<PAGE>
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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
------------------------
FORM 10-Q
/X/ QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE
SECURITIES EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED SEPTEMBER 30, 1999
OR
/ / TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the transition period from ______________ to ______________
Commission File Number: 000-26263
APPNET, INC.
---------------------------------------------
(Exact name of registrant as specified in its charter)
<TABLE>
<S> <C>
DELAWARE 52-2077860
-------------------------- ----------------
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
</TABLE>
6707 DEMOCRACY BOULEVARD
BETHESDA, MD 20817
--------------------------------------------------
(Address of principal executive offices including zip code)
(301) 493-8900
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(Registrant's telephone number, including area code)
APPNET SYSTEMS, INC.
---------------------------------------
(Former name, if changed since last report.)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.
Yes /X/ No / /
As of October 25, 1999, there were 31,085,119 outstanding shares of the
Registrant's Common Stock, $0.0005 par value.
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APPNET, INC.
QUARTERLY REPORT ON FORM 10-Q
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
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<S> <C>
PART I. FINANCIAL INFORMATION
Item 1. Unaudited Consolidated Financial Statements
Consolidated Balance Sheets at September 30, 1999 and December 31, 1998.................................... 3
Consolidated Statements of Operations for the three months ended September 30, 1999 and 1998 and the nine
months ended September 30, 1999 and 1998................................................................. 4
Consolidated Statements of Cash Flows for the nine months ended September 30, 1999
and 1998................................................................................................. 5
Notes to Consolidated Financial Statements................................................................. 6
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations.................................................................................... 14
Item 3. Quantitative and Qualitative Disclosure About Market Risk.......................................... 20
PART II. OTHER INFORMATION
Item 2. Changes in Securities and Use of Proceeds.......................................................... 21
Item 4. Submission of Matters to a Vote of Security Holders................................................ 21
Item 6. Exhibits and Reports on Form 8-K................................................................... 21
Signature.................................................................................................. 22
</TABLE>
2
<PAGE>
PART I. FINANCIAL INFORMATION
ITEM I. FINANCIAL STATEMENTS
APPNET, INC.
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
SEPTEMBER 30, DECEMBER 31,
1999 1998
------------- -------------
(UNAUDITED) (AUDITED)
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents......................................................... $ 3,236,000 $ 2,447,000
Accounts receivable, net of allowance for doubtful accounts of $1,597,000 and
$1,124,000, respectively........................................................ 27,010,000 11,238,000
Other current assets.............................................................. 1,428,000 1,118,000
----------- -------------
Total current assets............................................................ 31,674,000 14,803,000
Property and equipment, net......................................................... 7,359,000 3,012,000
Intangible assets, net.............................................................. 102,028,000 99,380,000
Other assets........................................................................ 1,867,000 1,175,000
----------- -------------
Total assets........................................................................ $142,928,000 $ 118,370,000
=========== =============
LIABILITIES, REDEEMABLE STOCK AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable.................................................................. $ 5,665,000 $ 2,737,000
Accrued expenses.................................................................. 28,925,000 6,911,000
Current portion of convertible notes and long-term debt........................... 1,610,000 2,426,000
----------- -------------
Total current liabilities....................................................... 36,200,000 12,074,000
Credit facilities................................................................... 3,660,000 37,461,000
Convertible notes, net of current portion........................................... 8,800,000 2,706,000
Other long-term debt, net of current portion........................................ 3,515,000 1,199,000
Other long-term liabilities......................................................... 1,066,000 3,398,000
----------- -------------
Total liabilities............................................................... 53,241,000 56,838,000
----------- -------------
Class A Preferred Stock, $.01 par value, 96,621 shares authorized, zero and 38,093
shares issued and outstanding as of September 30, 1999 and December 31, 1998,
respectively, liquidation value $1,000 per share.................................. -- 37,646,000
Common stock subject to put rights, $.0005 par value, zero and 48,771 shares issued
and outstanding as of September 30, 1999 and December 31, 1998, respectively...... -- 278,000
Stockholders' equity:
Class B Preferred Stock, $.01 par value, 20,000 shares authorized, zero and 11,576
shares issued and outstanding as of September 30, 1999 and December 31, 1998,
respectively, liquidation value $1,000 per share................................ -- 11,576,000
Common stock, $.0005 par value; 75,000,000 shares authorized, 31,162,465 shares
issued and 30,997,027 shares outstanding as of September 30, 1999 and 19,504,173
shares issued and outstanding as of December 31, 1998........................... 16,000 10,000
Additional paid in capital........................................................ 165,135,000 27,222,000
Treasury stock.................................................................... (50,000)
Notes receivable from management.................................................. (617,000) (821,000)
Deferred compensation............................................................. (414,000) --
Accumulated deficit............................................................... (74,383,000) (14,379,000)
----------- -------------
Total stockholders' equity...................................................... 89,687,000 23,608,000
----------- -------------
Total liabilities, redeemable stock and stockholders' equity........................ $142,928,000 $ 118,370,000
=========== =============
</TABLE>
The accompanying notes are an integral part of these statements.
3
<PAGE>
APPNET, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
<TABLE>
<CAPTION>
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
----------------------------- -----------------------------
1999 1998 1999 1998
-------------- ------------- -------------- -------------
<S> <C> <C> <C> <C>
Revenues........................................... $ 30,096,000 $ 2,488,000 $ 74,802,000 $ 3,508,000
Cost of revenues................................... 16,528,000 2,221,000 42,205,000 3,252,000
-------------- ------------- -------------- -------------
Gross profit..................................... 13,568,000 267,000 32,597,000 256,000
Operating expenses:
Selling and marketing............................ 3,048,000 206,000 5,832,000 218,000
General and administrative....................... 8,636,000 1,433,000 23,347,000 2,349,000
Stock-based and other acquisition-related
compensation................................... 7,779,000 -- 15,730,000 --
Depreciation and amortization.................... 15,018,000 1,240,000 42,857,000 1,669,000
-------------- ------------- -------------- -------------
Total operating expenses....................... 34,481,000 2,879,000 87,766,000 4,236,000
-------------- ------------- -------------- -------------
Loss from operations............................... (20,913,000) (2,612,000) (55,169,000) (3,980,000)
Interest expense................................. 206,000 165,000 3,948,000 289,000
Other expense, net............................... 1,000 387,000 559,000 387,000
-------------- ------------- -------------- -------------
Loss before income taxes........................... (21,120,000) (3,164,000) (59,676,000) (4,656,000)
Income tax provision (benefit)..................... 178,000 (70,000) 328,000 (70,000)
-------------- ------------- -------------- -------------
Net loss........................................... (21,298,000) (3,094,000) (60,004,000) (4,586,000)
Dividends on and accretion of preferred stock...... -- (110,000) (2,139,000) (110,000)
-------------- ------------- -------------- -------------
Net loss attributable to common stockholders....... $ (21,298,000) $ (3,204,000) $ (62,143,000) $ (4,696,000)
============== ============= ============== =============
Basic and diluted net loss per share............... $ (0.68) $ (0.19) $ (2.57) $ (0.59)
============== ============= ============== =============
Weighted average common shares outstanding......... 31,124,225 17,176,937 24,200,397 8,018,434
============== ============= ============== =============
</TABLE>
The accompanying notes are an integral part of these statements.
4
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APPNET, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
<TABLE>
<CAPTION>
NINE MONTHS ENDED
SEPTEMBER 30,
-------------------------------
1999 1998
--------------- --------------
<S> <C> <C>
Cash flows from operating activities:
Net loss...................................................................... $ (60,004,000) $ (4,586,000)
Adjustments to reconcile net loss to net cash used in operating activities:
Amortization................................................................ 40,893,000 1,611,000
Depreciation................................................................ 1,964,000 57,000
Stock-based and other acquisition-related compensation...................... 15,730,000 --
Write-off of deferred financing costs....................................... 559,000 --
Beneficial conversion charge................................................ 1,052,000 --
Changes in operating assets and liabilities:
Accounts receivable, net.................................................. (13,143,000) (520,000)
Other current assets...................................................... 86,000 182,000
Accounts payable.......................................................... 1,579,000 (138,000)
Accrued liabilities....................................................... 7,327,000 215,000
--------------- --------------
Net cash used in operating activities................................... (3,957,000) (3,179,000)
Cash flows from investing activities:
Purchase of property and equipment, net....................................... (5,109,000) (378,000)
Cash paid for acquired businesses, net of cash acquired....................... (26,381,000) (12,877,000)
Other assets.................................................................. (885,000) (454,000)
--------------- --------------
Net cash used in investing activities................................... (32,375,000) (13,709,000)
Cash flows from financing activities:
Proceeds from long-term debt.................................................. -- 351,000
Repayments of long-term debt.................................................. (203,000) (268,000)
Borrowings under credit facilities............................................ 74,000,000 10,374,000
Repayments of credit facilities............................................... (107,801,000) (1,081,000)
Debt issue costs.............................................................. (621,000) (194,000)
Proceeds from issuance of common stock........................................ 375,000 3,015,000
Net proceeds from initial public offering..................................... 64,119,000 --
Repurchase of common stock.................................................... (22,000) (789,000)
Proceeds from issuance of preferred stock..................................... 7,046,000 6,122,000
Proceeds from exercise of stock options....................................... 228,000 --
--------------- --------------
Net cash provided by financing activities............................... 37,121,000 17,530,000
Net increase in cash and cash equivalents....................................... 789,000 642,000
Cash and cash equivalents at beginning of period................................ 2,447,000 --
--------------- --------------
Cash and cash equivalents at end of period...................................... $ 3,236,000 $ 642,000
=============== ==============
Cash paid for income taxes...................................................... $ 181,000 $ --
=============== ==============
Cash paid for interest.......................................................... $ 2,212,000 $ 298,000
=============== ==============
</TABLE>
The accompanying notes are an integral part of these statements.
5
<PAGE>
APPNET, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
1. BASIS OF PRESENTATION
The accompanying consolidated financial statements of AppNet, Inc. (formerly
AppNet Systems, Inc.) and its subsidiaries (the "Company") are unaudited and
include all normal recurring adjustments which are, in the opinion of
management, necessary for a fair presentation of the results for the periods
presented pursuant to the instructions to Form 10-Q and Article 10 of
Regulation S-X. Certain information and footnote disclosures normally included
in the consolidated financial statements prepared in accordance with generally
accepted accounting principles have been condensed or omitted pursuant to such
rules and regulations. These consolidated financial statements should be read in
conjunction with the Company's Registration Statement on Form S-1, which
includes consolidated financial statements and the notes thereto for the year
ended December 31, 1998 and for the three months ended March 31, 1998 and 1999.
The consolidated operating results of operations for the three- and nine-month
periods ended September 30, 1999 are not necessarily indicative of the results
that may be expected for the entire year ending December 31, 1999.
On June 15, 1999, the Company declared a 2.85-for-one 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.
2. INITIAL PUBLIC OFFERING
On June 23, 1999, the Company completed its initial public offering of
securities and issued 6,000,000 shares of common stock at $12.00 per share,
which generated proceeds, net of issuance costs, of approximately
$64.1 million. The proceeds of the offering were used to repay outstanding
borrowings under various credit facilities and other outstanding debt, as well
as fund general corporate purposes, including working capital expenditures.
3. ACQUISITIONS
From March 1998 through March 29, 1999, the Company acquired 12 businesses
in the Internet and electronic commerce professional services industry.
Collectively, these entities are referred to as the "Acquired Businesses." The
accounts of the Acquired Businesses are included in the accompanying
consolidated financial statements from the date of their respective
acquisitions. The five acquisitions occurring during 1999 (collectively, these
entities are referred to as the "1999 Acquired Businesses") are described as
follows:
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 $21.6 million, plus transaction costs, consisting of
$10.3 million paid in cash and $11.3 million 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 $2.5 million, plus transaction costs, consisting of
$1.25 million paid in cash and $1.25 million paid in shares of Company Common
Stock. If certain performance criteria are met during the 12-month period ending
December 31, 1999, the former
6
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APPNET, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(UNAUDITED)
3. ACQUISITIONS (CONTINUED)
stockholders of Sigma6 are entitled to a contingent payment of up to
$2.8 million 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
$8.5 million, plus transaction costs, consisting of $5.0 million in cash and
$3.5 million in Company Common Stock. If certain performance criteria are met
during the period ending September 30, 2000, Salzinger is entitled to a
contingent payment of up to $5.0 million in cash or, 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 $9.5 million, plus
transaction costs, consisting of cash, $2.7 million in Company Common Stock, 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 $3.5 million
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 $5.1 million, plus transaction costs, consisting of
$3.5 million in cash and $1.6 million in Company Common Stock. If certain
performance criteria are met during the twelve-month period ending March 31,
2000, Transform IT is entitled to a contingent payment of up to $3.5 million in
cash.
