Closing (in each case
including the current portions of such indebtedness, but excluding trade
payables and other ordinary course accounts payable and amounts disclosed on
Schedule 4.10); provided, however, that AppNet may, in its sole discretion,
waive the foregoing condition in whole or in part and, in such case, the
Purchase Price shall be reduced by the amount of any such indebtedness of I33
(including principal and accrued interest, costs and fees). In calculating I33's
Net Worth as of the Closing, any material increase in intangible assets (other
than accounts receivable) since June 30, 1998 shall be excluded, except with the
prior written agreement of AppNet.
7.14. Payment of Loans. All notes receivable from the Stockholders, other
Affiliates of I33, and employees of I33 shall have been repaid in full in
accordance with their terms.
7.15. Purchase of Personal Use Items. The Stockholders shall have
purchased any personal use assets (e.g., automobiles) from I33 at a purchase
price equal to the greater of the net book value of such assets as of Closing or
the outstanding indebtedness secured by such assets. Cell phones and pagers
purchased by I33 for use by its officers and employees are not personal use
assets within the meaning of this section.
7.16. Stockholders Agreement and Registration Agreement. The Stockholders
shall have executed such agreements as shall be necessary to subject the AppNet
Common Stock to be delivered to the Stockholders upon conversion of the Notes to
AppNet's Stockholders Agreement and Registration Agreement.
7.17. Release. The Stockholders shall have delivered the release
described in Section 4.24.
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7.18. Exercise of Option. I33 shall have exercised its option under the
Option Agreement and I33 shall have secured a release from Barbara Colasuonno in
the form provided for in the Stock Option Agreement or as otherwise agreed to by
AppNet.
7.19. Accrual of Employee Bonus. I33 shall have accrued on its books and
records the Employee Bonuses and the principal amount due under the Employee
Note.
7.20. Resignations. Each of the directors of I33 shall have executed and
delivered resignations effective as of the Closing Date, and Enno Vandermeer
shall have executed and delivered a resignation as Treasurer effective as of the
Closing Date.
7.21. Termination of Lease. I33 shall have terminated its obligations to
pay, or reimburse either of the Stockholders for, automobile leases and the
lease for studio space at 450 West 15th Street, New York, New York 10011.
7.22. Software Licensing. I33 shall have obtained valid licenses for each
software program identified on Schedule 4.20(c)(ii).
8. CONDITIONS PRECEDENT TO OBLIGATIONS OF I33 AND THE STOCKHOLDERS
The obligations of the Stockholders to consummate the transactions
contemplated by this Agreement are subject to the satisfaction or partial or
complete waiver (in the Stockholders' sole and absolute discretion), at or
before the Closing Date, of the following conditions:
8.1. Representations and Warranties True as of the Closing Date. All of
the representations and warranties of AppNet contained in this Agreement shall
be true and correct on and as of the Closing Date with the same effect as though
such representations and warranties had been made on and as of such date, except
for those representations and warranties which by their terms are made as of a
specific date which shall be true and correct on and as of such date.
8.2. AppNet's Performance. All of the terms, covenants, agreements and
conditions of this Agreement to be complied with, performed or satisfied by
AppNet on or before the Closing Date shall have been duly complied with,
performed or satisfied by the Closing Date.
8.3. No Litigation. No temporary restraining order, preliminary or
permanent injunction or other order issued by any court of competent
jurisdiction or other legal or regulatory restraint or provision challenging the
transactions contemplated hereunder or limiting or restricting the conduct or
operation of the Business of AppNet or I33 following the transactions shall be
in effect, nor shall any proceeding brought by an administrative agency or
commission or other Governmental or Regulatory Authority seeking any of the
foregoing be pending. There shall be no action, suit, claim or proceeding of any
nature pending or threatened,
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against I33, AppNet, their respective properties or any of their officers or
directors, that could reasonably be expected to have a Material Adverse Effect
on I33 or AppNet.
8.4. Certificates. AppNet shall have furnished the Stockholders with such
certificates of the officers of AppNet and others to evidence compliance with
the conditions set forth in this Section 8 as may be reasonably requested by the
Stockholders.
8.5. Governmental, Regulatory and Other Consents and Approvals. All
consents, approvals and actions of, filings with and notices to any Governmental
or Regulatory Authority or any other public or private third parties required of
AppNet, the Stockholders or I33 to consummate the Stock Purchase and the other
matters contemplated hereby shall have been obtained.
8.6. Delivery of Good Standing Certificates; Corporate Resolutions. I33
shall have received certificates of good standing with respect to AppNet issued
by the State of Delaware. I33 shall have received copies of the resolutions of
AppNet approving the Stock Purchase and the other transactions contemplated
herein, certified by the appropriate corporate officers.
8.7. No Material Adverse Change. There shall have been, between the
Balance Sheet Date and the Closing Date, no change in the Business, financial
condition or prospects of AppNet which has a Material Adverse Effect on AppNet.
8.8. Opinion of Counsel. I33 shall have received an opinion of counsel to
AppNet in form and substance reasonably acceptable to I33.
8.9. Loan. I33 shall have received the proceeds of the Loan.
9. INDEMNIFICATION
9.1. General Indemnification.
(a) I33 and each of the Stockholders, jointly and severally (except
as otherwise provided in Section 9.1(e)), covenants and agrees to indemnify,
defend, protect and hold harmless AppNet and its officers, directors, employees,
stockholders, assigns, successors and affiliates (individually, a "Buyer Party"
and collectively, the "Buyer Parties") from, against and in respect of all
liabilities, losses, claims, damages, punitive damages, causes of actions,
lawsuits, administrative proceedings (including informal proceedings),
investigations, audits, demands, assessments, adjustments, judgments, settlement
payments, deficiencies, penalties, fines, excise taxes, interest (including
interest from the date of such damages) and costs and expenses (including,
without limitation, reasonable attorneys' fees and disbursements of every kind,
nature and description) (collectively, "Damages") suffered, sustained, incurred
or paid by the Buyer Parties, in any action or proceeding between the Seller
Parties (as defined in Section 9.1(b)) and the Buyer Parties or between the
Buyer Parties and a third party, in connection with, resulting from or arising
out of, directly or indirectly: (i) the inaccuracy of any representation or
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the breach of any warranty set forth in this Agreement or certificates delivered
on the part of I33 or the Stockholders in connection with the Closing; (ii) the
nonfulfillment of any covenant or agreement on the part of I33 or the
Stockholders set forth in this Agreement or in any agreement or certificate
executed and delivered by I33 or the Stockholders pursuant to this Agreement or
in the transactions contemplated hereby; (iii) any and all benefits accrued
under the Benefit Plans or Multiemployer Plans as of the Closing Date and any
and all other liabilities arising out of, or in connection with the operation of
the Benefit Plans or Multiemployer Plans through the Closing Date, in each case
to the extent such liabilities are not accrued on I33's balance sheet as of the
Closing Date used for purposes of preparing the Closing Financial Certificate;
(iv) any and all liabilities under the Environmental and Safety Requirements in
connection with or arising out of Releases that occurred on or prior to the
Closing Date; (v) failure of I33 or any I33 employee prior to the Closing Date
to maintain all licenses, permits, approvals and qualifications from any
Government or Government Regulatory Authority; (vi) any and all Taxes (other
than as a result of AppNet's actions pursuant to Section 6.12 hereof) which are
(A) imposed on the Stockholders or any member (other than I33) of the
consolidated, unitary or combined group which includes or included I33, that
AppNet or I33 pays or otherwise satisfies in whole or in part; and (B) imposed
on a Buyer Party in respect of I33's income, business, property or operations or
for which a Buyer Party may otherwise be liable as a successor to I33 (x) for
any taxable period or portion thereof ending on or prior to the Closing Date, or
(y) resulting by reason of the several liability of I33 pursuant to Treasury
Regulations Section 1.1502-6 or any analogous state, local or foreign law or
regulation or by reason of I33 having been a member of any consolidated,
combined or unitary group on or prior to the Closing Date; (vii) the business,
operations or assets of I33 on or before the Closing Date (except as otherwise
disclosed in the Financial Statements or the schedules to this Agreement) or the
actions of I33's directors, officers, shareholders, employees or agents before
the Closing Date; and (viii) the Option Agreement, any allegations of
Colasuonno, or other Claims with respect to or relating to the Option Agreement
or Colasuonno; provided, however, that in the event of a Section 338(h)(10)
Election, the Stockholders shall have no liability for Claims by Colasuonno
pursuant to Section 6.12 or Claims by Colasuonno that amounts paid under Section
6.12 to the Stockholders give rise to the payment of an "Additional Amount" as
such term is defined in the Option Agreement.
(b) AppNet covenants and agrees to indemnify, defend, protect and
hold harmless (i) each Stockholder and his or her assigns, successors and
affiliates and (ii) I33 and its officers, directors, employees, stockholders,
assigns, successors and affiliates (individually, a "Seller Party" and
collectively, the "Seller Parties") from, against and in respect of all Damages
suffered, sustained, incurred or paid by the Seller Parties, in any action or
proceeding between the Seller Parties and the Buyer Parties or between the
Seller Parties and a third party, in connection with, resulting from or arising
out of, directly or indirectly: (i) the inaccuracy of any representation or the
breach of any warranty set forth in this Agreement or certificates delivered on
the part of AppNet in connection with the Closing; (ii) the nonfulfillment of
any covenant or agreement on the part of AppNet set forth in this Agreement or
in any agreement or certificate executed and delivered by AppNet or pursuant to
this Agreement or in the transactions contemplated hereby; and (iii) any claims
of third parties against the Stockholders arising out of or based upon an
occurrence (1) happening after the Closing Date, (2) not involving a negligent
or willful act of any of the Stockholders, and (3) which is asserted against a
Stockholder in his
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capacity as a former stockholder of I33; provided, however, that this Section
9.1(b)(iii) shall not apply to any claims asserted against any Stockholder in
his capacity as a current or former director or officer of I33 (which claims
shall be treated in the manner specified in the I33 Certificate of Incorporation
and bylaws or the AppNet Certificate of Incorporation and bylaws, as the case
may be). Without limiting the foregoing, AppNet acknowledges that Damages
include Claims by Colasuonno against the Stockholders based on or arising out of
the Section 338(h)(10) Election.
(c) Notwithstanding the foregoing provisions of Section 9.1(a) and
(b), if Closing occurs, (i) the Stockholders hereby waive any right to
contribution, reimbursement or other right to recovery that they might otherwise
have against I33 in connection with any such indemnification or other
obligations, and (ii) I33 shall be deemed to be a Buyer Party.
(d) Notwithstanding anything contained in Section 9 to the contrary,
the amount of a Stockholder's liability as to a particular Claim shall not
exceed such Stockholder's Pro Rata Share of the Damages attributable to such
Claim (except as set forth in Section 9.1(e)) and the aggregate amount of a
Stockholder's liability on all Claims (including, without limitation, those
identified in Section 9.1(e)) shall not exceed such Stockholder's Pro Rata Share
of the Purchase Price and the aggregate amount of AppNet's liability shall not
exceed the Purchase Price. Notwithstanding anything contained in Section 9 to
the contrary, there shall be no liability for indemnification unless and to the
extent the aggregate amount of Damages exceeds $200,000 (the "Indemnity
Basket"); provided, however, that the Indemnity Basket shall not apply in the
event that liability arises out of or in connection with a breach of any of the
representations or warranties in Sections 4.2, 4.3, 4.5, 4.10 or 5.5, for any
amounts payable pursuant to Sections 2.5 or 6.12, indemnification pursuant to
Sections 9.1(a)(vi) or (viii), for a breach of the covenants of Section 10, or
Claims based on the failure to meet the conditions set forth in Section 7.21 or
7.22.
(e) Notwithstanding anything contained herein to the contrary, each
Stockholder shall be individually liable, and not jointly liable, solely with
respect to the representations and warranties regarding such Stockholder (but
not I33) in Sections 4.3, 4.4, 4.5, 4.27 and 4.29 and the covenants in Section
10 and each Stockholder shall be liable on such Claims to the extent such
Claims, when aggregated with all other Claims against either or both
Stockholders, exceed the Indemnity Basket, individually or in the aggregate, up
to such Stockholder's Pro Rata Share of the Purchase Price and subject to the
limitation on each Stockholder's aggregate liability on all Claims set forth in
Section 9.1(d).
9.2. Indemnification Procedures. All claims or demands for indemnification
under this Section 9 ("Claims") shall be asserted and resolved as follows:
(a) In the event a Buyer Party or a Seller Party (an "Indemnified
Party") has a Claim against the other party (an "Indemnifying Party") hereunder
which does not involve a Claim being asserted against or sought to be collected
by a third party, the Indemnified Party shall with reasonable promptness send a
Claim Notice (as defined in Section 9.2(b)) with respect to such Claim to the
Indemnifying Party. If the Indemnifying Party does not notify the
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Indemnified Party within the Notice Period (as defined in Section 9.2(b)) that
the Indemnifying Party disputes such Claim, the amount of such Claim shall be
conclusively deemed a liability of the Indemnifying Party hereunder. In case the
Indemnifying Party shall object in writing to any Claim made in accordance with
this Section 9.2(a), the Indemnified Party shall have fifteen (15) days to
respond in a written statement to the objection of the Indemnifying Party. If
after such fifteen (15)-day period there remains a dispute as to any Claims, the
parties shall attempt in good faith for thirty (30) days to agree upon the
rights of the respective parties with respect to each of such Claims. If the
parties should so agree, a memorandum setting forth such agreement shall be
prepared and signed by both parties. If no such agreement can be reached after
good faith negotiation, either the Indemnified Party or the Indemnifying Party
may arbitrate such claim in accordance with the terms of Section 11.11 hereof.
(b) In the event that any Claim for which an Indemnifying Party
would be liable to an Indemnified Party hereunder is asserted against an
Indemnified Party by a third party, the Indemnified Party shall with reasonable
promptness notify the Indemnifying Party of such Claim, specifying the nature of
such claim and the amount or the estimated amount thereof to the extent then
feasible (which estimate shall not be conclusive of the final amount of such
Claim) (the "Claim Notice"). The Indemnifying Party shall have fifteen (15) days
from the receipt of the Claim Notice (the "Notice Period") to notify the
Indemnified Party (i) whether or not the Indemnifying Party disputes the
Indemnifying Party's liability to the Indemnified Party hereunder with respect
to such Claim and (ii) if the Indemnifying Party does not dispute such
liability, whether or not the Indemnifying Party desires, at the sole cost and
expense of the Indemnifying Party, to defend against such Claim. In the event
that the Indemnifying Party notifies the Indemnified Party within the Notice
Period that the Indemnifying Party does not dispute the Indemnifying Party's
obligation to indemnify hereunder and desires to defend the Indemnified Party
against such Claim and except as hereinafter provided, the Indemnifying Party
shall have the right to defend by appropriate proceedings, which proceedings
shall be promptly settled or prosecuted by the Indemnifying Party to a final
conclusion; provided that, unless the Indemnified Party otherwise agrees in
writing, the Indemnifying Party may not settle any matter (in whole or in part)
unless such settlement includes a complete and unconditional release of the
Indemnified Party. If the Indemnified Party desires to participate in, but not
control, any such defense or settlement, the Indemnified Party may do so at the
Indemnified Party's sole cost and expense. If the Indemnifying Party elects not
to defend the Indemnified Party against such Claim, whether by failure of the
Indemnifying Party to give the Indemnified Party timely notice as provided above
or otherwise, then the Indemnified Party, without waiving any rights against the
Indemnifying Party, may settle or defend against any such Claim in the
Indemnified Party's sole discretion and the Indemnified Party shall be entitled
to recover from the Indemnifying Party the amount of any settlement or judgment
and, on an ongoing basis, all indemnifiable costs and expenses of the
Indemnified Party with respect thereto, including interest from the date such
costs and expenses were incurred.
(c) Notwithstanding the provisions of Section 9.2(b), if at any
time, in the reasonable opinion of the Indemnified Party, notice of which shall
be given in writing to the Indemnifying Party, any such Claim seeks relief which
could have a Material Adverse Effect on any Indemnified Party, the Indemnified
Party shall have the right to control or assume (as the
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case may be) the defense of any such Claim and the amount of any judgment or
settlement and the reasonable costs and expenses of defense shall be included as
part of the indemnification obligations of the Indemnifying Party hereunder. If
the Indemnified Party should elect to exercise such right, the Indemnifying
Party shall have the right to participate in, but not control, the defense of
such claim or demand at the sole cost and expense of the Indemnifying Party.
(d) Nothing herein shall be deemed to prevent the Indemnified Party
from making a Claim, and an Indemnified Party may make a Claim hereunder, for
potential or contingent Claims or demands provided the Claim Notice sets forth
the specific basis for any such potential or contingent claim or demand to the
extent then feasible and the Indemnified Party has reasonable grounds to believe
that such a claim or demand may be made.
9.3. Right to Setoff. In the event the Stockholders shall have an
indemnification obligation to AppNet or I33 (post-Closing), AppNet shall be
permitted to seek satisfaction of such obligation (when finally determined and
liquidated in amount) through an offset against each Stockholder's Pro Rata
Share of the $3.5 Million Notes. No limitation on such right of offset shall
otherwise affect a Buyer Party's rights hereunder or otherwise. In the event the
$3.5 Million Notes are, in accordance with their terms, converted into AppNet
Common Stock, such shares shall at the time of, and as a condition to, such
conversion be pledged to AppNet as security for the Stockholders' obligations to
AppNet under Sections 2.5 or 9 of this Agreement pursuant to a Stock Pledge
Agreement, in the form attached hereto as Exhibit E (the "Stock Pledge
Agreement"). The remedy of offset shall be in addition to and not in limitation
of any injunctive relief or other rights or remedies to which AppNet or any
other Buyer Party is or may be entitled, at law or equity, under this Agreement.
Notwithstanding the foregoing, AppNet shall provide thirty days' notice to the
Stockholders prior to exercising its right of offset, and, during such thirty
day period, each of the Stockholders shall be permitted to satisfy his share of
such indemnification amounts by wire transfer of immediately available funds to
AppNet.
9.4. Release. Effective as of the Closing, each of the Stockholders hereby
irrevocably waives and releases I33 of, from and against any and all claims or
causes of actions for Damages that he has, may have or has had at any time on or
before Closing.
10. NONCOMPETITION
10.1. Prohibited Activities. For the period commencing with Closing and
ending on the fifth (5th) year anniversary of Closing, none of the Stockholders
shall, for any reason whatsoever, directly or indirectly, for himself, herself
or on behalf of or in conjunction with any other Person:
(a) engage as a stockholder, officer, director, owner, partner,
joint venturer, or in a managerial capacity, whether as an employee, independent
contractor, consultant or advisor, in any business selling any products or
services in direct competition with I33 (a "Competing Business"); provided,
however, each of the Stockholders shall not be precluded from the ownership of
securities of corporations that are listed on a national securities exchange or
traded
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in the national over-the-counter market in an amount that shall not exceed one
percent (1%) of the outstanding shares of any such corporation;
(b) call upon any Person who is, at that time or was within one (1)
year prior to that time, an employee of I33 for the purpose or with the intent
of enticing such employee away from or out of the employ of I33;
(c) call upon any Person who or that is, at that time, or has been,
within one (1) year prior to that time, a customer of I33 for the purpose of
soliciting or selling products or services in competition with I33; or
(d) publish any statement or make any statement (under any
circumstances reasonably likely to become public) critical of AppNet, I33 or
their Affiliates, or in any way adversely affecting or otherwise maligning the
reputation of AppNet, I33 or their Affiliates.
10.2. Damages. Because of the difficulty of measuring economic losses to
AppNet, I33 and their Affiliates as a result of a breach of the foregoing
covenant, and because of the immediate and irreparable damage that could be
caused to AppNet, I33 and their Affiliates for which it would have no other
adequate remedy, the Stockholders agree that the foregoing covenant may be
enforced by AppNet or I33 in the event of breach by any of the Stockholders, in
addition to, but not in lieu of, any other available remedies, by injunctions
and restraining orders and other equitable remedies.
10.3. Reasonable Restraint. It is agreed by the parties that the foregoing
covenants in this Section 10 impose a reasonable restraint on the Stockholders
in light of the activities and business of I33 on the date of the execution of
this Agreement and the current plans of I33; but it is also the intent of the
parties, that such covenants be construed and enforced in accordance with the
changing activities and business of I33 throughout the term of this covenant.
10.4. Severability; Reformation. The covenants in this Section 10 are
severable and separate, and the unenforceability of any specific covenant shall
not affect the provisions of any other covenant. Moreover, in the event any
court of competent jurisdiction shall determine that the scope, time or
territorial restrictions set forth are unreasonable, then it is the intention of
the parties that such restrictions be enforced to the fullest extent which the
court deems reasonable, and the Agreement shall thereby be reformed.
10.5. Independent Covenant. All of the covenants in this Section 10 shall
be construed as an agreement independent of any other provision in this
Agreement, and the existence of any claim or cause of action of any of the
Stockholders against AppNet, I33 or an Affiliate thereof, whether predicated on
this Agreement or otherwise, shall not constitute a defense to the enforcement
by AppNet or I33 of such covenants. It is understood by the parties hereto that
the covenants contained in this Section 10 are essential elements of this
Agreement and that, but for the agreement of the Stockholders to comply with
such covenants, AppNet would not have agreed to enter into this Agreement. The
Stockholders and AppNet have independently consulted with their respective
counsel and have been advised concerning the reasonableness and
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propriety of such covenants with specific regard to the nature of the business
conducted by AppNet and I33. The Stockholders hereby agree that all covenants
contained in this Section 10 are reasonable and valid and waive all defenses to
the strict enforcement hereof by AppNet and I33. The covenants contained in this
Section 10 shall not be affected by any breach of any other provision hereof by
any party hereto and shall have no effect if this Agreement is terminated
pursuant to its terms.
10.6. Materiality. Each of the Stockholders hereby agrees that the
covenants set forth in this Section 10 are a material and substantial part of
the transactions contemplated by this Agreement.
11. GENERAL
11.1. Termination. This Agreement may be terminated at any time prior to
the Closing Date:
(a) by mutual consent of the Stockholders and the Board of Directors
of AppNet;
(b) by the Stockholders, on the one hand, or by AppNet, on the other
hand, if the Closing shall not have occurred on or before January 15, 1999;
provided that the right to terminate this Agreement under this Section 11.1(b)
shall not be available to either party whose material misrepresentation, breach
of warranty or failure to fulfill any obligation under this Agreement has been
the cause of, or resulted in, the failure of the Closing to occur on or before
such date;
(c) by the Stockholders, on the one hand, or by AppNet, on the other
hand, if there is or has been a material breach, failure to fulfill or default
on the part of the other party of any of the representations and warranties
contained herein or in the due and timely performance and satisfaction of any of
the covenants, agreements or conditions contained herein, and the curing of such
default shall not have been made or shall not reasonably be expected to occur
before the Closing Date; or
(d) by the Stockholders, on the one hand, or by AppNet, on the other
hand, if there shall be a final nonappealable order of a federal or state court
in effect preventing the consummation of the transactions contemplated by this
Agreement; or there shall be any action taken, or any statute, rule, regulation
or order enacted, promulgated or issued or deemed applicable to the transactions
by any governmental entity which would make the consummation of the transactions
illegal.
11.2. Effect of Termination. In the event of the termination of this
Agreement pursuant to Section 11.1, this Agreement shall forthwith become void,
and there shall be no liability or obligation on the part of any party hereto or
its officers, directors or stockholders. Notwithstanding the foregoing sentence,
(i) the provisions of this Section 11, Section 9, Section 6.2(a) (except for
I33's obligation to keep information regarding I33 confidential thereunder) and
Section 6.2(b) shall remain in full force and effect and survive any termination
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of this Agreement; (ii) each party shall remain liable for any intentional
breach of this Agreement prior to its termination; and (iii) in the event of
termination of this Agreement pursuant to Section 11.1(c), then notwithstanding
the provisions of Section 11.7, the breaching party (if such breach was in
effect as of the date hereof) shall be liable to the other party to the extent
of the reasonable expenses incurred by such other party in connection with this
Agreement and the transactions contemplated by this Agreement, as well as any
damages in accordance with applicable law.
11.3. Cooperation. I33 and the Stockholders, on the one hand, and AppNet,
on the other hand, shall each deliver or cause to be delivered to the other on
the Closing Date, and at such other times and places as shall be reasonably
agreed to, such additional instruments as the other may reasonably request for
the purpose of carrying out this Agreement. In connection therewith, if
required, each of AppNet, I33 and the Stockholders will execute any
documentation reasonably required by AppNet's or I33's independent certified
public accountants (in connection with such accountant's audit of AppNet or
I33). Each of I33 and AppNet will also cooperate and use their reasonable
efforts to have their respective officers and employees cooperate with AppNet
and I33, as the case may be, on and after the Closing Date in furnishing
information, accounting records, evidence, testimony and other assistance in
connection with any Tax return filing obligations, audits, actions, proceedings,
arrangements or disputes of any nature.
11.4. Successors and Assigns. This Agreement shall inure to the benefit of
and be binding upon the parties hereto and their respective successors and
assigns; provided, however, that I33 and the Stockholders may not make any
assignment of this Agreement or any interest herein without the prior written
consent of AppNet. This Agreement or any of the severable rights and obligations
inuring to the benefit of or to be performed by AppNet hereunder may be assigned
by AppNet prior to the Closing Date, to any wholly-owned subsidiary of AppNet,
and after the Closing Date, to any wholly-owned subsidiary of AppNet or to any
entity to which AppNet may sell all or substantially all of the assets of AppNet
and which assumes all of the obligations of AppNet, and to the extent so
assigned, I33 and the Stockholders hereby recognize said entity as the
party-in-interest with respect to the rights and obligations assigned. In the
event of such assignment to an entity which acquires all or substantially all of
the assets of AppNet, the Stockholders agree to look solely to said entity for
the purpose of conferring benefits, or requiring performance of obligations,
assigned to it by AppNet if and to the extent such entity has expressly assumed
such obligations.
11.5. Entire Agreement. This Agreement (which includes the schedules and
exhibits hereto), sets forth the entire understanding of the parties hereto with
respect to the transactions contemplated hereby and thereby. Any and all
previous agreements and understandings between or among the parties regarding
the subject matter hereof, whether written or oral, are superseded by this
Agreement.
11.6. Counterparts. This Agreement may be executed in any number of
counterparts and any party hereto may execute any such counterpart, each of
which when executed and delivered shall be deemed to be an original and all of
which counterparts taken together shall constitute but one and the same
instrument. This Agreement shall become binding when one or
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more counterparts taken together shall have been executed and delivered (which
deliveries may be by telefax) by the parties.
11.7. Expenses. AppNet has and shall pay the fees, expenses and
disbursements of AppNet and its brokers, agents, representatives, accountants
and counsel incurred in connection with the subject matter of this Agreement.
Except for the payment of the Professional Fees by I33, the Stockholders have
paid and shall pay the fees, expenses and disbursements of I33 and the
Stockholders and each of their respective brokers, agents, representatives,
financial advisors, accountants and counsel incurred in connection with the
subject matter of this Agreement.
11.8. Specific Performance; Remedies Not Exclusive. Each party hereto
acknowledges that the other parties shall be irreparably harmed and that there
shall be no adequate remedy at law for any violation by any of them of any of
the covenants or agreements contained in this Agreement, including, without
limitation, the confidentiality obligations set forth in Section 6.2(a) and (b)
and the noncompetition provisions set forth in Section 10. It is accordingly
agreed that, in addition to, but not in lieu of, any other remedies which may be
available upon the breach of any such covenants or agreements, each party hereto
shall have the right to obtain injunctive relief to restrain a breach or
threatened breach of, or otherwise to obtain specific performance of, the other
parties' covenants and agreements contained in this Agreement. All rights and
remedies of the parties under this Agreement shall be cumulative, and the
exercise of one or more rights or remedies will not preclude the exercise of any
other right or remedy available under this Agreement (including the Annexes
hereto) or applicable law.
11.9. Notices. Any notice, request, claim, demand, waiver, consent,
approval or other communication which is required or permitted hereunder shall
be in writing and shall be deemed given if delivered personally, by facsimile
transmission with receipt of delivery, or sent by registered or certified mail,
postage prepaid, return receipt requested, or by nationally recognized overnight
courier service, as follows:
If to AppNet or I33 (post-Closing) to:
AppNet Systems, Inc.
6700A Rockledge Drive, Suite 525
Bethesda, Maryland 20817
Attn: Ken S. Bajaj, President
Facsimile: (301) 581-2488
with a required copy to:
Tucker, Flyer & Lewis
1615 L Street, N.W., Suite 400
Washington, D.C. 20036
Attn: Arthur E. Cirulnick, Esq.
Facsimile: (202) 429-3231
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If to I33 (pre-Closing) or the Stockholders to:
I33 Communications Corp.
15 W. 26th Street, Ninth Floor
New York, New York 10010
Attn: Drew Rayman, President
Facsimile: (212) 448-9575
with a required copy to:
Kronish Lieb Weiner & Hellman LLP
1114 Avenue of the Americas
New York, New York 10036
Attn: Russell S. Berman, Esq.
Facsimile: (212) 479-6275
or to such other address as the person to whom notice is to be given may have
specified in a notice duly given to the sender as provided herein. Such notice,
request, claim, demand, waiver, consent, approval or other communication shall
be deemed to have been given as of the date so delivered, telefaxed, mailed or
dispatched and, if given by any other means, shall be deemed given only when
actually received by the addressees.
11.10. Governing Law. This Agreement shall be governed by and construed,
interpreted and enforced in accordance with, the laws of the State of Delaware
(without regard to its laws relating to choice-of-law or conflicts-of-law).
11.11. Arbitration. Any unresolved dispute or controversy arising under or
in connection with this Agreement arising after the Closing shall be settled
exclusively by a three (3) person arbitration panel, with such arbitration
proceeding conducted in accordance with the rules of the American Arbitration
Association then in effect. The arbitrators shall not have the authority to add
to, detract from, or modify any provision hereof. A decision by a majority of
the arbitration panel shall be final and binding. Judgment may be entered on the
arbitrators' award in any court having jurisdiction. The arbitration proceeding
shall be held in Wilmington, Delaware. Notwithstanding the foregoing, the
parties shall be entitled to seek injunctive or other equitable relief from any
court of competent jurisdiction, without the need to resort to arbitration.
11.12. Survival of Representations, Warranties and Covenants. All
representations, warranties and covenants made by either party in or pursuant to
this Agreement or in any document delivered pursuant hereto shall survive for
two (2) years after the Closing; provided, however, that the covenants set forth
in Sections 6.12 and 10 shall survive the Closing in accordance with their
terms; and provided, further (i) in the event of fraud by any party, the
representations and warranties of that party, (ii) the representations and
warranties in Sections 4.2, 4.3, 4.5 and 4.10 and (iii) indemnification pursuant
to Sections 9.1(a)(vi) and (viii) shall survive until the expiration of the
applicable statute of limitations, or if there is no applicable
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statute of limitations, shall survive indefinitely. Notwithstanding the
foregoing, if a Claim Notice is sent in good faith pursuant to Section 9.2(a) or
(b), the Claim with respect to which such Claim Notice is sent shall survive
until the resolution of the Claim to which such Claim Notice relates.
11.13. Severability. If any provision of this Agreement or the application
thereof to any person or circumstances is held invalid or unenforceable in any
jurisdiction, the remainder hereof, and the application of such provision to
such person or circumstances in any jurisdiction, shall not be affected thereby,
and to this end the provisions of this Agreement shall be severable. The
preceding sentence is in addition to and not in place of the severability
provisions in Section 10.4.
11.14. Absence of Third Party Beneficiary Rights. Except as expressly
provided herein (including, without limitation, Section 6.12(n)), no provision
of this Agreement is intended, nor will be interpreted, to provide or create any
third party beneficiary rights or any other rights of any kind in any client,
customer, affiliate, shareholder, employee or partner of any party hereto or any
other person or entity.
11.15. Mutual Drafting. This Agreement is the mutual product of the
parties hereto, and each provision hereof has been subject to the mutual
consultation, negotiation and agreement of each of the parties, and shall not be
construed for or against any party hereto.
11.16. Further Representations. Each party to this Agreement acknowledges
and represents that it has been represented by its own legal counsel in
connection with the transactions contemplated by this Agreement, with the
opportunity to seek advice as to its legal rights from such counsel. Each party
further represents that it is being independently advised as to the tax or
securities consequences of the transactions contemplated by this Agreement and
is not relying on any representation or statements made by the other party as to
such tax and securities consequences.
11.17. Amendment; Waiver. This Agreement may be amended by the parties
hereto at any time only by execution of an instrument in writing signed on
behalf of each of the parties hereto. Any extension or waiver by any party of
any provision hereto shall be valid only if set forth in an instrument in
writing signed on behalf of such party.
11.18. Gender. Unless the context clearly indicates otherwise, where
appropriate the singular shall include the plural and the masculine shall
include the feminine or neuter, and vice versa, to the extent necessary to give
the terms defined herein and/or the terms otherwise used in this Agreement the
proper meanings.
11.19. Headings. The headings and other captions in this Agreement are for
convenience and reference only and shall not be used in interpreting, construing
or enforcing any of the provisions of this Agreement.
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11.20. Public Disclosure. Prior to the Closing Date, neither party shall
make any disclosure (whether or not in response to an inquiry) of the subject
matter of this Agreement unless previously approved by I33 and AppNet.
[EXECUTION PAGE FOLLOWS]
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IN WITNESS WHEREOF, the parties hereto have executed this Stock Purchase
Agreement as of the day and year first above written.
APPNET:
APPNET SYSTEMS, INC.
By: /s/ Toby Tobaccawala
----------------------------------
Name: Toby Tobaccawala
--------------------------------
Title: Senior Vice President
-------------------------------
I33:
I33 COMMUNICATIONS CORP.
By: /s/ Drew Rayman
----------------------------------
Name: Drew Rayman
--------------------------------
Title: President
-------------------------------
STOCKHOLDERS:
/s/ Drew Rayman
-------------------------------------
DREW RAYMAN
/s/ Enno Vandermeer
-------------------------------------
ENNO VANDERMEER
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SCHEDULES
Schedule 1 Stockholders
Schedule 1(b) Professional Fees
Schedule 2.1 Option Agreement - Barbara Colasuonno
Schedule 4.5 Stock of I33
Schedule 4.6 Financial Statements
Schedule 4.7(a) Liabilities and Obligations
Schedule 4.7(b) Advance Payments or Deposits
Schedule 4.8 Adverse Changes
Schedule 4.9(a) Benefit Plans
Schedule 4.9(b) List of Employees
Schedule 4.10 Taxable Amounts
Schedule 4.12(a) Real Property
Schedule 4.12(b) Personal Property
Schedule 4.12(c) Permitted Encumbrances
Schedule 4.13 Material Contracts
Schedule 4.15 Litigation
Schedule 4.16 Violations of Law
Schedule 4.17 Environmental Disclosure
Schedule 4.18(a) Significant Customers
Schedule 4.18(b) Suppliers Who Have Threatened Termination
Schedule 4.19 Insurance
Schedule 4.20(a) Company Intellectual Property Rights
Schedule 4.20(b) Licenses to Use I33 Intellectual Property
Schedule 4.20(c) Third Party Intellectual Property Claims
Schedule 4.20(d) Missing Agreements for Company Third Party Intellectual
Property Rights
Schedule 4.20(e) Unauthorized Intellectual Property Use
Schedule 4.20(f) Intellectual Property Disputes
Schedule 4.23 Related Party Transactions
Schedule 4.24 Brokers
Schedule 5.6 AppNet Capitalization
Schedule 6.3 Interim Changes
Schedule 6.11 Employee Bonuses
EXHIBITS
Exhibit A Form of $3.5 Million Subordinated Convertible Promissory Notes
Exhibit B Form of $6.8 Million Subordinated Convertible Promissory Notes
Exhibit C Form of Employee Note
Exhibit D1 Form of Senior Management Agreement
Exhibit D2 Form of Non-Disclosure Agreement
Exhibit E Form of Stock Pledge Agreement
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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
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<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
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(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
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(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
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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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<PAGE>
"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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<PAGE>
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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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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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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(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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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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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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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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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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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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================================================================================
ASSET PURCHASE AGREEMENT
dated as of March 1, 1999
================================================================================
<PAGE>
TABLE OF CONTENTS
Page
1. DEFINITIONS.................................................................1
1.1. Defined Terms......................................................1
2. PURCHASE AND SALE OF PURCHASED ASSETS.......................................4
2.1. Purchased Assets...................................................4
2.2. Excluded Assets....................................................6
2.3. Assumed Liabilities................................................6
2.4. Non-Assumption of Liabilities......................................6
2.5. Conveyance of the Purchased Assets.................................7
2.6. Consideration for Purchase of Assets...............................7
3. CLOSING.....................................................................8
3.1. Time and Place of the Closing......................................8
3.2. Procedure at Closing...............................................8
3.3. Payment of Contingent Amount.......................................8
3.4. Holdback of Portion of Cash Payment...............................10
3.5. Withholding.......................................................10
4. REPRESENTATIONS AND WARRANTIES OF THE COMPANY AND THE STOCKHOLDER..........10
4.1. Organization......................................................10
4.2. Power and Authority...............................................11
4.3. Authority for Agreement...........................................11
4.4. No Violation to Result............................................11
4.5. Capitalization....................................................11
4.6. Financial Statements..............................................12
4.7. Liabilities and Obligations.......................................13
4.8. Adverse Changes...................................................13
4.9. Employee Matters..................................................13
4.10. Taxes.............................................................15
4.11. Investments.......................................................16
4.12. Property..........................................................16
4.13. Contracts.........................................................17
4.14. Government Contracts..............................................17
4.15. Litigation........................................................17
4.16. Compliance with Laws..............................................18
4.17. Environmental and Safety Matters..................................18
4.18. Customers; Suppliers..............................................19
4.19. Insurance.........................................................20
4.20. Intellectual Property.............................................20
4.21. Intentionally Omitted.............................................22
4.22. Supplies..........................................................22
4.23. Related Party Transactions........................................23
4.24. Brokers...........................................................23
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4.25. Accredited Investors; Investment Intent...........................23
4.26. Disclosure........................................................24
5. REPRESENTATIONS AND WARRANTIES OF APPNET AND SUB...........................25
5.1. Due Organization..................................................25
5.2. Power and Authority...............................................25
5.3. Authority for Agreement...........................................25
5.4. No Violation to Result............................................25
5.5. Brokers and Agents................................................26
5.6. Capitalization....................................................26
5.7. Shares Issued in Asset Purchase...................................26
5.8. Litigation........................................................26
6. COVENANTS..................................................................26
6.1. Access to Properties and Records..................................26
6.2. Confidentiality...................................................27
6.3. Interim Covenants of the Company..................................27
6.4. No Solicitation...................................................30
6.5. Notification of Certain Matters...................................30
6.6. Cooperation.......................................................31
6.7. Regulatory and Other Approvals....................................31
6.8. Benefits Plans....................................................31
6.9. Reasonable Efforts................................................31
6.10. Stock Options.....................................................31
6.11. Stockholder Vote..................................................31
6.12. Corporate Name....................................................32
6.13. Corporate Existence...............................................32
6.14. Hiring of the Company's Employees.................................32
6.15. Actions After the Closing.........................................32
6.16. WARN Act..........................................................32
6.17. Bulk Transfer Provisions..........................................32
6.18. The Company's Consent.............................................33
6.19. Allocation of Purchase Price......................................33
6.20. Advisory Fees.....................................................33
6.21. State Taxes.......................................................33
7. CONDITIONS PRECEDENT TO OBLIGATIONS OF APPNET AND SUB......................33
7.1. Representations and Warranties True at the Closing Date...........33
7.2. Performance.......................................................34
7.3. Stockholder Approval..............................................34
7.4. Agreements with Employees.........................................34
7.5. No Litigation.....................................................34
7.6. No Material Adverse Change........................................34
7.7. Certificates......................................................34
7.8. Opinion of Counsel................................................34
7.9. Financing.........................................................34
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7.10. Intentionally Omitted.............................................35
7.11. Governmental, Regulatory and Other Consents and Approvals.........35
7.12. Delivery of Good Standing Certificates; Corporate Resolutions.....35
7.13. Financial Terms...................................................35
7.14. Stockholders Agreement and Registration Agreement.................35
7.15. Release...........................................................35
7.16. Subordination Agreement...........................................35
7.17. January 1999 Financials...........................................36
8. CONDITIONS PRECEDENT TO OBLIGATIONS OF THE COMPANY AND THE STOCKHOLDER.....36
8.1. Representations and Warranties True as of the Closing Date........36
8.2. AppNet's and Sub's Performance....................................36
8.3. No Litigation.....................................................37
8.4. Certificates......................................................37
8.5. Governmental, Regulatory and Other Consents and Approvals.........37
8.6. Delivery of Good Standing Certificates; Corporate Resolutions.....37
8.7. Opinion of Counsel................................................37
9. INDEMNIFICATION............................................................37
9.1. General Indemnification...........................................37
9.2. Indemnification Procedures........................................39
9.3. Right to Setoff...................................................40
9.4. Release...........................................................40
10. NONCOMPETITION............................................................40
10.1. Prohibited Activities.............................................40
10.2. Damages...........................................................41
10.3. Reasonable Restraint..............................................41
10.4. Severability; Reformation.........................................41
10.5. Independent Covenant..............................................42
10.6. Materiality.......................................................42
11. GENERAL...................................................................42
11.1. Termination.......................................................42
11.2. Effect of Termination.............................................43
11.3. Cooperation.......................................................43
11.4. Successors and Assigns............................................43
11.5. Entire Agreement..................................................44
11.6. Counterparts......................................................44
11.7. Expenses..........................................................44
11.8. Specific Performance; Remedies Not Exclusive......................44
11.9. Notices...........................................................44
11.10 Governing Law ....................................................45
11.11 Arbitration ......................................................45
11.12 Survival of Representations, Warranties and Covenants ............46
11.13 Severability .....................................................46
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11.14 Absence of Third Party Beneficiary Rights ........................46
11.15 Mutual Drafting ..................................................46
11.16 Further Representations ..........................................46
11.17 Amendment; Waiver ................................................46
11.18 Gender ...........................................................47
11.19 Headings .........................................................47
11.20 Public Disclosure ................................................47
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ASSET PURCHASE AGREEMENT
THIS ASSET PURCHASE AGREEMENT (together with the schedules and exhibits
attached hereto, this "Agreement") is entered into effective for all purposes
and in all respects as of March 1, 1999, by and among (i) APPNET SYSTEMS, INC.,
a Delaware corporation ("AppNet"), (ii) SALZINGER ACQUISITION CORP., a Delaware
corporation ("Sub"), (iii) SALZINGER & COMPANY, INC., a Virginia corporation
(the "Company"), and (iv) STEVEN M. SALZINGER (the "Stockholder").
WHEREAS, the Stockholder is the record and beneficial owner of all of the
issued and outstanding shares (the "Shares") of Common Stock of the Company,
without par value (the "Common Stock"); and
WHEREAS, AppNet desires to purchase substantially all of the assets of the
Company and the Company desires to sell substantially all of its assets, on the
terms and conditions hereinafter set forth (the "Asset Purchase").
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 are hereby acknowledged, the parties hereto, intending to
be legally bound, hereby agree as follows:
1. DEFINITIONS
1.1. Defined Terms. As used herein, the terms defined below shall have the
following meanings. Any of these terms, unless the context otherwise requires,
may be used in the singular or plural depending on the reference.
"Adjusted Gross Revenue" shall mean the aggregate gross sales of Sub
calculated in accordance with GAAP except that, for purposes of determining
Sub's gross sales for any Earn Out Period (as defined in Section 3.3 (a)),
Sub shall be entitled to include:
all payments made to third party vendors that are paid by Sub and
billed to its clients on a pass through basis (e.g., overnight courier services
such as travel and entertainment expenses, Federal Express, printing services,
etc.) not in excess of 5% of Sub's gross sales (prior to such pass through
expenses), which is consistent with the method used by the Company as of the
date hereof for calculating gross sales,
and Sub shall exclude:
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(w) gross fees and revenues earned by the Company (or earned by, or
paid to, Sub) in its capacity as advisor to the Cisneros Group, (x) sales and
similar taxes, (y) returns, and (z) doubtful accounts receivable attributable to
such revenue.
In the event that Steven M. Salzinger, Michelle Madden or Elizabeth
Wald is assigned to a project for AppNet or another AppNet subsidiary (other
than Sub) with the consent of the Stockholder, the revenue (calculated as hours
spent on such assignment multiplied by such person's then-current hourly rate)
attributable to time spent by Steven M. Salzinger, Michelle Madden or Elizabeth
Wald on projects for AppNet or its subsidiaries (other than Sub) in excess of
five hours per month and not including AppNet or AppNet divisional
administrative functions, shall be added to Sub's gross sales for purposes of
determining Adjusted Gross Revenue.
In the event that Sub and another business unit or division of
AppNet undertake joint development of a service (including, without limitation,
personnel of other AppNet business units or divisions performing services for
Sub), the allocation of revenue to AppNet's other business unit or division and
Sub, respectively, related to such project shall be based on the respective
billing rates charged to third parties for each such entity's personnel
multiplied by the number of hours its personnel devoted to such joint
development.
"Affiliate" shall mean as to any party, any Person which directly or
indirectly, is in control of, is controlled by, or is under common control with,
such party, including any person who would be treated as a member of a
controlled group under Section 414 of the Internal Revenue Code of 1986, as
amended (the "Code"), and any officer or director of such party and, as to a
party who is a natural person, such person's spouse, parents, siblings and
lineal descendants. For purposes of this definition, an entity shall be deemed
to be "controlled by" a Person if the Person possesses, directly or indirectly,
power either to (i) vote ten percent (10%) or more of the securities (including
convertible securities) having ordinary voting power of such entity or (ii)
direct or cause the direction of the management or policies of such entity
whether by contract or otherwise.
"AppNet Common Stock" shall mean the $.0005 par value per share
common stock of AppNet.
"Business" shall mean the business of the Company, AppNet or Sub, as
the case may be.
"Contract" shall mean a note, bond, mortgage, contract, license,
lease, sublease, covenant, commitment, power of attorney, proxy, indenture, or
other agreement or arrangement, oral or written, to which the Company is a party
or by which the Company or any of its assets or property is bound, other than
Government Contracts.
"Encumbrance" shall mean any claim, lien, pledge, option, charge,
easement, security interest, right-of-way, encumbrance, mortgage or other right.
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"EBITDA" means earnings (where earnings is computed by deducting
from Sub's Adjusted Gross Revenue all of Sub's expenses except for interest,
taxes, depreciation and amortization), with such value being expressed as a
percentage of Adjusted Gross Revenue and not in dollars. For purposes of
calculating EBITDA, no bonuses for Steven M. Salzinger, Michelle Madden or
Elizabeth Wald shall be accrued or paid with respect to the period commencing as
of April 1, 1999 and ending on the last day of the Earn Out Period used to
compute the Contingent Amount. EBITDA shall be calculated in accordance with
GAAP; provided, however, that the Adjusted Gross Revenue portion of EBITDA shall
be computed in the manner described in the definition of Adjusted Gross Revenue
and all employment salaries, benefits and other direct expenses of Sub which are
paid by AppNet on behalf of Sub shall be included as expenses of Sub for
purposes of computing EBITDA.
In no event shall any overhead of AppNet be allocated to Sub for
purposes of determining Sub's EBITDA.
In the event that Sub and another business unit or division of
AppNet undertake joint development of a service (including, without limitation,
personnel of other AppNet business units or divisions performing services for
Sub), the allocation of expenses to AppNet's other business unit or division and
Sub, respectively, related to such project shall be based on the respective
billing rates charged to third parties for each such entity's personnel
multiplied by the number of hours its personnel devoted to such joint
development.
"GAAP" shall mean United States generally accepted accounting
principles, consistently applied.
"Government" shall mean any agency or instrumentality of the United
States of America, any state or territory or subdivision thereof or any foreign
country and any agency or instrumentality of any of the foregoing.
"Government Contracts" shall mean any contracts between the Company
and the Government, including, without limitation, any grants, cooperative
agreements and other transactions between the Company and the Government, and
any contract to which the Company is a party where the Government is the
ultimate customer.
"Governmental or Regulatory Authority" shall mean any court,
tribunal, arbitrator, authority (including any quasi-governmental authority),
agency, commission, official or other instrumentality of the United States, any
foreign country or any domestic or foreign state, county, city or other
political subdivision.
"Intellectual Property Rights" shall mean all (i) patents, patent
applications, patent disclosures and inventions, (ii) trademarks, service marks,
trade dress, trade names, logos and corporate names and registrations and
applications for registration thereof together with all of the goodwill
associated therewith, (iii) copyrights (registered or unregistered) and
copyrightable works and registrations and applications for registration thereof,
(iv) mask works and registrations and applications for registration thereof, (v)
computer software, data, data bases and
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documentation thereof, (vi) trade secrets and other confidential information
(including, without limitation, ideas, 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 official and marketing plans and customer and
supplier lists and information), (vii) other intellectual property rights,
(viii) "technical data" as defined in 48 Code of Federal Regulations, Chapter 1,
and (ix) copies and tangible embodiments thereof (in whatever form or medium).
"Legal Requirement" shall mean (i) with respect to any Person, any
judgment, decree, injunction, order, writ or ruling to or by which such Person
is a party or is bound, or (ii) any law, ordinance, statute, rule, regulation,
code or other requirement of any Federal, state, municipal or other
governmental, administrative or judicial body, agency or authority or the common
law.
"Liabilities" shall mean, without limitation, any direct or indirect
liability, indebtedness, guaranty, endorsement, claim, loss, damage, deficiency,
obligation or responsibility, either accrued, absolute, contingent, mature,
unmature or otherwise and whether known or unknown, fixed or unfixed, choate or
inchoate, liquidated or unliquidated, secured or unsecured.
"Material Adverse Effect" shall mean a material adverse effect on
(i) the assets, the business or the condition (financial or otherwise),
properties, liabilities, reserves, working capital, earnings, technology,
prospects or relations with customers, suppliers, distributors, employees or
regulators, or (ii) the right or ability to consummate the transactions
contemplated hereby.
"Person" shall mean any person, limited liability company,
partnership, trust, corporation, business, group, Government or other entity.
"Tax" or "Taxes" shall mean all federal, state, local, foreign and
other taxes, assessments or other Government charges, including, without
limitation, income, estimated income, business, occupation, franchise, property,
sales, transfer, use, employment, commercial rent or withholding taxes,
including interest, penalties and additions in connection therewith.
"Tax Return" means any return, report, information return or other
document (including any related or supporting information) required to be
supplied, or actually supplied, to a Governmental or Regulatory Authority with
respect to Taxes.
2. PURCHASE AND SALE OF PURCHASED ASSETS
2.1. Purchased Assets. On the basis of the representations, warranties,
covenants and agreements and subject to the satisfaction or waiver of the
conditions set forth herein, the Company hereby agrees to sell, convey, assign,
transfer and deliver to Sub and Sub hereby agrees to purchase, accept and take
possession from the Company, all of the assets, properties and other rights
(excluding the Excluded Assets (as defined in Section 2.2)) owned or leased by,
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licensed or used by, the Company in the operation of its Business as it is
presently being conducted, as it has been conducted in the past and as it is
proposed to be conducted in the future (the "Purchased Assets"), including,
without limitation:
(a) all of the Company's rights arising under the Contracts and any
engagement letters or agreements, contract extensions, rebids, existing
proposals, bids, opportunities pursued, purchase orders and other commitments;
(b) all of the Company's ownership or leasehold rights, as the case
may be, in the assets set forth on Schedule 4.12(b);
(c) all of the Company's rights in and to trade names and service
names, assumed names, marks, copyrights, patents, and all applications and
registrations with respect to any of the foregoing, and all telephone and fax
numbers, electronic addresses and passwords, the internet uniform resource
locator "www.salzinger.com", including, without limitation, the Company
Intellectual Property Rights and the Company Third Party Intellectual Property
Rights (as such terms are defined in Section 4.20);
(d) all of the Company's ownership or leasehold rights, as the case
may be, in the computer and telecommunication equipment, software programs,
source codes, object codes, information systems, proprietary interfaces,
routines, modules, procedures, functions, program specifications and related
documentation incidental to or used in performing the Contracts, and all rights
under licenses relating to the use thereof;
(e) all of the Company's supplier, distributor and similar
agreements and other intangible assets incidental to or used in performing the
Contracts;
(f) all of the Company's written or electronic information relating
to the clients (including, without limitation, client lists, client files and
other written accounts of the Company) incidental to or used in performing the
Contracts, and other reasonably and specifically requested information, in each
case, to the extent transferable, sales and marketing data, principal contacts,
and pricing information and copies of accounting records and information and
contract performance information;
(g) all of the Company's permits, franchises and licenses incidental
to or used in performing the Contracts, to the extent such licenses are
transferable under applicable law;
(h) all of the Company's goodwill and going concern value relating
to the Company's Business and the business appurtenant thereto;
(i) all of the Company's deposits, credits, pre-paid expenses,
deferred charges, advance payments, security deposits, rights to escrows and
prepaid items relating to the Contracts;
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(j) all of the Company's ownership or leasehold rights, as the case
may be, in the other tangible assets, including office furniture, office
equipment and supplies, computer hardware and software, leasehold improvements;
(k) all of the Company's books, records, manuals, documents,
correspondence, sales and credit reports, customer lists, literature, brochures,
advertising material and the like;
(l) all of the Company's rights to the Business as it is presently
being conducted, as it has been conducted in the past and as it is proposed to
be conducted in the future;
(m) all of the Company's rights under leases for real or personal
property, and all of the Company's rights under all other leases, contracts,
agreements and purchase and sales orders; and
(n) all of the Company's claims, claims in action, causes of action
and judgments.
2.2. Excluded Assets. Notwithstanding the foregoing, the Purchased Assets
shall not include the following properties, assets and other rights of the
Company (the "Excluded Assets") which shall be retained by the Company:
(a) cash;
(b) accounts receivable, other than as described in Section 6.20
hereof; and
(c) the Company's rights under its advisory agreement with the
Cisneros Group, other than as described in Section 6.20 hereof.
2.3. Assumed Liabilities. On the basis of the representations, warranties,
covenants and agreements and subject to the satisfaction or waiver of the
conditions set forth herein, Sub shall assume, discharge and perform when
lawfully due only the performance obligations and duties of the Company to
perform under the Contracts existing on or after the Closing Date (the "Assumed
Liabilities").
2.4. Non-Assumption of Liabilities. Except for the Assumed Liabilities,
Sub shall not assume, and the Company shall remain liable for, any and all
Liabilities or Encumbrances of the Company, whatsoever, including, without
limitation:
(a) all bank debt, senior debt or other debt obligations of the
Company;
(b) liens and encumbrances to which the Purchased Assets are
subject;
(c) any liability or obligation of the Company or any other person
or entity, absolute or contingent, known or unknown, not expressly agreed to be
assumed pursuant to the provisions of Section 2.3;
(d) any liability or obligation relating to Taxes of the Company,
including any interest or penalties related thereto;
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(e) any liability or obligation that is inconsistent with the
Company's and the Stockholder's representations and warranties in this
Agreement, including, without limitation, the schedules and exhibits hereto;
(f) any liability or obligation relating to any breach or
nonperformance under any of the Assumed Liabilities to the extent such breach or
nonperformance existed prior to the Closing Date;
(g) any liability or obligation, whether in tort, contract or for
violation of any law, statute, rule or regulation by the Company or any officer,
director, employee or agent of the Company, that arises out of or results from
any act, omission, occurrence or state of facts prior to the Closing Date;
(h) any liability or obligation of the Company with respect to or
arising out of any Benefit Plan (as defined in Section 4.9);
(i) any legal, accounting, brokerage, finder's fee or other expenses
incurred by the Company in connection with this Agreement or the consummation of
the transactions contemplated hereunder;
(j) any obligation relating to overpayments, billing errors or
similar adjustments with respect to payments received by the Company prior to
the Closing Date;
(k) any warranty or performance liability, whether based upon the
performance of the Company or any subcontractor or agent of the Company, under
any performance or contract deliverable that has or will be performed or
delivered prior to the Closing Date; and
(l) any liability payable to an Affiliate of the Company or the
Stockholder.
2.5. Conveyance of the Purchased Assets. On the Closing Date, the Company
shall convey good and marketable title to the Purchased Assets to Sub free and
clear of any Encumbrances, except for the leased personal property identified on
Schedule 4.12(b), which leasehold interests shall be transferred to Sub in
accordance with the consent of the lessor as required by Section 7.11.
2.6. Consideration for Purchase of Assets. In consideration for the
transfer, sale and delivery to AppNet of the Purchased Assets, AppNet will
deliver and issue to the Company the following amounts (in the aggregate, the
"Purchase Price"), subject to reduction pursuant to Sections 7.12 consisting of:
(a) $5,000,000 in cash payable at the Closing (as defined in Section
3.1), subject to adjustment as provided herein (the "Cash Payment");
(b) An aggregate of 700,000 shares of AppNet Common Stock (the
"Stock Payment"); and
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(c) The Contingent Amount (as defined in Section 3.3(a)), if any,
pursuant to the terms and conditions of Section 3.3 hereof.
3. CLOSING
3.1. Time and Place of the Closing. The closing of the Asset Purchase and
the consummation of the other transactions contemplated by this Agreement (the
"Closing") shall take place at the offices of Tucker Flyer, a professional
corporation, at 1615 L Street, N.W., Suite 400, Washington, D.C. 20036, as soon
as practicable after all conditions to the Closing shall have been satisfied or
waived, or at such other time and date as the parties hereto may mutually agree,
which date shall be referred to as the "Closing Date."
3.2. Procedure at Closing. On the Closing Date, the parties agree to take
the following steps listed below (provided, however, that upon their completion
all such steps shall be deemed to have occurred simultaneously):
(a) AppNet and Sub shall deliver to the Company the closing
documents specified in Section 8.
(b) AppNet shall pay the Cash Payment by wire transfer of
immediately available funds to accounts designated by the Company.
(c) AppNet shall issue and deliver the shares of AppNet Common Stock
comprising the Stock Payment.
(d) The Stockholder and the Company shall deliver to AppNet and Sub
the closing documents specified in Section 7.
(e) The Company shall deliver to Sub such bills of sale, deeds,
assignments, certificates of title and other documents as may be reasonably
requested by Sub in order to convey good and marketable title to all of the
Purchased Assets, free and clear of all Encumbrances and in order to carry out
the intentions and purposes of this Agreement
3.3. Payment of Contingent Amount.
(a) In the event that during any of the seven twelve-month periods
commencing on April 1, 1999, May 1, 1999, June 1, 1999, July 1, 1999, August 1,
1999, September 1, 1999, or October 1, 1999, respectively (each, an "Earn Out
Period"), Sub has (i) Adjusted Gross Revenue of at least $4,000,000 and (ii)
EBITDA of at least 20%, AppNet shall pay, as additional purchase consideration,
a one-time payment with respect only to the best one of the Earn Out Periods, to
the Company such portion of $5,000,000 as is determined in accordance with
Exhibit A (the "Contingent Amount"). For purposes of determining Sub's financial
performance during the Earn Out Period, the accounting method applied shall be
an accrual basis consistent with GAAP.
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(b) Subject to the terms of Section 3.3(c), any Contingent Amount
payable shall be paid by AppNet to the Company not later than 10 days after the
final determination made pursuant to Section 3.3(d). The Contingent Amount shall
be paid in cash (or, at the Company's option, 75% in cash and 25% in AppNet
Common Stock, valued at $5.00 per share (the "Stock Price")), up to the maximum
amount specified on Exhibit A. In case AppNet shall at any time subdivide (by
any stock split, stock dividend or otherwise) its outstanding shares of Common
Stock into a greater number of shares, the Stock Price in effect immediately
prior to such subdivision shall be proportionately reduced, and, in case the
outstanding shares of Common Stock shall be combined into a smaller number of
shares, the Stock Price in effect immediately prior to such combination shall be
proportionately increased.
(c) In the event that, on or before the date the Contingent Amount
is payable to the Company pursuant to this Section 3.3 (the "Contingent Payment
Date"), AppNet has sent a Claim Notice (as defined in Section 9.2(b)), AppNet
shall be entitled to withhold from the Contingent Amount so payable an amount
reasonably necessary to reimburse AppNet for Damages (as defined in Section
9.1(a)) relating to any Claim (as defined in Section 9.2) for which a Claim
Notice has been sent by AppNet prior to the Contingent Payment Date. Should
AppNet be entitled to indemnification for Damages pursuant to Article 9, AppNet
shall be entitled to offset the Contingent Amount and, upon resolution of all
Claims for which a Claim Notice has been sent on or before the Contingent Amount
Payment Date, AppNet shall pay to the Company, in cash (or, at the Company's
option, in the combination of cash and stock set forth in, and adjusted pursuant
to, Section 3.3(b)), any remaining portion of the Contingent Amount not so
offset by AppNet.
(d) On or before November 1, 2000, AppNet shall deliver to the
Stockholder a statement (the "Earn-Out Statement") setting forth whether any of
the Contingent Amount has been earned. The Stockholder and his representatives
shall have the right to review all work papers and procedures used to prepare
the Earn-Out Statement and shall have the right to perform any other reasonable
procedures necessary to verify the accuracy thereof. Unless the Stockholder,
within 30 days after delivery to the Stockholders of the Earn-Out Statement,
notifies AppNet in writing that he objects to the Earn-Out Statement, and
specifies the basis for such objection, such Earn-Out Statement shall become
final, binding and conclusive upon the parties hereto for purposes of this
Agreement. If AppNet and the Stockholder are unable to resolve any objections to
the Earn-Out Statement within ten days after any such notification has been
given, AppNet shall pay to the Stockholder any undisputed portion of the
Contingent Amount and the dispute shall be referred to an independent accounting
firm that has not represented any of the parties hereto within the preceding two
(2) years (the "Designated Accountant") for resolution (or, if the Designated
Accountant is unavailable, to another nationally recognized public accounting
firm mutually agreed upon by the Stockholder and AppNet within five days from
the date upon which the Designated Accountant notifies the parties that it is
not available). Within 30 days after its appointment, the Designated Accountant
will make a determination as to each of the items in dispute, which
determination shall be final, conclusive and binding upon each of the parties
hereto. AppNet and the Stockholder shall cooperate with each other and with each
other's authorized representatives in order to resolve any
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and all matters in dispute under this Section 3.3 as soon as practicable, and
each of AppNet and the Stockholder shall pay half of the fees and expenses of
the Designated Accountant.
(e) Neither AppNet nor Sub shall not terminate the Stockholder's or
Michelle Madden's or Elizabeth Wald's employment with Sub prior to September 30,
2000; except in the event of Cause as defined in the Senior Management Agreement
between the Stockholder and Sub executed at the Closing, or the Employment
Agreement between Sub and Michelle Madden or Elizabeth Wald, as the case may be,
executed at the Closing. During any Earn Out Period, Steven M. Salzinger,
Michelle Madden or Elizabeth Wald shall not be assigned to projects for AppNet
or AppNet subsidiaries (other than Sub) without the prior consent of the
Stockholder.
3.4. Holdback of Portion of Cash Payment. Notwithstanding anything
contained in this Agreement to the contrary, AppNet shall withhold from the Cash
Payment payable at the Closing a total of $850,000 (the "Holdback Amount"),
which shall be held by AppNet as collateral for any amounts payable by the
Company or the Stockholder to AppNet pursuant to Article 9. In the event any
amounts are payable by the Company or the Stockholder to AppNet pursuant to
Article 9, AppNet may offset such amounts from the Holdback Amount. Any portion
of the Holdback Amount not so offset by AppNet shall be paid by AppNet to the
Company on the later of (i) the first anniversary of the Closing Date or (ii)
the resolution of any Claim for which a Claim Notice has been sent by AppNet
prior to the first anniversary of the Closing Date. No limitation on such right
of offset shall otherwise affect AppNet's rights hereunder or otherwise. The
remedy of offset shall be in addition to and not in limitation of any injunctive
relief or other rights or remedies to which AppNet is or may be entitled, at law
or equity, under this Agreement.
3.5. Withholding. AppNet shall be entitled to deduct and withhold from the
Cash Payment or the Contingent Amount otherwise payable pursuant to this
Agreement to the Company such amounts as AppNet is required to deduct and
withhold with respect to the Cash Payment or the Contingent Amount, as the case
may be, under the Code or any provision of state, local or foreign Tax law.
4. REPRESENTATIONS AND WARRANTIES OF THE COMPANY AND THE STOCKHOLDER
To induce AppNet and Sub to enter into this Agreement and to consummate
the transactions contemplated by this Agreement, the Company and the
Stockholder, jointly and severally, represent and warrant to AppNet and Sub, as
of the date hereof and as of the Closing Date, as set forth below:
4.1. Organization. The Company is a corporation duly organized, validly
existing and in good standing under the laws of the Commonwealth of Virginia.
4.2. Power and Authority. The Company has all requisite corporate power
and authority to own, lease and operate its properties and to conduct its
Business as it is presently being conducted, as it has been conducted in the
past and as it is proposed to be conducted in the future. Except as set forth on
Schedule 4.2, the Company is duly qualified or licensed as a
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foreign corporation in good standing in each jurisdiction in which the character
of its properties or the nature of its business activities requires such
qualification, except where the failure to be so qualified or licensed would not
have a Material Adverse Effect on the Company.
4.3. Authority for Agreement. The execution, delivery and performance of
this Agreement and the consummation of the transactions contemplated hereby have
been authorized by all requisite corporate action on the part of the Company.
The Company has full corporate power, authority and legal right to enter into
this Agreement and to consummate the transactions contemplated hereby. The
Stockholder has the legal capacity to enter into this Agreement and to
consummate the transactions contemplated hereby. This Agreement has been duly
executed and delivered by the Stockholder and, assuming the due authorization,
execution and delivery by AppNet and Sub of this Agreement, this Agreement is a
legal, valid and binding obligation of the Stockholder enforceable against the
Stockholder in accordance with its terms, except as enforceability may be
limited by applicable bankruptcy, insolvency, reorganization, moratorium or
other similar laws affecting the enforcement of creditors' rights in general.
This Agreement has been duly executed and delivered by the Company and, assuming
the due authorization, execution and delivery by AppNet and Sub of this
Agreement, this Agreement is a legal, valid and binding obligation of the
Company enforceable against the Company in accordance with its terms, except as
enforceability may be limited by applicable bankruptcy, insolvency,
reorganization, moratorium or other similar laws affecting the enforcement of
creditors' rights in general.
4.4. No Violation to Result. The execution, delivery and performance of
this Agreement and the consummation of the transactions contemplated hereby and
the fulfillment of the terms hereof: (i) are not in violation or breach of, do
not conflict with or constitute a default under the Certificate of Incorporation
or Bylaws of the Company or any Contract to which the Company or the Stockholder
is a party, (ii) will not accelerate or permit the acceleration of the
performance on the part of the Company or the Stockholder required by any of the
terms of any Contract to which the Company or the Stockholder is a party or
which affects the Company; (iii) will not be an event which, after notice or
lapse of time or both, will result in any such violation, breach, conflict,
default, or acceleration; (iv) to the best of the Company's and the
Stockholder's knowledge will not result in a violation under any law, judgment,
decree, order, rule, regulation, permit or other legal requirement of any
Governmental or Regulatory Authority, court or arbitration tribunal whether
federal, state, provincial, municipal or local (within the U.S. or otherwise) at
law or in equity, which is applicable to the Company; and (v) will not result in
the creation or imposition of any Encumbrance in favor of any Person upon any of
the Purchased Assets.
4.5. Capitalization.
(a) Schedule 4.5 sets forth, with respect to the Company, (i) the
number of authorized shares of each class of its capital stock, (ii) the number
of issued and outstanding shares of each class of its capital stock and the
record owner thereof, and (iii) the number of shares of each class, if any,
which are held in treasury. All of the issued and outstanding shares of capital
stock of the Company (A) have been duly authorized and validly issued and are
fully
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paid and non-assessable, (B) were issued in compliance with all applicable
state and federal laws and (C) were not issued in violation of any preemptive
rights or rights of first refusal. No preemptive rights or rights of first
refusal exist with respect to the shares of capital stock of the Company, and no
such rights arise by virtue of or in connection with the transactions
contemplated hereby. There are no outstanding or authorized rights, options,
warrants, convertible securities, subscription rights, conversion rights,
exchange rights or other agreements or commitments of any kind that could
require the Company to issue or sell any shares of the Company Common Stock (or
securities convertible into or exchangeable for shares of its Common Stock).
There are no outstanding stock appreciation, phantom stock, profit participation
or other similar rights with respect to the Company. There are no proxies,
voting rights or other agreements or understandings with respect to the voting
or transfer of the capital stock of the Company. The Company is not obligated to
redeem or otherwise acquire any of its outstanding shares of capital stock.
(b) The Stockholder is the sole legal and beneficial holder of the
issued and outstanding shares of capital stock of the Company, and the
Stockholder owns all such shares free and clear of any mortgage, security
interest, pledge, hypothecation, assignment, deposit arrangement, Encumbrance,
lien (statutory or otherwise), charge, preference, priority or other security
agreement, option, warrant, attachment, right of first refusal, preemptive
right, conversion, put, call or other claim or right, restriction on transfer,
or preferential arrangement of any kind or nature whatsoever (including any
restriction on the transfer of any assets, any conditional sale or other title
retention agreement, any financing lease involving substantially the same
economic effect as any of the foregoing and the filing of any financing
statement under the Uniform Commercial Code or comparable law of any
jurisdiction).
4.6. Financial Statements. Schedule 4.6 includes true, complete and
correct copies of the unaudited balance sheets of the Company as of the end of
the periods identified on Schedule 4.6 (such dates being the end of the
Company's three (3) most recently completed fiscal years), and unaudited
statements of income for such periods (collectively, the "Annual Financials").
Other than as disclosed on Schedule 4.6, the Annual Financials have been
prepared in accordance with GAAP consistently applied. Each of the balance
sheets included in the Annual Financials presents fairly the financial condition
of the Company as of the dates indicated thereon, and each of the statements of
income, cash flows and retained earnings included in the Annual Financials
presents fairly the results of its operations for the periods indicated thereon.
During the periods covered by the Annual Financials and since the Balance Sheet
Date, there has been no material change in the Company's accounting policies.
There are no material, special or non-recurring items of income or expense
during the periods covered by the Annual Financials and the balance sheets
included in the Annual Financials do not reflect any write-up or revaluation
increasing the book value of any assets, except as specifically disclosed in the
notes thereto.
4.7. Liabilities and Obligations.
(a) Except as disclosed on Schedule 4.7(a), there are no Liabilities
or obligations of the Company, other than: (i) those Liabilities reflected on
the Current Balance Sheet and not
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previously paid or discharged; and (ii) those Liabilities incurred after the
Balance Sheet Date arising in the ordinary course of business, which were
incurred consistent with past practice under any contract, commitment or
agreement specifically disclosed on any schedule to this Agreement.
(b) Schedule 4.7(b) sets forth a summary description of all advance
payments or deposits held by the Company and reflected in the Annual Financials
and the related obligations thereunder.
4.8. Adverse Changes. From December 31, 1998: (i) to the best of the
Company's and the Stockholder's knowledge, there has been no change in the
condition (financial or otherwise), Business, net worth, assets, properties,
Liabilities or obligations (fixed, contingent, known, unknown or otherwise) of
the Company which has had or is likely to have a Material Adverse Effect on the
Company, and there has been no occurrence, circumstance or combination thereof
which might reasonably be expected to result in any such Material Adverse Effect
before or after the Closing Date; (ii) the Company has not declared or paid any
dividend or distribution in respect of the capital stock, or any direct or
indirect redemption, purchase or other acquisition of any of the capital stock
of the Company, and (iii) the Company has complied with all of the covenants set
forth in Section 6.3, to the same extent as if this Agreement had been executed
on December 31, 1998.
4.9. Employee Matters.
(a) All employee benefit plans, programs, policies and arrangements
(whether formal or informal, written or unwritten, and whether maintained for
the benefit of a single individual or more than one individual) maintained or
contributed to by the Company for the benefit of any current or former employee
of the Company or in which such employees are entitled to participate are listed
in Schedule 4.9(a) (the "Benefit Plans"). With respect to each Benefit Plan,
true, correct and complete copies of all of the following documents, if
applicable, will be delivered or made available to AppNet and Sub substantially
prior to the Closing Date: (i) all plan documents and amendments thereto; (ii)
all written descriptions of any oral plans or policies; (iii) all trust
agreements; (iv) all annuity contracts, insurance policies or contracts and
service agreements; (v) the three (3) most recent Forms 5500 and any financial
statements attached thereto; (vi) the most recent actuarial and valuation
report; (vii) the most recent IRS determination letter; (viii) the most recent
summary plan description; and (ix) copies of all nondiscrimination testing for
the last three (3) years. Except as set forth on Schedule 4.9(a), each Benefit
Plan and the administration thereof complies, and has at all times complied,
with the terms of such Benefit Plan and with the requirements of all applicable
law, including, without limitation, the Employee Retirement Income Security Act
of 1974, as amended ("ERISA"), and the Code. Except as set forth on Schedule
4.9(a), each Benefit Plan intended to qualify under Section 401(a) of the Code
so qualifies, and each trust which forms a part of any such Benefit Plan is
exempt from taxation under Section 501(a) of the Code. No Benefit Plan subject
to Part 3 of Title I of ERISA has incurred any "accumulated funding deficiency"
within the meaning of Section 302 of ERISA or Section 412 of the Code. No
liability has been incurred or is expected to be incurred under Title IV of
ERISA by any party with respect to any Benefit Plan, or any
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other plan presently or heretofore maintained or contributed to by the Company,
any predecessor to the Company, or any entity that is or at any time was a
member of a controlled group, as defined in Section 412(n)(6)(B) of the Code,
which includes or included the Company ("Controlled Group Member"). Neither the
Company, nor any Controlled Group Member has incurred any liability for any Tax
imposed under Sections 4971 through 4980B of the Code or civil liability under
Sections 502(i) or (l) of ERISA. The "amount of unfunded benefit liabilities"
within the meaning of Section 4001(a)(18) of ERISA does not exceed zero with
respect to any Benefit Plan subject to Title IV of ERISA. No Benefit Plan is a
"multiemployer plan" within the meaning of Section 3(37) of ERISA. No Benefit
Plan provides health or death benefit coverage to any employee or his spouse or
dependents beyond the termination of an employee's employment, except as
required by Part 6 of Subpart B of Title I of ERISA or Section 4980B of the
Code. No "reportable event" (within the meaning of Section 4043 of ERISA) has
occurred with respect to any Benefit Plan or any plan maintained by a Controlled
Group Member since the effective date of said Section 4043. The Company has no
liability (whether actual, contingent or otherwise) with respect to any employee
benefit plan or arrangement sponsored or maintained by a Controlled Group
Member. No suit, actions or other litigation (excluding claims for benefits
incurred in the ordinary course of plan activities) have been brought against or
with respect to any Benefit Plan, and no suit, action, or other litigation is
threatened by, against, or relating to any Benefit Plan and the Company does not
have any knowledge of any fact that could form the basis for any such suit,
action or litigation. No "prohibited transaction" within the meaning of Sections
406 or 407 of ERISA or Section 4975 of the Code has occurred with respect to any
Benefit Plan. No Benefit Plan is presently under audit or examination by the
IRS, the Department of Labor, or any other Governmental or Regulatory Authority,
and no matters are pending with respect to any Benefit Plan under the IRS
Voluntary Compliance Resolution program, its Closing Agreement Program, or any
other similar program. All contributions to Benefit Plans that were required to
be made under such Benefit Plans will have been made as of the Balance Sheet
Date, and all benefits accrued under any unfunded Benefit Plan will have been
paid, accrued or otherwise adequately reserved in accordance with GAAP as of
such date, and the Company will have performed by the Closing Date any
obligations required to be performed as of such date under all Benefit Plans. No
Benefit Plan contains any term or provision or is subject to any law that would
prohibit the transactions contemplated by this Agreement, or that would give
rise to the vesting of benefits, payments, or liabilities as a result of the
transactions contemplated by this Agreement, except to the extent that full
vesting is required under any tax-qualified Benefit Plan under Section 411 of
the Code.
(b) Schedule 4.9(b) contains a complete and correct list of all
employees of the Company as of the date hereof and the current compensation rate
payable to each such employee. Except as set forth in Schedule 4.9(b), (i) the
terms of employment or engagement of all directors, officers, employees, agents,
consultants and professional advisers of the Company are such that their
employment or engagement may be terminated upon not more than two weeks' notice
given at any time and without liability for payment of compensation or damages,
(ii) there are no severance payments which are or could become payable by the
Company to any director, officer or other employee of the Company under the
terms of any oral or written agreement or commitment or any law, custom, trade
or practice, and (iii) there are no agreements, contracts or
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commitments, oral or written, between the Company and any employee, consultant
or independent contractor.
(c) The Company is not bound by or subject to (and none of its
assets or properties are bound by or subject to) any arrangement with any labor
union. No employees of the Company are or ever have been represented by any
labor union or covered by any collective bargaining agreement while employed by
the Company, and, to the best of the Company's and the Stockholder's knowledge,
no campaign to establish such representation is in progress. There is no pending
or threatened labor dispute involving the Company and any group of their
employees nor has the Company experienced any labor interruptions. The Company
is and has been in compliance with all applicable laws respecting employment and
employment practices, terms and conditions of employment, and wages and hours,
including without limitation any such laws regarding employment documentation,
minimum wage and hours, workers' compensation, family and medical leave, the
Immigration Reform and Control Act, and occupational safety and health
requirements, and the Company has not engaged in any unfair labor practice. All
persons classified by the Company as independent contractors do satisfy and have
satisfied the requirements of law to be so classified, and the Company has fully
and accurately reported their compensation on IRS Forms 1099 when required to do
so.
4.10. Taxes.
(a) The Company has filed or caused to be filed with the appropriate
Governmental or Regulatory Authority any and all Tax Returns required to be
filed by it as of the date hereof, or requests for extensions to file Tax
Returns which have been filed have been timely filed or granted and have not
expired, and all such Tax Returns are true, complete and accurate in all
respects, except to the extent that such failures to file, have extensions
granted that remain in effect or be complete and accurate in all respects, as
applicable, individually or in the aggregate, would not have a Material Adverse
Effect on the Company. Except as set forth in Schedule 4.10(a), the Company has
paid all Taxes shown as due, claimed to be due by any Governmental or Regulatory
Authority, or accruable with respect to periods through the Closing Date, except
for such Taxes as (i) are fully reserved for in the Current Balance Sheet or
(ii) were incurred after the Balance Sheet Date in the ordinary course of
business and are not due and payable as of the Closing Date. The Company has
complied in all respects with all applicable laws, rules and regulations
relating to the payment and withholding of Taxes (including, without limitation,
withholding of Taxes pursuant to Sections 1441 and 1442 of the Code or similar
provisions under any foreign laws and withholding with respect to employee
wages) and has, within the time and manner prescribed by law, withheld and paid
over to the proper Governmental or Regulatory Authority all amounts required to
be withheld and paid over under all applicable laws. No federal, state, local or
foreign audits or other administrative proceedings or court proceedings
("Audits") exist or have been initiated with regard to any Taxes or Tax Returns
of the Company, and the Company has not received any notice that such an Audit
is pending or threatened with respect to any Taxes due from or with respect to
the Company or any Tax Return filed or required to be filed by or with respect
to the Company.
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(b) The Company has delivered to AppNet complete and accurate copies
of all filed federal income Tax Returns relating to taxable years beginning on
or prior to the Closing Date, and all examination reports and statements of
assessment or deficiency issued relating to such Tax Returns, and has delivered
or made available to AppNet complete and accurate copies of all other filed Tax
Returns of the Company, together with all related examination reports and
statements of assessment or deficiency for all periods beginning on or prior to
the Closing Date.
(c) The Company has not been informed by any Governmental or
Regulatory Authority that such authority believes that the Company was required
to file any Tax Return that has not been filed.
(d) The Company will not be required to include any amounts in
income for taxable years ending after the Closing Date pursuant to Section
481(a) of the Code or any similar provision of state or local law by reason of a
change in accounting method occurring in a taxable year ending on or before the
Closing Date, and neither the Company nor the Stockholder has any knowledge that
any Governmental or Regulatory Authority has proposed any change in method of
accounting that would require inclusion of such amounts.
(e) The Company has not undergone a change in its method of
accounting resulting in an adjustment to its taxable income pursuant to Section
481(a) of the Code which would be required to be included in income of the
Company for any taxable year ending after the Closing Date.
4.11. Investments. The Company has no debt, equity or other investment or
interest in any Person or any strategic alliance with any Person. The Company
has no commitments to contribute to the capital of, make loans to or share
losses of, any Person.
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4.12. Property.
(a) The Company has never owned any real property. Schedule 4.12(a)
sets forth an accurate and complete list of all leases of real property leased
by the Company (collectively, the "Facilities"). Except as otherwise disclosed
on Schedule 4.12(a), (i) to the best of the Company's and the Stockholder's
knowledge, there are no outstanding written or oral leases, rights to occupancy,
or tenancies of any kind (including tenancies by sufferance or holdover
tenancies arising under expired written or oral leases) covering or in any way
affecting the Facilities or any part or parts thereof; (ii) to the best of the
Company's and the Stockholder's knowledge, no person, firm or corporation other
than the Company has any rights (including rights arising under an installment
contract, option to purchase, easement, right-of-way, or otherwise) with respect
to the Facilities or any part thereof; and (iii) there have been no improvements
to, construction on, work done at, or services or material supplied to, the
Facilities or any part or parts thereof for which payment in full has not been
made and which might give rise to mechanic's liens or other lien rights with
respect to the Facilities, except in the ordinary course of business. All leases
set forth on Schedule 4.12(a) are in full force and effect and constitute valid
and binding agreements of the Company and, to the knowledge of the Company, the
other parties thereto in accordance with their respective terms.
(b) Schedule 4.12(b) sets forth an accurate list of all the Company
owned and leased personal property (i) as of the Balance Sheet Date, or (ii)
acquired since the Balance Sheet Date, including in each case true, complete and
correct copies of leases for equipment and also including an indication as to
which assets are currently owned, or were formerly owned, by the Stockholder or
business or personal Affiliates of the Company or the Stockholder. All of the
vehicles and other material machinery and equipment listed on Schedule 4.12(b)
are in good working order and condition, ordinary wear and tear excepted. All
fixed assets used by the Company that are material to the operation of the
Business, as it is presently being conducted and as it is proposed to be
conducted in the future, are either owned by the Company or leased under an
agreement listed on Schedule 4.12(b).
(c) Except as set forth on Schedule 4.12(c), the Company has good
and marketable title to the Purchased Assets, free and clear of any and all
Encumbrances and defects in title. The Purchased Assets, taken together, are
adequate for the operation of the Company's Business as it is presently being
conducted and as it is proposed to be conducted in the future. Except as set
forth on Schedule 4.12(c), the Company has the power to convey, transfer and
assign ownership of the Purchased Assets and the Assumed Liabilities without the
necessity of any approvals or consents of any person.
4.13. Contracts. Schedule 4.13 constitutes an accurate and complete list
of each Contract. Each Contract is in full force and effect, is a valid, binding
and enforceable obligation by or against the Company and the other parties
thereto, and, to the best of the Company's or the Stockholder's knowledge, no
event has occurred which constitutes or, with the giving of notice or passage of
time, or both, would constitute, a default or breach thereunder. Prior to the
Closing Date, the Company will deliver or will cause to be delivered or will
make available to AppNet and Sub correct and complete copies of each Contract
and all amendments thereto. Except as set
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forth on Schedule 4.13, there exists no restrictive covenants of any nature
whatsoever in any of the Contracts. The Company will not experience a loss on
any of the Contracts.
4.14. Government Contracts. The Company is not, and has never been, a
party to any Government Contract.
4.15. Litigation. Except as set forth in Schedule 4.15, there is no
litigation, suit, proceeding, action, claim, demand or investigation, at law or
in equity, pending or to the best of the Company's and the Stockholder's
knowledge threatened against or affecting the Company (including, without
limitation, the Company Intellectual Property Rights, any trade secrets of the
Company or Company Third Party Intellectual Property Rights (as such terms are
defined in Section 4.20)) before any court, agency, authority or arbitration
tribunal, including, without limitation, any product liability, workers'
compensation or wrongful dismissal claims, or claims, actions, suits, demands or
proceedings relating to toxic materials, hazardous substances, pollution or the
environment. To the best of the Company's and the Stockholder's knowledge, there
are no facts that would likely result in any such litigation, suit, proceeding,
action, claim or investigation. The Company is not subject to or in default with
respect to any notice, order, writ, injunction or decree of any court, agency,
authority or arbitration tribunal.
4.16. Compliance with Laws. Except as set forth in Schedule 4.16, the
Company has complied and is currently in compliance with all laws, regulations,
rules, orders, permits, judgments, decrees and other requirements and policies
imposed by any Governmental or Regulatory Authority applicable to it, its
properties or the operation of its Business. The Company has not received any
notice or citation for noncompliance with any of the foregoing, and there exists
no condition, situation or circumstance, nor has there existed such a condition,
situation or circumstance, which, after notice or lapse of time, or both, would
constitute noncompliance with or give rise to future liability with regard to
any of the foregoing. The Company has all licenses, permits, approvals,
qualifications or the like, from any Government, Governmental or Regulatory
Authority or any third party necessary for the conduct of the Company's
Business, as it is presently being conducted and as it is proposed to be
conducted in the future, and all such items are in full force and effect.