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.
In the nine month period ended September 30, 1999, the Company recorded
identifiable intangibles related to the 1999 Acquired Businesses of
approximately $2.9 million. This purchase price allocation also resulted in the
allocation of approximately $43.0 million to goodwill. During the nine months
ended September 30, 1999, management revised certain estimates related to
certain tax contingencies which resulted in a reduction of goodwill of
approximately $2.6 million. As of September 30, 1999, the purchase price in
excess of identified tangible and intangible assets and liabilities assumed for
the Acquired Businesses in the amount of $135.0 million was allocated 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.
CONTINGENT PAYMENTS
The Company may be required to make contingent payments through
November 2000 to some of the businesses it acquired. These contingent payments
are payable in cash and stock, in one case at the option
7
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APPNET, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(UNAUDITED)
3. ACQUISITIONS (CONTINUED)
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 the
Company's common stock. The majority of the former stockholders must remain
employed by the Company 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 $20.2 million of which $0.2
million was paid during the nine months ended September 30, 1999.
The following unaudited pro forma consolidated amounts give effect to the
1999 acquisitions as if they had occurred on January 1, 1999, by consolidating
the results of operations of the Acquired Businesses with the results of AppNet
for the nine months ended September 30, 1999. The pro forma amounts do not
purport to be indicative of the results of operations that would have been
achieved had the transactions been consummated as of the beginning of 1999 and
are not necessarily representative of future results of operations.
<TABLE>
<CAPTION>
FOR THE NINE MONTHS
ENDED SEPTEMBER 30,
-------------------
1999
-------------------
<S> <C>
Revenues................................................... $ 77,430,000
Net loss attributable to common stockholders............... (53,182,000)
Basic and diluted net loss per share....................... $ (2.54)
</TABLE>
4. ACCRUED LIABILITIES
Accrued liabilities consist of the following:
<TABLE>
<CAPTION>
SEPTEMBER 30, DECEMBER 31,
1999 1998
------------- ------------
<S> <C> <C>
Accrued compensation and benefits........................... $ 4,103,000 $2,590,000
Accrued dividends on Class A Preferred Stock and Class B
Preferred Stock........................................... -- 689,000
Payments due to former shareholders of Acquired
Businesses................................................ 1,600,000 1,500,000
Accrued stock-based and other acquisition-related
compensation.............................................. 14,072,000 --
Other accrued liabilities................................... 9,150,000 2,132,000
----------- ----------
Accrued liabilities......................................... $28,925,000 $6,911,000
=========== ==========
</TABLE>
5. DEBT
In connection with the initial public offering, the Company converted
promissory notes of approximately $0.7 million plus accrued interest into 75,129
shares of the Company's common stock at a conversion price at 80% of the $12.00
initial public offering price. The Company recognized an interest charge of
$1.1 million related to this conversion as the notes contained beneficial
conversion features, which allowed the holders to convert at a discount from the
initial public offering price of the common stock.
During May 1999 and August 1999, the Company converted promissory notes of
approximately $1.5 million plus accrued interest to former owners of an acquired
business into 185,429 shares of the
8
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APPNET, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(UNAUDITED)
5. DEBT (CONTINUED)
Company's common stock at a conversion price of $8.55 per share. During
October 1999, an additional $0.5 million of promissory notes to former owners of
an acquired business plus accrued interest were converted based on a conversion
price of $8.55 per share into 60,082 shares of common stock.
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
$55.0 million in borrowings. The 1999 Credit Facilities consisted of
$40.0 million in credit loans (the "Guaranteed Loans"), which were guaranteed by
a significant stockholder and $15.0 million of additional credit loans (the
"Unguaranteed Loans"). On March 10, 1999, the Company amended the Unguaranteed
Loans increasing available borrowings from $15.0 million to $26.0 million. On
June 23, 1999, in connection with the initial public offering, the Company
terminated the Guaranteed Loans and amended the Unguaranteed Loans decreasing
available borrowings from $26.0 million to $20.0 million (the "Amended 1999
Credit Facility"). The Amended 1999 Credit Facility matures on August 24, 2001.
The Amended 1999 Credit Facility includes 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, place limits on capital expenditures.
In conjunction with the modification of the credit facilities during June
1999, a charge of $0.6 million was recorded to write-off financing costs related
to the facilities.
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.
Debt consists of the following:
<TABLE>
<CAPTION>
SEPTEMBER 30, DECEMBER 31,
1999 1998
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<S> <C> <C>
Credit facilities:
Credit facility, bearing interest at the lender's prime rate
plus .5% (8.25% at December 31, 1998), interest due
monthly................................................... $ -- $19,730,000
Credit facility, bearing interest at the lender's prime rate
(7.75% at December 31, 1998), interest due monthly........ -- 17,731,000
Credit facility, bearing interest at the lender's prime rate
plus .25% to 1.5% or various LIBOR rates plus 2.25% to
3.5%, interest due at varying monthly intervals, interest
rate of 9.75% at September 30, 1999....................... 3,660,000 --
----------- -----------
3,660,000 37,461,000
</TABLE>
9
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APPNET, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(UNAUDITED)
5. DEBT (CONTINUED)
<TABLE>
<CAPTION>
SEPTEMBER 30, DECEMBER 31,
1999 1998
------------- ------------
<S> <C> <C>
Convertible notes:
Note payable, principal and interest due October 13, 1999,
bearing interest at 7%, convertible at the option of the
holder for common stock at $8.55 per share................ 485,000 2,000,000
Note payable, principal and interest due June 29, 2003,
bearing interest at 5%, convertible at 80% of common stock
price upon a sale of Company or an initial public
offering.................................................. -- 406,000
Notes payable, principal and interest due December 14, 2001,
bearing 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,
bearing 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
Note payable, principal and interest due January 8, 2002,
bearing interest at 4.3%, two notes totaling $6,800,000
convertible at the option of the holder for common stock
at $11.40 per share....................................... 6,800,000 --
----------- -----------
9,285,000 4,706,000
Other long-term debt:
Note payable, principal and interest due January 8, 2002,
bearing interest at 6%.................................... 3,500,000 --
Notes payable, principal and interest due January 1, 2000,
bearing 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, bearing
interest at 12%........................................... -- 150,000
Other notes payable......................................... 140,000 475,000
----------- -----------
4,640,000 1,625,000
----------- -----------
Total debt.............................................. 17,585,000 43,792,000
Less current portion........................................ (1,610,000) (2,426,000)
----------- -----------
Long-term debt, net of current portion.................. $15,975,000 $41,366,000
=========== ===========
</TABLE>
6. CAPITAL STOCK
COMMON STOCK SUBJECT TO PUT RIGHTS
In conjunction with a business acquisition in 1998, the Company issued
266,796 shares of Series A-1 Convertible Preferred Stock with a liquidation
value of $1.1 million. Pursuant to their terms, these shares
10
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APPNET, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(UNAUDITED)
6. CAPITAL STOCK (CONTINUED)
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. The Company repurchased 3,889 shares and the put
rights on the remaining 44,882 shares expired in April 1999.
CLASS A AND CLASS B PREFERRED STOCK
In connection with the initial public offering, the Company exchanged 45,430
shares of Class A Preferred Stock and 11,576 shares of Class B Preferred Stock,
including accrued dividends, for 4,936,808 shares of common stock at an exchange
rate based on the initial public offering price of $12.00 per share. Of the
4,936,808 shares of common stock, 3,813,864 shares of common stock were issued
to GTCR Golder Rauner, L.L.C. ("GTCR"), a significant investor of the Company.
The dividends and accretion of financing costs associated with the Class A
and Class B Preferred Stock was $2.1 million for the nine months ended
September 30, 1999 and is classified as Dividends on and accretion of preferred
stock in the accompanying statements of operations.
STOCK WARRANTS
The Company has issued warrants to purchase 84,795 shares of Company Common
Stock at $0.3007 per share, of which Smart Technology, L.L.C., a party related
to the Company's President and Chief Executive Officer held 70,175. In
July 1999, a holder of a warrant for 14,620 shares exercised its warrants. The
values attributable to these warrants at the time of issuance are not
significant and, therefore, have not been separately presented in the
consolidated financial statements.
RESERVED STOCK
At the time of the GTCR Investment, the Company's President and Chief
Executive Officer purchased 1,251,228 shares of Company Common Stock (the
"Reserved Stock") from the Company at a price of $0.3007 per share in exchange
for cash equal to the aggregate par value of the Reserved Stock and a promissory
note for the balance of the aggregate purchase price. The Company and the
Company's President and Chief Executive Officer are parties to a Senior
Management Agreement, dated June 29, 1998. The Senior Management Agreement
provides that the Company may repurchase any or all of the Reserved Stock at the
original purchase price in order to issue a corresponding number of shares and
options to purchase Company Common Stock to certain employees. This repurchase
right terminated upon the closing of the Company's initial public offering, at
that time 210,119 shares of Reserved Stock had not been repurchased by the
Company.
The Company recognized a compensation charge of $2.5 million, recorded as
stock-based and acquisition-related compensation expense, upon completion of the
initial public offering in connection with the termination of the Company's
right to repurchase the remaining shares. The amount of the compensation charge
was determined based on the number of common shares that the Company could
11
<PAGE>
APPNET, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(UNAUDITED)
6. CAPITAL STOCK (CONTINUED)
have repurchased and the difference between $0.3007, the repurchase price, and
the initial public offering price of $12.00 per share.
DEFERRED COMPENSATION
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
expense of $481,000. The amount of deferred compensation expense 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 $67,000 of the
deferred compensation expense for the nine months ended September 30, 1999 in
the unaudited consolidated statement of operations.
7. 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. Approximately 157,000
shares of common stock which are contingently payable pursuant to the
acquisition agreements 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 of potentially dilutive
securities are excluded from diluted earnings per share due to their
antidilutive effect as of September 30, 1999 as follows:
<TABLE>
<S> <C>
Stock options outstanding................................... 2,557,000
Warrants.................................................... 70,000
Convertible notes........................................... 829,000
Contingent shares........................................... 655,000
</TABLE>
8. SEGMENT INFORMATION
The Company currently operates in two operating segments: professional
services and electronic commerce processing. For the nine months ended
September 30, 1999 and 1998, the electronic commerce processing segment was not
significant to the overall financial statements.
9. SUBSEQUENT EVENTS
On September 30, 1999, the stockholders of the Company approved the adoption
of the 1998 Employee Stock Purchase Plan ("ESPP"). The purpose of the Plan is to
enhance stockholder value and promote the attainment of significant business
objectives of the Company by allowing employees to purchase the Company's Common
Stock at a discount of 15%, thereby giving employees an interest in common with
that of the stockholders. The number of shares available for purchase under the
ESPP is 250,000. The purchase price of shares under the plan is the lower of 85%
of the share price on the first day
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APPNET, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(UNAUDITED)
9. SUBSEQUENT EVENTS (CONTINUED)
of the plan quarter or the share price on the plan quarter close. All employees
are eligible to participate except (i) those employed for less than 20 hours per
week; (ii) employees who, as a result of participation in the ESPP, would own
stock or hold options to purchase stock possessing five percent or more of the
total combined voting power or value of all classes of stock of the Company; and
(iii) if such right would permit the employee to purchase stock under the Plan
and any other stock purchase plans of the Company and its subsidiaries in effect
from time to time with a fair market value in excess of $25,000 (determined as
of the first day of each plan quarter) for each calendar year. Participants can
contribute from 1% to 10% of their annual salary. The plan became effective on
October 1, 1999.
In connection with the acquisition of New Media Publishing, Inc. ("NMP"),
contingent purchase payments based upon the achievement of certain operating
targets during the year ended October 1, 1999 are payable in January 2000. Based
on the preliminary results of NMP's operating performance during the period of
performance, 100% of the contingent consideration, or $14.0 million, is payable
to the former shareholders, of which $8.4 million is payable in cash and $5.6
million is payable in stock based on $8.55 per share or 654,971 shares. The fair
value of the stock portion totalled approximately $17.2 million as of
October 1, 1999.