4.17. Environmental and Safety Matters.
(a) For purposes of this Agreement, the term "Environmental and
Safety Requirements" shall mean all federal, state, local and foreign statutes,
regulations, ordinances and other provisions having the force or effect of law,
all judicial and administrative orders and determinations, all contractual
obligations and all common law, in each case concerning public health and
safety, worker health and safety and pollution or protection of the environment
(including, without limitation, all those relating to the presence, use,
production, generation, handling, transport, treatment, storage, disposal,
distribution, labeling, testing, processing, discharge, Release, threatened
Release, control or cleanup of any hazardous or otherwise regulated materials,
substances or wastes, chemical substances or mixtures, pesticides, pollutants,
contaminants, toxic chemicals, petroleum products or byproducts, asbestos,
polychlorinated biphenyls, noise or radiation); "Release" shall have the meaning
set forth in CERCLA (as
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defined below); and "Environmental Lien" shall mean any lien, whether recorded
or unrecorded, in favor of any Governmental or Regulatory Authority, relating to
any liability of the Company arising under any Environmental and Safety
Requirements.
(b) Except as set forth on Schedule 4.17, to the best of the
Company's and the Stockholder's knowledge:
(i) The Company has complied with and is currently in
compliance with all Environmental and Safety Requirements, and the Company has
not received any oral or written notice, report or information regarding any
Liabilities (whether accrued, absolute, contingent, unliquidated or otherwise)
or any corrective, investigatory or remedial obligations arising under
Environmental and Safety Requirements which relate to the Company or any of its
properties or facilities.
(ii) Without limiting the generality of the foregoing, the
Company has obtained and complied with, and is currently in compliance with, all
permits, licenses and other authorizations that may be required pursuant to any
Environmental and Safety Requirements for the occupancy of its properties or
facilities or the operation of its Businesses as it is presently being
conducted, as it has been conducted in the past and as it is proposed to be
conducted in the future. A list of all such permits, licenses and other
authorizations which are material to the Company is set forth on Schedule 4.17
attached hereto.
(iii) Neither this Agreement nor the consummation of the
transactions contemplated by this Agreement shall impose any obligations on the
Company or otherwise for site investigation or cleanup, or notification to or
consent of any Governmental or Regulatory Authorities or third parties under any
Environmental and Safety Requirements (including, without limitation, any so
called "transaction-triggered" or "responsible property transfer" laws and
regulations).
(iv) The Company has not treated, stored, disposed of,
arranged for or permitted the disposal of, transported, handled or Released any
substance (including, without limitation, any hazardous substance), or owned,
occupied or operated any facility or property, so as to give rise to Liabilities
of the Company for response costs, natural resource damages or attorneys fees
pursuant to the Comprehensive Environmental Response, Compensation and Liability
Act of 1980, as amended ("CERCLA"), or any other Environmental and Safety
Requirements.
(v) Without limiting the generality of the foregoing, no
facts, events or conditions relating to the past or present properties,
facilities or operations of the Company prevent, hinder or limit continued
compliance with Environmental and Safety Requirements, give rise to any
corrective, investigatory or remedial obligations pursuant to Environmental and
Safety Requirements or give rise to any other Liabilities (whether accrued,
absolute, contingent, unliquidated or otherwise) pursuant to Environmental and
Safety Requirements (including, without limitation, those Liabilities relating
to onsite or offsite Releases or threatened Releases of hazardous materials,
substances or wastes, personal injury, property damage or natural resources
damage).
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(vi) The Company has not, either expressly or by operation of
law, assumed or undertaken any material liability or corrective, investigatory
or remedial obligation of any other Person relating to any Environmental and
Safety Requirements.
(vii) No Environmental Lien has attached to any property
leased or operated by the Company.
4.18. Customers; Suppliers.
(a) Except as set forth in Schedule 4.18(a), no single customer
accounted for more than 5% of the Company's revenues for the fiscal years ended
December 31, 1997 or December 31, 1998. Except as set forth on Schedule 4.18(a),
no customer listed on Schedule 4.18(a) (a "Significant Customer") has canceled
or otherwise terminated or threatened to cancel or otherwise terminate its
relationship with the Company, or during such periods has materially decreased
its usage or purchase of the Company's services or products. To the best of the
Company's and the Stockholder's knowledge, no Significant Customer has any plan
or intention to terminate, cancel or otherwise materially modify its
relationship with the Company or materially decrease or limit its usage,
purchase or distribution of the services or products of the Company.
(b) The relationships of the Company with its suppliers are good
commercial working relationships and, except as set forth on Schedule 4.18(b),
no supplier has during the last twelve months terminated or threatened to
terminate, its relationship with the Company or has during the last twelve (12)
months decreased or limited or threatened to decrease or limit, its services,
supplies or materials to the Company. No supplier is a sole source of supply of
any good or service to the Company. The Company does not have any knowledge that
any of the suppliers intends to terminate or otherwise modify adversely to the
Company its relationship with the Company or to decrease or limit its services,
supplies or materials to the Company.
4.19. Insurance. Schedule 4.19 sets forth an accurate list of all
insurance policies carried by the Company (all of which policies remain in full
force and effect) and all insurance loss runs or workers' compensation claims.
The Company has made available to AppNet and Sub true, complete and correct
copies of all current insurance policies of the Company, all of which are in
full force and effect. All premiums due and payable under all such policies have
been paid and the Company is otherwise in full compliance with the terms of such
policies (or other policies providing substantially similar insurance coverage).
Such policies of insurance are of the type and in amounts customarily carried by
persons conducting business similar to that of the Company. Neither the Company
nor the Stockholder knows of any threatened termination of, or material premium
increase with respect to, any of such policies.
4.20. Intellectual Property.
(a) The Company owns, or possesses valid written licenses to use all
patents, trademarks, trade names, service marks, copyrights, and any
applications therefor, maskworks, net lists, schematics, technology, know-how,
computer software programs and applications and tangible or intangible
proprietary information and material that are used or proposed to be used
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in the Business of the Company or the Sub (post-Closing) (the "Company
Intellectual Property Rights"). Schedule 4.20(a) lists all Company Intellectual
Property Rights owned by the Company, and specifies the jurisdictions in which
the Company Intellectual Property Rights are issued or registered or in which an
application for such issuance and registration has been filed, including the
respective registration or application numbers and the names of all registered
owners. The filings in respect of all such registrations and applications are in
good standing, are held solely in the name of the Company as the exclusive owner
of all rights therein, and all necessary steps have been taken to maintain such
filings and to prosecute the applications in a timely manner.
(b) Schedule 4.20(b) lists (i) all licenses, sublicenses and other
agreements to which the Company is a party and pursuant to which any person is
authorized to use any Company Intellectual Property Rights or any trade secret
material to the Company (and includes the identity of all parties thereto other
than non-exclusive product licenses and sublicenses granted by the Company in
the ordinary course of business); and (ii) all licenses, sublicenses and other
agreements as to which the Company is a party and pursuant to which the Company
is authorized to use any third party patents, trademarks or copyrights
(including software) which are incorporated in, are, or form a part of, any of
the Company's products or services, or other trade secrets of a third party in
or as to any product or service (collectively, the "Company Third Party
Intellectual Property Rights"), and includes the identity of all parties
thereto, a description of the nature and subject matter thereof, the applicable
royalty and the term thereof. The Company is authorized to use, in the manner
used by the Company, the Company Third Party Intellectual Property Rights.
Except as set forth on Schedule 4.20(b), the Company is not, nor will it be as a
result of the execution and delivery of this Agreement or the performance of its
obligations hereunder, in violation of any license, sublicense or agreement
described on Schedule 4.20(b) or by which it is authorized to use Company Third
Party Intellectual Property Rights.
(c) The Company has entered into all necessary agreements and
obtained all necessary rights to acquire Company Third Party Intellectual
Property Rights. All agreements relating to Company Third Party Intellectual
Property Rights are in full force and effect for the term set forth in each such
agreement.
(d) All registered trademarks, service marks and copyrights held by
the Company are valid and subsisting. There is no unauthorized use, disclosure,
infringement or misappropriation of any of Company Intellectual Property Rights,
any trade secrets of the Company, or any of Company Third Party Intellectual
Property Rights to the extent licensed by or through the Company, by any third
party, including any employee or former employee of the Company. Except as set
out on Schedule 4.20(d), (i) the Company has not been sued or charged in writing
as a defendant in any claim, suit, action or proceeding which involves a claim
of infringement of any patents, trademarks, service marks, copyrights or
violation of any trade secret or other proprietary right of any third party;
(ii) there is no basis for any such charge or claim; and (iii) there is not any
infringement liability with respect to, or infringement or violation by, the
Company of any patent, trademark, service mark, copyright, trade secret or other
proprietary right of another.
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(e) To the best of the Company's or the Stockholder's knowledge, no
Company Intellectual Property Rights, trade secrets of the Company or Company
Third Party Intellectual Property Rights are subject to any outstanding order,
judgment, decree, stipulation or agreement restricting in any manner the
licensing thereof by the Company. Except for contracts licensing the Company's
products executed in the ordinary course of business and in accordance with the
Company's past practices (all of which contracts are listed on Schedule 4.13),
the Company has not entered into any agreement to indemnify any other person
against any charge of infringement of any Company Intellectual Property Rights.
The Company is not and never has been engaged in any dispute or litigation with
an employee or former employee regarding matters pertaining to intellectual
property or assignment of inventions.
(f) The Company has used its best efforts to enforce an adequate
trade secret protection program through contractual agreements with officers,
employees, developers, consultants and other persons dealing with its Business
as it is presently being conducted, as it has been conducted in the past and as
it is proposed to be conducted in the future. To the knowledge of the Company,
there has been no material violation of such program by any Person.
(g) The Company Intellectual Property Rights, at no additional cost
to AppNet (or Sub, after the Closing Date), and without human intervention will:
(i) include year 2000 date conversion and capabilities
including, but not limited to, date data century
recognition; calculations which accommodate same century
and multi-century formulas and date values; correct sort
ordering; and date data interface values that reflect
the century;
(ii) automatically compensate for and manage and manipulate
data involving dates, including single century formulas
and multi-century formulas, and will not cause an
abnormal abort within the application or result in the
generation of incorrect values or invalid outputs
involving such dates;
(iii) provide that all date related user interface
functionalities and data fields include the indication
of the correct century;
(iv) provide that all date related software to software or
application to application data interface
functionalities will include the indication of the
correct century; and
(v) provide that all date processing by the Company
Intellectual Property Rights will include four-digit
date format and recognize and correctly process dates
for leap years.
4.21. Intentionally Omitted.
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4.22. Supplies. All items of supplies of the Company consist of items of a
quality, quantity and condition usable and saleable in the ordinary course of
the business of the Company and for the purpose for which they are intended,
without discount or reduction, and conform to generally accepted standards in
the industry of which the Company is a part. The value of each item of supplies
reflected on the Annual Financials was, in each instance, valued at the lower of
cost or market value and based on the ordinary course of the business consistent
with the historical valuation policy of the Company and is not subject to any
write-down or write-off.
4.23. Related Party Transactions. Schedule 4.23 sets forth all
arrangements, Liabilities, agreements and contracts in effect as of the date
hereof among the Company and any Person who is an officer, director or Affiliate
of the Company, any relative of any of the foregoing or any entity of which any
of the foregoing is an Affiliate.
4.24. Brokers. Except as set forth on Schedule 4.24, no Person has or will
have, as a result of the transactions contemplated by this Agreement, any right,
interest or claim against or upon the Company or, to the , to the best of the
Company's or the Stockholder's knowledge, against or upon AppNet or Sub, for any
commission, fee or other compensation payable as a finder or broker because of
any act or omission by the Company or the Stockholder. The Company shall be
fully responsible for the payment of all such commissions, fees and other
compensation and shall deliver to AppNet at Closing a release from the party
disclosed on Schedule 4.24.
4.25. Accredited Investors; Investment Intent.
(a) AppNet has made available to the Company and the Stockholder,
during the course of this transaction and prior to the delivery of the shares of
AppNet Common Stock (the "Securities"), the opportunity to ask questions of and
receive answers from any of the officers of AppNet concerning the terms and
conditions of the offering, and to obtain any documents or additional
information necessary to verify the information provided to the Company and the
Stockholder or otherwise relative to the financial data and business of AppNet,
to the extent that such parties possessed such information or could acquire it
without unreasonable effort or expense, and all such questions, if asked, have
been answered satisfactorily and all such documents, if examined, have been
found to be fully satisfactory.
(b) The Company and the Stockholder understand and acknowledge that
(i) the Stockholder must bear the economic risk of the Company's or the
Stockholder's investment in the Securities; (ii) the Securities have not been
registered under the Securities Act of 1933, as amended (the "1933 Act") or any
state securities laws and are being offered and sold in reliance upon exemptions
provided in the 1933 Act and state securities laws for transactions not
involving any public offering and, therefore, cannot be resold or transferred
unless they are subsequently registered under the 1933 Act and applicable state
laws or unless an exemption from such registration is available; (iii) the
Company and the Stockholder are purchasing the Securities for investment
purposes only for the Company's or the Stockholder's own account and not with
any view toward a distribution thereof; (iv) neither the Company nor the
Stockholder has any contract, undertaking, agreement or arrangement with any
person to sell, transfer or
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pledge to such person or anyone else any of the Securities which the Company or
the Stockholder hereby subscribes to purchase or any part thereof, and neither
the Company nor the Stockholder has any present plans to enter into any such
contract, undertaking, agreement or arrangement; (v) at the time of the Closing
there will be no public market for the Securities; and (vi) the Company and the
Stockholder understand that AppNet is not obligated to comply with any reporting
requirements under the Securities Exchange Act of 1934, as amended, and that
AppNet makes no representation or warranty that it will disseminate to the
public any current financial or other information concerning itself, as is
required by Rule 144 promulgated under the 1933 Act as one of the conditions of
its availability.
(c) The Company and the Stockholder have evaluated the risks of
investing in the Securities, and have determined that the Securities are a
suitable investment for the Company and the Stockholder. The Company and the
Stockholder can bear the economic risk of this investment and can afford a
complete loss of the Company's and the Stockholder's investment. In evaluating
the suitability of an investment in the Securities, neither the Company nor the
Stockholder has relied upon any representations or other information (whether
oral or written) other than as set forth in writing herein.
(d) The Company and the Stockholder are knowledgeable and
experienced in evaluating investments and experienced in financial and business
matters, and are capable of evaluating the merits and risks of investing in the
Securities. The aggregate amount of the investments of the Company and the
Stockholder in, and the Company's and the Stockholder's commitments to, all
similar investments that are illiquid is reasonable in relation to the Company's
and the Stockholder's net worth.
(e) The Company and the Stockholder hereby represent that the
Company and the Stockholder are residents of the Commonwealth of Virginia.
(f) Each of the Company and the Stockholder is an "Accredited
Investor" as such term is defined in Rule 501 of Regulation D promulgated under
the 1933 Act in order to qualify for the purchase of the Securities. Any
information which the Stockholder has heretofore furnished to AppNet with
respect to the Stockholder is correct and complete as of the date of this
Agreement.
4.26. Disclosure. No representation or warranty by the Company or the
Stockholder contained in this Agreement, and no representation, warranty or
statement by the Company or the Stockholder contained in any list, certificate,
schedule or other instrument, document, agreement or writing furnished or to be
furnished to, or made with, AppNet or Sub pursuant hereto or in connection with
the negotiation, execution or performance hereof, contains or will contain any
untrue statement by the Company or the Stockholder of a material fact or omits
or will omit to state any material fact necessary to make any statement herein
or therein not misleading. The Company and the Stockholder do not have knowledge
of any changes reasonably expected to occur within one (1) year from the date of
this Agreement to any of the Company's Business or Sub's Business
(post-Closing), the Company's relations with employees, the Company's relations
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with customers, the Company's competitive situation or the Company's relations
with suppliers, or action of any Governmental or Regulatory Authority or laws
affecting the Company.
5. REPRESENTATIONS AND WARRANTIES OF APPNET AND SUB
To induce the Company and the Stockholder to enter into this Agreement and
to consummate the transactions contemplated by this Agreement, AppNet and Sub,
jointly and severally, represent and warrant to the Company, as of the date
hereof and as of the Closing Date, as set forth below:
5.1. Due Organization. Each of AppNet and Sub is a corporation duly
organized, validly existing and in good standing under the laws of the State of
Delaware.
5.2. Power and Authority. Each of AppNet and Sub has all requisite
corporate power and authority to own, lease and operate its respective
properties and to conduct its respective Business as it is presently being
conducted, as it has been conducted in the past and as it is proposed to be
conducted in the future. Each of AppNet and Sub is duly qualified or licensed as
a foreign corporation in good standing in each jurisdiction in which the
character of its respective properties or the nature of its respective business
activities requires such qualification, except where the failure to be so
qualified or licensed would not have a Material Adverse Effect on AppNet or Sub,
respectively.
5.3. Authority for Agreement. The execution, delivery and performance of
this Agreement and the consummation of the transactions contemplated hereby have
been authorized by all requisite corporate action on the part of AppNet and Sub.
Each of AppNet and Sub has full corporate power, authority and legal right to
enter into this Agreement and to consummate the transactions contemplated
hereby. This Agreement has been duly executed and delivered by AppNet and Sub
and, assuming the due authorization, execution and delivery by the Company and
the Stockholder of this Agreement, this Agreement is a legal, valid and binding
obligation of AppNet and Sub enforceable against AppNet and Sub, respectively,
in accordance with its terms, except as enforceability may be limited by
applicable bankruptcy, insolvency, reorganization, moratorium or other similar
laws affecting the enforcement of creditors' rights in general.
5.4. No Violation to Result. The execution, delivery and performance of
this Agreement and the consummation of the transactions contemplated hereby and
the fulfillment of the terms hereof: (i) are not in violation or breach of, do
not conflict with or constitute a default under the Certificate of Incorporation
or Bylaws of AppNet or Sub or any contract to which AppNet or Sub is a party;
(ii) will not be an event which, after notice or lapse of time or both, will
result in any such violation, breach, conflict, default, or acceleration; (iii)
will not result in a violation under any law, judgment, decree, order, rule,
regulation, permit or other legal requirement of any Governmental or Regulatory
Authority, court or arbitration tribunal whether federal, state, provincial,
municipal or local (within the U.S. or otherwise) at law or in equity, which is
applicable to AppNet or Sub; and (iv) will not result in the creation or
imposition of any Encumbrance in favor of any Person upon any of the properties
or assets of AppNet or Sub.
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5.5. Brokers and Agents. No Person has or will have, as a result of the
transactions contemplated by this Agreement, any right, interest or claim
against or upon the Company or the Stockholder (other than as disclosed in
Section 4.24) for any commission, fee or other compensation payable as a finder
or broker because of any act or omission by AppNet or Sub.
5.6. Capitalization. Schedule 5.6 sets forth, with respect to AppNet, (i)
the number of authorized shares of each class of its capital stock, (ii) the
number of issued and outstanding shares of each class of its capital stock and
the record owner thereof, and (iii) the number of shares of each class, if any,
which are held in treasury. Except as set forth on Schedule 5.6, no preemptive
right or rights of first refusal exist with respect to the shares of capital
stock of AppNet, and no such rights arise by virtue of or in connection with the
transactions contemplated hereby. Except as set forth on Schedule 5.6, there are
no outstanding or authorized rights, options, warrants, convertible securities,
subscription rights, conversion rights, exchange rights or other agreements or
commitments of any kind that could require AppNet to issue or sell any shares of
its capital stock (all of the foregoing, the "AppNet Issuance Agreements").
Schedule 5.6 sets forth the identity of the holder of each AppNet Issuance
Agreement, the type of agreement to which such holder is a party, the class and
number of shares of capital stock subject to each such agreement, and the
exercise price or conversion price, or other similar information concerning the
consideration such holder is required to tender in exchange for such shares of
the capital stock of AppNet. Schedule 5.6 identifies each agreement pursuant to
which any of GTCR Golder Rauner, L.L.C. ("GTCR"), Smart Technology, L.L.C.
("Smart Technology"), and their respective Affiliates, has acquired shares of
the capital stock of AppNet. There are no outstanding stock appreciation,
phantom stock, profit participation or other similar rights with respect to
AppNet. Except as set forth on Schedule 5.6, AppNet is not obligated to redeem
or otherwise acquire any of its outstanding shares of capital stock.
5.7. Shares Issued in Asset Purchase. All of the shares of AppNet Common
Stock to be issued in connection with the Asset Purchase, upon issuance and
delivery by AppNet to the persons entitled thereto and receipt by AppNet of the
consideration therefor, will (i) be duly authorized and validly issued and fully
paid and non-assessable, and (ii) not have been issued in violation of any
preemptive rights or rights of first refusal.
5.8. Litigation. There is no litigation, suit, proceeding, action, claim,
demand or investigation, at law or in equity, pending against or affecting
AppNet or Sub before any court, agency, authority or arbitration tribunal.
6. COVENANTS
6.1. Access to Properties and Records.
(a) The Company shall afford to the officers, employees, attorneys,
accountants and other authorized representatives of AppNet and Sub, free and
full access to all of the Company's assets, properties, books and records and
employees in order to afford AppNet and Sub as full an opportunity of review,
examination and investigation as they shall desire to make of the affairs of the
Company, and AppNet and Sub shall be permitted to make extracts from, or take
copies of, such books, records (including the stock record and minute books) or
other
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documentation as may be reasonably necessary. The Company shall furnish or cause
to be furnished to AppNet and Sub such reasonable financial and operating data
and other information about the Company's Business, as it is presently being
conducted, as it has been conducted in the past and as it is proposed to be
conducted in the future, properties and assets which any of the respective
officers, employees, attorneys, accountants or other authorized representatives
of AppNet may reasonably request; provided that AppNet and Sub and their agents
shall not unreasonably interfere with the operations of the Company's Business.
No information or knowledge obtained in any investigation pursuant to this
Section 6.1 shall affect or be deemed to modify any representation or warranty
contained herein or the conditions to the obligations of the parties to
consummate the transactions contemplated by this Agreement.
(b) AppNet and Sub shall afford to the officers, employees,
attorneys, accountants and other authorized representatives of the Company,
access to such of AppNet's and Sub's assets, properties, books and records and
employees in order to afford the Company as full an opportunity of review,
examination and investigation as they shall reasonably request of the affairs of
AppNet and Sub, and the Company shall be permitted to make extracts from, or
take copies of, such books, records (including the stock record and minute
books) or other documentation thereof as may be reasonably necessary. AppNet and
Sub shall furnish or cause to be furnished to the Company such reasonable
financial and operating data and other information about AppNet's and Sub's
Business, as it is presently being conducted, as it has been conducted in the
past and as it is proposed to be conducted in the future, properties and assets
which any of the respective officers, employees, attorneys, accountants or other
authorized representatives of the Company may reasonably request; provided that
the Company and its agents shall not unreasonably interfere with the operations
of AppNet's and Sub's Business. No information or knowledge obtained in any
investigation pursuant to this Section 6.1 shall affect or be deemed to modify
any representation or warranty contained herein or the conditions to the
obligations of the parties to consummate the transactions contemplated by this
Agreement.
6.2. Confidentiality.
(a) The Company and the Stockholder recognize and acknowledge that
they have in the past, currently have, and in the future may possibly have,
access to certain confidential information of the Company and AppNet and Sub,
such as lists of customers, operational policies, and pricing and cost policies,
that are valuable, special and unique assets of the Company's, AppNet's or Sub's
respective businesses. The Company and the Stockholder agree that, for a period
of five years commencing upon the receipt of confidential information, they will
not disclose such confidential information with respect to the Company or AppNet
and Sub to any Person for any purpose or reason whatsoever (except to authorized
representatives of the Company, AppNet and Sub and to counsel and other
advisers, provided that such advisors (other than counsel) agree to the
confidentiality provisions of this Section 6.2), unless (i) such information
becomes known to the public generally through no fault of the Company or the
Stockholder, (ii) disclosure is required by law or the order of any Governmental
or Regulatory Authority under color of law, or (iii) the disclosing party
reasonably believes that such disclosure is required in connection with the
defense of a lawsuit against the disclosing party or for certification or state
licensure purposes; provided, that prior to disclosing any information
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pursuant to clauses (ii) or (iii) above, the Company or the Stockholder, shall,
if possible, give prior written notice thereof to AppNet and Sub and provide
AppNet and Sub with the opportunity to contest such disclosure.
(b) Each of AppNet and Sub agrees that prior to the Closing it will
not disclose confidential information with respect to the Company or the
Stockholder to any Person, for any purpose or reason whatsoever (except to
authorized representatives of AppNet, Sub, the Company, or the Stockholder and
to counsel and other advisers, provided that such advisors (other than counsel)
agree to the confidentiality provisions of this Section 6.2), unless (i) such
information becomes known to the public generally through no fault of AppNet or
Sub, (ii) disclosure is required by law or the order of any Governmental or
Regulatory Authority under color of law, or (iii) AppNet reasonably believes
that such disclosure is required in connection with the defense of a lawsuit
against AppNet or Sub or for certification or state licensure purposes;
provided, that prior to disclosing any information pursuant to clauses (ii) or
(iii) above, AppNet, shall, if possible, give prior written notice thereof to
the Company and/or the Stockholder and provide the Company and/or the
Stockholder with the opportunity to contest such disclosure.
6.3. Interim Covenants of the Company. From the date of this Agreement
until the Closing Date, except to the extent expressly permitted by this
Agreement or otherwise consented to by an instrument in writing signed by
AppNet, the Company shall (i) keep the Company's Business, as it is presently
being conducted and as it is proposed to be conducted in the future, and
organization intact and shall not take or permit to be taken or do or suffer to
be done anything other than in the ordinary course of its business as the same
is presently being conducted, (ii) use its reasonable best efforts to keep
available the services of its directors, officers, employees, independent
contractors and agents and retain and maintain good relationships with its
clients and maintain the Facilities in good condition, (iii) perform its
obligations under the Contracts and Government Contracts and (iv) maintain the
goodwill and reputation associated with its Business, as it is presently being
conducted and as it is proposed to be conducted in the future. Without limiting
the generality of the foregoing, the Company shall not, without the prior
written consent of AppNet:
(a) Adopt or propose any change in its Certificate of
Incorporation or Bylaws;
(b) Merge or consolidate with any other entity or acquire a material
amount of assets of any other entity;
(c) Issue or sell any stock, bonds, or other securities of which the
Company is the issuer or grant, issue or change any stock options, warrants or
other rights to purchase securities of the Company;
(d) Amend any term of any outstanding security of the Company;
(e) Sell, lease or dispose of or make any contract for the sale,
lease or disposition of or subject to lien or security interest or any other
Encumbrance any of its properties or assets (including, without limitation, the
Purchased Assets), other than in the ordinary and usual course
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of its business, consistent with the representations and warranties contained
herein, and not in breach of any of the provisions of this Section 6.3, in each
case for a consideration at least equal to the fair value of such property or
asset;
(f) Grant any salary increase to, or increase the draw of, any of
its officers, directors, employees or agents, or enter into any new, or amend or
alter any existing, employment, bonus, incentive compensation, deferred
compensation, profit sharing, retirement, severance, pension, stock option,
group insurance, death benefit or other fringe benefit plan, trust agreement or
other similar or dissimilar arrangement, or any employment or consulting
agreement except consistent with past compensation practices;
(g) Incur any bank indebtedness or borrowings, whether or not in the
ordinary course of its business, or issue any commercial paper;
(h) Enter into any leases of real property or any material leases of
equipment and machinery;
(i) Enter into any contract, (i) other than in the ordinary course
of business, which would be required to be listed on Schedule 4.13 as a Contract
had it been entered into prior to the date hereof; or (ii) in which any
Affiliate of the Company or the Stockholder has any beneficial interest;
(j) Redeem, purchase or otherwise acquire, directly or indirectly,
any shares of its capital stock or debt securities or any option, warrant or
other right to purchase or acquire any such shares, or declare or pay any
dividend or other distribution (whether in cash, stock or other property) with
respect to its capital stock;
(k) Create, incur or assume any liability or indebtedness, except in
the ordinary course of business consistent with past practices; or postpone or
defer the creation, incurrence, or assumption of any liability or indebtedness
that would otherwise be created, incurred or assumed in the ordinary course of
business absent the execution of this Agreement;
(l) Pay or apply any of its assets (including, without limitation,
the Purchased Assets) to the direct or indirect payment, discharge, satisfaction
or reduction of any amount, directly or indirectly, to or for the benefit of the
Company or any Affiliate thereof except for payments to the Company's Affiliates
in accordance with past practice, provided that any such transaction is on terms
no less favorable to the Company than terms generally available with third
parties in arm's length transactions;
(m) Split, combine or reclassify any of its capital stock or issue
or authorize the issuance of any other securities in respect of, in lieu of or
in substitution for shares of its capital stock;
(n) Acquire or negotiate for the acquisition of (by merger,
consolidation, purchase of a substantial portion of assets or otherwise) any
business or the start-up of any new business,
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or otherwise acquire or agree to acquire any assets that are material,
individually or in the aggregate, to the Company;
(o) Commit a breach of or amend or terminate any Contract,
Government Contract, permit, license or other right;
(p) Enter into any other transaction (i) that is not negotiated at
arm's length with an Affiliate of the Company or any officer or director of the
Company or the Stockholder, (ii) outside the ordinary course of business
consistent with past practice or (iii) prohibited hereunder; or
(q) Fail to maintain its status as an S corporation for federal and
state income tax purposes.
6.4. No Solicitation. Neither the Company (its officers or directors), the
Stockholder, nor any agent or any representative thereof, shall during the
period commencing on the date of this Agreement and ending with the earlier to
occur of the Closing or the termination of this Agreement in accordance with its
terms, directly or indirectly: (a) solicit, encourage or initiate the submission
of proposals or offers from any person or entity for, (b) participate in any
discussions pertaining to, or (c) furnish any information to any Person, other
than AppNet or Sub, relating to, any acquisition or purchase of all or a
material amount of the assets of, or any equity interest in, the Company or a
merger, consolidation or business combination involving the Company. If the
Company or the Stockholder receives any unsolicited offer or proposal relating
to any of the above, the Company or the Stockholder shall immediately notify
AppNet thereof, and provide to AppNet all information relating thereto,
including a copy of such offer or proposal, the identity of the party making
such offer or proposal and the specific terms of such offer or proposal.
6.5. Notification of Certain Matters. The Company shall give prompt notice
to AppNet of (a) the occurrence or non-occurrence of any event the occurrence or
non-occurrence of which would be likely to cause any representation or warranty
of the Company or the Stockholder contained herein to be untrue or inaccurate in
any material respect at or prior to the Closing Date and (b) any material
failure of the Company or the Stockholder to comply with or satisfy any
covenant, condition or agreement to be complied with or satisfied by the Company
or the Stockholder hereunder. AppNet shall give prompt notice to the Company of
(a) the occurrence or non-occurrence of any event the occurrence or
non-occurrence of which would be likely to cause any representation or warranty
of AppNet or Sub contained herein to be untrue or inaccurate in any material
respect at or prior to the Closing Date and (b) any material failure of AppNet
or Sub to comply with or satisfy any covenant, condition or agreement to be
complied with or satisfied by AppNet or Sub hereunder. The delivery of any
notice pursuant to this Section 6.5 shall not, without the express written
consent of the receiving party, be deemed to (A) modify the representations or
warranties hereunder, (B) modify the conditions set forth in Sections 7 or 8
hereof, as the case may be, or (C) limit or otherwise affect the remedies
available hereunder to any party hereto.
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6.6. Cooperation. AppNet, the Company and the Stockholder shall cooperate
fully, as and to the extent reasonably requested by the other party, in
connection with the filing of Tax Returns and any audit, litigation or other
proceeding with respect to Taxes. Such cooperation shall include the retention
and (upon reasonable request) the provision of records and information which are
reasonably relevant to any such audit, litigation or other proceeding.
6.7. Regulatory and Other Approvals. Subject to the terms and conditions
of this Agreement, each of the Company and AppNet will proceed diligently and in
good faith to, as promptly as practicable, (a) obtain all consents, approvals or
actions of, make all filings with and give all notices to Governmental or
Regulatory Authorities or any other public or private third parties required of
AppNet, the Company or the Stockholder to consummate the Asset Purchase and the
other matters contemplated hereby, and (b) provide such other information and
communications to such Governmental or Regulatory Authorities or other public or
private third parties as the other party or such Governmental or Regulatory
Authorities or other public or private third parties may reasonably request in
connection therewith.
6.8. Benefits Plans. Prior to Closing, if requested by AppNet, the Company
agrees to take any and all steps necessary in order to cease all accruals of
benefits or contributions under each Benefit Plan, to terminate each Benefit
Plan as of the Closing Date, and to distribute to the participants of each
Benefit Plan their accrued benefits thereunder, in accordance with the terms of
each Benefit Plan and all applicable laws including, without limitation, the
provisions of Section 401(k)(10) of the Code.
6.9. Reasonable Efforts. Subject to the terms and conditions of this
Agreement, each of the parties hereto agrees to use all reasonable efforts
promptly to take, or cause to be taken, all actions and do or cause to be done,
all things necessary, proper or advisable under applicable laws and regulations
to consummate and make effective the transactions contemplated by this Agreement
including the satisfaction of all conditions thereto. If applicable, the
Company, the Stockholder and AppNet shall file all notices and other information
and documents required under the Hart-Scott-Rodino Antitrust Improvement Act of
1976 (the "HSR Act") as promptly as practicable after the date hereof.
6.10. Stock Options. Options to purchase 150,000 shares of AppNet Common
Stock shall be reserved and made available promptly after the Closing Date for
issuance to key employees of Sub at the time of grant, at a price of $5.00 per
share, as determined in the sole discretion of the President of Sub in
accordance with AppNet's policies, and authorized and issued under the terms of
AppNet's Incentive Stock Option Plan. None of these options may be granted to
the Stockholder.
6.11. Stockholder Vote. Prior to the execution hereof, the Stockholder
shall have voted all of the Shares in favor of the approval of this Agreement,
the consummation of the Asset Purchase and the other transactions contemplated
herein.
6.12. Corporate Name. Promptly after the Closing, the Company shall take
such action (at its sole expense), including, without limitation, filing an
amendment to its Articles of Incorporation, to cause the Company's name to be
changed to a name which does not include the
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word "Salzinger" or a word or phrase confusingly similar thereto. The Company
shall not use the name "Salzinger" or any name confusingly similar to the
foregoing from and after the Closing. Notwithstanding the foregoing, in the
event that AppNet and Sub abandon the use of the name "Salzinger" for a period
of at least six consecutive months, such name and the internet uniform resource
locator "www.salzinger.com" shall be transferred, at no cost, to the Company.
6.13. Corporate Existence. The Company shall not dissolve or liquidate and
shall maintain its corporate existence until the termination of the Company's
indemnification obligations pursuant to Section 9.
6.14. Hiring of the Company's Employees. The Company agrees that until
thirty days after the Closing Date it will allow Sub to take applications of any
employee as listed in Schedule 4.9(b) and to interview any of such employees for
prospective employment with Sub after the Closing. Sub shall be permitted to
hire any such employee of the Company as determined in Sub's sole discretion.
The Company will use all reasonable efforts to cause such employees to make
available their employment services to Sub.
6.15. Actions After the Closing. Following the Closing, Sub shall have the
right to receive and open all mail addressed to the Company and deal with the
contents thereof in its discretion to the extent that such mail and the contents
thereof relate to the Purchased Assets and any of the Assumed Liabilities. Sub
shall promptly deliver to the Company any mail relating to the Excluded Assets,
including, but not limited to, checks received on account of receivables or
other items. The Company shall promptly transfer and deliver to Sub any cash or
property which the Company may receive in respect of the Purchased Assets after
the Closing. Sub shall promptly transfer and deliver to the Company any cash or
property which Sub may receive in respect of the Excluded Assets after the
Closing.
6.16. WARN Act. The Company shall take any and all actions (and the
Company hereby assumes sole responsibility, as between the Company and Sub, with
respect to such actions) required to be taken with respect to employees of the
Company under federal or state laws relating to mass layoffs or plant closures,
including (without limitation) the federal Worker Adjustment and Retraining
Notification Act.
6.17. Bulk Transfer Provisions. The Company and Sub hereby waive
compliance with the provisions of any applicable bulk transfer law; provided,
however, that the Company agrees (i) to pay and discharge when due or to contest
or litigate all claims of creditors which are asserted against Sub or the
Purchased Assets (other than the Assumed Liabilities) by reason of such
noncompliance, (ii) to indemnify, defend and hold harmless Sub from and against
any and all such claims in the manner provided in Section 9 and (iii) to take
promptly all necessary action to remove any lien or encumbrance which is placed
on the Purchased Assets by reason of such noncompliance.
6.18. The Company's Consent. The Company covenants that it will forever
waive any rights under any non-competition, non-disclosure, non-solicitation or
similar provisions it has with respect to the Purchased Assets under any
employment, non-compete or other arrangements with any of the Company's former
employees who are to be employed by Sub after the Closing.
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6.19. Allocation of Purchase Price. The Purchase Price for the Purchased
Assets shall be allocated within ninety (90) days of the Closing (or as soon as
practicable thereunder) among the Purchased Assets in accordance with an
allocation schedule to be prepared by Sub and consented to by the Company (which
consent will not be unreasonably withheld). Such allocation schedule shall be
prepared in accordance with section 1060 of the Code, and Sub and the Company
agree that the Purchase Price shall be allocated among the Purchased Assets in
accordance with their respective book value as of the Closing Date. In
connection with the determination of such schedule, the parties shall cooperate
with each other and provide such information as any of them shall reasonably
request. The parties shall (i) each report the federal, state and local and
other tax consequences of the purchase and sale contemplated hereby (including
the filing of Internal Revenue Service Form 8594) in a manner consistent with
such allocation schedule and (ii) take no position in any tax filing, return,
proceeding, audit or otherwise which is inconsistent with such allocation.
6.20. Advisory Fees. The Company shall pay to AppNet, upon the date such
funds are received by the Company, 25% of the gross fees and revenues earned by
the Company in its capacity as advisor to the Cisneros Group. Such gross fees
and revenues earned by the Company in the above-mentioned engagement, including
the portion of such gross fees and revenues due to AppNet, shall be specifically
excluded from Adjusted Gross Revenue and EBITDA in calculating the Contingent
Amount.
6.21. State Taxes. The Company shall be responsible for paying the Tax
liability identified on Schedule 4.10(a).
7. CONDITIONS PRECEDENT TO OBLIGATIONS OF APPNET AND SUB
The obligations of AppNet or Sub to consummate the transactions
contemplated by this Agreement are subject to the satisfaction or partial or
complete waiver (in AppNet's sole and absolute discretion), at or before the
Closing Date, of the following conditions:
7.1. Representations and Warranties True at the Closing Date. All of the
representations and warranties of the Company and the Stockholder contained in
this Agreement shall be true and correct on and as of the Closing Date with the
same effect as though such representations and warranties had been made on and
as of such date, except for those representations and warranties which by their
terms are made as of a specific date which shall be true and correct on and as
of such date.
7.2. Performance. All of the terms, covenants, agreements and conditions
of this Agreement to be complied with, performed or satisfied by the Company
and/or the Stockholder on or before the Closing Date shall have been duly
complied with, performed or satisfied by the Closing Date.
7.3. Stockholder Approval. This Agreement and the Asset Purchase shall
have been approved by the requisite vote or action of the Company's shareholders
under the Company's Certificate of Incorporation and Bylaws and Virginia law.
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7.4. Agreements with Employees. Those senior managers of the Company
listed on Schedule 7.4 shall have executed and delivered Senior Management
Agreements in the form attached hereto as Exhibit B. Those employees of the
Company listed on Schedule 7.4 shall have executed and delivered Employment
Agreements in the form attached hereto as Exhibit C. All other employees of the
Company shall have executed and delivered employment and/or non-disclosure
agreements in the form attached hereto as Exhibit D.
7.5. No Litigation. No temporary restraining order, preliminary or
permanent injunction or other order issued by any court of competent
jurisdiction or other legal or regulatory restraint or provision challenging the
transactions contemplated hereunder or limiting or restricting the conduct or
operation of the Business of AppNet or Sub following the transactions shall be
in effect, nor shall any proceeding brought by an administrative agency or
commission or other Governmental or Regulatory Authority or other
instrumentality, domestic or foreign, seeking any of the foregoing be pending.
There shall be no action, suit, claim or proceeding of any nature pending or
threatened, against the Stockholder, the Company, AppNet, Sub, their respective
properties or any of their officers or directors, that could reasonably be
expected to have a Material Adverse Effect on the Company, AppNet or Sub.
7.6. No Material Adverse Change. There shall have been, between the
Balance Sheet Date and the Closing Date, no change in the Business, financial
condition or prospects of the Company which could have a Material Adverse Effect
on the Company.
7.7. Certificates. The Company and the Stockholder shall have furnished
AppNet with such certificates of the officers of the Company, the Stockholder
and others to evidence compliance with the conditions set forth in this Section
7 as may be reasonably requested by AppNet.
7.8. Opinion of Counsel. AppNet shall have received an opinion of counsel
in form and substance reasonably acceptable to AppNet.
7.9. Financing. AppNet shall have secured all financing necessary to pay
the Cash Payment on terms satisfactory to AppNet; provided, however, that this
condition shall be deemed fully satisfied unless AppNet delivers notice to the
Company by 5:00 p.m. on March 22, 1999 that this condition has not been
satisfied. In the event that AppNet timely delivers such notice, the Company and
the Stockholder may immediately terminate this Agreement pursuant to Section
11.1(c).
7.10. Intentionally Omitted.
7.11. Governmental, Regulatory and Other Consents and Approvals. All
consents, approvals and actions of, filings with and notices to any Governmental
or Regulatory Authority or any other public or private third parties required of
the Stockholder, AppNet, or the Company to consummate the Asset Purchase and the
other matters contemplated hereby shall have been obtained. Any waiting period
applicable to the consummation of the Asset Purchase under the HSR Act shall
have expired or been terminated, and no action by the Department of Justice or
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the Federal Trade Commission challenging or seeking to enjoin the consummation
of the transactions contemplated hereby shall be pending.
7.12. Delivery of Good Standing Certificates; Corporate Resolutions.
AppNet shall have received certificates of good standing with respect to the
Company issued by the Commonwealth of Virginia and the State of New York. AppNet
shall have received copies of the resolutions of the Company's Board of
Directors and stockholders approving the Asset Purchase, this Agreement and the
other transactions contemplated herein, certified by the appropriate corporate
officers.
7.13. Financial Terms. AppNet shall have received a certificate (the
"Closing Financial Certificate"), dated as of the Closing Date, signed on behalf
of the Company and by the Stockholder, stating that: (i) gross sales, net of bad
debt expense, for the Company's fiscal year ended December 31, 1998 were no less
than $3,200,000; and (ii) earnings before interest and taxes ("EBIT") for the
Company's fiscal year ended December 31, 1998 were no less than $1,200,000
(excluding profit share expenses) (or 37.5% of sales, net of bad debt expense,
for such fiscal year).
7.14. Stockholders Agreement and Registration Agreement. The Company and
the Stockholder shall have executed such agreements as shall be necessary to
subject the AppNet Common Stock, to be delivered to the Company as part of the
Stock Payment or the Contingent Amount, to AppNet's Stockholders Agreement and
Registration Agreement.
7.15. Release. The Stockholder shall have delivered the release
described in Section 4.24.
7.16. Subordination Agreement. The Company shall have delivered a
subordination agreement in form and substance acceptable to BankBoston, N.A.
pursuant to AppNet's line of credit with BankBoston, N.A.
7.17. January 1999 Financials. The Company shall have delivered true,
complete and correct copies of the Company's unaudited interim balance sheet
(the "Current Balance Sheet") as of January 31, 1999 (the "Balance Sheet Date")
and the Company's statement of income for the one month period ended January 31,
1999 (collectively, the "Interim Financials"). AppNet shall have received a
certificate, dated as of the Closing Date, signed on behalf of the Company and
by the Stockholder, stating that: (i) other than as disclosed on Schedule 4.6,
the Interim Financials have been prepared in accordance with GAAP consistently
applied; (ii) the balance sheet included in the Interim Financials presents
fairly the financial condition of the Company as of the date indicated thereon,
and the statement of income included in the Interim Financials presents fairly
the results of its operations for the period indicated thereon; (iii) during the
period covered by the Interim Financials and since the Balance Sheet Date, there
has been no material change in the Company's accounting policies; (iv) there are
no material, special or non-recurring items of income or expense during the
period covered by the Interim Financials and the balance sheets included in the
Interim Financials do not reflect any write-up or revaluation increasing the
book value of any assets, except as specifically disclosed in the notes thereto;
and (v) the value of each item of supplies reflected on the Interim Financials
was, in each instance, valued at the
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lower of cost or market value and based on the ordinary course of the business
consistent with the historical valuation policy of the Company and is not
subject to any write-down or write-off.
8. CONDITIONS PRECEDENT TO OBLIGATIONS OF THE COMPANY AND THE STOCKHOLDER
The obligations of the Company and the Stockholder to consummate the
transactions contemplated by this Agreement are subject to the satisfaction or
partial or complete waiver (in the Company's and the Stockholder's sole and
absolute discretion), at or before the Closing Date, of the following
conditions:
8.1. Representations and Warranties True as of the Closing Date. All of
the representations and warranties of AppNet and Sub contained in this Agreement
shall be true and correct on and as of the Closing Date with the same effect as
though such representations and warranties had been made on and as of such date,
except for (i) those representations and warranties which by their terms are
made as of a specific date which shall be true and correct on and as of such
date, and (ii) the representation and warranty made in Section 5.8 to the extent
that any change since the date hereof shall not prevent the condition to Closing
in Section 8.3 from being satisfied.
8.2. AppNet's and Sub's Performance. All of the terms, covenants,
agreements and conditions of this Agreement to be complied with, performed or
satisfied by AppNet and Sub on or before the Closing Date shall have been duly
complied with, performed or satisfied by the Closing Date.
8.3. No Litigation. No temporary restraining order, preliminary or
permanent injunction or other order issued by any court of competent
jurisdiction or other legal or regulatory restraint or provision challenging the
transactions contemplated hereunder or limiting or restricting the conduct or
operation of the Business of AppNet or the Company following the transactions
shall be in effect, nor shall any proceeding brought by an administrative agency
or commission or other Governmental or Regulatory Authority seeking any of the
foregoing be pending. There shall be no action, suit, claim or proceeding of any
nature pending or threatened, against the Company, AppNet or Sub, their
respective properties or any of their officers or directors, that could
reasonably be expected to have a Material Adverse Effect on the Company, AppNet
or Sub.
8.4. Certificates. AppNet shall have furnished the Company with such
certificates of the officers of AppNet and others to evidence compliance with
the conditions set forth in this Section 8 as may be reasonably requested by the
Company.
8.5. Governmental, Regulatory and Other Consents and Approvals. All
consents, approvals and actions of, filings with and notices to any Governmental
or Regulatory Authority or any other public or private third parties required of
AppNet, Sub, the Stockholder or the Company to consummate the Asset Purchase and
the other matters contemplated hereby shall have been obtained. Any waiting
period applicable to the consummation of the Asset Purchase
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under the HSR Act shall have expired or been terminated, and no action by the
Department of Justice or the Federal Trade Commission challenging or seeking to
enjoin the consummation of the transactions contemplated hereby shall be
pending.
8.6. Delivery of Good Standing Certificates; Corporate Resolutions. The
Company shall have received certificates of good standing with respect to AppNet
issued by the State of Delaware and with respect to Sub issued by the States of
Delaware and the Commonwealth of Virginia. The Company shall have received
copies of the resolutions of AppNet and Sub approving the Asset Purchase
and the other transactions contemplated herein, certified by the appropriate
corporate officers.
8.7. Opinion of Counsel. The Company shall have received an opinion of
counsel in form and substance reasonably acceptable to the Company.
9. INDEMNIFICATION
9.1. General Indemnification.
(a) The Company and the Stockholder, jointly and severally, covenant
and agree to indemnify, defend, protect and hold harmless AppNet, Sub and their
respective officers, directors, employees, stockholders, assigns, successors and
affiliates (individually, a "Buyer Party" and collectively, the "Buyer Parties")
from, against and in respect of all liabilities, losses, claims, damages,
punitive damages, causes of actions, lawsuits, administrative proceedings
(including informal proceedings), investigations, audits, demands, assessments,
adjustments, judgments, settlement payments, deficiencies, penalties, fines,
excise taxes, interest (including interest from the date of such damages) and
costs and expenses (including, without limitation, reasonable attorneys' fees
and disbursements of every kind, nature and description) (collectively,
"Damages") suffered, sustained, incurred or paid by the Buyer Parties, in any
action or proceeding between the Seller Parties (as defined in Section 9.1(b))
and the Buyer Parties or between the Buyer Parties and a third party, in
connection with, resulting from or arising out of, directly or indirectly: (i)
the inaccuracy of any representation or the breach of any warranty set forth in
this Agreement or certificates delivered on the part of the Company or the
Stockholder in connection with the Closing; (ii) the nonfulfillment of any
covenant or agreement on the part of the Company or the Stockholder set forth in
this Agreement or in any agreement or certificate executed and delivered by the
Company or the Stockholder pursuant to this Agreement or in the transactions
contemplated hereby; (iii) any claim by any customer of the Company relating to
the performance or non-performance by the Company of any Contract; (iv) the bulk
transfer or bulk sale provisions of any applicable law; (v) any and all benefits
accrued under the Benefit Plans or multiemployer plans as of the Closing Date
and any and all other liabilities arising out of, or in connection with the
operation of the Benefit Plans or multiemployer plans through the Closing Date;
(vi) any and all liabilities under the Environmental and Safety Requirements in
connection with or arising out of Releases that occurred on or prior to the
Closing Date; (vii) failure of the Company or any Company employee to maintain
all licenses, permits, approvals and qualifications from any Government or
Government Regulatory Authority; (viii) any and all
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Taxes which are (A) imposed on the Stockholder or any member (other than the
Company) of the consolidated, unitary or combined group which includes or
included the Company, that AppNet, Sub or the Company pays or otherwise
satisfies in whole or in part; or (B) imposed on a Buyer Party in respect of the
Company's income, business, property or operations or for which a Buyer Party
may otherwise be liable as a successor to the Company (x) for any taxable period
or portion thereof ending on or prior to the Closing Date, or (y) resulting by
reason of the several liability of the Company pursuant to Treasury Regulations
Section 1.1502-6 or any analogous state, local or foreign law or regulation or
by reason of the Company having been a member of any consolidated, combined or
unitary group on or prior to the Closing Date; and (ix) the business, operations
or assets of the Company on or before the Closing Date (except as otherwise
disclosed in the Annual Financials or the Interim Financials or the schedules to
this Agreement) or the actions of the Company's directors, officers,
shareholders, employees or agents on or before the Closing Date.
(b) AppNet and Sub covenant and agree to indemnify, defend, protect
and hold harmless (i) the Stockholder and his assigns and (ii) the Company and
its officers, directors, employees, stockholders, assigns, successors and
affiliates (individually, a "Seller Party" and collectively, the "Seller
Parties") from, against and in respect of all Damages suffered, sustained,
incurred or paid by the Seller Parties, in any action or proceeding between the
Seller Parties and the Buyer Parties or between the Seller Parties and a third
party, in connection with, resulting from or arising out of, directly or
indirectly: (i) the inaccuracy of any representation or the breach of any
warranty set forth in this Agreement or certificates delivered on the part of
AppNet or Sub in connection with the Closing; and (ii) the nonfulfillment of any
covenant or agreement on the part of AppNet or Sub set forth in this Agreement
or in any agreement or certificate executed and delivered by AppNet or Sub or
pursuant to this Agreement or in the transactions contemplated hereby.
(c) Notwithstanding anything contained in Section 9 to the contrary,
the aggregate amount of an Indemnifying Party's liability shall not exceed
$4,250,000.
9.2. Indemnification Procedures. All claims or demands for indemnification
under this Section 9 ("Claims") shall be asserted and resolved as follows:
(a) In the event a Buyer Party or a Seller Party (an "Indemnified
Party") has a Claim against the other party (an "Indemnifying Party") hereunder
which does not involve a Claim being asserted against or sought to be collected
by a third party, the Indemnified Party shall with reasonable promptness send a
Claim Notice (as defined in Section 9.2(b)) with respect to such Claim to the
Indemnifying Party. If the Indemnifying Party does not notify the Indemnified
Party within the Notice Period (as defined in Section 9.2(b)) that the
Indemnifying Party disputes such Claim, the amount of such Claim shall be
conclusively deemed a liability of the Indemnifying Party hereunder. In case the
Indemnifying Party shall object in writing to any Claim made in accordance with
this Section 9.2(a), the Indemnified Party shall have fifteen (15) days to
respond in a written statement to the objection of the Indemnifying Party. If
after such fifteen (15)-day period there remains a dispute as to any Claims, the
parties shall attempt in good faith for thirty (30) days to agree upon the
rights of the respective parties with respect to
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each of such Claims. If the parties should so agree, a memorandum setting forth
such agreement shall be prepared and signed by both parties. If no such
agreement can be reached after good faith negotiation, either the Indemnified
Party or the Indemnifying Party may arbitrate such claim in accordance with the
terms of Section 11.11 hereof.
(b) In the event that any Claim for which an Indemnifying Party
would be liable to an Indemnified Party hereunder is asserted against an
Indemnified Party by a third party, the Indemnified Party shall with reasonable
promptness notify the Indemnifying Party of such Claim, specifying the nature of
such claim and the amount or the estimated amount thereof to the extent then
feasible (which estimate shall not be conclusive of the final amount of such
Claim) (the "Claim Notice"). The Indemnifying Party shall have fifteen (15) days
from the receipt of the Claim Notice (the "Notice Period") to notify the
Indemnified Party (i) whether or not the Indemnifying Party disputes the
Indemnifying Party's liability to the Indemnified Party hereunder with respect
to such Claim and (ii) if the Indemnifying Party does not dispute such
liability, whether or not the Indemnifying Party desires, at the sole cost and
expense of the Indemnifying Party, to defend against such Claim. In the event
that the Indemnifying Party notifies the Indemnified Party within the Notice
Period that the Indemnifying Party does not dispute the Indemnifying Party's
obligation to indemnify hereunder and desires to defend the Indemnified Party
against such Claim and except as hereinafter provided, the Indemnifying Party
shall have the right to defend by appropriate proceedings, which proceedings
shall be promptly settled or prosecuted by the Indemnifying Party to a final
conclusion; provided that, unless the Indemnified Party otherwise agrees in
writing, the Indemnifying Party may not settle any matter (in whole or in part)
unless such settlement includes a complete and unconditional release of the
Indemnified Party. If the Indemnified Party desires to participate in, but not
control, any such defense or settlement, the Indemnified Party may do so at the
Indemnified Party's sole cost and expense. If the Indemnifying Party elects not
to defend the Indemnified Party against such Claim, whether by failure of the
Indemnifying Party to give the Indemnified Party timely notice as provided above
or otherwise, then the Indemnified Party, without waiving any rights against the
Indemnifying Party, may settle or defend against any such Claim in the
Indemnified Party's sole discretion and the Indemnified Party shall be entitled
to recover from the Indemnifying Party the amount of any settlement or judgment
and, on an ongoing basis, all indemnifiable costs and expenses of the
Indemnified Party with respect thereto, including interest from the date such
costs and expenses were incurred.
(c) Notwithstanding the provisions of Section 9.2(b), if at any
time, in the reasonable opinion of the Indemnified Party, notice of which shall
be given in writing to the Indemnifying Party, any such Claim seeks relief which
could have a Material Adverse Effect on any Indemnified Party, the Indemnified
Party shall have the right to control or assume (as the case may be) the defense
of any such Claim and the amount of any judgment or settlement and the
reasonable costs and expenses of defense shall be included as part of the
indemnification obligations of the Indemnifying Party hereunder. If the
Indemnified Party should elect to exercise such right, the Indemnifying Party
shall have the right to participate in, but not control, the defense of such
claim or demand at the sole cost and expense of the Indemnifying Party.
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(d) Nothing herein shall be deemed to prevent the Indemnified Party
from making a Claim, and an Indemnified Party may make a Claim hereunder, for
potential or contingent Claims or demands provided the Claim Notice sets forth
the specific basis for any such potential or contingent claim or demand to the
extent then feasible and the Indemnified Party has reasonable grounds to believe
that such a claim or demand may be made.
9.3. Right to Setoff. In the event the Company or the Stockholder shall
have an indemnification obligation to AppNet or Sub, AppNet shall be permitted
to seek satisfaction of such obligation through an offset against either the
Contingent Amount or the Holdback Amount. No limitation on such right of offset
shall otherwise affect a Buyer Party's rights hereunder or otherwise. The remedy
of offset shall be in addition to and not in limitation of any injunctive relief
or other rights or remedies to which AppNet or any other Buyer Party is or may
be entitled, at law or equity, under this Agreement.
9.4. Release. Effective as of the Closing, the Stockholder hereby
irrevocably waives and releases the Company of, from and against any and all
claims or causes of actions for Damages that he has, may have, or has had at any
time on or before Closing.
10. NONCOMPETITION
10.1. Prohibited Activities. For the period commencing with Closing and
ending on the fifth (5th) year anniversary of Closing, neither the Company nor
the Stockholder shall, for any reason whatsoever, directly or indirectly, for
itself, himself, or on behalf of or in conjunction with any other Person:
(a) engage as a stockholder, officer, director, owner, partner,
joint venturer, or in a managerial capacity, whether as an employee, independent
contractor, consultant or advisor, in any business selling any products or
services in direct competition with AppNet, Sub, the Company or their Affiliates
within the field of internet strategy consulting (a "Competing Business");
provided, however, each of the Company and the Stockholder shall not be
precluded from the ownership of securities of corporations that are listed on a
national securities exchange or traded in the national over-the-counter market
in an amount that shall not exceed five percent (5%) of the outstanding shares
of any such corporation;
(b) call upon any Person who is, at that time or was within one (1)
year prior to that time, an employee of AppNet, Sub, the Company or their
Affiliates for the purpose or with the intent of enticing such employee away
from or out of the employ of AppNet, Sub or their Affiliates;
(c) call upon any Person who or that is, at that time, or has been,
within one (1) year prior to that time, a customer of AppNet, Sub, the Company
or their Affiliates for the purpose of soliciting or selling products or
services in competition with AppNet, Sub or their Affiliates; or
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(d) publish any statement or make any statement (under any
circumstances reasonably likely to become public) critical of AppNet, Sub or
their Affiliates, or in any way adversely affecting or otherwise maligning the
reputation of AppNet, Sub or their Affiliates.
10.2. Damages. Because of the difficulty of measuring economic losses to
AppNet, Sub and their Affiliates as a result of a breach of the foregoing
covenants, and because of the immediate and irreparable damage that could be
caused to AppNet, Sub and their Affiliates for which it would have no other
adequate remedy, the Company and the Stockholder agree that the foregoing
covenants may be enforced by AppNet or Sub in the event of breach by the Company
or the Stockholder, in addition to, but not in lieu of, any other available
remedies, by injunctions and restraining orders and other equitable remedies.
10.3. Reasonable Restraint. It is agreed by the parties that the foregoing
covenants in this Section 10 impose a reasonable restraint on the Company and
the Stockholder in light of the activities and business of AppNet, Sub and their
Affiliates on the date of the execution of this Agreement and the current plans
of AppNet, Sub and their Affiliates; but it is also the intent of the parties,
that such covenants be construed and enforced in accordance with the changing
activities and business of AppNet, Sub and their Affiliates throughout the term
of this covenant.
10.4. Severability; Reformation. The covenants in this Section 10 are
severable and separate, and the unenforceability of any specific covenant shall
not affect the provisions of any other covenant. Moreover, in the event any
court of competent jurisdiction shall determine that the scope, time or
territorial restrictions set forth are unreasonable, then it is the intention of
the parties that such restrictions be enforced to the fullest extent which the
court deems reasonable, and the Agreement shall thereby be reformed.
10.5. Independent Covenant. All of the covenants in this Section 10 shall
be construed as an agreement independent of any other provision in this
Agreement, and the existence of any claim or cause of action of the Company or
the Stockholder against AppNet, Sub or an Affiliate thereof, whether predicated
on this Agreement or otherwise, shall not constitute a defense to the
enforcement by AppNet or Sub of such covenants. It is understood by the parties
hereto that the covenants contained in this Section 10 are essential elements of
this Agreement and that, but for the agreement of the Company and the
Stockholder to comply with such covenants, AppNet would not have agreed to enter
into this Agreement. The Company, the Stockholder and AppNet have independently
consulted with their respective counsel and have been advised concerning the
reasonableness and propriety of such covenants with specific regard to the
nature of the business conducted by AppNet and Sub. The Company and the
Stockholder hereby agree that all covenants contained in this Section 10 are
reasonable and valid and waive all defenses to the strict enforcement hereof by
AppNet or Sub. The covenants contained in this Section 10 hereof shall not be
affected by any breach of any other provision hereof by any party hereto and
shall have no effect if this Agreement is terminated pursuant to its terms.
10.6. Materiality. The Stockholder hereby agrees that the covenants set
forth in this Section 10 are a material and substantial part of the transactions
contemplated by this Agreement.
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11. GENERAL
11.1. Termination. This Agreement may be terminated at any time prior to
the Closing Date:
(a) by mutual consent of the Boards of Directors of AppNet and
the Company;
(b) by the Company, on the one hand, or by AppNet, on the other
hand, if the Closing shall not have occurred on or before March 29, 1999;
provided that the right to terminate this Agreement under this Section 11.1(b)
shall not be available to either party whose material misrepresentation, breach
of warranty or failure to fulfill any obligation under this Agreement has been
the cause of, or resulted in, the failure of the Closing to occur on or before
such date;
(c) by the Company, on the one hand, or by AppNet, on the other
hand, if there is or has been a material breach, failure to fulfill or default
on the part of the other party of any of the representations and warranties
contained herein or in the due and timely performance and satisfaction of any of
the covenants, agreements or conditions contained herein, and the curing of such
default shall not have been made or shall not reasonably be expected to occur
before the Closing Date; or
(d) by the Company, on the one hand, or by AppNet, on the other
hand, if there shall be a final nonappealable order of a federal or state court
in effect preventing the consummation of the transactions contemplated by this
Agreement; or there shall be any action taken, or any statute, rule, regulation
or order enacted, promulgated or issued or deemed applicable to the transactions
by any governmental entity which would make the consummation of the transactions
illegal.
11.2. Effect of Termination. In the event of the termination of this
Agreement pursuant to Section 11.1, this Agreement shall forthwith become void,
and there shall be no liability or obligation on the part of any party hereto or
its officers, directors or stockholders. Notwithstanding the foregoing sentence,
(i) the provisions of this Section 11, Section 9, Section 6.2(a) (except for the
Company's obligation to keep information regarding the Company confidential
thereunder) and Section 6.2(b) shall remain in full force and effect and survive
any termination of this Agreement; (ii) each party shall remain liable for any
intentional breach of this Agreement prior to its termination; and (iii) in the
event of termination of this Agreement pursuant to Section 11.1(c), then
notwithstanding the provisions of Section 11.7, the breaching party (if such
breach was in effect as of the date hereof) shall be liable to the other party
to the extent of the reasonable expenses incurred by such other party in
connection with this Agreement and the transactions contemplated by this
Agreement, as well as any damages in accordance with applicable law.
11.3. Cooperation. The Company and the Stockholder, on the one hand, and
AppNet and Sub, on the other hand, shall each deliver or cause to be delivered
to the other on the Closing Date, and at such other times and places as shall be
reasonably agreed to, such additional instruments as the other may reasonably
request for the purpose of carrying out this Agreement.
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In connection therewith, if required, each of AppNet, Sub, the Company and the
Stockholder will execute any documentation reasonably required by AppNet's or
the Company's independent certified public accountants (in connection with such
accountant's audit of AppNet or the Company). Each of the Company, AppNet and
Sub will also cooperate and use their reasonable efforts to have their
respective officers and employees cooperate with AppNet, Sub and the Company, as
the case may be, on and after the Closing Date in furnishing information,
accounting records, evidence, testimony and other assistance in connection with
any Tax return filing obligations, audits, actions, proceedings, arrangements or
disputes of any nature.
11.4. Successors and Assigns. This Agreement shall inure to the benefit of
and be binding upon the parties hereto and their respective successors and
assigns; provided, however, that the Company and the Stockholder may not make
any assignment of this Agreement or any interest herein without the prior
written consent of AppNet. This Agreement or any of the severable rights and
obligations inuring to the benefit of or to be performed by AppNet hereunder may
be assigned by AppNet prior to the Closing Date, to any wholly-owned subsidiary
of AppNet, and after the Closing Date, to any wholly-owned subsidiary of AppNet
or to any entity to which AppNet may sell all or substantially all of the assets
of AppNet and which assumes all of the obligations of AppNet, and to the extent
so assigned, the Company and the Stockholder hereby recognize said entity as the
party-in-interest with respect to the rights and obligations assigned. In the
event of such assignment to an entity which acquires all or substantially all of
the assets of AppNet, the Stockholder agrees to look solely to said entity for
the purpose of conferring benefits, or requiring performance of obligations,
assigned to it by AppNet if and to the extent such entity has expressly assumed
such obligations.
11.5. Entire Agreement. This Agreement (which includes the schedules and
exhibits hereto) sets forth the entire understanding of the parties hereto with
respect to the transactions contemplated hereby. Any and all previous agreements
and understandings between or among the parties regarding the subject matter
hereof, whether written or oral, are superseded by this Agreement.
11.6. Counterparts. This Agreement may be executed in any number of
counterparts and any party hereto may execute any such counterpart, each of
which when executed and delivered shall be deemed to be an original and all of
which counterparts taken together shall constitute but one and the same
instrument. This Agreement shall become binding when one or more counterparts
taken together shall have been executed and delivered (which deliveries may be
by telefax) by the parties.
11.7. Expenses. AppNet has paid and shall pay the fees, expenses and
disbursements of AppNet and its brokers, agents, representatives, accountants
and counsel incurred in connection with the subject matter of this Agreement.
The Stockholder has paid and shall pay the fees, expenses and disbursements of
the Company and the Stockholder and each of their respective brokers, agents,
representatives, financial advisors, accountants and counsel incurred in
connection with the subject matter of this Agreement.
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11.8. Specific Performance; Remedies Not Exclusive. Each party hereto
acknowledges that the other parties shall be irreparably harmed and that there
shall be no adequate remedy at law for any violation by any of them of any of
the covenants or agreements contained in this Agreement, including, without
limitation, the confidentiality obligations set forth in Section 6.2(a) and (b)
and the noncompetition provisions set forth in Section 10. It is accordingly
agreed that, in addition to, but not in lieu of, any other remedies which may be
available upon the breach of any such covenants or agreements, each party hereto
shall have the right to obtain injunctive relief to restrain a breach or
threatened breach of, or otherwise to obtain specific performance of, the other
parties' covenants and agreements contained in this Agreement. All rights and
remedies of the parties under this Agreement shall be cumulative, and the
exercise of one or more rights or remedies will not preclude the exercise of any
other right or remedy available under this Agreement or applicable law.
11.9. Notices. Any notice, request, claim, demand, waiver, consent,
approval or other communication which is required or permitted hereunder shall
be in writing and shall be deemed given if delivered personally, sent by
facsimile transmission with receipt of delivery, sent by registered or certified
mail (postage prepaid, return receipt requested), or by nationally recognized
overnight courier service, as follows:
If to AppNet or Sub to:
AppNet Systems, Inc.
6707 Democracy Blvd., Suite 1000
Bethesda, Maryland 20817
Attn: Ken S. Bajaj, President
Facsimile: (301) 581-2488
with a required copy to:
Tucker Flyer
1615 L Street, N.W., Suite 400
Washington, D.C. 20036
Attn: Arthur E. Cirulnick, Esq.
Facsimile: (202) 429-3231
If to the Company or the Stockholder to:
Steven M. Salzinger
6931 Espey Lane
McLean, Virginia 22101
Facsimile: (703) 448-0734
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<PAGE>
with a required copy to:
Edwin M. Martin, Jr.
Piper & Marbury L.L.P.
1200 Nineteenth Street, N.W.
Washington, D.C. 20036
Facsimile: (202) 223-2085
or to such other address as the person to whom notice is to be given may have
specified in a notice duly given to the sender as provided herein. Such notice,
request, claim, demand, waiver, consent, approval or other communication shall
be deemed to have been given as of the date so delivered, telefaxed, mailed or
dispatched and, if given by any other means, shall be deemed given only when
actually received by the addressees.
11.10. Governing Law. This Agreement shall be governed by and construed,
interpreted and enforced in accordance with the laws of the State of Delaware
(without regard to its laws relating to choice-of-law or conflicts-of-law).
11.11. Arbitration. Any unresolved dispute or controversy arising under or
in connection with this Agreement arising after the Closing shall be settled
exclusively by a three (3) person arbitration panel, with such arbitration
proceeding conducted in accordance with the rules of the American Arbitration
Association then in effect. The arbitrators shall not have the authority to add
to, detract from, or modify any provision hereof. A decision by a majority of
the arbitration panel shall be final and binding. Judgment may be entered on the
arbitrators' award in any court having jurisdiction. The arbitration proceeding
shall be held in Bethesda, Maryland. Notwithstanding the foregoing, the parties
shall be entitled to seek injunctive or other equitable relief from any court of
competent jurisdiction, without the need to resort to arbitration.
11.12. Survival of Representations, Warranties and Covenants. All
representations, warranties and covenants made by either party in or pursuant to
this Agreement or in any document delivered pursuant hereto shall survive for
two (2) years following the Closing; provided, however, that (i) the covenants
set forth in Section 10 shall survive the Closing in accordance with their
terms, and (ii) the representations and warranties set forth in Sections 4.3,
4.10 and 4.12(c) shall survive until the expiration of the applicable statute of
limitations. Notwithstanding the foregoing, in the event a Claim Notice is sent
pursuant to Section 9.2 (a) or (b) prior to the applicable date set forth in the
preceding sentence, the Claim, and the related indemnification obligations set
forth in Section 9, with respect to which such Claim Notice is sent shall
survive until the resolution of such Claim.
11.13. Severability. If any provision of this Agreement or the application
thereof to any person or circumstances is held invalid or unenforceable in any
jurisdiction, the remainder hereof, and the application of such provision to
such person or circumstances in any jurisdiction, shall not be affected thereby,
and to this end the provisions of this Agreement shall be severable.
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<PAGE>
The preceding sentence is in addition to and not in place of the severability
provisions in Section 10.4.
11.14. Absence of Third Party Beneficiary Rights. Except as expressly
provided herein, no provision of this Agreement is intended, nor will be
interpreted, to provide or create any third party beneficiary rights or any
other rights of any kind in any client, customer, affiliate, shareholder,
employee or partner of any party hereto or any other person or entity.
11.15. Mutual Drafting. This Agreement is the mutual product of the
parties hereto, and each provision hereof has been subject to the mutual
consultation, negotiation and agreement of each of the parties, and shall not be
construed for or against any party hereto.
11.16. Further Representations. Each party to this Agreement acknowledges
and represents that it has been represented by its own legal counsel in
connection with the transactions contemplated by this Agreement, with the
opportunity to seek advice as to its legal rights from such counsel. Each party
further represents that it is being independently advised as to the tax or
securities consequences of the transactions contemplated by this Agreement and
is not relying on any representation or statements made by the other party as to
such tax and securities consequences.
11.17. Amendment; Waiver. This Agreement may be amended by the parties
hereto at any time only by execution of an instrument in writing signed on
behalf of each of the parties hereto. Any extension or waiver by any party of
any provision hereto shall be valid only if set forth in an instrument in
writing signed on behalf of such party.
11.18. Gender. Unless the context clearly indicates otherwise, where
appropriate the singular shall include the plural and the masculine shall
include the feminine or neuter, and vice versa, to the extent necessary to give
the terms defined herein and/or the terms otherwise used in this Agreement the
proper meanings.
11.19. Headings. The headings and other captions in this Agreement are for
convenience and reference only and shall not be used in interpreting, construing
or enforcing any of the provisions of this Agreement.
11.20. Public Disclosure. Prior to the Closing Date, neither party shall
make any disclosure (whether or not in response to an inquiry) of the subject
matter of this Agreement unless previously approved by the Company and AppNet.
[EXECUTION PAGE FOLLOWS]
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<PAGE>
IN WITNESS WHEREOF, the parties hereto have executed this Asset Purchase
Agreement as of the day and year first above written.
APPNET:
APPNET SYSTEMS, INC.
By: /s/ Toby Tobaccawala
-------------------------------------
Name: Toby Tobaccawala
------------------------------------
Title: Senior Vice President
-----------------------------------
SUB:
SALZINGER ACQUISITION CORP.
By: /s/ Ronald B. Alexander
-------------------------------------
Name: Ronald B. Alexander
------------------------------------
Title: President
-----------------------------------
THE COMPANY:
SALZINGER & COMPANY, INC.
By: /s/ Steven M. Salzinger
-------------------------------------
Name: Steven M. Salzinger
------------------------------------
Title: President
-----------------------------------
STOCKHOLDER:
/s/ Steven M. Salzinger
------------------------------------------
STEVEN M. SALZINGER
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<PAGE>
SCHEDULES
Schedule 4.2 Exception to Corporate Qualifications
Schedule 4.5 Company Capitalization
Schedule 4.6 Financial Statements
Schedule 4.7(a) Liabilities and Obligations
Schedule 4.7(b) Advance Payments or Deposits
Schedule 4.9(a) Benefit Plans
Schedule 4.9(b) List of Employees
Schedule 4.10(a) Taxes
Schedule 4.12(a) Real Property
Schedule 4.12(b) Personal Property
Schedule 4.12(c) Permitted Encumbrances
Schedule 4.13 Contracts
Schedule 4.15 Litigation
Schedule 4.16 Violations of Law
Schedule 4.17 Environmental Disclosure
Schedule 4.18(a) Significant Customers
Schedule 4.18(b) Suppliers Who Have Threatened Termination
Schedule 4.19 Insurance
Schedule 4.20(a) Company Intellectual Property Rights
Schedule 4.20(b) Licenses to Use Company Intellectual Property
Schedule 4.20(d) Unauthorized Intellectual Property Use
Schedule 4.23 Related Party Transactions
Schedule 4.24 Brokers
Schedule 5.6 AppNet Capitalization
Schedule 7.4 Designated Employees
EXHIBITS
Exhibit A Contingent Amount
Exhibit B Form of Senior Management Agreement
Exhibit C Form of Employment Agreement
Exhibit D Form of Non-Disclosure Agreement
<PAGE>
EXHIBIT 10.11
================================================================================
STOCK PURCHASE AGREEMENT
dated as of March 22, 1999
================================================================================
<PAGE>
TABLE OF CONTENTS
Page
1. DEFINITIONS...............................................................1
1.1. Defined Terms....................................................1
2. PURCHASE AND SALE OF SHARES...............................................3
2.1. Stock Purchase...................................................3
2.2. Consideration for Purchase of Shares.............................4
2.3. Net Worth Target.................................................4
2.4. Post-Closing Adjustment..........................................4
2.5. Stockholder Representative.......................................6
3. CLOSING...................................................................6
3.1. Time and Place of the Closing....................................6
3.2. Procedure at Closing.............................................6
3.3. Payment of Contingent Amount.....................................7
3.4. Holdback of Portion of Cash Payment and Pledge of Stock..........9
3.5. Withholding......................................................9
3.6. Company Incentive Stock Options.................................10
4. REPRESENTATIONS AND WARRANTIES OF THE COMPANY AND THE STOCKHOLDERS.......10
4.1. Organization....................................................10
4.2. Power and Authority.............................................10
4.3. Authority for Agreement.........................................10
4.4. No Violation to Result..........................................11
4.5. Capitalization..................................................11
4.6. Financial Statements............................................12
4.7. Liabilities and Obligations.....................................13
4.8. Adverse Changes.................................................13
4.9. Employee Matters................................................13
4.10. Taxes...........................................................15
4.11. Subsidiaries....................................................17
4.12. Property........................................................17
4.13. Contracts.......................................................18
4.14. Government Contracts............................................18
4.15. Litigation......................................................18
4.16. Compliance with Laws............................................18
4.17. Environmental and Safety Matters................................19
4.18. Customers; Suppliers............................................20
4.19. Insurance.......................................................21
4.20. Intellectual Property...........................................21
4.21. Accounts Receivable.............................................23
4.22. Inventory.......................................................23
4.23. Related Party Transactions......................................24
4.24. Brokers.........................................................24
4.25. Accredited Investors; Investment Intent.........................24
<PAGE>
4.26. Disclosure......................................................25
5. REPRESENTATIONS AND WARRANTIES OF APPNET.................................25
5.1. Due Organization................................................25
5.2. Power and Authority.............................................25
5.3. Authority for Agreement.........................................26
5.4. No Violation to Result..........................................26
5.5. Brokers and Agents..............................................26
5.6. Capitalization..................................................26
5.7. Shares Issued in Stock Purchase.................................27
5.8. Litigation......................................................27
6. COVENANTS................................................................27
6.1. Access to Properties and Records................................27
6.2. Confidentiality.................................................28
6.3. Interim Covenants of the Company................................29
6.4. No Solicitation.................................................30
6.5. Notification of Certain Matters.................................31
6.6. Cooperation.....................................................31
6.7. Regulatory and Other Approvals..................................32
6.8. Benefits Plans..................................................32
6.9. Reasonable Efforts..............................................32
6.10. Stock Options...................................................32
6.11. Refund of Assumed Option Value..................................33
7. CONDITIONS PRECEDENT TO OBLIGATIONS OF APPNET............................33
7.1. Representations and Warranties True at the Closing Date.........33
7.2. Performance.....................................................33
7.3. Agreements with Employees.......................................33
7.4. No Litigation...................................................34
7.5. No Material Adverse Change......................................34
7.6. Certificates....................................................34
7.7. Opinion of Counsel..............................................34
7.8. Financing.......................................................34
7.9. AppNet's Review.................................................34
7.10. Governmental, Regulatory and Other Consents and Approvals.......34
7.11. Delivery of Good Standing Certificates; Corporate
Resolutions ....................................................34
7.12. Financial Terms.................................................35
7.13. Payment of Loans................................................35
7.14. Purchase of Personal Use Items..................................35
7.15. Stockholders Agreement and Registration Agreement...............35
7.16. Release.........................................................35
7.17. Subordination Agreement.........................................35
7.18. Resignations....................................................36
7.19. Investor Questionnaires.........................................36
7.20. Termination of Factoring Agreement..............................36
7.21. Joinder of Optionholders........................................36
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7.22. Delivery of Stock Pledge and Escrow Agreement...................36
7.23. Maximum Number of Assumed Options...............................36
7.24. Spousal Consents................................................36
8. CONDITIONS PRECEDENT TO OBLIGATIONS OF THE COMPANY AND THE
STOCKHOLDERS................................................................37
8.1. Representations and Warranties True as of the Closing Date......37
8.2. AppNet's Performance............................................37
8.3. No Litigation...................................................37
8.4. Certificates....................................................37
8.5. Governmental, Regulatory and Other Consents and Approvals.......37
8.6. Delivery of Good Standing Certificates; Corporate
Resolutions ....................................................38
8.7. Opinion of Counsel..............................................38
8.8. Employment Agreements...........................................38
8.9. No Material Adverse Change......................................38
8.10. Stockholders' Agreement and Registration Agreement..............38
8.11. Offering Memorandum.............................................38
8.12. Consent Letter..................................................38
8.13. Listing of Stock................................................38
9. INDEMNIFICATION..........................................................38
9.1. General Indemnification.........................................38
9.2. Indemnification Procedures......................................41
9.3. Right to Setoff.................................................42
9.4. Stockholder Liability for Indemnification.......................43
9.5. Release.........................................................43
10. NONCOMPETITION........................................................43
10.1. Prohibited Activities...........................................43
10.2. Damages.........................................................44
10.3. Reasonable Restraint............................................44
10.4. Severability; Reformation.......................................44
10.5. Independent Covenant............................................44
10.6. Materiality.....................................................45
11. GENERAL...............................................................45
11.1. Termination.....................................................45
11.2. Effect of Termination...........................................45
11.3. Cooperation.....................................................46
11.4. Successors and Assigns..........................................46
11.5. Entire Agreement................................................46
11.6. Counterparts....................................................46
11.7. Expenses........................................................47
11.8. Specific Performance; Remedies Not Exclusive....................47
11.9. Notices.........................................................47
11.10. Governing Law .................................................48
11.11. Arbitration ...................................................48
11.12. Survival of Representations, Warranties and Covenants .........48
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11.13. Severability ..................................................49
11.14. Absence of Third Party Beneficiary Rights .....................49
11.15. Mutual Drafting ...............................................49
11.16. Further Representations .......................................49
11.17. Amendment; Waiver .............................................49
11.18. Gender ........................................................50
11.19. Headings ......................................................50
11.20. Public Disclosure .............................................50
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<PAGE>
STOCK PURCHASE AGREEMENT
THIS STOCK PURCHASE AGREEMENT (together with the schedules and exhibits
attached hereto, this "Agreement") is entered into effective for all purposes
and in all respects as of March 22, 1999, by and among (i) APPNET SYSTEMS, INC.,
a Delaware corporation ("AppNet"), (ii) INTERNET OUTFITTERS, INC., a California
corporation (the "Company"), and (iii) the undersigned parties listed as
Stockholders (collectively, the "Stockholders").
WHEREAS, the Stockholders are the record and beneficial owners of all of
the issued and outstanding shares (the "Shares") of Common Stock of the Company,
without par value (the "Common Stock"); and
WHEREAS, AppNet desires to purchase all of the Shares from the
Stockholders and the Stockholders desire to sell and transfer the Shares to
AppNet, on the terms and conditions hereinafter set forth (the "Stock
Purchase").
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 are hereby acknowledged, the parties hereto, intending to
be legally bound, hereby agree as follows:
1. DEFINITIONS
1.1 Defined Terms. As used herein, the terms defined below shall have
the following meanings. Any of these terms, unless the context otherwise
requires, may be used in the singular or plural depending on the reference.
"Affiliate" shall mean as to any party, any Person which directly or
indirectly, is in control of, is controlled by, or is under common control with,
such party, including any person who would be treated as a member of a
controlled group under Section 414 of the Internal Revenue Code of 1986, as
amended (the "Code"), and any officer or director of such party and, as to a
party who is a natural person, such person's spouse, parents, siblings and
lineal descendants. For purposes of this definition, an entity shall be deemed
to be "controlled by" a Person if the Person possesses, directly or indirectly,
power either to (i) vote ten percent (10%) or more of the securities (including
convertible securities) having ordinary voting power of such entity or (ii)
direct or cause the direction of the management or policies of such entity
whether by contract or otherwise.
"AppNet Common Stock" shall mean the $.0005 par value per share
common stock of AppNet.
"Assumed Options" shall mean and refer to all options to purchase
shares of Common Stock of the Company (vested or unvested) which are assumed by
AppNet pursuant to Section 3.6 of this Agreement.
<PAGE>
"Business" shall mean the business of the Company or AppNet, as
the case may be.
"Contract" shall mean a note, bond, mortgage, contract, license,
lease, sublease, covenant, commitment, power of attorney, proxy, indenture, or
other agreement or arrangement, oral or written, to which the Company is a party
or by which the Company or any of its assets or property is bound, other than
Government Contracts.
"Encumbrance" shall mean any claim, lien, pledge, option,
restriction, charge, easement, security interest, right-of-way, encumbrance,
mortgage or other right.
"GAAP" shall mean United States generally accepted accounting
principles, consistently applied.
"Government" shall mean any agency or instrumentality of the United
States of America, any state or territory or subdivision thereof or any foreign
country and any agency or instrumentality of any of the foregoing.
"Government Contracts" shall mean any contracts between the Company
and the Government, including, without limitation, any grants, cooperative
agreements and other transactions between the Company and the Government, and
any contract to which the Company is a party where the Company knows the
Government is the ultimate customer.
"Governmental or Regulatory Authority" shall mean any court,
tribunal, arbitrator, authority (including any quasi-governmental authority),
agency, commission, official or other instrumentality of the United States, any
foreign country or any domestic or foreign state, county, city or other
political subdivision.
"Intellectual Property Rights" shall mean all (i) patents, patent
applications, patent disclosures and inventions, (ii) trademarks, service marks,
trade dress, trade names, logos and corporate names and registrations and
applications for registration thereof together with all of the goodwill
associated therewith, (iii) copyrights (registered or unregistered) and
copyrightable works and registrations and applications for registration thereof,
(iv) mask works and registrations and applications for registration thereof, (v)
computer software, data, data bases and documentation thereof, (vi) trade
secrets and other confidential information (including, without limitation,
ideas, 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
official and marketing plans and customer and supplier lists and information),
(vii) other intellectual property rights, (viii) "technical data" as defined in
48 Code of Federal Regulations, Chapter 1, and (ix) copies and tangible
embodiments thereof (in whatever form or medium).
"Legal Requirement" shall mean (i) with respect to any Person, any
judgment, decree, injunction, order, writ or ruling to or by which such Person
is a party or is bound, or
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<PAGE>
(ii) any applicable law, ordinance, statute, rule, regulation, code or other
requirement of any Governmental or Regulatory Authority or the common law.
"Liabilities" shall mean, without limitation, any direct or indirect
liability, indebtedness, guaranty, endorsement, claim, loss, damage, deficiency,
cost, expense, obligation or responsibility, either accrued, absolute,
contingent, mature, unmature or otherwise and whether known or unknown, fixed or
unfixed, choate or inchoate, liquidated or unliquidated, secured or unsecured.
"Material Adverse Effect" shall mean a material adverse effect on
(i) the assets, the business or the condition (financial or otherwise),
properties, liabilities, reserves, working capital, earnings, technology,
prospects or relations with customers, suppliers, distributors, employees or
regulators, or (ii) the right or ability to consummate the transactions
contemplated hereby.
"Material Contract" means any Contract involving the receipt or
payment by the Company of $10,000 or more or any other Contract which, if not
complied with or which, if defaulted by any party thereto, could result in a
Material Adverse Effect on the Company.
"Net Worth" shall mean with regard to the Company total assets of
the Company less total liabilities of the Company determined in accordance with
GAAP, subject to the terms of Section 7.12.
"Oracle Dispute" shall mean and refer to a dispute between the
Company and Oracle Corporation ("Oracle") regarding the amount of licensing and
support fees due pursuant to that certain Full Use Relicensor Authorization
Agreement, dated May 8, 1995, between the Company and Access Graphics, as such
dispute is outlined in a series of letters between Oracle and Company counsel
attached hereto as Exhibit F.
"Oracle Dispute Settlement" shall mean, with respect to the Oracle
Dispute, either of the following: (i) receipt by the Company of a release from
Oracle in form reasonably acceptable to AppNet, in which Oracle irrevocably
waives and releases the Company from any and all claims, causes of action,
damages, costs and expenses in connection with the Oracle Dispute or (ii) such
other settlement of the Oracle Dispute as is reasonably acceptable to AppNet;
provided, however, that if neither of (i) or (ii) have occurred on or before
June 30, 2001, an Oracle Dispute Settlement shall be deemed to have been reached
as of June 30, 2001.
"Person" shall mean any person, limited liability company,
partnership, trust, corporation, business, group, Government or other entity.
"Tax" or "Taxes" shall mean all federal, state, local, foreign and other taxes,
assessments or other Government charges, including, without limitation, income,
estimated income, business, occupation, franchise, property, sales, transfer,
use, employment, commercial rent or withholding taxes, including interest,
penalties and additions in connection therewith.
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"Tax Return" means any return, report, information return or other
document (including any related or supporting information) required to be
supplied, or actually supplied, to a Governmental or Regulatory Authority with
respect to Taxes.
2. PURCHASE AND SALE OF SHARES
2.1 Stock Purchase. On the basis of the representations, warranties,
covenants and agreements and subject to the satisfaction or waiver of the
conditions set forth herein, each of the Stockholders agrees to and will sell,
transfer, assign and deliver to AppNet on the Closing Date (as defined in
Section 3.1) good title to all of the Shares owned by such Stockholder, free and
clear of all Encumbrances of any kind whatsoever, and AppNet agrees to and will
purchase and accept from the Stockholders all of the Shares owned by each of the
Stockholders. The Shares constitute and will constitute as of the Closing Date
all of the issued and outstanding shares of Common Stock. Notwithstanding the
foregoing, AppNet understands that the Shares have not been registered under the
Securities Act of 1933, as amended (the "1933 Act"), or any state securities
laws, and that AppNet cannot resell or transfer the Shares unless they are
subsequently registered under the 1933 Act and applicable state laws or an
exemption from registration is available.
2.2 Consideration for Purchase of Shares. In consideration for the
transfer, sale and delivery to AppNet of all of the issued and outstanding
Shares, AppNet will pay to the Stockholders, in accordance with their pro rata
share of the outstanding share ownership of the Company as set forth on Schedule
4.5 (the "Pro Rata Shares"), the following amounts (in the aggregate, the
"Purchase Price"), subject to reduction pursuant to Sections 2.3, 2.4 or 7.12
consisting of:
(a) $6,800,000 in cash payable at the Closing (as defined in
Section 3.1) (the "Cash Payment"), subject to (i) adjustment as provided herein
and (ii) reduction for the value attributable to the Assumed Options (the
"Assumed Option Value"), being the spread between (A) the aggregate exercise
price of the Assumed Options and (B) an amount equal to (I) the Cash Payment
(without reduction pursuant to this Section 2.2(a)(ii)), plus the aggregate
value of the Stock Payment (based on $6.00 per share), multiplied by, (II) a
fraction, the numerator of which is the number of Assumed Options and the
denominator of which is the number of fully diluted shares of Common Stock prior
to the Closing Date.
(b) An aggregate of 450,000 shares of AppNet Common Stock (the
"Stock Payment"); and
(c) The Contingent Amount (as defined in Section 3.3(a)), if any,
pursuant to the terms and conditions of Section 3.3 hereof.
2.3 Net Worth Target. The Purchase Price has been calculated based upon
several factors, including the assumption that the Net Worth of the Company is
equal to or greater than $450,000 as of the Closing. If on the Closing Financial
Certificate (as defined in Section 7.12), the Net Worth of the Company is less
than $450,000, the Purchase Price to be delivered to the
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Stockholders may, at AppNet's election, be reduced either (i) at the Closing by
the difference between $450,000 and the Net Worth set forth on the Closing
Financial Certificate (which reduction shall be in cash as a reduction of the
Cash Payment) or (ii) after completion of the Post-Closing Audit (as defined in
Section 2.4).
2.4 Post-Closing Adjustment.
(a) Within one hundred twenty (120) days following the Closing
Date, AppNet shall cause Arthur Andersen LLP ("AppNet's Accountant") to audit
the Company's books to determine the accuracy of the information set forth on
the Closing Financial Certificate (the "Post-Closing Audit"). The parties
acknowledge and agree that for purposes of determining the Net Worth of the
Company as of the Closing Date, the value of the assets of the Company shall,
except with the prior written consent of AppNet, be calculated as provided in
the last sentence of Section 7.12. The Stockholders shall cooperate and shall
use their reasonable efforts to cause the officers and employees of the Company
to cooperate with AppNet and AppNet's Accountant after the Closing Date in
furnishing information, documents, evidence and other assistance to AppNet's
Accountant to facilitate the completion of the Post-Closing Audit within the
aforementioned time period. In the event that AppNet's Accountant determines
that the actual Net Worth of the Company as of the Closing Date was less than
the Net Worth set forth as the Net Worth of the Company on the Closing Financial
Certificate, AppNet shall deliver a written notice (the "Financial Adjustment
Notice") to the Stockholder Representative (as defined in Section 2.5) setting
forth (i) the determination made by AppNet's Accountant of the actual Net Worth
of the Company (the "Actual Company Net Worth"), (ii) the Purchase Price that
would have been payable at Closing pursuant to Sections 2.2 and 2.3 had the
Actual Company Net Worth been reflected on the Closing Financial Certificate,
and (iii) the amount, if any, by which the Cash Payment would have been reduced
at Closing had the Actual Company Net Worth been used in the calculations
pursuant to Sections 2.2 and 2.3 (the "Adjustment"). The Adjustment shall take
account of the reduction, if any, to the Purchase Price already taken pursuant
to Section 2.3.
(b) The Stockholder Representative shall have thirty (30) days
from the receipt of the Financial Adjustment Notice to notify AppNet if the
Stockholders dispute such Financial Adjustment Notice. If AppNet has not
received notice of such a dispute within such 30-day period, AppNet shall be
entitled to receive from the Stockholder Representative the Adjustment, in cash
or, at the option of the Stockholder Representative, in AppNet Common Stock
valued at $6.00 per share, as adjusted pursuant to this Section 2.4(b) (the
"Stock Price"), on the thirtieth day after receipt of the Financial Adjustment
Notice; provided, that if AppNet shall at any time subdivide (by any stock
split, stock dividend or otherwise) its outstanding shares of Common Stock into
a greater number of shares, the Stock Price in effect immediately prior to such
subdivision shall be proportionately reduced and, in case the outstanding shares
of Common Stock shall be combined into a smaller number of shares, the Stock
Price in effect immediately prior to such combination shall be proportionately
increased. If, however, the Stockholder Representative has delivered notice of
such a dispute to AppNet within such 30-day period, then AppNet's Accountant
shall select an independent accounting firm that has not represented any of the
parties hereto within the preceding two (2) years to review the Company's
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books, the Closing Financial Certificate and Financial Adjustment Notice (and
related information) to determine the amount, if any, of the Adjustment. Such
independent accounting firm shall be confirmed by the Stockholder Representative
and AppNet within five (5) days of its selection, unless there is an actual
conflict of interest. The independent accounting firm shall make its
determination of the Adjustment, if any, within thirty (30) days of its
selection. The determination of the independent accounting firm shall be final
and binding on the parties hereto, and upon such determination, AppNet shall be
entitled to receive from the Stockholder Representative the Adjustment, in cash
or shares of AppNet Common Stock as set forth above. The costs of the
independent accounting firm shall be borne by the party (either AppNet or the
Stockholder Representative) whose determination of the Company's Net Worth at
Closing was further from the determination of the independent accounting firm,
or equally by AppNet and the Stockholder Representative in the event that the
determination by the independent accounting firm is equidistant between the Net
Worth set forth on the Closing Financial Certificate and the Actual Company Net
Worth. If any Adjustment is determined by the independent accounting firm to be
due, the Adjustment shall be payable to AppNet in cash by the Stockholder
Representative within ten (10) days after such determination.
2.5 Stockholder Representative
(a) Each holder of Company Common Stock, by signing this
Agreement, designates Christopher Paine, or in the event that Christopher Paine
is unable or unwilling to serve, such other Person as is appointed by the
holders of a majority of the Common Stock as of the date hereof, to be the
representative of the Stockholders (the "Stockholder Representative") for
purposes of this Agreement. The Stockholders shall be bound by any and all
actions taken by the Stockholder Representative on their behalf.
(b) AppNet shall be entitled to rely upon any communication or
writings given or executed by the Stockholder Representative. All notices,
communications or writings to be sent to the Stockholders pursuant to this
Agreement may be addressed to the Stockholder Representative and any notice,
communication or writing so sent shall be deemed notice to all of the
Stockholders hereunder. The Stockholders hereby consent and agree that the
Stockholder Representative is authorized to accept deliveries, including any
notice, on behalf of the Stockholders pursuant hereto.
(c) The Stockholder Representative is hereby appointed and
constituted the true and lawful attorney-in-fact of each Stockholder, with full
power in his or her name and on his or her behalf to act according to the terms
of this Agreement in the absolute discretion of the Stockholder Representative;
and in general to do all things and to perform all acts including, without
limitation, executing and delivering all agreements, certificates, receipts,
instructions and other instruments contemplated by or deemed advisable in
connection with this Agreement. This power of attorney and all authority hereby
conferred is granted subject to the interest of the other Stockholders hereunder
and in consideration of the mutual covenants and agreements made herein, and
shall be irrevocable and shall not be terminated by any act of any Stockholder,
by operation of law, whether by such Stockholder's death or any other event.
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3. CLOSING
3.1 Time and Place of the Closing. The closing of the Stock Purchase and
the consummation of the other transactions contemplated by this Agreement (the
"Closing") shall take place at the offices of Tucker Flyer, a professional
corporation, at 1615 L Street, N.W., Suite 400, Washington, D.C. 20036, as soon
as practicable after all conditions to the Closing shall have been satisfied or
waived, or at such other time and date as the parties hereto may mutually agree,
which date shall be referred to as the "Closing Date."
3.2 Procedure at Closing. On the Closing Date, the parties agree to take
the following steps listed below (provided, however, that upon their completion
all such steps shall be deemed to have occurred simultaneously):
(a) The Stockholders and the Company shall deliver to AppNet
the closing documents specified in Section 7.
(b) AppNet shall deliver to the Stockholders the closing
documents specified in Section 8.
(c) The Stockholders shall deliver to AppNet certificates in
valid form representing all of the Shares, duly endorsed by the Stockholders in
blank or accompanied by a duly executed stock power in order to convey good
title to all of the Shares, free and clear of all Encumbrances.
(d) AppNet shall pay the Cash Payment by wire transfer of
immediately available funds to accounts designated by the Stockholders,
subject to the terms of Section 3.4(a)
(e) AppNet shall deliver the shares of AppNet Common Stock
comprising the Stock Payment to the Stockholders, subject to the terms of
Section 3.4(b).
3.3 Payment of Contingent Amount.
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(a) In the event that for the period commencing January 1, 1999
and ending December 31, 1999 (the "Earn Out Period"), the Company has (i)
adjusted gross revenue (i.e., gross revenue minus (a) sales and similar taxes
(b) returns and (c) doubtful accounts receivable attributable to such revenue)
("Adjusted Gross Revenue") of at least $4,500,000 and (ii) earnings before
interest, taxes, depreciation and amortization ("EBITDA") (as a percentage of
adjusted gross revenue) of at least 14%, AppNet shall pay to the Stockholders
such portion of $3,500,000 as is determined in accordance with Exhibit A (the
"Contingent Amount"). For purposes of determining the Company's financial
performance during the Earn Out Period, the accounting policies applied shall be
consistent with those applied previously by the Company. In addition, no AppNet
overhead charges shall be allocated in determining the financial results of the
Company during the Earn Out Period. All calculations of Adjusted Gross Revenue
and EBITDA shall be determined on an accrual basis in accordance with GAAP.
(b) Subject to the terms of Section 3.3(c), any Contingent Amount
payable shall be paid by AppNet to the Stockholders not later than fifteen (15)
days after the final determination made pursuant to Section 3.3(d). The
Contingent Amount shall be paid in cash (or, at the Stockholder Representative's
option, 80% in cash and 20% in AppNet Common Stock, valued at $6.00 per share,
as adjusted pursuant to this Section 3.3(b) (the "Stock Price")), up to the
maximum amount specified on Exhibit A. Any Contingent Amount shall be payable to
the Stockholders in accordance with their Pro Rata Shares as of the Closing
Date. In case AppNet shall at any time subdivide (by any stock split, stock
dividend or otherwise) its outstanding shares of Common Stock into a greater
number of shares, the Stock Price in effect immediately prior to such
subdivision shall be proportionately reduced, and, in case the outstanding
shares of Common Stock shall be combined into a smaller number of shares, the
Stock Price in effect immediately prior to such combination shall be
proportionately increased.
(c) In the event that, on or before the date the Contingent
Amount is payable to the Stockholders pursuant to this Section 3.3 (the
"Contingent Payment Date"), AppNet has sent a Claim Notice (as defined in
Section 9.2(b)), AppNet shall be entitled to withhold from the Contingent Amount
so payable an amount reasonably necessary to reimburse AppNet for Damages (as
defined in Section 9.1(a)) relating to any Claim (as defined in Section 9.2) for
which a Claim Notice has been sent by AppNet prior to the Contingent Payment
Date; provided, however, that AppNet shall not be entitled to withhold any part
of the Contingent Amount in connection with a Claim Notice sent pursuant to
Section 9.2(d). Should AppNet be entitled to indemnification for Damages
pursuant to Article 9, AppNet shall be entitled to offset the Contingent Amount
and, upon resolution of all Claims for which a Claim Notice has been sent on or
before the Contingent Amount Payment Date, AppNet shall pay to the Stockholders
any remaining portion of the Contingent Amount not so offset by AppNet. Any
amount withheld by AppNet from the Contingent Amount on the Contingent Amount
Payment Date pursuant to this Section 3.3(c) shall be held in escrow until
resolution of all such Claims.
(d) On or before March 1, 2000, AppNet shall deliver to the
Stockholder Representative a statement (the "Earn-Out Statement") setting forth
whether any of the Contingent Amount has been earned. The Stockholder
Representative shall have the right to review all work papers and procedures
used to prepare the Earn-Out Statement and shall have the
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right to perform any other reasonable procedures necessary to verify the
accuracy thereof. Unless the Stockholder Representative, within 30 days after
delivery to the Stockholder Representative of the Earn-Out Statement, notifies
AppNet in writing that the Stockholder Representative objects to the Earn-Out
Statement, and specifies the basis for such objection (including the Stockholder
Representative's calculation of the Contingent Amount (the "Objection
Statement")), such Earn-Out Statement shall become final, binding and conclusive
upon the parties hereto for purposes of this Agreement. If AppNet and the
Stockholder Representative are unable to resolve any objections to the Earn-Out
Statement within ten (10) days after any such notification has been given,
AppNet shall pay to the Stockholders any undisputed portion of the Contingent
Amount and the dispute shall be referred to an independent accounting firm that
has not represented any of the parties hereto within the preceding two (2) years
(the "Designated Accountant") for resolution (or, if the Designated Accountant
is unavailable, to another nationally recognized public accounting firm mutually
agreed upon by the Stockholder Representative and AppNet within five (5) days
from the date upon which the Designated Accountant notifies the parties that it
is not available). Within 30 days after its appointment, the Designated
Accountant will make a determination as to each of the items in dispute, which
determination shall be final, conclusive and binding upon each of the parties
hereto. AppNet, the Stockholder Representative and the Stockholders shall
cooperate with each other in order to resolve any and all matters in dispute
under this Section 3.3 as soon as practicable. The costs of the Designated
Accountant shall be borne by the party (either AppNet or the Stockholders, in
accordance with their Pro Rata Shares) whose determination of the Contingent
Amount was further from the determination of the Designated Accountant of the
Contingent Amount, or equally by AppNet and the Stockholders, in accordance with
their Pro Rata Shares, in the event that the determination of the Designated
Accountant is equidistant between the Contingent Amount set forth in the
Earn-Out Statement and the Contingent Amount set forth in the Objection
Statement. The Stockholder Representative shall be responsible for collection
and payment of all amounts due from the Stockholders in connection with the
Designated Accountant's costs.
3.4 Holdback of Portion of Cash Payment and Pledge of Stock.
(a) Notwithstanding anything contained in this Agreement to the
contrary, AppNet shall withhold from the Cash Payment payable at the Closing a
total of $750,000 (the "Holdback Amount"), which shall be held by AppNet as
collateral for any amounts payable by the Company or the Stockholders to AppNet
pursuant to Article 9, including, but not limited to, any amounts payable by the
Company in connection with the Oracle Dispute. Interest shall accrue on the
Holdback Amount (less any amounts offset pursuant to this Section 3.4) at the
applicable Federal rate in effect as of the Closing Date, as determined pursuant
to Section 1274(d) of the Code, with all such accrued interest on the Holdback
Amount (less any interest accrued on amounts offset pursuant to this Section
3.4) being payable to the Stockholders upon release of the Holdback Amount
pursuant to Section 3.4(a)(i) or (ii). In the event any amounts are payable by
the Company or the Stockholders to AppNet pursuant to Article 9, AppNet may
offset such amounts from the Holdback Amount; provided, however, that no
interest shall accrue or be payable with respect to any portion of the Holdback
Amount which is offset by AppNet. Any portion of the Holdback Amount not so
offset by AppNet shall be paid by AppNet to the
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Stockholders in accordance with their Pro Rata Shares as follows: (i) if an
Oracle Dispute Settlement has been reached prior to the first anniversary of the
Closing Date, the Holdback Amount shall be paid to the Stockholders on the later
of (A) the first anniversary of the Closing Date or (B) resolution of any Claim
for which a Claim Notice has been sent by AppNet prior to the first anniversary
of the Closing Date (provided, that if such Claim Notice is sent pursuant to
Section 9.2(d) such Holdback Amount shall be paid in accordance with
3.4(a)(i)(A)); or (ii) if an Oracle Dispute Settlement has not been reached
prior to the first anniversary of the Closing Date, the Holdback Amount shall be
paid to the Stockholders on the later of (A) resolution of any Claim for which a
Claim Notice has been sent by AppNet prior to the first anniversary of the
Closing Date; provided, that if such Claim Notice is sent pursuant to Section
9.2(d) such Holdback Amount shall be paid in accordance with 3.4(a)(i)(A), or
(B) the date on which an Oracle Dispute Settlement is reached; provided, that
AppNet shall retain only so much of the Holdback Amount pursuant to subsections
3.4 (a) (i) and (ii) which is a reasonable estimate of the amount necessary to
satisfy the Damages of AppNet in connection with such unresolved Claim and/or
the Oracle Dispute.
(b) At the Closing, the Stockholders shall pledge an aggregate of
241,667 shares of the Stock Payment (the "Pledged Stock") to satisfy the
Indemnifying Stockholders' obligations to AppNet under this Agreement relating
to the Oracle Dispute and the Oracle Dispute Settlement pursuant to a Stock
Pledge and Escrow Agreement in the form attached hereto as Exhibit E (the "Stock
Pledge and Escrow Agreement"). Each of the Stockholders shall pledge their
respective Pro Rata Share of the Pledged Stock.
3.5 Withholding. AppNet shall be entitled to deduct and withhold from the
Cash Payment or the Contingent Amount otherwise payable pursuant to this
Agreement to any Stockholder such amounts as AppNet is required to deduct and
withhold with respect to the Cash Payment or the Contingent Amount, as the case
may be, under the Code or any provision of applicable state, local or foreign
Tax law. To the extent that such amounts are so withheld by AppNet, such
withheld amounts shall be treated for all purposes of this Agreement as having
been paid to the holder of the shares of the Company Common Stock.
3.6 Company Incentive Stock Options. Subject to the terms of Section 7.23,
AppNet shall assume options issued pursuant to the Company's Incentive Stock
Option Plan in such manner that each stock option under the Company's Incentive
Stock Option Plan outstanding as of the Closing Date (the "Company Stock
Options") shall be converted into an option to purchase .151203 shares of AppNet
Common Stock at a price equal to the exercise price of the Company Stock Options
divided by .151203 (an "AppNet Stock Option"). Any AppNet Stock Option
exercisable for a fractional share of AppNet Common Stock shall be rounded to
the nearest whole share. The AppNet Stock Options shall be on such terms as
provided in the Company's Incentive Stock Option Plan and any agreement between
the Company and the optionholder governing the Company Stock Option so assumed.
The AppNet Stock Options shall be delivered to the holders of Company Stock
Options following the Closing Date as set forth on Schedule 3.6 hereof. At
Closing, each holder of Company Stock Options which are being assumed by AppNet
pursuant to this Section 3.6 shall execute a joinder agreement agreeing to be
bound by
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the terms of the AppNet Stockholders' Agreement dated June 29, 1998 and
Registration Agreement dated June 29, 1998. All shares of AppNet Common Stock to
be delivered upon exercise of any such assumed Company Stock Options shall be
bound by and subject to the provisions of the AppNet Stockholders' Agreement and
Registration Agreement.
4. REPRESENTATIONS AND WARRANTIES OF THE COMPANY AND THE STOCKHOLDERS
To induce AppNet to enter into this Agreement and to consummate the
transactions contemplated by this Agreement, the Company and the Stockholders,
jointly and severally, represent and warrant to AppNet, as of the date hereof
and as of the Closing Date, as set forth below:
4.1 Organization. The Company is a corporation duly organized, validly
existing and in good standing under the laws of the State of California.
4.2 Power and Authority. The Company has all requisite corporate power and
authority to own, lease and operate its properties and to conduct its Business
as it is presently being conducted and as it has been conducted in the past. The
Company is not required to be qualified or licensed as a foreign corporation in
any jurisdiction.
4.3 Authority for Agreement. The execution, delivery and performance of
this Agreement and the consummation of the transactions contemplated hereby have
been authorized by all requisite corporate action on the part of the Company.
The Company has full corporate power, authority and legal right to enter into
this Agreement and to consummate the transactions contemplated hereby. Each of
the Stockholders has the legal capacity to enter into this Agreement and to
consummate the transactions contemplated hereby. This Agreement has been duly
executed and delivered by each of the Stockholders and assuming the due
authorization, execution and delivery by AppNet of this Agreement, the Agreement
is a legal, valid and binding obligation of each of the Stockholders enforceable
against each of the Stockholders in accordance with its terms, except as
enforceability may be limited by applicable bankruptcy, insolvency,
reorganization, moratorium or other similar laws affecting the enforcement of
creditors' rights in general. This Agreement has been duly executed and
delivered by the Company and, assuming the due authorization, execution and
delivery by AppNet of this Agreement, this Agreement is a legal, valid and
binding obligation of the Company enforceable against the Company in accordance
with its terms, except as enforceability may be limited by applicable
bankruptcy, insolvency, reorganization, moratorium or other similar laws
affecting the enforcement of creditors' rights in general.
4.4 No Violation to Result. The execution, delivery and performance of
this Agreement and the consummation of the transactions contemplated hereby and
the fulfillment of the terms hereof: (i) are not in violation or breach of, do
not conflict with or constitute a default under the Certificate of Incorporation
or Bylaws of the Company or, after obtaining the required third party consents
set forth on Schedule 4.4, any Contract to which the Company or any of the
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Stockholders is a party, except to the extent that such violation or breach
would not have a Material Adverse Effect on the Company; (ii) after obtaining
the required third party consents set forth on Schedule 4.4, will not accelerate
or permit the acceleration of the performance on the part of the Company or any
of the Stockholders required by any of the terms of any Contract to which the
Company or any of the Stockholders is a party or which affects the Company;
(iii) will not be an event which, after notice or lapse of time or both, will
result in any such violation, breach, conflict, default, or acceleration; (iv)
will not result in a violation under any applicable law, judgment, decree,
order, rule, regulation, permit or other legal requirement of any Governmental
or Regulatory Authority, court or arbitration tribunal whether federal, state,
provincial, municipal or local (within the U.S. or otherwise) at law or in
equity, which is applicable to the Company, except to the extent that such
violation would not have a Material Adverse Effect on the Company; and (v) will
not result in the creation or imposition of any Encumbrance in favor of any
Person upon any of the properties or assets of the Company.
4.5 Capitalization.
(a) Schedule 4.5 sets forth, with respect to the Company, (i) the
number of authorized shares of each class of its capital stock, (ii) the number
of issued and outstanding shares of each class of its capital stock and the
record owner thereof, (iii) the number of shares of each class, if any, which
are held in treasury and (iv) the number of Company Stock Options (as defined in
Section 3.6 hereof). All of the issued and outstanding shares of capital stock
of the Company (A) have been duly authorized and validly issued and are fully
paid and non-assessable, (B) were issued in compliance with all applicable state
and federal laws and (C) were not issued in violation of any preemptive rights
or rights of first refusal. No preemptive rights or rights of first refusal
exist with respect to the shares of capital stock of the Company, and no such
rights arise by virtue of or in connection with the transactions contemplated
hereby. There are no outstanding or authorized rights, options, warrants,
convertible securities, subscription rights, conversion rights, exchange rights
or other agreements or commitments of any kind that could require the Company to
issue or sell any shares of the Company Common Stock (or securities convertible
into or exchangeable for shares of its Common Stock), except for the Company
Stock Options set forth on Schedule 4.5. There are no outstanding stock
appreciation, phantom stock, profit participation or other similar rights with
respect to the Company. There are no proxies, voting rights or other agreements
or understandings with respect to the voting or transfer of the capital stock of
the Company. The Company is not obligated to redeem or otherwise acquire any of
its outstanding shares of capital stock.
(b) The Stockholders are the sole legal and beneficial holders of
the issued and outstanding shares of capital stock of the Company, and the
Stockholders own such shares as are set forth opposite their respective names on
Schedule 4.5 free and clear of any mortgage, security interest, pledge,
hypothecation, assignment, deposit arrangement, Encumbrance, lien (statutory or
otherwise), charge, preference, priority or other security agreement, option,
warrant, attachment, right of first refusal, preemptive right, conversion, put,
call or other claim or right, restriction on transfer, or preferential
arrangement of any kind or nature whatsoever (including any restriction on the
transfer of any assets, any conditional sale or other title retention agreement,
any financing lease involving substantially the same economic effect as any of
the
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foregoing and the filing of any financing statement under the Uniform Commercial
Code or comparable law of any jurisdiction).
4.6 Financial Statements.
(a) Schedule 4.6 includes true, complete and correct copies of (i)
the unaudited balance sheets of the Company as of the end of the periods
identified on Schedule 4.6 (such dates being the end of the Company's three (3)
most recently completed fiscal years ending December 31, 1998), and unaudited
statements of income, cash flows and retained earnings for the year ended
December 31, 1998 (collectively, the "Annual Financials"), and (ii) true,
complete and correct copies of the Company's unaudited interim balance sheet
(the "Current Balance Sheet") as of January 31, 1999 (the "Balance Sheet Date")
[the "Interim Financials" and together with the Annual Financials, the
"Financial Statements"]. The Company has not maintained statements of income,
cash flow and retained earnings for any period other than the twelve (12) month
period ended December 31, 1998. The Financial Statements have been prepared in
accordance with GAAP consistently applied. Each of the balance sheets included
in the Financial Statements presents fairly the financial condition of the
Company as of the dates indicated thereon, and each of the statements of income,
cash flows and retained earnings included in the Financial Statements presents
fairly the results of its operations for the periods indicated thereon. During
the periods covered by the Financial Statements and since the Balance Sheet
Date, there has been no material change in the Company's accounting policies.
There are no material, special or non-recurring items of income or expense
during the periods covered by the Financial Statements and the balance sheets
included in the Financial Statements do not reflect any write-up or revaluation
increasing the book value of any assets, except as specifically disclosed in the
notes thereto.
(b) The books and records, minute books, stock record books, and
other records of the Company, all of which have been made available to AppNet,
are materially complete and correct and have been maintained in accordance with
sound business practices. The minute book(s) of the Company, all of which have
been made available to AppNet, contains materially accurate and complete records
of all meetings held of, and corporate action taken by, the stockholders, the
Board of Directors, and committees of the Board of Directors of the Company, and
no meeting of any such stockholders, Board of Directors, or committee has been
held for which minutes have not been prepared as of the date hereof and are not
contained in such minute book.
4.7 Liabilities and Obligations.
(a) Except as disclosed on Schedule 4.7(a), there are no
Liabilities or obligations of the Company, other than: (i) those Liabilities
reflected on the Current Balance Sheet and not previously paid or discharged;
(ii) those Liabilities incurred after the Balance Sheet Date arising in the
ordinary course of business, which were incurred consistent with past practice
under any contract, commitment or agreement specifically disclosed on any
schedule to this Agreement; and (iii) those liabilities specifically described
in the Material Contracts listed on Schedule 4.13 hereof.
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(b) Schedule 4.7(b) sets forth a summary description of all
advance payments or deposits held by the Company and reflected in the Financial
Statements and the related obligations thereunder.
4.8 Adverse Changes. From December 31, 1998: (i) there has been no change
in the condition (financial or otherwise), Business, net worth, assets,
properties, Liabilities or obligations (fixed, contingent, known, unknown or
otherwise) of the Company which has had or is likely to have a Material Adverse
Effect on the Company, and to the Company's and the Stockholders' knowledge,
there has been no occurrence, circumstance or combination thereof which might
reasonably be expected to result in any such Material Adverse Effect before or
after the Closing Date; (ii) the Company has not declared or paid any dividend
or distribution in respect of the capital stock, or any direct or indirect
redemption, purchase or other acquisition of any of the capital stock of the
Company, and (iii) the Company has materially complied with all of the covenants
set forth in Section 6.3, to the same extent as if this Agreement had been
executed on December 31, 1997.
4.9 Employee Matters.
(a) All employee benefit plans, programs, policies and
arrangements (whether formal or informal, written or unwritten, and whether
maintained for the benefit of a single individual or more than one individual)
maintained or contributed to by the Company for the benefit of any current or
former employee of the Company or in which such employees are entitled to
participate are listed in Schedule 4.9(a) (the "Benefit Plans"). With respect to
each Benefit Plan, true, correct and complete copies of all of the following
documents, if applicable, will be delivered or made available to AppNet prior to
the Closing Date: (i) all plan documents and amendments thereto; (ii) all
written descriptions of any oral plans or policies; (iii) all trust agreements;
(iv) all annuity contracts, insurance policies or contracts and service
agreements; (v) the three (3) most recent Forms 5500 and any financial
statements attached thereto; (vi) the most recent actuarial and valuation
report; (vii) the most recent IRS determination letter; (viii) the most recent
summary plan description; and (ix) copies of all nondiscrimination testing for
the last three (3) years. Except as set forth on Schedule 4.9(a), each Benefit
Plan and the administration thereof complies, and has at all times complied,
with the terms of such Benefit Plan and with the requirements of all applicable
law, including, without limitation, the Employee Retirement Income Security Act
of 1974, as amended ("ERISA"), and the Code. Except as set forth on Schedule
4.9(a), (i) the Internal Revenue Service has issued a favorable determination
letter with respect to each Benefit Plan intended to qualify under Section
401(a) of the Code, and nothing has occurred since the issuance of such
determination letter which could adversely affect the qualified status of each
such Benefit Plan and (ii) each trust which forms a part of any such Benefit
Plan is exempt from taxation under Section 501(a) of the Code. No Benefit Plan
subject to Part 3 of Title I of ERISA has incurred any "accumulated funding
deficiency" within the meaning of Section 302 of ERISA or Section 412 of the
Code. No liability has been incurred or is expected to be incurred under Title
IV of ERISA by any party with respect to any Benefit Plan, or any other plan
presently or heretofore maintained or contributed to by the Company, any
predecessor to the Company, or any entity that is or at any time was a member of
a controlled
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group, as defined in Section 412(n)(6)(B) of the Code, which includes or
included the Company ("Controlled Group Member"). Neither the Company, nor any
Controlled Group Member has incurred any liability for any Tax imposed under
Sections 4971 through 4980B of the Code or civil liability under Sections 502(i)
or (l) of ERISA. The "amount of unfunded benefit liabilities" within the meaning
of Section 4001(a)(18) of ERISA does not exceed zero with respect to any Benefit
Plan subject to Title IV of ERISA. No Benefit Plan is a "multiemployer plan"
within the meaning of Section 3(37) of ERISA. No Benefit Plan provides health or
death benefit coverage to any employee or his spouse or dependents beyond the
termination of an employee's employment, except as required by Part 6 of Subpart
B of Title I of ERISA or Section 4980B of the Code. No "reportable event"
(within the meaning of Section 4043 of ERISA) has occurred with respect to any
Benefit Plan or any plan maintained by a Controlled Group Member since the
effective date of said Section 4043. The Company has no liability (whether
actual, contingent or otherwise) with respect to any employee benefit plan or
arrangement sponsored or maintained by a Controlled Group Member. No suit,
actions or other litigation (excluding claims for benefits incurred in the
ordinary course of plan activities) have been brought against or with respect to
any Benefit Plan, and no suit, action, or other litigation is threatened by,
against, or relating to any Benefit Plan and the Company does not have any
knowledge of any fact that could form the basis for any such suit, action or
litigation. No "prohibited transaction" within the meaning of Sections 406 or
407 of ERISA or Section 4975 of the Code has occurred with respect to any
Benefit Plan. No Benefit Plan is presently under audit or examination by the
IRS, the Department of Labor, or any other Governmental or Regulatory Authority,
and no matters are pending with respect to any Benefit Plan under the IRS
Voluntary Compliance Resolution program, its Closing Agreement Program, or any
other similar program. All contributions to Benefit Plans that were required to
be made under such Benefit Plans will have been made as of the Balance Sheet
Date, and all benefits accrued under any unfunded Benefit Plan will have been
paid, accrued or otherwise adequately reserved in accordance with GAAP as of
such date, and the Company will have performed by the Closing Date any
obligations required to be performed as of such date under all Benefit Plans. No
Benefit Plan contains any term or provision or is subject to any law that would
prohibit the transactions contemplated by this Agreement, or that would give
rise to the vesting of benefits, payments, or liabilities as a result of the
transactions contemplated by this Agreement, except to the extent that full
vesting is required under any tax-qualified Benefit Plan under Section 411 of
the Code.
(b) Schedule 4.9(b) contains a complete and correct list of all
employees of the Company as of the date hereof and the current compensation rate
payable to each such employee. Except as set forth in Schedule 4.9(b), (i) the
terms of employment or engagement of all directors, officers, employees, agents,
consultants and professional advisers of the Company are such that their
employment or engagement may be terminated upon not more than two weeks' notice
given at any time and without liability for payment of compensation or damages,
(ii) there are no severance payments which are or could become payable by the
Company to any director, officer or other employee of the Company under the
terms of any oral or written agreement or commitment or any law, custom, trade
or practice, and (iii) there are no agreements, contracts or commitments, oral
or written, between the Company and any employee, consultant or independent
contractor.
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(c) The Company is not bound by or subject to (and none of its
assets or properties are bound by or subject to) any arrangement with any labor
union. No employees of the Company are or ever have been represented by any
labor union or covered by any collective bargaining agreement while employed by
the Company, and no campaign to establish such representation is in progress.
There is no pending or threatened labor dispute involving the Company and any
group of their employees nor has the Company experienced any labor
interruptions. The Company is and has been in compliance with all applicable
laws respecting employment and employment practices, terms and conditions of
employment, and wages and hours, including without limitation any such laws
regarding employment documentation, minimum wage and hours, workers'
compensation, family and medical leave, the Immigration Reform and Control Act,
and occupational safety and health requirements, and the Company has not engaged
in any unfair labor practice. All persons treated by the Company as independent
contractors for any purpose do satisfy and have satisfied the requirements of
law to be so treated, and the Company has fully and accurately reported the
amounts paid by the Company to or on behalf of such persons on IRS Forms 1099
when required to do so. No individual who has performed services for or on
behalf of the Company, and who has been treated by the Company as an independent
contractor, is classified as a "leased employee", within the meaning of Section
414(n)(2) of the Code with respect to the Company.
4.10 Taxes.
(a) The Company has filed or caused to be filed with the
appropriate Governmental or Regulatory Authority any and all Tax Returns
required to be filed by it as of the date hereof, or requests for extensions to
file Tax Returns which have been filed have been timely filed or granted and
have not expired, and all such Tax Returns are true, complete and accurate in
all respects, except to the extent that such failures to file, have extensions
granted that remain in effect or be complete and accurate in all respects, as
applicable, individually or in the aggregate, would not have a Material Adverse
Effect on the Company. The Company has paid all Taxes shown as due, claimed to
be due by any Governmental or Regulatory Authority, or accruable with respect to
periods through the Closing Date, except for such Taxes as (i) are fully
reserved for in the Current Balance Sheet or (ii) were incurred after the
Balance Sheet Date in the ordinary course of business and are not due and
payable as of the Closing Date. No deficiencies for any Taxes have been proposed
against the Company that are not adequately reserved for in the Current Balance
Sheet. No requests for waivers or comparable consents with respect to the time
to assess any Taxes against the Company have been granted or are pending, except
for requests with respect to such Taxes that have been adequately reserved for
in the Current Balance Sheet. The Company has complied in all respects with all
applicable laws, rules and regulations relating to the payment and withholding
of Taxes (including, without limitation, withholding of Taxes pursuant to
Sections 1441 and 1442 of the Code or similar provisions under any foreign laws
and withholding with respect to employee wages) and has, within the time and
manner prescribed by law, withheld and paid over to the proper Governmental or
Regulatory Authority all amounts required to be withheld and paid over under all
applicable laws. No federal, state, local or foreign audits or other
administrative proceedings or court proceedings ("Audits") exist or have been
initiated with regard to any Taxes or Tax Returns of the Company, and the
Company has not received any notice that such an Audit is pending or threatened
with respect to
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any Taxes due from or with respect to the Company or any Tax
Return filed or required to be filed by or with respect to the Company. The
Company is not a party to, is not bound by, and has no obligation under, any tax
sharing agreement, tax indemnification agreement or similar contract or
arrangement.
(b) The Company has delivered to AppNet complete and accurate
copies of all filed federal income Tax Returns relating to taxable years
beginning on or prior to the Closing Date, and all examination reports and
statements of assessment or deficiency issued relating to such Tax Returns, and
has delivered or made available to AppNet complete and accurate copies of all
other filed Tax Returns of the Company, together with all related examination
reports and statements of assessment or deficiency for all periods beginning on
or prior to the Closing Date.
(c) The Company has not been informed by any Governmental or
Regulatory Authority that such authority believes that the Company was required
to file any Tax Return that has not been filed.
(d) The Company has not filed an election, consent or agreement
under Section 341(f) of the Code, and none of the assets of the Company are
subject to an election under Section 341(f) of the Code.
(e) The Company has no liability for the Taxes of any other person
either as a transferee under Section 6901 of the Code, or any similar provision
of state, local or foreign law, as a successor, or by contract or otherwise.
(f) Neither the Company nor any predecessor has ever been included
or required to be included, on any affiliated, consolidated, combined or unitary
Tax Return.
(g) The Company will not be required to include any amounts in
income for taxable years ending after the Closing Date pursuant to Section
481(a) of the Code or any similar provision of state or local law by reason of a
change in accounting method occurring in a taxable year ending on or before the
Closing Date, and none of the Company nor the Stockholders has any knowledge
that any Governmental or Regulatory Authority has proposed any change in method
of accounting that would require inclusion of such amounts.
(h) The Company has not been a United States real property holding
corporation within the meaning of Section 897(c)(2) of the Code during the
applicable period specified in Section 897(c)(1)(A)(ii) of the Code.
(i) The Company (i) has not made any payments, is not obligated to
make any payments, or is not a party to any agreement that could obligate it to
make any payments that may be treated as an "excess parachute payment" under
Section 280G of the Code; (ii) has no actual or potential liability for any
Taxes of any person (other than the Company) under Treasury Regulation Section
1.1502-6 (or any similar provision of federal, state, local, or foreign law), or
as a transferee or successor, by contract, or otherwise; or (iii) is not or has
not been required to make a basis reduction pursuant to Treasury Regulation
Section 1.1502-20(b) or Treasury Regulation Section 1.337(d)- 2(b).
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(j) The Company has not undergone a change in its method of
accounting resulting in an adjustment to its taxable income pursuant to Section
481(a) of the Code which would be required to be included in income of the
Company for any taxable year ending after the Closing Date.
(k) No state or federal "net operating loss" of the Company
determined as of the Closing Date is subject to limitation on its use pursuant
to Section 382 of the Code or comparable provisions of state law as a result of
any "ownership change" within the meaning of Section 382(g) of the Code or
comparable provisions of state law occurring prior to the Closing Date.
4.11 Subsidiaries. The Company has no debt, equity or other investment or
interest in any Person or any strategic alliance with any Person. The Company
has no commitments to contribute to the capital of, make loans to or share
losses of, any Person.
4.12 Property.
(a) The Company has never owned any real property. Schedule
4.12(a) sets forth an accurate and complete list of all leases of real property
leased by the Company (collectively, the "Facilities"). Except as otherwise
disclosed on Schedule 4.12(a), (i) there are no outstanding written or oral
leases, rights to occupancy, or tenancies of any kind (including tenancies by
sufferance and/or holdover tenancies arising under expired written or oral
leases) covering or in any way affecting the Facilities or any part or parts
thereof; (ii) to the knowledge of the Company and the Stockholders, no person,
firm or corporation other than the Company has any rights (including rights
arising under an installment contract, option to purchase, easement,
right-of-way, or otherwise) with respect to the Facilities or any part thereof;
and (iii) there have been no improvements to, construction on, work done at,
and/or services or material supplied to, the Facilities or any part or parts
thereof for which payment in full has not been made and which might give rise to
mechanic's liens or other lien rights with respect to the Facilities, except in
the ordinary course of business. All leases set forth on Schedule 4.12(a) are in
full force and effect and constitute valid and binding agreements of the Company
and, to the knowledge of the Company and the Stockholders, the other parties
thereto in accordance with their respective terms.
(b) Schedule 4.12(b) sets forth an accurate list of all the
material Company owned property and all of the Company leased personal property
(i) as of the Balance Sheet Date, or (ii) acquired since the Balance Sheet Date,
including in each case true, complete and correct copies of leases for equipment
and also including an indication as to which assets are currently owned by any
current stockholders of the Company or business or personal Affiliates of the
Company or any current stockholder of the Company. All of the vehicles and other
material machinery and equipment listed on Schedule 4.12(b) are in good working
order and condition, ordinary wear and tear excepted. All fixed assets used by
the Company that are material to the operation of the Business, as it is
presently being conducted are either owned by the Company or leased under an
agreement listed on Schedule 4.12(b).
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(c) Except as set forth on Schedule 4.12(c), the Company has good
and marketable title to its owned assets, free and clear of any and all
Encumbrances and defects in title; except for (i) Encumbrances for Taxes or
governmental assessments, charges or claims the payment of which is not yet due
or, as set forth on Schedule 4.12(c), for Taxes the validity of which are being
contested in good faith by appropriate proceedings; and (ii) statutory
Encumbrances of landlords and Encumbrances of laborers, carriers, warehousemen,
mechanics, materialmen or other similar Persons and other Encumbrances imposed
by Governmental or Regulatory Authority or Legal Requirement incurred in the
ordinary course of business for sums not yet due or, as set forth on Schedule
4.12(c), being contested in good faith. The Company's assets, taken together,
are adequate for the operation of the Business as it is presently being
conducted.
4.13 Contracts. Schedule 4.13 constitutes an accurate and complete list of
each Material Contract. Each Contract is in full force and effect, is a valid,
binding and enforceable obligation by or against the Company and the other
parties thereto and, to the knowledge of the Company and the Stockholders, no
event has occurred which constitutes or, with the giving of notice or passage of
time, or both, would constitute, a default or breach thereunder, except to the
extent such default or breach would not have a Material Adverse Effect on the
Company. Prior to the Closing Date, the Company will deliver or will cause to be
delivered or will make available to AppNet correct and complete copies of each
Material Contract and all amendments thereto. To the knowledge of the Company,
no other party to any Contract is in default thereunder. Except as set forth on
Schedule 4.13, there exists no restrictive covenants of any nature whatsoever in
any of the Contracts. To the knowledge of the Company and the Stockholders, the
Company will not experience a loss on any of the Contracts.
4.14. Government Contracts. The Company is not, and has never been, a
party to any Government Contract.
4.15 Litigation. Except as set forth in Schedule 4.15, there is no
litigation, suit, proceeding, action, claim, demand or investigation, at law or
in equity, pending or to the knowledge of the Company and the Stockholders
threatened against or affecting the Company before any Governmental or
Regulatory Authority including, without limitation, any product liability,
workers' compensation or wrongful dismissal claims, or claims, actions, suits,
demands or proceedings relating to toxic materials, hazardous substances,
pollution or the environment. To the knowledge of the Company and the
Stockholders, there are no facts that would likely result in any such
litigation, suit, proceeding, action, claim or investigation. The Company is not
subject to or in default with respect to any notice, order, writ, injunction or
decree of any court, agency, authority or arbitration tribunal.
4.16 Compliance with Laws. Except as set forth in Schedule 4.16, the
Company has complied and is currently in compliance with all material laws,
regulations, rules, orders, permits, judgments, decrees and other requirements
and policies imposed by any Governmental or Regulatory Authority applicable to
it, its properties or the operation of its Business. The Company has not
received any notice or citation for noncompliance with any of the foregoing and,
to the knowledge of the Company and the Stockholders, there exists no condition,
situation
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or circumstance, nor has there existed such a condition, situation or
circumstance, which, after notice or lapse of time, or both, would constitute
noncompliance with or give rise to future liability with regard to any of the
foregoing. The Company has all material licenses, permits, approvals,
qualifications or the like, from any Government, Governmental or Regulatory
Authority or any third party necessary for the conduct of the Company's
Business, as it is presently being conducted, and all such items are in full
force and effect.
4.17 Environmental and Safety Matters.
(a) For purposes of this Agreement, the term "Environmental and
Safety Requirements" shall mean all applicable federal, state, local and foreign
statutes, regulations, ordinances and other provisions having the force or
effect of law, all judicial and administrative orders and determinations, all
contractual obligations and all common law, in each case concerning public
health and safety, worker health and safety and pollution or protection of the
environment (including, without limitation, all those relating to the presence,
use, production, generation, handling, transport, treatment, storage, disposal,
distribution, labeling, testing, processing, discharge, Release, threatened
Release, control or cleanup of any hazardous or otherwise regulated materials,
substances or wastes, chemical substances or mixtures, pesticides, pollutants,
contaminants, toxic chemicals, petroleum products or byproducts, asbestos,
polychlorinated biphenyls, noise or radiation); "Release" shall have the meaning
set forth in CERCLA (as defined below); and "Environmental Lien" shall mean any
lien, whether recorded or unrecorded, in favor of any Governmental or Regulatory
Authority, relating to any liability of the Company arising under any
Environmental and Safety Requirements.
(b) Except as set forth on Schedule 4.17:
(i) To the knowledge of the Company and the Stockholders, the
Company has complied with and is currently in compliance with all Environmental
and Safety Requirements, and the Company has not received any oral or written
notice, report or information regarding any Liabilities (whether accrued,
absolute, contingent, unliquidated or otherwise) or any corrective,
investigatory or remedial obligations arising under Environmental and Safety
Requirements which relate to the Company or any of its properties or facilities.
(ii) Without limiting the generality of the foregoing, the
Company has obtained and complied with, and is currently in compliance with, all
permits, licenses and other authorizations that may be required pursuant to any
Environmental and Safety Requirements for the occupancy of its properties or
facilities or the operation of its Businesses as it is presently being
conducted, as it has been conducted in the past. A list of all such permits,
licenses and other authorizations which are material to the Company is set forth
on Schedule 4.17 attached hereto.
(iii) To the knowledge of the Company and the Stockholders,
neither this Agreement nor the consummation of the transactions contemplated by
this Agreement shall impose any obligations on the Company or otherwise for site
investigation or cleanup, or notification to or consent of any Governmental or
Regulatory Authorities or third parties under
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any Environmental and Safety Requirements (including, without limitation, any so
called "transaction-triggered" or "responsible property transfer" laws and
regulations).
(iv) The Company has not treated, stored, disposed of,
arranged for or permitted the disposal of, transported, handled or Released any
substance (including, without limitation, any hazardous substance), or owned,
occupied or operated any facility or property, so as to give rise to Liabilities
of the Company for response costs, natural resource damages or attorneys fees
pursuant to the Comprehensive Environmental Response, Compensation and Liability
Act of 1980, as amended ("CERCLA"), or any other Environmental and Safety
Requirements.
(v) To the knowledge of the Company and the Stockholders,
without limiting the generality of the foregoing, no facts, events or conditions
relating to the past or present properties, facilities or operations of the
Company prevent, hinder or limit continued compliance with Environmental and
Safety Requirements, give rise to any corrective, investigatory or remedial
obligations pursuant to Environmental and Safety Requirements or give rise to
any other Liabilities (whether accrued, absolute, contingent, unliquidated or
otherwise) pursuant to Environmental and Safety Requirements (including, without
limitation, those Liabilities relating to onsite or offsite Releases or
threatened Releases of hazardous materials, substances or wastes, personal
injury, property damage or natural resources damage).
(vi) To the knowledge of the Company and the Stockholders, the
Company has not, either expressly or by operation of law, assumed or undertaken
any material liability or corrective, investigatory or remedial obligation of
any other Person relating to any Environmental and Safety Requirements.
(vii) To the knowledge of the Company and the Stockholders, no
Environmental Lien has attached to any property leased or operated by the
Company.
4.18 Customers; Suppliers.
(a) Except as set forth in Schedule 4.18(a), no single customer
accounted for more than 5% of the Company's revenues for the fiscal years ended
December 31, 1997 or December 31, 1998. Except as set forth on Schedule 4.18(a),
no customer listed on Schedule 4.18(a) (a "Significant Customer") has canceled
or otherwise terminated or threatened to cancel or otherwise terminate its
relationship with the Company, or during such periods has materially decreased
its usage or purchase of the Company's services or products. To the knowledge of
the Company and the Stockholders, no Significant Customer has any plan or
intention to terminate, cancel or otherwise materially modify its relationship
with the Company or materially decrease or limit its usage, purchase or
distribution of the services or products of the Company.
(b) The relationships of the Company with its suppliers are good
commercial working relationships and, except as set forth on Schedule 4.18(b),
no supplier has during the last twelve months terminated or threatened to
terminate, its relationship with the Company or has during the last twelve (12)
months decreased or limited or threatened to decrease or limit, its services,
supplies or materials to the Company. The Company is not obligated to use any
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supplier as a sole source of supply of any good or service to the Company. The
Company does not have any knowledge that any of the suppliers intends to
terminate or otherwise modify adversely to the Company its relationship with the
Company or to decrease or limit its services, supplies or materials to the
Company.
4.19 Insurance. Schedule 4.19 sets forth an accurate list of all insurance
policies carried by the Company (all of which policies remain in full force and
effect) and all insurance loss runs or workers' compensation claims. The Company
has made available to AppNet true, complete and correct copies of all current
insurance policies of the Company, all of which are in full force and effect.
All premiums due and payable under all such policies have been paid and the
Company is otherwise in material compliance with the terms of such policies (or
other policies providing substantially similar insurance coverage). Such
policies of insurance are of the type and in amounts customarily carried by
persons conducting business similar to that of the Company. Neither the Company
nor the Stockholders know of any threatened termination of, or material premium
increase with respect to, any of such policies.
4.20 Intellectual Property.
(a) The Company owns, or possesses valid written licenses to use
all patents, trademarks, trade names, service marks, copyrights, and any
applications therefor, maskworks, net lists, schematics, technology, know-how,
computer software programs and applications and tangible or intangible
proprietary information and material that are used in the Business of the
Company (the "Company Intellectual Property Rights"). Schedule 4.20(a) lists all
Company Intellectual Property Rights owned by the Company, and specifies the
jurisdictions in which the Company Intellectual Property Rights are issued or
registered or in which an application for such issuance and registration has
been filed, including the respective registration or application numbers and the
names of all registered owners. The filings in respect of all such registrations
and applications (if any) are in good standing, are held solely in the name of
the Company as the exclusive owner of all rights therein, and all necessary
steps have been taken to maintain such filings and to prosecute the applications
in a timely manner.
(b) Schedule 4.20(b) lists (i) all licenses, sublicenses and other
agreements to which the Company is a party and pursuant to which any person is
authorized to use any Company Intellectual Property Rights or any trade secret
material to the Company (and includes the identity of all parties thereto other
than non-exclusive product licenses and sublicenses granted by the Company in
the ordinary course of business); and (ii) all licenses, sublicenses and other
agreements as to which the Company is a party and pursuant to which the Company
is authorized to use any third party patents, trademarks or copyrights
(including software) which are incorporated in, are, or form a part of, any of
the Company's products or services, or other trade secrets of a third party in
or as to any product or service (collectively, the "Company Third Party
Intellectual Property Rights"), and includes the identity of all parties
thereto, a description of the nature and subject matter thereof, the applicable
royalty and the term thereof. The Company is authorized to use, in the manner
used by the Company, the Company Third Party Intellectual Property Rights.
Except as set forth on Schedule 4.20(b), the Company is not, nor will it be as a
result of the execution and delivery of this Agreement or the performance of its
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obligations hereunder, after obtaining the required third party consents set
forth on Schedule 4.4, in violation of any license, sublicense or agreement
described on Schedule 4.20(b) or by which it is authorized to use Company Third
Party Intellectual Property Rights.
(c) No claims with respect to Company Intellectual Property
Rights, any trade secrets of the Company, or Company Third Party Intellectual
Property Rights to the extent arising out of any use, reproduction or
distribution of such of Company Third Party Intellectual Property Rights by or
through the Company, have been asserted or are threatened by any person, nor,
except as set out on Schedule 4.20(c), does the Company or any of the
Stockholders know of any valid grounds for any bona fide claims (i) to the
effect that the manufacture, sale, licensing or use of any product or service,
as now used, sold or licensed or proposed for use, sale or license by the
Company infringes any copyright, patent, trademark, service mark, trade secret
or any other intellectual property right; (ii) against the use by the Company of
any trademarks, trade names, trade secrets, copyrights, patents, technology,
know-how or computer software programs and applications used in the Company's
Business as it is presently being conducted; (iii) challenging the ownership,
validity or effectiveness of any of Company Intellectual Property Rights or
other trade secrets of the Company; or (iv) challenging the Company's license or
legally enforceable right to use, or the validity or effectiveness of any
Company Third Party Intellectual Property Rights.
(d) The Company has entered into all necessary agreements and
obtained all necessary rights to acquire Company Third Party Intellectual
Property Rights. All agreements relating to Company Third Party Intellectual
Property Rights are in full force and effect.
(e) All registered trademarks, service marks and copyrights held
by the Company are valid and subsisting. To the knowledge of the Company and the
Stockholders, there is no unauthorized use, disclosure, infringement or
misappropriation of any of Company Intellectual Property Rights, any trade
secrets of the Company, or any of Company Third Party Intellectual Property
Rights to the extent licensed by or through the Company, by any third party,
including any employee or former employee of the Company. Except as set out on
Schedule 4.20(e), (i) the Company has not been sued or charged in writing as a
defendant in any claim, suit, action or proceeding which involves a claim of
infringement of any patents, trademarks, service marks, copyrights or violation
of any trade secret or other proprietary right of any third party; (ii) to the
knowledge of the Company and the Stockholders, there is no basis for any such
charge or claim; and (iii) to the knowledge of the Company and the Stockholders,
there is not any infringement liability with respect to, or infringement or
violation by, the Company of any patent, trademark, service mark, copyright,
trade secret or other proprietary right of another.
(f) No Company Intellectual Property Rights, trade secrets of the
Company or, to the knowledge of the Company and the Stockholders, Company Third
Party Intellectual Property Rights are subject to any outstanding order,
judgment, decree, stipulation or agreement restricting in any manner the
licensing thereof by the Company. Except for contracts licensing the Company's
products executed in the ordinary course of business and in accordance with the
Company's past practices (all of which material contracts are listed on Schedule
4.13), the Company has not entered into any agreement to indemnify any other
person against any charge
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of infringement of any Company Intellectual Property Rights. Except as set forth
on Schedule 4.20(f), each current and former officer of, employee of, and each
consultant to, the Company has executed and delivered to the Company a
non-disclosure agreement, or consultant agreement, respectively, in the
Company's standard forms substantially as set forth in Schedule 4.20(f) hereto
regarding the protection of such confidential or proprietary information and the
assignments of inventions to the Company; copies of all such agreements have
been delivered to AppNet. The Company is not and never has been engaged in any
dispute or litigation with an employee or former employee regarding matters
pertaining to intellectual property or assignment of inventions.
(g) The Company Intellectual Property Rights which were developed
by the Company, at no material additional cost to AppNet (or the Company, after
the Closing Date), and without material human intervention will, by May 1999:
(i) include year 2000 date conversion and capabilities
including, but not limited to, date data century
recognition; calculations which accommodate same century
and multi-century formulas and date values; correct sort
ordering; and date data interface values that reflect
the century;
(ii) automatically compensate for and manage and manipulate
data involving dates, including single century formulas
and multi-century formulas, and will not cause an
abnormal abort within the application or result in the
generation of incorrect values or invalid outputs
involving such dates;
(iii) provide that all date related user interface
functionalities and data fields include the indication
of the correct century;
(iv) provide that all date related software to software or
application to application data interface
functionalities will include the indication of the
correct century; and
(v) provide that all date processing by the Company
Intellectual Property Rights will include four-digit
date format and recognize and correctly process dates
for leap years.
4.21 Accounts Receivable. The accounts receivable of the Company arose in
the ordinary course of business from bona fide transactions and are not subject
to any setoff, counterclaim or defense. The accounts receivable (both billed and
unbilled) shall be fully collectible in accordance with their terms, subject to
any applicable reserves on the Current Balance Sheet.
4.22 Inventory. All items of inventory and supplies of the Company consist
of items of a quality, quantity and condition usable and saleable in the
ordinary course of the business of the Company and for the purpose for which
they are intended, without discount or reduction, and
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conform to generally accepted standards in the industry of which the Company is
a part. The value of each item of inventory and supplies reflected on the
Financial Statements was, in each instance, valued at the lower of cost or
market value and based on the ordinary course of the business consistent with
the historical valuation policy of the Company and is not subject to any
write-down or write-off.
4.23 Related Party Transactions. Schedule 4.23 sets forth all
arrangements, Liabilities, agreements and contracts in effect as of the date
hereof among the Company and (i) any Person who is an officer, director or
Affiliate of the Company, or (ii) any Person who acquired the Company Common
Stock in a private placement.
4.24 Brokers. Except as set forth on Schedule 4.24, no Person has or will
have, as a result of the transactions contemplated by this Agreement, any right,
interest or claim against or upon the Company or, to the knowledge of the
Company or the Stockholders, against or upon AppNet, for any commission, fee or
other compensation payable as a finder or broker because of any act or omission
by the Company or the Stockholders. The Stockholders shall be fully responsible
for the payment of all such commissions, fees and other compensation due by the
Company or by the Stockholders and shall deliver to AppNet at Closing a release
from the party disclosed on Schedule 4.24.
4.25 Accredited Investors; Investment Intent.
(a) AppNet has made available to each Stockholder, during the
course of this transaction and prior to the delivery of the shares of AppNet
Common Stock (the "Securities"), the opportunity to ask questions of and receive
answers from any of the officers of AppNet concerning the terms and conditions
of the offering, and to obtain any documents or additional information necessary
to verify the information provided to each Stockholder or otherwise relative to
the financial data and business of AppNet, to the extent that such parties
possessed such information or could acquire it without unreasonable effort or
expense, and all such questions, if asked, have been answered satisfactorily and
all such documents, if examined, have been found to be fully satisfactory.
(b) Each Stockholder understands and acknowledges that (i) such
Stockholder must bear the economic risk of such Stockholder's investment in the
Securities; (ii) the Securities have not been registered under the 1933 Act or
any state securities laws and are being offered and sold in reliance upon
exemptions provided in the 1933 Act and state securities laws for transactions
not involving any public offering and, therefore, cannot be resold or
transferred unless they are subsequently registered under the 1933 Act and
applicable state laws or unless an exemption from such registration is
available; (iii) such Stockholder is purchasing the Securities for investment
purposes only for such Stockholder's own account and not with any view toward a
distribution thereof; (iv) no Stockholder has any contract, undertaking,
agreement or arrangement with any person to sell, transfer or pledge to such
person or anyone else any of the Securities which such Stockholder hereby
subscribes to purchase or any part thereof, and no Stockholder has any present
plans to enter into any such contract, undertaking, agreement or arrangement;
(v) there will be no public market for the Securities; and (vi) each Stockholder
understands that
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AppNet is not obligated to comply with any reporting requirements under the
Securities Exchange Act of 1934, as amended, and that AppNet makes no
representation or warranty that it will disseminate to the public any current
financial or other information concerning itself, as is required by Rule 144
promulgated under the 1933 Act as one of the conditions of its availability.
(c) Each Stockholder has evaluated the risks of investing in the
Securities, and has determined that the Securities are a suitable investment for
such Stockholder. Each Stockholder can bear the economic risk of this investment
and can afford a complete loss of such Stockholder's investment.
(d) Each Stockholder, by himself or herself, together with a
"Purchaser Representative" (as defined in Rule 501(a) of Regulation D of the
1933 Act), is knowledgeable and experienced in evaluating investments and
experienced in financial and business matters, and is capable of evaluating the
merits and risks of investing in the Securities.
(e) Except as set forth on Schedule 4.25(e), each Stockholder
hereby represents that such Stockholder is a resident of the State of
California. No Stockholder has any present intention of becoming a resident of
any other state or jurisdiction.
4.26 Disclosure. No representation or warranty by the Company and the
Stockholders contained in this Agreement, and no representation, warranty or
statement by the Company or the Stockholders contained in any list, certificate,
schedule or other instrument, document, agreement or writing furnished or to be
furnished to, or made with, AppNet pursuant hereto or in connection with the
negotiation, execution or performance hereof, contains or will contain any
untrue statement by the Company or the Stockholders of a material fact or omits
or will omit to state any material fact necessary to make any statement herein
or therein not misleading. The Company and the Stockholders do not have
knowledge of any material changes reasonably expected to occur within one (1)
year from the date of this Agreement to any of the Company, the Company's
relations with employees, the Company's relations with customers, the Company's
competitive situation or the Company's relations with suppliers, or action of
any Governmental or Regulatory Authority or laws affecting the Company.
5. REPRESENTATIONS AND WARRANTIES OF APPNET
To induce the Company and the Stockholders to enter into this Agreement
and to consummate the transactions contemplated by this Agreement, AppNet
represents and warrants to the Company, as of the date hereof and as of the
Closing Date, as set forth below:
5.1 Due Organization. AppNet is a corporation duly organized, validly
existing and in good standing under the laws of the State of Delaware.
5.2 Power and Authority. AppNet has all requisite corporate power and
authority to own, lease and operate its properties and to conduct its Business
as it is presently being conducted and as it has been conducted in the past.
AppNet is duly qualified or licensed as a foreign corporation in good standing
in each jurisdiction in which the character of its properties
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or the nature of its business activities requires such qualification, except
where the failure to be so qualified or licensed would not have a Material
Adverse Effect on AppNet.
5.3 Authority for Agreement. The execution, delivery and performance of
this Agreement and the consummation of the transactions contemplated hereby have
been authorized by all requisite corporate action on the part of AppNet. Each of
AppNet has full corporate power, authority and legal right to enter into this
Agreement and to consummate the transactions contemplated hereby. This Agreement
has been duly executed and delivered by AppNet and, assuming the due
authorization, execution and delivery by the Company and the Stockholders of
this Agreement, this Agreement is a legal, valid and binding obligation of
AppNet enforceable against AppNet, in accordance with its terms, except as
enforceability may be limited by applicable bankruptcy, insolvency,
reorganization, moratorium or other similar laws affecting the enforcement of
creditors' rights in general.
5.4 No Violation to Result. The execution, delivery and performance of
this Agreement and the consummation of the transactions contemplated hereby and
the fulfillment of the terms hereof: (i) are not in violation or breach of, do
not conflict with or constitute a default under the Certificate of Incorporation
or Bylaws of AppNet or any contract to which AppNet is a party; (ii) will not be
an event which, after notice or lapse of time or both, will result in any such
violation, breach, conflict, default, or acceleration; (iii) will not result in
a violation under any law, judgment, decree, order, rule, regulation, permit or
other legal requirement of any Governmental or Regulatory Authority, court or
arbitration tribunal whether federal, state, provincial, municipal or local
(within the U.S. or otherwise) at law or in equity, which is applicable to
AppNet; and (iv) will not result in the creation or imposition of any
Encumbrance in favor of any Person upon any of the properties or assets of
AppNet.
5.5 Brokers and Agents. No Person has or will have, as a result of the
transactions contemplated by this Agreement, any right, interest or claim
against or upon the Company or the Stockholders (other than as disclosed in
Section 4.24) for any commission, fee or other compensation payable as a finder
or broker because of any act or omission by AppNet.
5.6 Capitalization. Schedule 5.6 sets forth as of the date hereof, with
respect to AppNet, (i) the number of authorized shares of each class of its
capital stock, (ii) the number of issued and outstanding shares of each class of
its capital stock and the record owner thereof, and (iii) the number of shares
of each class, if any, which are held in treasury. Except as set forth on
Schedule 5.6, no preemptive right or rights of first refusal exist with respect
to the shares of capital stock of AppNet, and no such rights arise by virtue of
or in connection with the transactions contemplated hereby. Except as set forth
on Schedule 5.6, there are no outstanding or authorized rights, options,
warrants, convertible securities, subscription rights, conversion rights,
exchange rights or other agreements or commitments of any kind that could
require AppNet to issue or sell any shares of its capital stock (all of the
foregoing, the "AppNet Issuance Agreements"). Schedule 5.6 sets forth the
identity of the holder of each AppNet Issuance Agreement, the type of agreement
to which such holder is a party, the class and number of shares of capital stock
subject to each such agreement, and the exercise price or conversion price, or
other similar information concerning the consideration such holder is required
to tender in
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exchange for such shares of the capital stock of AppNet. Schedule 5.6 identifies
each agreement pursuant to which any of GTCR Golder Rauner, L.L.C. ("GTCR"),
Smart Technology, L.L.C. ("Smart Technology"), and their respective Affiliates,
has acquired shares of the capital stock of AppNet. There are no outstanding
stock appreciation, phantom stock, profit participation or other similar rights
with respect to AppNet. Except as set forth on Schedule 5.6, AppNet is not
obligated to redeem or otherwise acquire any of its outstanding shares of
capital stock. AppNet shall update the information on Schedule 5.6 as of the
Closing Date to reflect any changes between the date hereof and the Closing
Date.
5.7 Shares Issued in Stock Purchase. All of the shares of AppNet Common
Stock to be issued in connection with the Stock Purchase, upon issuance and
delivery by AppNet to the persons entitled thereto and receipt by AppNet of the
consideration therefor, will (i) be duly authorized and validly issued and fully
paid and non-assessable, and (ii) not have been issued in violation of any
preemptive rights or rights of first refusal.
5.8 Litigation. There is no litigation, suit, proceeding, action, claim,
demand or investigation, at law or in equity, pending, or, except as set forth
on Schedule 5.8, to the actual knowledge of Toby Tobaccowala, in his capacity as
a Senior Vice President of AppNet, threatened, against AppNet before any
Governmental or Regulatory Authority.
6. COVENANTS
6.1 Access to Properties and Records.
(a) The Company shall afford to the officers, employees,
attorneys, accountants and other authorized representatives of AppNet, free and
full access to all of the Company's assets, properties, books and records and
employees in order to afford AppNet as full an opportunity of review,
examination and investigation as they shall desire to make of the affairs of the
Company, and AppNet shall be permitted to make extracts from, or take copies of,
such books, records (including the stock record and minute books) or other
documentation as may be reasonably necessary. The Company shall furnish or cause
to be furnished to AppNet such reasonable financial and operating data and other
information about the Company's Business, as it is presently being conducted, as
it has been conducted in the past, properties and assets which any of the
officers, employees, attorneys, accountants or other authorized representatives
of AppNet may reasonably request; provided that AppNet and its agents shall not
unreasonably interfere with the operations of the Company's Business. No
information or knowledge obtained in any investigation pursuant to this Section
6.1 shall affect or be deemed to modify any representation or warranty contained
herein or the conditions to the obligations of the parties to consummate the
transactions contemplated by this Agreement.
(b) AppNet shall afford to the officers, employees, attorneys,
accountants and other authorized representatives of the Company, access to such
of AppNet's assets, properties, books and records and employees in order to
afford the Company as full an opportunity of review, examination and
investigation as they shall reasonably request of the affairs of AppNet, and the
Company shall be permitted to make extracts from, or take copies of, such books,
records (including the stock record and minute books) or other documentation
thereof as may be
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reasonably necessary. AppNet shall furnish or cause to be furnished to the
Company such reasonable financial and operating data and other information about
AppNet's Business, as it is presently being conducted, as it has been conducted
in the past, properties and assets which any of the respective officers,
employees, attorneys, accountants or other authorized representatives of the
Company may reasonably request; provided that the Company and its agents shall
not unreasonably interfere with the operations of AppNet's Business. No
information or knowledge obtained in any investigation pursuant to this Section
6.1 shall affect or be deemed to modify any representation or warranty contained
herein or the conditions to the obligations of the parties to consummate the
transactions contemplated by this Agreement.
6.2 Confidentiality.
(a) The Company and the Stockholders recognize and acknowledge
that they have in the past, currently have, and in the future may possibly have,
access to certain confidential information of the Company and/or AppNet, such as
lists of customers, operational policies, and pricing and cost policies, that
are valuable, special and unique assets of the Company's or AppNet's respective
businesses. The Company and the Stockholders agree that they will not disclose
confidential information with respect to the Company and/or AppNet to any Person
for any purpose or reason whatsoever (except to authorized representatives of
the Company, AppNet and to counsel and other advisers, provided that such
advisors (other than counsel) agree to the confidentiality provisions of this
Section 6.2), unless (i) such information becomes known to the public generally
through no fault of the Company or the Stockholders, (ii) disclosure is required
by law or the order of any Governmental or Regulatory Authority under color of
law, or (iii) the disclosing party reasonably believes that such disclosure is
required in connection with the defense of a lawsuit against the disclosing
party or for certification or state licensure purposes; provided, that prior to
disclosing any information pursuant to clauses (ii) or (iii) above, the Company
or the Stockholders, shall, if possible, give prior written notice thereof to
AppNet and provide AppNet with the opportunity to contest such disclosure; and
provided, further, that this Section 6.2(a) shall not apply to any information
independently discovered or invented by any Stockholder after such Stockholder's
employment with the Company has been terminated.
(b) AppNet agrees that prior to the Closing (and at all times
after the date hereof if the Closing does not occur) it will not disclose
confidential information with respect to the Company and/or the Stockholders to
any Person, for any purpose or reason whatsoever (except to authorized
representatives of AppNet, the Company, and/or the Stockholders and to counsel
and other advisers, provided that such advisors (other than counsel) agree to
the confidentiality provisions of this Section 6.2), unless (i) such information
becomes known to the public generally through no fault of AppNet, (ii)
disclosure is required by law or the order of any Governmental or Regulatory
Authority under color of law, or (iii) AppNet reasonably believes that such
disclosure is required in connection with the defense of a lawsuit against
AppNet or for certification or state licensure purposes; provided, that prior to
disclosing any information pursuant to clauses (ii) or (iii) above, AppNet,
shall, if possible, give prior written notice thereof to the Company and/or the
Stockholders and provide the Company and/or the Stockholders with the
opportunity to contest such disclosure.
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6.3 Interim Covenants of the Company. From the date of this Agreement
until the Closing Date, except to the extent expressly permitted by this
Agreement or otherwise consented to by an instrument in writing signed by
AppNet, the Company shall (i) keep the Company's Business, as it is presently
being conducted, and organization intact and shall not take or permit to be
taken or do or suffer to be done anything other than in the ordinary course of
its business as the same is presently being conducted, (ii) use its reasonable
best efforts to keep available the services of its directors, officers,
employees, independent contractors and agents and retain and maintain good
relationships with its clients and maintain the Facilities in good condition,
(iii) perform its material obligations under the Contracts and Government
Contracts and (iv) maintain the goodwill and reputation associated with its
Business, as it is presently being conducted. Without limiting the generality of
the foregoing, the Company shall not, without the prior written consent of
AppNet:
(a) Adopt or propose any change in its Certificate of
Incorporation or Bylaws;
(b) Merge or consolidate with any other entity or acquire a
material amount of assets of any other entity;
(c) Issue or sell any stock, bonds, or other securities of which
the Company is the issuer or grant, issue or change any stock options, warrants
or other rights to purchase securities of the Company;
(d) Amend any term of any outstanding security of the Company;
(e) Sell, lease or dispose of or make any contract for the sale,
lease or disposition of or subject to lien or security interest or any other
Encumbrance any of its properties or assets, other than in the ordinary and
usual course of its business, consistent with the representations and warranties
contained herein, and not in breach of any of the provisions of this Section
6.3, in each case for a consideration at least equal to the fair value of such
property or asset;
(f) Grant any salary increase to, or increase the draw of, any of
its officers, directors, employees or agents, or enter into any new, or amend or
alter any existing, employment, bonus, incentive compensation, deferred
compensation, profit sharing, retirement, severance, pension, stock option,
group insurance, death benefit or other fringe benefit plan, trust agreement or
other similar or dissimilar arrangement, or any employment or consulting
agreement except consistent with past compensation practices;
(g) Incur any bank indebtedness or borrowings, whether or not in
the ordinary course of its business, or issue any commercial paper; provided,
however, that the Company may, without AppNet's prior consent, borrow under that
certain Factoring Agreement, dated February 11, 1998, between the Company and
Silicon Valley Financial Services (the "Factoring Agreement) so long as the
aggregate amount of Purchased Receivables (as defined in the Factoring
Agreement) outstanding does not exceed $100,000;
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(h) Enter into any leases of real property or any material
leases of equipment and machinery;
(i) Enter into any contract, (i) which would be required to be
listed on Schedule 4.13 as a Material Contract had it been entered into prior to
the date hereof; or (ii) in which any Affiliate of the Company or any of the
Stockholders has any beneficial interest; provided, that AppNet shall not
unreasonably withhold consent, if the proposed Contract is in the ordinary
course of business consistent with prior practice and, provided that any such
Contract will not have a Material Adverse Effect on the Company.
(j) Redeem, purchase or otherwise acquire, directly or indirectly,
any shares of its capital stock or debt securities or any option, warrant or
other right to purchase or acquire any such shares, or declare or pay any
dividend or other distribution (whether in cash, stock or other property) with
respect to its capital stock;
(k) Create, incur or assume any liability or indebtedness, except
in the ordinary course of business consistent with past practices; or postpone
or defer the creation, incurrence, or assumption of any liability or
indebtedness that would otherwise be created, incurred or assumed in the
ordinary course of business absent the execution of this Agreement;
(l) Pay or apply any of its assets to the direct or indirect
payment, discharge, satisfaction or reduction of any amount, directly or
indirectly, to or for the benefit of the Company or any Affiliate thereof except
for payments to the Company's Affiliates in accordance with past practice,
provided that any such transaction is on terms no less favorable to the Company
than terms generally available with third parties in arm's length transactions;
(m) Split, combine or reclassify any of its capital stock or issue
or authorize the issuance of any other securities in respect of, in lieu of or
in substitution for shares of its capital stock;
(n) Acquire or negotiate for the acquisition of (by merger,
consolidation, purchase of a substantial portion of assets or otherwise) any
business or the start-up of any new business, or otherwise acquire or agree to
acquire any assets that are material, individually or in the aggregate, to the
Company;
(o) Commit a breach of or amend or terminate any Contract,
Government Contract, permit, license or other right; provided, that, with
respect to amendments of any Contract, AppNet shall not unreasonably withhold
consent, if the proposed amendment to such Contract is in the ordinary course of
business consistent with prior practice and provided that any such amendment
will not have an adverse effect on the Company.
(p) Enter into any other transaction (i) that is not negotiated at
arm's length with an Affiliate of the Company or any officer or director of the
Company or the Stockholders, (ii) outside the ordinary course of business
consistent with past practice or (iii) prohibited hereunder.
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6.4 No Solicitation. Neither the Company (its officers or directors), the
Stockholders, nor any agent or any representative thereof, shall during the
period commencing on the date of this Agreement and ending with the earlier to
occur of the Closing or the termination of this Agreement in accordance with its
terms, directly or indirectly: (a) solicit, encourage or initiate the submission
of proposals or offers from any person or entity for, (b) participate in any
discussions pertaining to, or (c) furnish any information to any Person, other
than AppNet, relating to, any acquisition or purchase of all or a material
amount of the assets of, or any equity interest in, the Company or a merger,
consolidation or business combination involving the Company. If the Company or
any of the Stockholders receives any unsolicited offer or proposal relating to
any of the above, the Company or the Stockholders shall immediately notify
AppNet thereof, and provide to AppNet all information relating thereto,
including a copy of such offer or proposal, the identity of the party making
such offer or proposal and the specific terms of such offer or proposal.
6.5 Notification of Certain Matters. The Company shall give prompt notice
(the "Company Notice") to AppNet of (a) the occurrence or non-occurrence of any
event the occurrence or non-occurrence of which would be likely to cause any
representation or warranty of the Company or the Stockholders contained herein
to be untrue or inaccurate in any material respect at or prior to the Closing
Date and (b) any material failure of the Company or the Stockholders to comply
with or satisfy any covenant, condition or agreement to be complied with or
satisfied by the Company or the Stockholders hereunder. AppNet shall give prompt
notice to the Company of (a) the occurrence or non-occurrence of any event the
occurrence or non-occurrence of which would be likely to cause any
representation or warranty of AppNet contained herein to be untrue or inaccurate
in any material respect at or prior to the Closing Date and (b) any material
failure of AppNet to comply with or satisfy any covenant, condition or agreement
to be complied with or satisfied by AppNet hereunder. The delivery of any notice
pursuant to this Section 6.5 shall not, without the express written consent of
the receiving party, be deemed to (A) modify the representations or warranties
hereunder, (B) modify the conditions set forth in Sections 7 or 8 hereof, as the
case may be, or (C) limit or otherwise affect the remedies available hereunder
to any party hereto; provided, however, that (i) a Company Notice shall modify
the representation or warranty to which it relates to the extent that the
aggregate amount of Damages attributable to the events or failure disclosed in
such Company Notice does not exceed the Indemnity Basket (as defined in Section
9.1(d)), in which case the Indemnity Basket shall be reduced by the amount of
such Damages resulting from the change in the representation or warranty
disclosed in the Company Notice; and (ii) the Company Notice shall not be deemed
to modify the representation or warranty to which it relates to the extent the
aggregate amount of Damages attributable to the events or failure disclosed in
such Company Notice exceeds the Indemnity Basket, in which case the Buyer may,
in its sole discretion, (a) proceed with Closing, reduce the Indemnity Basket by
the amount of such Damages resulting from the change in the representation or
warranty disclosed in the Company Notice and waive the breach of such
representation or warranty and all claims for Damages related thereto in excess
of the Indemnity Basket or (b) not consummate the transactions in this Agreement
based on the Company's and the Stockholders' failure to meet the condition
precedent in Section 7.1.
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6.6 Cooperation. AppNet, the Company and the Stockholders shall cooperate
fully, as and to the extent reasonably requested by the other party, in
connection with the filing of Tax Returns and any audit, litigation or other
proceeding with respect to Taxes. Such cooperation shall include the retention
and (upon reasonable request) the provision of records and information which are
reasonably relevant to any such audit, litigation or other proceeding.
6.7 Regulatory and Other Approvals. Subject to the terms and conditions of
this Agreement, each of the Company and AppNet will proceed diligently and in
good faith to, as promptly as practicable, (a) obtain all consents, approvals or
actions of, make all filings with and give all notices to Governmental or
Regulatory Authorities or any other public or private third parties required of
AppNet, the Company or the Stockholders to consummate the Stock Purchase and the
other matters contemplated hereby, and (b) provide such other information and
communications to such Governmental or Regulatory Authorities or other public or
private third parties as the other party or such Governmental or Regulatory
Authorities or other public or private third parties may reasonably request in
connection therewith.
6.8 Benefits Plans. Prior to Closing, if requested by AppNet, the Company
agrees to take any and all steps necessary in order to cease all accruals of
benefits or contributions under each Benefit Plan and to terminate each Benefit
Plan as of the day immediately preceding the Closing Date. The Company further
agrees that in the event of the termination of the Company's 401(k) plan, in
accordance with the preceding sentence, the Company shall promptly file with the
Internal Revenue Service a request for a determination letter with respect to
such transaction, and upon receipt of such letter, the Company shall
expeditiously distribute to the participants of the 401(k) plan their benefits
thereunder, in accordance with the terms of the 401(k) plan and all applicable
laws. Any and all actions taken by the Company pursuant to this Section 6.8
shall be solely at the Company's cost and expense. AppNet agrees to take any and
all steps necessary so that all Company employees (post-Closing) shall be
entitled to immediately participate in any AppNet standard benefits (including,
life insurance, medical insurance, disability insurance, and vacation, sick and
holiday leave) in accordance with AppNet's policies, subject to such changes,
additions or deletions as AppNet may make generally from time to time, and (i)
AppNet shall waive any limitations on benefits relating to pre-existing
conditions to the extent permitted under the applicable AppNet employee benefit
plan; and (ii) such employees shall be credited with their years of service with
the Company to the extent permitted under the applicable AppNet employee benefit
plan.
6.9 Reasonable Efforts. Subject to the terms and conditions of this
Agreement, each of the parties hereto agrees to use all reasonable efforts
promptly to take, or cause to be taken, all actions and do or cause to be done,
all things necessary, proper or advisable under applicable laws and regulations
to consummate and make effective the transactions contemplated by this Agreement
including the satisfaction of all conditions thereto. If applicable, the
Company, the Stockholders and AppNet shall file all notices and other
information and documents required under the Hart-Scott-Rodino Antitrust
Improvement Act of 1976 (the "HSR Act") as promptly as practicable after the
date hereof.
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6.10 Stock Options. Options to purchase 100,000 shares of AppNet Common
Stock shall be made available promptly after the Closing Date for issuance to
key employees of the Company at a price of $6.00 per share, as determined by the
President of the Company in accordance with AppNet's policies, and authorized
and issued under the terms of AppNet's Incentive Stock Option Plan. None of
these options may be granted to Stockholders (except for Duncan Essex) or other
Persons who, as of the Closing Date, owned or had options to purchase more than
two percent (2%) of the Common Stock of the Company.
6.11 Refund of Assumed Option Value. In the event that any holder of
Company Stock Options being assumed pursuant to Section 3.6 does not exercise
his or her AppNet Stock Options due to failure to vest or failure to exercise
prior to the expiration thereof, the value of the AppNet Stock Options which
have not vested or have expired unexercised (the "Terminated Options") shall be
paid in cash to the Stockholders, in accordance with their Pro Rata Shares,
within 60 days after the first date the Terminated Options are no longer
exercisable. For purposes of this Section 6.11, the value of any Terminated
Options shall be equal to (a) the $6.00 per share value of AppNet Stock as of
the Closing Date, as adjusted (the "Stock Price"), multiplied by, the number of
shares of AppNet Stock for which the Terminated Options are exercisable, minus
(b) the aggregate exercise price of the Terminated Options. If AppNet shall at
any time subdivide (by any stock split, stock dividend or otherwise) its
outstanding shares of Common Stock into a greater number of shares, the Stock
Price in effect immediately prior to such subdivision shall be proportionately
reduced and, in case the outstanding shares of Common Stock shall be combined
into a smaller number of shares, the Stock Price in effect immediately prior to
such combination shall be proportionately increased.
7. CONDITIONS PRECEDENT TO OBLIGATIONS OF APPNET
The obligations of AppNet to consummate the transactions contemplated by
this Agreement are subject to the satisfaction or partial or complete waiver (in
AppNet's sole and absolute discretion), at or before the Closing Date, of the
following conditions:
7.1 Representations and Warranties True at the Closing Date. All of the
representations and warranties of the Company and the Stockholders contained in
this Agreement shall be true and correct on and as of the Closing Date with the
same effect as though such representations and warranties had been made on and
as of such date, except for those representations and warranties which by their
terms are made as of a specific date which shall be true and correct on and as
of such date.
7.2 Performance. All of the terms, covenants, agreements and conditions of
this Agreement to be complied with, performed or satisfied by the Company and/or
the Stockholders on or before the Closing Date shall have been duly complied
with, performed or satisfied by the Closing Date.
7.3 Agreements with Employees. Those senior managers of the Company listed
on Schedule 7.3 shall have executed and delivered Senior Management Agreements
in the form attached hereto as Exhibit B. Those employees of the Company listed
on Schedule 7.3 shall
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have executed and delivered Employment Agreements in the form attached hereto as
Exhibit C. All other employees of the Company, who have not previously executed
a Nondisclosure Agreement with the Company, as set forth on Schedule 7.3, shall
have executed and delivered employment and/or non-disclosure agreements, in the
form attached hereto as Exhibit D.