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APPNET, INC.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
The following discussion and analysis compares the three- and nine-month
periods ended September 30, 1999 to the corresponding periods ended
September 30, 1998 for AppNet, Inc. (formerly AppNet Systems, Inc.) and its
subsidiaries ("AppNet," the "Company," "we," "us" and "our") and should be read
in conjunction with the Company's consolidated financial statements and notes
thereto appearing elsewhere in this Form 10-Q and in conjunction with the
Company's March 29, 1999 Registration Statement on Form S-1, as amended. The
matters discussed herein and elsewhere in this 10-Q may include forward-looking
statements within the meaning of the Private Securities Litigation Reform Act of
1995. Forward-looking statements include, without limitation, any statement that
may predict, forecast, indicate or imply future results, performance or
achievements and may contain the words "believe," "anticipate," "expect,"
"estimate," "project," "will be," "will continue," "will likely result" or
similar words or phrases. The matters discussed herein involve risks and
uncertainties which could result in operating performance that is materially
different from that implied in the forward-looking statements. Risks that could
cause actual results to differ materially from those in the forward-looking
statements include, but are not limited to, risks related to government
regulation of the Internet and electronic commerce, risks related to increased
competition in the Internet and electronic commerce industry, the need to
respond to rapid technological advances in the Internet and electronic commerce
industry, risks posed by the Year 2000 problem for the Internet and electronic
commerce industry and general economic conditions. Additional information
concerning these and other risks and uncertainties is contained from time to
time in the Company's filings with the Securities and Exchange Commission. New
risk factors emerge from time to time, and it is not possible for management to
predict all such risk factors nor can it assess the impact of all such risk
factors on the Company's business or the extent to which any factor or
combination of factors may cause actual results to differ materially from those
contained in any forward-looking statements. Given these risks and
uncertainties, investors should not place undue reliance on forward-looking
statements as a prediction of actual results.
OVERVIEW
AppNet provides Internet and electronic commerce professional services and
solutions to medium-sized and large businesses. We develop end-to-end electronic
commerce solutions that improve communication and commerce between businesses
and consumers as well as among businesses and their trading partners. Through
strategic acquisitions and internal growth, we have built a company with the
ability to design, develop, implement and manage end-to-end Internet and
electronic commerce solutions.
From the Company's inception in November 1997 through March 1998, AppNet's
operating activities primarily consisted of developing a preliminary business
plan, recruiting personnel, engaging in discussions with prospective lenders and
strategic investors, identifying potential acquisition targets and developing
preliminary technical and marketing materials. Our strategic plan identified the
specific professional services which are required to provide clients with
end-to-end solutions. We then identified a group of companies which focused on
providing services in one or more of these professional services areas. After
reviewing and evaluating over 100 companies, we ultimately acquired a set of
companies that we believe fit together strategically and culturally and which,
when integrated with one another, could design, develop, implement and manage
end-to-end solutions. In March 1998, we completed our first acquisition. Since
that time, AppNet has completed 11 additional acquisitions.
On June 15, 1999, AppNet declared a 2.85-for-one reverse stock split. All
share and per-share amounts, including stock option information, have been
restated to reflect this reverse stock split.
On June 23, 1999, the Company completed its initial public offering of
securities and issued 6,000,000 shares of common stock at $12.00 per share,
which generated proceeds, net of issuance costs, of approximately
$64.1 million. The proceeds of the offering were used to repay outstanding
borrowings
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under various credit facilities and other outstanding debt, as well as fund
general corporate purposes, including working capital expenditures.
Operating results may fluctuate from quarter to quarter and from year to
year based on such factors as the number, size, type and profitability of
projects in which we are engaged. Other factors that could cause our quarterly
results to fluctuate include:
- effectiveness of integrating acquisitions with existing operations;
- our ability to attract, train and retain skilled management, technical and
creative personnel;
- the entrance of new competitors; and
- timing and size of acquisition-related compensation expense charges which
fluctuate based on the market price of our stock and the level of
achievement of the agreed upon operating targets.
RESULTS OF OPERATIONS
THREE MONTHS ENDED SEPTEMBER 30, 1999 COMPARED TO THE THREE MONTHS ENDED
SEPTEMBER 30, 1998
REVENUES. Revenue for the three months ended September 30, 1999 increased
$27.6 million to $30.1 million from $2.5 million for the three months ended
September 30, 1998 due to acquisitions the Company made during the third quarter
of 1998 and the third quarter of 1999, as well as internal growth.
COST OF REVENUES. Cost of revenues for the three months ended
September 30, 1999 increased $14.3 million to $16.5 million from $2.2 million
for the three months ended September 30, 1998. The increase in cost of revenues
was primarily driven by an increase in average billable headcount resulting from
the acquisitions that occurred during 1998 and 1999, as well as internal growth.
As a percentage of revenues, cost of revenues for the three months ended
September 30, 1998 decreased to 54.9% from 89.3% for the three months ended
September 30, 1998.
OPERATING EXPENSES. Operating expenses for three months ended
September 30, 1999 increased by $31.6 million to $34.5 million from
$2.9 million for the three months ended September 30, 1998. The increase in
operating expenses for the three months ended September 30, 1999 was
attributable primarily to an increase in selling and marketing, general and
administrative, and stock-based and other acquisition-related compensation
expense as well as depreciation and amortization expenses.
SELLING AND MARKETING. Selling and marketing expenses for the three months
ended September 30, 1999 increased $2.8 million to $3.0 million from
$0.2 million for the three months ended September 30, 1998. As a percentage of
revenue, selling and marketing expenses for the three months ended
September 30, 1999 increased to 10.1% from 8.3% for the three months ended
September 30, 1998. The increase in selling and marketing expenses is a result
of the acquisitions we completed during the nine months ended 1998 and the nine
months ended 1999 and the development of our corporate sales and marketing
staff. Selling and marketing expenses could continue to increase as a percentage
of our revenues in future periods as we continue to build our corporate sales
team and expand our marketing strategy.
GENERAL AND ADMINISTRATIVE. General and administrative expenses for the
three months ended September 30, 1999 increased $7.2 million to $8.6 million
from $1.4 million for the three months ended September 30, 1998. The increase in
general and administrative expenses is a result of the build up of corporate
infrastructure through 1998 and into 1999 to assist in the integration of
acquisitions. 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 are expected to continue to increase, although they may
decline as a percentage of our revenues. As a percentage of revenue, general and
administrative expenses for the three months ended September 30, 1999 decreased
to 28.7% from 57.6% for the three months ended September 30, 1998.
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STOCK-BASED AND OTHER ACQUISITION-RELATED COMPENSATION. Stock-based and
other acquisition-related compensation expenses for the three months ended
September 30, 1999 was $7.8 million. The compensation charge during the three
months ended September 30, 1999 is attributable to the contingent payments due
to former shareholders of businesses acquired that must remain employed by
AppNet 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
assumes that operating targets will be fully met. The amount of this
compensation expense may fluctuate in future reports 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.
DEPRECIATION AND AMORTIZATION. Depreciation and amortization expense for
the three months ended September 30, 1999 increased $13.8 million to
$15.0 million from $1.2 million for the three months ended September 30, 1998.
The increase is primarily due to the amortization of intangible assets resulting
from the acquisitions made during the nine months ended 1998 and the nine months
ended 1999. Our goodwill and related amortization may increase in future periods
if AppNet is required to pay additional consideration for its acquisitions.
INTEREST EXPENSE. Interest expense for the three months ended
September 30, 1999 decreased $0.1 million to $0.3 million from $0.4 million for
the three months ended September 30, 1998 due to additional borrowings under our
credit facilities and issuance of notes payable to sellers of businesses
acquired during the nine months ended 1998 and the nine months ended 1999.
INCOME TAX PROVISION. The provision for income taxes was $178,000 for the
three months ended September 30, 1999 and is related to state income taxes.
NINE MONTHS ENDED SEPTEMBER 30, 1999 COMPARED TO THE NINE MONTHS ENDED
SEPTEMBER 30, 1998
REVENUES. Revenue for the nine months ended September 30, 1999 increased
$71.3 million to $74.8 million from $3.5 million for the nine months ended
September 30, 1998 due to acquisitions we made during the second half of 1998
and the first quarter of 1999, as well as internal growth.
COST OF REVENUES. Cost of revenues for the nine months ended September 30,
1999 increased $38.9 million to $42.2 million from $3.3 million for the nine
months ended September 30, 1998. The increase in cost of revenues was primarily
driven by an increase in average billable headcount resulting from the
acquisitions that occurred during 1998 and 1999, as well as internal growth.
OPERATING EXPENSES. Operating expenses for the nine months ended
September 30, 1999 increased $83.6 million to $87.8 million from $4.2 million
for the nine months ended September 30, 1998. The increase in operating expenses
for the nine months ended September 30, 1999 was attributable primarily to an
increase in selling and marketing, general and administrative, and stock-based
and other acquisition-related compensation expenses as well as depreciation and
amortization expenses.
SELLING AND MARKETING. Selling and marketing expenses for the nine months
ended September 30, 1999 increased $5.6 million to $5.8 million from $0.2 for
the nine months ended September 30, 1998. As a percentage of revenues, selling
and marketing expenses for the nine months ended September 30, 1999 increased to
8% from 6% for the nine months ended September 30, 1998. The increase in selling
and marketing expenses is a result of the acquisitions we completed during the
second half of 1998 and the first quarter of 1999 and the development of our
corporate sales and marketing staff.
GENERAL AND ADMINISTRATIVE. General and administrative expenses for the
nine months ended September 30, 1999 increased $21.0 million to $23.3 million
from $2.3 million for the nine months ended September 30, 1998. The increase in
general and administrative expenses is a result of the build up of corporate
infrastructure through 1998 and into 1999 to assist in the integration of
acquisitions. As a result of anticipated additional hiring costs associated with
the integration of the businesses we acquired in the
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second half of 1998 and the first quarter of 1999, our general and
administrative expenses are expected to continue to increase, although they may
decline as a percentage of our revenues. As a percentage of revenue, general and
administrative expenses for the nine months ended September 30, 1999 decreased
to 31% from 67% for the nine months ended September 30, 1998.
STOCK-BASED AND OTHER ACQUISITION-RELATED COMPENSATION. Stock-based and
other acquisition-related compensation expenses for the nine months ended
September 30, 1999 was $15.7 million. Approximately $12.6 million is
attributable to the contingent payments due to former shareholders of businesses
acquired that must remain employed by AppNet 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 assumes that operating targets will be fully
met. The amount of this compensation expense may fluctuate in future periods
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. In addition, we recognized a compensation charge of
$2.5 million during the nine months ended September 30, 1999, recorded as
stock-based and acquisition-related compensation expense, upon completion of the
initial public offering in connection with the termination of our right to
repurchase shares of our common stock from one of our officers. The amount of
the compensation charge was determined based on the number of common shares that
we could have repurchased from the officer and the difference between $0.3007,
the repurchase price, and the initial public offering price of $12.00 per share.
DEPRECIATION AND AMORTIZATION. Depreciation and amortization expense for
the nine months ended September 30, 1999 increased $41.2 million to
$42.9 million from $1.7 million for the nine months ended September 30, 1998.
The increase is primarily due to the amortization of intangible assets resulting
from the acquisitions made during the second half of 1998 and the first quarter
of 1999. Our goodwill and related amortization may increase in future periods if
AppNet is required to pay additional consideration for its acquisitions based on
attainment of certain operating targets.
INTEREST EXPENSE. Interest expense for the nine months ended September 30,
1999 increased $3.6 million to $3.9 million from $0.3 for the nine months ended
September 30, 1998 due to additional borrowings under our credit facilities and
issuance of notes payable to former owners of businesses acquired during the
second half of 1998 and the first quarter of 1999. In connection with our
initial public offering, we had an interest charge of $1.1 million during the
nine months ended September 30, 1999 related to beneficial conversion rights of
notes which contained conversion features at a discount from the initial public
offering price of the common stock.
OTHER EXPENSE, NET. Other expense of $0.6 million for the nine months ended
September 30, 1999 includes the write-off of deferred financing costs in
connection with the refinancing of our credit facilities during the period.
During the nine months ended September 30, 1998, other expense of $0.4 million
included 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 operations of the
venture.
INCOME TAX PROVISION. The provision for income taxes was $0.3 million for
the nine months ended September 30, 1999 and is related to state income taxes.
LIQUIDITY AND CAPITAL RESOURCES
At September 30, 1999, we had approximately $3.2 million in cash and cash
equivalents. We have financed our operations and acquisitions primarily through
the issuance of common stock, borrowings under credit facilities and the
issuance of preferred stock. For the nine months ended September 30, 1999, cash
used in operations was $4.0 million and $32.4 million was used in investing
activities. The principal use of cash in investing activities was to finance
acquisitions. As we continue to grow our business and
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integrate the businesses we have acquired, we expect to use cash from operations
to fund these activities and to fund selling and marketing activities.
Net cash provided by financing activities was $37.1 million for the nine
months ended September 30, 1999. Financing activities included net proceeds from
the initial public offering of $64.1 million, proceeds from issuance of
preferred stock, common stock and exercise of stock options of $7.6 million,
additional borrowings of $74.0 million, offset, in part, by debt repayments of
$107.8 million.