7.4 No Litigation. No temporary restraining order, preliminary or
permanent injunction or other order issued by any court of competent
jurisdiction or other legal or regulatory restraint or provision challenging the
transactions contemplated hereunder or limiting or restricting the conduct or
operation of the Business of AppNet or the Company following the transactions
shall be in effect, nor shall any proceeding brought by an administrative agency
or commission or other Governmental or Regulatory Authority or other
instrumentality, domestic or foreign, seeking any of the foregoing be pending.
There shall be no action, suit, claim or proceeding of any nature pending or
threatened, against any of the Stockholders, the Company or AppNet, their
respective properties or any of their officers or directors, that could
reasonably be expected to have a Material Adverse Effect on the Company or
AppNet.
7.5 No Material Adverse Change. There shall have been, between the Balance
Sheet Date and the Closing Date, no change in the Business, financial condition
or prospects of the Company which reasonably could have a Material Adverse
Effect on the Company.
7.6 Certificates. The Company and the Stockholders shall have furnished
AppNet with such certificates of the officers of the Company and others to
evidence compliance with the conditions set forth in this Section 7 as may be
reasonably requested by AppNet.
7.7 Opinion of Counsel. AppNet shall have received an opinion of counsel
in form and substance reasonably acceptable to AppNet.
7.8 Financing. AppNet shall have secured all financing necessary to pay
the Cash Payment on terms satisfactory to AppNet.
7.9 AppNet's Review. AppNet shall be fully satisfied in its sole and
absolute discretion with the results of its review of, and its other due
diligence investigations with respect to, the Business, operations, affairs,
prospects, properties, assets, existing and potential liabilities, obligations,
profits or condition (financial or otherwise) of the Company.
7.10 Governmental, Regulatory and Other Consents and Approvals. All
consents, approvals and actions of, filings with and notices to any Governmental
or Regulatory Authority or any other public or private third parties required of
the Stockholders, AppNet, or the Company to consummate the Stock Purchase and
the other matters contemplated hereby shall have been obtained. Any waiting
period applicable to the consummation of the Stock Purchase under the HSR Act
shall have expired or been terminated, and no action by the Department of
Justice or the Federal Trade Commission challenging or seeking to enjoin the
consummation of the transactions contemplated hereby shall be pending.
7.11 Delivery of Good Standing Certificates; Corporate Resolutions. AppNet
shall have received a certificate of good standing with respect to the Company
issued by the State of
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California. AppNet shall have received copies of the resolutions of the Company
approving this Agreement and the other transactions contemplated herein,
certified by the appropriate corporate officers.
7.12 Financial Terms. AppNet shall have received a certificate (the
"Closing Financial Certificate"), dated as of the Closing Date, signed on behalf
of the Company and by each Stockholder, stating that: (i) sales, net of bad debt
expense, for the Company's fiscal year ended December 31, 1998 were no less than
$2,700,000; (ii) earnings before interest and taxes ("EBIT") for the Company's
fiscal year ended December 31, 1998 were no less than $328,000 (or 12% of sales,
net of bad debt expense, for such fiscal year); (iii) the Company's Net Worth as
of the Closing is no less than $450,000; and (iv) the Company has no outstanding
long-term or short-term indebtedness to banks, stockholders, or other financial
institutions and creditors as of the Closing (in each case including the current
portions of such indebtedness, but excluding trade payables and other ordinary
course accounts payable); provided, however, that AppNet may, in its sole
discretion, waive the foregoing condition in whole or in part and, in such case,
the Cash Payment shall be reduced by the amount of any such indebtedness of the
Company (including principal and accrued interest, costs and fees). In
calculating the Company's Net Worth as of the Closing, any material increase in
intangible assets since December 31, 1997 shall be excluded, except with the
prior written agreement of AppNet.
7.13 Payment of Loans. All notes receivable from the Stockholders, other
Affiliates of the Company, and employees of the Company shall have been repaid
in full in accordance with their terms. AppNet shall have received, with respect
to each of the loans set forth on Schedule 4.23, a cancelled promissory note or
other evidence acceptable to AppNet from the lender acknowledging receipt of
full payment of each such loan.
7.14 Purchase of Personal Use Items. The Stockholders shall have purchased
any personal use assets (e.g., automobiles) from the Company at a purchase price
equal to the greater of the net book value of such assets as of Closing or the
outstanding indebtedness secured by such assets. Cell phones and pagers
purchased by the Company for use by its officers and employees are not personal
use assets within the meaning of this Section 7.14.
7.15 Stockholders Agreement and Registration Agreement. The Stockholders
shall have executed such agreements as shall be necessary to subject the AppNet
Common Stock to be delivered as the Stock Payment and as part of the Contingent
Amount to the Stockholders to AppNet's Stockholders Agreement and Registration
Agreement. Each holder of Company Stock Options which are converted into AppNet
Stock Options pursuant to Section 3.6 hereof shall have executed the joinder to
the AppNet Stockholders' Agreement and the Registration Agreement, as set forth
in Section 3.6.
7.16 Release. The Stockholders shall have delivered the release described
in Section 4.24.
7.17 Subordination Agreement. The Stockholders shall have delivered a
subordination agreement and the Company shall have delivered a perfection
certificate in form and substance acceptable to BankBoston, N.A. pursuant to
AppNet's line of credit with BankBoston, N.A.
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7.18 Resignations. Each of the directors of the Company shall have
executed and delivered resignations effective as of the Closing Date, and each
of the officers of the Company, except for Christopher Paine, in his capacity as
President of the Company, shall have executed and delivered resignations
effective as of the Closing Date.
7.19 Investor Questionnaires. The Company shall have received and provided
to AppNet properly executed Investor Questionnaires from each of holders of
Common Stock of the Company or Company Stock Options such that as of the Closing
Date the Company shall not have more than 35 stockholders and optionholders who
are not Accredited Investors (as defined in Rule 501 of Regulation D promulgated
under the Securities Act of 1933, as amended).
7.20 Termination of Factoring Agreement. The Company shall have terminated
that certain Factoring Agreement, dated February 11, 1998, between the Company
and Silicon Valley Financial Services (the "Bank") and all amounts due
thereunder shall have been repaid in full in accordance with the terms of such
agreement. The Company and the Stockholders shall have prepared for filing and
shall deliver at Closing a UCC-3 Termination Statement executed by the Bank,
evidencing that all amounts due under the Factoring Agreement have been fully
paid. After Closing, the Stockholders shall coordinate with the Bank in filing
such UCC-3 Termination Statement in the appropriate states, cities and counties.
7.21 Joinder of Optionholders. Each holder of Company Stock Options who
exercises such Options and receives shares of Company Common Stock prior to the
Closing Date shall have executed a joinder to this Agreement agreeing to be
bound by the terms and conditions hereof.
7.22 Delivery of Stock Pledge and Escrow Agreement. AppNet shall have
received from each Stockholder a Stock Pledge and Escrow Agreement, together
with stock powers executed in blank, representing each Stockholders' respective
Pro Rata Share of the Pledged Stock.
7.23 Maximum Number of Assumed Options. As of Closing, the maximum number
of shares of Common Stock underlying outstanding Company Stock Options to be
assumed by AppNet pursuant to Section 3.6 shall be 420,333.
7.24 Spousal Consents. The Company shall have received and provided to
AppNet properly executed Spousal Consents from each Stockholder's spouse, as
applicable.
8. CONDITIONS PRECEDENT TO OBLIGATIONS OF THE COMPANY AND THE STOCKHOLDERS
The obligations of the Company and the Stockholders to consummate the
transactions contemplated by this Agreement are subject to the satisfaction or
partial or complete waiver (in the Company's and the Stockholders' sole and
absolute discretion), at or before the Closing Date, of the following
conditions:
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8.1 Representations and Warranties True as of the Closing Date. All of the
representations and warranties of AppNet contained in this Agreement shall be
true and correct on and as of the Closing Date with the same effect as though
such representations and warranties had been made on and as of such date, except
for those representations and warranties which by their terms are made as of a
specific date which shall be true and correct on and as of such date.
8.2 AppNet's Performance. All of the terms, covenants, agreements and
conditions of this Agreement to be complied with, performed or satisfied by
AppNet on or before the Closing Date shall have been duly complied with,
performed or satisfied by the Closing Date.
8.3 No Litigation. No temporary restraining order, preliminary or
permanent injunction or other order issued by any court of competent
jurisdiction or other legal or regulatory restraint or provision challenging the
transactions contemplated hereunder or limiting or restricting the conduct or
operation of the Business of AppNet or the Company following the transactions
shall be in effect, nor shall any proceeding brought by an administrative agency
or commission or other Governmental or Regulatory Authority seeking any of the
foregoing be pending. There shall be no action, suit, claim or proceeding of any
nature pending or threatened, against the Company, AppNet or its subsidiaries,
their respective properties or any of their officers or directors, that could
reasonably be expected to have a Material Adverse Effect on the Company or
AppNet.
8.4 Certificates. AppNet shall have furnished the Stockholders with such
certificates of the officers of AppNet and others to evidence compliance with
the conditions set forth in this Section 8 as may be reasonably requested by the
Stockholders.
8.5 Governmental, Regulatory and Other Consents and Approvals. All
consents, approvals and actions of, filings with and notices to any Governmental
or Regulatory Authority or any other public or private third parties required of
AppNet, the Stockholders or the Company to consummate the Stock Purchase and the
other matters contemplated hereby shall have been obtained. Any waiting period
applicable to the consummation of the Stock Purchase under the HSR Act shall
have expired or been terminated, and no action by the Department of Justice or
the Federal Trade Commission challenging or seeking to enjoin the consummation
of the transactions contemplated hereby shall be pending.
8.6 Delivery of Good Standing Certificates; Corporate Resolutions. The
Company shall have received certificates of good standing with respect to AppNet
issued by the State of Delaware. The Company shall have received copies of the
resolutions of AppNet approving the Stock Purchase and the other transactions
contemplated herein, certified by the appropriate corporate officers.
8.7 Opinion of Counsel. The Company shall have received an opinion of
counsel in form and substance reasonably acceptable to the Company.
8.8 Employment Agreements. AppNet shall have executed and delivered the
Senior Management Agreements and the Employment Agreement.
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8.9 No Material Adverse Change. There shall have been, between the date
hereof and the Closing Date, no change in the financial condition of AppNet
which would have a Material Adverse Effect on AppNet.
8.10 Stockholders' Agreement and Registration Agreement. AppNet shall have
delivered to the Stockholders and to the holders of the Assumed Options a letter
executed by GTCR reflecting GTCR's consent to the Stockholders' and the
optionholders' joinder to the AppNet Stockholders' Agreement and Registration
Agreement.
8.11 Offering Memorandum. AppNet shall have delivered to each Stockholder
and holder of options to purchase shares of Common Stock a Confidential Offering
Memorandum and Investor Questionnaire.
8.12 Consent Letter. AppNet shall have delivered to the Stockholders a
letter executed by GTCR and Ken S. Bajaj reflecting their consent under the
Stockholders Agreement to each Stockholder's pledge of his or her respective
portion of the Pledged Stock.
8.13 Listing of Stock. In the event that AppNet shall determine to
register any of its securities in an initial public offering of the AppNet
Common Stock on a firm commitment underwritten basis, AppNet shall, prior to the
closing of such offering, file an application to list on the Nasdaq National
Market System or a national securities exchange (a) all of the AppNet Common
Stock to be sold in such offering and (b) all of the issued and outstanding
AppNet Common Stock (including the shares issued in connection with the Stock
Payment).
9. INDEMNIFICATION
9.1 General Indemnification.
(a) Each of Christopher Paine and Robert Hennessy (together, the
"Indemnifying Stockholders") and the Company, severally, covenants and agrees to
indemnify, defend, protect and hold harmless AppNet and its respective officers,
directors, employees, stockholders, assigns, successors and affiliates
(individually, a "Buyer Party" and collectively, the "Buyer Parties") from,
against and in respect of all liabilities, losses, claims, damages, punitive
damages, causes of actions, lawsuits, administrative proceedings (including
informal proceedings), investigations, audits, demands, assessments,
adjustments, judgments, settlement payments, deficiencies, penalties, fines,
excise taxes, interest (including interest from the date of such damages) and
costs and expenses (including, without limitation, reasonable attorneys' fees
and disbursements of every kind, nature and description) (collectively,
"Damages") suffered, sustained, incurred or paid by the Buyer Parties, in any
action or proceeding against the Seller Parties (as defined in Section 9.1(b))
by the Buyer Parties or between the Buyer Parties and a third party, in
connection with, resulting from or arising out of, directly or indirectly: (i)
the inaccuracy of any representation or the breach of any warranty set forth in
this Agreement or certificates delivered on the part of the Company or the
Stockholders in connection with the Closing; (ii) the nonfulfillment of any
covenant or agreement on the part of the Company or the Stockholders set forth
in this Agreement or in any agreement or certificate executed and
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delivered by the Company or the Stockholders pursuant to this Agreement or in
the transactions contemplated hereby; (iii) any and all benefits accrued under
the Benefit Plans or multiemployer plans as of the Closing Date and any and all
other liabilities arising out of, or in connection with the operation of the
Benefit Plans or multiemployer plans through the Closing Date; (iv) any and all
liabilities under the Environmental and Safety Requirements in connection with
or arising out of Releases by the Company or the Stockholders in or on the
property and facilities occupied by the Company that occurred on or prior to the
Closing Date; (v) failure of the Company or any Company employee to maintain all
licenses, permits, approvals and qualifications from any Government or
Government Regulatory Authority; (vi) any and all Taxes which are (A) imposed on
the Stockholders or any member (other than the Company) of the consolidated,
unitary or combined group which includes or included the Company, that AppNet or
the Company pays or otherwise satisfies in whole or in part; and (B) imposed on
a Buyer Party in respect of the Company's income, business, property or
operations or for which a Buyer Party may otherwise be liable as a successor to
the Company (x) for any taxable period or portion thereof ending on or prior to
the Closing Date, or (y) resulting by reason of the several liability of the
Company pursuant to Treasury Regulations Section 1.1502-6 or any analogous
state, local or foreign law or regulation or by reason of the Company having
been a member of any consolidated, combined or unitary group on or prior to the
Closing Date [other than (A) Taxes imposed on the Company on gain recognized by
the Company due to an election under Section 338 of the Code with respect to a
qualified stock purchase of the Company (as so determined in such Section)
resulting from the Stock Purchase, or corresponding provisions of State or local
law, or (B) Taxes imposed on the Company due to transactions outside the
ordinary course of the Company's business on the Closing Date which were
undertaken at the direction or control of AppNet; (vii) the business, operations
or assets of the Company on or before the Closing Date (except as otherwise
disclosed in the Financial Statements or the schedules to this Agreement) or the
actions of the Company's directors, officers, shareholders, employees or agents
before the Closing Date; and (viii) the Oracle Dispute and the Oracle Dispute
Settlement. Nothing in this Section 9.1(a) shall be deemed to extend the
survival period for any representation or warranty to which an indemnification
obligation most directly relates, as set forth in Section 11.12 hereof.
(b) AppNet covenants and agrees to indemnify, defend, protect and
hold harmless (i) each of the Stockholders and their respective assigns,
successors and affiliates and (ii) the Company and its officers, directors,
employees, stockholders, assigns, successors and affiliates (individually, a
"Seller Party" and collectively, the "Seller Parties") from, against and in
respect of all Damages suffered, sustained, incurred or paid by the Seller
Parties, in any action or proceeding against the Seller Parties by the Buyer
Parties or between the Seller Parties and a third party, in connection with,
resulting from or arising out of, directly or indirectly: (i) the inaccuracy of
any representation or the breach of any warranty set forth in this Agreement or
certificates delivered on the part of AppNet in connection with the Closing; and
(ii) the nonfulfillment of any covenant or agreement on the part of AppNet set
forth in this Agreement or in any agreement or certificate executed and
delivered by AppNet or pursuant to this Agreement or in the transactions
contemplated hereby.
(c) Notwithstanding the foregoing provisions of Section 9.1(a) and
(b), if Closing occurs, (i) the Stockholders hereby waive any right to
contribution, reimbursement or
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other right to recovery that they might otherwise have against the Company in
connection with any such indemnification or other obligations, and (ii) the
Company shall be deemed to be a Buyer Party.
(d) Notwithstanding anything contained in Section 9 to the
contrary, there shall be no liability for indemnification under this Section 9,
(i) unless the aggregate amount of Damages exceeds $50,000 (the "Indemnity
Basket"), but if the amount of such Damages exceeds $50,000, then
indemnification shall be made by the Indemnifying Party (as defined in Section
9.2) hereunder to the fullest extent of such Damages, including the first
$50,000 thereof or (ii) to the extent that an Indemnified Party has suffered,
incurred, sustained or become subject to, Damages by reason of all such claims
in excess of seventy-five percent (75%) of the Purchase Price (the
"Indemnification Cap") and no Indemnifying Party (and for the purpose of this
sentence, all Seller Parties shall be considered one and the same Indemnifying
Party) shall be obligated to pay more than seventy-five percent (75%) of the
Purchase Price under Section 9; provided, however, that the Indemnity Basket
shall not apply in the event that liability arises out of or in connection with
a breach of the representations or warranties in Sections 4.2, 4.3, 4.5, 4.10 or
4.17, for amounts payable pursuant to Sections 2.3 or 2.4, indemnification
pursuant to Section 9.1(a)(vi), for breach of covenants of Section 10 or for
amounts payable in connection with the Oracle Dispute or the Oracle Dispute
Settlement. Notwithstanding anything contained in Section 9 to the contrary, the
amount of Christopher Paine's liability as to a particular Claim shall not
exceed 65% of the Damages attributable to such Claim and the amount of Robert
Hennessy's liability as to a particular Claim shall not exceed 35% of the
Damages attributable to such Claim; and the aggregate amount of Christopher
Paine's liability on all Claims shall not exceed 65% of the Indemnification Cap
and the aggregate amount of Robert Hennessy's liability on all Claims shall not
exceed 35% of the Indemnification Cap.
(e) For purposes of determining whether the Company or the
Stockholders have breached a representation or warranty solely for purposes of
determining whether a Buyer has incurred Damages for which it is entitled to be
indemnified, defended, protected and held harmless, all representations and
warranties of the Company and the Stockholders shall be deemed to be re-written
as if any qualifications to such representations and warranties regarding
materiality or Material Adverse Effect were not contained therein (i.e., such
representations and warranties shall be absolute).
9.2 Indemnification Procedures. All claims or demands for indemnification
under this Section 9 ("Claims") shall be asserted and resolved as follows:
(a) In the event a Buyer Party or a Seller Party (an "Indemnified
Party") has a Claim against the other party (an "Indemnifying Party") hereunder
which does not involve a Claim being asserted against or sought to be collected
by a third party, the Indemnified Party shall with reasonable promptness send a
Claim Notice (as defined in Section 9.2(b)) with respect to such Claim to the
Indemnifying Party; provided, however, that AppNet shall not send a Claim Notice
with respect to the Oracle Dispute and/or the Oracle Dispute Settlement unless
and until such time as Oracle has made an actual claim against the Company
and/or any Buyer Party relating to the Oracle Dispute. If the Indemnifying Party
does not notify the Indemnified Party
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within the Notice Period (as defined in Section 9.2(b)) that the Indemnifying
Party disputes such Claim, the amount of such Claim shall be conclusively deemed
a liability of the Indemnifying Party hereunder. In case the Indemnifying Party
shall object in writing to any Claim made in accordance with this Section
9.2(a), the Indemnified Party shall have fifteen (15) days to respond in a
written statement to the objection of the Indemnifying Party. If after such
fifteen (15)-day period there remains a dispute as to any Claims, the parties
shall attempt in good faith for thirty (30) days to agree upon the rights of the
respective parties with respect to each of such Claims. If the parties should so
agree, a memorandum setting forth such agreement shall be prepared and signed by
both parties. If no such agreement can be reached after good faith negotiation,
either the Indemnified Party or the Indemnifying Party may arbitrate such claim
in accordance with the terms of Section 11.11 hereof. For purposes of this
Section 9.2, (i) any notices or other communications required to be sent by the
Buyer Parties to the Seller Parties shall be sent directly to the Stockholder
Representative who shall then be required to forward such notices to each of the
Stockholders and (ii) any notices or other communications required to be sent by
the Seller Parties shall be sent by the Stockholder Representative to the Buyer
Parties.
(b) In the event that any Claim for which an Indemnifying Party
would be liable to an Indemnified Party hereunder is asserted against an
Indemnified Party by a third party, the Indemnified Party shall with reasonable
promptness notify the Indemnifying Party of such Claim, specifying the nature of
such claim and the amount or the estimated amount thereof to the extent then
feasible (which estimate shall not be conclusive of the final amount of such
Claim) (the "Claim Notice"). The Indemnifying Party shall have fifteen (15) days
from the receipt of the Claim Notice (the "Notice Period") to notify the
Indemnified Party (i) whether or not the Indemnifying Party disputes the
Indemnifying Party's liability to the Indemnified Party hereunder with respect
to such Claim and (ii) if the Indemnifying Party does not dispute such
liability, whether or not the Indemnifying Party desires, at the sole cost and
expense of the Indemnifying Party, to defend against such Claim. In the event
that the Indemnifying Party notifies the Indemnified Party within the Notice
Period that the Indemnifying Party does not dispute the Indemnifying Party's
obligation to indemnify hereunder and desires to defend the Indemnified Party
against such Claim and except as hereinafter provided, the Indemnifying Party
shall have the right to defend by appropriate proceedings, which proceedings
shall be promptly settled or prosecuted by the Indemnifying Party to a final
conclusion; provided that, unless the Indemnified Party otherwise agrees in
writing, the Indemnifying Party may not settle any matter (in whole or in part)
unless such settlement includes a complete and unconditional release of the
Indemnified Party. If the Indemnified Party desires to participate in, but not
control, any such defense or settlement, the Indemnified Party may do so at the
Indemnified Party's sole cost and expense. If the Indemnifying Party elects not
to defend the Indemnified Party against such Claim, whether by failure of the
Indemnifying Party to give the Indemnified Party timely notice as provided above
or otherwise, then the Indemnified Party, without waiving any rights against the
Indemnifying Party, may settle or defend against any such Claim in the
Indemnified Party's sole discretion and the Indemnified Party shall be entitled
to recover from the Indemnifying Party the amount of any settlement or judgment
and, on an ongoing basis, all indemnifiable costs and expenses of the
Indemnified Party with respect thereto, including interest from the date such
costs and expenses were incurred.
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(c) Notwithstanding the provisions of Section 9.2(b), if at any
time, in the reasonable opinion of the Indemnified Party, notice of which shall
be given in writing to the Indemnifying Party, any such Claim seeks relief which
could have a Material Adverse Effect on any Indemnified Party, the Indemnified
Party shall have the right to control or assume (as the case may be) the defense
of any such Claim and the amount of any judgment or settlement and the
reasonable costs and expenses of defense shall be included as part of the
indemnification obligations of the Indemnifying Party hereunder. If the
Indemnified Party should elect to exercise such right, the Indemnifying Party
shall have the right to participate in, but not control, the defense of such
claim or demand at the sole cost and expense of the Indemnifying Party. For
purposes of this Section 9.2(c), any Claim with respect to the Oracle Dispute
and/or the Oracle Dispute Settlement shall be deemed not to have a Material
Adverse Effect if, at the time a Claim Notice is sent by AppNet with respect to
such Oracle Dispute and/or the Oracle Dispute Settlement, the amount of such
Claim does not, as of the date of such Claim Notice, exceed the product of (i)
the Holdback Amount, plus the value of the Pledged Stock as determined pursuant
to the Stock Pledge and Escrow Agreement (and any cash substituted in lieu
thereof), multiplied by (ii) one hundred fifteen percent (115%).
(d) Nothing herein shall be deemed to prevent the Indemnified
Party from making a Claim, and an Indemnified Party may make a Claim hereunder,
for potential or contingent Claims or demands provided the Claim Notice sets
forth the specific basis for any such potential or contingent claim or demand to
the extent then feasible and the Indemnified Party has reasonable grounds to
believe that such a claim or demand may be made. Notwithstanding that the
Holdback Amount and the Contingent Amount may not be withheld by AppNet after
the first anniversary of the Closing Date to satisfy Claims asserted by AppNet
pursuant to this Section 9.2(d), the Indemnifying Stockholders shall, subject to
Section 11.12, continue to be liable for any indemnifiable Claims made by AppNet
pursuant with this Section 9.2(d).
9.3 Right to Setoff. In the event the Stockholders or the Indemnifying
Stockholders shall have an indemnification obligation to AppNet or the Company
(post-Closing, other than with respect to the Oracle Dispute or Oracle Dispute
Settlement) AppNet shall satisfy such indemnification obligations in the
following order: (i) first, through an offset of the Holdback Amount and (ii)
second, through an offset of the Contingent Amount. In the event that the
Stockholders or the Indemnifying Stockholders shall have an indemnification
obligation to AppNet or the Company (post-Closing) with respect to the Oracle
Dispute or Oracle Dispute Settlement, AppNet shall satisfy such indemnification
obligations in the following order: (i) first, through an offset of the Holdback
Amount; (ii) second, through an offset of the Contingent Amount and (iii) third,
through an offset of the Collateral (as defined in the Stock Pledge and Escrow
Agreement), pursuant to the terms of the Stock Pledge and Escrow Agreement. No
limitation on such right of offset shall otherwise affect a Buyer Party's rights
hereunder or otherwise. The remedy of offset shall be in addition to and not in
limitation of any injunctive relief or other rights or remedies to which AppNet
or any other Buyer Party is or may be entitled at law or equity, under this
Agreement.
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9.4 Stockholder Liability for Indemnification. Each of the Stockholders
hereby acknowledges and agrees that each such Stockholders' Pro Rata Share of
(a) the Holdback Amount and the Contingent Amount shall be subject to setoff
pursuant to Section 9.3 hereof to satisfy the indemnification obligations of the
Indemnifying Stockholders pursuant to this Section 9 (including, without
limitation, the Oracle Dispute and the Oracle Dispute Settlement) and (b) the
Pledged Stock shall be subject to setoff pursuant to the terms of the Stock
Pledge and Escrow Agreement to satisfy the indemnification obligations of the
Indemnifying Stockholders in connection with Oracle Dispute and the Oracle
Dispute Settlement.
9.5 Release. Effective as of the Closing, each of the Stockholders hereby
irrevocably waives and releases the Company of, from and against any and all
claims or causes of actions for Damages that he has, may have, or has had at any
time on or before Closing.
10. NONCOMPETITION
10.1 Prohibited Activities. For the period commencing with Closing and
ending on the fifth (5th) year anniversary of Closing, none of the Indemnifying
Stockholders shall, for any reason whatsoever, directly or indirectly, for
himself or on behalf of or in conjunction with any other Person:
(a) engage as a stockholder, officer, director, owner, partner,
joint venturer, or in a managerial capacity, whether as an employee, independent
contractor, consultant or advisor, in any business selling any products or
services in direct competition with AppNet, the Company or their Affiliates (a
"Competing Business") which is located in the counties in California listed on
Schedule 10.1(a) or in any other state within the United States; provided,
however, each of the Indemnifying Stockholders shall not be precluded from the
ownership of securities of corporations that are listed on a national securities
exchange or traded in the national over-the-counter market in an amount that
shall not exceed one percent (1%) of the outstanding shares of any such
corporation;
(b) call upon any Person who is, at that time or was within one
(1) year prior to that time, an employee of AppNet, the Company or their
Affiliates for the purpose or with the intent of enticing such employee away
from or out of the employ of AppNet, the Company or their Affiliates;
(c) call upon any Person who or that is, at that time, or has
been, within one (1) year prior to that time, a customer of AppNet, the Company
or their Affiliates for the purpose of soliciting or selling products or
services in competition with AppNet, the Company or their Affiliates; or
(d) publish any statement or make any statement (under any
circumstances reasonably likely to become public) critical of AppNet, the
Company or their Affiliates, or in any way adversely affecting or otherwise
maligning the reputation of AppNet, the Company or their Affiliates.
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10.2 Damages. Because of the difficulty of measuring economic losses to
AppNet, the Company and their Affiliates as a result of a breach of the
foregoing covenants, and because of the immediate and irreparable damage that
could be caused to AppNet, the Company and their Affiliates for which it would
have no other adequate remedy, the Indemnifying Stockholders agree that the
foregoing covenants may be enforced by AppNet or the Company in the event of
breach by any of the Principal Stockholders, in addition to, but not in lieu of,
any other available remedies, by injunctions and restraining orders and other
equitable remedies.
10.3 Reasonable Restraint. It is agreed by AppNet and the Indemnifying
Stockholders that the foregoing covenants in this Section 10 impose a reasonable
restraint on the Indemnifying Stockholders in light of the activities and
business of AppNet, the Company and their Affiliates on the date of the
execution of this Agreement and the current plans of AppNet, the Company and
their Affiliates; but it is also the intent of the parties, that such covenants
be construed and enforced in accordance with the changing activities and
business of AppNet, the Company and their Affiliates throughout the term of this
covenant.
10.4 Severability; Reformation. The covenants in this Section 10 are
severable and separate, and the unenforceability of any specific covenant shall
not affect the provisions of any other covenant. Moreover, in the event any
court of competent jurisdiction shall determine that the scope, time or
territorial restrictions set forth are unreasonable, then it is the intention of
AppNet and the Indemnifying Stockholders that such restrictions be enforced to
the fullest extent which the court deems reasonable, and the Agreement shall
thereby be reformed.
10.5 Independent Covenant. All of the covenants in this Section 10 shall
be construed as an agreement independent of any other provision in this
Agreement, and the existence of any claim or cause of action of any of the
Indemnifying Stockholders against AppNet, the Company or an Affiliate thereof,
whether predicated on this Agreement or otherwise, shall not constitute a
defense to the enforcement by AppNet or the Company of such covenants. It is
understood by the parties hereto that the covenants contained in this Section 10
are essential elements of this Agreement and that, but for the agreement of the
Indemnifying Stockholders to comply with such covenants, AppNet would not have
agreed to enter into this Agreement. The Indemnifying Stockholders and AppNet
have independently consulted with their respective counsel and have been advised
concerning the reasonableness and propriety of such covenants with specific
regard to the nature of the business conducted by AppNet and the Company. The
Indemnifying Stockholders hereby agree that all covenants contained in this
Section 10 are reasonable and valid and waive all defenses to the strict
enforcement hereof by AppNet or the Company. The covenants contained in this
Section 10 hereof shall not be affected by any breach of any other provision
hereof by any party hereto and shall have no effect if this Agreement is
terminated pursuant to its terms.
10.6 Materiality. Each of the Indemnifying Stockholders hereby agrees that
the covenants set forth in this Section 10 are a material and substantial part
of the transactions contemplated by this Agreement.
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11. GENERAL
11.1 Termination. This Agreement may be terminated at any time prior to
the Closing Date:
(a) by mutual consent of the Board of Directors of AppNet and
the Stockholder Representative;
(b) by the Stockholder Representative, on the one hand, or by
AppNet, on the other hand, if the Closing shall not have occurred on or before
April 15, 1999; provided that the right to terminate this Agreement under this
Section 11.1(b) shall not be available to either party whose material
misrepresentation, breach of warranty or failure to fulfill any obligation under
this Agreement has been the cause of, or resulted in, the failure of the Closing
to occur on or before such date;
(c) by the Stockholder Representative, on the one hand, or by
AppNet, on the other hand, if there is or has been a material breach, failure to
fulfill or default on the part of the other party of any of the representations
and warranties contained herein or in the due and timely performance and
satisfaction of any of the covenants, agreements or conditions contained herein,
and the curing of such default shall not have been made or shall not reasonably
be expected to occur before the Closing Date;
(d) by the Stockholder Representative, on the one hand, or by
AppNet, on the other hand, if there shall be a final nonappealable order of a
federal or state court in effect preventing the consummation of the transactions
contemplated by this Agreement; or there shall be any action taken, or any
statute, rule, regulation or order enacted, promulgated or issued or deemed
applicable to the transactions by any governmental entity which would make the
consummation of the transactions illegal; or
(e) by AppNet pursuant to Section 6.5.
11.2 Effect of Termination. In the event of the termination of this
Agreement pursuant to Section 11.1, this Agreement shall forthwith become void,
and there shall be no liability or obligation on the part of any party hereto or
its officers, directors or stockholders. Notwithstanding the foregoing sentence,
(i) the provisions of this Section 11 (except that the time periods set forth in
Section 11.12 shall expire in accordance with their terms), Section 9, Section
6.2(a) (except for the Company's obligation to keep information regarding the
Company confidential thereunder) and Section 6.2(b) shall remain in full force
and effect and survive any termination of this Agreement; (ii) each party shall
remain liable for any intentional breach of this Agreement prior to its
termination; and (iii) in the event of termination of this Agreement pursuant to
Section 11.1(c) or (e), then notwithstanding the provisions of Section 11.7, the
breaching party (if such breach was in effect as of the date hereof) shall be
liable to the other party for reasonable expenses up to an aggregate of $100,000
incurred by such other party in connection with this Agreement and the
transactions contemplated by this Agreement.
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11.3 Cooperation. The Company and the Stockholders, on the one hand, and
AppNet, on the other hand, shall each deliver or cause to be delivered to the
other on the Closing Date, and at such other times and places as shall be
reasonably agreed to, such additional instruments as the other may reasonably
request for the purpose of carrying out this Agreement. In connection therewith,
if required, each of AppNet, the Company and the Stockholders will execute any
documentation reasonably required by AppNet's or the Company's independent
certified public accountants (in connection with such accountant's audit of
AppNet or the Company). Each of the Company and AppNet will also cooperate and
use their reasonable efforts to have their respective officers and employees
cooperate with AppNet and the Company, as the case may be, on and after the
Closing Date in furnishing information, accounting records, evidence, testimony
and other assistance in connection with any Tax return filing obligations,
audits, actions, proceedings, arrangements or disputes of any nature.
11.4 Successors and Assigns. This Agreement shall inure to the benefit of
and be binding upon the parties hereto and their respective successors and
assigns; provided, however, that the Company and the Stockholders may not make
any assignment of this Agreement or any interest herein without the prior
written consent of AppNet. This Agreement or any of the severable rights and
obligations inuring to the benefit of or to be performed by AppNet hereunder may
be assigned by AppNet prior to the Closing Date, to any wholly-owned subsidiary
of AppNet, and after the Closing Date, to any wholly-owned subsidiary of AppNet
or to any entity to which AppNet may sell all or substantially all of the assets
of AppNet and which assumes all of the obligations of AppNet, and to the extent
so assigned, the Company and the Stockholders hereby recognize said entity as
the party-in-interest with respect to the rights and obligations assigned. In
the event of such assignment to an entity which acquires all or substantially
all of the assets of AppNet, the Stockholders agree to look solely to said
entity for the purpose of conferring benefits, or requiring performance of
obligations, assigned to it by AppNet if and to the extent such entity has
expressly assumed such obligations.
11.5 Entire Agreement. This Agreement (which includes the schedules and
exhibits hereto), sets forth the entire understanding of the parties hereto with
respect to the transactions contemplated hereby and thereby. Any and all
previous and contemporaneous agreements and understandings between or among the
parties regarding the subject matter hereof, whether written or oral, are
superseded by this Agreement.
11.6 Counterparts. This Agreement may be executed in any number of
counterparts and any party hereto may execute any such counterpart, each of
which when executed and delivered shall be deemed to be an original and all of
which counterparts taken together shall constitute but one and the same
instrument.
11.7 Expenses. AppNet has paid and shall pay the fees, expenses and
disbursements of AppNet and its brokers, agents, representatives, accountants
and counsel incurred in connection with the subject matter of this Agreement.
The Stockholders have paid and shall pay the fees, expenses and disbursements of
the Company and the Stockholders and each of their respective brokers, agents,
representatives, financial advisors, accountants and counsel incurred in
connection with the subject matter of this Agreement.
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11.8 Specific Performance; Remedies Not Exclusive. Each party hereto
acknowledges that the other parties shall be irreparably harmed and that there
shall be no adequate remedy at law for any violation by any of them of any of
the covenants or agreements contained in this Agreement, including, without
limitation, the confidentiality obligations set forth in Section 6.2(a) and (b)
and the noncompetition provisions set forth in Section 10. It is accordingly
agreed that, in addition to, but not in lieu of, any other remedies which may be
available upon the breach of any such covenants or agreements, each party hereto
shall have the right to obtain injunctive relief to restrain a breach or
threatened breach of, or otherwise to obtain specific performance of, the other
parties' covenants and agreements contained in this Agreement. All rights and
remedies of the parties under this Agreement shall be cumulative, and the
exercise of one or more rights or remedies will not preclude the exercise of any
other right or remedy available under this Agreement or applicable law.
11.9 Notices. Any notice, request, claim, demand, waiver, consent,
approval or other communication which is required or permitted hereunder shall
be in writing and shall be deemed given if delivered personally, sent by
facsimile transmission with receipt of delivery, sent by registered or certified
mail (postage prepaid, return receipt requested), or by nationally recognized
overnight courier service, as follows:
If to AppNet or the Company (post-Closing) to:
AppNet Systems, Inc.
6707 Democracy Blvd., Suite 1000
Bethesda, Maryland 20817
Attn: Ken S. Bajaj, President
Facsimile: (301) 581-2488
with a required copy to:
Tucker Flyer
1615 L Street, N.W., Suite 400
Washington, D.C. 20036
Attn: Arthur E. Cirulnick, Esq.
Facsimile: (202) 429-3231
If to the Company (pre-Closing) to:
Internet Outfitters, Inc.
1131 Olympic Boulevard
Santa Monica, California 90404
Attn: Christopher Paine
Facsimile: 310-664-4801
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<PAGE>
with a required copy to:
Manatt Phelps Phillips
11355 West Olympic Boulevard
Los Angeles, California 90064
Attn: Bruce Friedman, Esquire
Facsimile: 310-312-4224
If to the Stockholders, to the Stockholder Representative:
Internet Outfitters, Inc.
1131 Olympic Boulevard
Santa Monica, California 90404
Attn: Christopher Paine
Facsimile: 310-664-4801
or to such other address as the person to whom notice is to be given may have
specified in a notice duly given to the sender as provided herein. Such notice,
request, claim, demand, waiver, consent, approval or other communication shall
be deemed to have been given as of the date so delivered, telefaxed or
dispatched, and if given by mail, shall be deemed to have been given three (3)
days after the date of mailing such notice by registered or certified mail, and
if given by any other means, shall be deemed given only when actually received
by the addressees.
11.10 Governing Law. This Agreement shall be governed by and construed,
interpreted and enforced in accordance with the laws of the State of Delaware
(without regard to its laws relating to choice-of-law or conflicts-of-law).
11.11 Arbitration. Any unresolved dispute or controversy arising under or
in connection with this Agreement arising after the Closing shall be settled
exclusively by a three (3) person arbitration panel, with such arbitration
proceeding conducted in accordance with the rules of the American Arbitration
Association then in effect. The arbitrators shall not have the authority to add
to, detract from, or modify any provision hereof. A decision by a majority of
the arbitration panel shall be final and binding. Judgment may be entered on the
arbitrators' award in any court having jurisdiction. The arbitration proceeding
shall be held in Bethesda, Maryland. Notwithstanding the foregoing, the parties
shall be entitled to seek injunctive or other equitable relief from any court of
competent jurisdiction, without the need to resort to arbitration.
11.12 Survival of Representations, Warranties and Covenants. All
representations and warranties made by either party in or pursuant to this
Agreement or in any document delivered pursuant hereto shall survive for two (2)
years after the Closing; provided, however, that (i) in the event of fraud by
any party, the fraudulent representations and warranties of that party shall
survive the Closing for an indefinite period; (ii) the representations and
warranties in Sections 4.2, 4.3, 4.5, 4.10 and 4.17 shall survive until the
expiration of the applicable statute of limitations if longer than two (2)
years, or if there is no applicable statute of limitations, such
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representations and warranties shall survive indefinitely; and (iii) the
representations and warranties in Section 4.15 applicable to the Oracle Dispute
and the obligation of the Indemnifying Stockholders pursuant to Section
9.1(a)(viii) shall survive until such time as an Oracle Dispute Settlement has
been reached and any obligation of the Indemnifying Stockholders to make payment
to the Buyer Parties pursuant to Section 9.1(a) with respect thereto has been
satisfied. Notwithstanding the foregoing, if a Claim Notice is sent pursuant to
Section 9.2(a) or (b), the representation or warranty with respect to which such
Claim Notice is sent, and the related indemnification obligations set forth in
Section 9 with respect to the Claim Notice, shall survive until the resolution
of the Claim to which such Claim Notice relates and any obligation of the
Indemnifying Party to make payment to the Indemnified Party with respect thereto
has been satisfied, or such longer period as provided in subsections (i) and
(ii) hereof. All covenants, which by their own terms are intended to survive the
Closing, made by either party pursuant to this Agreement or in any document
delivered pursuant hereto shall survive the Closing pursuant to their terms.
11.13 Severability. If any provision of this Agreement or the application
thereof to any person or circumstances is held invalid or unenforceable in any
jurisdiction, the remainder hereof, and the application of such provision to
such person or circumstances in any jurisdiction, shall not be affected thereby,
and to this end the provisions of this Agreement shall be severable. The
preceding sentence is in addition to and not in place of the severability
provisions in Section 10.4.
11.14 Absence of Third Party Beneficiary Rights. Except as expressly
provided herein, no provision of this Agreement is intended, nor will be
interpreted, to provide or create any third party beneficiary rights or any
other rights of any kind in any client, customer, affiliate, shareholder,
employee or partner of any party hereto or any other person or entity.
11.15 Mutual Drafting. This Agreement is the mutual product of the parties
hereto, and each provision hereof has been subject to the mutual consultation,
negotiation and agreement of each of the parties, and shall not be construed for
or against any party hereto.
11.16 Further Representations. Each party to this Agreement acknowledges
and represents that it has been represented by its own legal counsel in
connection with the transactions contemplated by this Agreement, with the
opportunity to seek advice as to its legal rights from such counsel. Each party
further represents that it is being independently advised as to the tax or
securities consequences of the transactions contemplated by this Agreement and
is not relying on any representation or statements made by the other party as to
such tax and securities consequences.
11.17 Amendment; Waiver. This Agreement may be amended by the parties
hereto at any time only by execution of an instrument in writing signed by
AppNet and the Stockholder Representative. Any extension or waiver by any party
of any provision hereto shall be valid only if set forth in an instrument in
writing signed by AppNet and the Stockholder Representative.
11.18 Gender. Unless the context clearly indicates otherwise, where
appropriate the singular shall include the plural and the masculine shall
include the feminine or neuter, and vice
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<PAGE>
versa, to the extent necessary to give the terms defined herein and/or the terms
otherwise used in this Agreement the proper meanings.
11.19 Headings. The headings and other captions in this Agreement are for
convenience and reference only and shall not be used in interpreting, construing
or enforcing any of the provisions of this Agreement.
11.20 Public Disclosure. Prior to the Closing Date, neither party shall
make any disclosure (whether or not in response to an inquiry) of the subject
matter of this Agreement unless previously approved by the Company and AppNet.
[EXECUTION PAGES FOLLOW]
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IN WITNESS WHEREOF, the parties hereto have executed this Stock Purchase
Agreement as of the day and year first above written.
APPNET:
ATTEST: APPNET SYSTEMS, INC.
By: /s/ Ronald B. Alexander By: /s/ Toby Tobaccawala
----------------------------- -----------------------------------------
Ronald B. Alexander Name: Toby Tobaccawala
--------------------, Secretary ---------------------------------------
Title: Senior Vice President
-------------------------------------
THE COMPANY:
ATTEST: INTERNET OUTFITTERS, INC.
By: /s/ Donald T. Freeman By: /s/ Christopher Paine
----------------------------- -----------------------------------------
Donald T. Freeman Name: Christopher Paine
--------------------, Secretary ---------------------------------------
Title: CEO
-------------------------------------
STOCKHOLDERS:
/s/ Christopher Paine
--------------------------------------------
Christopher Paine
/s/ Robert Hennessy
--------------------------------------------
Robert Hennessy
/s/ Aaron Crow
--------------------------------------------
Aaron Crow
/s/ Caroline Kelley
--------------------------------------------
Caroline Kelley
[Signatures continued on the following page]
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/s/ Duncan Essex
--------------------------------------------
Duncan Essex
/s/ Stephen Paik
--------------------------------------------
Stephen Paik
/s/ Erick Hoppe
--------------------------------------------
Erick Hoppe
/s/ Josh Blackwell
--------------------------------------------
Josh Blackwell
/s/ Richard Abronson
--------------------------------------------
Richard Abronson
/s/ Megan McCartney
--------------------------------------------
Megan McCartney
/s/ Suzanne Hornwood
--------------------------------------------
Suzanne Hornwood
/s/ Tam Huynh
--------------------------------------------
Tam Huynh
/s/ Pamela Stayden
--------------------------------------------
Pamela Stayden
/s/ Matthew Easton
--------------------------------------------
Matthew Easton
/s/ Seng Leong
--------------------------------------------
Seng Leong
[Signatures continued on the following page]
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/s/ Yvonne Meier-Hull
--------------------------------------------
Yvonne Meier-Hull
/s/ William Bartley
--------------------------------------------
William Bartley
/s/ Tom O'Neill
--------------------------------------------
Tom O'Neill
/s/ Patrick Shandrick
--------------------------------------------
Patrick Shandrick
[Signatures continued from previous page]
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SCHEDULES
Schedule 3.6 Company Stock Options
Schedule 4.4 Third Party Consents
Schedule 4.5 Company Capitalization
Schedule 4.6 Financial Statements
Schedule 4.7(a) Liabilities and Obligations
Schedule 4.7(b) Advance Payments or Deposits
Schedule 4.9(a) Benefit Plans
Schedule 4.9(b) List of Employees
Schedule 4.12(a) Real Property
Schedule 4.12(b) Personal Property
Schedule 4.12(c) Permitted Encumbrances
Schedule 4.13 Contracts
Schedule 4.15 Litigation
Schedule 4.16 Violations of Law
Schedule 4.17 Environmental Disclosure
Schedule 4.18(a) Significant Customers
Schedule 4.18(b) Suppliers Who Have Threatened Termination
Schedule 4.19 Insurance
Schedule 4.20(a) Company Intellectual Property Rights
Schedule 4.20(b) Licenses to Use Company Intellectual Property
Schedule 4.20(c) Third Party Intellectual Property Claims
Schedule 4.20(e) Unauthorized Intellectual Property Use
Schedule 4.20(f) Company Nondisclosure Agreement
Schedule 4.23 Related Party Transactions
Schedule 4.24 Brokers
Schedule 4.25(e) Residency of Stockholders
Schedule 4.26 Transfers of Assets Occurring Prior to the
Closing
Schedule 5.6 AppNet Capitalization
Schedule 5.8 Litigation
Schedule 7.3 Designated Employees
Schedule 10.1 (a) List of California Counties
EXHIBITS
Exhibit A Contingent Amount
Exhibit B Form of Senior Management Agreement
Exhibit C Form of Employment Agreement
Exhibit D Form of on-Disclosure Agreement
Exhibit E Stock Pledge and Escrow Agreement
Exhibit F Oracle Dispute Letters
<PAGE>
Exhibit 10.12
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
ASSET PURCHASE AGREEMENT
dated as of March 29, 1999
- --------------------------------------------------------------------------------
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<PAGE>
TABLE OF CONTENTS
<TABLE>
<S> <C>
1. DEFINITIONS.......................................................................................................1
1.1. Defined Terms............................................................................................1
2. PURCHASE AND SALE OF PURCHASED ASSETS.............................................................................3
2.1. Purchased Assets.........................................................................................3
2.2. Assumed Liabilities......................................................................................4
2.3. Non-Assumption of Liabilities............................................................................5
2.4. Conveyance of the Purchased Assets.......................................................................6
2.5. Consideration for Purchase of Assets.....................................................................6
3. CLOSING...........................................................................................................6
3.1. Time and Place of the Closing............................................................................6
3.2. Procedure at Closing.....................................................................................6
3.3. Payment of Contingent Amount.............................................................................7
3.4. Holdback of Portion of Cash Payment......................................................................8
4. REPRESENTATIONS AND WARRANTIES OF THE COMPANY AND THE STOCKHOLDERS................................................8
4.1. Organization.............................................................................................8
4.2. Power and Authority......................................................................................8
4.3. Authority for Agreement..................................................................................8
4.4. No Violation to Result...................................................................................9
4.5. Capitalization...........................................................................................9
4.6. Financial Statements.....................................................................................9
4.7. Liabilities and Obligations.............................................................................10
4.8. Adverse Changes.........................................................................................10
4.9. Employee Matters........................................................................................10
4.10. Taxes...................................................................................................12
4.11. Subsidiaries............................................................................................13
4.12. Property................................................................................................13
4.13. Contracts...............................................................................................14
4.14. Government Contracts....................................................................................14
4.15. Litigation..............................................................................................14
4.16. Compliance with Laws....................................................................................14
4.17. Environmental and Safety Matters........................................................................15
4.18. Customers; Suppliers....................................................................................16
4.19. Insurance...............................................................................................16
4.20. Intellectual Property...................................................................................17
4.21. Accounts Receivable.....................................................................................18
4.22. Intentionally Omitted...................................................................................18
4.23. Related Party Transactions..............................................................................18
4.24. Brokers.................................................................................................18
4.25. Accredited Investors; Investment Intent.................................................................19
4.26. Disclosure..............................................................................................20
5. REPRESENTATIONS AND WARRANTIES OF APPNET AND SUB.................................................................20
i
</TABLE>
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<TABLE>
<S> <C>
5.1. Due Organization........................................................................................20
5.2. Power and Authority.....................................................................................20
5.3. Authority for Agreement.................................................................................20
5.4. No Violation to Result..................................................................................20
5.5. Brokers and Agents......................................................................................21
5.6. Capitalization..........................................................................................21
5.7. Shares Issued in Stock Purchase.........................................................................21
6. COVENANTS........................................................................................................21
6.1. Access to Properties and Records........................................................................21
6.2. Confidentiality.........................................................................................22
6.3. Interim Covenants of the Company........................................................................23
6.4. No Solicitation.........................................................................................25
6.5. Notification of Certain Matters.........................................................................25
6.6. Cooperation.............................................................................................25
6.7. Regulatory and Other Approvals..........................................................................25
6.8. Benefits Plans..........................................................................................26
6.9. Reasonable Efforts......................................................................................26
6.10. Stock Options...........................................................................................26
6.11. Stockholder Vote........................................................................................27
6.12. Intentionally Omitted...................................................................................27
6.13. Corporate Existence.....................................................................................27
6.14. Hiring of the Company's Employees.......................................................................27
6.15. Actions After The Closing...............................................................................27
6.16. Intentionally Omitted...................................................................................27
6.17. Bulk Transfer Provisions................................................................................27
6.18. The Company's Consent...................................................................................27
6.19. Allocation of Purchase Price............................................................................28
6.20. Corporate Name..........................................................................................28
7. CONDITIONS PRECEDENT TO OBLIGATIONS OF APPNET AND SUB............................................................28
7.1. Representations and Warranties True at the Closing Date.................................................28
7.2. Performance.............................................................................................28
7.3. Stockholder Approval....................................................................................28
7.4. Agreements with Employees...............................................................................28
7.5. No Litigation...........................................................................................29
7.6. No Material Adverse Change..............................................................................29
7.7. Certificates............................................................................................29
7.8. Opinion of Counsel......................................................................................29
7.9. Financing...............................................................................................29
7.10. AppNet's Review.........................................................................................29
7.11. Governmental, Regulatory and Other Consents and Approvals...............................................29
7.12. Delivery of Good Standing Certificates; Corporate Resolutions...........................................29
7.13. Financial Terms.........................................................................................29
7.14. Payment of Loans........................................................................................30
7.15. Purchase of Personal Use Items..........................................................................30
7.16. Stockholders Agreement and Registration Agreement.......................................................30
7.17. Subordination Agreement.................................................................................30
</TABLE>
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<TABLE>
<S> <C>
7.18. Investor Questionnaires.................................................................................30
8. CONDITIONS PRECEDENT TO OBLIGATIONS OF THE COMPANY AND THE STOCKHOLDERS..........................................30
8.1. Representations and Warranties True as of the Closing Date..............................................30
8.2. AppNet's and Sub's Performance..........................................................................31
8.3. No Litigation...........................................................................................31
8.4. Certificates............................................................................................31
8.5. Governmental, Regulatory and Other Consents and Approvals...............................................31
8.6. Delivery of Good Standing Certificates; Corporate Resolutions...........................................31
8.7. Opinion of Counsel......................................................................................31
9. INDEMNIFICATION..................................................................................................31
9.1. General Indemnification.................................................................................31
9.2. Indemnification Procedures..............................................................................33
9.3. Right to Setoff.........................................................................................34
9.4. Release.................................................................................................34
10. NONCOMPETITION...................................................................................................35
10.1. Prohibited Activities...................................................................................35
10.2. Damages.................................................................................................35
10.3. Reasonable Restraint....................................................................................35
10.4. Severability; Reformation...............................................................................35
10.5. Independent Covenant....................................................................................36
10.6. Materiality.............................................................................................36
10.7. Early Termination of Section 10.........................................................................36
11. GENERAL..........................................................................................................36
11.1. Termination.............................................................................................36
11.2. Effect of Termination...................................................................................37
11.3. Cooperation.............................................................................................37
11.4. Successors and Assigns..................................................................................37
11.5. Entire Agreement........................................................................................38
11.6. Counterparts............................................................................................38
11.7. Expenses................................................................................................38
11.8. Specific Performance; Remedies Not Exclusive............................................................38
11.9. Notices.................................................................................................38
11.10. Governing Law...........................................................................................39
11.11. Arbitration.............................................................................................39
11.12. Survival of Representations, Warranties and Covenants...................................................40
11.13. Severability............................................................................................40
11.14. Absence of Third Party Beneficiary Rights...............................................................40
11.15. Further Representations.................................................................................40
11.16. Amendment; Waiver.......................................................................................40
11.17. Gender..................................................................................................40
11.18. Headings................................................................................................41
11.19. Public Disclosure.......................................................................................41
</TABLE>
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ASSET PURCHASE AGREEMENT
THIS ASSET PURCHASE AGREEMENT (together with the schedules and exhibits
attached hereto, this "Agreement") is entered into effective for all purposes
and in all respects as of March 29, 1999, by and among (i) APPNET SYSTEMS, INC.,
a Delaware corporation ("AppNet"), (ii) TRANSFORM ACQUISITION CORP., a Delaware
corporation ("Sub"), (iii) TRANSFORM IT, INCORPORATED, a Georgia corporation
(the "Company"), and (iv) JOHN C. KING, THOMAS E. HUNT and ROY A. CHANDLER
(collectively, the "Stockholders").
WHEREAS, the Stockholders are the record and beneficial owners of all
of the issued and outstanding shares (the "Shares") of Common Stock of the
Company, par value $0.01 per share (the "Common Stock"); and
WHEREAS, AppNet desires to purchase substantially all of the assets of
the Company and the Company desires to sell substantially all of its assets, on
the terms and conditions hereinafter set forth (the "Asset Purchase").
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 are hereby acknowledged, the parties hereto,
intending to be legally bound, hereby agree as follows:
1. DEFINITIONS
1.1. DEFINED TERMS. As used herein, the terms defined below shall have
the following meanings. Any of these terms, unless the context otherwise
requires, may be used in the singular or plural depending on the reference.
"Affiliate" shall mean as to any party, any Person which
directly or indirectly, is in control of, is controlled by, or is under common
control with, such party, including any person who would be treated as a member
of a controlled group under Section 414 of the Internal Revenue Code of 1986, as
amended (the "Code"), and any officer or director of such party and, as to a
party who is a natural person, such person's spouse, parents, siblings and
lineal descendants. For purposes of this definition, an entity shall be deemed
to be "controlled by" a Person if the Person possesses, directly or indirectly,
power either to (i) vote ten percent (10%) or more of the securities (including
convertible securities) having ordinary voting power of such entity or (ii)
direct or cause the direction of the management or policies of such entity
whether by contract or otherwise.
"AppNet Common Stock" shall mean the $.0005 par value per
share common stock of AppNet.
"Business" shall mean the business of the Company, AppNet or
Sub, as the case may be.
"Contract" shall mean a note, bond, mortgage, contract,
license, lease, sublease, covenant, commitment, power of attorney, proxy,
indenture, or other agreement or arrangement,
<PAGE>
oral or written, to which the Company is a party or by which the Company or
any of its assets or property is bound, other than Government Contracts.
"Encumbrance" shall mean any claim, lien, pledge, option,
charge, easement, security interest, right-of-way, encumbrance, mortgage or
other right.
"GAAP" shall mean United States generally accepted accounting
principles, consistently applied.
"Government" shall mean any agency or instrumentality of the
United States of America, any state or territory or subdivision thereof or any
foreign country and any agency or instrumentality of any of the foregoing.
"Government Contracts" shall mean any contracts between the
Company and the Government, including, without limitation, any grants,
cooperative agreements and other transactions between the Company and the
Government, and any contract to which the Company is a party where the
Government is the ultimate customer.
"Governmental or Regulatory Authority" shall mean any court,
tribunal, arbitrator, authority (including any quasi-governmental authority),
agency, commission, official or other instrumentality of the United States, any
foreign country or any domestic or foreign state, county, city or other
political subdivision.
"Intellectual Property Rights" shall mean all (i) patents,
patent applications, patent disclosures and inventions, (ii) trademarks, service
marks, trade dress, trade names, logos and corporate names and registrations and
applications for registration thereof together with all of the goodwill
associated therewith, (iii) copyrights (registered or unregistered) and
copyrightable works and registrations and applications for registration thereof,
(iv) mask works and registrations and applications for registration thereof, (v)
computer software, data, data bases and documentation thereof, (vi) trade
secrets and other confidential information (including, without limitation,
ideas, 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
official and marketing plans and customer and supplier lists and information),
(vii) other intellectual property rights, (viii) "technical data" as defined in
48 Code of Federal Regulations, Chapter 1, and (ix) copies and tangible
embodiments thereof (in whatever form or medium).
"Legal Requirement" shall mean (i) with respect to any Person,
any judgment, decree, injunction, order, writ or ruling to or by which such
Person is a party or is bound, or (ii) any law, ordinance, statute, rule,
regulation, code or other requirement of any Federal, state, municipal or other
governmental, administrative or judicial body, agency or authority or the common
law.
"Liabilities" shall mean, without limitation, any direct or
indirect liability, indebtedness, guaranty, endorsement, claim, loss, damage,
deficiency, cost, expense, obligation or responsibility, either accrued,
absolute, contingent, mature, unmature or otherwise and
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whether known or unknown, fixed or unfixed, choate or inchoate, liquidated or
unliquidated, secured or unsecured.
"Material Adverse Effect" shall mean a material adverse effect
on (i) the assets, the business or the condition (financial or otherwise),
properties, liabilities, reserves, working capital, earnings, technology,
prospects or relations with customers, suppliers, distributors, employees or
regulators, or (ii) the right or ability to consummate the transactions
contemplated hereby.
"Person" shall mean any person, limited liability company,
partnership, trust, corporation, business, group, Government or other entity.
"Tax" or "Taxes" shall mean all federal, state, local, foreign
and other taxes, assessments or other Government charges, including, without
limitation, income, estimated income, business, occupation, franchise, property,
sales, transfer, use, employment, commercial rent or withholding taxes,
including interest, penalties and additions in connection therewith.
"Tax Return" means any return, report, information return or
other document (including any related or supporting information) required to be
supplied, or actually supplied, to a Governmental or Regulatory Authority with
respect to Taxes.
2. PURCHASE AND SALE OF PURCHASED ASSETS
2.1. PURCHASED ASSETS. On the basis of the representations, warranties,
covenants and agreements and subject to the satisfaction or waiver of the
conditions set forth herein, the Company hereby agrees to sell, convey, assign,
transfer and deliver to Sub and Sub hereby agrees to purchase, accept and take
possession from the Company, except as set forth on SCHEDULE 2.1, all of the
assets, properties and other rights owned or leased by, licensed or used by, the
Company (the "Purchased Assets"), including, without limitation:
(a) all of the Company's cash on hand, cash in banks, cash equivalents,
bank and mutual fund accounts, trade and other notes and accounts receivable,
deposits, investments, securities, advance payments, prepaid items and expenses,
deferred charges, rights of offset and credits and claims for refunds;
(b) all of the Company's rights arising under the Contracts and any
sales orders, contract extensions, rebids, existing proposals, bids,
opportunities pursued, purchase orders and other commitments;
(c) all of the Company's assets set forth on SCHEDULE 4.12(b);
(d) all of the Company's rights in and to trade names and service
names, assumed names, marks, copyrights, patents, and all applications and
registrations with respect to any of the foregoing, and all telephone and fax
numbers, electronic addresses and passwords, including, without limitation, the
Company Intellectual Property Rights and the Company Third Party Intellectual
Property Rights (as such terms are defined in Section 4.20);
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(e) all of the Company's computer and telecommunication equipment,
software programs, source codes, object codes, information systems, proprietary
interfaces, routines, modules, procedures, functions, program specifications and
related documentation incidental to or used in performing the Contracts, and all
rights under licenses relating to the use thereof;
(f) all of the Company's supplier, distributor and similar agreements
and other intangible assets incidental to or used in performing the Contracts;
(g) all of the Company's written or electronic information relating to
the customers (including, without limitation, customer lists, customer files and
other written accounts of the Company) incidental to or used in performing the
Contracts, and other reasonably and specifically requested information, in each
case, to the extent transferable, sales and marketing data, principal contacts,
and pricing information and copies of accounting records and information and
contract performance information;
(h) all of the Company's permits, franchises and licenses incidental to
or used in performing the Contracts, to the extent such licenses are
transferable under applicable law;
(i) all of the Company's goodwill and going concern value relating to
the Company's Business;
(j) all of the Company's security deposits, rights to escrows and
prepaid items relating to the Contracts;
(k) all of the Company's other tangible assets, including office
furniture, office equipment and supplies, computer hardware and software,
leasehold improvements;
(l) all of the Company's books, records, manuals, documents,
correspondence, sales and credit reports, customer lists, literature, brochures,
advertising material and the like, excluding, however, the Company's minute
books;
(m) all of the Company's rights to the Business as it is presently
being conducted;
(n) all of the Company's rights under leases for real or personal
property, and all of the Company's rights under all other leases, contracts,
agreements and purchase and sales orders; and
(o) all of the Company's claims, claims in action, causes of action and
judgments.
2.2. ASSUMED LIABILITIES. On the basis of the representations,
warranties, covenants and agreements and subject to the satisfaction or waiver
of the conditions set forth herein, Sub shall assume, discharge and perform when
lawfully due only the obligations and duties of the Company to perform under the
Contracts identified on SCHEDULE 4.13(a) and SCHEDULE 4.13(b) existing on or
after the Closing Date, except for those Contracts identified as not being
assumed on SCHEDULE 4.13(a) (the "Assumed Liabilities").
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2.3. NON-ASSUMPTION OF LIABILITIES. Except for the Assumed Liabilities,
Sub shall not assume, and the Company shall remain liable for, any and all
Liabilities or Encumbrances of the Company, whatsoever, including, without
limitation:
(a) all bank debt, senior debt or other debt obligations of the
Company;
(b) liens and encumbrances to which the Purchased Assets are subject;
(c) any liability or obligation of the Company or any other person or
entity, absolute or contingent, known or unknown, not expressly agreed to be
assumed pursuant to the provisions of Section 2.2;
(d) any liability or obligation relating to Taxes of the Company,
including any interest or penalties related thereto;
(e) any liability or obligation that is inconsistent with the Company's
and the Stockholders' representations and warranties in this Agreement,
including, without limitation, the schedules and exhibits hereto;
(f) any liability or obligation relating to any breach or
nonperformance under any of the Assumed Liabilities to the extent such breach or
nonperformance existed on or prior to the Closing Date;
(g) any liability or obligation, whether in tort, contract or for
violation of any law, statute, rule or regulation by the Company or any officer,
director, employee or agent of the Company, that arises out of or results from
any act, omission, occurrence or state of facts on or prior to the Closing Date;
(h) any liability or obligation of the Company with respect to or
arising out of any Benefit Plan (as defined in Section 4.9);
(i) any legal, accounting, brokerage, finder's fee or other expenses
incurred by the Company in connection with this Agreement or the consummation of
the transactions contemplated hereunder;
(j) any obligation relating to overpayments, billing errors or similar
adjustments with respect to payments received by the Company prior to the
Closing Date;
(k) any warranty or performance liability, whether based upon the
performance of the Company or any subcontractor or agent of the Company, under
any performance or contract deliverable that has or will be performed or
delivered prior to the Closing Date; and
(l) any liability payable to an Affiliate of the Company or the
Stockholders.
2.4. CONVEYANCE OF THE PURCHASED ASSETS. On the Closing Date, the
Company shall convey good and marketable title to the Purchased Assets to Sub
free and clear of any Encumbrances, other than the Assumed Liabilities.
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2.5. CONSIDERATION FOR PURCHASE OF ASSETS. In consideration for the
transfer, sale and delivery to Sub of the Purchased Assets, AppNet will pay to
the Company the following amounts (in the aggregate, the "Purchase Price")
consisting of:
(a) $3,500,000 in cash payable at the Closing (as defined in Section
3.1) (the "Cash Payment");
(b) An aggregate of 270,000 shares of AppNet Common Stock (the "Stock
Payment"); and
(c) The Contingent Amount (as defined in Section 3.3(a)), if any,
pursuant to the terms and conditions of Section 3.3 hereof.
3. CLOSING
3.1. TIME AND PLACE OF THE CLOSING. The closing of the Asset Purchase
and the consummation of the other transactions contemplated by this Agreement
(the "Closing") shall take place at the offices of Tucker Flyer, a professional
corporation, at 1615 L Street, N.W., Suite 400, Washington, D.C. 20036, as soon
as practicable after all conditions to the Closing shall have been satisfied or
waived, or at such other time and date as the parties hereto may mutually agree,
which date shall be referred to as the "Closing Date."
3.2. PROCEDURE AT CLOSING. On the Closing Date, the parties agree to
take the following steps listed below (provided, however, that upon their
completion all such steps shall be deemed to have occurred simultaneously):
(a) AppNet and Sub shall deliver to the Company the closing documents
specified in Section 8.
(b) AppNet shall pay the Cash Payment by wire transfer of immediately
available funds to accounts designated by the Company. (c) AppNet shall issue
and deliver the shares of AppNet Common Stock comprising the Stock Payment. (d)
The Stockholders and the Company shall deliver to AppNet and Sub the closing
documents specified in Section 7.
(e) The Company shall deliver to Sub such bills of sale, deeds,
assignments, certificates of title and other documents as may be reasonably
requested by Sub in order to convey good and marketable title to all of the
Purchased Assets, free and clear of all Encumbrances (other than the Assumed
Liabilities) and in order to carry out the intentions and purposes of this
Agreement.
3.3. PAYMENT OF CONTINGENT AMOUNT.
(a) In the event that for the period commencing March 30, 1999 and
ending March 31, 2000 (the "Earn Out Period"), Sub has (i) adjusted gross
revenue (i.e., gross revenue
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MINUS (a) sales and similar taxes (b) returns and (c) doubtful accounts
receivable attributable to such revenue) ("Adjusted Gross Revenue") of at least
$4,500,000 and (ii) earnings before interest, taxes, depreciation and
amortization ("EBITDA") (as a percentage of Adjusted Gross Revenue) of at least
20%, AppNet shall pay to the Company such portion of $3,500,000 as is determined
in accordance with Exhibit A (the "Contingent Amount"). For purposes of
determining Sub's financial performance during the Earn Out Period, the
accounting method applied shall be on an accrual basis consistent with GAAP. In
addition, no AppNet overhead charges shall be allocated in determining the
financial results of Sub during the Earn Out Period. Revenue from consulting
engagements intended to improve electronic retail payments, electronic data
interchange or internet commerce which are won, managed and delivered upon by
Sub (post-Closing) shall be counted at 110% for purposes of calculating Adjusted
Gross Revenue and determining the applicable Contingent Amount, and the
resulting EBITDA from such revenue shall be counted at 110% for purposes of
Exhibit A and determining the applicable Contingent Amount.
(b) Subject to the terms of Section 3.3(c), any Contingent Amount
payable shall be paid by AppNet to the Company not later than 45 days after the
closing and review of Sub's books for the Earn Out Period. The Contingent Amount
shall be paid in cash, up to the maximum amount specified on Exhibit A.
(c) In the event that, on or before the date the Contingent Amount is
payable to the Company pursuant to this Section 3.3 (the "Contingent Payment
Date"), AppNet has sent a Claim Notice (as defined in Section 9.2(b)), AppNet
shall be entitled to withhold from the Contingent Amount so payable an amount
reasonably necessary to reimburse AppNet for Damages (as defined in Section
9.1(a)) relating to any Claim (as defined in Section 9.2) for which a Claim
Notice has been sent by AppNet prior to the Contingent Payment Date. Should
AppNet be entitled to indemnification for Damages pursuant to Article 9, AppNet
shall be entitled to offset the Contingent Amount and, upon resolution of all
Claims for which a Claim Notice has been sent on or before the Contingent
Payment Date, AppNet shall pay to the Company any remaining portion of the
Contingent Amount not so offset by AppNet.
(d) In the event that, during the Earn Out Period, AppNet sells all of
the capital stock of Sub, Sub sells all or substantially all of its assets, or
Sub merges with another entity, whether or not Sub is the surviving entity, and
such event, in the reasonable view of the Stockholders, materially adversely
affects Sub's ability to earn Adjusted Gross Revenue or achieve an EBITDA
necessary to require AppNet to pay to the Company any portion of the Contingent
Amount, the parties hereto shall negotiate in good faith to adjust the
provisions of this Section 3.3 and Exhibit A, in a mutually agreeable manner. In
the event (i) that the parties hereto do not agree that such an event occurred
or materially adversely affects Sub's ability to earn Adjusted Gross Revenue or
achieve an EBITDA necessary to require AppNet to pay to the Company any portion
of the Contingent Amount, or (ii) that such negotiations do not result in a
mutually agreeable adjustment, any party hereto can avail itself of the
arbitration provisions contained in Section 11.11 hereof.
(e) In the event that any two Stockholders have resigned during the
Earn Out Period without Good Reason (as defined in the Senior Management
Agreement attached hereto as Exhibit C), the Contingent Amount payable to the
Company shall be reduced by the pro rata
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amount (based on such resigned Stockholders' percentage ownership of the
Company) attributable to such resigned Stockholders.
3.4. PLEDGE OF PORTION OF STOCK PAYMENT. Notwithstanding anything contained in
this Agreement to the contrary, AppNet shall withhold from the Stock Payment
payable at the Closing a total of 68,266 shares of AppNet Common Stock (the
"Pledged Stock"), which shall be held by AppNet pursuant to a Stock Pledge
Agreement in the form attached hereto as Exhibit B as collateral for any amounts
payable by the Company or the Stockholders to AppNet pursuant to Article 9. In
the event the Company or the Stockholders shall have an indemnification
obligation to AppNet or Sub, AppNet shall be permitted to seek satisfaction of
such obligation through an offset against the Pledged Stock in accordance with
the terms of the Stock Pledge Agreement. No limitation on such right of offset
shall otherwise affect a Buyer Party's (as defined in Section 9.1) rights
hereunder or otherwise. The remedy of offset shall be in addition to and not in
limitation of any injunctive relief or other rights or remedies to which AppNet
or any other Buyer Party is or may be entitled at law or equity, under this
Agreement.
4. REPRESENTATIONS AND WARRANTIES OF THE COMPANY AND THE STOCKHOLDERS
To induce AppNet and Sub to enter into this Agreement and to consummate
the transactions contemplated by this Agreement, the Company and the
Stockholders, jointly and severally, represent and warrant to AppNet and Sub, as
of the date hereof and as of the Closing Date, as set forth below:
4.1. ORGANIZATION. The Company is a corporation duly organized, validly
existing and in good standing under the laws of the State of Georgia.
4.2. POWER AND AUTHORITY. The Company has all requisite corporate power
and authority to own, lease and operate its properties and to conduct its
Business as it is presently being conducted and as it has been conducted in the
past. Except as set forth on SCHEDULE 4.2, the Company is duly qualified or
licensed as a foreign corporation in good standing in each jurisdiction in which
the character of its properties or the nature of its business activities
requires such qualification, except where the failure to be so qualified or
licensed would not have a Material Adverse Effect on the Company.
4.3. AUTHORITY FOR AGREEMENT. The execution, delivery and performance
of this Agreement and the consummation of the transactions contemplated hereby
have been authorized by all requisite corporate action on the part of the
Company. The Company has full corporate power, authority and legal right to
enter into this Agreement and to consummate the transactions contemplated
hereby. Each of the Stockholders has the legal capacity to enter into this
Agreement and to consummate the transactions contemplated hereby. This Agreement
has been duly executed and delivered by each of the Stockholders and is a legal,
valid and binding obligation of each of the Stockholders enforceable against
each of the Stockholders in accordance with its terms, except as enforceability
may be limited by applicable bankruptcy, insolvency, reorganization, moratorium
or other similar laws affecting the enforcement of creditors' rights in general.
This Agreement has been duly executed and delivered by the Company and, assuming
the due authorization, execution and delivery by AppNet and Sub of
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this Agreement, this Agreement is a legal, valid and binding obligation of the
Company enforceable against the Company in accordance with its terms, except as
enforceability may be limited by applicable bankruptcy, insolvency,
reorganization, moratorium or other similar laws affecting the enforcement of
creditors' rights in general.
4.4. NO VIOLATION TO RESULT. The execution, delivery and performance of
this Agreement and the consummation of the transactions contemplated hereby and
the fulfillment of the terms hereof, except as set forth in SCHEDULE 4.4: (i)
are not in violation or breach of, do not conflict with or constitute a default
under the Certificate of Incorporation or Bylaws of the Company or any Contract
to which the Company is a party, (ii) will not accelerate or permit the
acceleration of the performance on the part of the Company required by any of
the terms of any Contract to which the Company is a party; (iii) will not be an
event which, after notice or lapse of time or both, will result in any such
violation, breach, conflict, default, or acceleration; (iv) will not result in a
violation under any law, judgment, decree, order, rule, regulation, permit or
other legal requirement of any Governmental or Regulatory Authority, court or
arbitration tribunal whether federal, state, provincial, municipal or local
(within the U.S. or otherwise) at law or in equity, which is applicable to the
Company; and (v) will not result in the creation or imposition of any
Encumbrance in favor of any Person upon any of the Purchased Assets.
4.5. CAPITALIZATION.
(A) SCHEDULE 4.5 sets forth, with respect to the Company, (i) the
number of authorized shares of each class of its capital stock, (ii) the number
of issued and outstanding shares of each class of its capital stock and the
record owner thereof, and (iii) the number of shares of each class, if any,
which are held in treasury. There are no outstanding or authorized rights,
options, warrants, convertible securities, subscription rights, conversion
rights, exchange rights or other agreements or commitments of any kind that
could require the Company to issue or sell any shares of the Company's Common
Stock (or securities convertible into or exchangeable for shares of its Common
Stock). There are no outstanding stock appreciation, phantom stock, profit
participation or other similar rights with respect to the Company. There are no
proxies, voting rights or other agreements or understandings with respect to the
voting or transfer of the capital stock of the Company.
(b) The Stockholders are the sole legal and beneficial holders of the
issued and outstanding shares of capital stock of the Company, and the
Stockholders own such shares as are set forth opposite their respective names on
SCHEDULE 4.5.
4.6. FINANCIAL STATEMENTS.
(A) SCHEDULE 4.6 includes true, complete and correct copies of (i) the
unaudited balance sheet of the Company as of December 31, 1998, and unaudited
statements of income, cash flows and retained earnings for the twelve-months
ended December 31, 1998 (collectively, the "Annual Financials"), and (ii) the
unaudited interim balance sheet of the Company (the "Current Balance Sheet") as
of February 28, 1999 (the "Balance Sheet Date") and the unaudited interim
statements of income, cash flows and retained earnings of the Company for the
two months ended February 28, 1999 (collectively, the "Interim Financials" and
together with the Annual Financials, the "Financial Statements"). The Financial
Statements have been
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prepared in accordance with GAAP consistently applied. Each of the balance
sheets included in the Financial Statements presents fairly the financial
condition of the Company as of the dates indicated thereon, and each of the
statements of income, cash flows and retained earnings included in the Financial
Statements presents fairly the results of its operations for the periods
indicated thereon. During the periods covered by the Financial Statements and
since the Balance Sheet Date, there has been no material change in the Company's
accounting policies. There are no material, special or non-recurring items of
income or expense during the periods covered by the Financial Statements and the
balance sheets included in the Financial Statements do not reflect any write-up
or revaluation increasing the book value of any assets, except as specifically
disclosed in the notes thereto.
(b) The minute book(s) of the Company, all of which have been made
available to AppNet and Sub, contains accurate and complete records of all
meetings held of, and corporate action taken by, the stockholders, the Board of
Directors, and committees of the Board of Directors of the Company, and no
meeting of any such stockholders, Board of Directors, or committee has been held
for which minutes have not been prepared as of the date hereof and are not
contained in such minute book.
4.7. LIABILITIES AND OBLIGATIONS.
(a) Except as disclosed on SCHEDULE 4.7(a), to the best of the
Company's and the Stockholders' knowledge there are no Liabilities or
obligations of the Company, other than: (i) those Liabilities reflected on the
Current Balance Sheet and not previously paid or discharged; and (ii) those
Liabilities incurred after the Balance Sheet Date arising in the ordinary course
of business, which were incurred consistent with past practice under any
contract, commitment or agreement specifically disclosed on any schedule to this
Agreement.
(B) SCHEDULE 4.7(b) sets forth a summary description of all advance
payments or deposits held by the Company and reflected in the Financial
Statements and the related obligations thereunder.
4.8. ADVERSE CHANGES. From December 31, 1998 and except as disclosed on
SCHEDULE 4.8: (i) there has been no change in the condition (financial or
otherwise), Business, net worth, assets, properties, Liabilities or obligations
(fixed, contingent, known, unknown or otherwise) of the Company which has had or
is likely to have a Material Adverse Effect on the Company, and there has been
no occurrence, circumstance or combination thereof which might reasonably be
expected to result in any such Material Adverse Effect before or after the
Closing Date; (ii) the Company has not declared or paid any dividend or
distribution in respect of the capital stock, or any direct or indirect
redemption, purchase or other acquisition of any of the capital stock of the
Company, and (iii) the Company has complied with all of the covenants set forth
in Section 6.3, to the same extent as if this Agreement had been executed on
December 31, 1998.
4.9. EMPLOYEE MATTERS.
(a) All employee benefit plans, programs, policies and arrangements
(whether formal or informal, written or unwritten, and whether maintained for
the benefit of a single individual or more than one individual) maintained or
contributed to by the Company for the
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benefit of any current or former employee of the Company or in which such
employees are entitled to participate are listed in SCHEDULE 4.9(A) (the
"Benefit Plans"). With respect to each Benefit Plan, true, correct and complete
copies of all of the following documents, if applicable, will be delivered or
made available to AppNet and Sub prior to the Closing Date: (i) all plan
documents and amendments thereto; (ii) all written descriptions of any oral
plans or policies; (iii) all trust agreements; (iv) all annuity contracts,
insurance policies or contracts and service agreements; (v) the three (3) most
recent Forms 5500 and any financial statements attached thereto; and (vi) the
most recent summary plan description. Except as set forth on SCHEDULE 4.9(A),
and except as would not reasonably be expected to have a Material Adverse Effect
on the Company, each Benefit Plan and the administration thereof complies, and
has at all times complied, with the terms of such Benefit Plan and with the
requirements of all applicable law, including, without limitation, the Employee
Retirement Income Security Act of 1974, as amended ("ERISA"), and the Code.
Neither the Company, nor any Controlled Group Member has incurred any liability
for any Tax imposed under Sections 4971 through 4980B of the Code or civil
liability under Sections 502(i) or (l) of ERISA. The "amount of unfunded benefit
liabilities" within the meaning of Section 4001(a)(18) of ERISA does not exceed
zero with respect to any Benefit Plan subject to Title IV of ERISA. No Benefit
Plan is a "multiemployer plan" within the meaning of Section 3(37) of ERISA. No
Benefit Plan provides health or death benefit coverage to any employee or his
spouse or dependents beyond the termination of an employee's employment, except
as required by Part 6 of Subpart B of Title I of ERISA or Section 4980B of the
Code. No "reportable event" (within the meaning of Section 4043 of ERISA) has
occurred with respect to any Benefit Plan subject to Title IV of ERISA or any
such plan maintained by a Controlled Group Member since the effective date of
said Section 4043. The Company has no liability (whether actual, contingent or
otherwise) with respect to any employee benefit plan or arrangement sponsored or
maintained by a Controlled Group Member. No suit, actions or other litigation
(excluding claims for benefits incurred in the ordinary course of plan
activities) have been brought against or with respect to any Benefit Plan, and
no suit, action, or other litigation is threatened by, against, or relating to
any Benefit Plan and the Company does not have any knowledge of any fact that
could form the basis for any such suit, action or litigation. No "prohibited
transaction" within the meaning of Sections 406 or 407 of ERISA or Section 4975
of the Code has occurred with respect to any Benefit Plan. No Benefit Plan is
presently under audit or examination by the IRS, the Department of Labor, or any
other Governmental or Regulatory Authority, and no matters are pending with
respect to any Benefit Plan under the IRS Voluntary Compliance Resolution
program, its Closing Agreement Program, or any other similar program. All
contributions to Benefit Plans that were required to be made under such Benefit
Plans will have been made as of the Balance Sheet Date, and all benefits accrued
under any unfunded Benefit Plan will have been paid, accrued or otherwise
adequately reserved in accordance with GAAP as of such date, and the Company
will have performed by the Closing Date any obligations required to be performed
as of such date under all Benefit Plans. No Benefit Plan contains any term or
provision or is subject to any law that would prohibit the transactions
contemplated by this Agreement, or that would give rise to the vesting of
benefits, payments, or liabilities as a result of the transactions contemplated
by this Agreement.
(b) SCHEDULE 4.9(b) contains a complete and correct list of all
employees of the Company as of the date hereof and the current compensation rate
payable to each such employee. Except as set forth in SCHEDULE 4.9(b), (i) the
terms of employment or engagement of all directors, officers, employees, agents,
consultants and professional advisers of the Company
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are such that their employment or engagement may be terminated upon not more
than two weeks' notice given at any time and without liability for payment of
compensation or damages, (ii) there are no severance payments which are or could
become payable by the Company to any director, officer or other employee of the
Company under the terms of any oral or written agreement or commitment or any
law, custom, trade or practice, and (iii) there are no agreements, contracts or
commitments, oral or written, between the Company and any employee, consultant
or independent contractor.
(c) The Company is not bound by or subject to (and none of its assets
or properties are bound by or subject to) any arrangement with any labor union.
No employees of the Company are or ever have been represented by any labor union
or covered by any collective bargaining agreement while employed by the Company,
and no campaign to establish such representation is in progress. There is no
pending or threatened labor dispute involving the Company and any group of their
employees nor has the Company experienced any labor interruptions. The Company
is and has been in compliance with all applicable laws respecting employment and
employment practices, terms and conditions of employment, and wages and hours,
including without limitation any such laws regarding employment documentation,
minimum wage and hours, workers' compensation, family and medical leave, the
Immigration Reform and Control Act, and occupational safety and health
requirements, and the Company has not engaged in any unfair labor practice. All
persons treated by the Company as independent contractors for any purpose do
satisfy and have satisfied the requirements of law to be so treated, and the
Company has fully and accurately reported the amounts paid by the Company to or
on behalf of such persons on IRS Forms 1099 when required to do so. No
individual who has performed services for or on behalf of the Company, and who
has been treated by the Company as an independent contractor, is classifiable as
a "leased employee," within the meaning of Section 414(n)(2) of the Code, with
respect to the Company or with respect to any customer of the Company.
4.10. TAXES.
(a) The Company has filed or caused to be filed with the appropriate
Governmental or Regulatory Authority any and all Tax Returns required to be
filed by it as of the date hereof, or requests for extensions to file Tax
Returns which have been filed have been timely filed or granted and have not
expired, and all such Tax Returns are true, complete and accurate in all
respects, except to the extent that such failures to file, have extensions
granted that remain in effect or be complete and accurate in all respects, as
applicable, individually or in the aggregate, would not have a Material Adverse
Effect on the Company. The Company has paid all Taxes shown as due, claimed to
be due by any Governmental or Regulatory Authority, or accruable with respect to
periods through the Closing Date, except for such Taxes as (i) are fully
reserved for in the Current Balance Sheet or (ii) were incurred after the
Balance Sheet Date in the ordinary course of business and are not due and
payable as of the Closing Date. The Company has complied in all respects with
all applicable laws, rules and regulations relating to the payment and
withholding of Taxes (including, without limitation, withholding of Taxes
pursuant to Sections 1441 and 1442 of the Code or similar provisions under any
foreign laws and withholding with respect to employee wages) and has, within the
time and manner prescribed by law, withheld and paid over to the proper
Governmental or Regulatory Authority all amounts required to be withheld and
paid over under all applicable laws. No federal, state, local or
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foreign audits or other administrative proceedings or court proceedings
("Audits") exist or have been initiated with regard to any Taxes or Tax Returns
of the Company, and the Company has not received any notice that such an Audit
is pending or threatened with respect to any Taxes due from or with respect to
the Company or any Tax Return filed or required to be filed by or with respect
to the Company.
(b) The Company has delivered to AppNet complete and accurate copies of
all filed federal income Tax Returns relating to taxable years beginning on or
prior to the Closing Date, and all examination reports and statements of
assessment or deficiency issued relating to such Tax Returns, and has delivered
or made available to AppNet complete and accurate copies of all other filed Tax
Returns of the Company, together with all related examination reports and
statements of assessment or deficiency for all periods beginning on or prior to
the Closing Date.