In connection with our initial public offering, we issued 4,936,808 shares
of common stock in exchange for 45,430 shares of Class A Preferred Stock and
11,576 shares of Class B Preferred Stock, including accrued dividends, at an
exchange rate based on the initial public offering price of $12.00 per share. We
also issued 123,210 shares of common stock on conversion of promissory notes of
approximately $1.0 million plus accrued interest at a conversion price of $8.55
per share and issued 75,129 shares of common stock on conversion of promissory
notes of approximately $0.7 million plus accrued interest at a conversion price
at 80% of our June 1999 initial public offering price of $12.00 per share.
In connection with certain acquisitions, we issued notes to the selling
stockholders some of which are convertible into shares of our common stock. The
balance of the notes at September 30, 1999 was approximately $13.8 million,
$9.3 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 4.3% and 8.0% as of September 30, 1999.
In June 1999, we terminated one of our credit facilities that provided for a
revolving line of credit up to $40.0 million, which was guaranteed by an
affiliate, and decreased the available borrowings from $26.0 million to
$20.0 million on our other unguaranteed facility. The amended unquaranteed
credit facility expires on August 24, 2001, and bears interest, at our option,
at LIBOR or the lenders' prime rate, plus an applicable margin based on our
operating performance. The credit facility is secured by all of our assets and
contains various restrictive covenants that, among other things, require us to
maintain specified financial ratios, restrict us from paying dividends to our
common stockholders. At September 30, 1999, approximately $11.8 million remained
available for borrowing under our credit facility based on the level of
financial ratios, as set forth in the credit facility.
Our capital expenditures for the nine months ended September 30, 1999 were
approximately $5.1 million. Historically, capital expenditures have been used to
make leasehold improvements to our leased office space and to purchase computer
hardware and software and furniture and fixtures. We do not have any material
commitments for capital expenditures for the foreseeable future. However, we do
plan to make capital expenditures, which may include office space, over the next
two years to further develop our electronic commerce outsourcing and internet
professional services.
We may be required to make contingent payments through November 2000 to some
of the businesses we acquired. These contingent payments are payable in cash and
stock, in one case at the option of the former 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 $11.5 million.
In connection with our acquisition of New Media Publishing, contingent
purchase payments based upon the achievement of certain operating targets during
New Media Publishing's 12 months ended October 1, 1999 are payable in
January 2000. Based on the preliminary results of New Media Publishing's
operating performance during the applicable period, we expect to pay contingent
consideration, of approximately $8.4 million in cash and 654,971 shares of our
common stock.
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
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portion of our contingent payments and pursue our business strategy for the next
18 months. To the extent AppNet is unable to fund its operations from cash flows
and existing credit facilities during or following the next 18 months, it may
need to obtain financing from external sources either by issuing additional
equity or incurring additional indebtedness.
RECENT ACCOUNTING PRONOUNCEMENTS
In June 1998, the Financial Accounting Standards Board issued SFAS No. 133,
"Accounting for Derivatives and Hedging Activities", which establishes
accounting and reporting standards for derivative instruments, including
derivative instruments embedded in other contracts, and for hedging activities.
SFAS No. 133, as amended, is effective for all fiscal quarters of fiscal years
beginning after June 15, 2000. We have determined that the adoption of SFAS
No. 133 will not have a material effect on our results of operations, financial
position or cash flows.
YEAR 2000
We have completed an assessment of our Year 2000 readiness and have made
substantial progress in making our systems Year 2000 compliant. The risks posed
by the Year 2000 issue could adversely affect our business in a number of
significant ways. Many of our clients and potential clients maintain their
operations on systems that could be impacted by Year 2000 problems. If our
clients fail to ensure their systems are Year 2000 compliant and Year 2000
problems materially adversely affect them, our business could be adversely
affected, particularly if demand for our services declines as companies spend
their resources to upgrade their computer systems. We rely on our suppliers for
hardware, software and services. Our business could be adversely affected if we
cannot obtain products, services or systems that are Year 2000 compliant when we
need them. We also depend on the availability of the Internet infrastructure to
conduct our business and provide services to our clients. Disruptions in the
Internet infrastructure arising from Year 2000 problems could materially
adversely affect our business, financial condition and results of operations. In
addition, our solutions are sometimes dependent upon third-party products and
components. Failure of a third party whose products or services we employ to
adequately address Year 2000 issues could result in our involvement in
litigation concerning our products and services or those of a third party.
Futhermore, because we provide computer-related services, the risk we will be
involved in a lawsuit relating to Year 2000 issues is likely to be greater than
that of companies in other industries. We sometimes provide express warranties
to clients that our work is Year 2000 compliant.
We have received assurances from all of our major suppliers that they are
Year 2000 compliant. We have established a Year 2000 Executive Steering
Committee, appointed a Year 2000 Compliance Program Manager and adopted a formal
compliance program to oversee and coordinate our Year 2000 compliance efforts
throughout our organization. This program is designed to ensure consistency and
minimize the impact of Year 2000 problems on our operations. Our Year 2000
compliance program consists of the following five phases: awareness, assessment,
remediation, testing and implementation. We have completed the awareness and
assessment phases of our Year 2000 compliance program. We estimate that we are
approximately 90% complete in our Year 2000 remediation efforts across the
entire organization. We have completed our testing and implementation phases at
a number of our locations and have begun this process at several others.
In the event we do not complete the phases of our program, we may fail to
meet contractual obligations, provide adequate service or meet customer
requirements. The result of such failures could subject us 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 have been
approximately $0.4 million. At this time, we estimate the potential additional
costs of becoming Year 2000 compliant to be between $0.2 million and $0.4
million, which includes the cost to replace hardware and software, outside
consulting
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services and some internal labor costs. However, as we continue to implement our
Year 2000 compliance program, these cost estimates may need to be significantly
revised, which could have a material adverse effect on our business, financial
condition or results of operations.
As part of our plan to integrate the back-office functions of the businesses
we have acquired, we are implementing new, uniform internal information systems,
such as general ledger, billing, accounts payable and payroll, throughout our
organization. Although we have received assurances from our vendors that these
new systems are Year 2000 compliant, our internal systems may experience
operational difficulties because of undetected errors or defects in the
technology used.
If we fail to address a Year 2000 compliance problem in one of our systems,
the result could be a failure or interruption of normal business operations. We
believe that our Year 2000 compliance program, when fully implemented, should
minimize the risk of significant interruptions to our operations. Currently, we
do not have an expected completion date for our compliance program. At this
point, we believe that the most reasonably likely worst case scenario may
involve circumstances 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.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
We are exposed to market risk related to changes in interest rates on our
long-term credit facility. We are able to manage our interest rate risk to some
degree through management's option to select the factor used to determine its
interest rate. Our credit facility is a variable rate credit facility and bears
interest, at our option, at LIBOR or the lenders' prime rate plus an applicable
margin based on our operating performance. The balance outstanding as of
September 30, 1999 was $3.7 million, which bears interest at a rate of 9.75%.
Assuming the amount outstanding at September 30, 1999, which was $3.7 million,
was outstanding for the entire year, we estimate that a one percentage point
change to the weighted average interest rate at September 30, 1999 would equal a
$0.1 million change in interest expense.
PART II. OTHER INFORMATION
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS
On June 23, 1999, AppNet issued 4,936,808 shares of its common stock in
exchange for 45,430 shares of its Class A Preferred Stock and 11,576 shares of
its Class B Preferred Stock at an exchange rate of
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$12.00 per share. These securities were issued without registration under the
Securities Act of 1933, as amended, in reliance upon an exemption from
registration under Section 3(a)(9).
On June 23, 1999, AppNet issued 75,129 shares of its common stock upon the
conversion of promissory notes of approximately $0.7 million plus accrued
interest at a conversion price of $9.60 per share. These securities were issued
without registration under the Securities Act of 1933, as amended, in reliance
upon an exemption from registration under Section 3(a)(9).
The Company used the net proceeds from its initial public offering to repay
outstanding borrowings under various credit facilities and other outstanding
debt in an amount aggregating $62.4 million and for general corporate purposes,
including working capital expenditures, in an amount aggregating $1.7 million.
Except for a repayment of approximately $3,300 to Smart Technology, L.L.C., an
associate of our Chief Executive Officer, none of the net proceeds were used to
make direct or indirect payments to directors or officers of AppNet, their
associates or to others, or to persons owning ten (10) percent or more of any
class of equity securities of AppNet or to affiliates of AppNet.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
Certain stockholders of the Company holding an aggregate of 16,731,741
shares, or approximately 53.7%, of the Company's issued and outstanding Common
Stock, acting by written consent in accordance with Delaware law and the
Company's By-laws, approved the following effective September 30, 1999:
1. An amendment to the Company's Restated Certificate of Incorporation
pursuant to which the Company's Board of Directors authorized the changing
of the Company's corporate name from AppNet Systems, Inc. to AppNet, Inc.;
and
2. The adoption of the Company's 1999 Employee Stock Purchase Plan.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
10.1 Recapitalization Agreement, dated as of June 16 , 1999, by and among
AppNet Systems, Inc. and the holders of its Class A Preferred Stock
and the holders of its Class B Preferred Stock.
10.2 AppNet, Inc. 1999 Stock Incentive Plan.
10.3 Limited Consent Letter Agreement, dated August 16, 1999, by Bank
Boston, N.A., Antares Capital Corporation, and AppNet, Inc. and
certain of its subsidiaries, relating to the Revolving Credit
Agreement, dated as of January 8, 1999.
27 Financial Data Schedule
(b) Reports on Form 8-K during the three months ended September 30, 1999:
None.
21
<PAGE>
SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934, as
amended, the registrant has duly caused this report to be signed on its behalf
by the undersigned thereunto duly authorized.
<TABLE>
<S> <C> <C>
APPNET, INC.
By: /s/ JACK PEARLSTEIN
-----------------------------------------
Jack Pearlstein
SENIOR VICE PRESIDENT, CHIEF FINANCIAL
OFFICER
Date: October 28, 1999 AND TREASURER
</TABLE>
22
<PAGE>
Exhibit 10.1
RECAPITALIZATION AGREEMENT
THIS RECAPITALIZATION AGREEMENT (this "AGREEMENT") is made as
of June 16, 1999 among AppNet Systems, Inc., a Delaware corporation (the
"COMPANY"), GTCR Fund VI, L.P., a Delaware limited partnership ("GTCR FUND VI"),
GTCR VI Executive Fund, L.P., a Delaware limited partnership ("EXECUTIVE FUND"),
GTCR Associates VI, a Delaware general partnership ("ASSOCIATES FUND" and,
together with GTCR Fund VI and the Executive Fund, the "GTCR INVESTORS"), FSC
Corp. ("FSC"), Bajaj Enterprises, LLC ("BAJAJ ENTERPRISES" and, together with
the GTCR Investors and FSC, the "STOCKHOLDERS"). Except as otherwise indicated
herein, capitalized terms used herein are defined in Section 5 hereof.
Each Stockholder owns the number of shares of the Company's
Class A Preferred Stock, par value $.01 per share (the "CLASS A PREFERRED") set
forth opposite such Stockholder's name on the SCHEDULE OF STOCKHOLDERS attached
hereto.
Section 1B of Part B.II. of Article Four of the Company's
Fourth Restated Certificate of Incorporation (the "CERTIFICATE") provides that
the Company shall, at the request of the holders of a majority of the Class A
Preferred, apply the net cash proceeds from any public offering of equity
securities to redeem the outstanding shares of Class A Preferred at a price
equal to the liquidation value thereof plus accrued and unpaid dividends
thereon. Section 6(l) of the Merger Agreement, dated as of July 31, 1998 (the
"MERGER AGREEMENT") by and among the Company, SSC Acquisition Sub #1, Inc.,
Software Services Corporation ("SSC") and the shareholders of SSC, provides that
in the event of an initial public offering of equity securities by the Company
the Company shall take all actions necessary so that the Company's Class B
Preferred Stock, par value $.01 per share (the "CLASS B PREFERRED") is either
(i) converted into shares of the Company's common stock or (ii) entitled to
receive the same per share consideration as that paid with respect to the Class
A Preferred.
The Company has filed a Registration Statement on Form S-1
(File No. 333-75205) (the "REGISTRATION STATEMENT") with the Securities and
Exchange Commission relating to an initial public offering (the "INITIAL PUBLIC
OFFERING") of the Company's common stock, par value $.0005 per share (the
"COMMON STOCK"), under the Securities Act. The Stockholders desire that the
Company redeem the shares of Class A Preferred with the net proceeds of the
Initial Public Offering after payment of underwriting discounts and reasonable
out-of-pocket fees and expenses incurred in connection therewith (the "NET
PROCEEDS"). However, the Company desires to use a portion of the Net Proceeds to
repay certain outstanding indebtedness, as described in the Registration
Statement (the "INDEBTEDNESS") and to maintain certain proceeds for working
capital as required by the Company's lenders. If the Company applies the
proceeds as set forth above, the remaining Net Proceeds may not be sufficient to
redeem all outstanding shares of Class A Preferred and Class B Preferred.
The Stockholders and the Company desire to enter into an
agreement pursuant to which (i) the Net Proceeds remaining after the repayment
of the Indebtedness and after the application of proceeds as required by the
Company's lenders shall be used by the Company to
<PAGE>
redeem shares of Class A Preferred and Class B Preferred and (ii) to the extent
that the remaining Net Proceeds of the Initial Public Offering are not
sufficient to redeem all shares of Class A Preferred and Class B Preferred, the
remaining shares of Class A Preferred and Class B Preferred shall be exchanged
for shares of Common Stock.
The parties hereto agree as follows:
Section 1. REDEMPTION AND EXCHANGE.
1A. PAYMENT OF INDEBTEDNESS; REDEMPTION. At the Closing, the
Company shall apply the Net Proceeds to repay the Indebtedness and to maintain
certain proceeds for working capital, as required pursuant to a letter dated May
28 1999 from BankBoston, N.A. and Antares Capital Corporation (a copy of which
is attached as EXHIBIT A hereto) (the "BANK BOSTON LETTER"). Subject to the
terms of the BankBoston Letter, the Company shall use the remaining Net Proceeds
to redeem shares of Class A Preferred and Class B Preferred, on a pro rata basis
according to the aggregate liquidation value and accrued and unpaid dividends of
the Class A Preferred and Class B Preferred, respectively. The redemption price
for each share of Class A Preferred Stock shall equal the liquidation value
thereof plus accrued and unpaid dividends thereon. The redemption of the Class A
Preferred Stock pursuant to this Section 1A is referred to herein as the
"REDEMPTION." At the Closing (as defined below), each Stockholder shall tender
to the Company the shares of Class A Preferred Stock held by such Stockholder
which are being redeemed pursuant to the Redemption. As described below in
Section 1B, any shares of Class A Preferred Stock not so tendered shall have the
right to receive Exchange Shares.
1B. EXCHANGE OF THE REMAINING SHARES OF CLASS A PREFERRED
STOCK. At the Closing, the Company shall issue to each Stockholder a number of
shares of Common Stock equal to (i) the aggregate liquidation value plus accrued
and unpaid dividends of the shares of Class A Preferred Stock, if any, held by
such Stockholder after giving effect to the Redemption divided by (ii) the
initial offering price of a share of Common Stock in the Initial Public
Offering, in exchange for the surrender to the Company and cancellation of the
shares of Class A Preferred Stock, if any, remaining after giving effect to the
Redemption and held by such Stockholder. The shares of Common Stock to be issued
to the Stockholders hereunder are referred to herein as the "EXCHANGE SHARES."
If a fractional share of Exchange Shares would be issuable to a Stockholder
pursuant to this Section 1B, the Company shall deliver to such Stockholder cash
in lieu of such fractional share in an amount equal to the percentage of a share
represented by such fractional interest multiplied by the initial offering price
of a share of Common Stock in the Initial Public Offering.
1C. THE CLOSING. The closing of the transactions contemplated
hereby (the "CLOSING") shall take place concurrently with the consummation of
the Initial Public Offering and at the same location. As of the Closing, all
shares of outstanding Class A Preferred shall automatically be canceled and
retired and 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 the Recapitalization Consideration therefor upon the surrender
of such certificate in the manner provided
- 2 -
<PAGE>
in this Section 1C. At the Closing and thereafter, upon presentment and delivery
by each such Stockholder to the Company of the certificates representing the
Class A Preferred Stock held by such Stockholder duly endorsed for transfer to
the Company, the Company (i) shall pay to each Stockholder the aggregate
redemption price for the shares of Class A Preferred Stock being redeemed, (ii)
shall deliver, or cause the Company's transfer agent to deliver, to each
Stockholder stock certificates evidencing the Exchange Shares to be issued by
the Company to each such Stockholder, registered in each such Stockholder's name
or its nominee's name, and (iii) shall deliver to each Stockholder cash for any
fractional shares of Exchange Stock (collectively, the "RECAPITALIZATION
CONSIDERATION"). Until surrendered as contemplated in this Section 1C, each
certificate representing Class A Preferred shall be deemed at any time after the
Closing to represent only the right to receive the Recapitalization
Consideration. Each certificate for Exchange Shares shall be imprinted with a
legend in substantially the following form:
The shares represented by this certificate have not been
registered under the Securities Act of 1933 (the "Act") or
applicable state securities law and may not be sold or
transferred unless (i) a registration statement covering such
shares is effective under the Act or (ii) the transaction is
exempt from registration under the Act and, if the Company
reasonably requests, an opinion reasonably satisfactory to the
Company to such effect has been rendered by counsel.
Section 2. CONDITIONS OF EACH STOCKHOLDER'S OBLIGATION AT THE
CLOSING. The obligation of each Stockholder to deliver its shares of Class A
Preferred Stock for redemption and exchange hereunder at the Closing is subject
to the satisfaction as of the Closing of the following conditions:
2A. REPRESENTATIONS AND WARRANTIES. The representations and
warranties contained in Section 3 hereof shall be true and correct in all
material respects at and as of the Closing as though then made, except to the
extent of changes caused by the transactions expressly contemplated herein.
2B. INITIAL PUBLIC OFFERING. The Company shall consummate the
Initial Public offering concurrently with the transactions contemplated hereby.
2C. AMENDMENT OF CERTIFICATE OF INCORPORATION; AMENDMENT TO
PURCHASE AGREEMENT. The Company shall have amended and restated its certificate
of incorporation in the form of EXHIBIT B attached hereto (the "RESTATED
CERTIFICATE"), the Restated Certificate shall be in full force and effect as of
the Closing under the laws of Delaware and shall not have been further amended
or modified. The Company shall have entered into an amendment to the Purchase
Agreement, dated June 29, 1998 (the "PURCHASE AGREEMENT"), among the Company,
GTCR Golder Rauner, L.L.C. and Smart Technology, L.L.C., substantially in the
form of EXHIBIT C attached hereto, and the Purchase Agreement as so amended
shall be in full force and effect and shall not have been further amended or
modified.
- 3 -
<PAGE>
2D. SECURITIES LAW COMPLIANCE. The Company shall have made all
filings under all applicable federal and state securities laws necessary to
consummate the issuance of the Common Stock pursuant to this Agreement in
compliance with such laws.
2E. ISSUANCE OF CAPITAL STOCK. From the date hereof until the
Closing Date, the Company shall not have issued any additional shares of its
capital stock other than in connection with (i) the conversion of outstanding
options and convertible notes and (ii) the Initial Public Offering.
2F. CLOSING DOCUMENTS. The Company shall have delivered to
each Stockholder the following documents, which shall be in form and substance
reasonably satisfactory to the holders of a majority of the shares of Class A
Preferred Stock:
(a) A certificate of an authorized officer of the Company
stating that the conditions specified in Sections 2A
through 2E, inclusive, have been satisfied.
(b) Certified copies of (i) the resolutions adopted by the
Company's board of directors authorizing the execution,
delivery and performance of this Agreement and all other
agreements contemplated hereby, the filing of the Restated
Certificate, the issuance of the Exchange Shares and the
consummation of all other transactions contemplated by
this Agreement, and (ii) the resolutions duly adopted by
the Company's stockholders adopting the Restated
Certificate.
(c) Certified copies of the Restated Certificate and the
Company's bylaws, each as in effect at the Closing.
2G. WAIVER. Any condition specified in this Section 2 may be
waived if consented to by the holders of a majority of the shares of Class A
Preferred Stock held by all Stockholders.
Section 3. REPRESENTATIONS AND WARRANTIES OF THE COMPANY. As a
material inducement to the Stockholders to enter into this Agreement and to
perform their obligations hereunder, the Company hereby represents and warrants
that:
3A. ORGANIZATION AND CORPORATE POWER. The Company is a
corporation duly organized, validly and in good standing under the laws of
Delaware and is qualified to do business in every jurisdiction in which the
failure to so qualify has had or would reasonably be expected to have a material
adverse effect on the financial condition, operating results, assets or
operations or business prospects of the Company and its Subsidiaries taken as a
whole.
- 4 -
<PAGE>
3B. AUTHORIZATION, NO BREACH. The execution, delivery and
performance of this Agreement and all other agreements contemplated hereby to
which the Company is a party have been duly authorized and the Restated
Certificate has been duly authorized and executed by the Company. This Agreement
and all other agreements contemplated hereby to which the Company is a party
each constitutes a valid and binding obligation of the Company, enforceable in
accordance with its terms. Subject to the filing of the Restated Certificate
with the Secretary of State of the State of Delaware, the execution and delivery
by the Company of this Agreement and all other agreements contemplated hereby to
which the Company is a party, the issuance of the Exchange Shares hereunder, and
the fulfillment of and compliance with the respective terms hereof and thereof
by the Company, do not and shall not (i) conflict with or result in a breach of
the terms, conditions or provisions of, (ii) constitute a default under, (iii)
result in the creation of any lien, security interest, charge or encumbrance
upon the Company's or any Subsidiary's capital stock or assets pursuant to, (iv)
give any third party the right to modify, terminate or accelerate any obligation
under, (v) result in a violation of, or (vi) require any authorization, consent,
approval, exemption or other action by or notice or declaration to, or filing
with, any court or administrative or governmental body or agency pursuant to,
the Certificate or the certificate of incorporation of any Subsidiary, or any
law, statute, rule or regulation to which the Company or any Subsidiary is
subject, or any agreement, instrument, order, judgment or decree to which the
Company or any Subsidiary is a party or by which their respective property is
bound, other than as expressly contemplated in such agreements described above
and other than those made and obtained.
3C. CAPITAL STOCK AND RELATED MATTERS. As of the date hereof,
the authorized capital stock of the Company consists of 75,000,000 shares of
Common Stock, 20,068,010 of which are issued and outstanding, and 5,000,000
shares of preferred stock, par value $.01 per share, of which 96,621 are
designated as Class A Preferred (45,430.035407 of which are issued and
outstanding) and 20,000 are designated as Class B Preferred (11,576 of which are
issued and outstanding). As of the Closing, all of the outstanding shares of the
Company's capital stock (including the Exchange Shares) shall be validly issued,
fully paid and non-assessable. There are no statutory, or contractual
stockholders preemptive rights or rights of refusal with respect to the issuance
of Exchange Shares hereunder which have not been waived or terminated. The
offer, sale and issuance of the Exchange Shares hereunder do not require
registration under the Securities Act or any applicable state securities laws.
Section 4. REPRESENTATIONS AND WARRANTIES OF THE STOCKHOLDERS.
Each Stockholder hereby represents and warrants to the Company, as to itself
only and not jointly and severally, that:
4A. AUTHORIZATION; ENFORCEABILITY. The execution, delivery and
performance of this Agreement and all other agreements contemplated hereby to
which the Stockholder is a party each constitutes a valid and binding obligation
of such Stockholder, enforceable in accordance with its terms.
- 5 -
<PAGE>
4B. NO VIOLATION. The execution and delivery by the
Stockholder of this Agreement and all other agreements contemplated hereby to
which the Stockholder is a party, and the fulfillment of and compliance with the
respective terms hereof and thereof by the Stockholder, will not (a) conflict
with, result in a breach of any of the terms, conditions or provisions of, (b)
constitute a default under, (c) result in the violation of, (d) result in the
creation of any lien, security interest, charge or encumbrance upon such
Stockholders' Class A Preferred Stock, (e) give any third party the right to
terminate or to accelerate any obligation under, or (f) require any
authorization, consent, approval, execution or other action by or notice to or
filing with any court or administrative or governmental body under, the
provisions of the certificate of incorporation or bylaws of the Stockholder
(where the Stockholder is an incorporated entity) or any statute, regulation,
rule, judgment, order, decree or other restriction of any government,
governmental agency or court to which the Stockholder is subject or by which
its, his or her property is bound or any agreement to which the Stockholder is a
party.
4C. OWNERSHIP. Each Stockholder owns the shares of Class A
Preferred Stock set forth opposite such Stockholder's name on the SCHEDULE OF
STOCKHOLDERS free and clear of any restrictions on transfer, claims, taxes,
liens, charges, encumbrances, pledges, security interests, options, warrants,
rights, contracts, calls, commitments, equities and demands, except for
applicable restrictions on transfer under securities laws.