(c) The Company has not been informed by any Governmental or Regulatory
Authority that such authority believes that the Company was required to file any
Tax Return that has not been filed. (d) The Company will not be required to
include any amounts in income for taxable years ending after the Closing Date
pursuant to Section 481(a) of the Code or any similar provision of state or
local law by reason of a change in accounting method occurring in a taxable year
ending on or before the Closing Date, and none of the Company nor the
Stockholders has any knowledge that any Governmental or Regulatory Authority has
proposed any change in method of accounting that would require inclusion of such
amounts.
(e) The Company has not undergone a change in its method of accounting
resulting in an adjustment to its taxable income pursuant to Section 481(a) of
the Code which would be required to be included in income of the Company for any
taxable year ending after the Closing Date.
4.11. SUBSIDIARIES. The Company has no debt, equity or other investment
or interest in any Person or any joint venture with any Person. The Company has
no commitments to contribute to the capital of, make loans to or share losses
of, any Person.
4.12. PROPERTY.
(a) The Company has never owned or leased any real property.
(b) SCHEDULE 4.12(b) sets forth an accurate list of all the Company
owned and leased personal property (i) as of the Balance Sheet Date, or (ii)
acquired since the Balance Sheet Date, including in each case complete and
correct copies of leases for equipment and also including an indication as to
which assets are currently owned, or were formerly owned, by any current or
former stockholders of the Company or business or personal Affiliates of the
Company or any current or former stockholder of the Company. All of the vehicles
and other material machinery and equipment listed on SCHEDULE 4.12(b) are in
good working order and condition, ordinary wear and tear excepted. All fixed
assets used by the Company that are material to the operation of the Business,
as it is presently being conducted and as it is proposed to be conducted in the
future, are either owned by the Company or leased under an agreement listed on
SCHEDULE 4.12(b).
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(c) Except as set forth on SCHEDULE 4.12(c), the Company has good and
marketable title to the Purchased Assets, free and clear of any and all
Encumbrances and defects in title. The Purchased Assets, taken together, are
adequate for the operation of the Company's Business as it is presently being
conducted and as it is proposed to be conducted in the future. Except for the
need to obtain the consent of the parties identified on SCHEDULE 4.4, the
Company has the power to convey, transfer and assign ownership of the Purchased
Assets and the Assumed Liabilities without the necessity of any approvals or
consents of any person.
4.13. CONTRACTS. SCHEDULES 4.13(a) and 4.13(b) together constitute an
accurate and complete list of each Contract. Each Contract is in full force and
effect, is a valid, binding and enforceable obligation by or against the Company
and the other parties thereto, and, except for the need to obtain the consent of
each party to the Contracts (other than the Company) set forth on SCHEDULE
4.13(a) and SCHEDULE 4.13(b), to the best of the Company's and the Stockholders'
knowledge, no event has occurred which constitutes or, with the giving of notice
or passage of time, or both, would constitute, a default or breach thereunder.
Prior to the Closing Date, the Company will deliver or will cause to be
delivered or will make available to AppNet and Sub correct and complete copies
of each Contract set forth on SCHEDULE 4.13(b) and all amendments thereto.
Except as set forth on SCHEDULE 4.13(b), there exists no restrictive covenants
of any nature whatsoever in any of the Contracts set forth on SCHEDULE 4.13(b).
For each Contract set forth on SCHEDULE 4.13(b), the cost of any remaining
performance does not exceed the remaining revenue to be earned under such
Contract.
4.14. GOVERNMENT CONTRACTS. The Company is not, and has never been, a
party to any Government Contract.
4.15. LITIGATION. Except as set forth in SCHEDULE 4.15, there is no
litigation, suit, proceeding, action, claim, demand or, to the best of the
Company's and the Stockholders' knowledge, investigation, at law or in equity,
pending or to the knowledge of the Company and the Stockholders threatened
against or affecting the Company before any court, agency, authority or
arbitration tribunal, including, without limitation, any product liability,
workers' compensation or wrongful dismissal claims, or claims, actions, suits,
demands or proceedings relating to toxic materials, hazardous substances,
pollution or the environment. To the knowledge of the Company and the
Stockholders, there are no facts that would likely result in any such
litigation, suit, proceeding, action, claim or investigation. The Company is not
subject to or in default with respect to any notice, order, writ, injunction or
decree of any court, agency, authority or arbitration tribunal.
4.16. COMPLIANCE WITH LAWS. Except as set forth in SCHEDULE 4.16, the
Company has complied and is currently in compliance with all laws, regulations,
rules, orders, permits, judgments, decrees and other requirements and policies
imposed by any Governmental or Regulatory Authority applicable to it, its
properties or the operation of its Business. The Company has not received any
notice or citation for noncompliance with any of the foregoing, and there exists
no condition, situation or circumstance, nor has there existed such a condition,
situation or circumstance, which, after notice or lapse of time, or both, would
constitute noncompliance with or give rise to future liability with regard to
any of the foregoing. The Company has all licenses, permits, approvals,
qualifications or the like, from any Government,
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Governmental or Regulatory Authority or any third party necessary for the
conduct of the Company's Business, as it is presently being conducted.
4.17. ENVIRONMENTAL AND SAFETY MATTERS.
(a) For purposes of this Agreement, the term "Environmental and Safety
Requirements" shall mean all federal, state, local and foreign statutes,
regulations, ordinances and other provisions having the force or effect of law,
all judicial and administrative orders and determinations, all contractual
obligations and all common law, in each case concerning public health and
safety, worker health and safety and pollution or protection of the environment
(including, without limitation, all those relating to the presence, use,
production, generation, handling, transport, treatment, storage, disposal,
distribution, labeling, testing, processing, discharge, Release, threatened
Release, control or cleanup of any hazardous or otherwise regulated materials,
substances or wastes, chemical substances or mixtures, pesticides, pollutants,
contaminants, toxic chemicals, petroleum products or byproducts, asbestos,
polychlorinated biphenyls, noise or radiation); "Release" shall have the meaning
set forth in CERCLA (as defined below); and "Environmental Lien" shall mean any
lien, whether recorded or unrecorded, in favor of any Governmental or Regulatory
Authority, relating to any liability of the Company arising under any
Environmental and Safety Requirements.
(b) Except as set forth on SCHEDULE 4.17, to the best of the Company's
and the Stockholders' knowledge:
(i) The Company has complied with and is currently in
compliance with all Environmental and Safety Requirements, and the Company has
not received any oral or written notice, report or information regarding any
Liabilities (whether accrued, absolute, contingent, unliquidated or otherwise)
or any corrective, investigatory or remedial obligations arising under
Environmental and Safety Requirements which relate to the Company or any of its
properties or facilities.
(ii) Without limiting the generality of the foregoing, the
Company has obtained and complied with, and is currently in compliance with, all
permits, licenses and other authorizations that may be required pursuant to any
Environmental and Safety Requirements for the occupancy of its properties or
facilities or the operation of its Businesses as it is presently being conducted
and as it has been conducted in the past. A list of all such permits, licenses
and other authorizations which are material to the Company is set forth on
SCHEDULE 4.17 attached hereto.
(iii) Neither this Agreement nor the consummation of the
transactions contemplated by this Agreement shall impose any obligations on the
Company or otherwise for site investigation or cleanup, or notification to or
consent of any Governmental or Regulatory Authorities or third parties under any
Environmental and Safety Requirements (including, without limitation, any so
called "transaction-triggered" or "responsible property transfer" laws and
regulations).
(iv) The Company has not treated, stored, disposed of,
arranged for or permitted the disposal of, transported, handled or Released any
substance (including, without
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limitation, any hazardous substance), or owned, occupied or operated any
facility or property, so as to give rise to Liabilities of the Company for
response costs, natural resource damages or attorneys fees pursuant to the
Comprehensive Environmental Response, Compensation and Liability Act of 1980, as
amended ("CERCLA"), or any other Environmental and Safety Requirements.
(v) The Company has not, either expressly or by operation of
law, assumed or undertaken any material liability or corrective, investigatory
or remedial obligation of any other Person relating to any Environmental and
Safety Requirements.
(vi) No Environmental Lien has attached to any property leased
or operated by the Company.
4.18. CUSTOMERS; SUPPLIERS.
(a) Except as set forth on SCHEDULE 4.18(a), no single customer
accounted for more than 5% of the Company's revenues for the fiscal years ended
December 31, 1997 or December 31, 1998. Except as set forth on SCHEDULE 4.18(a),
no customer listed on SCHEDULE 4.18(a) (a "Significant Customer") has canceled
or otherwise terminated or threatened to cancel or otherwise terminate its
relationship with the Company, or during such periods has materially decreased
its usage or purchase of the Company's services or products. Except as set forth
on SCHEDULE 4.18(a), no Significant Customer has any plan or intention to
terminate, cancel or otherwise materially modify its relationship with the
Company or materially decrease or limit its usage, purchase or distribution of
the services or products of the Company.
(b) The relationships of the Company with its suppliers are good
commercial working relationships and, except as set forth on SCHEDULE 4.18(b),
no supplier has during the last twelve months terminated or threatened to
terminate, its relationship with the Company or has during the last twelve (12)
months decreased or limited or threatened to decrease or limit, its services,
supplies or materials to the Company. No supplier (other than communications
common carriers, communications service providers or credit card service
providers) is a sole source of supply of any good or service to the Company. The
Company does not have any knowledge that any of the suppliers intends to
terminate or otherwise modify adversely to the Company its relationship with the
Company or to decrease or limit its services, supplies or materials to the
Company.
4.19. INSURANCE. SCHEDULE 4.19 sets forth an accurate list of all
insurance policies carried by the Company (all of which policies remain in full
force and effect) and all insurance loss runs or workers' compensation claims.
The Company has made available to AppNet and Sub true, complete and correct
copies of all current insurance policies of the Company, all of which are in
full force and effect. All premiums due and payable under all such policies have
been paid and the Company is otherwise in full compliance with the terms of such
policies (or other policies providing substantially similar insurance coverage).
To the best of the Company's and the Stockholders' knowledge, such policies of
insurance are of the type and in amounts customarily carried by persons
conducting business similar to that of the Company. Neither the Company nor the
Stockholders know of any threatened termination of, or material premium increase
with respect to, any of such policies.
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4.20. INTELLECTUAL PROPERTY.
(a) The Company owns, or possesses valid written licenses to use all
Intellectual Property Rights that are used in the Business of the Company (the
"Company Intellectual Property Rights"). SCHEDULE 4.20(a) lists all Company
Intellectual Property Rights owned by the Company, and specifies the
jurisdictions in which the Company Intellectual Property Rights are issued or
registered or in which an application for such issuance and registration has
been filed, including the respective registration or application numbers and the
names of all registered owners. The filings in respect of all such registrations
and applications are in good standing, are held solely in the name of the
Company as the exclusive owner of all rights therein, and all necessary steps
have been taken to maintain such filings and to prosecute the applications in a
timely manner.
(b) SCHEDULE 4.20(b) lists (i) all licenses, sublicenses and other
agreements to which the Company is a party and pursuant to which any person is
authorized to use any Company Intellectual Property Rights or any trade secret
material to the Company (and includes the identity of all parties thereto other
than non-exclusive product licenses and sublicenses granted by the Company in
the ordinary course of business); and (ii) all licenses, sublicenses and other
agreements as to which the Company is a party and pursuant to which the Company
is authorized to use any third party patents, trademarks or copyrights
(including software) which are incorporated in, are, or form a part of, any of
the Company's products or services, or other trade secrets of a third party in
or as to any product or service (collectively, the "Company Third Party
Intellectual Property Rights"), and includes the identity of all parties
thereto, a description of the nature and subject matter thereof, the applicable
royalty and the term thereof. The Company is authorized to use, in the manner
used by the Company, the Company Third Party Intellectual Property Rights.
Except as set forth on SCHEDULE 4.20(b), the Company is not, nor will it be as a
result of the execution and delivery of this Agreement or the performance of its
obligations hereunder, in violation of any license, sublicense or agreement
described on SCHEDULE 4.20(b) or by which it is authorized to use Company Third
Party Intellectual Property Rights.
(c) No claims with respect to Company Intellectual Property Rights, any
trade secrets of the Company, or Company Third Party Intellectual Property
Rights to the extent arising out of any use, reproduction or distribution of
such of Company Third Party Intellectual Property Rights by or through the
Company, have been asserted or are threatened by any person, nor, except as set
out on SCHEDULE 4.20(c), does the Company or any of the Stockholders know of any
valid grounds for any bona fide claims (i) to the effect that the manufacture,
sale, licensing or use of any product or service, as now used, sold or licensed
or proposed for use, sale or license by the Company infringes any copyright,
patent, trademark, service mark, trade secret or any other intellectual property
right; (ii) against the use by the Company of any trademarks, trade names, trade
secrets, copyrights, patents, technology, know-how or computer software programs
and applications used in the Company's Business as it is presently being
conducted; (iii) challenging the ownership, validity or effectiveness of any of
Company Intellectual Property Rights or other trade secrets of the Company; or
(iv) challenging the Company's license or legally enforceable right to use, or
the validity or effectiveness of any Company Third Party Intellectual Property
Rights.
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(d) The Company has entered into all necessary agreements and obtained
all necessary rights to acquire Company Third Party Intellectual Property
Rights. All agreements relating to Company Third Party Intellectual Property
Rights are in full force and effect for the term set forth in each such
agreement.
(e) All registered trademarks, service marks and copyrights held by the
Company are valid and subsisting. There is no unauthorized use, disclosure,
infringement or misappropriation of any of Company Intellectual Property Rights,
any trade secrets of the Company, or any of Company Third Party Intellectual
Property Rights to the extent licensed by or through the Company, by any third
party, including any employee or former employee of the Company. Except as set
out on SCHEDULE 4.20(e), (i) the Company has not been sued or charged in writing
as a defendant in any claim, suit, action or proceeding which involves a claim
of infringement of any patents, trademarks, service marks, copyrights or
violation of any trade secret or other proprietary right of any third party;
(ii) there is no basis for any such charge or claim; and (iii) there is not any
infringement liability with respect to, or infringement or violation by, the
Company of any patent, trademark, service mark, copyright, trade secret or other
proprietary right of another.
(f) No Company Intellectual Property Rights, trade secrets of the
Company or Company Third Party Intellectual Property Rights are subject to any
outstanding order, judgment, decree, stipulation or agreement restricting in any
manner the licensing thereof by the Company. Except for contracts licensing the
Company's products executed in the ordinary course of business and in accordance
with the Company's past practices (all of which contracts are listed on SCHEDULE
4.13), the Company has not entered into any agreement to indemnify any other
person against any charge of infringement of any Company Intellectual Property
Rights. The Company is not and never has been engaged in any dispute or
litigation with an employee or former employee regarding matters pertaining to
intellectual property or assignment of inventions.
4.21. ACCOUNTS RECEIVABLE. The accounts receivable of the Company arose
in the ordinary course of business from bona fide transactions and, to the best
of the Company's and the Stockholders' knowledge, are not subject to any setoff,
counterclaim or defense. The accounts receivable (both billed and unbilled)
shall be fully collectible in accordance with their terms, subject to any
applicable reserves on the Current Balance Sheet.
4.22. INTENTIONALLY OMITTED.
4.23. RELATED PARTY TRANSACTIONS. SCHEDULE 4.23 sets forth all
arrangements, Liabilities, agreements and contracts in effect as of the date
hereof among the Company and (i) any Person who is an officer, director or
Affiliate of the Company, any relative of any of the foregoing or any entity of
which any of the foregoing is an Affiliate, or (ii) any Person who acquired the
Company's Common Stock in a private placement.
4.24. BROKERS. No Person has or will have, as a result of the
transactions contemplated by this Agreement, any right, interest or claim
against or upon the Company or, to the knowledge of the Company or the
Stockholders, against or upon AppNet or Sub, for any commission, fee or
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other compensation payable as a finder or broker because of any act or omission
by the Company or the Stockholders.
4.25. ACCREDITED INVESTORS; INVESTMENT INTENT.
(a) AppNet has made available to the Company and each Stockholder,
during the course of this transaction and prior to the delivery of the shares of
AppNet Common Stock (the "Securities"), the opportunity to ask questions of and
receive answers from any of the officers of AppNet concerning the terms and
conditions of the offering, and to obtain any documents or additional
information necessary to verify the information provided to the Company and each
Stockholder or otherwise relative to the financial data and business of AppNet,
to the extent that such parties possessed such information or could acquire it
without unreasonable effort or expense, and all such questions, if asked, have
been answered satisfactorily and all such documents, if examined, have been
found to be fully satisfactory.
(b) The Company and each Stockholder understands and acknowledges that
(i) the Company or such Stockholder must bear the economic risk of the Company's
or such Stockholder's investment in the Securities; (ii) the Securities have not
been registered under the Securities Act of 1933, as amended (the "1933 Act") or
any state securities laws and are being offered and sold in reliance upon
exemptions provided in the 1933 Act and state securities laws for transactions
not involving any public offering and, therefore, cannot be resold or
transferred unless they are subsequently registered under the 1933 Act and
applicable state laws or unless an exemption from such registration is
available; (iii) the Company and such Stockholder is purchasing the Securities
for investment purposes only for the Company's or such Stockholder's own account
and not with any view toward a distribution thereof; (iv) neither the Company
nor any Stockholder has any contract, undertaking, agreement or arrangement with
any person to sell, transfer or pledge to such person or anyone else any of the
Securities which the Company or such Stockholder hereby subscribes to purchase
or any part thereof, and neither the Company nor any Stockholder has any present
plans to enter into any such contract, undertaking, agreement or arrangement;
(v) there will be no public market for the Securities; and (vi) the Company and
each Stockholder understands that AppNet is not obligated to comply with any
reporting requirements under the Securities Exchange Act of 1934, as amended,
and that AppNet makes no representation or warranty that it will disseminate to
the public any current financial or other information concerning itself, as is
required by Rule 144 promulgated under the 1933 Act as one of the conditions of
its availability.
(c) The Company and each Stockholder has evaluated the risks of
investing in the Securities, and has determined that the Securities are a
suitable investment for the Company and such Stockholder. The Company and each
Stockholder can bear the economic risk of this investment and can afford a
complete loss of the Company's and such Stockholder's investment.
(d) The Company is knowledgeable and experienced in evaluating
investments and experienced in financial and business matters, and is capable of
evaluating the merits and risks of investing in the Securities. The aggregate
amount of the investments of the Company in, and the Company's commitments to,
all similar investments that are illiquid is reasonable in relation to the
Company's net worth.
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(e) The Company hereby represents that the Company is a resident of the
State of Georgia. Each Stockholder represents that he is a resident of either
the State of Georgia or the Commonwealth of Virginia. Neither the Company nor
any Stockholder has any present intention of becoming a resident of any other
state or jurisdiction.
4.26. DISCLOSURE. No representation or warranty by the Company and the
Stockholders contained in this Agreement, and no representation, warranty or
statement by the Company or the Stockholders contained in any list, certificate,
schedule or other instrument, document, agreement or writing furnished or to be
furnished to, or made with, AppNet or Sub pursuant hereto or in connection with
the negotiation, execution or performance hereof, contains or will contain any
untrue statement by the Company or the Stockholders of a material fact or omits
or will omit to state any material fact necessary to make any statement herein
or therein not misleading.
5. REPRESENTATIONS AND WARRANTIES OF APPNET AND SUB
To induce the Company and the Stockholders to enter into this Agreement
and to consummate the transactions contemplated by this Agreement, AppNet and
Sub, jointly and severally, represent and warrant to the Company, as of the date
hereof and as of the Closing Date, as set forth below:
5.1. DUE ORGANIZATION. Each of AppNet and Sub is a corporation duly
organized, validly existing and in good standing under the laws of the State of
Delaware.
5.2. POWER AND AUTHORITY. Each of AppNet and Sub has all requisite
corporate power and authority to own, lease and operate its respective
properties and to conduct its respective Business as it is presently being
conducted and as it has been conducted in the past. Each of AppNet and Sub is
duly qualified or licensed as a foreign corporation in good standing in each
jurisdiction in which the character of its respective properties or the nature
of its respective business activities requires such qualification, except where
the failure to be so qualified or licensed would not have a Material Adverse
Effect on AppNet or Sub, respectively.
5.3. AUTHORITY FOR AGREEMENT. The execution, delivery and performance
of this Agreement and the consummation of the transactions contemplated hereby
have been authorized by all requisite corporate action on the part of AppNet and
Sub. Each of AppNet and Sub has full corporate power, authority and legal right
to enter into this Agreement and to consummate the transactions contemplated
hereby. This Agreement has been duly executed and delivered by AppNet and Sub
and, assuming the due authorization, execution and delivery by the Company and
the Stockholders of this Agreement, this Agreement is a legal, valid and binding
obligation of AppNet and Sub enforceable against AppNet and Sub, respectively,
in accordance with its terms, except as enforceability may be limited by
applicable bankruptcy, insolvency, reorganization, moratorium or other similar
laws affecting the enforcement of creditors' rights in general.
5.4. NO VIOLATION TO RESULT. The execution, delivery and performance of
this Agreement and the consummation of the transactions contemplated hereby and
the fulfillment of the terms hereof: (i) are not in violation or breach of, do
not conflict with or constitute a default
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under the Certificate of Incorporation or Bylaws of AppNet or Sub or any
contract to which AppNet or Sub is a party; (ii) will not be an event which,
after notice or lapse of time or both, will result in any such violation,
breach, conflict, default, or acceleration; (iii) will not result in a violation
under any law, judgment, decree, order, rule, regulation, permit or other legal
requirement of any Governmental or Regulatory Authority, court or arbitration
tribunal whether federal, state, provincial, municipal or local (within the U.S.
or otherwise) at law or in equity, which is applicable to AppNet or Sub; and
(iv) will not result in the creation or imposition of any Encumbrance in favor
of any Person upon any of the properties or assets of AppNet or Sub.
5.5. BROKERS AND AGENTS. No Person has or will have, as a result of the
transactions contemplated by this Agreement, any right, interest or claim
against or upon the Company or the Stockholders (other than as disclosed in
Section 4.24) for any commission, fee or other compensation payable as a finder
or broker because of any act or omission by AppNet or Sub.
5.6. CAPITALIZATION. SCHEDULE 5.6 sets forth, with respect to AppNet,
(i) the number of authorized shares of each class of its capital stock, (ii) the
number of issued and outstanding shares of each class of its capital stock and
the record owner thereof, and (iii) the number of shares of each class, if any,
which are held in treasury. Except as set forth on SCHEDULE 5.6, no preemptive
right or rights of first refusal exist with respect to the shares of capital
stock of AppNet, and no such rights arise by virtue of or in connection with the
transactions contemplated hereby. Except as set forth on SCHEDULE 5.6, there are
no outstanding or authorized rights, options, warrants, convertible securities,
subscription rights, conversion rights, exchange rights or other agreements or
commitments of any kind that could require AppNet to issue or sell any shares of
its capital stock (all of the foregoing, the "AppNet Issuance Agreements").
SCHEDULE 5.6 sets forth the identity of the holder of each AppNet Issuance
Agreement, the type of agreement to which such holder is a party, the class and
number of shares of capital stock subject to each such agreement, and the
exercise price or conversion price, or other similar information concerning the
consideration such holder is required to tender in exchange for such shares of
the capital stock of AppNet. SCHEDULE 5.6 identifies each agreement pursuant to
which any of GTCR Golder Rauner, L.L.C. ("GTCR"), Smart Technology, L.L.C.
("Smart Technology"), and their respective Affiliates, has acquired shares of
the capital stock of AppNet. There are no outstanding stock appreciation,
phantom stock, profit participation or other similar rights with respect to
AppNet. Except as set forth on SCHEDULE 5.6, AppNet is not obligated to redeem
or otherwise acquire any of its outstanding shares of capital stock.
5.7. SHARES ISSUED IN ASSET PURCHASE. All of the shares of AppNet
Common Stock to be issued in connection with the Asset Purchase are reserved for
issuance and, upon issuance and delivery by AppNet to the persons entitled
thereto and receipt by AppNet of the consideration therefor, will (i) be duly
authorized and validly issued and fully paid and non-assessable, and (ii) not
have been issued in violation of any preemptive rights or rights of first
refusal.
6. COVENANTS
6.1. ACCESS TO PROPERTIES AND RECORDS.
(a) The Company shall afford to the officers, employees, attorneys,
accountants and other authorized representatives of AppNet and Sub, upon
reasonable notice and
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during normal business hours, free and full access to all of the Company's
assets, properties, books and records and employees in order to afford AppNet
and Sub as full an opportunity of review, examination and investigation as they
shall desire to make of the affairs of the Company, and AppNet and Sub shall be
permitted to make extracts from, or take copies of, such books, records
(including the stock record and minute books) or other documentation as may be
reasonably necessary. The Company shall furnish or cause to be furnished to
AppNet and Sub such reasonable financial and operating data and other
information about the Company's Business, as it is presently being conducted and
as it has been conducted in the past, properties and assets which any of the
respective officers, employees, attorneys, accountants or other authorized
representatives of AppNet may reasonably request; provided that AppNet and Sub
and their agents shall not unreasonably interfere with the operations of the
Company's Business. No information or knowledge obtained in any investigation
pursuant to this Section 6.1 shall affect or be deemed to modify any
representation or warranty contained herein or the conditions to the obligations
of the parties to consummate the transactions contemplated by this Agreement.
(b) AppNet and Sub shall afford to the officers, employees, attorneys,
accountants and other authorized representatives of the Company, access to such
of AppNet's and Sub's assets, properties, books and records and employees in
order to afford the Company as full an opportunity of review, examination and
investigation as they shall reasonably request of the affairs of AppNet and Sub,
and the Company shall be permitted to make extracts from, or take copies of,
such books, records (including the stock record and minute books) or other
documentation thereof as may be reasonably necessary. AppNet and Sub shall
furnish or cause to be furnished to the Company such reasonable financial and
operating data and other information about AppNet's and Sub's Business, as it is
presently being conducted, as it has been conducted in the past and as it is
proposed to be conducted in the future, properties and assets which any of the
respective officers, employees, attorneys, accountants or other authorized
representatives of the Company may reasonably request; provided that the Company
and its agents shall not unreasonably interfere with the operations of AppNet's
and Sub's Business. No information or knowledge obtained in any investigation
pursuant to this Section 6.1 shall affect or be deemed to modify any
representation or warranty contained herein or the conditions to the obligations
of the parties to consummate the transactions contemplated by this Agreement.
6.2. CONFIDENTIALITY.
(a) The Company and the Stockholders recognize and acknowledge that
they have in the past, currently have, and in the future may possibly have,
access to certain confidential information of the Company and/or AppNet and Sub,
such as lists of customers, operational policies, and pricing and cost policies,
that are valuable, special and unique assets of the Company's, AppNet's or Sub's
respective businesses. The Company and the Stockholders agree that they will not
disclose confidential information with respect to the Company (except as
required in the conduct of the Business prior to the Closing) and/or AppNet and
Sub to any Person for any purpose or reason whatsoever (except to authorized
representatives of the Company, AppNet and Sub and to counsel and other
advisers, provided that such advisors (other than counsel) agree to the
confidentiality provisions of this Section 6.2), unless (i) such information
becomes known to the public generally through no fault of the Company or the
Stockholders, (ii) disclosure is required by law or the order of any
Governmental or Regulatory Authority under color of law, or (iii) the disclosing
party reasonably believes that such disclosure
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is required in connection with the defense of a lawsuit against the disclosing
party or for certification or state licensure purposes; provided, that prior to
disclosing any information pursuant to clauses (ii) or (iii) above, the Company
or the Stockholders, shall, if possible, give prior written notice thereof to
AppNet and Sub and provide AppNet and Sub with the opportunity to contest such
disclosure.
(b) Each of AppNet and Sub agrees that prior to the Closing it will not
disclose confidential information with respect to the Company and/or the
Stockholders to any Person, for any purpose or reason whatsoever (except to
authorized representatives of AppNet, Sub, the Company, and/or the Stockholders
and to counsel and other advisers, provided that such advisors (other than
counsel) agree to the confidentiality provisions of this Section 6.2), unless
(i) such information becomes known to the public generally through no fault of
AppNet or Sub, (ii) disclosure is required by law or the order of any
Governmental or Regulatory Authority under color of law, or (iii) AppNet or Sub
reasonably believes that such disclosure is required in connection with the
defense of a lawsuit against AppNet or Sub or for certification or state
licensure purposes; provided, that prior to disclosing any information pursuant
to clauses (ii) or (iii) above, AppNet or Sub, shall, if possible, give prior
written notice thereof to the Company and/or the Stockholders and provide the
Company and/or the Stockholders with the opportunity to contest such disclosure.
6.3. INTERIM COVENANTS OF THE COMPANY. From the date of this Agreement
until the Closing Date, unless this Agreement is sooner terminated, except to
the extent expressly permitted by this Agreement or otherwise consented to by an
instrument in writing signed by AppNet, the Company shall (i) keep the Company's
Business, as it is presently being conducted, intact and shall not take or
permit to be taken or do or suffer to be done anything other than in the
ordinary course of its business as the same is presently being conducted, (ii)
use its reasonable best efforts to keep available the services of its directors,
officers, employees, independent contractors and agents and retain and maintain
good relationships with its clients, (iii) perform its obligations under the
Contracts and (iv) maintain the goodwill and reputation associated with its
Business, as it is presently being conducted. Without limiting the generality of
the foregoing, the Company shall not, without the prior written consent of
AppNet:
(a) Adopt or propose any change in its Certificate of Incorporation or
Bylaws;
(b) Merge or consolidate with any other entity or acquire a material
amount of assets of any other entity;
(c) Issue or sell any stock, bonds, or other securities of which the
Company is the issuer or grant, issue or change any stock options, warrants or
other rights to purchase securities of the Company;
(d) Amend any term of any outstanding security of the Company;
(e) Sell, lease or dispose of or make any contract for the sale, lease
or disposition of or subject to lien or security interest or any other
Encumbrance any of its properties or assets (including, without limitation, the
Purchased Assets), other than in the ordinary and usual course of its business,
consistent with the representations and warranties
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contained herein, and not in breach of any of the provisions of this Section
6.3, in each case for a consideration at least equal to the fair value of such
property or asset;
(f) Grant any salary increase to, or increase the draw of, any of its
officers, directors, employees or agents, or enter into any new, or amend or
alter any existing, employment, bonus, incentive compensation, deferred
compensation, profit sharing, retirement, severance, pension, stock option,
group insurance, death benefit or other fringe benefit plan, trust agreement or
other similar or dissimilar arrangement, or any employment or consulting
agreement except consistent with past compensation practices;
(g) Incur any bank indebtedness or borrowings, whether or not in the
ordinary course of its business, or issue any commercial paper;
(h) Enter into any leases of real property or any material leases of
equipment and machinery;
(i) Enter into any contract, (i) which would be required to be listed
on SCHEDULE 4.13 as a Contract had it been entered into prior to the date
hereof; or (ii) in which any Affiliate of the Company or any of the Stockholders
has any beneficial interest;
(j) Redeem, purchase or otherwise acquire, directly or indirectly, any
shares of its capital stock or debt securities or any option, warrant or other
right to purchase or acquire any such shares, or declare or pay any dividend or
other distribution (whether in cash, stock or other property) with respect to
its capital stock;
(k) Create, incur or assume any liability or indebtedness, except in
the ordinary course of business consistent with past practices; or postpone or
defer the creation, incurrence, or assumption of any liability or indebtedness
that would otherwise be created, incurred or assumed in the ordinary course of
business absent the execution of this Agreement;
(l) Pay or apply any of its assets (including, without limitation, the
Purchased Assets) to the direct or indirect payment, discharge, satisfaction or
reduction of any amount, directly or indirectly, to or for the benefit of the
Company or any Affiliate thereof except for payments to the Company's Affiliates
in accordance with past practice, provided that any such transaction is on terms
no less favorable to the Company than terms generally available with third
parties in arm's length transactions;
(m) Split, combine or reclassify any of its capital stock or issue or
authorize the issuance of any other securities in respect of, in lieu of or in
substitution for shares of its capital stock;
(n) Acquire or negotiate for the acquisition of (by merger,
consolidation, purchase of a substantial portion of assets or otherwise) any
business or the start-up of any new business, or otherwise acquire or agree to
acquire any assets that are material, individually or in the aggregate, to the
Company;
(o) Commit a breach of or amend or terminate any Contract, Government
Contract, permit, license or other right;
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(p) Enter into any other transaction (i) that is not negotiated at
arm's length with an Affiliate of the Company or any officer or director of the
Company or the Stockholders, (ii) outside the ordinary course of business
consistent with past practice or (iii) prohibited hereunder; or
(q) Fail to maintain its status as an S corporation for federal and
state income tax purposes.
6.4. NO SOLICITATION. Neither the Company (its officers or directors),
the Stockholders, nor any agent or any representative thereof, shall during the
period commencing on the date of this Agreement and ending with the earlier to
occur of the Closing or the termination of this Agreement in accordance with its
terms, directly or indirectly: (a) solicit, encourage or initiate the submission
of proposals or offers from any person or entity for, (b) participate in any
discussions pertaining to, or (c) furnish any information to any Person, other
than AppNet or Sub, relating to, any acquisition or purchase of all or a
material amount of the assets of, or any equity interest in, the Company or a
merger, consolidation or business combination involving the Company. If the
Company or any of the Stockholders receives any unsolicited offer or proposal
relating to any of the above, the Company or the Stockholders shall immediately
notify AppNet thereof, and provide to AppNet all information relating thereto,
including a copy of such offer or proposal, the identity of the party making
such offer or proposal and the specific terms of such offer or proposal.
6.5. NOTIFICATION OF CERTAIN MATTERS. The Company shall give prompt
notice to AppNet of (a) the occurrence or non-occurrence of any event the
occurrence or non-occurrence of which would be likely to cause any
representation or warranty of the Company or the Stockholders contained herein
to be untrue or inaccurate in any material respect at or prior to the Closing
Date and (b) any material failure of the Company or the Stockholders to comply
with or satisfy any covenant, condition or agreement to be complied with or
satisfied by the Company or the Stockholders hereunder. AppNet shall give prompt
notice to the Company of (a) the occurrence or non-occurrence of any event the
occurrence or non-occurrence of which would be likely to cause any
representation or warranty of AppNet or Sub contained herein to be untrue or
inaccurate in any material respect at or prior to the Closing Date and (b) any
material failure of AppNet or Sub to comply with or satisfy any covenant,
condition or agreement to be complied with or satisfied by AppNet or Sub
hereunder. The delivery of any notice pursuant to this Section 6.5 shall not,
without the express written consent of the receiving party, be deemed to (A)
modify the representations or warranties hereunder, (B) modify the conditions
set forth in Sections 7 or 8 hereof, as the case may be, or (C) limit or
otherwise affect the remedies available hereunder to any party hereto.
6.6. COOPERATION. AppNet, the Company and the Stockholders shall
cooperate fully, as and to the extent reasonably requested by the other party,
in connection with the filing of Tax Returns and any audit, litigation or other
proceeding with respect to Taxes. Such cooperation shall include the retention
and (upon reasonable request) the provision of records and information which are
reasonably relevant to any such audit, litigation or other proceeding.
6.7. REGULATORY AND OTHER APPROVALS. Subject to the terms and
conditions of this Agreement, each of the Company and AppNet will proceed
diligently and in good faith to, as
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promptly as practicable, (a) obtain all consents, approvals or actions of, make
all filings with and give all notices to Governmental or Regulatory Authorities
or any other public or private third parties required of AppNet, the Company or
the Stockholders to consummate the Asset Purchase and the other matters
contemplated hereby, and (b) provide such other information and communications
to such Governmental or Regulatory Authorities or other public or private third
parties as the other party or such Governmental or Regulatory Authorities or
other public or private third parties may reasonably request in connection
therewith.
6.8. BENEFITS PLANS. Prior to Closing, if requested by AppNet, the
Company agrees to take any and all steps necessary in order to cease all
accruals of benefits or contributions under each Benefit Plan, to terminate each
Benefit Plan, in each instance, as of the day immediately preceding the Closing
Date, and to distribute to the participants of each Benefit Plan their accrued
benefits thereunder, in accordance with the terms of each Benefit Plan and all
applicable laws. Any and all actions taken by the Company pursuant to this
Section 6.8 shall be solely at the Company's cost and expense.
6.9. REASONABLE EFFORTS. Subject to the terms and conditions of this
Agreement, each of the parties hereto agrees to use all reasonable efforts
promptly to take, or cause to be taken, all actions and do or cause to be done,
all things necessary, proper or advisable under applicable laws and regulations
to consummate and make effective the transactions contemplated by this Agreement
including the satisfaction of all conditions thereto. If applicable, the
Company, the Stockholders and AppNet shall file all notices and other
information and documents required under the Hart-Scott-Rodino Antitrust
Improvement Act of 1976 (the "HSR Act") as promptly as practicable after the
date hereof. Following the Closing, the Company agrees to use its best efforts
to obtain (i) the assignment of the Contracts listed on SCHEDULE 4.13(b), and
(ii) the execution and delivery of Employment Agreements, in the form attached
hereto as Exhibit D, by those employees of the Company listed on SCHEDULE 7.4.
6.10. STOCK OPTIONS.
(a) Options to purchase 175,000 shares of AppNet Common Stock shall be
reserved and made available promptly after the Closing Date for issuance to key
employees of Sub at the time of grant, at an exercise price of $6.00 per share,
as adjusted for any subdivision (by any stock split, stock dividend or
otherwise) or combination (by any reverse stock split or otherwise) of the
outstanding shares of AppNet Common Stock, as determined by the President of Sub
in accordance with AppNet's policies, and authorized and issued under the terms
of AppNet's Incentive Stock Option Plan. None of these options may be granted to
the Stockholders.
(b) Additional options to purchase shares of AppNet Common Stock shall
be made available to the employees of Sub, as determined by the President or a
Vice President of Sub, in the following amounts, for revenue which is won,
managed and delivered upon, during the Earn Out Period, by divisions or
subsidiaries of AppNet (other than Sub) which resulted from the referral efforts
of Sub (post-Closing), in the following amounts:
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<TABLE>
<CAPTION>
Revenue Level Options
------------- -------
<S> <C>
In excess of $1,000,000 25,000
In excess of $2,000,000 additional 25,000
In excess of $5,000,000 additional 50,000
</TABLE>
Such options shall vest 25% per year, commencing on the first anniversary of the
date of grant, and will have an exercise price equal to the fair market value of
a share of AppNet Common Stock on the date of grant, which, for each revenue
milestone achieved, shall be the last day of the fiscal quarter during which
such applicable revenue milestone is reached.
6.11. STOCKHOLDER VOTE. Prior to the execution hereof, the Stockholders
shall have voted all of the Shares in favor of the approval of this Agreement,
the consummation of the Asset Purchase and the other transactions contemplated
herein.
6.12. INTENTIONALLY OMITTED.
6.13. CORPORATE EXISTENCE. The Company shall not dissolve or liquidate
and shall maintain its corporate existence until the termination of the
Company's indemnification obligations pursuant to Section 9.
6.14. HIRING OF THE COMPANY'S EMPLOYEES. The Company agrees that until
thirty days after the Closing Date it will allow Sub to take applications of any
employee as listed in SCHEDULE 4.9(b) and to interview any of such employees for
prospective employment with Sub after the Closing. Sub shall be permitted to
hire any such employee of the Company as determined in Sub's sole discretion.
The Company will use all reasonable efforts to cause such employees to make
available their employment services to Sub.
6.15. ACTIONS AFTER THE CLOSING. Following the Closing, Sub shall have
the right to receive and open all mail addressed to the Company and deal with
the contents thereof in its discretion to the extent that such mail and the
contents thereof relate to the Purchased Assets and any of the Assumed
Liabilities. Sub shall promptly deliver to the Company any mail that does not
relate to the Purchased Assets or the Assumed Liabilities. The Company shall
promptly transfer and deliver to Sub any cash or property which the Company may
receive in respect of the Purchased Assets after the Closing. Sub shall promptly
transfer and deliver to the Company any cash or property which Sub may receive
not in respect of the Purchased Assets after the Closing.
6.16. INTENTIONALLY OMITTED.
6.17. BULK TRANSFER PROVISIONS. The Company and Sub hereby waive
compliance with the provisions of any applicable bulk transfer law; provided,
however, that the Company agrees (i) to pay and discharge when due or to contest
or litigate all claims of creditors which are asserted against Sub or the
Purchased Assets (other than the Assumed Liabilities) by reason of such
noncompliance, (ii) to indemnify, defend and hold harmless Sub from and against
any and all such claims in the manner provided in Section 9 and (iii) to take
promptly all necessary action to remove any lien or encumbrance which is placed
on the Purchased Assets by reason of such noncompliance.
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6.18. THE COMPANY'S CONSENT. The Company covenants that it will forever
waive any rights under any non-competition, non-disclosure, non-solicitation or
similar provisions it has with respect to the Purchased Assets under any
employment, non-compete or other arrangements with any of the Company's former
employees who are to be employed by Sub after the Closing.
6.19. ALLOCATION OF PURCHASE PRICE. The Purchase Price for the
Purchased Assets shall be allocated within ninety (90) days of the Closing (or
as soon as practicable thereunder) among the Purchased Assets in accordance with
an allocation schedule to be prepared by Sub and consented to by the Company
(which consent will not be unreasonably withheld). Such allocation schedule
shall be prepared in accordance with section 1060 of the Code. In connection
with the determination of such schedule, the parties shall cooperate with each
other and provide such information as any of them shall reasonably request. The
parties shall (i) each report the federal, state and local and other tax
consequences of the purchase and sale contemplated hereby (including the filing
of Internal Revenue Service Form 8594) in a manner consistent with such
allocation schedule and (ii) take no position in any tax filing, return,
proceeding, audit or otherwise which is inconsistent with such allocation.
6.20. CORPORATE NAME. Promptly after the Closing, the Company shall
take such action (at its sole expense), including, without limitation, filing an
amendment to its Certificate of Incorporation, to cause the Company's name to be
changed to a name which does not include the word "Transform" or a word or
phrase confusingly similar thereto. The Company shall not use the name
"Transform" or any name confusingly similar to the foregoing from and after the
Closing.
7. CONDITIONS PRECEDENT TO OBLIGATIONS OF APPNET AND SUB
The obligations of AppNet or Sub to consummate the transactions
contemplated by this Agreement are subject to the satisfaction or partial or
complete waiver (in AppNet's sole and absolute discretion), at or before the
Closing Date, of the following conditions:
7.1. REPRESENTATIONS AND WARRANTIES TRUE AT THE CLOSING DATE. All of
the representations and warranties of the Company and the Stockholders contained
in this Agreement shall be true and correct on and as of the Closing Date with
the same effect as though such representations and warranties had been made on
and as of such date, except for those representations and warranties which by
their terms are made as of a specific date which shall be true and correct on
and as of such date.
7.2. PERFORMANCE. All of the terms, covenants, agreements and
conditions of this Agreement to be complied with, performed or satisfied by the
Company and/or the Stockholders on or before the Closing Date shall have been
duly complied with, performed or satisfied by the Closing Date.
7.3. STOCKHOLDER APPROVAL. This Agreement and the Asset Purchase shall
have been approved by the requisite vote or action of the Company's shareholders
under the Company's Certificate of Incorporation and Bylaws and Georgia law.
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7.4. AGREEMENTS WITH EMPLOYEES. Those senior managers of the Company
listed on SCHEDULE 7.4 shall have executed and delivered Senior Management
Agreements in the form attached hereto as Exhibit C.
7.5. NO LITIGATION. No temporary restraining order, preliminary or
permanent injunction or other order issued by any court of competent
jurisdiction or other legal or regulatory restraint or provision challenging the
transactions contemplated hereunder or limiting or restricting the conduct or
operation of the Business of AppNet or Sub following the transactions shall be
in effect, nor shall any proceeding brought by an administrative agency or
commission or other Governmental or Regulatory Authority or other
instrumentality, domestic or foreign, seeking any of the foregoing be pending.
There shall be no action, suit, claim or proceeding of any nature pending or
threatened, against any of the Stockholders, the Company, AppNet, Sub, their
respective properties or any of their officers or directors, that could
reasonably be expected to have a Material Adverse Effect on the Company, AppNet
or Sub.
7.6. NO MATERIAL ADVERSE CHANGE. There shall have been, between the
Balance Sheet Date and the Closing Date, no change in the Business, financial
condition or prospects of the Company which could have a Material Adverse Effect
on the Company, except as set forth on any schedule hereto.
7.7. CERTIFICATES. The Company and the Stockholders shall have
furnished AppNet with such certificates of the officers of the Company or the
Stockholders to evidence compliance with the conditions set forth in this
Section 7 as may be reasonably requested by AppNet.
7.8. OPINION OF COUNSEL. AppNet shall have received an opinion of
counsel in form and substance reasonably acceptable to AppNet.
7.9. FINANCING. AppNet shall have secured all financing necessary to
pay the Cash Payment on terms satisfactory to AppNet.
7.10. APPNET'S REVIEW. AppNet shall be fully satisfied in its sole and
absolute discretion with the results of its review of, and its other due
diligence investigations with respect to, the Business, operations, affairs,
prospects, properties, assets, existing and potential liabilities, obligations,
profits or condition (financial or otherwise) of the Company.
7.11. GOVERNMENTAL, REGULATORY AND OTHER CONSENTS AND APPROVALS. All
consents, approvals and actions of, filings with and notices to any Governmental
or Regulatory Authority or any other public or private third parties required of
the Stockholders, AppNet, or the Company to consummate the Asset Purchase and
the other matters contemplated hereby shall have been obtained, except for the
consents required under the Contracts set forth on SCHEDULES 4.13(a) and
4.13(b). Any waiting period applicable to the consummation of the Asset Purchase
under the HSR Act shall have expired or been terminated, and no action by the
Department of Justice or the Federal Trade Commission challenging or seeking to
enjoin the consummation of the transactions contemplated hereby shall be
pending.
7.12. DELIVERY OF GOOD STANDING CERTIFICATES; CORPORATE RESOLUTIONS.
AppNet shall have received certificates of good standing with respect to the
Company issued by the State of Georgia and the Commonwealth of Virginia. AppNet
shall have received copies of the
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resolutions of the Company and the Stockholders approving the Asset Purchase,
this Agreement and the other transactions contemplated herein, certified by the
appropriate corporate officers.
7.13. FINANCIAL TERMS. AppNet shall have received a certificate (the
"Closing Financial Certificate"), dated as of the Closing Date, signed on behalf
of the Company and by each Stockholder, stating that: (i) sales, net of bad debt
expense, for the Company's fiscal year ended December 31, 1998 were no less than
$3,083,399; (ii) earnings before interest and taxes ("EBIT") for the Company's
fiscal year ended December 31, 1998 were no less than $528,853; and (iii) the
Company has no outstanding long-term or short-term indebtedness to banks,
stockholders, or other financial institutions and creditors as of the Closing
(in each case including the current portions of such indebtedness, but excluding
trade payables and other ordinary course accounts payable); provided, however,
that AppNet may, in its sole discretion, waive the foregoing condition in whole
or in part and, in such case, the Cash Payment shall be reduced by the amount of
any such indebtedness of the Company (including principal and accrued interest,
costs and fees).
7.14. PAYMENT OF LOANS. All notes receivable from the Stockholders,
other Affiliates of the Company, and employees of the Company shall have been
repaid in full in accordance with their terms, except such notes as reflect the
obligations set forth on SCHEDULE 2.1.
7.15. PURCHASE OF PERSONAL USE ITEMS. The Stockholders shall have
purchased any personal use assets (e.g., automobiles) from the Company at a
purchase price equal to the greater of the net book value of such assets as of
Closing or the outstanding indebtedness secured by such assets. Cell phones and
pagers purchased by the Company for use by its officers and employees are not
personal use assets within the meaning of this Section 7.15.
7.16. STOCKHOLDERS AGREEMENT AND REGISTRATION AGREEMENT. The Company
and the Stockholders shall have executed such agreements as shall be necessary
to subject the AppNet Common Stock, to be delivered to the Company as part of
the Stock Payment, to AppNet's Stockholders Agreement and Registration
Agreement.
7.17. SUBORDINATION AGREEMENT. The Company shall have delivered a
subordination agreement in form and substance acceptable to BankBoston, N.A.
pursuant to AppNet's line of credit with BankBoston, N.A.
7.18. INVESTOR QUESTIONNAIRES. The Company shall have delivered to
AppNet properly executed Accredited Investor Questionnaires from the holders of
the Company's Common Stock, and at the Closing Date the Company shall not have
more than 35 stockholders who are not "Accredited Investors" (as defined in Rule
501 of Regulation D promulgated under the 1933 Act).
8. CONDITIONS PRECEDENT TO OBLIGATIONS OF THE COMPANY AND THE STOCKHOLDERS
The obligations of the Company and the Stockholders to consummate the
transactions contemplated by this Agreement are subject to the satisfaction or
partial or complete waiver (in
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the Company's and the Stockholders' sole and absolute discretion), at or before
the Closing Date, of the following conditions:
8.1. REPRESENTATIONS AND WARRANTIES TRUE AS OF THE CLOSING DATE. All of
the representations and warranties of AppNet and Sub contained in this Agreement
shall be true and correct on and as of the Closing Date with the same effect as
though such representations and warranties had been made on and as of such date,
except for those representations and warranties which by their terms are made as
of a specific date which shall be true and correct on and as of such date.
8.2. APPNET'S AND SUB'S PERFORMANCE. All of the terms, covenants,
agreements and conditions of this Agreement to be complied with, performed or
satisfied by AppNet and Sub on or before the Closing Date shall have been duly
complied with, performed or satisfied by the Closing Date.
8.3. NO LITIGATION. No temporary restraining order, preliminary or
permanent injunction or other order issued by any court of competent
jurisdiction or other legal or regulatory restraint or provision challenging the
transactions contemplated hereunder or limiting or restricting the conduct or
operation of the Business of AppNet or the Company following the transactions
shall be in effect, nor shall any proceeding brought by an administrative agency
or commission or other Governmental or Regulatory Authority seeking any of the
foregoing be pending. There shall be no action, suit, claim or proceeding of any
nature pending or threatened, against the Company, AppNet or Sub, their
respective properties or any of their officers or directors, that could
reasonably be expected to have a Material Adverse Effect on the Company, AppNet
or Sub.
8.4. CERTIFICATES. AppNet and Sub shall have furnished the Company with
such certificates of the officers of AppNet or Sub to evidence compliance with
the conditions set forth in this Section 8 as may be reasonably requested by the
Company.
8.5. GOVERNMENTAL, REGULATORY AND OTHER CONSENTS AND APPROVALS. All
consents, approvals and actions of, filings with and notices to any Governmental
or Regulatory Authority or any other public or private third parties required of
AppNet, Sub, the Stockholders or the Company to consummate the Asset Purchase
and the other matters contemplated hereby shall have been obtained, except for
the consents required under the Contracts set forth on SCHEDULES 4.13(a) and
4.13(b). Any waiting period applicable to the consummation of the Asset Purchase
under the HSR Act shall have expired or been terminated, and no action by the
Department of Justice or the Federal Trade Commission challenging or seeking to
enjoin the consummation of the transactions contemplated hereby shall be
pending.
8.6. DELIVERY OF GOOD STANDING CERTIFICATES; CORPORATE RESOLUTIONS. The
Company shall have received certificates of good standing with respect to AppNet
issued by the State of Delaware and with respect to Sub issued by the States of
Delaware and Georgia. The Company shall have received copies of the resolutions
of AppNet and Sub approving the Asset Purchase and the other transactions
contemplated herein, certified by the appropriate corporate officers.
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8.7. OPINION OF COUNSEL. The Company shall have received an opinion of
counsel in form and substance reasonably acceptable to the Company.
9. INDEMNIFICATION
9.1. GENERAL INDEMNIFICATION.
(a) The Company and each of the Stockholders, jointly and severally,
covenants and agrees to indemnify, defend, protect and hold harmless AppNet, Sub
and their respective officers, directors, employees, stockholders, assigns,
successors and affiliates (individually, a "Buyer Party" and collectively, the
"Buyer Parties") from, against and in respect of all liabilities, losses,
claims, damages, punitive damages, causes of actions, lawsuits, administrative
proceedings (including informal proceedings), investigations, audits, demands,
assessments, adjustments, judgments, settlement payments, deficiencies,
penalties, fines, excise taxes, interest (including interest from the date of
such damages) and costs and expenses (including, without limitation, reasonable
attorneys' fees and disbursements of every kind, nature and description)
(collectively, "Damages") suffered, sustained, incurred or paid by the Buyer
Parties, in any action or proceeding between the Seller Parties (as defined in
Section 9.1(b)) and the Buyer Parties or between the Buyer Parties and a third
party, in connection with, resulting from or arising out of, directly or
indirectly: (i) the inaccuracy of any representation or the breach of any
warranty set forth in this Agreement or certificates delivered on the part of
the Company or the Stockholders in connection with the Closing; (ii) the
nonfulfillment of any covenant or agreement on the part of the Company or the
Stockholders set forth in this Agreement or in any agreement or certificate
executed and delivered by the Company or the Stockholders pursuant to this
Agreement or in the transactions contemplated hereby; (iii) any claim by any
customer of the Company relating to the performance or non-performance by the
Company of any Contract prior to the Closing; (iv) the bulk transfer or bulk
sale provisions of any applicable law; (v) any and all benefits accrued under
the Benefit Plans or multiemployer plans as of the Closing Date and any and all
other liabilities arising out of, or in connection with the operation of the
Benefit Plans or multiemployer plans through the Closing Date; (vi) any and all
liabilities under the Environmental and Safety Requirements in connection with
or arising out of Releases that occurred on or prior to the Closing Date; (vii)
failure of the Company or any Company employee to maintain all licenses,
permits, approvals and qualifications from any Government or Government
Regulatory Authority; (viii) any and all Taxes which are (A)(x) imposed on the
Company or any member of the consolidated, unitary or combined group which
includes or included the Company through and including the Closing Date, or
stockholders thereof, that a Buyer Party pays or otherwise satisfies in whole or
in part; (y) imposed on a Buyer Party in respect of the Company's income,
business, property or operations or (z) for which a Buyer Party may otherwise be
liable as a successor to the Company and (B)(x) for any taxable period or
portion thereof ending on or prior to the Closing Date, or (y) resulting by
reason of the several liability of the Company pursuant to Treasury Regulations
Section 1.1502-6 or any analogous state, local or foreign law or regulation or
by reason of the Company having been a member of any consolidated, combined or
unitary group on or prior to the Closing Date; and (ix) the business, operations
or assets of the Company on or before the Closing Date (except as otherwise
disclosed in the Financial Statements or the schedules to this Agreement) or the
actions of the Company's directors, officers, shareholders, employees or agents
on or before the Closing Date.
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(b) AppNet and Sub covenant and agree to indemnify, defend, protect and
hold harmless (i) each Stockholder and his or her assigns and (ii) the Company
and its officers, directors, employees, stockholders, assigns, successors and
affiliates (individually, a "Seller Party" and collectively, the "Seller
Parties") from, against and in respect of all Damages suffered, sustained,
incurred or paid by the Seller Parties, in any action or proceeding between the
Seller Parties and the Buyer Parties or between the Seller Parties and a third
party, in connection with, resulting from or arising out of, directly or
indirectly: (i) the inaccuracy of any representation or the breach of any
warranty set forth in this Agreement or certificates delivered on the part of
AppNet or Sub in connection with the Closing; (ii) the nonfulfillment of any
covenant or agreement on the part of AppNet or Sub set forth in this Agreement
or in any agreement or certificate executed and delivered by AppNet or Sub or
pursuant to this Agreement or in the transactions contemplated hereby; and (iii)
any occurrence based on or related to the Purchased Assets and the operation of
the Business by Sub (1) happening after the Closing Date, (2) not involving an
act of gross negligence or an act of willful misconduct by a Stockholder, and
(3) with respect to any claim against a Stockholder, which is asserted against
such Stockholder in his capacity as a current or former stockholder, director or
officer of the Company; provided however, that this Section 9.1(b)(iii) shall
not apply to any claims asserted against a Stockholder in his capacity as a
current or former director or officer of Sub (which claims shall be subject to
indemnification pursuant to Sub's Certificate of Incorporation and bylaws and
Delaware law).
(c) Notwithstanding anything contained in Section 9 to the contrary,
the aggregate amount of an Indemnifying Party's liability shall not exceed
$5,120,000.
9.2. INDEMNIFICATION PROCEDURES. All claims or demands for
indemnification under this Section 9 ("Claims") shall be asserted and resolved
as follows:
(a) In the event a Buyer Party or a Seller Party (an "Indemnified
Party") has a Claim against the other party (an "Indemnifying Party") hereunder
which does not involve a Claim being asserted against or sought to be collected
by a third party, the Indemnified Party shall with reasonable promptness send a
Claim Notice (as defined in Section 9.2(b)) with respect to such Claim to the
Indemnifying Party. If the Indemnifying Party does not notify the Indemnified
Party within the Notice Period (as defined in Section 9.2(b)) that the
Indemnifying Party disputes such Claim, the amount of such Claim shall be
conclusively deemed a liability of the Indemnifying Party hereunder. In case the
Indemnifying Party shall object in writing to any Claim made in accordance with
this Section 9.2(a), the Indemnified Party shall have fifteen (15) days to
respond in a written statement to the objection of the Indemnifying Party. If
after such fifteen (15)-day period there remains a dispute as to any Claims, the
parties shall attempt in good faith for thirty (30) days to agree upon the
rights of the respective parties with respect to each of such Claims. If the
parties should so agree, a memorandum setting forth such agreement shall be
prepared and signed by both parties. If no such agreement can be reached after
good faith negotiation, either the Indemnified Party or the Indemnifying Party
may arbitrate such claim in accordance with the terms of Section 11.11 hereof.
(b) In the event that any Claim for which an Indemnifying Party would
be liable to an Indemnified Party hereunder is asserted against an Indemnified
Party by a third party, the Indemnified Party shall with reasonable promptness
notify the Indemnifying Party of such Claim, specifying the nature of such claim
and the amount or the estimated amount thereof to the
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extent then feasible (which estimate shall not be conclusive of the final amount
of such Claim) (the "Claim Notice"). The Indemnifying Party shall have fifteen
(15) days from the receipt of the Claim Notice (the "Notice Period") to notify
the Indemnified Party (i) whether or not the Indemnifying Party disputes the
Indemnifying Party's liability to the Indemnified Party hereunder with respect
to such Claim and (ii) if the Indemnifying Party does not dispute such
liability, whether or not the Indemnifying Party desires, at the sole cost and
expense of the Indemnifying Party, to defend against such Claim. In the event
that the Indemnifying Party notifies the Indemnified Party within the Notice
Period that the Indemnifying Party does not dispute the Indemnifying Party's
obligation to indemnify hereunder and desires to defend the Indemnified Party
against such Claim and except as hereinafter provided, the Indemnifying Party
shall have the right to defend by appropriate proceedings, which proceedings
shall be promptly settled or prosecuted by the Indemnifying Party to a final
conclusion; provided that, unless the Indemnified Party otherwise agrees in
writing, the Indemnifying Party may not settle any matter (in whole or in part)
unless such settlement includes a complete and unconditional release of the
Indemnified Party. If the Indemnified Party desires to participate in, but not
control, any such defense or settlement, the Indemnified Party may do so at the
Indemnified Party's sole cost and expense. If the Indemnifying Party elects not
to defend the Indemnified Party against such Claim, whether by failure of the
Indemnifying Party to give the Indemnified Party timely notice as provided above
or otherwise, then the Indemnified Party, without waiving any rights against the
Indemnifying Party, may settle or defend against any such Claim in the
Indemnified Party's sole discretion and the Indemnified Party shall be entitled
to recover from the Indemnifying Party the amount of any settlement or judgment
and, on an ongoing basis, all indemnifiable costs and expenses of the
Indemnified Party with respect thereto, including interest from the date such
costs and expenses were incurred.
(c) Notwithstanding the provisions of Section 9.2(b), if at any time,
in the reasonable opinion of the Indemnified Party, notice of which shall be
given in writing to the Indemnifying Party, any such Claim seeks relief which
could have a Material Adverse Effect on any Indemnified Party, the Indemnified
Party shall have the right to control or assume (as the case may be) the defense
of any such Claim and the amount of any judgment or settlement and the
reasonable costs and expenses of defense shall be included as part of the
indemnification obligations of the Indemnifying Party hereunder. If the
Indemnified Party should elect to exercise such right, the Indemnifying Party
shall have the right to participate in, but not control, the defense of such
claim or demand at the sole cost and expense of the Indemnifying Party.
(d) Nothing herein shall be deemed to prevent the Indemnified Party
from making a Claim, and an Indemnified Party may make a Claim hereunder, for
potential or contingent Claims or demands provided the Claim Notice sets forth
the specific basis for any such potential or contingent claim or demand to the
extent then feasible and the Indemnified Party has reasonable grounds to believe
that such a claim or demand may be made.
9.3. RIGHT TO SETOFF. In the event the Company or the Stockholders
shall have an indemnification obligation to AppNet or Sub, AppNet shall be
permitted to seek satisfaction of such obligation through an offset against
either the Contingent Amount or the Pledged Stock in accordance with the terms
of the Stock Pledge Agreement. No limitation on such right of offset shall
otherwise affect a Buyer Party's rights hereunder or otherwise. The remedy of
offset shall
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be in addition to and not in limitation of any injunctive relief or other rights
or remedies to which AppNet or any other Buyer Party is or may be entitled at
law or equity, under this Agreement.
9.4. RELEASE. Effective as of the Closing, each of the Stockholders
hereby irrevocably waives and releases the Company of, from and against any and
all claims or causes of actions for Damages that he has, may have, or has had at
any time on or before Closing with respect to the Purchased Assets.
10. NONCOMPETITION
10.1. PROHIBITED ACTIVITIES. For the period commencing with Closing and
ending on the fifth (5th) year anniversary of Closing, neither the Company nor
any of the Stockholders shall, for itself, any reason whatsoever, directly or
indirectly, for itself, himself, herself or on behalf of or in conjunction with
any other Person:
(a) engage as a stockholder, officer, director, owner, partner, joint
venturer, or in a managerial capacity, whether as an employee, independent
contractor, consultant or advisor, in any business providing internet and
web-based (i) consulting, (ii) applications development, (iii) systems design,
(iv) applications integration or (v) applications operations (collectively, the
"Competing Business"); provided, however, each of the Company and each of the
Stockholders shall not be precluded from the ownership of securities of
corporations that are listed on a national securities exchange or traded in the
national over-the-counter market in an amount that shall not exceed one percent
(1%) of the outstanding shares of any such corporation;
(b) call upon any Person who is, at that time or was within one (1)
year prior to that time, an employee of AppNet, Sub, the Company or their
Affiliates for the purpose or with the intent of enticing such employee away
from or out of the employ of AppNet, Sub or their Affiliates;
(c) call upon any Person who or that is, at that time, or has been,
within one (1) year prior to that time, a customer of AppNet, Sub, the Company
or their Affiliates for the purpose of soliciting or selling products or
services in competition with the Competing Business; or
(d) publish any statement or make any statement (under any
circumstances reasonably likely to become public) critical of AppNet, Sub or
their Affiliates, or in any way adversely affecting or otherwise maligning the
reputation of AppNet, Sub or their Affiliates.
10.2. DAMAGES. Because of the difficulty of measuring economic losses
to AppNet, Sub and their Affiliates as a result of a breach of the foregoing
covenants, and because of the immediate and irreparable damage that could be
caused to AppNet, Sub and their Affiliates for which it would have no other
adequate remedy, the Company and the Stockholders agree that the foregoing
covenants may be enforced by AppNet or Sub in the event of breach by the Company
or any of the Stockholders, in addition to, but not in lieu of, any other
available remedies, by injunctions and restraining orders and other equitable
remedies.
10.3. REASONABLE RESTRAINT. It is agreed by the parties that the
foregoing covenants in this Section 10 impose a reasonable restraint on the
Company and the Stockholders in light of the
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activities and business of AppNet, Sub and their Affiliates on the date of the
execution of this Agreement and the current plans of AppNet, Sub and their
Affiliates.
10.4. SEVERABILITY; REFORMATION. The covenants in this Section 10 are
severable and separate, and the unenforceability of any specific covenant shall
not affect the provisions of any other covenant. Moreover, in the event any
court of competent jurisdiction shall determine that the scope, time or
territorial restrictions set forth are unreasonable, then it is the intention of
the parties that such restrictions be enforced to the fullest extent which the
court deems reasonable, and the Agreement shall thereby be reformed.
10.5. INDEPENDENT COVENANT. All of the covenants in this Section 10
shall be construed as an agreement independent of any other provision in this
Agreement, and the existence of any claim or cause of action of the Company or
any of the Stockholders against AppNet, Sub or an Affiliate thereof, whether
predicated on this Agreement or otherwise, shall not constitute a defense to the
enforcement by AppNet or Sub of such covenants. It is understood by the parties
hereto that the covenants contained in this Section 10 are essential elements of
this Agreement and that, but for the agreement of the Company and the
Stockholders to comply with such covenants, AppNet would not have agreed to
enter into this Agreement. The Company, the Stockholders and AppNet have
independently consulted with their respective counsel and have been advised
concerning the reasonableness and propriety of such covenants with specific
regard to the nature of the business conducted by AppNet and Sub. The Company
and the Stockholders hereby agree that all covenants contained in this Section
10 are reasonable and valid and waive all defenses to the strict enforcement
hereof by AppNet or Sub. The covenants contained in this Section 10 hereof shall
not be affected by any breach of any other provision hereof by any party hereto
and shall have no effect if this Agreement is terminated pursuant to its terms.
10.6. MATERIALITY. The Company and each of the Stockholders hereby
agrees that the covenants set forth in this Section 10 are a material and
substantial part of the transactions contemplated by this Agreement.
10.7. EARLY TERMINATION OF SECTION 10. Notwithstanding anything to the
contrary contained in this Agreement, if any amount of the Contingent Amount
owed to the Company pursuant to Section 3.3 is not paid on or before May 15,
2000, then upon the failure by AppNet to pay such amounts within ten (10)
business days after receipt by AppNet of written notice from the Company to that
effect, Section 10 shall terminate in all respects and such section shall be of
no further force and effect.
11. GENERAL
11.1. TERMINATION. This Agreement may be terminated at any time prior
to the Closing Date:
(a) by mutual consent of the Boards of Directors of AppNet and the
Company;
(b) by the Company, on the one hand, or by AppNet, on the other hand,
if the Closing shall not have occurred on or before March 29, 1999; provided
that the right to terminate this Agreement under this Section 11.1(b) shall not
be available to either party whose material
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misrepresentation, breach of warranty or failure to fulfill any obligation under
this Agreement has been the cause of, or resulted in, the failure of the Closing
to occur on or before such date;
(c) by the Company, on the one hand, or by AppNet, on the other hand,
if there is or has been a material breach, failure to fulfill or default on the
part of the other party of any of the representations and warranties contained
herein or in the due and timely performance and satisfaction of any of the
covenants, agreements or conditions contained herein, and the curing of such
default shall not have been made or shall not reasonably be expected to occur
before the Closing Date; or
(d) by the Company, on the one hand, or by AppNet, on the other hand,
if there shall be a final nonappealable order of a federal or state court in
effect preventing the consummation of the transactions contemplated by this
Agreement; or there shall be any action taken, or any statute, rule, regulation
or order enacted, promulgated or issued or deemed applicable to the transactions
by any governmental entity which would make the consummation of the transactions
illegal.
11.2. EFFECT OF TERMINATION. In the event of the termination of this
Agreement pursuant to Section 11.1, this Agreement shall forthwith become void,
and there shall be no liability or obligation on the part of any party hereto or
its officers, directors or stockholders. Notwithstanding the foregoing sentence,
(i) the provisions of this Section 11, Section 9, Section 6.2(a) (except for the
Company's and the Stockholders' obligation to keep information regarding the
Company confidential thereunder) and Section 6.2(b) shall remain in full force
and effect and survive any termination of this Agreement; (ii) each party shall
remain liable for any intentional breach of this Agreement prior to its
termination; and (iii) in the event of termination of this Agreement pursuant to
Section 11.1(c), then notwithstanding the provisions of Section 11.7, the
breaching party (if such breach was in effect as of the date hereof) shall be
liable to the other party to the extent of the reasonable expenses incurred by
such other party in connection with this Agreement and the transactions
contemplated by this Agreement, as well as any damages in accordance with
applicable law.
11.3. COOPERATION. The Company and the Stockholders, on the one hand,
and AppNet and Sub, on the other hand, shall each deliver or cause to be
delivered to the other on the Closing Date, and at such other times and places
as shall be reasonably agreed to, such additional instruments as the other may
reasonably request for the purpose of carrying out this Agreement. In connection
therewith, if required, each of AppNet, Sub the Company and the Stockholders
will execute any documentation reasonably required by AppNet's or the Company's
independent certified public accountants (in connection with such accountant's
audit of AppNet or the Company). Each of the Company, AppNet and Sub will also
cooperate and use their reasonable efforts to have their respective officers and
employees cooperate with AppNet, Sub and the Company, as the case may be, on and
after the Closing Date in furnishing information, accounting records, evidence,
testimony and other assistance in connection with any Tax return filing
obligations, audits, actions, proceedings, arrangements or disputes of any
nature.
11.4. SUCCESSORS AND ASSIGNS. This Agreement shall inure to the benefit
of and be binding upon the parties hereto and their respective successors and
assigns; provided, however, that the Company and the Stockholders may not make
any assignment of this Agreement or any
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interest herein without the prior written consent of AppNet. This Agreement or
any of the severable rights and obligations inuring to the benefit of or to be
performed by AppNet hereunder may be assigned by AppNet prior to the Closing
Date, to any wholly-owned subsidiary of AppNet, and after the Closing Date, to
any wholly-owned subsidiary of AppNet or to any entity to which AppNet may sell
all or substantially all of the assets of AppNet and which assumes all of the
obligations of AppNet, and to the extent so assigned, the Company and the
Stockholders hereby recognize said entity as the party-in-interest with respect
to the rights and obligations assigned. In the event of such assignment to an
entity which acquires all or substantially all of the assets of AppNet, the
Stockholders agree to look solely to said entity for the purpose of conferring
benefits, or requiring performance of obligations, assigned to it by AppNet if
and to the extent such entity has expressly assumed such obligations.
11.5. ENTIRE AGREEMENT. This Agreement (which includes the schedules
and exhibits hereto) sets forth the entire understanding of the parties hereto
with respect to the transactions contemplated hereby. Any and all previous
agreements and understandings between or among the parties regarding the subject
matter hereof, whether written or oral, are superseded by this Agreement.
11.6. COUNTERPARTS. This Agreement may be executed in any number of
counterparts and any party hereto may execute any such counterpart, each of
which when executed and delivered shall be deemed to be an original and all
of which counterparts taken together shall constitute but one and the same
instrument. This Agreement shall become binding when one or more counterparts
taken together shall have been executed and delivered (which deliveries may
be by telefax) by the parties.
11.7. EXPENSES. AppNet has paid and shall pay the fees, expenses and
disbursements of AppNet and its brokers, agents, representatives, accountants
and counsel incurred in connection with the subject matter of this Agreement.
The Stockholders have paid and shall pay the fees, expenses and disbursements of
the Company and the Stockholders and each of their respective brokers, agents,
representatives, financial advisors, accountants and counsel incurred in
connection with the subject matter of this Agreement.
11.8. SPECIFIC PERFORMANCE; REMEDIES NOT EXCLUSIVE. Each party hereto
acknowledges that the other parties shall be irreparably harmed and that there
shall be no adequate remedy at law for any violation by any of them of any of
the covenants or agreements contained in this Agreement, including, without
limitation, the confidentiality obligations set forth in Section 6.2(a) and (b)
and the noncompetition provisions set forth in Section 10. It is accordingly
agreed that, in addition to, but not in lieu of, any other remedies which may be
available upon the breach of any such covenants or agreements, each party hereto
shall have the right to obtain injunctive relief to restrain a breach or
threatened breach of, or otherwise to obtain specific performance of, the other
parties' covenants and agreements contained in this Agreement. All rights and
remedies of the parties under this Agreement shall be cumulative, and the
exercise of one or more rights or remedies will not preclude the exercise of any
other right or remedy available under this Agreement or applicable law.
11.9. NOTICES. Any notice, request, claim, demand, waiver, consent,
approval or other communication which is required or permitted hereunder shall
be in writing and shall be deemed
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given if delivered personally, sent by facsimile transmission with confirmation
of transmission, sent by registered or certified mail (postage prepaid, return
receipt requested), or by nationally recognized overnight courier service, as
follows:
If to AppNet or Sub to:
AppNet Systems, Inc.
6707 Democracy Blvd., Suite 1000
Bethesda, Maryland 20817
Attn: Ken S. Bajaj, President
Facsimile: (301) 581-2488
with a required copy to:
Tucker Flyer
1615 L Street, N.W., Suite 400
Washington, D.C. 20036
Attn: Arthur E. Cirulnick, Esq.
Facsimile: (202) 429-3231
If to the Company or the Stockholders to:
Transform IT, Incorporated
1904 Bridle Lane
Alexandria, Virginia 22308
Attn: Roy A. Chandler, Vice President
with a required copy to:
Shaw Pittman Potts & Trowbridge
2300 N Street, N.W.
Washington, D.C. 20037
Attn: Danielle R. Srour, Esq.
Facsimile: (202) 663-8007
or to such other address as the person to whom notice is to be given may have
specified in a notice duly given to the sender as provided herein. Such notice,
request, claim, demand, waiver, consent, approval or other communication shall
be deemed to have been given as of the date so delivered, telefaxed, mailed or
dispatched and, if given by any other means, shall be deemed given only when
actually received by the addressees.
11.10. GOVERNING LAW. This Agreement shall be governed by and
construed, interpreted and enforced in accordance with the laws of the State of
Maryland (without regard to its laws relating to choice-of-law or
conflicts-of-law).
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11.11. ARBITRATION. Any unresolved dispute or controversy arising under
or in connection with this Agreement arising after the Closing shall be settled
exclusively by a three (3) person arbitration panel, with such arbitration
proceeding conducted in accordance with the rules of the American Arbitration
Association then in effect. The arbitrators shall not have the authority to add
to, detract from, or modify any provision hereof. A decision by a majority of
the arbitration panel shall be final and binding. Judgment may be entered on the
arbitrators' award in any court having jurisdiction. The arbitration proceeding
shall be held in Bethesda, Maryland. Notwithstanding the foregoing, the parties
shall be entitled to seek injunctive or other equitable relief from any court of
competent jurisdiction, without the need to resort to arbitration.
11.12. SURVIVAL OF REPRESENTATIONS, WARRANTIES AND COVENANTS. All
representations and warranties made by either party in or pursuant to this
Agreement or in any document delivered pursuant hereto shall survive for two (2)
years after the Closing; provided, however, that (i) in the event of fraud by
any party, the representations and warranties of that party shall survive the
Closing for an indefinite period of time, and (ii) the representations and
warranties in Section 4.2, 4.3, 4.5 and 4.10 shall survive until the expiration
of the applicable statute of limitations, or if there is no applicable statute
of limitations, such representations and warranties shall survive indefinitely.
Notwithstanding the foregoing, if a Claim Notice is sent pursuant to Section
9.2(a) or (b), the representation or warranty with respect to which such Claim
Notice is sent, and the related indemnification obligations set forth in Section
9 with respect to the Claim Notice, shall survive until the resolution of the
Claim to which such Claim Notice relates, or such longer period as provided in
subsections (i) and (ii) hereof. All covenants made by any party pursuant to
this Agreement shall survive the Closing pursuant to their terms.
11.13. SEVERABILITY. If any provision of this Agreement or the
application thereof to any person or circumstances is held invalid or
unenforceable in any jurisdiction, the remainder hereof, and the application of
such provision to such person or circumstances in any jurisdiction, shall not be
affected thereby, and to this end the provisions of this Agreement shall be
severable. The preceding sentence is in addition to and not in place of the
severability provisions in Section 10.4.
11.14. ABSENCE OF THIRD PARTY BENEFICIARY RIGHTS. Except as expressly
provided herein, no provision of this Agreement is intended, nor will be
interpreted, to provide or create any third party beneficiary rights or any
other rights of any kind in any client, customer, affiliate, shareholder,
employee or partner of any party hereto or any other person or entity.
11.15. FURTHER REPRESENTATIONS. Each party to this Agreement
acknowledges and represents that it has been represented by its own legal
counsel in connection with the transactions contemplated by this Agreement, with
the opportunity to seek advice as to its legal rights from such counsel. Each
party further represents that it is being independently advised as to the tax or
securities consequences of the transactions contemplated by this Agreement and
is not relying on any representation or statements made by the other party as to
such tax and securities consequences.
11.16. AMENDMENT; WAIVER. This Agreement may be amended by the parties
hereto at any time only by execution of an instrument in writing signed on
behalf of each of the parties
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hereto. Any extension or waiver by any party of any provision hereto shall be
valid only if set forth in an instrument in writing signed on behalf of such
party.
11.17. GENDER. Unless the context clearly indicates otherwise, where
appropriate the singular shall include the plural and the masculine shall
include the feminine or neuter, and vice versa, to the extent necessary to give
the terms defined herein and/or the terms otherwise used in this Agreement the
proper meanings.
11.18. HEADINGS. The headings and other captions in this Agreement are
for convenience and reference only and shall not be used in interpreting,
construing or enforcing any of the provisions of this Agreement.
11.19. PUBLIC DISCLOSURE. Prior to the Closing Date, neither party
shall make any disclosure (whether or not in response to an inquiry) of the
subject matter of this Agreement unless previously approved by the Company and
AppNet.
[EXECUTION PAGE FOLLOWS]
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IN WITNESS WHEREOF, the parties hereto have executed this Asset
Purchase Agreement as of the day and year first above written.
APPNET:
------
APPNET SYSTEMS, INC.
By: /s/ Toby Tobaccowala
----------------------------
Name: Toby Tobaccowala
----------------------------
Title: Senior Vice President
----------------------------
SUB:
---
TRANSFORM ACQUISITION CORP.
By: /s/ Ronald B. Alexander
----------------------------
Name: Ronald B. Alexander
----------------------------
Title: President
----------------------------
THE COMPANY:
-----------
TRANSFORM IT, INCORPORATED
By: /s/ Roy A. Chandler
----------------------------
Name: Roy A. Chandler
----------------------------
Title: Vice President
----------------------------
STOCKHOLDERS:
------------
/s/ John C. King
------------------------------------
JOHN C. KING
/s/ Thomas E. Hunt
------------------------------------
THOMAS E. HUNT
/s/ Roy A. Chandler
------------------------------------
ROY A. CHANDLER
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SCHEDULES
Schedule 2.1 Excluded Assets
Schedule 4.2 Exceptions to Corporate Qualifications
Schedule 4.4 Third Party Consents
Schedule 4.5 Company Capitalization
Schedule 4.6 Financial Statements
Schedule 4.7(a) Liabilities and Obligations
Schedule 4.7(b) Advance Payments or Deposits
Schedule 4.8 Adverse Changes
Schedule 4.9(a) Benefit Plans
Schedule 4.9(b) List of Employees
Schedule 4.12(b) Personal Property
Schedule 4.12(c) Permitted Encumbrances
Schedule 4.13 Contracts
Schedule 4.15 Litigation
Schedule 4.16 Violations of Law
Schedule 4.17 Environmental Disclosure
Schedule 4.18(a) Significant Customers
Schedule 4.18(b) Suppliers Who Have Threatened Termination
Schedule 4.19 Insurance
Schedule 4.20(a) Company Intellectual Property Rights
Schedule 4.20(b) Licenses to Use Company Intellectual Property
Schedule 4.20(c) Third Party Intellectual Property Claims
Schedule 4.20(e) Unauthorized Intellectual Property Use
Schedule 4.23 Related Party Transactions
Schedule 5.6 AppNet Capitalization
Schedule 7.4 Designated Employees
EXHIBITS
Exhibit A Contingent Amount
Exhibit B Form of Stock Pledge Agreement
Exhibit C Form of Senior Management Agreement
Exhibit D Form of Employment Agreement
<PAGE>
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REVOLVING CREDIT AGREEMENT (UNGUARANTEED)
Dated as of January 8, 1999
among
APPNET SYSTEMS, INC.
BANKBOSTON, N.A. and the other lending institutions
set forth on Schedule 1 hereto,
BANKBOSTON, N.A., as Agent
and
ANTARES CAPITAL CORPORATION, as Co-Agent
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<PAGE>
TABLE OF CONTENTS
1. DEFINITIONS AND RULES OF INTERPRETATION..................................1
1.1. Definitions....................................................1
1.2. Rules of Interpretation........................................17
2. THE REVOLVING CREDIT FACILITY............................................18
2.1. Commitment To Lend.............................................18
2.2. Commitment Fee.................................................19
2.3. Reduction of Total Commitment..................................19
2.4. The Revolving Credit Notes.....................................20
2.5. Interest on Revolving Credit Loans.............................20
2.6. Requests for Revolving Credit Loans............................20
2.7. Conversion Options.............................................21
2.7.1. Conversion to Different Type of Revolving Credit
Loan...............................................21
2.7.2. Continuation of Type of Revolving Credit Loan.........21
2.7.3. LIBOR Rate Loans......................................21
2.8. Funds for Revolving Credit Loans...............................22
2.8.1. Funding Procedures....................................22
2.8.2. Advances by Agent.....................................22
3. REPAYMENT OF THE REVOLVING CREDIT LOANS..................................22
3.1. Maturity.......................................................22
3.2. Mandatory Repayments of Revolving Credit Loans.................23
3.3. Optional Repayments of Revolving Credit Loans..................23
4. LETTERS OF CREDIT........................................................23
4.1. Letter of Credit Commitments...................................23
4.1.1. Commitment to Issue Letters of Credit.................23
4.1.2. Letter of Credit Applications.........................24
4.1.3. Terms of Letters of Credit............................24
4.1.4. Reimbursement Obligations of Banks....................24
4.1.5. Participations of Banks...............................25
4.2. Reimbursement Obligation of the Borrower.......................25
4.3. Letter of Credit Payments......................................25
4.4. Obligations Absolute...........................................26
4.5. Reliance by Issuer.............................................26
4.6. Letter of Credit Fee...........................................27
5. CERTAIN GENERAL PROVISIONS...............................................27
5.1. Closing Fee; Agent's Fee.......................................27
5.2. Funds for Payments.............................................27
5.2.1. Payments to Agent.....................................27
5.2.2. No Offset, etc........................................28
5.3. Computations...................................................28
5.4. Inability to Determine LIBOR Rate..............................28
5.5. Illegality.....................................................29
5.6. Additional Costs, etc..........................................29
5.7. Capital Adequacy...............................................30
5.8. Certificate....................................................31
<PAGE>
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5.9. Indemnity......................................................31
5.10. Interest After Default.........................................31
5.10.1. Overdue Amounts......................................31
5.10.2. Amounts Not Overdue..................................31
6. SECURITY AND GUARANTIES..................................................32
6.1. Security of Borrower...........................................32
6.2. Guaranties and Security of Subsidiaries........................32
7. REPRESENTATIONS AND WARRANTIES...........................................32
7.1. Corporate Authority............................................32
7.1.1. Incorporation; Good Standing..........................32
7.1.2. Authorization.........................................32
7.1.3. Enforceability........................................32
7.2. Governmental Approvals.........................................33
7.3. Title to Properties; Leases....................................33
7.4. Financial Statements and Projections...........................33
7.4.1. Fiscal Year...........................................33
7.4.2. Financial Statements..................................33
7.4.3. Projections...........................................33
7.5. No Material Changes, etc.; Solvency............................34
7.5.1. No Changes............................................34
7.5.2. Solvency..............................................34
7.6. Franchises, Patents, Copyrights, etc...........................34
7.7. Litigation.....................................................34
7.8. No Materially Adverse Contracts, etc...........................35
7.9. Compliance With Other Instruments, Laws, etc...................35
7.10. Tax Status.....................................................35
7.11. No Event of Default............................................35
7.12. Holding Company and Investment Company Acts....................35
7.13. Absence of Financing Statements, etc...........................35
7.14. Perfection of Security Interest................................36
7.15. Certain Transactions...........................................36
7.16. Employee Benefit Plans.........................................36
7.16.1. In General...........................................36
7.16.2. Terminability of Welfare Plans.......................36
7.16.3. Guaranteed Pension Plans.............................37
7.16.4. Multiemployer Plans..................................37
7.17. Use of Proceeds................................................37
7.17.1. General..............................................37
7.17.2. Regulations U and X..................................37
7.17.3. Ineligible Securities................................38
7.18. Environmental Compliance.......................................38
7.19. Subsidiaries, etc..............................................39
7.20. Bank Accounts..................................................39
7.21. Year 2000 Problem..............................................40
7.22. Disclosure.....................................................40
7.23. Chief Executive Offices........................................40
7.24. Insurance......................................................40
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8. AFFIRMATIVE COVENANTS OF THE BORROWER....................................40
8.1. Punctual Payment...............................................40
8.2. Maintenance of Office..........................................40
8.3. Records and Accounts...........................................41
8.4. Financial Statements, Certificates and Information.............41
8.5. Notices........................................................42
8.5.1. Defaults..............................................42
8.5.2. Environmental Events..................................43
8.5.3. Notification of Claims Against Collateral.............43
8.5.4. Notice of Litigation and Judgments....................43
8.6. Corporate Existence; Maintenance of Properties.................43
8.7. Insurance......................................................44
8.8. Taxes..........................................................44
8.9. Inspection of Properties and Books, etc........................44
8.9.1. General...............................................44
8.9.2. Collateral Audit......................................44
8.9.3. Communication with Accountants........................45
8.10. Compliance with Laws, Contracts, Licenses, and Permits.........45
8.11. Employee Benefit Plans.........................................45
8.12. Use of Proceeds................................................45
8.13. Bank Accounts..................................................45
8.14. New Guarantors.................................................46
8.15. Landlord Consents..............................................46
8.16. Bank Agency Agreements.........................................46
8.17. Further Assurances.............................................46
9. CERTAIN NEGATIVE COVENANTS OF THE BORROWER...............................46
9.1. Restrictions on Indebtedness...................................47
9.2. Restrictions on Liens..........................................47
9.3. Restrictions on Investments....................................49
9.4. Restricted Payments; Distributions.............................50
9.5. Merger, Consolidation..........................................50
9.5.1. Mergers and Acquisitions..............................50
9.5.2. Disposition of Assets.................................51
9.6. Sale and Leaseback.............................................51
9.7. Compliance with Environmental Laws.............................51
9.8. Fiscal Year....................................................51
9.9. Employee Benefit Plans.........................................52
9.10. Business Activities............................................52
9.11. Transactions with Affiliates...................................52
9.12. Bank Accounts..................................................52
9.13. Change in Terms of Capital Stock...............................53
9.14. Upstream Limitations...........................................53
9.15. Inconsistent Agreements........................................53
9.16. Charter Amendments.............................................53
9.17. Amendments to Employment Agreements............................53
9.18. Seller Subordinated Debt.......................................53
10. FINANCIAL COVENANTS OF THE BORROWER.....................................54
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10.1. Leverage Ratio.................................................54
10.2. Minimum EBITDA.................................................54
10.3. Consolidated Operating Cash Flow to Total Debt Service.........54
10.4. Consolidated Operating Cash Flow to Senior Debt Service........54
10.5. Quick Ratio....................................................55
10.6. No Quarterly Net Loss..........................................55
10.7. Capital Expenditures...........................................55
11. CLOSING CONDITIONS......................................................55
11.1. Loan Documents etc.............................................55
11.2. Certified Copies of Charter Documents..........................55
11.3. Corporate Action...............................................55
11.4. Incumbency Certificate.........................................55
11.5. Validity of Liens..............................................56
11.6. Perfection Certificates and UCC Search Results.................56
11.7. Certificates of Insurance......................................56
11.8. Statement of Financial Position................................56
11.9. Opinions of Counsel............................................56
11.10. Payment of Fees................................................56
11.11. Payoff Letters.................................................56
11.12. Disbursement Instructions......................................56
11.13. Completion of Successful Financial Inquiry and Due Diligence...57
11.14. Consents and Approvals.........................................57
11.15. Negative Pledge Letters........................................57
12. CONDITIONS TO ALL BORROWINGS............................................57
12.1. Representations True; No Event of Default......................57
12.2. No Legal Impediment............................................57
12.3. Governmental Regulation........................................57
12.4. Proceedings and Documents......................................58
12.5. Pro Forma Compliance...........................................58
12.6. Guaranteed Credit Agreement Outstandings.......................58
13. EVENTS OF DEFAULT; ACCELERATION; ETC....................................58
13.1. Events of Default and Acceleration.............................58
13.2. Termination of Commitments.....................................61
13.3. Remedies.......................................................62
13.4. Distribution of Collateral Proceeds............................62
14. SETOFF..................................................................63
15. THE AGENT...............................................................64
15.1. Authorization..................................................64
15.2. Employees and Agents...........................................64
15.3. No Liability...................................................64
15.4. No Representations.............................................65
15.4.1. General..............................................65
15.4.2. Closing Documentation, etc...........................65
15.5. Payments.......................................................65
15.5.1. Payments to Agent....................................65
15.5.2. Distribution by Agent................................66
15.5.3. Delinquent Banks.....................................66
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15.6. Holders of Notes...............................................66
15.7. Indemnity......................................................66
15.8. Agent as Bank..................................................67
15.9. Resignation....................................................67
15.10. Notification of Defaults and Events of Default.................67
15.11. Duties in the Case of Enforcement..............................67
16. EXPENSES AND INDEMNIFICATION............................................68
16.1. Expenses.......................................................68
16.2. Indemnification................................................68
16.3. Survival.......................................................69
17. TREATMENT OF CERTAIN CONFIDENTIAL INFORMATION...........................69
17.1. Sharing of Information with Section 20 Subsidiary..............69
17.2. Confidentiality................................................69
17.3. Prior Notification.............................................70
17.4. Other..........................................................70
18. SURVIVAL OF COVENANTS, ETC..............................................70
19. ASSIGNMENT AND PARTICIPATION............................................71
19.1. Conditions to Assignment by Banks..............................71
19.2. Certain Representations and Warranties; Limitations;
Covenants....................................................71
19.3. Register.......................................................72
19.4. New Revolving Credit Notes.....................................73
19.5. Participations.................................................73
19.6. Disclosure.....................................................73
19.7. Assignee or Participant Affiliated with the Borrower...........74
19.8. Miscellaneous Assignment Provisions............................74
19.9. Assignment by Borrower.........................................75
20. NOTICES, ETC............................................................75
21. GOVERNING LAW...........................................................75
22. HEADINGS................................................................76
23. COUNTERPARTS............................................................76
24. ENTIRE AGREEMENT, ETC...................................................76
25. WAIVER OF JURY TRIAL....................................................76
26. CONSENTS, AMENDMENTS, WAIVERS, ETC......................................77
27. SEVERABILITY............................................................77
<PAGE>
EXHIBITS
Exhibit A Form of Revolving Credit Note
Exhibit B Form of Loan Request
Exhibit C Form of Compliance Certificate
Exhibit D Form of Assignment and Acceptance
SCHEDULES
Schedule 1 Banks
Schedule 7.3 Title to Properties; Leases
Schedule 7.7 Litigation
Schedule 7.15 Certain Transactions
Schedule 7.19 Subsidiaries, etc.
Schedule 7.20 Bank Accounts
Schedule 9.1 Restrictions on Indebtedness
Schedule 9.2 Restrictions on Liens
Schedule 9.3 Restrictions on Investments
<PAGE>
REVOLVING CREDIT AGREEMENT
This REVOLVING CREDIT AGREEMENT is made as of January 8, 1999, by and
among APPNET SYSTEMS, INC. (the "Borrower"), a Delaware corporation having its
principal place of business at 6707 Democracy Boulevard, Suite 1000, Bethesda,
Maryland 20817, and BANKBOSTON, N.A., a national banking association and the
other lending institutions listed on Schedule 1, BANKBOSTON, N.A. as agent for
itself and such other lending institutions and ANTARES CAPITAL CORPORATION as
co-agent (the "Co-Agent") for itself and such other lending institutions.
1. DEFINITIONS AND RULES OF INTERPRETATION.
1.1. Definitions. The following terms shall have the meanings set forth in
this ss.1 or elsewhere in the provisions of this Credit Agreement referred to
below:
Accounts Receivable. All rights of the Borrower or any of its Subsidiaries
to payment for goods sold, leased or otherwise marketed in the ordinary course
of business and all rights of the Borrower or any of its Subsidiaries to payment
for services rendered in the ordinary course of business and all sums of money
or other proceeds due thereon pursuant to transactions with account debtors,
except for that portion of the sum of money or other proceeds due thereon that
relate to sales, use or property taxes in conjunction with such transactions,
recorded on books of account in accordance with generally accepted accounting
principles.
Adjustment Date. The first day of the month immediately following the
month in which a Compliance Certificate is to be delivered by the Borrower
pursuant to ss.8.4(d).
Affiliate. Any Person that would be considered to be an affiliate of the
Borrower under Rule 144(a) of the Rules and Regulations of the Securities and
Exchange Commission, as in effect on the date hereof, if the Borrower were
issuing securities.
Agency Account Agreement. See ss.8.16.
Agent's Head Office. The Agent's head office located at 100 Federal
Street, Boston, Massachusetts 02110, or at such other location as the Agent may
designate from time to time.
Agent. BankBoston, N.A. acting as agent for the Banks.
Agent's Special Counsel. Bingham Dana LLP or such other counsel as may be
approved by the Agent.
Applicable Margin. For each period commencing on an Adjustment Date
through the date immediately preceding the next Adjustment Date (each a "Rate
Adjustment Period"), the Applicable Margin shall be the applicable margin set
forth below with respect to the Borrower's Leverage Ratio, as determined for the
fiscal period
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ending on the fiscal quarter ended immediately preceding the applicable Rate
Adjustment Period.
===================================================================
Tier Leverage Ratio Base Rate Loans LIBOR Rate Loans
-------------------------------------------------------------------
1 Less than 1.50:1.00 0.25% 2.25%
-------------------------------------------------------------------
2 Greater than or equal 0.75% 2.75%
to 1.50:1.00 but less
than or equal to
2.00:1.00
-------------------------------------------------------------------
3 Greater than 2.00:1.00 1.25% 3.25%
but less than or equal
to 2.25:1.00
-------------------------------------------------------------------
4 Greater than 2.25:1.00 1.50% 3.50%
-------------------------------------------------------------------
Notwithstanding the foregoing, (a) for Revolving Credit Loans outstanding
during the period commencing on the Closing Date through the date immediately
preceding the first Adjustment Date to occur after the fiscal quarter ending
June 30, 1999, the Applicable Margin will be as set forth in the Closing Date
Compliance Certificate, but in no event lower than Tier 3 above, and (b) if the
Borrower fails to deliver any Compliance Certificate pursuant to ss.8.4(d)
hereof then, for the period commencing on the Adjustment Date to occur
subsequent to such failure through the date immediately following the date on
which such Compliance Certificate is delivered, the Applicable Margin shall be
the highest Applicable Margin set forth above.
Assignment and Acceptance. See ss.19.1.
Balance Sheet Date. June 30, 1998.
Banks. BKB and the other lending institutions listed on Schedule 1 hereto
and any other Person who becomes an assignee of any rights and obligations of a
Bank pursuant to ss.19.
Base Rate. The higher of (a) the annual rate of interest announced from
time to time by BKB at its head office in Boston, Massachusetts, as its "base
rate" and (b) one-half of one percent (1/2%) above the Federal Funds Effective
Rate. For the purposes of this definition, "Federal Funds Effective Rate" shall
mean, for any day, the rate per annum equal to the weighted average of the rates
on overnight federal funds transactions with members of the Federal Reserve
System arranged by federal funds brokers, as published for such day (or if such
day is not a Business Day, for the next preceding Business Day) by the Federal
Reserve Bank of New York, or, if such rate is not so published for any day that
is a Business Day, the average of the quotations for such day on such
transactions received by the Agent from three funds brokers of recognized
standing selected by the Agent.
Base Rate Loans. Revolving Credit Loans bearing interest calculated by
reference to the Base Rate.
BKB. BankBoston, N.A. (f/k/a The First National Bank of Boston), a
national banking association, in its individual capacity.
<PAGE>
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Borrower. As defined in the preamble hereto.
Business Day. Any day on which banking institutions in Boston,
Massachusetts, are open for the transaction of banking business and, in the case
of LIBOR Rate Loans, also a day which is a LIBOR Business Day.
Capital Assets. Fixed assets, both tangible (such as land, buildings,
fixtures, machinery and equipment) and intangible (such as patents, copyrights,
trademarks, franchises and good will); provided that Capital Assets shall not
include any item customarily charged directly to expense or depreciated over a
useful life of twelve (12) months or less in accordance with generally accepted
accounting principles.
Capital Expenditures. Amounts paid or Indebtedness incurred by the
Borrower or any of its Subsidiaries in connection with (a) the purchase or lease
by the Borrower or any of its Subsidiaries of Capital Assets that would be
required to be capitalized and shown on the balance sheet of such Person in
accordance with generally accepted accounting principles or (b) the lease of any
assets by the Borrower or any of its Subsidiaries as lessee under any synthetic
lease referred to in clause (f) of the definition of the term "Indebtedness" to
the extent that such assets would have been Capital Assets had the synthetic
lease been treated for accounting purposes as a Capitalized Lease.
Capitalized Leases. Leases under which the Borrower or any of its
Subsidiaries is the lessee or obligor, the discounted future rental payment
obligations under which are required to be capitalized on the balance sheet of
the lessee or obligor in accordance with generally accepted accounting
principles.
CERCLA. See ss.7.18(a).
Closing Date. The first date on which the conditions set forth in ss.11
have been satisfied and any Revolving Credit Loans are to be made or any Letter
of Credit is to be issued hereunder.
Co-Agent. As defined in the preamble hereto.
Code. The Internal Revenue Code of 1986.
Collateral. All of the property, rights and interests of the Borrower and
its Subsidiaries that are or are intended to be subject to the security
interests and mortgages created by the Security Documents.
Commitment. With respect to each Bank, the amount set forth on Schedule 1
hereto as the amount of such Bank's commitment to make Revolving Credit Loans
to, and to participate in the issuance, extension and renewal of Letters of
Credit for the account of, the Borrower, as the same may be reduced from time to
time; or if such commitment is terminated pursuant to the provisions hereof,
zero.
<PAGE>
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Commitment Percentage. With respect to each Bank, the percentage set forth
on Schedule 1 hereto as such Bank's percentage of the aggregate Commitments of
all of the Banks.
Compliance Certificate. See ss.8.4(d) hereof.
Consolidated or consolidated. With reference to any term defined herein,
shall mean that term as applied to the accounts of the Borrower and its
Subsidiaries, consolidated in accordance with generally accepted accounting
principles.
Consolidated Current Liabilities. All liabilities of the Borrower and its
Subsidiaries on a consolidated basis maturing on demand or within one (1) year
from the date as of which Consolidated Current Liabilities are to be determined,
and such other liabilities as may properly be classified as current liabilities
in accordance with generally accepted accounting principles; provided, however,
the outstanding Revolving Credit Loans, the outstanding "Guaranteed Revolving
Credit Loan" (as such term is defined in the Guaranteed Credit Agreement) and
the outstanding amount of all Seller Subordinated Debt shall not be included as
a Consolidated Current Liability.
Consolidated Net Income (or Deficit). The consolidated net income (or
deficit) of the Borrower and its Subsidiaries, after deduction of all expenses,
taxes, and other proper charges, determined in accordance with generally
accepted accounting principles, after eliminating therefrom all extraordinary
nonrecurring items of income or expense provided, however, for purposes of
calculating compliance with the financial covenants set forth in ss.10 hereof,
Consolidated Net Income shall not include (a) any non-cash writedowns of (i)
goodwill, (ii) purchased research and development and/or (iii) intangible assets
arising from the consummation of a Permitted Acquisition and the Borrower's
allocation of gross intangibles to a variety of intangible assets such as
contracts, employee base, copyrights, trademarks and other intellectual
property; and/or (b) compensation expenses or additional goodwill amortization
relating to the granting by the Borrower of stock options and restricted stock
or arising out of earn-out arrangements in connection with Permitted
Acquisitions which would otherwise be considered a compensation charge in
accordance with generally accepted accounting principles.
Consolidated Operating Cash Flow. For any period, an amount equal to (a)
EBITDA for such period, plus (b) to the extent deducted from EBITDA, expenses
incurred by Persons which are acquired in a Permitted Acquisition and which the
Majority Banks reasonably determine are likely to be eliminated in connection
with such Person's consolidation with the Borrower, less (c) the sum of (i) cash
payments for all taxes (excluding any taxes included in the calculation of
EBITDA) paid during such period, plus (ii) to the extent not already deducted in
the determination of EBITDA, Capital Expenditures made during such period to the
extent permitted by ss.10, other than Capital Expenditures which the Majority
Banks reasonably determine are made for nonrecurring one-time infrastructure
purchases or leases by the Borrower, plus (iii) the portion of the costs of
software development required to be capitalized pursuant to FASB Statement No.
86.
<PAGE>
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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 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;
and such notes and Accounts Receivable shall be taken at their face value less
reserves pertaining thereto determined to be sufficient in accordance with
generally accepted accounting principles.
Consolidated Total Interest Expense. For any period, the aggregate amount
of interest required to be paid or accrued (excluding accrued interest the
payment of which is deferred beyond one year from the date such amount is being
determined) by the Borrower and its Subsidiaries during such period on all
Indebtedness of the Borrower and its Subsidiaries outstanding during all or any
part of such period, whether such interest was or is required to be reflected as
an item of expense or capitalized, including payments consisting of interest in
respect of any Capitalized Lease, or any synthetic lease referred to in clause
(f) of the definition of the term "Indebtedness," and including commitment fees,
agency fees, facility fees, balance deficiency fees and similar fees or expenses
in connection with the borrowing of money, provided, however, when calculating
Consolidated Total Interest Expense for any period in which a Permitted
Acquisition has occurred, the calculation of Consolidated Total Interest Expense
shall be made on a Pro Forma Basis.
Conversion Request. A notice given by the Borrower to the Agent of the
Borrower's election to convert or continue a Revolving Credit Loan in accordance
with ss.2.7.
Credit Agreement. This Revolving Credit Agreement, including the Schedules
and Exhibits hereto.
Davidson. Collectively, Thomas M. Davidson and/or Davidson Capital Group.
Default. See ss.13.
Delinquent Bank. See ss.15.5.3.
Distribution. The declaration or payment of any dividend on or in respect
of any shares of any class of capital stock of the Borrower, other than
dividends payable solely in shares of common stock of the Borrower; the
purchase, redemption, or other retirement of any shares of any class of capital
stock of the Borrower, directly or indirectly through a Subsidiary of the
Borrower or otherwise; the return of capital by the Borrower to its shareholders
as such; or any other distribution on or in respect of any shares of any class
of capital stock of the Borrower, provided, however, that the retirements or
issuances of capital stock in connection with the conversion of the
<PAGE>
-6-
Borrower's preferred stock into common stock shall not constitute
"Distributions" hereunder.
Dollars or $. Dollars in lawful currency of the United States of America.
Domestic Lending Office. Initially, the office of each Bank designated as
such in Schedule 1 hereto; thereafter, such other office of such Bank, if any,
located within the United States that will be making or maintaining Base Rate
Loans.
Drawdown Date. The date on which any Revolving Credit Loan is made or is
to be made, and the date on which any Revolving Credit Loan is converted or
continued in accordance with ss.2.7.
EBITDA. With respect to the Borrower and its Subsidiaries for any fiscal
period, an amount equal to Consolidated Net Income for such period, plus, to the
extent deducted in the calculation of Consolidated Net Income and without
duplication, (a) income tax expense for such period; (b) Consolidated Total
Interest Expense paid or accrued (excluding accrued interest the payment of
which is deferred beyond one year from the date such amount is being determined)
during such period; (c) depreciation and amortization for such period; and (d)
the amount of any earn-out or noncompete for such period to the extent such
amount was capitalized and treated as debt (including without limitation any
earn-out such as that which was part of the consideration in the acquisition of
New Media Publishing, Inc., which earn-out was accounted for as compensation and
noncompete and capitalized as an intangible asset and amortized), and minus, to
the extent added in computing Consolidated Net Income and without duplication,
all noncash gains (including income tax benefits) for such period and minus the
aggregate amount of all Capital Expenditures made in the last twelve consecutive
calendar months from the date of determination, other than Capital Expenditures
which the Majority Banks reasonably determine are made for nonrecurring one-time
infrastructure purchases or leases by the Borrower and minus (i) 25% of the
aggregate value of Accounts Receivable, net of reserves, which are outstanding
for more than ninety (90) days past the invoice date thereof (the "Past 90 Days
AR") and (ii) to the extent the aggregate amount of the Past 90 Days AR is in
excess of $500,000, an additional 25% of the aggregate value of Past 90 Days AR
which exceed $500,000, all as determined in accordance with generally accepted
accounting principles.
Eligible Assignee. Any of (a) a commercial bank or finance company
organized under the laws of the United States, or any State thereof or the
District of Columbia, and having total assets in excess of $1,000,000,000; (b) a
savings and loan association or savings bank organized under the laws of the
United States, or any State thereof or the District of Columbia, and having a
net worth of at least $100,000,000, calculated in accordance with generally
accepted accounting principles; (c) a commercial bank organized under the laws
of any other country which is a member of the Organization for Economic
Cooperation and Development (the "OECD"), or a political subdivision of any such
country, and having total assets in excess of $1,000,000,000, provided that such
bank is acting through a branch or agency located in the country in which it is
<PAGE>
-7-
organized or another country which is also a member of the OECD; (d) the central
bank of any country which is a member of the OECD; and (e) if, but only if, an
Event of Default has occurred and is continuing, any other bank, insurance
company, commercial finance company or other financial institution or other
Person approved by the Agent, such approval not to be unreasonably withheld.
Employee Benefit Plan. Any employee benefit plan within the meaning of
ss.3(3) of ERISA maintained or contributed to by the Borrower or any ERISA
Affiliate, other than a Guaranteed Pension Plan or a Multiemployer Plan.
Environmental Laws. See ss.7.18(a).
EPA. See ss.7.18(b).
ERISA. The Employee Retirement Income Security Act of 1974.
ERISA Affiliate. Any Person which is treated as a single employer with the
Borrower under ss.414 of the Code.
ERISA Reportable Event. A reportable event with respect to a Guaranteed
Pension Plan within the meaning of ss.4043 of ERISA and the regulations
promulgated thereunder.
Eurocurrency Reserve Rate. For any day with respect to a LIBOR Rate Loan,
the maximum rate (expressed as a decimal) at which any lender subject thereto
would be required to maintain reserves under Regulation D of the Board of
Governors of the Federal Reserve System (or any successor or similar regulations
relating to such reserve requirements) against "Eurocurrency Liabilities" (as
that term is used in Regulation D), if such liabilities were outstanding. The
Eurocurrency Reserve Rate shall be adjusted automatically on and as of the
effective date of any change in the Eurocurrency Reserve Rate.
Event of Default. See ss.13.
Fairfax. Collectively, Fairfax Partners, Fairfax Management Company II,
L.L.C. and/or Fairfax Consulting Company.
Fee Letters. Collectively, (a) the fee letter dated or to be dated on or
prior to the Closing Date between the Borrower and the Agent, in form and
substance satisfactory to the Agent and (b) the fee letter dated or to be dated
on or prior to the Closing Date between the Borrower and the Co-Agent, in form
and substance satisfactory to the Co-Agent.
generally accepted accounting principles. (a) When used in ss.10, whether
directly or indirectly through reference to a capitalized term used therein,
means (i) principles that are consistent with the principles promulgated or
adopted by the Financial Accounting Standards Board and its predecessors, in
effect for the fiscal quarter ended on the Balance Sheet Date, and (ii) to the
extent consistent with such
<PAGE>
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principles, the accounting practice of the Borrower reflected in its financial
statements for the quarter ended on the Balance Sheet Date, and (b) when used in
general, other than as provided above, means principles that are (i) consistent
with the principles promulgated or adopted by the Financial Accounting Standards
Board and its predecessors, as in effect from time to time and (ii) consistently
applied with past financial statements of the Borrower adopting the same
principles. No "Accounting Changes" (as hereinafter defined) shall effect
financial covenants, standards or terms in this Credit Agreement; provided, that
the Borrower shall prepare footnotes to each Compliance Certificate and the
financial statements required to be delivered hereunder that show the
differences between the financial statements delivered hereunder (which reflect
such Accounting Changes) and the basis for calculating financial covenant
compliance and the Leverage Ratio set forth in computing the Applicable Margin
(in each case without reflecting such Accounting Changes). Accounting Changes
shall mean (a) changes in accounting principles required by generally accepted
accounting principles and implemented by the Borrower; (b) changes in accounting
principles recommended by the Borrower's certified public accountants and
implemented by the Borrower; and (c) changes in carrying value of the Borrower's
or any of its Subsidiaries' assets, liabilities or equity accounts resulting
from any adjustments that were applicable to, but not included in, any pro forma
calculations delivered to the Agent on or prior to the Closing Date. All such
adjustments resulting from expenditures made subsequent to the Closing Date
shall be treated as expenses in the period the expenditures are made.
GTCR. GTCR Fund VI, L.P., a Delaware limited partnership.
Guaranteed Credit Agreement. That certain Revolving Credit Agreement dated
as of the date hereof by and among the Borrower, BankBoston, N.A. and the other
lenders party thereto (collectively, the "Guaranteed Banks"), BankBoston, N.A.,
as agent for the Guaranteed Banks (the "Guaranteed Agent") and Antares Capital
Corporation as co-agent for the Guaranteed Banks.
Guaranteed Credit Agreement Outstandings. As of any date of determination,
the sum of the outstanding amount of all "Guaranteed Revolving Credit Loans" (as
such term is defined in the Guaranteed Credit Agreement) plus the "Maximum
Drawing Amount" and all "Unpaid Reimbursement Obligations" (as each such term is
defined in the Guaranteed Credit Agreement) plus any and all other outstanding
"Obligations" (as such term is defined in the Guaranteed Credit Agreement)
thereunder.
Guaranteed Pension Plan. Any employee pension benefit plan within the
meaning of ss.3(2) of ERISA maintained or contributed to by the Borrower or any
ERISA Affiliate the benefits of which are guaranteed on termination in full or
in part by the PBGC pursuant to Title IV of ERISA, other than a Multiemployer
Plan.
Guaranty. The Guaranty dated as of the date hereof made by each Subsidiary
of the Borrower in favor of the Banks and the Agent pursuant to which each
Subsidiary of the Borrower guaranties to the Banks and the Agent the payment and
performance of the Obligations and in form and substance satisfactory to the
Banks and the Agent.
Hazardous Substances. See ss.7.18(b).
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Indebtedness. As to any Person and whether recourse is secured by or is
otherwise available against all or only a portion of the assets of such Person
and whether or not contingent, but without duplication:
(a) every obligation of such Person for money borrowed,
(b) every obligation of such Person evidenced by bonds, debentures,
notes or other similar instruments, including obligations incurred in
connection with the acquisition of property, assets or businesses, other
than notes issued in connection with any Permitted Acquisition
representing earn-out arrangements with the seller so long as such note
would not be required to be treated as a liability or debt pursuant to
generally accepted accounting principles,
(c) every reimbursement obligation of such Person with respect to
letters of credit, bankers' acceptances or similar facilities issued for
the account of such Person,
(d) every obligation of such Person issued or assumed as the
deferred purchase price of property or services (including securities
repurchase agreements but excluding trade accounts payable or accrued
liabilities arising in the ordinary course of business which are not
overdue or which are being contested in good faith),
(e) every obligation of such Person under any Capitalized Lease,
(f) every obligation of such Person under any lease treated as an
operating lease under generally accepted accounting principles and as a
loan or financing for U.S. income tax purposes(a "synthetic lease");
provided, however, for purposes of this Credit Agreement, synthetic leases
shall not include any lease arrangement entered into by the Borrower for
the lease of computer equipment so long as such arrangements are for
substantially the same purpose as those computer lease arrangements
existing on the Closing Date,
(g) all sales by such Person of (i) accounts or general intangibles
for money due or to become due, (ii) chattel paper, instruments or
documents creating or evidencing a right to payment of money or (iii)
other receivables (collectively "receivables"), whether pursuant to a
purchase facility or otherwise, other than in connection with the
disposition of the business operations of such Person relating thereto or
a disposition of defaulted receivables for collection and not as a
financing arrangement, and together with any obligation of such Person to
pay any discount, interest, fees, indemnities, penalties, recourse,
expenses or other amounts in connection therewith,
(h) every obligation of such Person (an "equity related purchase
obligation") to purchase, redeem, retire or otherwise acquire for value
any shares of capital stock of any class issued by such Person, any
warrants, options or other rights to acquire any such shares, or any
rights measured by the value of such shares, warrants, options or other
rights, provided, however, those items
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which are covered in the provision to the defined term "Restricted
Payment" shall not constitute Indebtedness for purposes of this paragraph
(h),
(i) every obligation of such Person under any forward contract,
futures contract, swap, option or other financing agreement or arrangement
(including, without limitation, caps, floors, collars and similar
agreements), the value of which is dependent upon interest rates, currency
exchange rates, commodities or other indices (a "derivative contract"),
(j) every obligation in respect of Indebtedness of any other entity
(including any partnership in which such Person is a general partner) to
the extent that such Person is liable therefor as a result of such
Person's ownership interest in or other relationship with such entity,
except to the extent that the terms of such Indebtedness provide that such
Person is not liable therefor and such terms are enforceable under
applicable law,
(k) every obligation, contingent or otherwise, of such Person
guaranteeing, or having the economic effect of guarantying or otherwise
acting as surety for, any obligation of a type described in any of clauses
(a) through (j) (the "primary obligation") of another Person (the "primary
obligor"), in any manner, whether directly or indirectly, and including,
without limitation, any obligation of such Person (i) to purchase or pay
(or advance or supply funds for the purchase of) any security for the
payment of such primary obligation, (ii) to purchase property, securities
or services for the purpose of assuring the payment of such primary
obligation, or (iii) to maintain working capital, equity capital or other
financial statement condition or liquidity of the primary obligor so as to
enable the primary obligor to pay such primary obligation.
The "amount" or "principal amount" of any Indebtedness at any time of
determination represented by (u) any Indebtedness, issued at a price that is
less than the principal amount at maturity thereof, shall be the amount of the
liability in respect thereof determined in accordance with generally accepted
accounting principles, (v) any Capitalized Lease shall be the principal
component of the aggregate of the rentals obligation under such Capitalized
Lease payable over the term thereof that is not subject to termination by the
lessee, (w) any sale of receivables shall be the amount of unrecovered capital
or principal investment of the purchaser (other than the Borrower or any of its
wholly-owned Subsidiaries) thereof, excluding amounts representative of yield or
interest earned on such investment, (x) any synthetic lease shall be the
stipulated loss value, termination value or other equivalent amount, (y) any
derivative contract shall be the maximum amount of any termination or loss
payment required to be paid by such Person if such derivative contract were, at
the time of determination, to be terminated by reason of any event of default or
early termination event thereunder, whether or not such event of default or
early termination event has in fact occurred and (z) any equity related purchase
obligation shall be the maximum fixed redemption or purchase price thereof
inclusive of any accrued and unpaid dividends to be comprised in such redemption
or purchase price.
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Ineligible Securities. Securities which may not be underwritten or dealt
in by member banks of the Federal Reserve System under Section 16 of the Banking
Act of 1993 (12 U.S.C. ss.24, Seventh), as amended.
Interest Payment Date. (a) As to any Base Rate Loan, the last day of the
calendar quarter with respect to interest accrued during such calendar quarter,
including, without limitation, the calendar quarter which includes the Drawdown
Date of such Base Rate Loan; and (b) as to any LIBOR Rate Loan in respect of
which the Interest Period is (i) three (3) months or less, the last day of such
Interest Period and (ii) more than three (3) months, the date that is three (3)
months from the first day of such Interest Period and, in addition, the last day
of such Interest Period.
Interest Period. With respect to each Revolving Credit Loan, (a)
initially, the period commencing on the Drawdown Date of such Revolving Credit
Loan and ending on the last day of one of the periods set forth below, as
selected by the Borrower in a Loan Request or as otherwise required by the terms
of this Credit Agreement (i) for any Base Rate Loan, the last day of the
calendar quarter; and (ii) for any LIBOR Rate Loan, 1, 2, 3, or 6 months; and
(b) thereafter, each period commencing on the last day of the next preceding
Interest Period applicable to such Revolving Credit Loan and ending on the last
day of one of the periods set forth above, as selected by the Borrower in a
Conversion Request; provided that all of the foregoing provisions relating to
Interest Periods are subject to the following:
(a) if any Interest Period with respect to a LIBOR Rate Loan would
otherwise end on a day that is not a LIBOR Business Day, that Interest
Period shall be extended to the next succeeding LIBOR Business Day unless
the result of such extension would be to carry such Interest Period into
another calendar month, in which event such Interest Period shall end on
the immediately preceding LIBOR Business Day;
(b) if any Interest Period with respect to a Base Rate Loan would
end on a day that is not a Business Day, that Interest Period shall end on
the next succeeding Business Day;
(c) if the Borrower shall fail to give notice as provided in ss.2.7,
the Borrower shall be deemed to have requested a conversion of the
affected LIBOR Rate Loan to a Base Rate Loan and the continuance of all
Base Rate Loans as Base Rate Loans on the last day of the then current
Interest Period with respect thereto;
(d) any Interest Period relating to any LIBOR Rate Loan that begins
on the last LIBOR Business Day of a calendar month (or on a day for which
there is no numerically corresponding day in the calendar month at the end
of such Interest Period) shall end on the last LIBOR Business Day of a
calendar month; and
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(e) any Interest Period that would otherwise extend beyond the
Revolving Credit Loan Maturity Date shall end on the Revolving Credit Loan
Maturity Date.
International Standby Practices. With respect to any standby Letter of
Credit, International Standby Practices (ISP98) as promulgated by the Institute
of International Banking Law & Practice, Inc., or any successor code of standby
letter of credit practices among banks adopted by the Agent in the ordinary
course of business as a standby letter of credit issuer and in effect at the
time of issuance of such Letter of Credit.
Investments. All expenditures made and all liabilities incurred
(contingently or otherwise) for the acquisition of stock or Indebtedness of, or
for loans, advances, capital contributions or transfers of property to, or in
respect of any guaranties (or other commitments as described under
Indebtedness), or obligations of, any Person. In determining the aggregate
amount of Investments outstanding at any particular time: (a) the amount of any
Investment represented by a guaranty shall be taken at not less than the
principal amount of the obligations guaranteed and still outstanding; (b) there
shall be included as an Investment all interest accrued with respect to
Indebtedness constituting an Investment unless and until such interest is paid;
(c) there shall be deducted in respect of each such Investment any amount
received as a return of capital (but only by repurchase, redemption, retirement,
repayment, liquidating dividend or liquidating distribution); (d) there shall
not be deducted in respect of any Investment any amounts received as earnings on
such Investment, whether as dividends, interest or otherwise, except that
accrued interest included as provided in the foregoing clause (b) may be
deducted when paid; and (e) there shall not be deducted from the aggregate
amount of Investments any decrease in the value thereof.
Investors. GTCR, Ken S. Bajaj and Smart Technology, LLC.
Letter of Credit. See ss.4.1.1.
Letter of Credit Application. See ss.4.1.1.
Letter of Credit Fee. See ss.4.6.
Letter of Credit Participation. See ss.4.1.4.
Leverage Ratio. As at any date of determination, the ratio of (a) Total
Funded Indebtedness of the Borrower and its Subsidiaries outstanding on such
date to (b) EBITDA of the Borrower and its Subsidiaries for the Reference Period
ending as of the most recent quarter ended for which a Compliance Certificate
has been delivered to the Agent by the Borrower, provided, however, when
calculating the Leverage Ratio for any period in which a Permitted Acquisition
has occurred, the calculation of the Leverage Ratio shall be made on a Pro Forma
Basis.
LIBOR Business Day. Any day on which commercial banks are open for
international business (including dealings in Dollar deposits) in London or such
other
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eurodollar interbank market as may be selected by the Agent in its sole
discretion acting in good faith.
LIBOR Lending Office. Initially, the office of each Bank designated as
such in Schedule 1 hereto; thereafter, such other office of such Bank, if any,
that shall be making or maintaining LIBOR Rate Loans.
LIBOR Rate. For any Interest Period with respect to a LIBOR Rate Loan, the
rate of interest equal to (a) the rate determined by the Agent at which Dollar
deposits for such Interest Period are offered based on information presented on
Telerate Page 3750 as of 11:00 a.m. London time on the second LIBOR Business Day
prior to the first day of such Interest Period, divided by (b) a number equal to
1.00 minus the Eurocurrency Reserve Rate, if applicable.
LIBOR Rate Loans. Revolving Credit Loans bearing interest calculated by
reference to the LIBOR Rate.
Loan Documents. This Credit Agreement, the Revolving Credit Notes, the
Letter of Credit Applications, the Letters of Credit, the Fee Letters, the
Subordination Agreements and the Security Documents.
Loan Request. See ss.2.6.
Majority Banks. If there are less than three (3) Banks, all Banks; if
there are three (3) Banks or more, as of any date, the Banks holding at least
fifty one percent (51%) of the outstanding principal amount of the Revolving
Credit Notes on such date; and if no such principal is outstanding, the Banks
whose aggregate Commitments constitute at least fifty one percent (51%) of the
Total Commitment.
Maximum Drawing Amount. The maximum aggregate amount that the
beneficiaries may at any time draw under outstanding Letters of Credit, as such
aggregate amount may be reduced from time to time pursuant to the terms of the
Letters of Credit.
Multiemployer Plan. Any multiemployer plan within the meaning of ss.3(37)
of ERISA maintained or contributed to by the Borrower or any ERISA Affiliate.
Obligations. All indebtedness, obligations and liabilities of any of GTCR,
the Borrower and its Subsidiaries to any of the Banks and the Agent,
individually or collectively, existing on the date of this Credit Agreement or
arising thereafter, direct or indirect, joint or several, absolute or
contingent, matured or unmatured, liquidated or unliquidated, secured or
unsecured, arising by contract, operation of law or otherwise, arising or
incurred under this Credit Agreement or any of the other Loan Documents or in
respect of any of the Revolving Credit Loans made or Reimbursement Obligations
incurred or any of the Revolving Credit Notes, Letter of Credit Applications,
Letters of Credit or other instruments at any time evidencing any thereof.
<PAGE>
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outstanding. With respect to the Revolving Credit Loans, the aggregate
unpaid principal thereof as of any date of determination.
PBGC. The Pension Benefit Guaranty Corporation created by ss.4002 of ERISA
and any successor entity or entities having similar responsibilities.
Perfection Certificates. The Perfection Certificates as defined in the
Security Agreements.
Permitted Acquisition. See ss.9.5.1(d).
Permitted Liens. Liens, security interests and other encumbrances
permitted by ss.9.2.
Person. Any individual, corporation, partnership, trust, unincorporated
association, business, or other legal entity, and any government or any
governmental agency or political subdivision thereof.
Pro Forma Basis. Following a Permitted Acquisition, the interest component
of Total Funded Indebtedness (or, in the case of Consolidated Total Interest
Expense, all Indebtedness) and EBITDA for the fiscal quarter in which such
Permitted Acquisition occurred and each of the three fiscal quarters immediately
following such Permitted Acquisition being calculated with reference to the
audited historical financial results of the Person so acquired (or, to the
extent such financial results are unaudited, such unaudited results shall have
been prepared in a manner which is acceptable to the Majority Banks) and the
Borrower and its Subsidiaries for the applicable Test Period after giving effect
on a pro forma basis to such Permitted Acquisition and assuming that such
Permitted Acquisition had been consummated at the beginning of such Test Period
in the manner described in (i), (ii) and (iii) below:
(i) all Indebtedness (whether under this Credit Agreement or
otherwise) and any other balance sheet adjustments incurred or made in
connection with the Permitted Acquisition shall be deemed to have been
incurred or made on the first day of the Test Period, and all Indebtedness
of the Person acquired or to be acquired in such Permitted Acquisition
which was or will have been repaid in connection with the consummation of
the Permitted Acquisition shall be deemed to have been repaid concurrently
with the incurrence of the Indebtedness incurred in connection with the
Permitted Acquisition;
(ii) all Indebtedness assumed to have been incurred pursuant to the
preceding clause (i) shall be deemed to have borne interest at the sum of
(a) the arithmetic mean of (x) the LIBOR Rate for LIBOR Rate Loans having
an Interest Period of one month in effect on the first day of the Test
Period and (y) the LIBOR Rate for LIBOR Rate Loans having an Interest
Period of one month in effect on the last day of the Test Period plus (b)
the Applicable Margin for LIBOR Rate Loans then in effect (after giving
effect to the Permitted Acquisition on a Pro Forma Basis); and
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(iii) other reasonable cost savings, expenses and other income
statement or operating statement adjustments which are acceptable to the
Majority Banks and which are attributable to the change in ownership
and/or management resulting from such Permitted Acquisition shall be
deemed to have been realized on the first day of the Test Period.
Rate Adjustment Period. See the definition of Applicable Margin.
RCRA. See ss.7.18(a).
Real Estate. All real property at any time owned or leased (as lessee or
sublessee) by the Borrower or any of its Subsidiaries.
Record. The grid attached to a Revolving Credit Note, or the continuation
of such grid, or any other similar record, including computer records,
maintained by any Bank with respect to any Revolving Credit Loan referred to in
such Revolving Credit Note.
Reference Period. The period of four (4) consecutive fiscal quarters of
the Borrower ending on the relevant date.
Register. See ss.19.3.
Reimbursement Obligation. The Borrower's obligation to reimburse the Agent
and the Banks on account of any drawing under any Letter of Credit as provided
in ss.4.2.
Restricted Payment. In relation to the Borrower and its Subsidiaries, any
(a) Distribution or (b) payment or prepayment by the Borrower or its
Subsidiaries to the Investors or to any other Affiliate of the Borrower, any of
its Subsidiaries or the Investors; provided, however, the term "Restricted
Payment" shall not include (i) so long as no Default or Event of Default has
occurred and is continuing or would exist a result thereof, any redemption of
such preferred stock in contemplation of an initial public offering of the
Borrower's common stock in accordance with the terms of the Borrower's Articles
of Incorporation (as in effect on the Closing Date); (ii) the repurchase of
capital stock of the Borrower from employees upon the termination of employment
or otherwise pursuant to any executive management or employment agreements
between the Borrower and such employees; and (iii) retirements or cancellations
of capital stock in connection with the conversion of the Borrower's preferred
stock into common stock.
Revolving Credit Loan Maturity Date. August 24, 2001.
Revolving Credit Loans. Revolving credit loans made or to be made by the
Banks to the Borrower pursuant to ss.2.
Revolving Credit Notes. See ss.2.4.
SARA. See ss.7.18(a).
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Section 20 Subsidiary. A Subsidiary of the bank holding company
controlling any Bank, which Subsidiary has been granted authority by the Federal
Reserve Board to underwrite and deal in certain Ineligible Securities.
Security Agreements. The several Security Agreements dated or to be dated
on or prior to the Closing Date between the Borrower and its Subsidiaries and
the Agent and in form and substance satisfactory to the Banks and the Agent.
Security Documents. The Guaranty, the Security Agreements, the Trademark
Assignments, the Stock Pledge Agreement and all other instruments and documents,
including without limitation Uniform Commercial Code financing statements,
required to be executed or delivered pursuant to any Security Document.
Seller Subordinated Debt. Collectively, (a) those notes set forth on
Schedule 1.2 hereto and (b) any Indebtedness of the Borrower to any seller in
connection with a Permitted Acquisition evidenced or incurred by a subordinated
note and in form and substance satisfactory to the Majority Banks.
Senior Debt Service. For any period, Total Debt Service minus the
aggregate amount of debt service attributable to Seller Subordinated Debt
outstanding for such period.
Stock Pledge Agreement. The Stock Pledge Agreement dated or to be dated on
or prior to the date hereof between the Borrower and the Agent and in form and
substance satisfactory to the Banks and the Agent.
Subordination Agreements. Collectively, those Subordination Agreements
dated or to be dated on or after the Closing Date, by and among the Agent, the
Borrower and the holders of certain of the Seller Subordinated Debt, with such
Subordination Agreements to be in form and substance acceptable to the Majority
Banks.
Subsidiary. Any corporation, association, trust, or other business entity
of which the designated parent shall at any time own directly or indirectly
through a Subsidiary or Subsidiaries at least a majority (by number of votes) of
the outstanding Voting Stock.
Test Period. The period of all fiscal quarters (and any portion of a
fiscal quarter) being tested in any covenant calculation period prior to the
date of such Permitted Acquisition as set forth in the definition of Pro Forma
Basis.
Total Commitment. The sum of the Commitments of the Banks, as in effect
from time to time.
Total Debt Service. For any period, all scheduled mandatory payments of
principal of Indebtedness of the Borrower and its Subsidiaries made or required
to be made in such period plus the Consolidated Total Interest Expense of the
Borrower and its Subsidiaries for that period.
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Total Funded Indebtedness. All Indebtedness of the Borrower and its
Subsidiaries for borrowed money (including without limitation, all guarantees by
such Person of Indebtedness of others for borrowed money), purchase money
Indebtedness and with respect to Capitalized Leases and synthetic leases (as
defined in clause (f) of the definition of "Indebtedness"), determined on a
consolidated basis in accordance with generally accepted accounting principles,
provided, however, for purposes of calculating the Leverage Ratio, Total Funded
Indebtedness shall not include (a) the Seller Subordinated Debt and (b) all
"Obligations" (as such term is defined in the Guaranteed Credit Agreement) of
the Borrower and its Subsidiaries to the Guaranteed Banks and the Guaranteed
Agent under the Guaranteed Credit Agreement so long as the payment and
performance of all of such Obligations are guaranteed by GTCR to the
satisfaction of the Agent and the Banks.
Trademark Assignments. The several Trademark Assignments dated or to be
dated on or prior to the Closing Date made by the Borrower and its Subsidiaries
in favor of the Agent and in form and substance satisfactory to the Banks and
the Agent.
Type. As to any Revolving Credit Loan, its nature as a Base Rate Loan or a
LIBOR Rate Loan.
Uniform Customs. With respect to any Letter of Credit, the Uniform Customs
and Practice for Documentary Credits (1993 Revision), International Chamber of
Commerce Publication No. 500 or any successor version thereto adopted by the
Agent in the ordinary course of its business as a letter of credit issuer and in
effect at the time of issuance of such Letters of Credit.
Unpaid Reimbursement Obligation. Any Reimbursement Obligation for which
the Borrower does not reimburse the Agent and the Banks on the date specified
in, and in accordance with, ss.4.2.
Voting Stock. Stock or similar interests, of any class or classes (however
designated), the holders of which are at the time entitled, as such holders, to
vote for the election of a majority of the directors (or persons performing
similar functions) of the corporation, association, trust or other business
entity involved, whether or not the right so to vote exists by reason of the
happening of a contingency.
1.2. Rules of Interpretation.
(a) A reference to any document or agreement shall include such
document or agreement as amended, modified or supplemented from time to
time in accordance with its terms and the terms of this Credit Agreement.
(b) The singular includes the plural and the plural includes the
singular.
(c) A reference to any law includes any amendment or modification to
such law.
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(d) A reference to any Person includes its permitted successors and
permitted assigns.
(e) Accounting terms not otherwise defined herein have the meanings
assigned to them by generally accepted accounting principles applied on a
consistent basis by the accounting entity to which they refer.
(f) The words "include", "includes" and "including" are not
limiting.
(g) All terms not specifically defined herein or by generally
accepted accounting principles, which terms are defined in the Uniform
Commercial Code as in effect in the Commonwealth of Massachusetts, have
the meanings assigned to them therein, with the term "instrument" being
that defined under Article 9 of the Uniform Commercial Code.
(h) Reference to a particular "ss." refers to that section of this
Credit Agreement unless otherwise indicated.
(i) The words "herein", "hereof", "hereunder" and words of like
import shall refer to this Credit Agreement as a whole and not to any
particular section or subdivision of this Credit Agreement.
(j) Unless otherwise expressly indicated, in the computation of
periods of time from a specified date to a later specified date, the word
"from" means "from and including," the words "to" and "until" each mean
"to but excluding," and the word "through" means "to and including".
(k) This Credit Agreement and the other Loan Documents may use
several different limitations, tests or measurements to regulate the same
or similar matters. All such limitations, tests and measurement are,
however, cumulative and are to be performed in accordance with the terms
thereof.
(l) This Credit Agreement and the other Loan Documents are the
results of negotiation among, and have been reviewed by counsel to, among
others, the Agent and the Borrower and are the product of discussions and
negotiations among all parties. Accordingly, this Credit Agreement and the
other Loan Documents are not intended to be construed against the Agent or
any of the Banks merely on account of the Agent's or any Bank's
involvement in the preparation of such documents.
2. THE REVOLVING CREDIT FACILITY.
2.1. Commitment To Lend. Subject to the terms and conditions set forth in
this Credit Agreement, each of the Banks severally agrees to lend to the
Borrower and the Borrower may borrow, repay, and reborrow from time to time from
the Closing Date up to but not including the Revolving Credit Loan Maturity Date
upon notice by the Borrower to the Agent given in accordance with ss.2.6, such
sums as are requested by the Borrower up to a maximum aggregate amount
outstanding (after giving effect to all
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amounts requested) at any one time equal to such Bank's Commitment minus such
Bank's Commitment Percentage of the sum of the Maximum Drawing Amount and all
Unpaid Reimbursement Obligations, provided that the sum of the outstanding
amount of the Revolving Credit Loans (after giving effect to all amounts
requested) plus the Maximum Drawing Amount and all Unpaid Reimbursement
Obligations shall not at any time exceed the Total Commitment and, provided
further, that the sum of the outstanding amount of the Revolving Credit Loans
(after giving effect to all amounts requested) plus the Maximum Drawing Amount
and all Unpaid Reimbursement Obligations shall not at any time exceed the
Guaranteed Credit Agreement Outstandings. The Revolving Credit Loans shall be
made pro rata in accordance with each Bank's Commitment Percentage. Each request
for a Revolving Credit Loan hereunder shall constitute a representation and
warranty by the Borrower that the conditions set forth in ss.11 and ss.12, in
the case of the initial Revolving Credit Loans to be made on the Closing Date,
and ss.12, in the case of all other Revolving Credit Loans, have been satisfied
on the date of such request.
2.2. Commitment Fee. The Borrower agrees to pay to the Agent for the
accounts of the Banks in accordance with their respective Commitment Percentages
a commitment fee calculated at the rate of one-half of one percent (1/2%) per
annum on the average daily amount during each calendar quarter or portion
thereof from the date hereof to the Revolving Credit Loan Maturity Date by which
the Total Commitment minus the sum of the Maximum Drawing Amount and all Unpaid
Reimbursement Obligations exceeds the outstanding amount of Revolving Credit
Loans during such calendar quarter. The commitment fee shall be payable
quarterly in arrears on the first day of each calendar quarter for the
immediately preceding calendar quarter commencing on the first such date
following the date hereof, with a final payment on the Revolving Credit Maturity
Date or any earlier date on which the Commitments shall terminate.
2.3. Reduction of Total Commitment. The Borrower shall have the right at
any time and from time to time upon five (5) Business Days prior written notice
to the Agent to reduce by $100,000 or an integral multiple thereof or terminate
entirely the Total Commitment, whereupon the Commitments of the Banks shall be
reduced pro rata in accordance with their respective Commitment Percentages of
the amount specified in such notice or, as the case may be, terminated. In
addition, to the extent the "Total Commitment" (as such term is defined in the
Guaranteed Credit Agreement) is ever reduced to an amount which is less than the
Total Commitment hereunder, then the Total Commitment hereunder shall
automatically be reduced to an amount equal to the "Total Commitment" under the
Guaranteed Credit Agreement. Promptly after receiving any notice of the Borrower
delivered pursuant to this ss.2.3, or any evidence which would require a
mandatory reduction in the Total Commitment, the Agent will notify the Banks of
the substance thereof. Upon the effective date of any such reduction or
termination, the Borrower shall pay to the Agent for the respective accounts of
the Banks the full amount of any commitment fee then accrued on the amount of
the reduction. No reduction or termination of the Commitments may be reinstated.
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2.4. The Revolving Credit Notes. The Revolving Credit Loans shall be
evidenced by separate promissory notes of the Borrower in substantially the form
of Exhibit A hereto (each a "Revolving Credit Note"), dated as of the Closing
Date and completed with appropriate insertions. One Revolving Credit Note shall
be payable to the order of each Bank in a principal amount equal to such Bank's
Commitment or, if less, the outstanding amount of all Revolving Credit Loans
made by such Bank, plus interest accrued thereon, as set forth below. The
Borrower irrevocably authorizes each Bank to make or cause to be made, at or
about the time of the Drawdown Date of any Revolving Credit Loan or at the time
of receipt of any payment of principal on such Bank's Revolving Credit Note, an
appropriate notation on such Bank's Record reflecting the making of such
Revolving Credit Loan or (as the case may be) the receipt of such payment. The
outstanding amount of the Revolving Credit Loans set forth on such Bank's Record
shall be prima facie evidence of the principal amount thereof owing and unpaid
to such Bank, but the failure to record, or any error in so recording, any such
amount on such Bank's Record shall not limit or otherwise affect the obligations
of the Borrower hereunder or under any Revolving Credit Note to make payments of
principal of or interest on any Revolving Credit Note when due.
2.5. Interest on Revolving Credit Loans. Except as otherwise provided in
ss.5.10,
(a) Each Base Rate Loan shall bear interest for the period
commencing with the Drawdown Date thereof and ending on the last day of
the Interest Period with respect thereto at the rate per annum equal to
the Base Rate plus the Applicable Margin.
(b) Each LIBOR Rate Loan shall bear interest for the period
commencing with the Drawdown Date thereof and ending on the last day of
the Interest Period with respect thereto at the rate per annum equal to
the LIBOR Rate determined for such Interest Period plus the Applicable
Margin.
(c) The Borrower promises to pay interest on each Revolving Credit
Loan in arrears on each Interest Payment Date with respect thereto.
2.6. Requests for Revolving Credit Loans. The Borrower shall give to the
Agent written notice in the form of Exhibit B hereto (or telephonic notice
confirmed in a writing in the form of Exhibit B hereto) of each Revolving Credit
Loan requested hereunder (a "Loan Request") no later than (a) 11:00 a.m. (Boston
time) on the day of the proposed Drawdown Date of any Base Rate Loan and (b)
three (3) LIBOR Business Days prior to the proposed Drawdown Date of any LIBOR
Rate Loan. Each such notice shall specify (i) the principal amount of the
Revolving Credit Loan requested, (ii) the proposed Drawdown Date of such
Revolving Credit Loan, (iii) the Interest Period for such Revolving Credit Loan
and (iv) the Type of such Revolving Credit Loan. Promptly upon receipt of any
such notice, the Agent shall notify each of the Banks thereof. Each Loan Request
shall be irrevocable and binding on the Borrower and shall obligate the Borrower
to accept the Revolving Credit Loan requested from the Banks on the proposed
Drawdown Date. Each Loan Request shall be in a minimum aggregate amount of
$100,000 or an integral multiple thereof.
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2.7. Conversion Options.
2.7.1. Conversion to Different Type of Revolving Credit Loan. The
Borrower may elect from time to time to convert any outstanding Revolving
Credit Loan to a Revolving Credit Loan of another Type, provided that (a)
with respect to any such conversion of a Revolving Credit Loan to a Base
Rate Loan, the Borrower shall give the Agent at least two (2) Business
Days prior written notice of such election; (b) with respect to any such
conversion of a LIBOR Rate Loan into a Revolving Credit Loan of another
Type, such conversion shall only be made on the last day of the Interest
Period with respect thereto; (c) with respect to any such conversion of a
Base Rate Loan to a LIBOR Rate Loan, the Borrower shall give the Agent at
least three (3) LIBOR Business Days prior written notice of such election
and (d) no Revolving Credit Loan may be converted into a LIBOR Rate Loan
when any Default or Event of Default has occurred and is continuing. On
the date on which such conversion is being made each Bank shall take such
action as is necessary to transfer its Commitment Percentage of such
Revolving Credit Loans to its Domestic Lending Office or its LIBOR Lending
Office, as the case may be. All or any part of outstanding Revolving
Credit Loans of any Type may be converted into a Revolving Credit Loan of
another Type as provided herein, provided that any partial conversion
shall be in an aggregate principal amount of $100,000 or a whole multiple
thereof. Each Conversion Request relating to the conversion of a Revolving
Credit Loan to a LIBOR Rate Loan shall be irrevocable by the Borrower.
2.7.2. Continuation of Type of Revolving Credit Loan. Any Revolving
Credit Loans of any Type may be continued as such upon the expiration of
an Interest Period with respect thereto by compliance by the Borrower with
the notice provisions contained in ss.2.7.1; provided that no LIBOR Rate
Loan may be continued as such when any Default or Event of Default has
occurred and is continuing, but shall be automatically converted to a Base
Rate Loan on the last day of the first Interest Period relating thereto
ending during the continuance of any Default or Event of Default of which
the officers of the Agent active upon the Borrower's account have actual
knowledge. In the event that the Borrower fails to provide any such notice
with respect to the continuation of any LIBOR Rate Loan as such, then such
LIBOR Rate Loan shall be automatically converted to a Base Rate Loan on
the last day of the first Interest Period relating thereto. The Agent
shall notify the Banks promptly when any such automatic conversion
contemplated by this ss.2.7 is scheduled to occur.
2.7.3. LIBOR Rate Loans. Any conversion to or from LIBOR Rate Loans
shall be in such amounts and be made pursuant to such elections so that,
after giving effect thereto, the aggregate principal amount of all LIBOR
Rate Loans having the same Interest Period shall not be less than $100,000
or a whole multiple of $100,000 in excess thereof.
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2.8. Funds for Revolving Credit Loans.
2.8.1. Funding Procedures. Not later than 1:00 p.m. (Boston time) on
the proposed Drawdown Date of any Revolving Credit Loans, each of the
Banks will make available to the Agent, at the Agent's Head Office, in
immediately available funds, the amount of such Bank's Commitment
Percentage of the amount of the requested Revolving Credit Loans. Upon
receipt from each Bank of such amount, and upon receipt of the documents
required by ss.ss.11 and 12 and the satisfaction of the other conditions
set forth therein, to the extent applicable, the Agent will make available
to the Borrower the aggregate amount of such Revolving Credit Loans made
available to the Agent by the Banks. The failure or refusal of any Bank to
make available to the Agent at the aforesaid time and place on any
Drawdown Date the amount of its Commitment Percentage of the requested
Revolving Credit Loans shall not relieve any other Bank from its several
obligation hereunder to make available to the Agent the amount of such
other Bank's Commitment Percentage of any requested Revolving Credit
Loans.
2.8.2. Advances by Agent. The Agent may, unless notified to the
contrary by any Bank prior to a Drawdown Date, assume that such Bank has
made available to the Agent on such Drawdown Date the amount of such
Bank's Commitment Percentage of the Revolving Credit Loans to be made on
such Drawdown Date, and the Agent may (but it shall not be required to),
in reliance upon such assumption, make available to the Borrower a
corresponding amount. If any Bank makes available to the Agent such amount
on a date after such Drawdown Date, such Bank shall pay to the Agent on
demand an amount equal to the product of (1) the average computed for the
period referred to in clause (c) below, of the weighted average interest
rate paid by the Agent for federal funds acquired by the Agent during each
day included in such period, times (b) the amount of such Bank's
Commitment Percentage of such Revolving Credit Loans, times (c) a
fraction, the numerator of which is the number of days that elapse from
and including such Drawdown Date to the date on which the amount of such
Bank's Commitment Percentage of such Revolving Credit Loans shall become
immediately available to the Agent, and the denominator of which is 365. A
statement of the Agent submitted to such Bank with respect to any amounts
owing under this paragraph shall be prima facie evidence of the amount due
and owing to the Agent by such Bank. If the amount of such Bank's
Commitment Percentage of such Revolving Credit Loans is not made available
to the Agent by such Bank within three (3) Business Days following such
Drawdown Date, the Agent shall be entitled to recover such amount from the
Borrower on demand, with interest thereon at the rate per annum applicable
to the Revolving Credit Loans made on such Drawdown Date.
3. REPAYMENT OF THE REVOLVING CREDIT LOANS.
3.1. Maturity. The Borrower promises to pay on the Revolving Credit Loan
Maturity Date, and there shall become absolutely due and payable on the
Revolving Credit Loan Maturity Date, all of the Revolving Credit Loans
outstanding on such date,
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together with any and all accrued and unpaid interest thereon and all other
Obligations outstanding on such date.
3.2. Mandatory Repayments of Revolving Credit Loans. If at any time either
(a) the sum of the outstanding amount of the Revolving Credit Loans, the Maximum
Drawing Amount and all Unpaid Reimbursement Obligations exceeds the Total
Commitment or (b) 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 shall
immediately pay the amount of such excess to the Agent for the respective
accounts of the Banks for application: first, to any Unpaid Reimbursement
Obligations; second, to the Revolving Credit Loans, and third, to provide the
Agent cash collateral for Reimbursement Obligations as contemplated by ss.4.2(b)
and (c). Each payment of any Unpaid Reimbursement Obligations or prepayment of
Revolving Credit Loans shall be allocated among the Banks, in proportion, as
nearly as practicable, to each Reimbursement Obligation or (as the case may be)
the respective unpaid principal amount of each Bank's Revolving Credit Note,
with adjustments to the extent practicable to equalize any prior payments or
repayments not exactly in proportion.
3.3. Optional Repayments of Revolving Credit Loans. The Borrower shall
have the right, at its election, to repay the outstanding amount of the
Revolving Credit Loans, as a whole or in part, at any time without penalty or
premium, provided that any full or partial prepayment of the outstanding amount
of any LIBOR Rate Loans pursuant to this ss.3.3 may be made only on the last day
of the Interest Period relating thereto. The Borrower shall give the Agent prior
written notice, no later than 11:00 a.m. (Boston time), on the day of any
proposed prepayment pursuant to this ss.3.3 of Base Rate Loans, and three (3)
LIBOR Business Days notice of any proposed prepayment pursuant to this ss.3.3 of
LIBOR Rate Loans, in each case, specifying the proposed date of payment of
Revolving Credit Loans and the principal amount to be prepaid. Each such partial
prepayment of the Revolving Credit Loans shall be in an integral multiple of
$100,000, shall be accompanied by the payment of accrued interest on the
principal prepaid to the date of prepayment and shall be applied, in the absence
of instruction by the Borrower, first to the principal of Base Rate Loans and
then to the principal of LIBOR Rate Loans. Each partial prepayment shall be
allocated among the Banks, in proportion, as nearly as practicable, to the
respective unpaid principal amount of each Bank's Revolving Credit Note, with
adjustments to the extent practicable to equalize any prior repayments not
exactly in proportion.
4. LETTERS OF CREDIT.
4.1. Letter of Credit Commitments.
4.1.1. Commitment to Issue Letters of Credit. Subject to the terms
and conditions hereof and the execution and delivery by the Borrower of a
letter of credit application on the Agent's customary form (a "Letter of
Credit Application"), the Agent on behalf of the Banks and in reliance
upon the agreement of the Banks set forth in ss.4.1.4 and upon the
representations and
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warranties of the Borrower contained herein, agrees, in its individual
capacity, to issue, extend and renew for the account of the Borrower one
or more standby or documentary letters of credit (individually, a "Letter
of Credit"), in such form as may be requested from time to time by the
Borrower and agreed to by the Agent; provided, however, that, after giving
effect to such request, (a) the sum of the aggregate Maximum Drawing
Amount and all Unpaid Reimbursement Obligations shall not exceed $500,000
at any one time and (b) the sum of (i) the Maximum Drawing Amount on all
Letters of Credit, (ii) all Unpaid Reimbursement Obligations, and (iii)
the amount of all Revolving Credit Loans outstanding shall not exceed
either the Total Commitment or the Guaranteed Credit Agreement
Outstandings. Notwithstanding the foregoing, the Agent shall have no
obligation to issue any Letter of Credit to support or secure any
Indebtedness of the Borrower or any of its Subsidiaries to the extent that
such Indebtedness was incurred prior to the proposed issuance date of such
Letter of Credit, unless in any such case the Borrower demonstrates to the
satisfaction of the Agent that (x) such prior incurred Indebtedness were
then fully secured by a prior perfected and unavoidable security interest
in collateral provided by the Borrower or such Subsidiary to the proposed
beneficiary of such Letter of Credit or (y) such prior incurred
Indebtedness were then secured or supported by a letter of credit issued
for the account of the Borrower or such Subsidiary and the reimbursement
obligation with respect to such letter of credit was fully secured by a
prior perfected and unavoidable security interest in collateral provided
to the issuer of such letter of credit by the Borrower or such Subsidiary.
4.1.2. Letter of Credit Applications. Each Letter of Credit
Application shall be completed to the satisfaction of the Agent. In the
event that any provision of any Letter of Credit Application shall be
inconsistent with any provision of this Credit Agreement, then the
provisions of this Credit Agreement shall, to the extent of any such
inconsistency, govern.
4.1.3. Terms of Letters of Credit. Each Letter of Credit issued,
extended or renewed hereunder shall, among other things, (a) provide for
the payment of sight drafts for honor thereunder when presented in
accordance with the terms thereof and when accompanied by the documents
described therein, and (b) have an expiry date no later than the date
which is fourteen (14) days (or, if the Letter of Credit is confirmed by a
confirmer or otherwise provides for one or more nominated persons,
forty-five (45) days) prior to the Revolving Credit Loan Maturity Date.
Each Letter of Credit so issued, extended or renewed shall be subject to
the Uniform Customs or, in the case of a standby Letter of Credit issued
on or after January 1, 1999, either the Uniform Customs or the
International Standby Practices.
4.1.4. Reimbursement Obligations of Banks. Each Bank severally
agrees that it shall be absolutely liable, without regard to the
occurrence of any Default or Event of Default or any other condition
precedent whatsoever, to the extent of such Bank's Commitment Percentage,
to reimburse the Agent on demand for the amount of each draft paid by the
Agent under each Letter of
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Credit issued pursuant to the terms of this Credit Agreement to the extent
that such amount is not reimbursed by the Borrower pursuant to ss.4.2
(such agreement for a Bank being called herein the "Letter of Credit
Participation" of such Bank).
4.1.5. Participations of Banks. Each such payment made by a Bank
shall be treated as the purchase by such Bank of a participating interest
in the Borrower's Reimbursement Obligation under ss.4.2 in an amount equal
to such payment. Each Bank shall share in accordance with its
participating interest in any interest which accrues pursuant to ss.4.2.
4.2. Reimbursement Obligation of the Borrower. In order to induce the
Agent to issue, extend and renew each Letter of Credit and the Banks to
participate therein, the Borrower hereby agrees to reimburse or pay to the
Agent, for the account of the Agent or (as the case may be) the Banks, with
respect to each Letter of Credit issued, extended or renewed by the Agent
hereunder,
(a) except as otherwise expressly provided in ss.4.2(b) and (c), on
each date that any draft presented under such Letter of Credit is honored
by the Agent, or the Agent otherwise makes a payment with respect thereto,
(i) the amount paid by the Agent under or with respect to such Letter of
Credit, and (ii) the amount of any taxes, fees, charges or other costs and
expenses whatsoever incurred by the Agent or any Bank in connection with
any payment made by the Agent or any Bank under, or with respect to, such
Letter of Credit,
(b) upon the reduction (but not termination) of the Total Commitment
to an amount less than the Maximum Drawing Amount, an amount equal to such
difference, which amount shall be held by the Agent for the benefit of the
Banks and the Agent as cash collateral for all Reimbursement Obligations,
and
(c) upon the termination of the Total Commitment, or the
acceleration of the Reimbursement Obligations with respect to all Letters
of Credit in accordance with ss.13, an amount equal to the then Maximum
Drawing Amount on all Letters of Credit, which amount shall be held by the
Agent for the benefit of the Banks and the Agent as cash collateral for
all Reimbursement Obligations.
Each such payment shall be made to the Agent at the Agent's Head Office in
immediately available funds. Interest on any and all amounts remaining unpaid by
the Borrower under this ss.4.2 at any time from the date such amounts become due
and payable (whether as stated in this ss.4.2, by acceleration or otherwise)
until payment in full (whether before or after judgment) shall be payable to the
Agent on demand at the rate specified in ss.5.10 for overdue principal on the
Revolving Credit Loans.
4.3. Letter of Credit Payments. If any draft shall be presented or other
demand for payment shall be made under any Letter of Credit, the Agent shall
notify the Borrower of the date and amount of the draft presented or demand for
payment and of
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the date and time when it expects to pay such draft or honor such demand for
payment. If the Borrower fails to reimburse the Agent as provided in ss.4.2 on
or before the date that such draft is paid or other payment is made by the
Agent, the Agent may at any time thereafter notify the Banks of the amount of
any such Unpaid Reimbursement Obligation. No later than 3:00 p.m. (Boston time)
on the Business Day next following the receipt of such notice, each Bank shall
make available to the Agent, at the Agent's Head Office, in immediately
available funds, such Bank's Commitment Percentage of such Unpaid Reimbursement
Obligation, together with an amount equal to the product of (a) the average,
computed for the period referred to in clause (c) below, of the weighted average
interest rate paid by the Agent for federal funds acquired by the Agent during
each day included in such period, times (b) the amount equal to such Bank's
Commitment Percentage of such Unpaid Reimbursement Obligation, times (c) a
fraction, the numerator of which is the number of days that elapse from and
including the date the Agent paid the draft presented for honor or otherwise
made payment to the date on which such Bank's Commitment Percentage of such
Unpaid Reimbursement obligation shall become immediately available to the Agent,
and the denominator of which is 360. The responsibility of the Agent to the
Borrower and the Banks shall be only to determine that the documents (including
each draft) delivered under each Letter of Credit in connection with such
presentment shall be in conformity in all material respects with such Letter of
Credit.
4.4. Obligations Absolute. The Borrower's obligations under this ss.4
shall be absolute and unconditional under any and all circumstances and
irrespective of the occurrence of any Default or Event of Default or any
condition precedent whatsoever or any setoff, counterclaim or defense to payment
which the Borrower may have or have had against the Agent, any Bank or any
beneficiary of a Letter of Credit. The Borrower further agrees with the Agent
and the Banks that the Agent and the Banks shall not be responsible for, and the
Borrower's Reimbursement Obligations under ss.4.2 shall not be affected by,
among other things, the validity or genuineness of documents or of any
endorsements thereon, even if such documents should in fact prove to be in any
or all respects invalid, fraudulent or forged, or any dispute between or among
the Borrower, the beneficiary of any Letter of Credit or any financing
institution or other party to which any Letter of Credit may be transferred or
any claims or defenses whatsoever of the Borrower against the beneficiary of any
Letter of Credit or any such transferee. The Agent and the Banks shall not be
liable for any error, omission, interruption or delay in transmission, dispatch
or delivery of any message or advice, however transmitted, in connection with
any Letter of Credit. The Borrower agrees that any action taken or omitted by
the Agent or any Bank under or in connection with each Letter of Credit and the
related drafts and documents, if done in good faith, shall be binding upon the
Borrower and shall not result in any liability on the part of the Agent or any
Bank to the Borrower.
4.5. Reliance by Issuer. To the extent not inconsistent with ss.4.4, the
Agent shall be entitled to rely, and shall be fully protected in relying upon,
any Letter of Credit, draft, writing, resolution, notice, consent, certificate,
affidavit, letter, cablegram, telegram, telecopy, telex or teletype message,
statement, order or other document believed by it to be genuine and correct and
to have been signed, sent or made by the
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proper Person or Persons and upon advice and statements of legal counsel,
independent accountants and other experts selected by the Agent. The Agent shall
be fully justified in failing or refusing to take any action under this Credit
Agreement unless it shall first have received such advice or concurrence of the
Majority Banks as it reasonably deems appropriate or it shall first be
indemnified to its reasonable satisfaction by the Banks against any and all
liability and expense which may be incurred by it by reason of taking or
continuing to take any such action. The Agent shall in all cases be fully
protected in acting, or in refraining from acting, under this Credit Agreement
in accordance with a request of the Majority Banks, and such request and any
action taken or failure to act pursuant thereto shall be binding upon the Banks
and all future holders of the Revolving Credit Notes or of a Letter of Credit
Participation.
4.6. Letter of Credit Fee. The Borrower shall, on the date of issuance or
any extension or renewal of any Letter of Credit pay a fee (in each case, a
"Letter of Credit Fee") to the Agent (a) in respect of each standby Letter of
Credit an amount equal to two and one-eighth percent (2 1/8%) per annum of the
face amount of such standby Letter of Credit, of which an amount equal to 1/8
percent (1/8%) per annum of the face amount of such standby Letter of Credit
shall be for the account of the Agent, as a fronting fee, and the balance of
which Letter of Credit Fee shall be for the accounts of the Banks in accordance
with their respective Commitment Percentages and (b) in respect of each
documentary Letter of Credit an amount equal to one and one-eighth percent (1
1/8%) per annum on the face amount of such documentary Letter of Credit, of
which an amount equal to 1/8 percent (1/8%) per annum of the face amount of such
documentary Letter of Credit shall be for the account of the Agent, as a
fronting fee, and the balance of which Letter of Credit Fee shall be for the
accounts of the Banks in accordance with their respective Commitment
Percentages. In respect of each Letter of Credit, the Borrower shall also pay to
the Agent for the Agent's own account, at such other time or times as such
charges are customarily made by the Agent, the Agent's customary issuance,
amendment, negotiation or document examination and other administrative fees as
in effect from time to time.
5. CERTAIN GENERAL PROVISIONS.
5.1. Closing Fee; Agent's Fee. The Borrower agrees to pay to the Agent and
the Co-Agent for the Agent's and the Co-Agent's own account on the Closing Date
a closing fee in the amount set forth in the Fee Letters. In addition, the
Borrower shall pay to the Agent for the Agent's own account an Agent's fee in
the amount and at the times set forth in the Fee Letter between the Borrower and
the Agent.
5.2. Funds for Payments.
5.2.1. Payments to Agent. All payments of principal, interest,
Reimbursement Obligations, commitment fees, Letter of Credit Fees and any
other amounts due hereunder or under any of the other Loan Documents shall
be made to the Agent in Dollars, for the respective accounts of the Banks
and the Agent, at the Agent's Head Office or at such other place that the
Agent may from
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time to time designate, in each case at or about 11:00 a.m. (Boston time,
or the local time in the place of payment) and in immediately available
funds.
5.2.2. No Offset, etc. All payments by the Borrower hereunder and
under any of the other Loan Documents shall be made without recoupment,
setoff or counterclaim and free and clear of and without deduction for any
taxes, levies, imposts, duties, charges, fees, deductions, withholdings,
compulsory loans, restrictions or conditions of any nature now or
hereafter imposed or levied by any jurisdiction or any political
subdivision thereof or taxing or other authority therein unless the
Borrower is compelled by law to make such deduction or withholding. If any
such obligation is imposed upon the Borrower with respect to any amount
payable by it hereunder or under any of the other Loan Documents, the
Borrower will pay to the Agent, for the account of the Banks or (as the
case may be) the Agent, on the date on which such amount is due and
payable hereunder or under such other Loan Document, such additional
amount in Dollars as shall be necessary to enable the Banks or the Agent
to receive the same net amount which the Banks or the Agent would have
received on such due date had no such obligation been imposed upon the
Borrower. The Borrower will deliver promptly to the Agent certificates or
other valid vouchers for all taxes or other charges deducted from or paid
with respect to payments made by the Borrower hereunder or under such
other Loan Document.
5.3. Computations. All computations of interest on the Revolving Credit
Loans consisting of Base Rate Loans shall be based on a 365-day year and paid
for the actual number of days elapsed. All computations of interest on the
Revolving Credit Loans consisting of LIBOR Rate Loans and of commitment fees,
Letter of Credit Fees or other fees shall be based on a 360-day year and paid
for the actual number of days elapsed. Except as otherwise provided in the
definition of the term "Interest Period" with respect to LIBOR Rate Loans,
whenever a payment hereunder or under any of the other Loan Documents becomes
due on a day that is not a Business Day, the due date for such payment shall be
extended to the next succeeding Business Day, and interest shall accrue during
such extension. The outstanding amount of the Revolving Credit Loans as
reflected on the Records from time to time shall be considered correct and
binding on the Borrower unless within five (5) Business Days after receipt of
any notice by the Agent or any of the Banks of such outstanding amount, the
Agent or such Bank shall notify the Borrower to the contrary.
5.4. Inability to Determine LIBOR Rate. In the event, prior to the
commencement of any Interest Period relating to any LIBOR Rate Loan, the Agent
shall determine or be notified by the Majority Banks that adequate and
reasonable methods do not exist for ascertaining the LIBOR Rate that would
otherwise determine the rate of interest to be applicable to any LIBOR Rate Loan
during any Interest Period, the Agent shall forthwith give notice of such
determination (which shall be conclusive and binding on the Borrower and the
Banks) to the Borrower and the Banks. In such event (a) any Loan Request or
Conversion Request with respect to LIBOR Rate Loans shall be automatically
withdrawn and shall be deemed a request for Base Rate Loans, (b) each
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LIBOR Rate Loan will automatically, on the last day of the then current Interest
Period relating thereto, become a Base Rate Loan, and (c) the obligations of the
Banks to make LIBOR Rate Loans shall be suspended until the Agent or the
Majority Banks determine that the circumstances giving rise to such suspension
no longer exist, whereupon the Agent or, as the case may be, the Agent upon the
instruction of the Majority Banks, shall so notify the Borrower and the Banks.
5.5. Illegality. Notwithstanding any other provisions herein, if any
present or future law, regulation, treaty or directive or the interpretation or
application thereof shall make it unlawful for any Bank to make or maintain
LIBOR Rate Loans, such Bank shall forthwith give notice of such circumstances to
the Borrower and the other Banks and thereupon (a) the commitment of such Bank
to make LIBOR Rate Loans or convert Revolving Credit Loans of another Type to
LIBOR Rate Loans shall forthwith be suspended and (b) such Bank's Revolving
Credit Loans then outstanding as LIBOR Rate Loans, if any, shall be converted
automatically to Base Rate Loans on the last day of each Interest Period
applicable to such LIBOR Rate Loans or within such earlier period as may be
required by law. The Borrower hereby agrees promptly to pay the Agent for the
account of such Bank, upon demand by such Bank, any additional amounts necessary
to compensate such Bank for any costs incurred by such Bank in making any
conversion in accordance with this ss.5.5, including any interest or fees
payable by such Bank to lenders of funds obtained by it in order to make or
maintain its LIBOR Rate Loans hereunder.
5.6. Additional Costs, etc. If any present or future applicable law, which
expression, as used herein, includes statutes, rules and regulations thereunder
and interpretations thereof by any competent court or by any governmental or
other regulatory body or official charged with the administration or the
interpretation thereof and requests, directives, instructions and notices at any
time or from time to time hereafter made upon or otherwise issued to any Bank or
the Agent by any central bank or other fiscal, monetary or other authority
(whether or not having the force of law), shall:
(a) subject any Bank or the Agent to any tax, levy, impost, duty,
charge, fee, deduction or withholding of any nature with respect to this
Credit Agreement, the other Loan Documents, any Letters of Credit, such
Bank's Commitment or the Revolving Credit Loans (other than taxes based
upon or measured by the income or profits of such Bank or the Agent), or
(b) materially change the basis of taxation (except for changes in
taxes on income or profits) of payments to any Bank of the principal of or
the interest on any Revolving Credit Loans or any other amounts payable to
any Bank or the Agent under this Credit Agreement or any of the other Loan
Documents, or
(c) impose or increase or render applicable (other than to the
extent specifically provided for elsewhere in this Credit Agreement) any
special deposit, reserve, assessment, liquidity, capital adequacy or other
similar requirements (whether or not having the force of law) against
assets held by, or
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deposits in or for the account of, or loans by, or letters of credit
issued by, or commitments of an office of any Bank, or
(d) impose on any Bank or the Agent any other conditions or
requirements with respect to this Credit Agreement, the other Loan
Documents, any Letters of Credit, the Revolving Credit Loans, such Bank's
Commitment, or any class of loans, letters of credit or commitments of
which any of the Revolving Credit Loans or such Bank's Commitment forms a
part, and the result of any of the foregoing is
(i) to increase the cost to any Bank of making, funding,
issuing, renewing, extending or maintaining any of the Revolving
Credit Loans or such Bank's Commitment or any Letter of Credit, or
(ii) to reduce the amount of principal, interest,
Reimbursement Obligation or other amount payable to such Bank or the
Agent hereunder on account of such Bank's Commitment, any Letter of
Credit or any of the Revolving Credit Loans, or
(iii) to require such Bank or the Agent to make any payment or
to forego any interest or Reimbursement Obligation or other sum
payable hereunder, the amount of which payment or foregone interest
or Reimbursement Obligation or other sum is calculated by reference
to the gross amount of any sum receivable or deemed received by such
Bank or the Agent from the Borrower hereunder,
then, and in each such case, the Borrower will, upon demand made by such Bank or
(as the case may be) the Agent at any time and from time to time and as often as
the occasion therefor may arise, pay to such Bank or the Agent such additional
amounts as will be sufficient to compensate such Bank or the Agent for such
additional cost, reduction, payment or foregone interest or Reimbursement
Obligation or other sum.
5.7. Capital Adequacy. If after the date hereof any Bank or the Agent
determines that (a) the adoption of or change in any law, governmental rule,
regulation, policy, guideline or directive (whether or not having the force of
law) regarding capital requirements for banks or bank holding companies or any
change in the interpretation or application thereof by a court or governmental
authority with appropriate jurisdiction, or (b) compliance by such Bank or the
Agent or any corporation controlling such Bank or the Agent with any law,
governmental rule, regulation, policy, guideline or directive (whether or not
having the force of law) of any such entity regarding capital adequacy, has the
effect of reducing the return on such Bank's or the Agent's commitment with
respect to any Revolving Credit Loans to a level below that which such Bank or
the Agent could have achieved but for such adoption, change or compliance
(taking into consideration such Bank's or the Agent's then existing policies
with respect to capital adequacy and assuming full utilization of such entity's
capital) by any amount deemed by such Bank or (as the case may be) the Agent to
be material, then such Bank or the Agent may notify the Borrower of such fact.
To the extent that the amount of such reduction in the return on capital is not
reflected in the Base Rate, the
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Borrower and such Bank shall thereafter attempt to negotiate in good faith,
within thirty (30) days of the day on which the Borrower receives such notice,
an adjustment payable hereunder that will adequately compensate such Bank in
light of these circumstances. If the Borrower and such Bank are unable to agree
to such adjustment within thirty (30) days of the date on which the Borrower
receives such notice, then commencing on the date of such notice (but not
earlier than the effective date of any such increased capital requirement), the
fees payable hereunder shall increase by an amount that will, in such Bank's
reasonable determination, provide adequate compensation. Each Bank shall
allocate such cost increases among its customers in good faith and on an
equitable basis.
5.8. Certificate. A certificate setting forth any additional amounts
payable pursuant to ss.5.6 or 5.7 and a brief explanation of such amounts which
are due, submitted by any Bank or the Agent to the Borrower, shall be
conclusive, absent manifest error, that such amounts are due and owing.
5.9. Indemnity. The Borrower agrees to indemnify each Bank and to hold
each Bank harmless from and against any loss, cost or expense that such Bank may
sustain or incur as a consequence of (a) default by the Borrower in payment of
the principal amount of or any interest on any LIBOR Rate Loans as and when due
and payable, including any such loss or expense arising from interest or fees
payable by such Bank to lenders of funds obtained by it in order to maintain its
LIBOR Rate Loans, (b) default by the Borrower in making a borrowing or
conversion after the Borrower has given (or is deemed to have given) a Loan
Request or a Conversion Request relating thereto in accordance with ss.2.6 or
ss.2.7 or (c) the making of any payment of a LIBOR Rate Loan or the making of
any conversion of any such Revolving Credit Loan to a Base Rate Loan on a day
that is not the last day of the applicable Interest Period with respect thereto,
including interest or fees payable by such Bank to lenders of funds obtained by
it in order to maintain any such Revolving Credit Loans.
5.10. Interest After Default.
5.10.1. Overdue Amounts. Overdue principal and (to the extent
permitted by applicable law) interest on the Revolving Credit Loans and
all other overdue amounts payable hereunder or under any of the other Loan
Documents shall bear interest compounded monthly and payable on demand at
a rate per annum equal to two percent (2%) above the rate of interest
otherwise applicable to such Revolving Credit Loans pursuant to ss.2.5
until such amount shall be paid in full (after as well as before
judgment).
5.10.2. Amounts Not Overdue. During the continuance of a Default or
an Event of Default the principal of the Revolving Credit Loans not
overdue shall, until such Default or Event of Default has been cured or
remedied or such Default or Event of Default has been waived by the
Majority Banks pursuant to ss.26, bear interest at a rate per annum equal
the rate of interest applicable to overdue principal pursuant to
ss.5.10.1.
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6. SECURITY AND GUARANTIES.
6.1. Security of Borrower. The Obligations shall be secured by a perfected
first priority security interest (subject only to Permitted Liens entitled to
priority under applicable law) in all of the assets of the Borrower, whether now
owned or hereafter acquired, pursuant to the terms of the Security Documents to
which the Borrower is a party.
6.2. Guaranties and Security of Subsidiaries. The Obligations shall also
be guaranteed pursuant to the terms of the Guaranty. The obligations of the
Borrower's Subsidiaries under the Guaranty shall be in turn secured by a
perfected first priority security interest (subject only to Permitted Liens
entitled to priority under applicable law) in all of the assets of each such
Subsidiary, whether now owned or hereafter acquired, pursuant to the terms of
the Security Documents to which such Subsidiary is a party.
7. REPRESENTATIONS AND WARRANTIES.
The Borrower represents and warrants to the Banks and the Agent as
follows:
7.1. Corporate Authority.
7.1.1. Incorporation; Good Standing. Each of the Borrower and its
Subsidiaries (a) is a corporation duly organized, validly existing and in
good standing under the laws of its state of incorporation, (b) has all
requisite corporate power to own its property and conduct its business as
now conducted and as presently contemplated, and (c) is in good standing
as a foreign corporation and is duly authorized to do business in each
jurisdiction where such qualification is necessary except where a failure
to be so qualified would not have a materially adverse effect on the
business, assets or financial condition of the Borrower or its
Subsidiaries.
7.1.2. Authorization. The execution, delivery and performance of
this Credit Agreement and the other Loan Documents to which the Borrower
or any of its Subsidiaries is or is to become a party and the transactions
contemplated hereby and thereby (a) are within the corporate authority of
such Person, (b) have been duly authorized by all necessary corporate
proceedings, (c) do not conflict with or result in any breach or
contravention of any provision of law, statute, rule or regulation to
which the Borrower or any of its Subsidiaries is subject or any judgment,
order, writ, injunction, license or permit applicable to the Borrower or
any of its Subsidiaries and (d) do not conflict with any provision of the
corporate charter or bylaws of, or any agreement or other instrument
binding upon, the Borrower or any of its Subsidiaries.