Section 5. DEFINITIONS. For the purposes of this Agreement,
the following terms have the meanings set forth below:
"PERSON" means an individual, a partnership, a corporation, a
limited liability company, an association, a joint stock company, a trust, a
joint venture, an unincorporated organization and a governmental entity or any
department, agency or political subdivision thereof.
"SECURITIES ACT" means the Securities Act of 1933, as amended,
or any similar federal law then in force.
"SUBSIDIARY" means, with respect to any Person, any
corporation, limited liability company, partnership, association or other
business entity of which (i) if a corporation, a majority of the total voting
power of shares of stock entitled (without regard to the occurrence of any
contingency) to vote in the election of directors, managers or trustees thereof
is at the time owned or controlled, directly or indirectly, by that Person or
one or more of the other Subsidiaries of that Person or a combination thereof,
or (ii) if a limited liability company, partnership, association or other
business entity, a majority of the partnership or other similar ownership
interest thereof is at the time owned or controlled, directly or indirectly, by
any Person or one or more Subsidiaries of that Person or a combination thereof.
For purposes hereof, a Person or Persons shall be deemed to have a majority
ownership interest in a limited liability company, partnership, association or
other business entity if such Person or Persons shall be allocated a majority of
limited liability company, partnership, association or other business entity
gains or losses or shall be or control any managing director or general partner
of such limited liability company, partnership, association or other
- 6 -
<PAGE>
business entity.
Section 6. MISCELLANEOUS.
6A. TERMINATION. This Agreement shall terminate upon the
earlier of (i) July 31, 1999, if the Initial Public Offering has not occurred by
such date, and (ii) the delivery of notice by the Company to each Stockholder
that the Initial Public Offering will not be consummated.
6B. REMEDIES. Any Person having any rights under any provision
of this Agreement shall be entitled to enforce such rights specifically (without
posting a bond or other security), to recover damages by reason of any breach of
any provision of this Agreement and to exercise all other rights granted by law.
6C. CONSENT TO AMENDMENTS. Except as otherwise expressly
provided herein, the provisions of this Agreement may be amended and the Company
may take any action herein prohibited, or omit to perform any act herein
required to be performed by it, only if the Company has obtained the written
consent of the holders of a majority of the Class A Preferred Stock (or the
Exchange Shares issued in exchange therefor).
6D. SURVIVAL OF REPRESENTATIONS AND WARRANTIES. All
representations and warranties contained herein or made in writing by any party
in connection herewith shall survive the execution and delivery of this
Agreement and the consummation of the transactions contemplated hereby,
regardless of any investigation made by any Stockholder or on its behalf.
6E. SUCCESSORS AND ASSIGNS. Except as otherwise expressly
provided herein, all covenants and agreements contained in this Agreement by or
on behalf of any of the parties hereto shall bind and inure to the benefit of
the respective successors and assigns of the parties hereto whether so expressed
or not. In addition, and whether or not any express assignment has been made,
the provisions of this Agreement which are for any Stockholder's benefit as a
Stockholder or holder of Class A Preferred Stock or Exchange Shares are also for
the benefit of, and enforceable by, any subsequent holder of such Class A
Preferred Stock or Exchange Shares, as the case may be.
6F. SEVERABILITY. Whenever possible, each provision of this
Agreement shall be interpreted in such manner as to be effective and valid under
applicable law, but if any provision of this Agreement is held to be prohibited
by or invalid under applicable law, such provision shall be ineffective only to
the extent of such prohibition or invalidity, without invalidating the remainder
of this Agreement.
6G. COUNTERPARTS. This Agreement may be executed
simultaneously in two or more counterparts. any one of which need not contain
the signatures of more than one party, but all such counterparts taken together
shall constitute one and the same Agreement.
6H. DESCRIPTIVE HEADINGS, INTERPRETATION. The descriptive
headings of this
- 7 -
APNTREC7.WPD
<PAGE>
Agreement are inserted for convenience only and do not constitute a substantive
part of this Agreement. The use of the word "'including" in this Agreement shall
be by way of example rather than by limitation.
6I. GOVERNING LAW. All questions concerning the construction,
validity and interpretation of this Agreement and the exhibits and schedules
hereto shall be governed by the internal law, and not the law of conflicts, of
Delaware.
6J. NOTICES. All notices, demands or other communications to
be given or delivered under or by reason of the provisions of this Agreement
shall be in writing and shall be deemed to have been given when delivered
personally to the recipient, sent to the recipient by reputable overnight
courier service (charges prepaid) or telecopied to the recipient. Such notices,
demands and other communications shall be sent to the Company and each
Stockholder at the address indicated next to such party's name on the signature
pages hereto or to such other address or to the attention of such other person
as the recipient party has specified by prior written notice to the sending
party.
6K. ENTIRE AGREEMENT. Except as otherwise expressly set forth
herein, this Agreement embodies the complete agreement among the parties hereto
with respect to the subject matter hereof and supersedes and preempts any prior
understandings, agreements or representations by or among the parties, written
or oral, which may have related to the subject matter hereof in any way. Without
limiting the foregoing, each of the Company and each Stockholder hereby waives
any rights it may have under the Certificate with respect to the redemption or
conversion of the Class A Preferred Stock and agrees that this Agreement shall
govern such matters.
* * * * *
- 8 -
<PAGE>
IN WITNESS WHEREOF, the parties hereto have executed this
Recapitalization Agreement on the date first written above.
Address: APPNET SYSTEMS, INC.
6707 Democracy Boulevard
Suite 1000
Bethesda, MD 20817 By: /s/
Attention: Ken S. Bajaj ------------------------------
Telecopier: 301/581-2488 Its:
-----------------------------
Address: GTCR FUND VI, L.P.
6100 Sears Tower
Chicago, IL 60606-6402 By: GTCR Partners VI, L.P.
Attention: Philip A. Canfield Its: General Partner
Telecopier: 312/382-2201
By: GTCR Golder Rauner, L.L.C.
Its: General Partner
By: /s/
------------------------------
Name: Philip A. Canfield
Its: Principal
Address: GTCR VI EXECUTIVE FUND, L.P.
6100 Sears Tower
Chicago, IL 60606-6402 By: GTCR Partners VI, L.P.
Attention: Philip A. Canfield Its: General Partner
Telecopier: 312/382-2201
By: GTCR Golder Rauner, L.L.C.
Its: General Partner
By: /s/
------------------------------
Name: Philip A. Canfield
Its: Principal
- 9 -
<PAGE>
Address: GTCR ASSOCIATES VI
6100 Sears Tower
Chicago, IL 60606-6402 By: GTCR Partners VI, L.P.
Attention: Philip A. Canfield Its: Managing General Partner
Telecopier: 312/382-2201
By: GTCR Golder Rauner, L.L.C.
Its: General Partner
By: /s/
------------------------------
Name: Philip A. Canfield
Its: Principal
Address: BAJAJ ENTERPRISES, LLC
c/o Ken S. Bajaj
10201 Norton Road
Potomac, MD 20854 By: /s/
------------------------------
Name: Ken S. Bajaj
Its: Manager
Address: FSC CORPORATION
c/o Mary Reilly
Bank Boston Capital
175 Federal St., 10th Floor By: /s/
Boston, MA 02110 ------------------------------
Telecopier: 618/434-1153 Its:
-----------------------------
- 10 -
<PAGE>
SCHEDULE OF STOCKHOLDERS
<TABLE>
<CAPTION>
Name Shares of Class A Preferred
- ---- ---------------------------
<S> <C>
GTCR Fund VI, L.P. 43,753.961602
GTCR VI Executive Fund, L.P. 313.67123
GTCR Associates VI 99.066029
Bajaj Enterprises, LLC 901.369805
FSC Corp. 361.966741
</TABLE>
- 11 -
<PAGE>
Exhibit 10.2
APPNET SYSTEMS, INC.
1999 STOCK INCENTIVE PLAN
AS OF JUNE 17, 1999
<PAGE>
APPNET SYSTEMS, INC.
1999 STOCK INCENTIVE PLAN
1. PURPOSE.
The purpose of this Plan is to strengthen AppNet Systems, Inc., a
Delaware corporation (the "Company"), by providing an incentive to its
employees, officers, directors and consultants and thereby encouraging them to
devote their abilities and industry to the success of the Company's business
enterprise. It is intended that this purpose be achieved by extending to
employees (including future employees who have received a formal written offer
of employment), officers, directors, and consultants of the Company and its
Subsidiaries an added long-term incentive for high levels of performance and
unusual efforts through the grant of Incentive Stock Options, Nonqualified Stock
Options, Formula Options, Stock Appreciation Rights, Dividend Equivalent Rights,
Performance Awards, Share Awards, Phantom Stock and Restricted Stock (as each
term is herein defined).
2. DEFINITIONS.
For purposes of the Plan:
2.1 "ADJUSTED FAIR MARKET VALUE" means, in the event of a
Change in Control, the highest price per Share paid to holders of the Shares in
any transaction (or series of related transactions) constituting or resulting in
a Change in Control other than pursuant to Section 2.10(b).
2.2 "AFFILIATE" means, with respect to any Person, any other
Person that, directly or indirectly through one or more intermediaries,
controls, or is controlled by, or under common control with, such Person. Any
Relative (for this purpose, "Relative" means a spouse, child, parent, parent of
spouse, sibling or grandchild) of an individual shall be deemed to be an
Affiliate of such individual for purposes hereof. Neither the Company nor any
Person controlled by the Company shall be deemed to be an Affiliate of any
holder of Company stock.
2.3 "AGREEMENT" means the written agreement between the
Company and an Optionee or Grantee evidencing the grant of an Option or Award
and setting forth the terms and conditions thereof.
<PAGE>
2.4 "AWARD" means a grant of Restricted Stock, Phantom
Stock, a Stock Appreciation Right, a Performance Award, a Dividend Equivalent
Right, a Share Award, or any or all of them.
2.5 "BENEFICIAL OWNERSHIP" means ownership within the
meaning of Rule 13d-3 promulgated under the Exchange Act.
2.6 "BENEFICIARY" means an individual, trust or estate who
or which, by a written designation of the Optionee or Grantee filed with the
Company by operation of law succeeds to the rights and obligations of the
Optionee or Grantee under the Plan and an Agreement upon the Optiontee's or
Grantee's death.
2.7 "BOARD" means the Board of Directors of the Company.
2.8 "CAUSE" means:
(a) for purposes of Section 6.4, the term "Cause" shall
mean (i) intentional failure to perform duties as a Director, (ii) intentional
misrepresentation or the commission of an act of fraud in the performance of
such duties, (iii) breach of fiduciary duty involving personal profit including,
without limitation, embezzlement, misappropriation or conversion of assets or
opportunities of the Company or any of its Subsidiaries or (iv) willful
violation of any law, rule or regulation (other than traffic violations or
similar offenses) in connection with the performance of duties as a Director;
provided, HOWEVER, that if the term "Cause" is defined in the Articles of
Incorporation of the Company, Cause shall have the meaning given such term in
such Articles, or
(b) in the case of an Optionee or Grantee whose
employment with the Company or a Subsidiary is, as the date of the applicable
Agreement, subject to the terms of an employment agreement between such Optionee
or Grantee and the Company or Subsidiary, which employment agreement includes a
definition of "Cause," the term "Cause" as used in this Plan or any Agreement
shall have the meaning set forth in such employment agreement during the period
that such employment agreement remains in effect; or
(c) in all other cases, the term "Cause" as used in
this Plan or any Agreement shall mean (i) intentional failure to perform
reasonably assigned duties, (ii) dishonesty or willful misconduct in the
performance of duties, (iii) involvement in a transaction in connection with the
performance of duties to the Company or any of its Subsidiaries which
transaction is adverse to the interests of the Company or any of its
Subsidiaries and which is engaged in for personal profit or (iv) willful
violation of any law, rule or regulation (other than traffic violations or
similar offenses) in connection with the performance of duties.
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2.9 "CHANGE IN CAPITALIZATION" means any increase or
reduction in the number of Shares, or any change (including, without limitation,
in the case of a spin-off, dividend or other distribution in respect of Shares,
a change in value) in the Shares or exchange of Shares for a different number or
kind of shares or other securities of the Company or another corporation, by
reason of a reclassification, recapitalization, merger, consolidation,
reorganization, spin-off, split-up, issuance of warrants or rights or
debentures, stock dividend, stock split or reverse stock split, cash dividend,
property dividend, combination or exchange of shares, repurchase of shares,
change in corporate structure or a substantially similar transaction.
2.10 A "CHANGE IN CONTROL" shall mean the occurrence of any
of the following:
(a) An acquisition in one transaction or a series of
related transactions (other than directly from the Company or pursuant to
Options or Awards granted under this Plan or otherwise by the Company) of any
Voting Securities of the Company by any Person, immediately after which such
Person has Beneficial Ownership of fifty percent (50%) or more of the combined
voting power of the Company's then outstanding Voting Securities; PROVIDED,
HOWEVER, in determining whether a Change in Control has occurred pursuant to
this Section 2.10(a), Voting Securities which are acquired in a "Non-Control
Acquisition" (as hereinafter defined) shall not constitute an acquisition which
would cause a Change in Control. A "Non-Control Acquisition" shall mean an
acquisition by (i) an employee benefit plan (or a trust forming a part thereof)
maintained by (A) the Company or (B) any corporation or other Person of which a
majority of its voting power or its voting equity securities or equity interest
is owned, directly or indirectly, by the Company (for purposes of this
definition, a "Related Entity"), (ii) the Company or any Related Entity, or
(iii) any Person in connection with a "Non-Control Transaction" (as hereinafter
defined);
(b) The individuals who, as of the date hereof, are
members of the Board (the "Incumbent Board"), cease for any reason to constitute
at least a majority of the members of the Board; PROVIDED, HOWEVER, that if the
election, or nomination for election by the Company's common stockholders, of
any new director was approved by a vote of at least a majority of the Incumbent
Board, such new director shall, for purposes of this Plan, be considered as a
member of the Incumbent Board; PROVIDED FURTHER, HOWEVER, that no individual
shall be considered a member of the Incumbent Board if such individual initially
assumed office as a result of either an actual or threatened "Election Contest"
(as described in Rule 14a-11 promulgated under the Exchange Act) or other actual
or threatened solicitation of proxies or consents by or on behalf of a Person
other than the Board (a "Proxy Contest") including by reason of any agreement
intended to avoid or settle any Election Contest or Proxy Contest; or
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(c) The consummation of:
(i) A merger, consolidation or reorganization
involving the Company unless:
(A) the stockholders of the Company,
immediately before such merger, consolidation or
reorganization, own directly or indirectly
immediately following such merger, consolidation or
reorganization, more than fifty percent (50%) of
the combined voting power of the outstanding voting
securities of the corporation resulting from such
merger or consolidation or reorganization (the
"Surviving Corporation") in substantially the same
proportion as their ownership of the Voting
Securities immediately before such merger,
consolidation or reorganization,
(B) the individuals who were members of
the Incumbent Board immediately prior to the
execution of the agreement providing for such
merger, consolidation or reorganization constitute
at least a majority of the members of the board of
directors of the Surviving Corporation, or a
corporation Beneficially Owning directly or
indirectly a majority of the voting securities of
the Surviving Corporation, and
(C) no Person other than (1) the Company,
(2) any Related Entity, (3) any employee benefit
plan (or any trust forming a part thereof) that,
immediately prior to such merger, consolidation or
reorganization, was maintained by the Company, the
Surviving Corporation, or any Related Entity or (4)
any Person who, together with its Affiliates,
immediately prior to such merger, consolidation or
reorganization had Beneficial Ownership of fifty
percent (50%) or more of the then outstanding
Voting Securities, owns, together with its
Affiliates, Beneficial Ownership of fifty percent
(50%) or more of the combined voting power of the
Surviving Corporation's then outstanding voting
securities.
(D) a transaction described in clauses
(A) through (C) above shall herein be referred to
as a "Non-Control Transaction;"
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(ii) A complete liquidation or dissolution of
the Company; or
(iii) An agreement for the sale or other
disposition of all or substantially all of the assets of
the Company to any Person (other than a transfer to a
Related Entity or the distribution to the Company's
stockholders of the stock of a Related Entity or any
other assets).
Notwithstanding the foregoing, a Change in Control shall not be deemed
to occur solely because any Person (the "Subject Person") acquired Beneficial
Ownership of fifty percent (50%) or more of the combined voting power of the
Company's then outstanding Voting Securities as a result of the acquisition of
Voting Securities by the Company which, by reducing the number of Voting
Securities then outstanding, increases the proportional number of shares
Beneficially Owned by the Subject Persons, provided that if a Change in Control
would occur (but for the operation of this sentence) as a result of the
acquisition of Voting Securities by the Company, and (1) before such share
acquisition by the Company the Subject Person becomes the Beneficial Owner of
any new or additional Voting Securities in a related transaction or (2) after
such share acquisition by the Company the Subject Person becomes the Beneficial
Owner of any new or additional Voting Securities which in either case increases
the percentage of the then outstanding Voting Securities Beneficially Owned by
the Subject Person, then a Change in Control shall occur.
2.11 "CODE" means the Internal Revenue Code of 1986, as
amended.
2.12 "COMMITTEE" means a committee, as described in Section
3.1, appointed by the Board from time to time to administer the Plan and to
perform the functions set forth herein.
2.13 "COMPANY" means AppNet Systems, Inc.
2.14 "DIRECTOR" means a director of the Company.
2.15 "DISABILITY" means:
(a) in the case of an Optionee or Grantee whose
employment with the Company or a Subsidiary is, as of the date of the applicable
Agreement, subject to the terms of an employment agreement between such Optionee
or Grantee and the Company or Subsidiary, which employment agreement includes a
definition of "Disability," the term "Disability" as used in this Plan or any
Agreement shall have the meaning set forth in such employment agreement during
the period that such employment agreement remains in effect; or
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(b) in all other cases, the term "Disability" as used
in this Plan or any Agreement shall mean a physical or mental infirmity which
impairs the Optionee's or Grantee's ability to perform substantially his or her
duties for a period of one hundred eighty (180) consecutive days.
2.16 "DISABILITY DATE" means the date which is six (6) months
after the date on which an Optionee or Grantee is first absent from active
employment with the Company by reason of a Disability.
2.17 "DIVIDEND EQUIVALENT RIGHT" means a right to receive all
or some portion of the cash dividends that are or would be payable with respect
to Shares.
2.18 "DIVISION" means any of the operating units or divisions
of the Company designated as a Division by the Committee.
2.19 "ELIGIBLE INDIVIDUAL" means any of the following
individuals who is designated by the Committee as eligible to receive Options or
Awards subject to the conditions set forth herein: (a) any director (other than
a Nonemployee Director), officer or employee of the Company or a Subsidiary, (b)
any individual to whom the Company or a Subsidiary has extended a formal,
written offer of employment, or (c) any consultant or advisor of the Company or
a Subsidiary.
2.20 "EXCHANGE ACT" means the Securities Exchange Act of
1934, as amended.
2.21 "FAIR MARKET VALUE" on any date means the closing sales
prices of the Shares on such date on the principal national securities exchange
on which such Shares are listed or admitted to trading, or, if such Shares are
not so listed or admitted to trading, the average of the per Share closing bid
price and per Share closing asked price on such date as quoted on the National
Association of Securities Dealers Automated Quotation System or such other
market in which such prices are regularly quoted, or, if there have been no
published bid or asked quotations with respect to Shares on such date, the Fair
Market Value shall be the value established by the Board in good faith and, in
the case of an Incentive Stock Option, in accordance with Section 422 of the
Code.
2.22 "FORMULA OPTION" means an Option granted pursuant to
Section 6.
2.23 "GRANTEE" means a person to whom an Award has been
granted under the Plan.
2.24 "INCENTIVE STOCK OPTION" means an Option satisfying the
requirements of Section 422 of the Code and designated by the Committee as an
Incentive Stock Option.
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2.25 "INITIAL PUBLIC OFFERING" means the consummation of the
first public offering of Shares pursuant to a registration statement (other than
on Form S-8 or successor form) filed with, and declared effective by, the
Securities and Exchange Commission.
2.26 "NONEMPLOYEE DIRECTOR" means a director of the Company
who is a "nonemployee director" within the meaning of Rule 16b-3 promulgated
under the Exchange Act.
2.27 "NONQUALIFIED STOCK OPTION" means an Option which is not
an Incentive Stock Option.
2.28 "NORMAL RETIREMENT DATE" means the date on which an
Optionee or Grantee terminates active employment with the Company or a
Subsidiary on or after attainment of age 65, but does not include termination by
the Company or a Subsidiary for Cause.
2.29 "OPTION" means a Nonqualified Stock Option, an Incentive
Stock Option, a Formula Option, or any or all of them.
2.30 "OPTIONEE" means a person to whom an Option has been
granted under the Plan.
2.31 "OUTSIDE DIRECTOR" means a director of the Company who
is an "outside director" within the meaning of Section 162(m) of the Code and
the regulations promulgated thereunder.
2.32 "PARENT" means any corporation which is a parent
corporation (within the meaning of Section 424(e) of the Code) with respect to
the Company.
2.33 "PERFORMANCE AWARDS" means Performance Units,
Performance Shares or either or both of them.
2.34 "PERFORMANCE-BASED COMPENSATION" means any Option or
Award that is intended to constitute "performance based compensation" within the
meaning of Section 162(m)(4)(C) of the Code and the regulations promulgated
thereunder.
2.35 "PERFORMANCE CYCLE" means the time period specified by
the Committee at the time Performance Awards are granted during which the
performance of the Company, a Subsidiary or a Division will be measured.
2.36 "PERFORMANCE OBJECTIVES" has the meaning set forth in
Section 11.
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2.37 "PERFORMANCE SHARES" means Shares issued or transferred
to an Eligible Individual under Section 11.
2.38 "PERFORMANCE UNITS" means Performance Units granted to
an Eligible Individual under Section 11.
2.39 "PERSON" means `person' as such term is used for
purposes of Section 13(d) or 14(d) of the Exchange Act, including without
limitation, any individual, corporation, limited liability company, partnership,
trust, unincorporated organization, government or any agency or political
subdivision thereof, or any other entity or any group of Persons.
2.40 "PHANTOM STOCK" means a right granted to an Eligible
Individual under Section 12 representing a number of hypothetical Shares.
2.41 "PLAN" means the AppNet Systems, Inc. 1999 Stock
Incentive Plan, as amended and restated from time to time.
2.42 "POOLING TRANSACTION" means an acquisition of the
Company in a transaction which is intended to be treated as a "pooling of
interests" under generally accepted accounting principles.
2.43 "RESTRICTED STOCK" means Shares issued or transferred to
an Eligible Individual pursuant to Section 10.
2.44 "SHARE AWARD" means a grant of Shares pursuant to
Section 12.
2.45 "SHARES" means the common stock, par value $.0005 per
share, of the Company.
2.46 "STOCK APPRECIATION RIGHT" means a right to receive all
or some portion of the increase in the value of the Shares as provided in
Section 8 hereof.
2.47 "SUBSIDIARY" means (i) except as provided in subsection
(ii) below, any corporation which is a subsidiary corporation (within the
meaning of Section 424(f) of the Code) with respect to the Company, and (ii)
with respect to provisions relating to the eligibility to receive Options or
Awards other than Incentive Stock Options and to continued employment for
purposes of Options and Awards (unless the Committee determines otherwise), any
entity, whether or not incorporated, in which the Company directly or indirectly
owns fifty percent (50%) or more of the outstanding equity or other ownership
interests.
2.48 "SUCCESSOR CORPORATION" means a corporation, or a parent
or subsidiary thereof, which issues or assumes an Option or Award in a
transaction
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described in Section 424(a) of the Code without regard to Sections 424(a)(1) and
(2) thereof.
2.49 "TAX BENEFIT" means an actual decrease in the Company's
liability for taxes in any period.
2.50 "TEN-PERCENT STOCKHOLDER" means an Eligible Individual,
who, at the time an Incentive Stock Option is to be granted to him or her, owns
(within the meaning of Section 422(b)(6) of the Code) stock possessing more than
ten percent (10%) of the total combined voting power of all classes of stock of
the Company, or of a Parent or a Subsidiary.
2.51 "TERMINATION OF EMPLOYMENT" means the later of (i)
severance of the employer-employee relationship with the Company or any
Subsidiary or (ii) the resignation, removal or termination of an officer or
Director of the Company or any Subsidiary.
2.52 "TRANSITION PERIOD" means the period beginning with an
Initial Public Offering and ending as of the earlier of (i) the date of the
first annual meeting of stockholders of the Company at which Directors are to be
elected that occurs after the close of the third (3rd) calendar year following
the calendar year in which the Initial Public Offering occurs, (ii) the
expiration of the Plan, (iii) a material modification of the Plan within the
meaning of Treasury Regulation Section 1.162-27(h)(1)(iii), or (iv) the
issuance of all Shares that have been allocated under the Plan.