7.1.3. Enforceability. The execution and delivery of this Credit
Agreement and the other Loan Documents to which the Borrower or any of its
Subsidiaries is or is to become a party will result in valid and legally
binding obligations of such Person enforceable against it in accordance
with the
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respective terms and provisions hereof and thereof, except as
enforceability is limited by bankruptcy, insolvency, reorganization,
moratorium or other laws relating to or affecting generally the
enforcement of creditors' rights and except to the extent that
availability of the remedy of specific performance or injunctive relief is
subject to the discretion of the court before which any proceeding
therefor may be brought.
7.2. Governmental Approvals. The execution, delivery and performance by
the Borrower and any of its Subsidiaries of this Credit Agreement and the other
Loan Documents to which the Borrower or any of its Subsidiaries is or is to
become a party and the transactions contemplated hereby and thereby do not
require the approval or consent of, or filing with, any governmental agency or
authority other than those already obtained.
7.3. Title to Properties; Leases. Except as indicated on Schedule 7.3
hereto, the Borrower and its Subsidiaries own all of the assets reflected in the
consolidated balance sheet of the Borrower and its Subsidiaries as at the
Balance Sheet Date or acquired since that date (except property and assets sold
or otherwise disposed of in the ordinary course of business since that date),
subject to no rights of others, including any mortgages, leases, conditional
sales agreements, title retention agreements, liens or other encumbrances except
Permitted Liens.
7.4. Financial Statements and Projections.
7.4.1. Fiscal Year. The Borrower and each of its Subsidiaries has a
fiscal year which is the twelve months ending on December 31 of each
calendar year.
7.4.2. Financial Statements. There has been furnished to each of the
Banks a consolidated balance sheet of the Borrower and its Subsidiaries as
at the Balance Sheet Date, and consolidated statement of income of the
Borrower and its Subsidiaries for the fiscal quarter then ended. In
addition there has been furnished to each of the Banks a consolidated
balance sheet of The Kodiak Group, Inc. and I33 Communication Corp., and
consolidated statements of income of The Kodiak Group, Inc. and I33
Communication Corp. for the fiscal year then ended, certified by such
Person's certified public accountants. Such balance sheets and statement
of income have been prepared in accordance with generally accepted
accounting principles and fairly present the financial condition of the
Borrower and its Subsidiaries as at the close of business on the date
thereof and the results of operations for the fiscal year then ended.
There are no contingent liabilities of the Borrower or any of its
Subsidiaries as of such date involving material amounts, known to the
officers of the Borrower which were not disclosed in such balance sheet
and the notes related thereto.
7.4.3. Projections. The projections of the annual operating budgets
of the Borrower and its Subsidiaries on a consolidated basis, balance
sheets and cash flow statements for the 1999 to 2002 fiscal years, copies
of which will be delivered to each Bank within thirty (30) days of the
Closing Date, will disclose
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all assumptions made with respect to general economic, financial and
market conditions used in formulating such projections. To the knowledge
of the Borrower or any of its Subsidiaries, no facts exist as of the date
of delivery that (individually or in the aggregate) would result in any
material change in any of such projections. The projections will be based
upon reasonable estimates and assumptions, will be prepared on the basis
of the assumptions stated therein and will reflect the reasonable
estimates of the Borrower and its Subsidiaries of the results of
operations and other information projected therein.
7.5. No Material Changes, etc.; Solvency
7.5.1. No Changes. Since the Balance Sheet Date there has occurred
no materially adverse change in the financial condition or business of the
Borrower and its Subsidiaries as shown on or reflected in the consolidated
balance sheet of the Borrower and its Subsidiaries as at the Balance Sheet
Date, or the consolidated statement of income for the fiscal year then
ended, other than changes in the ordinary course of business that have not
had any materially adverse effect either individually or in the aggregate
on the business or financial condition of the Borrower or its
Subsidiaries. Since the Balance Sheet Date, the Borrower has not made any
Distributions.
7.5.2. Solvency. The Borrower and its Subsidiaries, on a
going-concern basis and on a consolidated and consolidating basis, both
before and after giving effect to the transactions contemplated by this
Credit Agreement and the other Loan Documents (a) are solvent, (b) have
assets having a fair value in excess of their liabilities, (c) have assets
having a fair value in excess of the amount required to pay their
liabilities on existing debts as such debts become absolute and matured,
and (d) have, and expect to continue to have, access to adequate capital
for the conduct of their business and the ability to pay their debts from
time to time incurred in connection with the operation of their business
as such debts mature.
7.6. Franchises, Patents, Copyrights, etc. Each of the Borrower and its
Subsidiaries possesses all franchises, patents, copyrights, trademarks, trade
names, licenses and permits, and rights in respect of the foregoing, adequate
for the conduct of its business substantially as now conducted without known
conflict with any rights of others.
7.7. Litigation. Except as set forth on Schedule 7.7 hereto, there are no
actions, suits, proceedings or investigations of any kind pending or threatened
against the Borrower or any of its Subsidiaries before any court, tribunal or
administrative agency or board that, if adversely determined, might, either in
any case or in the aggregate, materially adversely affect the properties,
assets, financial condition or business of the Borrower and its Subsidiaries or
materially impair the right of the Borrower and its Subsidiaries, considered as
a whole, to carry on business substantially as now conducted by them, or result
in any substantial liability not adequately covered by insurance, or for which
adequate reserves are not maintained on the consolidated
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balance sheet of the Borrower and its Subsidiaries, or which question the
validity of this Credit Agreement or any of the other Loan Documents, or any
action taken or to be taken pursuant hereto or thereto.
7.8. No Materially Adverse Contracts, etc. Neither the Borrower nor any of
its Subsidiaries is subject to any charter, corporate or other legal
restriction, or any judgment, decree, order, rule or regulation that has or is
expected in the future to have a materially adverse effect on the business,
assets or financial condition of the Borrower or any of its Subsidiaries.
Neither the Borrower nor any of its Subsidiaries is a party to any contract or
agreement that has or is expected, in the judgment of the Borrower's officers,
to have any materially adverse effect on the business of the Borrower or any of
its Subsidiaries.
7.9. Compliance With Other Instruments, Laws, etc. Neither the Borrower
nor any of its Subsidiaries is in violation of any provision of its charter
documents, bylaws, or any agreement or instrument to which it may be subject or
by which it or any of its properties may be bound or any decree, order,
judgment, statute, license, rule or regulation, in any of the foregoing cases in
a manner that could result in the imposition of substantial penalties or
materially and adversely affect the financial condition, properties or business
of the Borrower or any of its Subsidiaries.
7.10. Tax Status. The Borrower and its Subsidiaries (a) have made or filed
all federal and state income and all other tax returns, reports and declarations
required by any jurisdiction to which any of them is subject, (b) have paid all
taxes and other governmental assessments and charges shown or determined to be
due on such returns, reports and declarations, except those being contested in
good faith and by appropriate proceedings and (c) have set aside on their books
provisions reasonably adequate for the payment of all taxes for periods
subsequent to the periods to which such returns, reports or declarations apply.
There are no unpaid taxes in any material amount claimed to be due by the taxing
authority of any jurisdiction, and the officers of the Borrower know of no basis
for any such claim.
7.11. No Event of Default. No Default or Event of Default has occurred and
is continuing.
7.12. Holding Company and Investment Company Acts. Neither the Borrower
nor any of its Subsidiaries is a "holding company", or a "subsidiary company" of
a "holding company", or an affiliate" of a "holding company", as such terms are
defined in the Public Utility Holding Company Act of 1935; nor is it an
"investment company", or an "affiliated company" or a "principal underwriter" of
an "investment company", as such terms are defined in the Investment Company Act
of 1940.
7.13. Absence of Financing Statements, etc. Except with respect to
Permitted Liens, there is no financing statement, security agreement, chattel
mortgage, real estate mortgage or other document filed or recorded with any
filing records, registry, or other public office, that purports to cover, affect
or give notice of any present or possible
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future lien on, or security interest in, any assets or property of the Borrower
or any of its Subsidiaries or any rights relating thereto.
7.14. Perfection of Security Interest. All filings, assignments, pledges
and deposits of documents or instruments have been made and all other actions
have been taken that are necessary or advisable, under applicable law, to
establish and perfect the Agent's security interest in the Collateral. The
Collateral and the Agent's rights with respect to the Collateral are not subject
to any setoff, claims, withholdings or other defenses. The Borrower or a
Subsidiary of the Borrower party to one of the Security Agreements is the owner
of the Collateral free from any lien, security interest, encumbrance and any
other claim or demand, except for Permitted Liens.
7.15. Certain Transactions. Except as otherwise provided on Schedule 7.15
and for arm's length transactions pursuant to which the Borrower or any of its
Subsidiaries makes payments in the ordinary course of business upon terms no
less favorable than the Borrower or such Subsidiary could obtain from third
parties, none of the Affiliates, Investors, officers, directors, or employees of
the Borrower or any of its Subsidiaries is presently a party to any transaction
with the Borrower or any of its Subsidiaries (other than for services as
employees, officers and directors), including any contract, agreement or other
arrangement providing for the furnishing of services to or by, providing for
rental of real or personal property to or from, or otherwise requiring payments
to or from any Affiliate, Investor, officer, director or such employee or, to
the knowledge of the Borrower, any corporation, partnership, trust or other
entity in which any officer, director, or any such employee has a substantial
interest or is an officer, director, trustee or partner.
7.16. Employee Benefit Plans.
7.16.1. In General. Each Employee Benefit Plan and each Guaranteed
Pension Plan has been maintained and operated in compliance in all
material respects with the provisions of ERISA and, to the extent
applicable, the Code, including but not limited to the provisions
thereunder respecting prohibited transactions and the bonding of
fiduciaries and other persons handling plan funds as required by ss.412 of
ERISA. The Borrower has heretofore delivered to the Agent the most
recently completed annual report, Form 5500, with all required
attachments, and actuarial statement required to be submitted under
ss.103(d) of ERISA, with respect to each Guaranteed Pension Plan.
7.16.2. Terminability of Welfare Plans. No Employee Benefit Plan,
which is an employee welfare benefit plan within the meaning of ss.3(1) or
ss.3(2)(B) of ERISA, provides benefit coverage subsequent to termination
of employment, except as required by Title I, Part 6 of ERISA or the
applicable state insurance laws. The Borrower may terminate each such Plan
at any time (or at any time subsequent to the expiration of any applicable
bargaining agreement) in the discretion of the Borrower without liability
to any Person other than for claims arising prior to termination.
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7.16.3. Guaranteed Pension Plans. Each contribution required to be
made to a Guaranteed Pension Plan, whether required to be made to avoid
the incurrence of an accumulated funding deficiency, the notice or lien
provisions of ss.302(f) of ERISA, or otherwise, has been timely made. No
waiver of an accumulated funding deficiency or extension of amortization
periods has been received with respect to any Guaranteed Pension Plan, and
neither the Borrower nor any ERISA Affiliate is obligated to or has posted
security in connection with an amendment to a Guaranteed Pension Plan
pursuant to ss.307 of ERISA or ss.401(a)(29) of the Code. No liability to
the PBGC (other than required insurance premiums, all of which have been
paid) has been incurred by the Borrower or any ERISA Affiliate with
respect to any Guaranteed Pension Plan and there has not been any ERISA
Reportable Event (other than an ERISA Reportable Event as to which the
requirement of 30 days notice has been waived), or any other event or
condition which presents a material risk of termination of any Guaranteed
Pension Plan by the PBGC. Based on the latest valuation of each Guaranteed
Pension Plan (which in each case occurred within twelve months of the date
of this representation), and on the actuarial methods and assumptions
employed for that valuation, the aggregate benefit liabilities of all such
Guaranteed Pension Plans within the meaning of ss.4001 of ERISA did not
exceed the aggregate value of the assets of all such Guaranteed Pension
Plans, disregarding for this purpose the benefit liabilities and assets of
any Guaranteed Pension Plan with assets in excess of benefit liabilities.
7.16.4. Multiemployer Plans. Neither the Borrower nor any ERISA
Affiliate has incurred any material liability (including secondary
liability) to any Multiemployer Plan as a result of a complete or partial
withdrawal from such Multiemployer Plan under ss.4201 of ERISA or as a
result of a sale of assets described in ss.4204 of ERISA. Neither the
Borrower nor any ERISA Affiliate has been notified that any Multiemployer
Plan is in reorganization or insolvent under and within the meaning of
ss.4241 or ss.4245 of ERISA or is at risk of entering reorganization or
becoming insolvent, or that any Multiemployer Plan intends to terminate or
has been terminated under ss.4041A of ERISA.
7.17. Use of Proceeds.
7.17.1. General. The proceeds of the Revolving Credit Loans shall be
used to refinance existing Indebtedness of the Borrower and for working
capital and general corporate purposes. The Borrower will obtain Letters
of Credit solely for working capital and general corporate purposes,
including any Permitted Acquisitions.
7.17.2. Regulations U and X. No portion of any Revolving Credit Loan
is to be used, and no portion of any Letter of Credit is to be obtained,
for the purpose of purchasing or carrying any "margin security" or "margin
stock" as such terms are used in Regulations U and X of the Board of
Governors of the Federal Reserve System, 12 C.F.R. Parts 221 and 224.
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7.17.3. Ineligible Securities. No portion of the proceeds of any
Revolving Credit Loans is to be used, and no portion of any Letter of
Credit is to be obtained, for the purpose of (a) knowingly purchasing, or
providing credit support for the purchase of, Ineligible Securities from a
Section 20 Subsidiary during any period in which such Section 20
Subsidiary makes a market in such Ineligible Securities, (b) knowingly
purchasing, or providing credit support for the purchase of, during the
underwriting or placement period, any Ineligible Securities being
underwritten or privately placed by a Section 20 Subsidiary, or (c)
making, or providing credit support for the making of, payments of
principal or interest on Ineligible Securities underwritten or privately
placed by a Section 20 Subsidiary and issued by or for the benefit of the
Borrower or any Subsidiary or other Affiliate of the Borrower.
7.18. Environmental Compliance. The Borrower has, consistent with its
status as lessee of commercial real estate, taken all necessary steps to
investigate the past and present condition and usage of the Real Estate and the
operations conducted thereon and, based upon such diligent investigation and to
the Borrower's knowledge, has determined that:
(a) none of the Borrower, its Subsidiaries or any operator of the
Real Estate or any operations thereon is in violation, or alleged
violation, of any judgment, decree, order, law, license, rule or
regulation pertaining to environmental matters, including without
limitation, those arising under the Resource Conservation and Recovery Act
("RCRA"), the Comprehensive Environmental Response, Compensation and
Liability Act of 1980 as amended ("CERCLA"), the Superfund Amendments and
Reauthorization Act of 1986 ("SARA"), the Federal Clean Water Act, the
Federal Clean Air Act, the Toxic Substances Control Act, or any state or
local statute, regulation, ordinance, order or decree relating to health,
safety or the environment (hereinafter "Environmental Laws"), which
violation would have a material adverse effect on the environment or the
business, assets or financial condition of the Borrower or any of its
Subsidiaries;
(b) neither the Borrower nor any of its Subsidiaries has received
notice from any third party including, without limitation, any federal,
state or local governmental authority, (i) that any one of them has been
identified by the United States Environmental Protection Agency ("EPA") as
a potentially responsible party under CERCLA with respect to a site listed
on the National Priorities List, 40 C.F.R. Part 300 Appendix B; (ii) that
any hazardous waste, as defined by 42 U.S.C. ss.6903(5), any hazardous
substances as defined by 42 U.S.C. ss.9601(14), any pollutant or
contaminant as defined by 42 U.S.C. ss.9601(33) and any toxic substances,
oil or hazardous materials or other chemicals or substances regulated by
any Environmental Laws ("Hazardous Substances") which any one of them has
generated, transported or disposed of has been found at any site at which
a federal, state or local agency or other third party has conducted or has
ordered that any Borrower or any of its Subsidiaries conduct a remedial
investigation, removal or other response action pursuant to any
Environmental
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Law; or (iii) that it is or shall be a named party to any claim, action,
cause of action, complaint, or legal or administrative proceeding (in each
case, contingent or otherwise) arising out of any third party's incurrence
of costs, expenses, losses or damages of any kind whatsoever in connection
with the release of Hazardous Substances;
(c) (i) no portion of the Real Estate has been used for the
handling, processing, storage or disposal of Hazardous Substances except
in accordance with applicable Environmental Laws; and no underground tank
or other underground storage receptacle for Hazardous Substances is
located on any portion of the Real Estate; (ii) in the course of any
activities conducted by the Borrower, its Subsidiaries or operators of its
properties, no Hazardous Substances have been generated or are being used
on the Real Estate except in accordance with applicable Environmental
Laws; (iii) there have been no releases (i.e. any past or present
releasing, spilling, leaking, pumping, pouring, emitting, emptying,
discharging, injecting, escaping, disposing or dumping) or threatened
releases of Hazardous Substances on, upon, into or from the properties of
the Borrower or its Subsidiaries, which releases would have a material
adverse effect on the value of any of the Real Estate or adjacent
properties or the environment; (iv) to the best of the Borrower's
knowledge, there have been no releases on, upon, from or into any real
property in the vicinity of any of the Real Estate which, through soil or
groundwater contamination, may have come to be located on, and which would
have a material adverse effect on the value of, the Real Estate; and (v)
in addition, any Hazardous Substances that have been generated on any of
the Real Estate have been transported offsite only by carriers having an
identification number issued by the EPA, treated or disposed of only by
treatment or disposal facilities maintaining valid permits as required
under applicable Environmental Laws, which transporters and facilities
have been and are, to the best of the Borrower's knowledge, operating in
compliance with such permits and applicable Environmental Laws; and
(d) None of the Borrower and its Subsidiaries or any of the other
Real Estate is subject to any applicable environmental law requiring the
performance of Hazardous Substances site assessments, or the removal or
remediation of Hazardous Substances, or the giving of notice to any
governmental agency or the recording or delivery to other Persons of an
environmental disclosure document or statement by virtue of the
transactions set forth herein and contemplated hereby, or as a condition
to the effectiveness of any other transactions contemplated hereby.
7.19. Subsidiaries, etc. Schedule 7.19(a) sets forth each Subsidiary of
the Borrower, and each Subsidiary of any Subsidiary. Except as set forth on
Schedule 7.19(b) hereto, neither the Borrower nor any Subsidiary of the Borrower
is engaged in any joint venture or partnership with any other Person.
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7.20. Bank Accounts. Schedule 7.20 sets forth the account numbers and
location of all bank accounts of the Borrower or any of its Subsidiaries.
7.21. Year 2000 Problem. The Borrower and its Subsidiaries have reviewed
the areas within their businesses and operations which could be adversely
affected by, and have developed or are developing a program to address on a
timely basis, the "Year 2000 Problem" (i.e. the risk that computer applications
used by the Borrower or any of its Subsidiaries may be unable to recognize and
perform properly date-sensitive functions involving certain dates prior to and
any date after December 31, 1999). Based upon such review, the Borrower
reasonably believes that the "Year 2000 Problem" will not have any materially
adverse effect on the business or financial condition of the Borrower or any of
its Subsidiaries.
7.22. Disclosure. None of this Credit Agreement or any of the other Loan
Documents contains any untrue statement of a material fact or omits to state a
material fact (known to the Borrower or any of its Subsidiaries in the case of
any document or information not furnished by it or any of its Subsidiaries)
necessary in order to make the statements herein or therein not misleading.
There is no fact known to the Borrower or any of its Subsidiaries which
materially adversely affects, or which is reasonably likely in the future to
materially adversely affect, the business, assets, financial condition or
prospects of the Borrower or any of its Subsidiaries, exclusive of effects
resulting from changes in general economic conditions, legal standards or
regulatory conditions.
7.23. Chief Executive Offices. As of the date hereof, the Borrower's
principal place of business is at 6707 Democracy Boulevard, Suite 1001,
Bethesda, Maryland 20817, at which location its books and records are kept.
7.24. Insurance. The Borrower and each of its Subsidiaries maintain with
financially sound and reputable insurers insurance with respect to their
properties and businesses against such casualties and contingencies as are in
accordance with sound business practices.
8. AFFIRMATIVE COVENANTS OF THE BORROWER.
The Borrower covenants and agrees that, so long as any Revolving Credit
Loan, Unpaid Reimbursement Obligation, Letter of Credit or Revolving Credit Note
is outstanding or any Bank has any obligation to make any Revolving Credit Loans
or the Agent has any obligation to issue, extend or renew any Letters of Credit:
8.1. Punctual Payment. The Borrower will duly and punctually pay or cause
to be paid the principal and interest on the Revolving Credit Loans, all
Reimbursement Obligations, the Letter of Credit Fees, the Agent's fee and the
commitment fees and all other amounts provided for in this Credit Agreement and
the other Loan Documents to which the Borrower or any of its Subsidiaries is a
party, all in accordance with the terms of this Credit Agreement and such other
Loan Documents.
8.2. Maintenance of Office. The Borrower will maintain its chief executive
office in 6707 Democracy Boulevard, Suite 1001, Bethesda, Maryland 20817, or at
such
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other place in the United States of America as the Borrower shall designate upon
written notice to the Agent, where notices, presentations and demands to or upon
the Borrower in respect of the Loan Documents to which the Borrower is a party
may be given or made.
8.3. Records and Accounts. The Borrower will (a) keep, and cause each of
its Subsidiaries to keep, true and accurate records and books of account in
which full, true and correct entries will be made in accordance with generally
accepted accounting principles; (b) maintain adequate accounts and reserves for
all taxes (including income taxes), depreciation, depletion, obsolescence and
amortization of its properties and the properties of its Subsidiaries,
contingencies, and other reserves; and (c) at all times engage Arthur Andersen
LLP or other independent certified public accountants satisfactory to the Agent
as the independent certified public accountants of the Borrower and its
Subsidiaries and will not permit more than thirty (30) days to elapse between
the cessation of such firm's (or any successor firm's) engagement as the
independent certified public accountants of the Borrower and its Subsidiaries
and the appointment in such capacity of a successor firm as shall be
satisfactory to the Agent.
8.4. Financial Statements, Certificates and Information. The Borrower will
deliver to each of the Banks:
(a) as soon as practicable, but in any event not later than ninety
(90) days after the end of each fiscal year of the Borrower, the
consolidated balance sheet of the Borrower and its Subsidiaries and the
consolidating balance sheet of the Borrower and its Subsidiaries, each as
at the end of such year, and the related consolidated statement of income
and consolidated statement of cash flow and consolidating statement of
income and consolidating statement of cash flow for such year, each
setting forth in comparative form the figures for the previous fiscal year
and all such consolidated and consolidating statements to be in reasonable
detail, prepared in accordance with generally accepted accounting
principles, and with respect to such consolidated statements, certified
without qualification by Arthur Andersen LLP or by other independent
certified public accountants satisfactory to the Agent, together with a
written statement from such accountants to the effect that they have read
a copy of this Credit Agreement, and that, in making the examination
necessary to said certification, they have obtained no knowledge of any
Default or Event of Default, or, if such accountants shall have obtained
knowledge of any then existing Default or Event of Default they shall
disclose in such statement any such Default or Event of Default; provided
that such accountants shall not be liable to the Banks for failure to
obtain knowledge of any Default or Event of Default;
(b) as soon as practicable, but in any event not later than
forty-five (45) days after the end of each of the fiscal quarters of the
Borrower, copies of the unaudited consolidated balance sheet of the
Borrower and its Subsidiaries and the unaudited consolidating balance
sheet of the Borrower and its Subsidiaries, each as at the end of such
quarter, and the related consolidated statement of income and consolidated
statement of cash flow and consolidating statement of
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income and consolidating statement of cash flow for the portion of the
Borrower's fiscal year then elapsed, all in reasonable detail and prepared
in accordance with generally accepted accounting principles (exclusive of
footnotes), together with a certification by the principal financial or
accounting officer of the Borrower that the information contained in such
financial statements fairly presents the financial position of the
Borrower and its Subsidiaries on the date thereof (subject to year-end
adjustments);
(c) as soon as practicable, but in any event within thirty (30) days
after the end of each month other than those months ending at the end of
any fiscal quarter in each fiscal year of the Borrower, unaudited monthly
consolidated financial statements of the Borrower and its Subsidiaries for
such month and unaudited monthly consolidating financial statements of the
Borrower and its Subsidiaries for such month, each prepared in accordance
with generally accepted accounting principles (exclusive of footnotes),
together with a certification by the principal financial or accounting
officer of the Borrower that the information contained in such financial
statements fairly presents the financial condition of the Borrower and its
Subsidiaries on the date thereof (subject to year-end adjustments);
(d) simultaneously with the delivery of the financial statements
referred to in subsections (a), (b) and, for purposes of calculating the
Leverage Ratio, (c) above, a statement certified by the principal
financial or accounting officer of the Borrower in substantially the form
of Exhibit C hereto (the "Compliance Certificate") and setting forth in
reasonable detail computations evidencing compliance with the covenants
contained in ss.10 and (if applicable) reconciliations to reflect changes
in generally accepted accounting principles since the Balance Sheet Date;
(e) contemporaneously with the filing or mailing thereof, copies of
all material of a financial nature filed with the Securities and Exchange
Commission or sent to the stockholders of the Borrower;
(f) from time to time upon request of the Agent or any Bank,
projections of the Borrower and its Subsidiaries updating those
projections delivered to the Banks and referred to in ss.7.4.3 or, if
applicable, updating any later such projections delivered in response to a
request pursuant to this ss.8.4(f); and
(g) from time to time such other financial data and information
(including accountants, management letters) as the Agent or any Bank may
reasonably request.
8.5. Notices.
8.5.1. Defaults. The Borrower will promptly notify the Agent and
each of the Banks in writing of the occurrence of any Default or Event of
Default. If any Person shall give any notice or take any other action in
respect of a claimed default (whether or not constituting an Event of
Default) under this Credit
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Agreement or any other note, evidence of indebtedness, indenture or other
obligation to which or with respect to which the Borrower or any of its
Subsidiaries is a party or obligor, whether as principal, guarantor or
surety or otherwise, the Borrower shall forthwith give written notice
thereof to the Agent and each of the Banks, describing the notice or
action and the nature of the claimed default.
8.5.2. Environmental Events. The Borrower will promptly give notice
to the Agent and each of the Banks (a) of any violation of any
Environmental Law that the Borrower or any of its Subsidiaries reports in
writing or is reportable by such Person in writing (or for which any
written report supplemental to any oral report is made) to any federal,
state or local environmental agency and (b) upon becoming aware thereof,
of any inquiry, proceeding, investigation, or other action, including a
notice from any agency of potential environmental liability, of any
federal, state or local environmental agency or board, that has the
potential to materially affect the assets, liabilities, financial
conditions or operations of the Borrower or any of its Subsidiaries, or
the Agent's security interests pursuant to the Security Documents.
8.5.3. Notification of Claims Against Collateral. The Borrower will,
immediately upon becoming aware thereof, notify the Agent and each of the
Banks in writing of any setoff, claims (including, with respect to the
Real Estate, environmental claims), withholdings or other defenses to
which any of the Collateral, or the Agent's rights with respect to the
Collateral, are subject.
8.5.4. Notice of Litigation and Judgments. The Borrower will, and
will cause each of its Subsidiaries to, give notice to the Agent and each
of the Banks in writing within fifteen (15) days of becoming aware of any
litigation or proceedings threatened in writing or any pending litigation
and proceedings affecting the Borrower or any of its Subsidiaries or to
which the Borrower or any of its Subsidiaries is or becomes a party
involving an uninsured claim against the Borrower or any of its
Subsidiaries that could reasonably be expected to have a materially
adverse effect on the Borrower or any of its Subsidiaries and stating the
nature and status of such litigation or proceedings. The Borrower will,
and will cause each of its Subsidiaries to, give notice to the Agent and
each of the Banks, in writing, in form and detail satisfactory to the
Agent, within ten (10) days of any judgment not covered by insurance,
final or otherwise, against the Borrower or any of its Subsidiaries in an
amount in excess of $500,000.
8.6. Corporate Existence; Maintenance of Properties. The Borrower will do
or cause to be done all things necessary to preserve and keep in full force and
effect its corporate existence, rights and franchises and those of its
Subsidiaries and will not, and will not cause or permit any of its Subsidiaries
to, convert to a limited liability company. It (a) will cause all of its
properties and those of its Subsidiaries used or useful in the conduct of its
business or the business of its Subsidiaries to be maintained and kept in good
condition, repair and working order and supplied with all necessary equipment,
(b) will cause to be made all necessary repairs, renewals, replacements,
betterments and
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improvements thereof, all as in the judgment of the Borrower may be necessary so
that the business carried on in connection therewith may be properly and
advantageously conducted at all times, and (c) will, and will cause each of its
Subsidiaries to, continue to engage primarily in the businesses now conducted by
them and in related businesses; provided that nothing in this ss.8.6 shall
prevent the Borrower from discontinuing the operation and maintenance of any of
its properties or any of those of its Subsidiaries if such discontinuance is, in
the judgment of the Borrower, desirable in the conduct of its or their business
and that do not in the aggregate materially adversely affect the business of the
Borrower and its Subsidiaries on a consolidated basis.
8.7. Insurance. The Borrower will, and will cause each of its Subsidiaries
to, maintain with financially sound and reputable insurers insurance with
respect to its properties and business against such casualties and contingencies
as shall be in accordance with the general practices of businesses engaged in
similar activities in similar geographic areas and in amounts, containing such
terms, in such forms and for such periods as may be reasonable and prudent and
in accordance with the terms of the Security Agreements.
8.8. Taxes. The Borrower will, and will cause each of its Subsidiaries to,
duly pay and discharge, or cause to be paid and discharged, before the same
shall become overdue, all taxes, assessments and other governmental charges
imposed upon it and its real properties, sales and activities, or any part
thereof, or upon the income or profits therefrom, as well as all claims for
labor, materials, or supplies that if unpaid might by law become a lien or
charge upon any of its property; provided that any such tax, assessment, charge,
levy or claim need not be paid if the validity or amount thereof shall currently
be contested in good faith by appropriate proceedings and if the Borrower or
such Subsidiary shall have set aside on its books adequate reserves with respect
thereto; and provided further that the Borrower and each Subsidiary of the
Borrower will pay all such taxes, assessments, charges, levies or claims
forthwith upon the commencement of proceedings to foreclose any lien that may
have attached as security therefor.
8.9. Inspection of Properties and Books, etc.
8.9.1. General. The Borrower shall permit the Banks, through the
Agent or any of the Banks' other designated representatives, to visit and
inspect any of the properties of the Borrower or any of its Subsidiaries
to examine the books of account of the Borrower and its Subsidiaries (and
to make copies thereof and extracts therefrom), and to discuss the
affairs, finances and accounts of the Borrower and its Subsidiaries with,
and to be advised as to the same by, its and their officers, all at such
reasonable times and intervals as the Agent or any Bank may reasonably
request.
8.9.2. Collateral Audit. No more frequently than once each calendar
year, or more frequently as determined by the Agent or the Majority Banks
if an Event of Default shall have occurred and be continuing, upon the
request of the Agent or the Majority Banks, the Borrower shall permit the
Banks, the Agent or any of the Banks' other designated representatives, to
conduct a collateral audit
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and inspection. All such audits and inspections shall be made at the
expense of the Borrower.
8.9.3. Communication with Accountants. The Borrower authorizes the
Agent and, if accompanied by the Agent, the Banks to communicate directly
with the Borrower's independent certified public accountants and
authorizes such accountants to disclose to the Agent and the Banks any and
all financial statements and other supporting financial documents and
schedules including copies of any management letter with respect to the
business, financial condition and other affairs of the Borrower or any of
its Subsidiaries. The Borrower shall have the right to be present at all
such communications. At the request of the Agent, the Borrower shall
deliver a letter addressed to such accountants instructing them to comply
with the provisions of this ss.8.9.3.
8.10. Compliance with Laws, Contracts, Licenses, and Permits. The Borrower
will, and will cause each of its Subsidiaries to, comply with (a) the applicable
laws and regulations wherever its business is conducted, including all
Environmental Laws, (b) the provisions of its charter documents and by-laws, (c)
all agreements and instruments by which it or any of its properties may be bound
and (d) all applicable decrees, orders, and judgments. If any authorization,
consent, approval, permit or license from any officer, agency or instrumentality
of any government shall become necessary or required in order that the Borrower
or any of its Subsidiaries may fulfill any of its obligations hereunder or under
any of the other Loan Documents to which the Borrower or such Subsidiary is a
party, the Borrower will, or (as the case may be) will cause such Subsidiary to,
immediately take or cause to be taken all reasonable steps within the power of
the Borrower or such Subsidiary to obtain such authorization, consent, approval,
permit or license and furnish the Agent and the Banks with evidence thereof.
8.11. Employee Benefit Plans. The Borrower will (a) promptly upon filing
the same with the Department of Labor or Internal Revenue Service, furnish to
the Agent a copy of the most recent actuarial statement required to be submitted
under ss.103(d) of ERISA and Annual Report, Form 5500, with all required
attachments, in respect of each Guaranteed Pension Plan and (ii) promptly upon
receipt or dispatch, furnish to the Agent any notice, report or demand sent or
received in respect of a Guaranteed Pension Plan under ss.ss.302, 4041, 4042,
4043, 4063, 4065, 4066 and 4068 of ERISA, or in respect of a Multiemployer Plan,
under ss.ss.4041A, 4202, 4219, 4242, or 4245 of ERISA.
8.12. Use of Proceeds. The Borrower will use the proceeds of the Revolving
Credit Loans solely to refinance existing Indebtedness of the Borrower and for
working capital and general corporate purposes including any Permitted
Acquisitions. The Borrower will obtain Letters of Credit solely for working
capital and general corporate purposes.
8.13. Bank Accounts. The Borrower will, and will cause each of its
Subsidiaries to, together with the employees, agents and other Persons acting on
behalf of the Borrower or such Subsidiary, receive and hold in trust for the
Agent and the Banks all payments constituting proceeds of Accounts Receivable or
other Collateral which come
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into their possession or under their control and, immediately upon receipt
thereof, deposit such payments in the form received, with any appropriate
endorsements, in one of the accounts designated as a central depository account
on Schedule 7.20.
8.14. New Guarantors. In the event any Subsidiary is formed or acquired
after the date hereof, such Subsidiary shall, on the date of its formation or
acquisition, guarantee the Obligations and shall execute and deliver to the
Agent a joinder to the Guaranty in form and substance satisfactory to the Agent.
In addition, such new Subsidiary shall also be bound by the security provisions
of ss.6 hereof and shall execute and deliver to the Agent a Security Agreement
and any other necessary Security Documents, each to be in form and substance
acceptable to the Agent and the Banks, to the Agent.
8.15. Landlord Consents. The Borrower and its Subsidiaries shall deliver
to the Agent within sixty (60) days of the Closing Date a landlord consent in
form and substance satisfactory to the Agent as to each of its leaseholds of
real property; provided, however, it shall not be an Event of Default hereunder
if the Borrower, or such Subsidiary after using reasonable efforts, is unable to
execute and deliver any such consent (other than the consent in respect of the
lease in Bethesda, Maryland of the chief executive office of the Borrower).
8.16. Bank Agency Agreements. Within sixty (60) days of the Closing Date,
the Agent shall have received an agreement (each, an "Agency Account
Agreement"), in form and substance satisfactory to the Agent, from each bank at
which the Borrower or any of its Subsidiaries maintains depository accounts
(including bank agency or lock box agreements) concerning the Agent's interest
for the benefit of the Banks and the Agent in such accounts.
8.17. Subordination Agreements. Within thirty (30) days of the Closing
Date, the Agent shall have received a Subordination Agreement, duly executed and
delivered by the Borrower, the Agent and each holder of the Seller Subordinated
Debt existing on the Closing Date other than (a) the holders of existing Seller
Subordinated Debt to Smart Technology, LLC, LOGEX and Fairfax Management Company
II, LLC and (b) those holders which have executed and delivered a Subordination
Agreement to the Agent on the Closing Date.
8.18. Further Assurances. The Borrower will, and will cause each of its
Subsidiaries to, cooperate with the Banks and the Agent and execute such further
instruments and documents as the Majority Banks or the Agent shall reasonably
request to carry out to their satisfaction the transactions contemplated by this
Credit Agreement and the other Loan Documents.
9. CERTAIN NEGATIVE COVENANTS OF THE BORROWER.
The Borrower covenants and agrees that, so long as any Revolving Credit
Loan, Unpaid Reimbursement Obligation, Letter of Credit or Revolving Credit Note
is
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outstanding or any Bank has any obligation to make any Revolving Credit Loans or
the Agent has any obligations to issue, extend or renew any Letters of Credit:
9.1. Restrictions on Indebtedness. The Borrower will not, and will not
permit any of its Subsidiaries to, create, incur, assume, guarantee or be or
remain liable, contingently or otherwise, with respect to any Indebtedness other
than:
(a) Indebtedness to the Banks and the Agent arising under any of the
Loan Documents or the Guaranteed Credit Agreement;
(b) endorsements for collection, deposit or negotiation and
warranties of products or services, in each case incurred in the ordinary
course of business;
(c) Indebtedness incurred in connection with the acquisition after
the date hereof of any real or personal property by the Borrower or such
Subsidiary or under any Capitalized Lease, provided that the aggregate
principal amount of such Indebtedness of the Borrower and its Subsidiaries
shall not exceed the aggregate amount of $1,000,000 at any one time;
(d) Indebtedness existing on the date of this Credit Agreement and
listed and described on Schedule 9.1 hereto;
(e) Indebtedness of a Subsidiary of the Borrower to the Borrower so
long as such Subsidiary has guaranteed all the Obligations hereunder
pursuant to the Guaranty;
(f) Indebtedness of the Borrower in respect of Seller Subordinated
Debt; and
(g) other unsecured Indebtedness not otherwise expressly permitted
pursuant to this ss.9.1 in an aggregate amount not to exceed $500,000.
9.2. Restrictions on Liens. The Borrower will not, and will not permit any
of its Subsidiaries to, (a) create or incur or suffer to be created or incurred
or to exist any lien, encumbrance, mortgage, pledge, charge, restriction or
other security interest of any kind upon any of its property or assets of any
character whether now owned or hereafter acquired, or upon the income or profits
therefrom; (b) transfer any of such property or assets or the income or profits
therefrom for the purpose of subjecting the same to the payment of Indebtedness
or performance of any other obligation in priority to payment of its general
creditors; (c) acquire, or agree or have an option to acquire, any property or
assets upon conditional sale or other title retention or purchase money security
agreement, device or arrangement; (d) suffer to exist for a period of more than
thirty (30) days after the same shall have been incurred any Indebtedness or
claim or demand against it that if unpaid might by law or upon bankruptcy or
insolvency, or otherwise, be given any priority whatsoever over its general
creditors; (e) sell, assign, pledge or otherwise transfer any "receivables" as
defined in clause (g) of the definition of the term "Indebtedness" with or
without recourse; or (f) enter into or permit to exist any arrangement or
agreement, enforceable under applicable law, which directly or
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indirectly prohibits the Borrower or any of its Subsidiaries from creating or
incurring any lien, encumbrance, mortgage, pledge, charge, restriction or other
security interest other than in favor of the Agent for the benefit of the Banks
and the Agent under the Loan Documents and other customary anti-assignment
provisions in leases and licensing agreements entered into by the Borrower or
such Subsidiary in the ordinary course of its business, provided that the
Borrower or any of its Subsidiaries may create or incur or suffer to be created
or incurred or to exist:
(a) liens in favor of the Borrower on all or part of the assets of
Subsidiaries of the Borrower securing Indebtedness owing by Subsidiaries
of the Borrower to the Borrower;
(b) liens to secure taxes, assessments and other government charges
in respect of obligations not overdue or liens on properties to secure
claims for labor, material or supplies in respect of obligations not
overdue;
(c) deposits or pledges made in connection with, or to secure
payment of, workmen's compensation, unemployment insurance, old age
pensions or other social security obligations;
(d) liens on properties in respect of judgments or awards that have
been in force for less than the applicable period for taking an appeal so
long as execution is not levied thereunder or in respect of which the
Borrower or such Subsidiary shall at the time in good faith be prosecuting
an appeal or proceeding for review and in respect of which a stay of
execution shall have been obtained pending such appeal or review;
(e) liens of carriers, warehousemen, mechanics and materialmen, and
other like liens on properties in existence less than 120 days from the
date of creation thereof in respect of obligations not overdue;
(f) encumbrances on Real Estate consisting of easements, rights of
way, zoning restrictions, restrictions on the use of real property and
defects and irregularities in the title thereto, landlord's or lessor's
liens under leases to which the Borrower or a Subsidiary of the Borrower
is a party, and other minor liens or encumbrances none of which in the
opinion of the Borrower interferes materially with the use of the property
affected in the ordinary conduct of the business of the Borrower and its
Subsidiaries, which defects do not individually or in the aggregate have a
materially adverse effect on the business of the Borrower individually or
of the Borrower and its Subsidiaries on a consolidated basis;
(g) liens existing on the date hereof and listed on Schedule 9.2
hereto;
(h) purchase money security interests in or purchase money mortgages
on real or personal property acquired after the date hereof to secure
purchase money Indebtedness of the type and amount permitted by ss.9.1(c),
incurred in connection with the acquisition of such property, which
security interests or mortgages cover only the real or personal property
so acquired; and
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(i) liens in favor of the Agent for the benefit of the Banks and the
Agent under the Loan Documents.
9.3. Restrictions on Investments. The Borrower will not, and will not
permit any of its Subsidiaries to, make or permit to exist or to remain
outstanding any Investment except Investments in:
(a) marketable direct or guaranteed obligations of the United States
of America that mature within one (1) year from the date of purchase by
the Borrower;
(b) demand deposits, certificates of deposit, bankers acceptances
and time deposits of United States banks having total assets in excess of
$1,000,000,000;
(c) securities commonly known as "commercial paper" issued by a
corporation organized and existing under the laws of the United States of
America or any state thereof that at the time of purchase have been rated
and the ratings for which are not less than "P 1" if rated by Moody's
Investors Services, Inc., and not less than "A 1" if rated by Standard and
Poor's Rating Group;
(d) Investments existing on the date hereof and listed on Schedule
9.3 hereto;
(e) Investments with respect to Indebtedness permitted by ss.9.1(e)
so long as such entities remain Subsidiaries of the Borrower and such
Subsidiary is a party to the Guaranty;
(f) Investments consisting of the Guaranty or Investments by the
Borrower in Subsidiaries of the Borrower which are party to the Guaranty;
(g) Investments consisting of promissory notes received as proceeds
of asset dispositions permitted by ss.9.5.2;
(h) Investments consisting of notes receivables from officers and
key employees of the Borrower accepted by the Borrower as full or partial
payment in respect of capital stock of the Borrower purchased by such
employee; and
(i) Investments by the Borrower consisting of loans or advances to
employees of the Borrower, provided, that such Investments do not exceed
in the aggregate $200,000 outstanding at any one time.
provided, however, that, with the exception of demand deposits referred to in
ss.9.3(b), such Investments will be considered Investments permitted by this
ss.9.3 only if all actions have been taken to the satisfaction of the Agent to
provide to the Agent, for the benefit of the Banks and the Agent, a first
priority perfected security interest in all of such Investments free of all
encumbrances other than Permitted Liens.
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9.4. Restricted Payments; Distributions. The Borrower and its Subsidiaries
will not make any Restricted Payments; provided, however, the Subsidiaries of
the Borrower shall be permitted to make Distributions to the Borrower or to any
other Subsidiary of the Borrower which is party to the Guaranty and, so long as
no Default or Event of Default has occurred and is continuing or would exist as
a result thereof, the Borrower shall be permitted (a) to make a payment to GTCR
consisting of annual management fee payments in an aggregate annual amount not
to exceed $200,000 per fiscal year which are due and payable in such fiscal year
pursuant to a management agreement between GTCR and the Borrower, provided such
payments shall not be made until a date which is not more than fifteen (15) days
prior to the date such payments are due and payable pursuant to the terms of
such agreement and (b) to make customary and reasonable payments in respect of
management or consulting fees to Fairfax and Davidson in accordance with the
terms of the Borrower's agreements with such persons as they exist on the
Closing Date.
9.5. Merger, Consolidation.
9.5.1. Mergers and Acquisitions. The Borrower will not, and will not
permit any of its Subsidiaries to, become a party to any merger or
consolidation, or agree to or effect any asset acquisition or stock
acquisition except (a) the merger or consolidation of one or more of the
Subsidiaries of the Borrower with and into the Borrower; (b) or the merger
or consolidation of two or more Subsidiaries of the Borrower; and (c)
other asset or stock acquisitions of Persons in the same or a similar line
of business as the Borrower (a "Permitted Acquisition") where (i) the
Borrower has provided the Agent with five (5) Business Days prior written
notice of such Permitted Acquisition, which notice shall include a
reasonably detailed description of such Permitted Acquisition, and the
Majority Banks have consented in writing, in advance, to the Borrower or
the Subsidiary, as the case may be, consummating such acquisition; (ii)
the Borrower has provided the Agent with all documents, instruments and
agreements to be entered into in connection with the Permitted
Acquisition, which documents, instruments and agreements shall be in form
and substance satisfactory to the Agent; (iii) the business to be acquired
would not subject the Agent or any of the Banks to regulatory or third
party approvals in connection with the exercise of its rights and remedies
under this Credit Agreement and the other Loan Documents; (iv) the
business and assets so acquired in such Permitted Acquisition shall be
acquired by the Borrower free and clear of all liens (other than Permitted
Liens) and all Indebtedness (other than Indebtedness expressly permitted
pursuant to ss.9.1 hereof); (v) the Borrower has taken or caused to be
taken all necessary actions to grant to the Agent a first priority
perfected lien in all assets and stock to be acquired in connection with
such Permitted Acquisition; (vi) the Borrower has demonstrated to the
satisfaction of the Agent, based on a pro forma Compliance Certificate,
compliance with ss.10 hereof on a Pro Forma Basis both immediately prior
to and after giving effect to such Permitted Acquisition; (vii) the
Borrower is the survivor of any such Permitted Acquisition; (viii) no more
than seventy five percent (75%) of the total consideration for any
Permitted Acquisition shall be financed with
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Indebtedness; and (ix) the Borrower has delivered to the Agent a
certificate of the chief financial officer of the Borrower to the effect
that (1) the Borrower will be solvent on a going concern basis upon the
consummation of the Permitted Acquisition; (2) the pro forma Compliance
Certificate fairly presents the financial condition of the Borrower and
its Subsidiaries as of the date thereof and after giving effect to such
Permitted Acquisition and (3) no Default or Event of Default then exists
or would result after giving effect to the Permitted Acquisition.
In the event any new Subsidiary is formed or acquired as a result of
or in connection with any acquisition, the Loan Documents shall be amended
and/or supplemented as necessary to make the terms and conditions of the
Loan Documents applicable to such Subsidiary.
9.5.2. Disposition of Assets. The Borrower will not, and will not
permit any of its Subsidiaries to, become a party to or agree to or effect
any disposition of assets, other than the licensing of intellectual
property and the disposition of obsolete assets, in each case in the
ordinary course of business, consistent with past practices.
9.6. Sale and Leaseback. The Borrower will not, and will not permit any of
its Subsidiaries to, enter into any arrangement, directly or indirectly, whereby
the Borrower or any Subsidiary of the Borrower shall sell or transfer any
property owned by it in order then or thereafter to lease such property or lease
other property that the Borrower or any Subsidiary of the Borrower intends to
use for substantially the same purpose as the property being sold or
transferred.
9.7. Compliance with Environmental Laws. The Borrower will not, and will
not permit any of its Subsidiaries to, (a) use any of the Real Estate or any
portion thereof for the handling, processing, storage or disposal of Hazardous
Substances, (b) cause or permit to be located on any of the Real Estate any
underground tank or other underground storage receptacle for Hazardous
Substances, (c) generate any Hazardous Substances on any of the Real Estate, (d)
conduct any activity at any Real Estate or use any Real Estate in any manner so
as to cause a release (i.e. releasing, spilling, leaking, pumping, pouring,
emitting, emptying, discharging, injecting, escaping, leaching, disposing or
dumping) or threatened release of Hazardous Substances on, upon or into the Real
Estate or (e) otherwise conduct any activity at any Real Estate or use any Real
Estate in any manner that would violate any Environmental Law or bring such Real
Estate in violation of any Environmental Law.
9.8. Fiscal Year. The Borrower will not, and will not permit any of its
Subsidiaries to, change the date of the end of their respective fiscal years
from that set forth in ss.7.4.1.
9.9. Employee Benefit Plans. Neither the Borrower nor any ERISA Affiliate
will:
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(a) engage in any "prohibited transaction" within the meaning of
ss.406 of ERISA or ss.4975 of the Code which could result in a material
liability for the Borrower or any of its Subsidiaries; or
(b) permit any Guaranteed Pension Plan to incur an "accumulated
funding deficiency", as such term is defined in ss.302 of ERISA, whether
or not such deficiency is or may be waived; or
(c) fail to contribute to any Guaranteed Pension Plan to an extent
which, or terminate any Guaranteed Pension Plan in a manner which, could
result in the imposition of a lien or encumbrance on the assets of the
Borrower or any of its Subsidiaries pursuant to ss.302(f) or ss.4068 of
ERISA; or
(d) amend any Guaranteed Pension Plan in circumstances requiring the
posting of security pursuant to ss.307 of ERISA or ss.401(a)(29) of the
Code; or
(e) permit or take any action which would result in the aggregate
benefit liabilities (with the meaning of ss.4001 of ERISA) of all
Guaranteed Pension Plans exceeding the value of the aggregate assets of
such Plans, disregarding for this purpose the benefit liabilities and
assets of any such Plan with assets in excess of benefit liabilities.
9.10. Business Activities. The Borrower will not, and will not permit any
of its Subsidiaries to, engage directly or indirectly (whether through
Subsidiaries or otherwise) in any type of business other than the businesses
conducted by them on the Closing Date and in related businesses.
9.11. Transactions with Affiliates. The Borrower will not, and will not
permit any of its Subsidiaries to, engage in any transaction with any Affiliate
(other than for services as employees, officers and directors), including any
contract, agreement or other arrangement providing for the furnishing of
services to or by, providing for rental of real or personal property to or from,
or otherwise requiring payments to or from any such Affiliate or, to the
knowledge of the Borrower, any corporation, partnership, trust or other entity
in which any such Affiliate has a substantial interest or is an officer,
director, trustee or partner, on terms more favorable to such Person than would
have been obtainable on an arm's-length basis in the ordinary course of
business.
9.12. Bank Accounts. The Borrower will not, and will not permit any of its
Subsidiaries to, (a) establish any bank accounts other than those accounts, all
listed on Schedule 7.20, without the Agent's and the Majority Banks' prior
written consent, (b) violate directly or indirectly any bank agency or lock box
agreement in favor of the Agent for the benefit of the Banks and the Agent with
respect to such account, or (c) deposit into any of the payroll accounts listed
on Schedule 7.20 any amounts in excess of amounts necessary to pay current
payroll obligations from such accounts.
9.13. Change in Terms of Capital Stock. The Borrower will not, and will
not permit any of its Subsidiaries to effect or permit any change in or
amendment to any document or instrument pertaining to the terms of such Person's
capital stock unless
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such change or amendment would not have a material adverse effect on the Agent
or any Banks in respect of the Obligations hereunder.
9.14. Upstream Limitations. The Borrowers will not, and will not permit
any of its Subsidiaries to, enter into any agreement, contract or arrangement
(other than the Credit Agreement and the other Loan Documents) restricting the
ability of any Subsidiary to pay or make dividends or distributions in cash or
kind, to make loans, advances or other payments of whatsoever nature or to make
transfers or distributions of all or any part of its assets (other than as
permitted by ss.9.2 hereof) to the Borrower or any of its Subsidiaries.
9.15. Inconsistent Agreements. The Borrower will not, and will not permit
any of its Subsidiaries to, enter into any agreement containing any provision
which would be violated or breached by the performance by the Borrower or any of
its Subsidiaries of their respective obligations hereunder or under any of the
Loan Documents.
9.16. Charter Amendments. The Borrower will not, nor will it permit any of
its Subsidiaries to, amend its certificate of incorporation or bylaws, or
similar organizational documents, except if such change would not have a
material adverse effect on the Agent or any Banks in respect of the Obligations
hereunder.
9.17. Amendments to Employment Agreements. The Borrower will not, nor will
it permit any of its Subsidiaries to, amend, supplement or modify, or consent to
any such amendment, supplement or modification to, any provisions of any
employment agreement pertaining to (a) any repurchase options by the Borrower;
(b) any rights of first refusal upon transfers of the capital stock of the
Borrower; (c) non competition and non solicitation requirements; (d)
confidentiality requirements by the employee; (e) ownership of inventions,
patents, developments and similar or related information; and (f) the
assignability by the Borrower of such agreements without the prior written
consent of the Agent, unless such amendment, supplement or modification would
not have a material adverse effect on the assets, business or financial
condition of the Borrower or such Subsidiary.
9.18. Seller Subordinated Debt. The Borrower will not, and will not permit
any of its Subsidiaries to amend, supplement or otherwise modify the terms of
the Seller Subordinated Debt except for changes which are immaterial and
ministerial in nature and would not have a material adverse effect on the
Agent's, the Co-Agent's or any Bank's rights under the Loan Documents or the
Borrower's or any of its Subsidiaries' obligations under the Loan Documents or
prepay, redeem or repurchase any of the Seller Subordinated Debt.
10. FINANCIAL COVENANTS OF THE BORROWER.
The Borrower covenants and agrees that, so long as any Revolving Credit
Loan, Unpaid Reimbursement Obligation, Letter of Credit or Revolving Credit Note
is outstanding or any Bank has any obligation to make any Revolving Credit Loans
or the Agent has any obligation to issue, extend or renew any Letters of Credit:
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10.1. Leverage Ratio. The Borrower will not permit the Leverage Ratio (a)
at any time when the Borrower's EBITDA (calculated on a Pro Forma Basis) for the
immediately preceding twelve month period from the date of determination is less
than $10,000,000 to exceed 2.50:1.00; (b) at any time when the Borrower's EBITDA
(calculated on a Pro Forma Basis) for the immediately preceding twelve month
period from the date of determination is greater than or equal to $10,000,000
but less than $15,000,000 to exceed 2.75:1.00; and (c) at any time when the
Borrower's EBITDA (calculated on a Pro Forma Basis) for the immediately
preceding twelve month period from the date of determination is equal to or
greater than $15,000,000 to exceed 3.00:1.00.
10.2. Minimum EBITDA. The Borrower will not, as of the end of any fiscal
quarter ending during any period described in the table set forth below, permit
EBITDA of the Borrower and its Subsidiaries for the fiscal quarter ending on
such date, to be less than the amount set forth opposite such period in such
table:
-------------------------------------------------------------
Fiscal Quarter Ending Minimum EBITDA
-------------------------------------------------------------
March 31, 1999 $720,000
-------------------------------------------------------------
June 30, 1999 $1,980,000
-------------------------------------------------------------
September 30, 1999 $2,520,000
-------------------------------------------------------------
December 31, 1999 and each $3,847,817
fiscal quarter ending thereafter
-------------------------------------------------------------
10.3. Consolidated Operating Cash Flow to Total Debt Service. The Borrower
will not permit the ratio of Consolidated Operating Cash Flow to Total Debt
Service for any fiscal quarter ending on or after June 30, 1999 to be less than
1.50:1.00 for such fiscal quarter; provided, however, for purposes of this
ss.10.3, solely for the fiscal quarters ending June 30, 1999 and September 30,
1999, Total Debt Service shall not include any mandatory payments of principal
on the Guaranteed Revolving Credit Loans or required Consolidated Total Interest
Expense on such Guaranteed Revolving Credit Loans, and, provided, further,
solely for the fiscal quarter ending December 31, 1999, Total Debt Service shall
not include any mandatory payments of principal on the Seller Subordinated Debt
consisting of the convertible promissory note issued by Century Computing,
Incorporated in the original principal amount of $2,000,000.
10.4. Consolidated Operating Cash Flow to Senior Debt Service. The
Borrower will not permit the ratio of Consolidated Operating Cash Flow to Senior
Debt Service for any fiscal quarter ending on or after December 31, 1998 to be
less than 2.00:1.00 for such fiscal quarter; provided, however, for purposes of
this ss.10.4, solely for the fiscal quarters ending June 30, 1999 and September
30, 1999, Total Debt Service shall not include any mandatory payments of
principal on the Guaranteed Revolving Credit Loans or required Consolidated
Total Interest Expense on such Guaranteed Revolving Credit Loans.
10.5. Quick Ratio. The Borrower will not permit the ratio of Consolidated
Quick Assets to Consolidated Current Liabilities to be less than 1.75:1.00 at
any time.
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10.6. No Quarterly Net Loss. The Borrower will not permit Consolidated Net
Income for the fiscal quarter ending March 31, 1999 to be less than ($1,000,000)
and will not permit Consolidated Net Income for any fiscal quarter ending
thereafter to be less than $1.00.
10.7. Capital Expenditures. The Borrower will not make, or permit any
Subsidiary of the Borrower to make, Capital Expenditures, other than Capital
Expenditures which the Majority Banks reasonably determine are made for
nonrecurring one-time infrastructure purchases or leases by the Borrower, in any
fiscal year that exceed, in the aggregate, $3,000,000 for such fiscal year.
11. CLOSING CONDITIONS.
The obligations of the Banks to make the initial Revolving Credit Loans
and of the Agent to issue any initial Letters of Credit shall be subject to the
satisfaction of the following conditions precedent on or prior to January 8,
1999:
11.1. Loan Documents etc. Each of the Loan Documents shall have been duly
executed and delivered by the respective parties thereto, shall be in full force
and effect and shall be in form and substance satisfactory to each of the Banks.
Each Bank shall have received a fully executed copy of each such document.
11.2. Certified Copies of Charter Documents. Each of the Banks shall have
received from the Borrower and each of its Subsidiaries, a copy, certified by a
duly authorized officer of such Person to be true and complete on the Closing
Date, of each of (a) its charter or other incorporation documents as in effect
on such date of certification, and (b) its by-laws as in effect on such date.
11.3. Corporate Action. All corporate action necessary for the valid
execution, delivery and performance by GTCR, the Borrower and each of its
Subsidiaries of this Credit Agreement and the other Loan Documents to which it
is or is to become a party shall have been duly and effectively taken, and
evidence thereof satisfactory to the Banks shall have been provided to each of
the Banks.
11.4. Incumbency Certificate. Each of the Banks shall have received from
GTCR, the Borrower and each of its Subsidiaries an incumbency certificate, dated
as of the Closing Date, signed by a duly authorized officer of GTCR, the
Borrower or such Subsidiary, and giving the name and bearing a specimen
signature of each individual who shall be authorized: (a) to sign, in the name
and on behalf of each of GTCR, the Borrower of such Subsidiary, each of the Loan
Documents to which GTCR, the Borrower or such Subsidiary is or is to become a
party; (b) in the case of the Borrower, to make Loan Requests and Conversion
Requests and to apply for Letters of Credit; and (c) to give notices and to take
other action on its behalf under the Loan Documents.
11.5. Validity of Liens. The Security Documents shall be effective to
create in favor of the Agent a legal, valid and enforceable first (except for
Permitted Liens entitled to priority under applicable law) security interest in
and lien upon the Collateral. All filings, recordings, deliveries of instruments
and other actions necessary
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or desirable in the opinion of the Agent to protect and preserve such security
interests shall have been duly effected. The Agent shall have received evidence
thereof in form and substance satisfactory to the Agent.
11.6. Perfection Certificates and UCC Search Results. The Agent shall have
received from each of the Borrower and its Subsidiaries a completed and fully
executed Perfection Certificate and the results of UCC searches with respect to
the Collateral, indicating no liens other than Permitted Liens and otherwise in
form and substance satisfactory to the Agent.
11.7. Certificates of Insurance. The Agent shall have received (a) a
certificate of insurance from an independent insurance broker dated as of the
Closing Date, identifying insurers, types of insurance, insurance limits, and
policy terms, and otherwise describing the insurance obtained in accordance with
the provisions of the Security Agreements and (b) certified copies of all
policies evidencing such insurance (or certificates therefore signed by the
insurer or an agent authorized to bind the insurer).
11.8. Statement of Financial Position The Agent shall have received from
GTCR a copy of its most recent statement of financial position.
11.9. Opinions of Counsel. Each of the Banks and the Agent shall have
received a favorable opinion addressed to the Banks and the Agent, dated as of
the Closing Date, in form and substance satisfactory to the Banks and the Agent,
from Hogan & Hartson, counsel to the Borrower and its Subsidiaries.
11.10. Payment of Fees. The Borrower shall have paid to the Banks or the
Agent, as appropriate, the closing fees and the Agent's fee pursuant to ss.5.1.
11.11. Payoff Letters. The Agent shall have received payoff letters from
each of BankBoston, N.A. and Harris Bank & Trust Company, indicating the amount
of the loan obligations of the Borrower to each such Person to be discharged on
the Closing Date.
11.12. Disbursement Instructions. The Agent shall have received
disbursement instructions from the Borrower, indicating that a portion of the
proceeds of the Revolving Credit Loan are paid to each of BankBoston, N.A. and
Harris Bank & Trust Company.
11.13. Completion of Successful Financial Inquiry and Due Diligence. The
Agent shall be reasonably satisfied (a) that all financial statements of the
Borrower and its Subsidiaries provided to the Agent prior to the Closing Date
accurately set forth the financial condition of the Borrower and its
Subsidiaries for the period covered thereby; (b) with the results of its due
diligence conducted in connection with this transaction; (c) with the results of
a commercial financial audit by its field examiners or other agents; and (d)
with the results of the most recent management letter delivered to the Agent.
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11.14. Consents and Approvals. The Agent shall have received evidence that
all consents and approvals necessary to complete the transactions contemplated
hereby have been obtained.
11.15. Negative Pledge Letters. The Agent shall have received from GTCR a
negative pledge letter agreement, to be in form and substance satisfactory to
the Agent.
12. CONDITIONS TO ALL BORROWINGS.
The obligations of the Banks to make any Revolving Credit Loan and of the
Agent to issue, extend or renew any Letter of Credit, in each case whether on or
after the Closing Date, shall also be subject to the satisfaction of the
following conditions precedent:
12.1. Representations True; No Event of Default. Each of the
representations and warranties of any of the Borrower and its Subsidiaries
contained in this Credit Agreement, the other Loan Documents or in any document
or instrument delivered pursuant to or in connection with this Credit Agreement
shall be true as of the date as of which they were made and shall also be true
at and as of the time of the making of such Revolving Credit Loan or the
issuance, extension or renewal of such Letter of Credit, with the same effect as
if made at and as of that time (except to the extent of changes resulting from
transactions contemplated or permitted by this 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) and no
Default or Event of Default shall have occurred and be continuing.
12.2. No Legal Impediment. No change shall have occurred in any law or
regulations thereunder or interpretations thereof that in the reasonable opinion
of any Bank would make it illegal for such Bank to make such Revolving Credit
Loan or to participate in the issuance, extension or renewal of such Letter of
Credit or in the reasonable opinion of the Agent would make it illegal for the
Agent to issue, extend or renew such Letter of Credit.
12.3. Governmental Regulation. Each Bank shall have received such
statements in substance and form reasonably satisfactory to such Bank as such
Bank shall require for the purpose of compliance with any applicable regulations
of the Comptroller of the Currency or the Board of Governors of the Federal
Reserve System.
12.4. Proceedings and Documents. All proceedings in connection with the
transactions contemplated by this Credit Agreement, the other Loan Documents and
all other documents incident thereto shall be satisfactory in substance and in
form to the Banks and to the Agent and the Agent's Special Counsel, and the
Banks, the Agent and such counsel shall have received all information and such
counterpart originals or certified or other copies of such documents as the
Agent may reasonably request.
12.5. Pro Forma Compliance. The Agent shall have received a pro forma
Compliance Certificate demonstrating compliance with the Leverage Ratio covenant
set
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forth in ss.10.1 hereof on a pro forma basis both before and after giving effect
to the making of the Revolving Credit Loan or the issuance, extension or renewal
of a Letter of Credit being requested by the Borrower.
12.6. Guaranteed Credit Agreement Outstandings. The Agent shall have
received evidence satisfactory to the Agent that (a) the "Total Commitment" as
defined in the Guaranteed Credit Agreement is not less than the Total Commitment
hereunder and (b) the sum of the outstanding amount of the Revolving Credit
Loans (after giving effect to all amounts requested) plus the Maximum Drawing
Amount (including the Maximum Drawing Amount of all Letters of Credit being
requested) and all Unpaid Reimbursement Obligations does not exceed the
Guaranteed Credit Agreement Outstandings.
13. EVENTS OF DEFAULT; ACCELERATION; ETC.
13.1. Events of Default and Acceleration. If any of the following events
("Events of Default" or, if the giving of notice or the lapse of time or both is
required, then, prior to such notice or lapse of time, "Defaults") shall occur:
(a) the Borrower shall fail to pay any principal of the Revolving
Credit Loans or any Reimbursement Obligation when the same shall become
due and payable, whether at the stated date of maturity or any accelerated
date of maturity or at any other date fixed for payment;
(b) the Borrower shall fail to pay any interest on the Revolving
Credit Loans, the commitment fee, any Letter of Credit Fee, the Agent's
fee or other sums due hereunder or under any of the other Loan Documents
within two (2) days after the same shall become due and payable, whether
at the stated date of maturity or any accelerated date of maturity or at
any other date fixed for payment;
(c) the Borrower shall fail to comply with any of its covenants
contained in ss.ss.8.1, 8.4, 8.5.1, 8.9, 8.14, 8.16, 8.17, 9 or 10;
(d) GTCR, the Borrower or any of its Subsidiaries shall fail to
perform any term, covenant or agreement contained herein or in any of the
other Loan Documents (other than those specified elsewhere in this
ss.13.1) for thirty (30) days after written notice of such failure has
been given to the Borrower by the Agent or any Bank;
(e) any representation or warranty of GTCR, the Borrower or any of
its Subsidiaries in this Credit Agreement or any of the other Loan
Documents or in any other document or instrument delivered pursuant to or
in connection with this Credit Agreement shall prove to have been false in
any material respect upon the date when made or deemed to have been made
or repeated;
(f) the Borrower or any of its Subsidiaries shall fail to pay at
maturity, or within any applicable period of grace, any obligation for
borrowed money or
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credit received or in respect of any Capitalized Leases, or fail to
observe or perform any material term, covenant or agreement contained in
any agreement by which it is bound, evidencing or securing borrowed money
or credit received or in respect of any Capitalized Leases for such period
of time as would permit (assuming the giving of appropriate notice if
required) the holder or holders thereof or of any obligations issued
thereunder to accelerate the maturity thereof, or any such holder or
holders shall rescind or shall have a right to rescind the purchase of any
such obligations;
(g) GTCR, the Borrower or any of its Subsidiaries shall make an
assignment for the benefit of creditors, or admit in writing its inability
to pay or generally fail to pay its debts as they mature or become due, or
shall petition or apply for the appointment of a trustee or other
custodian, liquidator or receiver of GTCR, the Borrower or any of its
Subsidiaries or of any substantial part of the assets of GTCR, the
Borrower or any of its Subsidiaries or shall commence any case or other
proceeding relating to GTCR, the Borrower or any of its Subsidiaries under
any bankruptcy, reorganization, arrangement, insolvency, readjustment of
debt, dissolution or liquidation or similar law of any jurisdiction, now
or hereafter in effect, or shall take any action to authorize or in
furtherance of any of the foregoing, or if any such petition or
application shall be filed or any such case or other proceeding shall be
commenced against GTCR, the Borrower or any of its Subsidiaries and GTCR,
the Borrower or any of its Subsidiaries shall indicate its approval
thereof, consent thereto or acquiescence therein or such petition or
application shall not have been dismissed within forty-five (45) days
following the filing thereof;
(h) a decree or order is entered appointing any such trustee,
custodian, liquidator or receiver or adjudicating GTCR, the Borrower or
any of its Subsidiaries bankrupt or insolvent, or approving a petition in
any such case or other proceeding, or a decree or order for relief is
entered in respect of GTCR, the Borrower or any Subsidiary of the Borrower
in an involuntary case under federal bankruptcy laws as now or hereafter
constituted;
(i) there shall remain in force, undischarged, unsatisfied and
unstayed, for more than thirty days, whether or not consecutive, any final
judgment against the Borrower or any of its Subsidiaries that, with other
outstanding final judgments, undischarged, against the Borrower or any of
its Subsidiaries exceeds in the aggregate $500,000;
(j) if any of the Loan Documents shall be cancelled, terminated,
revoked or rescinded or the Agent's security interests, mortgages or liens
in a substantial portion of the Collateral shall cease to be perfected, or
shall cease to have the priority contemplated by the Security Documents,
in each case otherwise than in accordance with the terms thereof or with
the express prior written agreement, consent or approval of the Banks, or
any action at law, suit or in equity or other legal proceeding to cancel,
revoke or rescind any of the Loan Documents shall be commenced by or on
behalf of GTCR, the Borrower or any of its Subsidiaries
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party thereto or any of their respective stockholders, or any court or any
other governmental or regulatory authority or agency of competent
jurisdiction shall make a determination that, or issue a judgment, order,
decree or ruling to the effect that, any one or more of the Loan Documents
is illegal, invalid or unenforceable in accordance with the terms thereof;
(k) the Borrower or any ERISA Affiliate incurs any liability to the
PBGC or a Guaranteed Pension Plan pursuant to Title IV of ERISA in an
aggregate amount exceeding $500,000, or the Borrower or any ERISA
Affiliate is assessed withdrawal liability pursuant to Title IV of ERISA
by a Multiemployer Plan requiring aggregate annual payments exceeding
$500,000, or any of the following occurs with respect to a Guaranteed
Pension Plan: (i) an ERISA Reportable Event, or a failure to make a
required installment or other payment (within the meaning of ss.302(f)(1)
of ERISA), provided that the Agent or the Majority Banks determines in its
or their reasonable discretion that such event (A) could be expected to
result in liability of the Borrower or any of its Subsidiaries to the PBGC
or such Guaranteed Pension Plan in an aggregate amount exceeding $500,000
and (B) could constitute grounds for the termination of such Guaranteed
Pension Plan by the PBGC, for the appointment by the appropriate United
States District Court of a trustee to administer such Guaranteed Pension
Plan or for the imposition of a lien in favor of such Guaranteed Pension
Plan; or (ii) the appointment by a United States District Court of a
trustee to administer such Guaranteed Pension Plan; or (iii) the
institution by the PBGC of proceedings to terminate such Guaranteed
Pension Plan;
(l) the Borrower or any of its Subsidiaries shall be enjoined,
restrained or in any way prevented by the order of any court or any
administrative or regulatory agency from conducting any material part of
its business and such order shall continue in effect for more than thirty
(30) days;
(m) there shall occur any material damage to, or loss, theft or
destruction of, any Collateral, whether or not insured, or any strike,
lockout, labor dispute, embargo, condemnation, act of God or public enemy,
or other casualty, which in any such case causes, for more than fifteen
(15) consecutive days, the cessation or substantial curtailment of revenue
producing activities at any facility of the Borrower or any of its
Subsidiaries if such event or circumstance is not covered by business
interruption insurance and would have a material adverse effect on the
business or financial condition of the Borrower or such Subsidiary;
(n) there shall occur the loss, suspension or revocation of, or
failure to renew, any license or permit now held or hereafter acquired by
the Borrower or any of its Subsidiaries if such loss, suspension,
revocation or failure to renew would have a material adverse effect on the
business or financial condition of the Borrower or such Subsidiary;
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(o) the Borrower or any of its Subsidiaries shall be indicted for a
state or federal crime, or any civil or criminal action shall otherwise
have been brought or threatened against the Borrower or any of its
Subsidiaries, a punishment for which in any such case could include the
forfeiture of any assets of the Borrower or such Subsidiary having a fair
market value in excess of $500,000;
(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 the Investors shall at any time, legally or
beneficially own less than 51% of the capital stock of the Borrower; or,
during any period of twelve consecutive calendar months, individuals who
were directors of the Borrower on the first day of such period shall cease
to constitute a majority of the board of directors of the Borrower; or
(q) an "Event of Default" (as such term is defined in the Guaranteed
Credit Agreement) has occurred under the Guaranteed Credit Agreement;
then, and in any such event, so long as the same may be continuing, the Agent,
upon the request of the Majority Banks, shall, by notice in writing to the
Borrower declare all amounts owing with respect to this Credit Agreement, the
Revolving Credit Notes and the other Loan Documents and all Reimbursement
Obligations to be, and they shall thereupon forthwith become, immediately due
and payable without presentment, demand, protest or other notice of any kind,
all of which are hereby expressly waived by the Borrower; provided that in the
event of any Event of Default specified in ss.13.1(g) or 13.1(h), all such
amounts shall become immediately due and payable automatically and without any
requirement of notice from the Agent or any Bank.
13.2. Termination of Commitments. If any one or more of the Events of
Default specified in ss.13.1(g) or ss.13.1(h) shall occur, any unused portion of
the credit hereunder shall forthwith terminate and each of the Banks shall be
relieved of all further obligations to make Revolving Credit Loans to the
Borrower and the Agent shall be relieved of all further obligations to issue,
extend or renew Letters of Credit. If any other Event of Default shall have
occurred and be continuing, or if on any Drawdown Date or other date for
issuing, extending or renewing any Letter of Credit the conditions precedent to
the making of the Revolving Credit Loans to be made on such Drawdown Date or (as
the case may be) to issuing, extending or renewing such Letter of Credit on such
other date are not satisfied, the Agent may and, upon the request of the
Majority Banks, shall, by notice to the Borrower, terminate the unused portion
of the credit hereunder, and upon such notice being given such unused portion of
the credit hereunder shall terminate immediately and each of the Banks shall be
relieved of all further obligations to make Revolving Credit Loans and the Agent
shall be relieved of all further obligations to issue, extend or renew Letters
of Credit. No termination of the credit hereunder shall relieve the Borrower or
any of its Subsidiaries of any of the Obligations or any of its existing
obligations to any of the Banks arising under other agreements or instruments.
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13.3. Remedies. In case any one or more of the Events of Default shall
have occurred and be continuing, and whether or not the Banks shall have
accelerated the maturity of the Revolving Credit Loans pursuant to ss.13.1, each
Bank, if owed any amount with respect to the Revolving Credit Loans or the
Reimbursement Obligations, may, with the consent of the Majority Banks but not
otherwise, proceed to protect and enforce its rights by suit in equity, action
at law or other appropriate proceeding, whether for the specific performance of
any covenant or agreement contained in this Credit Agreement and the other Loan
Documents or any instrument pursuant to which the Obligations to such Bank are
evidenced, including as permitted by applicable law the obtaining of the ex
parte appointment of a receiver, and, if such amount shall have become due, by
declaration or otherwise, proceed to enforce the payment thereof or any other
legal or equitable right of such Bank. No remedy herein conferred upon any Bank
or the Agent or the holder of any Note or purchaser of any Letter of Credit
participation is intended to be exclusive of any other remedy and each and every
remedy shall be cumulative and shall be in addition to every other remedy given
hereunder or now or hereafter existing at law or in equity or by statute or any
other provision of law.
13.4. Distribution of Collateral Proceeds. In the event that, following
the occurrence or during the continuance of any Default or Event of Default, the
Agent or any Bank, as the case may be, receives any monies in connection with
the enforcement of any the Security Documents, or otherwise with respect to the
realization upon any of the Collateral, such monies shall be distributed for
application as follows:
(a) First, to the payment of, or (as the case may be) the
reimbursement of the Agent for or in respect of all reasonable costs,
expenses, disbursements and losses which shall have been incurred or
sustained by the Agent in connection with the collection of such monies by
the Agent, for the exercise, protection or enforcement by the Agent of all
or any of the rights, remedies, powers and privileges of the Agent under
this Credit Agreement or any of the other Loan Documents or in respect of
the Collateral or in support of any provision of adequate indemnity to the
Agent against any taxes or liens which by law shall have, or may have,
priority over the rights of the Agent to such monies;
(b) Second, to all other such Obligations in such order or
preference as the Majority Banks may determine; provided, however, that
distributions shall be made (A) pari passu among Obligations with respect
to the Agent's fee payable pursuant to Section 5.2 and all other
Obligations and (B) with respect to each type of Obligation owing to the
Banks, such as interest, principal, fees and expenses, among the Banks pro
rata; and provided, further, that the Agent may in its discretion make
proper allowance to take into account any Obligations not then due and
payable;
(c) Third, to the "Obligations" under the Guaranteed Credit
Agreement, to be applied in such order or preference as the Majority Banks
(as defined in the Guaranteed Credit Agreement) may determine;
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(d) Fourth, upon payment and satisfaction in full or other
provisions for payment in full satisfactory to the Banks and the Agent of
all of the Obligations, to the payment of any obligations required to be
paid pursuant to ss.9-504(1)(c) of the Uniform Commercial Code of the
Commonwealth of Massachusetts; and
(e) Fifth, the excess, if any, shall be returned to the Borrower or
to such other Persons as are entitled thereto.
14. SETOFF.
Regardless of the adequacy of any collateral, during the continuance of
any Event of Default, any deposits or other sums credited by or due from any of
the Banks to the Borrower and any securities or other property of the Borrower
in the possession of such Bank may be applied to or set off by such Bank against
the payment of Obligations and any and all other liabilities, direct, or
indirect, absolute or contingent, due or to become due, now existing or
hereafter arising, of the Borrower to such Bank. Each of the Banks agrees with
each other Bank that (a) if an amount to be set off is to be applied to
Indebtedness of the Borrower to such Bank, other than Indebtedness evidenced by
the Revolving Credit Notes held by such Bank or constituting Reimbursement
Obligations owed to such Bank, such amount shall be applied ratably to such
other Indebtedness and to the Indebtedness evidenced by all such Revolving
Credit Notes held by such Bank or constituting Reimbursement Obligations owed to
such Bank, and (b) if such Bank shall receive from the Borrower, whether by
voluntary payment, exercise of the right of setoff, counterclaim, cross action,
enforcement of the claim evidenced by the Revolving Credit Notes held by, or
constituting Reimbursement Obligations owed to, such Bank by proceedings against
the Borrower at law or in equity or by proof thereof in bankruptcy,
reorganization, liquidation, receivership or similar proceedings, or otherwise,
and shall retain and apply to the payment of the Revolving Credit Note or
Revolving Credit Notes held by, or Reimbursement Obligations owed to, such Bank
any amount in excess of its ratable portion of the payments received by all of
the Banks with respect to the Revolving Credit Notes held by, and Reimbursement
Obligations owed to, all of the Banks, such Bank will make such disposition and
arrangements with the other Banks with respect to such excess, either by way of
distribution, pro tanto assignment of claims, subrogation or otherwise as shall
result in each Bank receiving in respect of the Revolving Credit Notes held by
it or Reimbursement Obligations owed to it, its proportionate payment as
contemplated by this Credit Agreement; provided that if all or any part of such
excess payment is thereafter recovered from such Bank, such disposition and
arrangements shall be rescinded and the amount restored to the extent of such
recovery, but without interest.
15. THE AGENT.
15.1. Authorization.
(a) The Agent is authorized to take such action on behalf of each of
the Banks and to exercise all such powers as are hereunder and under any
of the other Loan Documents and any related documents delegated to the
Agent, together with such powers as are reasonably incident thereto,
provided that no
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duties or responsibilities not expressly assumed herein or therein shall
be implied to have been assumed by the Agent.
(b) The relationship between the Agent and each of the Banks is that
of an independent contractor. The use of the term "Agent" is for
convenience only and is used to describe, as a form of convention, the
independent contractual relationship between the Agent and each of the
Banks. Nothing contained in this Credit Agreement nor the other Loan
Documents shall be construed to create an agency, trust or other fiduciary
relationship between the Agent and any of the Banks.
(c) As an independent contractor empowered by the Banks to exercise
certain rights and perform certain duties and responsibilities hereunder
and under the other Loan Documents, the Agent is nevertheless a
"representative" of the Banks, as that term is defined in Article 1 of the
Uniform Commercial Code, for purposes of actions for the benefit of the
Banks and the Agent with respect to all collateral security and guaranties
contemplated by the Loan Documents. Such actions include the designation
of the Agent as "secured party", "mortgagee" or the like on all financing
statements and other documents and instruments, whether recorded or
otherwise, relating to the attachment, perfection, priority or enforcement
of any security interests, mortgages or deeds of trust in collateral
security intended to secure the payment or performance of any of the
Obligations, all for the benefit of the Banks and the Agent.
15.2. Employees and Agents. The Agent may exercise its powers and execute
its duties by or through employees or agents and shall be entitled to take, and
to rely on, advice of counsel concerning all matters pertaining to its rights
and duties under this Credit Agreement and the other Loan Documents. The Agent
may utilize the services of such Persons as the Agent in its sole discretion may
reasonably determine, and all reasonable fees and expenses of any such Persons
shall be paid by the Borrower.
15.3. No Liability. Neither the Agent nor any of its shareholders,
directors, officers or employees nor any other Person assisting them in their
duties nor any agent or employee thereof, shall be liable for any waiver,
consent or approval given or any action taken, or omitted to be taken, in good
faith by it or them hereunder or under any of the other Loan Documents, or in
connection herewith or therewith, or be responsible for the consequences of any
oversight or error of judgment whatsoever, except that the Agent or such other
Person, as the case may be, may be liable for losses due to its willful
misconduct or gross negligence.
15.4. No Representations.
15.4.1. General. The Agent shall not be responsible for the
execution or validity or enforceability of this Credit Agreement, the
Revolving Credit Notes, the Letters of Credit, any of the other Loan
Documents or any instrument at any time constituting, or intended to
constitute, collateral security for the Revolving Credit Notes, or for the
value of any such collateral security or for the validity,
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enforceability or collectability of any such amounts owing with respect to
the Revolving Credit Notes, or for any recitals or statements, warranties
or representations made herein or in any of the other Loan Documents or in
any certificate or instrument hereafter furnished to it by or on behalf of
the Borrower or any of its Subsidiaries, or be bound to ascertain or
inquire as to the performance or observance of any of the terms,
conditions, covenants or agreements herein or in any instrument at any
time constituting, or intended to constitute, collateral security for the
Revolving Credit Notes or to inspect any of the properties, books or
records of the Borrower or any of its Subsidiaries. The Agent shall not be
bound to ascertain whether any notice, consent, waiver or request
delivered to it by the Borrower or any holder of any of the Notes shall
have been duly authorized or is true, accurate and complete. The Agent has
not made nor does it now make any representations or warranties, express
or implied, nor does it assume any liability to the Banks, with respect to
the credit worthiness or financial conditions of the Borrower or any of
its Subsidiaries. Each Bank acknowledges that it has, independently and
without reliance upon the Agent or any other Bank, and based upon such
information and documents as it has deemed appropriate, made its own
credit analysis and decision to enter into this Credit Agreement.
15.4.2. Closing Documentation, etc. For purposes of determining
compliance with the conditions set forth in ss.11, each Bank that has
executed this Credit Agreement shall be deemed to have consented to,
approved or accepted, or to be satisfied with, each document and matter
either sent, or made available, by the Agent or any of its affiliates to
such Bank for consent, approval, acceptance or satisfaction, or required
thereunder to be consented to or approved by or acceptable or satisfactory
to such Bank, unless an officer of the Agent or any of its affiliates
active upon the Borrower's account shall have received notice from such
Bank prior to the Closing Date specifying such Bank's objection thereto
and such objection shall not have been withdrawn by notice to the Agent or
any of its affiliates to such effect on or prior to the Closing Date.
15.5. Payments.
15.5.1. Payments to Agent. A payment by the Borrower to the Agent
hereunder or any of the other Loan Documents for the account of any Bank
shall constitute a payment to such Bank. The Agent agrees promptly to
distribute to each Bank such Bank's pro rata share of payments received by
the Agent for the account of the Banks except as otherwise expressly
provided herein or in any of the other Loan Documents.
15.5.2. Distribution by Agent. If in the opinion of the Agent the
distribution of any amount received by it in such capacity hereunder,
under the Revolving Credit Notes or under any of the other Loan Documents
might involve it in liability, it may refrain from making distribution
until its right to make distribution shall have been adjudicated by a
court of competent jurisdiction. If a court of competent jurisdiction
shall adjudge that any amount
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received and distributed by the Agent is to be repaid, each Person to whom
any such distribution shall have been made shall either repay to the Agent
its proportionate share of the amount so adjudged to be repaid or shall
pay over the same in such manner and to such Persons as shall be
determined by such court.
15.5.3. Delinquent Banks. Notwithstanding anything to the contrary
contained in this Credit Agreement or any of the other Loan Documents, any
Bank that fails (a) to make available to the Agent its pro rata share of
any Revolving Credit Loan or to purchase any Letter of Credit
Participation or (b) to comply with the provisions of ss.14 with respect
to making dispositions and arrangements with the other Banks, where such
Bank's share of any payment received, whether by setoff or otherwise, is
in excess of its pro rata share of such payments due and payable to all of
the Banks, in each case as, when and to the full extent required by the
provisions of this Credit Agreement, shall be deemed delinquent (a
"Delinquent Bank") and shall be deemed a Delinquent Bank until such time
as such delinquency is satisfied. A Delinquent Bank shall be deemed to
have assigned any and all payments due to it from the Borrower, whether on
account of outstanding Revolving Credit Loans, Unpaid Reimbursement
Obligations, interest, fees or otherwise, to the remaining nondelinquent
Banks for application to, and reduction of, their respective pro rata
shares of all outstanding Revolving Credit Loans and Unpaid Reimbursement
Obligations. The Delinquent Bank hereby authorizes the Agent to distribute
such payments to the nondelinquent Banks in proportion to their respective
pro rata shares of all outstanding Revolving Credit Loans and Unpaid
Reimbursement Obligations. A Delinquent Bank shall be deemed to have
satisfied in full a delinquency when and if, as a result of application of
the assigned payments to all outstanding Revolving Credit Loans and Unpaid
Reimbursement Obligations of the nondelinquent Banks, the Banks'
respective pro rata shares of all outstanding Revolving Credit Loans and
Unpaid Reimbursement Obligations have returned to those in effect
immediately prior to such delinquency and without giving effect to the
nonpayment causing such delinquency.
15.6. Holders of Notes. The Agent may deem and treat the payee of any
Revolving Credit Note or the purchaser of any Letter of Credit Participation as
the absolute owner or purchaser thereof for all purposes hereof until it shall
have been furnished in writing with a different name by such payee or by a
subsequent holder, assignee or transferee.
15.7. Indemnity. The Banks ratably agree hereby to indemnify and hold
harmless the Agent and its affiliates from and against any and all claims,
actions and suits (whether groundless or otherwise), losses, damages, costs,
expenses (including any expenses for which the Agent or such affiliate has not
been reimbursed by the Borrower as required by ss.16), and liabilities of every
nature and character arising out of or related to this Credit Agreement, the
Revolving Credit Notes, or any of the other Loan Documents or the transactions
contemplated or evidenced hereby or thereby, or the Agent's actions taken
hereunder or thereunder, except to the extent that any of the same shall be
directly caused by the Agent's willful misconduct or gross negligence.
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15.8. Agent as Bank. In its individual capacity, BKB shall have the same
obligations and the same rights, powers and privileges in respect to its
Commitment and the Revolving Credit Loans made by it, and as the holder of any
of the Revolving Credit Notes and as the purchaser of any Letter of Credit
Participations, as it would have were it not also the Agent.
15.9. Resignation. The Agent may resign at any time by giving sixty (60)
days prior written notice thereof to the Banks and the Borrower; provided,
however, notwithstanding the foregoing, BKB agrees that so long as its
Commitment Percentage is 51% or greater, it will not resign as the Agent
hereunder without the Borrower's prior written consent. Upon any such
resignation, the Majority Banks shall have the right to appoint a successor
Agent. Unless a Default or Event of Default shall have occurred and be
continuing, such successor Agent shall be reasonably acceptable to the Borrower.
If no successor Agent shall have been so appointed by the Majority Banks and
shall have accepted such appointment within thirty (30) days after the retiring
Agent's giving of notice of resignation, then the retiring Agent may, on behalf
of the Banks, appoint a successor Agent, which shall be a financial institution
having a rating of not less than A or its equivalent by Standard & Poor's
Corporation. Upon the acceptance of any appointment as Agent hereunder by a
successor Agent, such successor Agent shall thereupon succeed to and become
vested with all the rights, powers, privileges and duties of the retiring Agent,
and the retiring Agent shall be discharged from its duties and obligations
hereunder. After any retiring Agent's resignation, the provisions of this Credit
Agreement and the other Loan Documents shall continue in effect for its benefit
in respect of any actions taken or omitted to be taken by it while it was acting
as Agent.
15.10. Notification of Defaults and Events of Default. Each Bank hereby
agrees that, upon learning of the existence of a Default or an Event of Default,
it shall promptly notify the Agent thereof. The Agent hereby agrees that upon
receipt of any notice under this ss.15.10 it shall promptly notify the other
Banks of the existence of such Default or Event of Default.
15.11. Duties in the Case of Enforcement. In case one of more Events of
Default have occurred and shall be continuing, and whether or not acceleration
of the Obligations shall have occurred, the Agent shall, if (a) so requested by
the Majority Banks and (b) the Banks have provided to the Agent such additional
indemnities and assurances against expenses and liabilities as the Agent may
reasonably request, proceed to enforce the provisions of the Security Documents
authorizing the sale or other disposition of all or any part of the Collateral
and exercise all or any such other legal and equitable and other rights or
remedies as it may have in respect of such Collateral. The Majority Banks may
direct the Agent in writing as to the method and the extent of any such sale or
other disposition, the Banks hereby agreeing to indemnify and hold the Agent,
harmless from all liabilities incurred in respect of all actions taken or
omitted in accordance with such directions, provided that the Agent need not
comply with any such direction to the extent that the Agent reasonably believes
the Agent's compliance with such direction to be unlawful or commercially
unreasonable in any applicable jurisdiction.
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16. EXPENSES AND INDEMNIFICATION.
16.1. Expenses. The Borrower agrees to pay (a) the reasonable costs of
producing and reproducing this Credit Agreement, the other Loan Documents and
the other agreements and instruments mentioned herein, (b) any taxes (including
any interest and penalties in respect thereto) payable by the Agent, the
Co-Agent or any of the Banks (other than taxes based upon the Agent's, the
Co-Agent's or any Bank's net income) on or with respect to the transactions
contemplated by this Credit Agreement (the Borrower hereby agreeing to indemnify
the Agent, the Co-Agent and each Bank with respect thereto), (c) the reasonable
fees, expenses and disbursements of the Agent's Special Counsel, the Co-Agent's
counsel or any local counsel to the Agent or the Co-Agent incurred in connection
with the preparation, syndication, administration or interpretation of the Loan
Documents and other instruments mentioned herein, each closing hereunder, any
amendments, modifications, approvals, consents or waivers hereto or hereunder,
or the cancellation of any Loan Document upon payment in full in cash of all of
the Obligations or pursuant to any terms of such Loan Document for providing for
such cancellation, (d) the fees, expenses and disbursements of the Agent and the
Co-Agent or any of its affiliates incurred by the Agent and the Co-Agent or such
affiliate in connection with the preparation, syndication, administration or
interpretation of the Loan Documents and other instruments mentioned herein, (e)
any fees, costs, expenses and bank charges, including bank charges for returned
checks, incurred by the Agent in establishing, maintaining or handling agency
accounts, lock box accounts and other accounts for the collection of any of the
Collateral; (f) all reasonable out-of-pocket expenses (including without
limitation reasonable attorneys' fees and costs, which attorneys may be
employees of any Bank, the Agent or the Co-Agent, and reasonable consulting,
accounting, appraisal, investment banking and similar professional fees and
charges) incurred by any Bank, the Agent or the Co-Agent in connection with (i)
the enforcement of or preservation of rights under any of the Loan Documents
against the Borrower or any of its Subsidiaries or the administration thereof
after the occurrence of a Default or Event of Default and (ii) any litigation,
proceeding or dispute whether arising hereunder or otherwise, in any way related
to any Bank's, the Co-Agent's or the Agent's relationship with the Borrower or
any of its Subsidiaries and (g) all reasonable fees, expenses and disbursements
of any Bank or the Agent incurred in connection with UCC searches or UCC
filings.
16.2. Indemnification. The Borrower agrees to indemnify and hold harmless
the Agent, the Co-Agent, their respective affiliates and the Banks from and
against any and all claims, actions and suits whether groundless or otherwise,
and from and against any and all liabilities, losses, damages and expenses of
every nature and character arising out of this Credit Agreement or any of the
other Loan Documents or the transactions contemplated hereby including, without
limitation, (a) any actual or proposed use by the Borrower or any of its
Subsidiaries of the proceeds of any of the Revolving Credit Loans or Letters of
Credit, (b) the reversal or withdrawal of any provisional credits granted by the
Agent upon the transfer of funds from lock box, bank agency or concentration
accounts or in connection with the provisional honoring of checks or other
items, (c) any actual or alleged infringement of any patent, copyright,
trademark, service mark or similar right of the Borrower or any of its
Subsidiaries
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comprised in the Collateral, (d) the Borrower or any of its Subsidiaries
entering into or performing this Credit Agreement or any of the other Loan
Documents or (e) with respect to the Borrower and its Subsidiaries and their
respective properties and assets, the violation of any Environmental Law, the
presence, disposal, escape, seepage, leakage, spillage, discharge, emission,
release or threatened release of any Hazardous Substances or any action, suit,
proceeding or investigation brought or threatened with respect to any Hazardous
Substances (including, but not limited to, claims with respect to wrongful
death, personal injury or damage to property), in each case including, without
limitation, the reasonable fees and disbursements of counsel and allocated costs
of internal counsel incurred in connection with any such investigation,
litigation or other proceeding. In litigation, or the preparation therefor, the
Banks, the Co-Agent and the Agent and its affiliates shall be entitled to select
their own counsel and, in addition to the foregoing indemnity, the Borrower
agrees to pay promptly the reasonable fees and expenses of such counsel. If, and
to the extent that the obligations of the Borrower under this ss.16.2 are
unenforceable for any reason, the Borrower hereby agrees to make the maximum
contribution to the payment in satisfaction of such obligations which is
permissible under applicable law.
16.3. Survival. The covenants contained in this ss.16 shall survive
payment or satisfaction in full of all other Obligations.
17. TREATMENT OF CERTAIN CONFIDENTIAL INFORMATION.
17.1. Sharing of Information with Section 20 Subsidiary. The Borrower
acknowledges that from time to time financial advisory, investment banking and
other services may be offered or provided to the Borrower or one or more of its
Subsidiaries, in connection with this Credit Agreement or otherwise, by a
Section 20 Subsidiary. The Borrower, for itself and each of its Subsidiaries,
hereby authorizes (a) such Section 20 Subsidiary to share with the Agent and
each Bank any information delivered to such Section 20 Subsidiary by the
Borrower or any of its Subsidiaries, and (b) the Agent and each Bank to share
with such Section 20 Subsidiary any information delivered to the Agent or such
Bank by the Borrower or any of its Subsidiaries pursuant to this Credit
Agreement, or in connection with the decision of such Bank to enter into this
Credit Agreement; it being understood, in each case, that any such Section 20
Subsidiary receiving such information shall be bound by the confidentiality
provisions of this Credit Agreement. Such authorization shall survive the
payment and satisfaction in full of all of Obligations.
17.2. Confidentiality. Each of the Banks and the Agent agrees, on behalf
of itself and each of its affiliates, directors, officers, employees and
representatives, to use reasonable precautions to keep confidential, in
accordance with their customary procedures for handling confidential information
of the same nature and in accordance with safe and sound banking practices, any
non-public information supplied to it by the Borrower or any of its Subsidiaries
pursuant to this Credit Agreement that is identified by such Person as being
confidential at the time the same is delivered to the Banks or the Agent,
provided that nothing herein shall limit the disclosure of any such information
(a) after such information shall have become public other than through a
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violation of this ss.17, (b) to the extent required by statute, rule, regulation
or judicial process, (c) to counsel for any of the Banks or the Agent, (d) to
bank examiners or any other regulatory authority having jurisdiction over any
Bank or the Agent, or to auditors or accountants in respect of such regulatory
matters, (e) to the Agent, any Bank or any Section 20 Subsidiary, (f) in
connection with any litigation to which any one or more of the Banks, the Agent
or any Section 20 Subsidiary is a party, or in connection with the enforcement
of rights or remedies hereunder or under any other Loan Document, (g) to a
Subsidiary or affiliate of such Bank as provided in ss.17.1 or (h) to any
assignee or participant (or prospective assignee or participant) so long as such
assignee or participant agrees to be bound by the provisions of ss.17.6.
17.3. Prior Notification. Unless specifically prohibited by applicable law
or court order, each of the Banks and the Agent shall, prior to disclosure
thereof, notify the Borrower of any request for disclosure of any such
non-public information by any governmental agency or representative thereof
(other than any such request in connection with an examination of the financial
condition of such Bank by such governmental agency) or pursuant to legal
process.
17.4. Other. In no event shall any Bank or the Agent be obligated or
required to return any materials furnished to it or any Section 20 Subsidiary by
the Borrower or any of its Subsidiaries. The obligations of each Bank under this
ss.17 shall supersede and replace the obligations of such Bank under any
confidentiality letter in respect of this financing signed and delivered by such
Bank to the Borrower prior to the date hereof and shall be binding upon any
assignee of, or purchaser of any participation in, any interest in any of the
Revolving Credit Loans or Reimbursement Obligations from any Bank.
18. SURVIVAL OF COVENANTS, ETC.
All covenants, agreements, representations and warranties made herein, in
the Revolving Credit Notes, in any of the other Loan Documents or in any
documents or other papers delivered by or on behalf of the Borrower or any of
its Subsidiaries pursuant hereto shall be deemed to have been relied upon by the
Banks and the Agent, notwithstanding any investigation heretofore or hereafter
made by any of them, and shall survive the making by the Banks of any of the
Revolving Credit Loans and the issuance, extension or renewal of any Letters of
Credit as herein contemplated, and shall continue in full force and effect so
long as any Letter of Credit or any amount due under this Credit Agreement or
the Revolving Credits or any of the other Loan Documents remains outstanding or
any Bank has any obligation to make any Revolving Credit Loans or the Agent has
any obligation to issue, extend or renew any Letter of Credit, and for such
further time as may be otherwise expressly specified in this Credit Agreement.
All statements contained in any certificate or other paper delivered to any Bank
or the Agent at any time by or on behalf of the Borrower or any of its
Subsidiaries pursuant hereto or in connection with the transactions contemplated
hereby shall constitute representations and warranties by the Borrower or such
Subsidiary hereunder.
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19. ASSIGNMENT AND PARTICIPATION.
19.1. Conditions to Assignment by Banks. Except as provided herein, each
Bank may assign to one or more Eligible Assignees all or a portion of its
interests, rights and obligations under this Credit Agreement (including all or
a portion of its Commitment Percentage and Commitment and the same portion of
the Revolving Credit Loans at the time owing to it, the Revolving Credit Notes
held by it and its participating interest in the risk relating to any Letters of
Credit); provided that (a) each of the Agent and, unless a Default or Event of
Default shall have occurred and be continuing, the Borrower shall have given its
prior written consent to such assignment, which consent will not be unreasonably
withheld, (b) each such assignment shall be of a constant, and not a varying,
percentage of all the assigning Bank's rights and obligations under this Credit
Agreement, (c) each assignment shall be in a minimum amount of $1,000,000 or a
whole multiple of $500,000 in excess thereof, (d) any assignor making an
assignment hereunder shall, simultaneously with making any assignment hereunder,
also assign to the Eligible Assignee a pro rata portion of such assignor's
interests, rights and obligations under the Guaranteed Credit Agreement and (e)
the parties to such assignment shall execute and deliver to the Agent, for
recording in the Register (as hereinafter defined), an Assignment and
Acceptance, substantially in the form of Exhibit D hereto (an "Assignment and
Acceptance"), together with any Revolving Credit Notes subject to such
assignment. Upon such execution, delivery, acceptance and recording, from and
after the effective date specified in each Assignment and Acceptance, which
effective date shall be at least five (5) Business Days after the execution
thereof, (i) the assignee thereunder shall be a party hereto and, to the extent
provided in such Assignment and Acceptance, have the rights and obligations of a
Bank hereunder, and (ii) the assigning Bank shall, to the extent provided in
such assignment and upon payment to the Agent of the registration fee referred
to in ss.19.3, be released from its obligations under this Credit Agreement.
19.2. Certain Representations and Warranties; Limitations; Covenants. By
executing and delivering an Assignment and Acceptance, the parties to the
assignment thereunder confirm to and agree with each other and the other parties
hereto as follows:
(a) other than the representation and warranty that it is the legal
and beneficial owner of the interest being assigned thereby free and clear
of any adverse claim, the assigning Bank makes no representation or
warranty, express or implied, and assumes no responsibility with respect
to any statements, warranties or representations made in or in connection
with this Credit Agreement or the execution, legality, validity,
enforceability, genuineness, sufficiency or value of this Credit
Agreement, the other Loan Documents or any other instrument or document
furnished pursuant hereto or the attachment, perfection or priority of any
security interest or mortgage,
(b) the assigning Bank makes no representation or warranty and
assumes no responsibility with respect to the financial condition of the
Borrower and its Subsidiaries or any other Person primarily or secondarily
liable in respect of any of the Obligations, or the performance or
observance by the Borrower and
<PAGE>
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its Subsidiaries or any other Person primarily or secondarily liable in
respect of any of the Obligations of any of their obligations under this
Credit Agreement or any of the other Loan Documents or any other
instrument or document furnished pursuant hereto or thereto;
(c) such assignee confirms that it has received a copy of this
Credit Agreement, together with copies of the most recent financial
statements referred to in ss.7.4 and ss.8.4 and such other documents and
information as it has deemed appropriate to make its own credit analysis
and decision to enter into such Assignment and Acceptance;
(d) such assignee will, independently and without reliance upon the
assigning Bank, the Agent or any other Bank and based on such documents
and information as it shall deem appropriate at the time, continue to make
its own credit decisions in taking or not taking action under this Credit
Agreement;
(e) such assignee represents and warrants that it is an Eligible
Assignee;
(f) such assignee appoints and authorizes the Agent to take such
action as agent on its behalf and to exercise such powers under this
Credit Agreement and the other Loan Documents as are delegated to the
Agent by the terms hereof or thereof, together with such powers as are
reasonably incidental thereto;
(g) such assignee agrees that it will perform in accordance with
their terms all of the obligations that by the terms of this Credit
Agreement are required to be performed by it as a Bank;
(h) such assignee represents and warrants that it is legally
authorized to enter into such Assignment and Acceptance; and
(i) such assignee acknowledges that it has made arrangements with
the assigning Bank satisfactory to such assignee with respect to its pro
rata share of Letter of Credit Fees in respect of outstanding Letters of
Credit.
19.3. Register. The Agent shall maintain a copy of each Assignment and
Acceptance delivered to it and a register or similar list (the "Register") for
the recordation of the names and addresses of the Banks and the Commitment
Percentage of, and principal amount of the Revolving Credit Loans owing to and
Letter of Credit Participations purchased by, the Banks from time to time. The
entries in the Register shall be conclusive, in the absence of manifest error,
and the Borrower, the Agent and the Banks may treat each Person whose name is
recorded in the Register as a Bank hereunder for all purposes of this Credit
Agreement. The Register shall be available for inspection by the Borrower and
the Banks at any reasonable time and from time to time upon reasonable prior
notice. Upon each such recordation, the assigning Bank agrees to pay to the
Agent a registration fee in the sum of $2,500.
19.4. New Revolving Credit Notes. Upon its receipt of an Assignment and
Acceptance executed by the parties to such assignment, together with each
Revolving
<PAGE>
-73-
Credit subject to such assignment, the Agent shall (a) record the information
contained therein in the Register, and (b) give prompt notice thereof to the
Borrower and the Banks (other than the assigning Bank). Within five (5) Business
Days after receipt of such notice, the Borrower, at its own expense, shall
execute and deliver to the Agent, in exchange for each surrendered Revolving
Credit Note, a new Revolving Credit Note to the order of such Eligible Assignee
in an amount equal to the amount assumed by such Eligible Assignee pursuant to
such Assignment and Acceptance and, if the assigning Bank has retained some
portion of its obligations hereunder, a new Revolving Credit Note to the order
of the assigning Bank in an amount equal to the amount retained by it hereunder.
Such new Revolving Credit Notes shall provide that they are replacements for the
surrendered Revolving Credit Notes, shall be in an aggregate principal amount
equal to the aggregate principal amount of the surrendered Revolving Credit
Notes, shall be dated the effective date of such in Assignment and Acceptance
and shall otherwise be substantially the form of the assigned Revolving Credit
Notes. Within five (5) days of issuance of any new Revolving Credit Notes
pursuant to this ss.19.4, the Borrower shall deliver an opinion of counsel,
addressed to the Banks and the Agent, relating to the due authorization,
execution and delivery of such new Revolving Credit Notes and the legality,
validity and binding effect thereof, in form and substance satisfactory to the
Banks. The surrendered Revolving Credit Notes shall be cancelled and returned to
the Borrower.
19.5. Participations. Each Bank may sell participations to one or more
banks or other entities in all or a portion of such Bank's rights and
obligations under this Credit Agreement and the other Loan Documents; provided
that (a) each such participation shall be in an amount of not less than
$1,000,000, (b) any such sale or participation shall not affect the rights and
duties of the selling Bank hereunder to the Borrower and (c) the only rights
granted to the participant pursuant to such participation arrangements with
respect to waivers, amendments or modifications of the Loan Documents shall be
the rights to approve waivers, amendments or modifications that would reduce the
principal of or the interest rate on any Revolving Credit Loans, extend the term
or increase the amount of the Commitment of such Bank as it relates to such
participant, reduce the amount of any commitment fees or Letter of Credit Fees
to which such participant is entitled or extend any regularly scheduled payment
date for principal or interest.
19.6. Disclosure. The Borrower agrees that in addition to disclosures made
in accordance with standard and customary banking practices any Bank may
disclose information obtained by such Bank pursuant to this Credit Agreement to
assignees or participants and potential assignees or participants hereunder;
provided that such assignees or participants or potential assignees or
participants shall agree (a) to treat in confidence such information unless such
information otherwise becomes public knowledge, (b) not to disclose such
information to a third party, except as required by law or legal process and (c)
not to make use of such information for purposes of transactions unrelated to
such contemplated assignment or participation. For purposes of this ss.19.6 an
assignee or participant or potential assignee or participant may include a
counterparty with whom such Bank has entered into or potentially might enter
into a
<PAGE>
-74-
derivative contract referenced to credit or other risks or events arising under
this Credit Agreement or any other Loan Document.
19.7. Assignee or Participant Affiliated with the Borrower. If any
assignee Bank is an Affiliate of the Borrower, then any such assignee Bank shall
have no right to vote as a Bank hereunder or under any of the other Loan
Documents for purposes of granting consents or waivers or for purposes of
agreeing to amendments or other modifications to any of the Loan Documents or
for purposes of making requests to the Agent pursuant to ss.13.1 or ss.13.2, and
the determination of the Majority Banks shall for all purposes of this Credit
Agreement and the other Loan Documents be made without regard to such assignee
Bank's interest in any of the Revolving Credit Loans or Reimbursement
Obligations. If any Bank sells a participating interest in any of the Revolving
Credit Loans or Reimbursement Obligations to a participant, and such participant
is the Borrower or an Affiliate of the Borrower, then such transferor Bank shall
promptly notify the Agent of the sale of such participation. A transferor Bank
shall have no right to vote as a Bank hereunder or under any of the other Loan
Documents for purposes of granting consents or waivers or for purposes of
agreeing to amendments or modifications to any of the Loan Documents or for
purposes of making requests to the Agent pursuant to ss.13.1 or ss.13.2 to the
extent that such participation is beneficially owned by the Borrower or any
Affiliate of the Borrower, and the determination of the Majority Banks shall for
all purposes of this Credit Agreement and the other Loan Documents be made
without regard to the interest of such transferor Bank in the Revolving Credit
Loans or Reimbursement Obligations to the extent of such participation. The
provisions of this ss.19.7 shall not apply to an assignee Bank or participant
which is also a Bank on the Closing Date or to an assignee Bank or participant
which has disclosed to the other Banks that it is an Affiliate of the Borrower
and which, following such disclosure, has been excepted from the provisions of
this ss.19.7 in a writing signed by the Majority Banks determined without regard
to the interest of such assignee Bank or transferor Bank, to the extent of such
participation, in Revolving Credit Loans or Reimbursement Obligations.
19.8. Miscellaneous Assignment Provisions. Any assigning Bank shall retain
its rights to be indemnified pursuant to ss.16 with respect to any claims or
actions arising prior to the date of such assignment. If any assignee Bank is
not incorporated under the laws of the United States of America or any state
thereof, it shall, prior to the date on which any interest or fees are payable
hereunder or under any of the other Loan Documents for its account, deliver to
the Borrower and the Agent certification as to its exemption from deduction or
withholding of any United States federal income taxes. Anything contained in
this ss.19 to the contrary notwithstanding, any Bank may at any time pledge all
or any portion of its interest and rights under this Credit Agreement (including
all or any portion of its Revolving Credit Notes) to any of the twelve Federal
Reserve Banks organized under ss.4 of the Federal Reserve Act, 12 U.S.C. ss.341.
No such pledge or the enforcement thereof shall release the pledgor Bank from
its obligations hereunder or under any of the other Loan Documents.
<PAGE>
-75-
19.9. Assignment by Borrower. The Borrower shall not assign or transfer
any of its rights or obligations under any of the Loan Documents without the
prior written consent of each of the Banks.
20. NOTICES, ETC.
Except as otherwise expressly provided in this Credit Agreement, all
notices and other communications made or required to be given pursuant to this
Credit Agreement or the Revolving Credit Notes or any Letter of Credit
Applications shall be in writing and shall be delivered in hand, mailed by
United States registered or certified first class mail, postage prepaid, sent by
overnight courier, or sent by telegraph, telecopy, facsimile or telex and
confirmed by delivery via courier or postal service, addressed as follows:
(a) if to the Borrower, at AppNet Systems, Inc., Attention:
President, or at such other address for notice as the Borrower shall last
have furnished in writing to the Person giving the notice;
(b) if to the Agent, at 100 Federal Street, Boston, Massachusetts
02110, USA, Attention: Jay L. Massimo, Director, or such other address for
notice as the Agent shall last have furnished in writing to the Person
giving the notice; and
(c) if to any Bank, at such Bank's address set forth on Schedule 1
hereto, or such other address for notice as such Bank shall have last
furnished in writing to the Person giving the notice.
Any such notice or demand shall be deemed to have been duly given or made
and to have become effective (a) if delivered by hand, overnight courier or
facsimile to a responsible officer of the party to which it is directed, at the
time of the receipt thereof by such officer or the sending of such facsimile and
(b) if sent by registered or certified first-class mail, postage prepaid, on the
third Business Day following the mailing thereof.
21. GOVERNING LAW.
THIS CREDIT AGREEMENT AND, EXCEPT AS OTHERWISE SPECIFICALLY PROVIDED
THEREIN, EACH OF THE OTHER LOAN DOCUMENTS ARE CONTRACTS UNDER THE LAWS OF THE
COMMONWEALTH OF MASSACHUSETTS AND SHALL FOR ALL PURPOSES BE CONSTRUED IN
ACCORDANCE WITH AND GOVERNED BY THE LAWS OF SAID COMMONWEALTH OF MASSACHUSETTS
(EXCLUDING THE LAWS APPLICABLE TO CONFLICTS OR CHOICE OF LAW). THE BORROWER
AGREES THAT ANY SUIT FOR THE ENFORCEMENT OF THIS CREDIT AGREEMENT OR ANY OF THE
OTHER LOAN DOCUMENTS MAY BE BROUGHT IN THE COURTS OF THE COMMONWEALTH OF
MASSACHUSETTS OR ANY FEDERAL COURT SITTING THEREIN AND CONSENTS TO THE
NONEXCLUSIVE JURISDICTION OF SUCH COURT AND SERVICE OF PROCESS IN ANY SUCH SUIT
BEING MADE UPON THE BORROWER BY MAIL AT THE ADDRESS SPECIFIED IN ss.19.
<PAGE>
-76-
THE BORROWER HEREBY WAIVES ANY OBJECTION THAT IT MAY NOW OR HEREAFTER HAVE TO
THE VENUE OF ANY SUCH SUIT OR ANY SUCH COURT OR THAT SUCH SUIT IS BROUGHT IN AN
INCONVENIENT COURT.
22. HEADINGS.
The captions in this Credit Agreement are for convenience of reference
only and shall not define or limit the provisions hereof.
23. COUNTERPARTS.
This Credit Agreement and any amendment hereof may be executed in several
counterparts and by each party on a separate counterpart, each of which when
executed and delivered shall be an original, and all of which together shall
constitute one instrument. In proving this Credit Agreement it shall not be
necessary to produce or account for more than one such counterpart signed by the
party against whom enforcement is sought.
24. ENTIRE AGREEMENT, ETC.
The Loan Documents and any other documents executed in connection herewith
or therewith express the entire understanding of the parties with respect to the
transactions contemplated hereby. Neither this Credit Agreement nor any term
hereof may be changed, waived, discharged or terminated, except as provided in
ss.26.
25. WAIVER OF JURY TRIAL.
The Borrower hereby waives its right to a jury trial with respect to any
action or claim arising out of any dispute in connection with this Credit
Agreement, the Revolving Credit Notes or any of the other Loan Documents, any
rights or obligations hereunder or thereunder or the performance of which rights
and obligations. Except as prohibited by law, the Borrower hereby waives any
right it may have to claim or recover in any litigation referred to in the
preceding sentence any special, exemplary, punitive or consequential damages or
any damages other than, or in addition to, actual damages. The Borrower (a)
certifies that no representative, agent or attorney of any Bank or the Agent has
represented, expressly or otherwise, that such Bank or the Agent would not, in
the event of litigation, seek to enforce the foregoing waivers and (b)
acknowledges that the Agent and the Banks have been induced to enter into this
Credit Agreement, the other Loan Documents to which it is a party by, among
other things, the waivers and certifications contained herein.
26. CONSENTS, AMENDMENTS, WAIVERS, ETC.
Any consent or approval required or permitted by this Credit Agreement to
be given by the Banks may be given, and any term of this Credit Agreement, the
other Loan Documents or any other instrument related hereto or mentioned herein
may be amended, and the performance or observance by the Borrower or any of its
Subsidiaries of any terms of this Credit Agreement, the other Loan Documents or
such other
<PAGE>
-77-
instrument or the continuance of any Default or Event of Default may be waived
(either generally or in a particular instance and either retroactively or
prospectively) with, but only with, the written consent of the Borrower and the
written consent of the Majority Banks. Notwithstanding the foregoing, the rate
of interest on the Revolving Credit Notes (other than interest accruing pursuant
to ss.5.10 following the effective date of any waiver by the Majority Banks of
the Default or Event of Default relating thereto), the amount of the Commitments
of the Banks, and the amount of commitment fee or Letter of Credit Fees
hereunder may not be changed without the written consent of the Borrower and the
written consent of each Bank affected thereby; the Revolving Credit Loan
Maturity Date may not be postponed without the written consent of each Bank
affected thereby; this ss.26 and the definition of Majority Banks may not be
amended, without the written consent of all of the Banks; and the amount of the
Agent's Fee or any Letter of Credit Fees payable for the Agent's account and
ss.15 may not be amended without the written consent of the Agent. No waiver
shall extend to or affect any obligation not expressly waived or impair any
right consequent thereon. No course of dealing or delay or omission on the part
of the Agent or any Bank in exercising any right shall operate as a waiver
thereof or otherwise be prejudicial thereto. No notice to or demand upon the
Borrower shall entitle the Borrower to other or further notice or demand in
similar or other circumstances.
27. SEVERABILITY.
The provisions of this Credit Agreement are severable and if any one
clause or provision hereof shall be held invalid or unenforceable in whole or in
part in any jurisdiction, then such invalidity or unenforceability shall affect
only such clause or provision, or part thereof, in such jurisdiction, and shall
not in any manner affect such clause or provision in any other jurisdiction, or
any other clause or provision of this Credit Agreement in any jurisdiction.
<PAGE>
IN WITNESS WHEREOF, the undersigned have duly executed this Credit
Agreement as a sealed instrument as of the date first set forth above.
APPNET SYSTEMS, INC.
By: /s/ Ronald B. Alexander
-----------------------------------
Ronald B. Alexander
Senior Vice President
BANKBOSTON, N.A., individually and as
Agent
By: /s/ Jay L. Massimo
-----------------------------------
Jay L. Massimo, Director
ANTARES CAPITAL CORPORATION,
individually and as Co-Agent
By: /s/
-----------------------------------
Title:
<PAGE>
Schedule 1
Banks; Commitments
- --------------------------------------------------------------------------------
Bank Commitment Amount Commitment Percentage
- --------------------------------------------------------------------------------
BankBoston, N.A.
100 Federal Street
Boston, MA 02110
LIBOR Lending Office: Same $ 7,500,000 50%
- --------------------------------------------------------------------------------
Antares Capital Corporation
311 South Wacker Drive
Suite 2725
Chicago, Illinois 60606
LIBOR Lending Office: Same $ 7,500,000 50%
- --------------------------------------------------------------------------------
Total Commitment $15,000,000 100%
- --------------------------------------------------------------------------------
<PAGE>
- --------------------------------------------------------------------------------
FIRST AMENDMENT
TO
REVOLVING CREDIT AGREEMENT (UNGUARANTEED)
- --------------------------------------------------------------------------------
First Amendment dated as of March 10, 1999 to Revolving Credit Agreement
(the "First 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 First
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:
ss.1. Amendment to Section 1 of the Credit Agreement. Section 1.1 of the
Credit Agreement is hereby amended by inserting the following definition in the
appropriate alphabetical order:
IPO. The initial underwritten public offering of the common stock of
the Borrower registered under the Securities Act of 1933.
ss.2. Amendment to Section 2 of the Credit Agreement. Section 2.4 of the
Credit Agreement is hereby amended by deleting the first sentence of ss.2.4 in
its entirety and substituting in place thereof the following: "The Revolving
Credit Loans shall be evidenced by separate amended and restated promissory
notes of the Borrower in substantially the form of Exhibit A hereto (each a
"Revolving Credit Note"), dated as of March 5, 1999 and completed with
appropriate insertions."
ss.3. Amendment to Section 9 of the Credit Agreement. Section 9.5.1 of the
Credit Agreement is hereby amended by deleting ss.9.5.1 in its entirety and
restating it as follows:
9.5.1. Mergers and Acquisitions. The Borrower will not, and will not
permit any of its Subsidiaries to, become a party to any merger or
consolidation, or agree to or effect any asset acquisition or stock
acquisition except (a) the merger or consolidation of one or more of the
Subsidiaries of the Borrower with and into the Borrower; (b) or the merger
or consolidation of two or more Subsidiaries of the Borrower; (c) the
acquisition by the Borrower or any of its Subsidiaries of all or
substantially all of the assets or stock of Salzinger &
<PAGE>
-2-
Company, Inc., Internet Outfitters, Inc., and Dimension Enterprises, Inc.
so long as (i) the financial information provided to the Banks by the
Borrower on or prior to March 3, 1999 as to (1) the Person to be acquired,
and (2) the financial condition of the Borrower and its Subsidiaries after
giving effect to each such acquisition, remains true and correct at the
time of consummating each such acquisition; and (ii) the Borrower has
complied with all the conditions set forth in this ss.9.5.1 (d)(ii)-(ix);
and (d) other asset or stock acquisitions of Persons in the same or a
similar line of business as the Borrower (a "Permitted Acquisition") where
(i) the Borrower has provided the Agent with five (5) Business Days prior
written notice of such Permitted Acquisition, which notice shall include a
reasonably detailed description of such Permitted Acquisition, and the
Majority Banks have consented in writing, in advance, to the Borrower or
the Subsidiary, as the case may be, consummating such acquisition; (ii)
the Borrower has provided the Agent with all documents, instruments and
agreements to be entered into in connection with the Permitted
Acquisition, which documents, instruments and agreements shall be in form
and substance satisfactory to the Agent; (iii) the business to be acquired
would not subject the Agent or any of the Banks to regulatory or third
party approvals in connection with the exercise of its rights and remedies
under this Credit Agreement and the other Loan Documents; (iv) the
business and assets so acquired in such Permitted Acquisition shall be
acquired by the Borrower free and clear of all liens (other than Permitted
Liens) and all Indebtedness (other than Indebtedness expressly permitted
pursuant to ss.9.1 hereof); (v) the Borrower has taken or caused to be
taken all necessary actions to grant to the Agent a first priority
perfected lien in all assets and stock to be acquired in connection with
such Permitted Acquisition; (vi) the Borrower has demonstrated to the
satisfaction of the Agent, based on a pro forma Compliance Certificate,
compliance with ss.10 hereof on a Pro Forma Basis both immediately prior
to and after giving effect to such Permitted Acquisition; (vii) the
Borrower is the survivor of any such Permitted Acquisition; (viii) no more
than seventy five percent (75%) of the total consideration for any
Permitted Acquisition shall be financed with Indebtedness; and (ix) the
Borrower has delivered to the Agent a certificate of the chief financial
officer of the Borrower to the effect that (1) the Borrower will be
solvent on a going concern basis upon the consummation of the Permitted
Acquisition; (2) the pro forma Compliance Certificate fairly presents the
financial condition of the Borrower and its Subsidiaries as of the date
thereof and after giving effect to such Permitted Acquisition and (3) no
Default or Event of Default then exists or would result after giving
effect to the Permitted Acquisition.
In the event any new Subsidiary is formed or acquired as a result of
or in connection with any acquisition, the Loan Documents shall be amended
and/or supplemented as necessary to make the terms and conditions of the
Loan Documents applicable to such Subsidiary.
ss.4. Amendment to Section 10 of the Credit Agreement. Section 10.1 of the
Credit Agreement is hereby amended by deleting ss.10.1 in its entirety and
restating it as follows:
<PAGE>
-3-
10.1. Leverage Ratio. The Borrower will not permit the Leverage
Ratio at any time from the Closing Date until the date which is the
earlier to occur of (a) the consummation of the IPO and (b) December 31,
1999 to exceed 3.00:1.00 and then after such date the Borrower will not
permit the Leverage Ratio (1) at any time when the Borrower's EBITDA
(calculated on a Pro Forma Basis) for the immediately preceding twelve
month period from the date of determination is less than $10,000,000 to
exceed 2.50:1.00; (2) at any time when the Borrower's EBITDA (calculated
on a Pro Forma Basis) for the immediately preceding twelve month period
from the date of determination is greater than or equal to $10,000,000 but
less than $15,000,000 to exceed 2.75:1.00; and (3) at any time when the
Borrower's EBITDA (calculated on a Pro Forma Basis) for the immediately
preceding twelve month period from the date of determination is equal to
or greater than $15,000,000 to exceed 3.00:1.00.
ss.5. Amendment to Schedule 1 to the Credit Agreement. Schedule 1 to the
Credit Agreement is hereby amended by deleting Schedule 1 in its entirety and
replacing it with the Schedule 1 attached hereto.
ss.6. Conditions to Effectiveness. This First Amendment shall not become
effective until the Agent receives the following:
(a) a counterpart of this First Amendment, executed by the Borrower,
each Subsidiary and the Banks;
(b) the replacement Revolving Credit Notes, duly executed and
delivered by the Borrower;
(c) corporate resolutions of the Borrower authorizing the
transactions contemplated by this First Amendment; and
(d) an amendment fee of $220,000 in cash from the Borrower, which
amendment fee shall be for the pro rata accounts of the Banks.
ss.7. 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 ss.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 this First 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.
<PAGE>
-4-
ss.8. 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 First 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.
ss.9. 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.
ss.10. Counterparts. This First 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.
ss.11. Governing Law. THIS FIRST AMENDMENT SHALL BE GOVERNED BY, AND
CONSTRUED IN ACCORDANCE WITH, THE LAWS OF THE COMMONWEALTH OF MASSACHUSETTS
(WITHOUT REFERENCE TO CONFLICT OF LAWS).
<PAGE>
-5-
IN WITNESS WHEREOF, the parties hereto have executed this First Amendment
as a document under seal as of the date first above written.
APPNET SYSTEMS, INC.
By: /s/ Ronald B. Alexander
----------------------------------
Title:
BANKBOSTON, N.A.
By: /s/ Jay L. Massimo
----------------------------------
Jay L. Massimo, Director
ANTARES CAPITAL CORPORATION
By: /s/
----------------------------------
Title:
<PAGE>
RATIFICATION OF GUARANTY
Each of the undersigned guarantors hereby acknowledges and consents to the
foregoing First Amendment as of March __, 1999, and agrees that each of the
Guaranty dated as of January 8, 1999 and March 4, 1999 from each of the
undersigned guarantors remains in full force and effect, and each of the
guarantors confirms and ratifies all of its obligations thereunder.
APPNET OF MICHIGAN, INC.
By: /s/ Ronald B. Alexander
-------------------------------------
Title: Sr. VP-CFO
APPNET OF MARYLAND, INC.
By: /s/ Ronald B. Alexander
-------------------------------------
Title: Sr. VP-CFO
SOFTWARE SERVICES CORPORATION
By: /s/ Ronald B. Alexander
-------------------------------------
Title: Sr. VP-CFO
NEW MEDIA PUBLISHING, INC.
By: /s/ Ronald B. Alexander
-------------------------------------
Title: Sr. VP-CFO
RESEARCH & PLANNING, INC.
By: /s/ Ronald B. Alexander
-------------------------------------
Title: Sr. VP-CFO
CENTURY COMPUTING, INCORPORATED
<PAGE>
-7-
By: /s/ Ronald B. Alexander
-------------------------------------
Title: Sr. VP-CFO
THE KODIAK GROUP, INC.
By: /s/ Ronald B. Alexander
-------------------------------------
Title: Sr. VP-CFO
133 COMMUNICATION CORP.
By: /s/ Ronald B. Alexander
-------------------------------------
Title: Sr. VP-CFO
SIGMA6, INC.
By: /s/ Ronald B. Alexander
-------------------------------------
Title: Sr. VP-CFO
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Schedule 1
Banks; Commitments
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Bank Commitment Amount Commitment Percentage
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BankBoston, N.A.
100 Federal Street
Boston, MA 02110
LIBOR Lending Office: Same $13,000,000 50%
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Antares Capital
Corporation
311 South Wacker Drive
Suite 2725
Chicago, Illinois 60606
LIBOR Lending Office: Same $13,000,000 50%
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Total Commitment $26,000,000 100%
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Exhibit 10.18
Amended November 29, 1994
Amended October 29, 1996
Amended September 15, 1998
CENTURY COMPUTING, INCORPORATED
INCENTIVE STOCK OPTION PLAN
1 GENERAL
1.1 PURPOSE
This 1993 Incentive Stock Option Plan (the "Plan") is established to create
additional incentive for employees of Century Computing, Incorporated (the
"Company") to promote the financial success and progress of the Company.
1.2 ADMINISTRATION
(a) The Plan shall be administered by the Company's Board of Directors (the
"Board") and/or by a duly appointed Stock Option Committee (the "Committee") of
the Board having such powers as shall be specified by the Board. Any subsequent
references to the Board shall also mean the Committee if it has been appointed.
(b) Subject to the limitations of the Plan, the Board shall have the sole and
complete authority:
(i) to select from the regular full-time employees of the Company those
who shall participate in the Plan ("Participants"),
(ii) to make awards in such forms and amounts as it shall determine,
(iii) to impose such limitations, restrictions and conditions upon such
awards as it shall deem appropriate, and
(iv) to interpret the Plan and to adopt, amend and rescind
administrative guidelines and other rules and regulations relating to
the actions necessary or advisable for the implementation and
administration of the Plan. The Board's determinations on matters
within its authority shall be conclusive and binding upon the Company
and all other persons.
(c) The Board shall act on behalf of the Company as sponsor of the Plan. Except
as otherwise provided in Section 2.4 hereof, all expenses associated with the
administration of the Plan shall be borne by the Company.
(d) Without the express approval of the Board, the Committee shall not have the
authority to award Options for more than 5,000 shares to any single Participant.
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1.3 ELIGIBILITY
Participants shall be selected by the Board from employees of the Company
who have the capacity to contribute to the success of the Company. In making
these selections and in determining the form and amount of awards, the Board may
give consideration to the functions and responsibilities of the individual, his
or her past, present and potential contributions to the Company's profitability
and sound growth, the value of his or her services to the Company, and other
factors deemed relevant by the Board.
1.4 TYPE OF AWARDS UNDER THE PLAN
Awards under the Plan shall be in the form of Incentive Stock Options
(hereinafter referred to as "Options"). A Participant may, if otherwise
eligible, be granted Options in any combination from time to time.
1.5 SHARES SUBJECT TO THE PLAN
Shares of stock issued under the Plan may be in whole or in part authorized
and unissued or treasury shares of the Company's common stock, with par value
$.01 per share (the "Common Stock") which may be voting or nonvoting, in the
discretion of the Board or the Committee. The maximum number of shares of Common
Stock which may be issued for all purposes under the Plan shall be 130,000,
subject to adjustment in accordance with the provisions of Section 3.2 hereof.
Any shares of Common Stock subject to an Option which for any reason is canceled
or terminated without having been exercised shall again be available for awards
under the Plan. No fractional shares shall be issued, and the Board shall
determine the manner in which fractional share values shall be treated.
2 TERMS OF THE OPTIONS
2.1 AWARD OF OPTIONS
Subject to the provisions of the Plan, the Board shall determine for each
Option (which need not be identical) the number of shares for which the Option
shall be granted, the option price of the Option, the exercisability of the
Option, and all other terms and conditions of the Option. Options granted
pursuant to the Plan shall be evidenced by written agreements specifying the
number of shares covered thereby, in such form as the Board shall from time to
time establish, which agreements may incorporate all or any of the terms of the
Plan by reference ("Stock Option Agreements").
2.2 OPTION PRICE
The purchase price of Common Stock purchasable under Options shall be not
less than the fair market value, as determined by the Board, of the shares of
Common Stock of the Company on the date of the grant of the Option, except that,
as to an employee who at the time the Option is granted owns stock possessing
more than 10% of the total combined voting power of all classes of stock of the
Company within the meaning of section 422(b)(6) of the Internal Revenue Code of
1986, as amended (the "Code") (a "Ten Percent Owner Employee"), the option price
shall not be less than 110% of the fair market value of the shares on the date
the Option is granted.
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2.3 TERM OF OPTIONS
(a) The Plan shall become effective on the date of its adoption by the Board
subject to the approval of the Plan by the holders of the majority of the shares
of stock of the Company entitled to vote at a meeting of the stockholders held
within 12 months of the effective date. No Option shall be awarded pursuant to
the Plan after the expiration of the ten year period beginning on the date the
Plan is adopted by the Board.
(b) The Board shall have the power (1) to set the time or times within which
each Option shall be exercisable or the event or events upon the occurrence of
which all or a portion of each Option shall be exercisable and then term of each
Option and (2) to accelerate the exerciseability or vesting of all options that
are not then exercisable.
(c) No option shall be exercisable after the expiration of ten years from the
date such Option is granted, and provided further, that no Option granted to a
Ten Percent Owner Employee shall be exercisable after the expiration of five
years from the date such Option is granted.
2.4 EXERCISE OF OPTIONS
(a) Options may be exercised only by written notice to the Company, stating the
number of shares of Common Stock being purchased and accompanied by payment of
the option price for the number of such shares being purchased (i) in cash, or
(ii) by tender to the Company of shares of the Company's Common Stock owned by
the Participant and having a fair market value (or appraised value pursuant to
an independent valuation of the Company's Common Stock) not less than the
aggregate option price, or by such other consideration as the Board may approve
at the time the Option is granted. As soon as practicable after receipt of such
notice and full payment for the shares of Common Stock being purchased, the
Company shall deliver to the Participant a certificate or certificates
representing the acquired shares of Common Stock. At the time an Option is
exercised, in whole or in part, or at any time thereafter as requested by the
Company, the Participant shall pay, or make adequate provision for payment of,
federal and state income and employment tax withholding obligations of the
Company, if any, which arise upon exercise, in whole or in part, of the Option
or upon disposition of the shares acquired by exercise of the Option. The
applicability of such withholding taxes shall be determined by the Company in
its sole discretion.
(b) Unless otherwise agreed in writing by the Board, Options may be exercised by
an Optionee only twice in any calendar year.
2.5 LIMITATIONS ON OPTIONS
(a) Under the terms of the Plan, the aggregate fair market value (determined at
the time an Option is granted) of the shares of Common Stock with respect to
which Options are exercisable for the first time by a Participant during any
calendar year (under all such option plans of the Company) shall not exceed
$100,000.
(b) A Participant shall have the following rights upon death, disability or
other termination of his or her employment:
(i) If the Participant's employment is terminated by death, his or her
estate or the person who acquired the right to exercise such Option by
bequest or inheritance from the Participant shall be entitled, for a
period of one year following the date of his of her death, to exercise
the Option with respect to all or any part of the shares of Common
Stock subject thereto, to the extent the Option had become exercisable
at the time of death.
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(ii) If the Participant's employment terminates because of disability
within the meaning of section 22(e)(3) of the Code, the Participant or
his or her legal representative shall have the right, for a period of
one year following the date of such termination, to exercise the Option
with respect to all or any part of the shares of Common Stock subject
thereto, to the extent the Option had become exercisable at the time of
such termination.
(iii) If the Company terminates a Participant's employment, or if a
Participant voluntarily terminates his or her employment with the
Company, all of the then outstanding Options granted to such
Participant shall terminate immediately.
3 MISCELLANEOUS PROVISIONS
3.1 NON-TRANSFERABILITY
No Option award under the Plan shall be transferable by any Participant
otherwise than by will or, if the Participant dies intestate, by the laws of
descent and distribution. All awards shall be exercisable or received during the
Participant's lifetime only by such Participant or his or her legal
representative. Any transfer contrary to this Section 3.1 will nullify the
Option involved.
3.2 ADJUSTMENTS OF AND CHANGES IN STOCK
In the event that the shares of Common Stock of the Company, as presently
constituted, shall be changed into or exchanged for a different number or kind
of shares of stock of the Company or of another corporation (whether by reason
of corporate merger, consolidation, acquisition of property or stock separation,
reorganization or liquidation) or if the number of such shares of Common Stock
shall be increased through the payment of a stock dividend, then there shall be
substituted for or added to each share of stock which may become subject to an
Option under this Plan, the number and kind of such shares of stock into which
each outstanding share of Common Stock of the Company shall be so changed,
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or for which each such share shall be exchanged, or to which each such share
shall be entitled, as the case may be. Outstanding Options shall also be
appropriately amended as to price and other terms as may be necessary to reflect
the foregoing events. Upon dissolution or liquidation of the Company, or upon a
reorganization, merger or consolidation in which the Company is not the
surviving corporation, or upon the sale of substantially all of the assets of
the Company to another corporation, the Options issued hereunder shall survive
and appropriate provision shall be made for the continuation of outstanding
Options by, for example, the substitution on an equitable basis, of appropriate
securities, or options on such securities, of the reorganized, merged,
purchasing, or consolidated corporation.
3.3 STOCK TRANSFER RESTRICTIONS
Shares of Common Stock purchased under the Plan and held by or through any
person who is an officer, director or affiliate of the Company may not be sold
or otherwise disposed of within two years of the date of grant of the Option for
such shares nor within one year after receipt by the Participant of such shares.
Any such transfers shall be:
(i) pursuant to an effective registration statement under the
Securities Act of 1933, as amended, (the "Act"), or a transaction
which, in the opinion of counsel for the Company, is exempt from
registration under the Act and,
(ii) in compliance with state securities laws.
The Board may waive the foregoing restrictions, in whole or in part, in any
particular case or cases or may terminate such restrictions whenever the Board
determines that such restrictions afford no substantial benefit to the Company.
3.4 AMENDMENT, MODIFICATION AND TERMINATION OF THE PLAN
The Board of Directors may terminate, amend or modify the Plan, at any
time; provided, however, that no such action of the Board of Directors, without
approval of the stockholders, may
(i) increase the total number of shares of Common Stock for which
Options may be granted under the Plan, except as contemplated in
Section 3.2 above,
(ii)decrease the minimum Option price or
(iii) increase the maximum Option term or extend the period after which
Options may not be awarded under the Plan.
No amendment, modification or termination of the Plan shall in any manner
affect any Option theretofore granted to a Participant under the Plan without
the consent of the Participant or the transferee of such Option.
3.5 NON-UNIFORM DETERMINATIONS
The Board's determinations under the Plan, including without limitation,
(i) the determination of the Participants to receive awards, (ii) the form,
amount and timing of such awards, (iii) the terms and provisions of such awards
and (iv) the agreements evidencing the same, need not be uniform and may be made
by it selectively among Participants who receive, or who are eligible to
receive, awards under the Plan, whether or not such Participants are similarly
situated.
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3.6 LEAVES OF ABSENCE; TRANSFERS
The Board shall be entitled to make such rules, regulations and
determinations as it deems appropriate under the Plan in respect of any leave of
absence from the Company granted to a Participant. Without limiting the
generality of the foregoing, the Board shall be entitled to determine
(i) whether or not any such leave of absence shall be treated as if a
Participant ceased to be an employee and
(ii) the impact, if any, of any such leave of absence on awards under
the Plan. In the event Participant transfers within the Company, such
Participant shall not be deemed to have ceased to be an employee for
purposes of the Plan.
3.7 RIGHTS AS A STOCKHOLDER OR EMPLOYEE
No person shall have any rights as a stockholder with respect to any shares
of Common Stock covered by an Option until such time as stock certificates for
the shares of Common Stock for which the Option has been exercised are issued.
No adjustment shall be made for dividends or distributions or other rights for
which the record date is prior to the date such stock certificate(s) are issued,
except as provided in Section 3.2 above. Nothing in this Plan or in any Stock
Option Agreement shall confer upon any Participant any right to continue in the
employ of the Company or interfere in any way with any right of the Company to
terminate the Participant's employment at any time.
3.8 TERMINATION OF THE PLAN
Termination of the Plan shall not affect the right of Participants under
Options previously granted to them, and all unexpired Options shall continue in
force and operation after termination of the Plan except as they may lapse or be
terminated by their own terms and conditions.
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Exhibit 10.21
INTERNET OUTFITTERS, INC.
1996 INCENTIVE STOCK OPTION PLAN
(AS AMENDED 12/20/97)
1. PURPOSES OF THE PLAN. The purposes of this 1996 Incentive Stock
Option Plan are:
- to attract and retain the best available personnel for
positions of substantial responsibility,
- to provide additional incentive to Employees and Consultants,
and
- to promote the success of the Company's business.
Options granted under the Plan may be Incentive Stock Options or Nonstatutory
Stock Options, as determined by the Administrator at the time of the grant.
2. DEFINITIONS. As used herein, the following definitions shall apply:
(a) "Administrator" means the Board or any of its Committees as
shall be administering the Plan, in accordance with Section 4 of the Plan.
(b) "Applicable Laws" means the legal requirements relating to the
administration of stock option plans under state corporate and securities laws
and the Code.
(c) "Board" means the Board of Directors of the Company.
(d) "Code" means the Internal Revenue Code of 1986, as amended.
(e) "Committee" means a Committee appointed by the Board in
accordance with Section 4 of the Plan.
(f) "Common Stock" means the Common Stock of the Company.
(g) "Company" means Internet Outfitters, Inc., a California
corporation.
(h) "Consultant" means any person, including an advisor, engaged
by the Company or a Parent or Subsidiary to render services and who is
compensated for such services, provided that the term "Consultant" shall not
include Directors who are paid only a director's fee by the Company or who are
not compensated by the Company for their services as Directors.
(i) "Continuous Status as an Employee or Consultant" means that
the employment or consulting relationship is not interrupted or terminated by
the Company, any Parent or Subsidiary. Continuous Status as an Employee or
Consultant shall not be considered interrupted in the case of: (i) any leave of
absence approved by the Board, including sick leave,
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military leave, or any other personal leave; PROVIDED, HOWEVER, that for
purposes of Incentive Stock Options, any such leave may not exceed ninety (90)
days, unless reemployment upon the expiration of such leave is guaranteed by
contract (including certain Company policies) or statute; or (ii) transfers
between locations of the Company or between the Company, its Parent, its
Subsidiaries or its successor.
(j) "Director" means a member of the Board.
(k) "Disability" means total and permanent disability as defined
in Section 22(e)(3) of the Code.
(l) "Employee" means any person, including Officers and Directors
employed by the Company or any Parent or Subsidiary of the Company. Neither
service as a Director nor payment of a director's fee by the Company shall be
sufficient to constitute "employment" by the Company.
(m) "Exchange Act" means the Securities Exchange Act of 1934, as
amended.
(n) "Fair Market Value" means, as of any date, the value of Common
Stock determined as follows:
(i) If the Common Stock is listed on any established stock
exchange or a national market system, including without limitation, the National
Market System of the National Association of Securities Dealers, Inc. Automated
Quotation ("NASDAQ") System, the Fair Market Value of a Share of Common Stock
shall be the closing sales price for such stock (or the closing bid, if no sales
are reported) as quoted on such system or exchange (or the exchange with the
greatest volume of trading in Common Stock) on the last market trading day prior
to the day of determination, as reported in the Wall Street Journal or such
other source as the Administrator deems reliable;
(ii) If the Common Stock is quoted on the NASDAQ System (but
not on the National Market System thereof) or is regularly quoted by recognized
securities dealers but selling prices are not reported, the Fair Market Value of
a Share of Common Stock shall be the mean between the high bid and low asked
prices for the Common Stock on the last market trading day prior to the day of
determination, as reported in the Wall Street Journal or such other source as
the Administrator deems reliable;
(iii) In the absence of any established market for the Common
Stock, the Fair Market Value shall be determined in good faith by the
Administrator with reference to the earnings history, book value and prospects
of the Company in light of market conditions generally, and such other factors
as the Administrator may deem appropriate to reflect the fair market value
thereof.
(o) "Incentive Stock Option" means an Option intended to qualify
as an incentive stock option within the meaning of Section 422 of the Code and
the regulations promulgated thereunder.
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(p) "Nonstatutory Stock Option" means an Option not intended to
qualify as an Incentive Stock Option.
(q) "Notice of Grant" means a written notice evidencing certain
terms and conditions of an individual Option grant. The Notice of Grant is part
of the Option Agreement.
(r) "Officer" means a person who is an officer of the Company
within the meaning of Section 15 of the Exchange Act and the rules and
regulations promulgated thereunder.
(s) "Option" means a stock option granted pursuant to the Plan.
(t) "Option Agreement" means a written agreement between the
Company and an Optionee evidencing the terms and conditions of an individual
Option grant. The Option Agreement is subject to the terms and conditions of the
Plan.
(u) "Option Exchange Program" means a program whereby outstanding
options are surrendered in exchange for options with a lower exercise price.
(v) "Optioned Stock" means the Common Stock subject to an Option.
(w) "Optionee" means an Employee or Consultant who holds an
outstanding Option.
(x) "Parent" means a "parent corporation," whether now or
hereafter existing, as defined in Section 424(e) of the Code.
(y) "Plan" means this 1996 Incentive Stock Option Plan.
(z) "Share" means a share of the Common Stock, as adjusted in
accordance with Section 12 of the Plan.
(aa) "Subsidiary" means a "subsidiary corporation," whether now or
hereafter existing, as defined in Section 424(f) of the Code.
3. STOCK SUBJECT TO THE PLAN. Subject to the provisions of Section 13
of the Plan, the maximum aggregate number of Shares which may be optioned under
the Plan is 5,000,000 Shares of Common Stock. The Shares may be authorized, but
unissued, or reacquired Common Stock. However, should the Company reacquire
Shares which were issued pursuant to the exercise of an Option, such Shares
shall not become available for future grant under the Plan.
If an Option expires or becomes unexercisable without having been
exercised in full, or is surrendered pursuant to an Option Exchange Program, the
unpurchased Shares which were subject thereto shall become available for future
grant or sale under the Plan (unless the Plan has terminated).
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4. ADMINISTRATION OF THE PLAN.
(a) PROCEDURE.
(i) MULTIPLE ADMINISTRATIVE BODIES. The Plan may be
administered by different bodies with respect to Directors, Officers who are not
Directors, and Employees who are neither Directors nor Officers.
(ii) ADMINISTRATION WITH RESPECT TO OTHER PERSONS. With
respect to Option grants made to Employees or Consultants who are neither
Directors nor Officers of the Company, the Plan shall be administered by (A) the
Board or (B) a committee designated by the Board, which committee shall be
constituted to satisfy Applicable Laws. Once appointed, such Committee shall
serve in its designated capacity until otherwise directed by the Board. The
Board may increase the size of the Committee and appoint additional members,
remove members (with or without cause) and substitute new members, fill
vacancies (however caused), and remove all members of the Committee and
thereafter directly administer the Plan, all to the extent permitted by
Applicable Laws.
(b) POWERS OF THE ADMINISTRATOR. Subject to the provisions of
the Plan, and in the case of a Committee, subject to the specific duties
delegated by the Board to such Committee, the Administrator shall have the
authority, in its discretion:
(i) to determine the Fair Market Value of the Common Stock, in
accordance with Section 2(n) of the Plan;
(ii) to select the Consultants and Employees to whom Options
may be granted hereunder;
(iii) to determine whether and to what extent Options are
granted hereunder;
(iv) to determine the number of shares of Common Stock to be
covered by each Option granted hereunder;
(v) to approve forms of agreement for use under the Plan;
(vi) to determine the terms and conditions, not inconsistent
with the terms of the Plan, of any award granted hereunder. Such terms and
conditions include, but are not limited to, the exercise price, the time or
times when Options may be exercised (which may be based on performance
criteria), any vesting acceleration or waiver of forfeiture restrictions, and
any restriction or limitation regarding any Option or the Shares of Common Stock
relating thereto based in each case on such factors as the Administrator, in its
sole discretion, shall determine, including but not limited to a requirement
that Shares of Common Stock acquired pursuant to exercise of an Option be
subject to (i) certain restrictions on transfer (including without limitation a
right of first refusal in favor of the Company) and (ii) a right of repurchase
in favor of the Company upon termination of the Optionee's employment, which
right shall
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terminate no later than the date on which the Company's securities become
publicly traded and shall satisfy the requirements of Rule 260.140.41(k)
promulgated under the California Corporations Code, as amended;
(vii) to determine whether, to what extent and under what
circumstances Common Stock and other amounts payable with respect to an award
under this Plan shall be deferred either automatically or at the election of the
participant (including providing for and determining the amount (if any) of any
deemed earnings on any deferred amount during any deferral period);
(viii) to reduce the exercise price of any Option to the then
current Fair Market Value if the Fair Market Value of the Common Stock covered
by such Option shall have declined since the date the Option was granted;
(ix) to construe and interpret the terms of the Plan;
(x) to prescribe, amend and rescind rules and regulations
relating to the Plan;
(xi) to modify or amend each Option (subject to Section 15(c)
of the Plan);
(xii) to authorize any person to execute on behalf of the
Company any instrument required to effect the grant of an Option previously
granted by the Administrator; (xiii) to institute an Option Exchange Program;
(xiv) to determine the terms and restrictions applicable to
Options; and
(xv) to make all other determinations deemed necessary or
advisable for administering the Plan.
(c) EFFECT OF ADMINISTRATOR'S DECISION. The Administrator's
decisions, determinations and interpretations shall be final and binding on all
Optionees and any other holders of the Options.
5. ELIGIBILITY. Nonstatutory Stock Options may be granted to Employees
and Consultants. Incentive Stock Options may be granted only to Employees. If
otherwise eligible, an Employee or Consultant who has been granted an Option may
be granted additional Options.
6. LIMITATIONS.
(a) DESIGNATION. Each option shall be designated in the Notice
of Grant as either an Incentive Stock Option or a Nonstatutory Stock Option.
However, notwithstanding such designations, to the extent that the aggregate
Fair market Value:
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(i) of Shares subject to an Optionee's Incentive Stock Options
granted by the Company, any parent or Subsidiary, which (ii) become exercisable
for the first time during any calendar year (under all plans of the Company or
any parent or Subsidiary) exceeds $100,000, such excess Options shall be treated
as Nonstatutory Stock Options. For purposes of this Section 6(a), incentive
stock options shall be taken into account in the order in which they were
granted, and the Fair Market Value of the Shares shall be determined as of the
time of grant.
(b) NO EMPLOYMENT RIGHTS. Neither the Plan nor any Option
shall confer upon an Optionee any right with respect to continuing the
Optionee's employment or consulting relationship with the Company, nor shall
they interfere in any way with the Optionee's right or the Company's right to
terminate such employment or consulting relationship at any time, with or
without cause.
7. TERMS OF THE PLAN. Subject to Section 19 of the Plan, the Plan
shall become effective upon the earlier to occur of its adoption by the Board or
its approval by the shareholders of the Company as described in Section 19 of
the Plan. It shall continue in effect for a term of ten (10) years unless
terminated earlier under Section 15 of the Plan. Unless otherwise provided
herein, the termination of the Plan shall not affect the validity of any option
agreement outstanding at the date of such termination.
8. TERM OF OPTION. The term of each Option shall be stated in the
Notice of Grant; PROVIDED, HOWEVER, in no event may the term be more than ten
(10) years form the date of the Grant. In addition, in the case of an Incentive
Stock Option granted to an Optionee who, at the time the Incentive Stock Option
is granted, owns stock representing more than ten percent (10%) of the voting
power of all classes of capital stock of the Company or any Parent or
Subsidiary, the term of the Incentive Stock Option shall be five (5) years form
the date of grant or such shorter term as may be provided in the Notice of
Grant.
9. OPTION EXERCISE PRICE AND CONSIDERATION.
(a) EXERCISE PRICE. The price per share exercise price for the
Share to be issued pursuant to exercise of an Option shall be determined by the
Administrator, subject to the following:
(i) In the case of an Incentive Stock Option.
(A) granted to an Employee who, at the time of the
Incentive Stock Option is granted, owns stock representing more than ten percent
(10%) of the voting power of all classes of capital stock of the Company or any
Parent or Subsidiary, the per Share exercise price shall be no less than 110% of
the Fair Market Value per Share on the date of grant.
(B) granted to any other Employee, the per Share exercise
price shall be no less than 100% of the Fair Market Value per Share on the date
of grant.
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(ii) In the case of a Nonstatutory Stock Option:
(A) granted to an Employee or Consultant who, at the time
the Incentive Stock Option is granted, owns stock representing more than ten
percent (10%) of the voting power of all classes of capital stock of the Company
or any Parent or Subsidiary, the per Share exercise price shall be no less than
100% of the Fair Market Value per Share on the date of grant.
(B) granted to any other Employee or Consultant the per
Share exercise price shall be no less than 85% of the Fair Market Value per
Share on the date of grant.
(b) WAITING PERIOD AND EXERCISE DATES. At the time an Option
is granted, the Administrator shall fix the period within which the Option may
be exercised and shall determine any conditions which must be satisfied before
the Option may be exercised. In so doing, the Administrator may specify that an
Option may not be exercised until the completion of a service period.
(c) FORM OF CONSIDERATION. The Administrator shall determine
the acceptable form of consideration for exercising an Option, including the
method of payment. In the case of an Incentive Stock Option, the Administrator
shall determine the acceptable form of consideration at the time of grant. Such
consideration may consist entirely of:
(i) cash;
(ii) a promissory note made by the Optionee in favor of the
Company;
(iii) other Shares which have a Fair Market Value on the date
of surrender equal to the aggregate exercise price of the Shares as to which
said Option shall be exercised;
(iv) delivery of a properly executed exercise notice together
with such other documentation as the Administrator and the Optionee's broker, if
applicable, shall require to effect an exercise of the Option and delivery to
the Company of the sale or loan proceeds required to pay the exercise price;
(v) any combination of the foregoing methods of payment; or
(vi) such other consideration and method of payment for the
issuance of Shares to the extent permitted by Applicable Laws.
10. EXERCISE OF OPTION.
(a) PROCEDURE FOR EXERCISE; RIGHTS AS A SHAREHOLDER. Any Option
granted hereunder shall be exercisable according to the terms of the Plan and at
such times and under such conditions as determined by the Administrator and set
forth in the Option Agreement; PROVIDED, HOWEVER, that each Option shall become
exercisable as to at least 20% of the Shares of Common Stock covered thereby on
each anniversary of the date such Option is granted.
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An Option may not be exercised for a fraction of a Share.
An Option shall be deemed exercised when the Company receives: (1)
written notice of exercise (in accordance with the Option Agreement) from the
person entitled to exercise the Option, (ii) full payment for the Shares with
respect to which the Option is exercised and (iii) all representations,
indemnifications and documents reasonably requested by the Administrator. Full
payment may consist of any consideration and method of payment authorized by the
Administrator and permitted by the Option Agreement and the Plan. Shares issued
upon exercise of an Option shall be issued in the name of the Optionee or, if
requested by the Optionee, in the name of the Optionee and his or her spouse.
Until the stock certificate evidencing such Shares is issued (as evidenced by
the appropriate entry on the books of the Company or of a duly authorized
transfer agent of the Company), no right to vote or receive dividends or any
other rights as a shareholder shall exist with respect to the Optioned Stock,
notwithstanding the exercise of the Option. Subject to Section 12, the Company
shall issue (or cause to be issued) such stock certificate promptly after the
Option is exercised. No adjustment will be made for a dividend or other right
for which the record date is prior to the date the stock certificate is issued,
except as provided in Section 13 of the Plan. Notwithstanding the foregoing, the
Administrator in its discretion may require the Company to retain possession of
any certificate evidencing Shares of Common Stock acquired upon exercise of an
Option which remains subject to repurchase under the provisions of the Option
Agreement or any other agreement sighed by the Optionee in order to facilitate
such repurchase provisions.
Exercising an Option in any manner shall decrease the number of Shares
thereafter available, both for purposes of the Plan and for sale under the
Option, by the number of Shares as to which the Option is exercised.
(b) TERMINATION OF EMPLOYMENT OR CONSULTING RELATIONSHIP. In the
event that an Optionee's Continuous Status as an Employee or Consultant
terminates (other than upon the Optionee's death or Disability), the Optionee
may exercise his or her Option, but only within such period of time as is
determined by the Administrator (but in no event shall such period of time be
less than thirty (30) days), and only to the extent that the Optionee was
entitled to exercise it at the date of termination (but in no event later than
the expiration of the term of such Option as set forth in the Notice of grant).
In the case of an Incentive Stock Option, the Administrator shall determine such
period of time (in no event to exceed ninety (90) days from the date of
termination) when the Option is granted. If, at the date of termination, the
Optionee is not entitled to exercise his or her entire Option, the Shares
covered by the unexercisable portion of the Option shall revert to the Plan. If,
after termination, the Optionee does not exercise his or her Option within the
time specified by the Administrator, the Option shall terminate, and the Shares
covered by such Option shall revert to the Plan.
(c) DISABILITY OF OPTIONEE. In the event that an Optionee's
Continuous Status as an Employee or Consultant terminates as a result of the
Optionee's Disability, the Optionee may exercise his or his Option at any time
within six (6) months from the date of such termination, but only to the extent
that the Optionee was entitled to exercise it at the date of such termination
(but in no event later than the expiration of the term of such Option as set
forth in the
-8-
<PAGE>
Notice of Grant). If, at the date of termination the Optionee is not entitled to
exercise his or her entire Option, the Shares covered by the unexercisable
portion of the Option shall revert to the Plan. If, after termination, the
Optionee does not exercise his or her Option within the time specified herein,
the Option shall terminate, and the Shares covered by such Option shall revert
to the Plan.
(d) DEATH OF OPTIONEE. In the event of the death of an Optionee,
the Option may be exercised at any time within six (6) months following the date
of death (but in no event later than the expiration of the term of such Option
as set forth in the Notice of Grant), by the Optionee's estate or by a person
who acquired the right to exercise the Option by bequest or inheritance, but
only to the extent that the Optionee was entitled to exercise the Option at the
date of death. If, at the time of death, the Optionee was not entitled to
exercise his or her entire Option, the Shares covered by unexercisable portion
of the Option shall immediately revert to the Plan. If, after death, the
Optionee's estate or a person who acquires the right to exercise the Option by
bequest or inheritance does not exercise the Option within the time specified
herein, the Option shall terminate, and the Shares covered by such Option shall
revert to the Plan.
(e) DISQUALIFYING DISPOSITIONS OF INCENTIVE STOCK OPTIONS. If
Common Stock acquired upon exercise of any Incentive Stock Option is disposed of
in a disposition that, under Section 422 of the Code, disqualifies the holder
from the application of Section 421(a) of the Code, the holder of the Common
Stock immediately before the disposition shall comply with any requirements
imposed by the Company in order to enable the Company to secure the related
income tax deduction to which it is entitled in such event.
11. NON-TRANSFERABILITY OF OPTIONS.
(a) NO TRANSFER. An Option may not be sold, pledged, assigned,
hypothecated, transferred, or disposed of in any manner other than by will or by
the laws of descent or distribution and may be exercised, during the lifetime of
the Optionee, only by the Optionee.
(b) DESIGNATION OF BENEFICIARY. An Optionee may file a written
designation of a beneficiary who is to receive any Options that remain
unexercised in the event of the Optionee's death. If a participant is married,
and the designated beneficiary is not the spouse, spousal consent shall be
required for such designation to be effective. Such designation of beneficiary
may be changed by the Optionee at any time by written notice, subject to the
above spousal consent conditions.
(c) EFFECT OF NO DESIGNATION. In the event of the death of the
Optionee and in the absence of a beneficiary validly designated under the Plan
who is living at the time of such Optionee's death, the Company shall deliver
such options to the executor or administrator of the estate of the Optionee, or
if no such executor or administrator has been appointed (to the knowledge of the
Company), the Company, in its discretion, may deliver such options to the spouse
or to any one or more dependents or relatives of the participant or if no
spouse, dependent or relative is known to the Company, then to such other person
as the Company may designate.
-9-
<PAGE>
12. WITHHOLDING TAXES. Upon (i) the disposition by an Optionee of
shares of Common Stock acquired pursuant to the exercise of an Incentive Stock
Option within two years of the granting of such Incentive Stock Option or within
one year after exercise of such Incentive Stock Option, or (ii) the exercise of
a Nonstatutory Stock Option, the Company shall have the right to require such
Optionee to pay the Company the amount of any taxes which the Company may be
required to withhold with respect to such shares of Common Stock, and the
Company may withhold the delivery of certificates representing the Shares
acquired upon exercise of the Option until such payment is received.
13. ADJUSTMENTS UPON CHANGES IN CAPITALIZATION, DISSOLUTION, MERGER,
ASSET SALE OR CHANGE OF CONTROL.
(a) CHANGES IN CAPITALIZATION. Subject to any required action by
the shareholders of the Company, if the outstanding shares of Common Stock are
increased, decreased, changed into or exchanged for a different number or kind
of shares of securities of the Company through reorganization, recapitalization,
reclassification, stock combination, stock dividend, stock split, reverse stock
split or other similar transaction, an appropriate and proportionate adjustment
shall be made in the maximum number and kind of shares as to which Options may
be granted under this Plan. A corresponding adjustment changing the number or
kind of shares allocated to unexercised Options which have been granted prior to
any such change, shall likewise be made. Any such adjustment in the outstanding
Options shall be made without change in the aggregate purchase price applicable
to the unexercised portion of the Options but with a corresponding adjustment in
the price for each share or other unit of any security covered by the Option.
Such adjustment shall be made by the Board, whose determination in that respect
shall be final, binding and conclusive.
Where an adjustment under this Section 15(a) is made to an Incentive
Stock Option, the adjustment will be made in a manner which will not be
considered a "modification" under the provisions of subsection 424(h)(3) of the
Code.
(b) DISSOLUTION OR LIQUIDATION. In the event of the proposed
dissolution or liquidation of the Company, to the extent that an Option had not
been previously exercised, it will terminate immediately prior to the
consummation of such proposed action. The Board may, in the exercise of its sole
discretion in such instances, declare that any Option shall terminate as of a
date fixed by the Board and give each Optionee the right to exercise his or her
Option as to all or any part of the Optioned Stock, including Shares as to which
the Option would not otherwise be exercisable.
(c) MERGER OR ASSET SALE. In connection with a reorganization of
the Company in which another entity is the survivor, a merger or reorganization
of the Company under which more than fifty percent (50%) of the Common Stock
outstanding prior to the merger or reorganization is converted into cash or into
another security, a sale of more than fifty percent (50%) of the Company's
assets, or a similar event that the Administrator determines, in its discretion,
would materially alter the structure of the Company or its ownership, the
Administrator, upon 30 days prior written notice to the Option holders, may, in
its discretion, do
-10-
<PAGE>
one or more of the following: (i) shorten the period during which Options are
exercisable (provided they remain exercisable for at least 30 days after the
date the notice is given); (ii) accelerate any vesting schedule to which an
option is subject; (iii) arrange to have the surviving or successor entity grant
replacement options with appropriate adjustments in the number and kind of
securities and option prices; or (iv) cancel options upon payment to the Option
holders in cash, with respect to each Option to the extent then exercisable
(including any options as to which the exercise has been accelerated as
contemplated in clause (ii) above), of any amount that is the equivalent of the
Fair Market Value of the Common Stock (at the effective time of the merger,
reorganization, sale of other event) or the fair market value of the Option. The
Administrator may also provide for one or more of the foregoing alternatives in
any particular Option Agreement. In the case of a change in corporate control,
the Administrator may, in considering the advisability or the terms and
conditions of any acceleration of the exercisability of any option pursuant to
this Section 15(c), take into account the penalties that may result directly or
indirectly from such acceleration to either the Company or the Option holder, or
both, under Sections 28OG and 4999 of the Code, and may decide to limit such
acceleration to the extent necessary to avoid or mitigate such penalties or
their effects.
14. DATE OF GRANT. The date of grant of an Option shall be, for all
purposes, the date on which the Administrator makes the determination granting
such Option, or such other later date as is determined by the Administrator.
Notice of the determination shall be provided to each Optionee within a
reasonable time after the date of such grant.
15. AMENDMENT AND TERMINATION OF THE PLAN.
(a) AMENDMENT AND TERMINATION. The Board may at any time amend,
alter or suspend or terminate the Plan.
(b) SHAREHOLDER APPROVAL. The company shall obtain shareholder
approval of any Plan amendment to the extent necessary and desirable to comply
with Section 422 of the Code (or any successor statute) or other applicable law,
rule or regulation, including the requirements of any exchange or quotation
system on which the Common Stock is listed or quoted). Such shareholder
approval, if required, shall be obtained in such a manner and to such a degree
as is required by the applicable law, rule or regulation.
(c) EFFECT OF AMENDMENT OR TERMINATION. No amendment, alteration,
suspension or termination of the Plan shall impair the rights of an Optionee,
unless mutually agreed otherwise between the Optionee and the Administrator,
which agreement must be in writing and signed by the Optionee and the Company.
16. CONDITIONS UPON ISSUANCE OF SHARES.
(a) LEGAL COMPLIANCE. Shares shall not be issued pursuant to the
exercise of an Option unless the exercise of such Option and the issuance and
delivery of such Shares shall comply with all relevant provisions of law,
including, without limitation, the Securities Act of 1933, as amended, the
Exchange Act, the rules and regulations promulgated thereunder, Applicable Laws,
the requirements of any stock exchange or quotation system upon which the
-11-
<PAGE>
Shares may then be listed or quoted, and any other requirements of law or of any
regulatory bodies having jurisdiction over such issuance and delivery, and shall
be further subject to the approval of counsel for the Company with respect to
such compliance. Any securities delivered under the Plan shall be subject to
such restrictions, and the person acquiring such securities shall, if requested
by the Company, provide such assurances and representations to the Company as
the Company may deem necessary or desirable to assure compliance with all
applicable legal requirements. To the extent permitted by applicable law, the
Plan and options granted hereunder shall be deemed amended to the extent
necessary to conform to such laws, rules and regulations.
(b) INVESTMENT REPRESENTATION. As a condition to the exercise of
an Option, the Company may require the person exercising such Option to
represent and warrant at the time of any such exercise that the Shares are being
purchased only for investment and without any present intention to sell,
transfer or distribute such Shares.
17. LIABILITY OF COMPANY.
(a) INABILITY TO OBTAIN AUTHORITY. The inability of the Company to
obtain authority from any regulatory body having jurisdiction, which authority
is deemed by the Company's counsel to be necessary to the lawful issuance and
sale of any Shares hereunder, shall relieve the Company of any liability in
respect of the failure to issue or sell such Shares as to which such requisite
authority shall not have been obtained.
(b) GRANTS EXCEEDING ALLOTTED SHARES. If the Optioned Stock
covered by an Option exceeds, as of the date of grant, the number of Shares
which may be issued under the Plan without additional shareholder approval, such
Option shall be void with respect to such excess Optioned Stock, unless
shareholder approval of an amendment sufficiently increasing the number of
Shares subject to the Plan is timely obtained in accordance with Section 15(b)
of the Plan.
(c) RIGHTS OF PARTICIPANTS AND BENEFICIARIES. The Company shall
pay all amounts payable hereunder only to the Option holder or beneficiaries
entitled thereto pursuant to the Plan. The Company shall not be liable for the
debts, contracts or engagements of any Option holder or his or her
beneficiaries, and rights to cash payments under the Plan may not be taken in
execution by attachment or garnishment, or by any other legal or equitable
proceeding while in the hands of the Company.
18. RESERVATION OF SHARES. The Company, during the term of this Plan,
will at all times reserve and keep available such number of Shares as shall be
sufficient to satisfy the requirements of the Plan.
19. SHAREHOLDER APPROVAL. Continuance of the Plan shall be subject to
approval by the shareholders of the Company within twelve (12) months before or
after the date the Plan is adopted. Such shareholder approval shall be obtained
in the manner and to the degree required under applicable federal and state law.
Options may be granted but not exercised prior to shareholder approval of the
Plan. If any options are so granted and stockholder approval shall not have been
obtained within twelve months of the date of adoption of this Plan by the Board
of Directors, such options shall terminate retroactively as of the date they
were granted.
-12-
<PAGE>
20. INFORMATION TO OPTIONEES. Each Option holder shall be provided with
a copy of financial statements of the Company at least annually and, in any
event, prior to his or her purchase of Common Stock pursuant to the exercise of
an option.
21. LEGENDING SHARE CERTIFICATES. In order to enforce any restrictions
imposed upon Common Stock issued upon exercise of an Option granted under the
Plan or to which such Common Stock may be subject, the Administrator may cause a
legend or legends to be placed on any share certificates representing such
Common Stock, which legend or legends shall make appropriate reference to such
restrictions, including, but not limited to, a restriction against sale of such
Common Stock for any period of time as may be required by applicable laws or
regulations. If any restriction with respect to which a legend was placed on any
certificate ceases to apply to Common Stock represented by such certificate, the
owner of the Common Stock represented by such certificate may require the
Company to cause the issuance of a new certificate not bearing the legend.
Additionally, and not by way of limitation, the Administrator may
impose such restrictions on any Common Stock issued pursuant to the Plan as it
may deem advisable.
22. GOVERNING LAW. The Plan shall be governed by, and construed in
accordance with the laws of the State of California (without giving effect to
conflicts of law principles).
-13-
<PAGE>
FIRST AMENDMENT TO THE INTERNET OUTFITTERS, INC.
1996 INCENTIVE STOCK OPTION PLAN
Internet Outfitters, Inc., a California corporation (the "COMPANY"),
hereby makes this First Amendment to the Internet Outfitters, Inc. 1996
Incentive Stock Option Plan as of December 10, 1997 with reference to the
following facts:
A. Internet Outfitters, Inc. maintains the Internet Outfitters, Inc.
1996 Incentive Stock Option Plan for the benefit of its officers, directors,
employees, consultants and advisers (the "PLAN").
B. Section 3 of the Plan limits the maximum number of shares for which
options may be granted over the term of the Plan to 1,500,000 shares.
C. The Company wishes to amend the Plan to increase the maximum number
of shares for which options may be granted over the term of the Plan to
5,000,000 shares and has obtained the approval of its Board of Directors and its
shareholders to such amendment.
NOW, THEREFORE, the Plan is hereby amended as follows:
1. The first sentence of Section 3 of the Plan is hereby amended,
effective December 20, 1997 to read in its entirety as follows:
"Subject to the provisions of Section 13 of the Plan, the
maximum aggregate number of Shares which may be optioned under
the Plan is 5,000,000 Shares of Common Stock."
2. In all other respects, the terms and provisions of the Plan are
hereby ratified and declared to be in full force and effect.
3. IN WITNESS WHEREOF, Internet Outfitters, Inc. has executed this
First Amendment to be effective as of December 20, 1997.
INTERNET OUTFITTERS, INC.
By: /s/ Chris Paine
----------------------------
Chris Paine, its President
<PAGE>
EXHIBIT 21.1
Subsidiaries of AppNet Systems, Inc.
AppNet Commerce Services, Inc., a Delaware corporation
AppNet of Michigan, Inc., a Delaware corporation
AppNet of Maryland, Inc., a Delaware corporation
Software Services Corporation, a Michigan corporation
New Media Publishing, Inc., a Delaware corporation
Century Computing, Incorporated, a Delaware corporation
Research & Planning, Inc., a Massachusetts corporation
The Kodiak Group, Inc., a Massachusetts corporation
i33 communications corp., a New York corporation
Sigma 6, Inc., a Michigan corporation
Salzinger & Company, Inc., a Virginia corporation
Internet Outfitters, Inc., a California corporation
Transform Acquisition Corp., a Delaware corporation
<PAGE>
EXHIBIT 23.1
Consent of Arthur Andersen LLP
As independent public accountants, we hereby consent to the use of our
reports (and to all references to our Firm) included in or made a part of
this prospectus.
/s/ ARTHUR ANDERSEN LLP
-----------------------
May 10, 1999 ARTHUR ANDERSEN LLP
<PAGE>
Exhibit 23.3
CONSENT OF GARTNER GROUP/DATAQUEST:
We hereby consent to the use of Buying Intentions in the IT Services
Industry: User Wants and Needs, a Dataquest report, 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.
The following information is what will be included in the S-1:
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.
Date: 12 May 99 Gartner Group/Dataquest
/s/ Myron F. Kerstetter
---------------------------------------
Myron F. Kerstetter
Vice President & Director,
Research Management
<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, an International Data
Corporation report, and to all references to us included in or made part
or AppNet Systems' Registration Statement on Form S-1 (File No. 333-75205)
and any related prospectus.
Date: 5/12/99 International Data Corporation
--------
/s/ Brigitte Zepernick
-----------------------
Brigitte Zepernick
Sr. Account Executive
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-END> MAR-31-1999
<CASH> 5,655,000
<SECURITIES> 0
<RECEIVABLES> 18,770,000
<ALLOWANCES> 1,773,000
<INVENTORY> 0
<CURRENT-ASSETS> 23,824,000
<PP&E> 5,152,000
<DEPRECIATION> 556,000
<TOTAL-ASSETS> 163,471,000
<CURRENT-LIABILITIES> 27,152,000
<BONDS> 0
45,115,000
11,576,000
<COMMON> 10,000
<OTHER-SE> 4,635,000
<TOTAL-LIABILITY-AND-EQUITY> 163,471,000
<SALES> 0
<TOTAL-REVENUES> 19,643,000
<CGS> 0
<TOTAL-COSTS> 11,457,000
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 1,262,000
<INCOME-PRETAX> (16,242,000)
<INCOME-TAX> 100,000
<INCOME-CONTINUING> (16,342,000)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (16,342,000)
<EPS-PRIMARY> (.88)
<EPS-DILUTED> (.88)
</TABLE>