2.53 "VOTING SECURITIES" means all outstanding voting
securities of the Company entitled to vote generally in the election of the
Board of Directors.
3. ADMINISTRATION.
3.1 The Plan shall be administered by the Committee, which
shall be appointed by the Board. The Committee shall hold meetings at such times
as may be necessary for the proper administration of the Plan. The Committee
shall keep minutes of its meetings. A quorum shall consist of a majority of the
members of the Committee and a majority of a quorum may authorize any action.
Any decision or determination reduced to writing and signed by all of the
members of the Committee shall be as fully effective as if made by a majority
vote at a meeting duly called and held. The Committee shall consist of at least
two (2) Directors and may consist of the entire Board; PROVIDED, HOWEVER, that
from and after the date of an Initial Public Offering, (A) if the Committee
consists of less than the entire Board, each member shall be a Nonemployee
Director and (B) to the extent necessary for any Option or Award intended to
qualify as Performance-Based Compensation to so qualify, each member of the
Committee, whether or not it consists of the entire Board, shall be an Outside
Director.
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3.2 For purposes of the preceding sentence, if one or more
members of the Committee is not a Nonemployee Director and, if necessary for any
Option or Award intended to qualify as Performance-Based Compensation to so
qualify, an Outside Director, but recuses himself or herself or abstains from
voting with respect to a particular action taken by the Committee, then the
Committee, with respect to that action, shall be deemed to consist only of the
members of the Committee who have not recused themselves or abstained from
voting. Subject to applicable law, the Committee may delegate its authority
under the Plan to any other person or persons.
3.3 No member of the Committee shall be liable for any
action, failure to act, determination or interpretation made in good faith with
respect to this Plan or any transaction hereunder. The Company hereby agrees to
indemnify each member of the Committee for all costs and expenses and, to the
extent permitted by applicable law, any liability incurred in connection with
defending against, responding to, negotiating for the settlement of or otherwise
dealing with any claim, cause of action or dispute of any kind arising in
connection with any actions in administering this Plan or in authorizing or
denying authorization to any transaction hereunder.
3.4 Subject to the express terms and conditions set forth
herein, the Committee shall have the power from time to time to:
(a) determine those Eligible Individuals to whom
Options shall be granted under the Plan and the number of such Options to be
granted and to prescribe the terms and conditions (which need not be identical)
of each such Option, including the purchase price per Share subject to each
Option, and make any amendment or modification to any Option Agreement
consistent with the terms of the Plan;
(b) select those Eligible Individuals to whom Awards
shall be granted under the Plan and to determine the number of Shares in respect
of which each Award is granted, the terms and conditions (which need not be
identical) of each such Award, including the restrictions or Performance
Objectives relating to Awards and the maximum value of any Award, and make any
amendment or modification to any Award Agreement consistent with the terms of
the Plan;
(c) construe and interpret the Plan and the Options and
Awards granted hereunder and to establish, amend and revoke rules and
regulations for the administration of the Plan, including, without limitation,
correcting any defect or supplying any omission, or reconciling any
inconsistency in the Plan or in any Agreement, in the manner and to the extent
it shall deem necessary or advisable, including so that the Plan and the
operation of the Plan complies with the Code to the extent applicable and other
applicable law, and otherwise to make the Plan fully effective. All decisions
and determinations by the Committee in the exercise of this power shall be
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final, binding and conclusive upon the Company, its Subsidiaries, the Optionees
and Grantees, and all other persons having any interest therein;
(d) determine the duration and purposes for leaves of
absence which may be granted to an Optionee or Grantee on an individual basis
without constituting a termination of employment or service for purposes of the
Plan;
(e) exercise its sole discretion with respect to the
powers and rights granted to it as set forth in the Plan; and
(f) generally, exercise such powers and to perform such
acts as are deemed necessary or advisable to promote the best interests of the
Company with respect to the Plan.
4. STOCK SUBJECT TO THE PLAN; GRANT LIMITATIONS.
4.1 The aggregate number of Shares that may be made the
subject of Options and Awards granted under the Plan shall not exceed 2,000,000
plus the additional Shares described in Section 4.2; PROVIDED, HOWEVER, that the
aggregate maximum number of Shares that may be made the subject of Options and
Awards granted under the Plan shall not exceed 10,000,000; and PROVIDED,
FURTHER, HOWEVER, that in the aggregate, not more than one-third of the number
of allotted Shares may be made the subject of Restricted Stock Awards under
Section 10 of the Plan (other than shares of Restricted Stock made in settlement
of Performance Units pursuant to Section 11.2(b)). Upon a Change in
Capitalization, the maximum number of Shares referred to in the first sentence
of this Section 4.1 shall be adjusted in number and kind pursuant to Section 14.
The Company shall reserve for the purposes of the Plan, out of its authorized
but unissued Shares or out of Shares held in the Company's treasury, or partly
out of each, such number of Shares as shall be determined by the Board.
4.2 As of January 1 of each year, commencing with the year
2000, the aggregate number of Shares that may be made the subject of Options and
Awards granted under the Plan shall automatically increase by a number equal to
an amount determined by the Committee in its sole discretion.
4.3 Upon the granting of an Option or an Award, the number
of Shares available under Section 4.1 for the granting of further Options and
Awards shall be reduced as follows:
(a) In connection with the granting of an Option or an
Award (other than the granting of a Performance Unit denominated in dollars),
the number of Shares shall be reduced by the number of Shares in respect of
which the Option or Award is granted or denominated.
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(b) In connection with the granting of a Performance
Unit denominated in dollars, the number of Shares shall be reduced by an amount
equal to the quotient of (i) the dollar amount in which the Performance Unit is
denominated, divided by (ii) the Fair Market Value of a Share on the date the
Performance Unit is granted.
4.4 Whenever any outstanding Option or Award or portion
thereof expires, is canceled, or is otherwise terminated for any reason without
having been exercised or payment having been made in respect of the entire
Option or Award, the Shares allocable to the expired, canceled, or otherwise
terminated portion of the Option or Award may again be the subject of Options or
Awards granted hereunder.
5. OPTION GRANTS FOR ELIGIBLE INDIVIDUALS.
5.1 AUTHORITY OF COMMITTEE. Subject to the provisions of the
Plan, the Committee shall have full and final authority to select those Eligible
Individuals who will receive Options, the terms and conditions of which shall be
set forth in an Agreement; PROVIDED, HOWEVER, that no Eligible Individual shall
receive any Incentive Stock Options unless he is an employee of the Company, a
Parent or a Subsidiary at the time the Incentive Stock Option is granted.
5.2 PURCHASE PRICE. The purchase price (which may be greater
than, less than or equal to the Fair Market Value on the date of grant) or the
manner in which the purchase price is to be determined for Shares under each
Option shall be determined by the Committee and set forth in the Agreement
pursuant to which each Option is granted; PROVIDED, HOWEVER, that the purchase
price per Share under each Incentive Stock Option shall not be less than 100% of
the Fair Market Value of a Share on the date the Option is granted (110% in the
case of an Incentive Stock Option granted to a Ten-Percent Stockholder).
5.3 MAXIMUM DURATION. Options granted hereunder shall be for
such term as the Committee shall determine, PROVIDED, HOWEVER, that an Option
shall not be exercisable after the expiration of ten (10) years from the date it
is granted (five (5) years in the case of an Incentive Stock Option granted to a
Ten-Percent Stockholder); PROVIDED, FURTHER, HOWEVER, that the Committee may
provide that an Option (other than an Incentive Stock Option) may, upon the
death of the Optionee, be exercised for up to one (1) year following the date of
the Optionee's death even if such period extends beyond ten (10) years from the
date the Option is granted. The Committee may, subsequent to the granting of any
Option, extend the term thereof, but in no event shall the term as so extended
exceed the maximum term provided for in the preceding sentence.
5.4 EXERCISABILITY. Subject to Sections 5.5 and 7.5, each
Option shall become exercisable in such installments (which need not be equal)
and at such times as
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may be designated by the Committee and set forth in the Agreement. To the extent
not exercised, installments shall accumulate and be exercisable, in whole or in
part, at any time after becoming exercisable, but not later than the date the
Option expires. The Committee may accelerate the exercisability of any Option or
portion thereof at any time.
5.5 TERMINATION. Subject to Sections 7.5 and 13 and unless
otherwise provided by the Committee, in its sole discretion, in the applicable
Agreement, the following provisions shall apply to Options upon a Termination of
Employment:
(a) Subject to Section 5.3, unless otherwise determined
by the Committee at the time of grant (and set forth in the applicable
Agreement) or at a later date, except in the case of Disability, retirement on
or after the Optionee's Normal Retirement Date and death as provided in Sections
5.5(c) and 5.5(d) below, upon an Optionee's Termination of Employment with the
Company, a Parent or a Subsidiary for any reason other than a termination for
Cause, any unexercised Option held by such Optionee shall expire three (3)
months after the Optionee has a Termination of Employment and such Option may
only be exercised by the Optionee or his or her Beneficiary to the extent that
the Option or a portion thereof was exercisable on the date of Termination of
Employment; PROVIDED, HOWEVER, that no Option may be exercised after the
expiration date specified for the particular Option in the Agreement.
(b) If the Optionee's Termination of Employment arises
as a result of a termination for Cause, then, unless the Committee determines
otherwise at the time of the Termination of Employment, any unexercised Options
(whether or not vested and exercisable) held by such Optionee shall terminate
and expire concurrently with the Optionee's Termination of Employment and no
rights thereunder may be exercised.
(c) Subject to Section 5.3, unless otherwise determined
by the Committee at the time of grant (and set forth in the applicable
Agreement) or at a later date, if an Optionee suffers a Disability or retires on
or after the Optionee's Normal Retirement Date, any unexercised Option held by
such disabled or retired Optionee shall expire one (1) year after the Disability
Date or date of Termination of Employment by reason of retirement, as the case
may be, and such Option may only be exercised by the Optionee or his or her
guardian or legal representative to the extent that the Option or a portion
thereof was exercisable on the Disability Date or the date of Termination of
Employment by reason of retirement, as the case may be; PROVIDED, HOWEVER, no
Option may be exercised after the expiration date specified for the particular
Option in the Agreement.
(d) Subject to Section 5.3, unless otherwise determined
by the Committee at the time of grant (and set forth in the applicable
Agreement) or at a later
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date, if an Optionee dies while still employed by the Company, the Options which
the Optionee was entitled to exercise on the date of the Optionee's death may be
exercised at any time after the Optionee's death by the Optionee's Beneficiary;
PROVIDED, HOWEVER, that no Option may be exercised after the earlier of: (i) one
(1) year after the Optionee's death or (ii) the expiration date specified for
the particular Option in the Agreement. If an Optionee dies after his or her
Termination of Employment, then the Options which the Optionee was entitled to
exercise on the date of the Optionee's death may be exercised by his or her
Beneficiary within the period specified in Sections 5.5(a) or 5.5(c), as the
case may be.
(e) Subject to Section 5.3 and notwithstanding any
other provision of this Section 5.5, upon an Optionee's Termination of
Employment at any time on, or within one (1) year after, the occurrence of a
Change in Control, each Option held by the Optionee that was exercisable as of
the date of such Termination of Employment shall remain exercisable for a period
ending not before the earlier of (A) the first anniversary of the Termination of
Employment or (B) the expiration of the stated term of the Option.
(f) Unless otherwise determined by the Committee at the
time of grant (and set forth in the applicable Agreement) or at a later date,
the Option (or portion thereof), to the extent not yet vested and exercisable as
of the date of the Optionee's Termination of Employment, shall terminate
immediately upon such date.
5.6 DEFERRED DELIVERY OF OPTION SHARES. The Committee may,
in its sole discretion, permit Optionees to elect to defer the issuance of
Shares upon the exercise of one or more Nonqualified Stock Options granted
pursuant to the Plan. The terms and conditions of such deferral shall be
determined at the time of the grant of the Option or thereafter and shall be set
forth in the Agreement evidencing the Option.
5.7 MODIFICATION. No modification of a Option shall
adversely alter or impair any rights or obligations under the Option without the
Optionee's consent.
5.8 LIMITATIONS ON INCENTIVE STOCK OPTIONS. To the extent
that the aggregate Fair Market Value (determined as of the date of the grant)
of Shares with respect to which Incentive Stock Options granted under the
Plan and "incentive stock options" (within the meaning of Section 422 of the
Code) granted under all other plans of the Company or its Subsidiaries (in
either case determined without regard to this Section 5.8) are exercisable by
an Optionee for the first time during any calendar year exceeds $100,000,
such Incentive Stock Options shall be treated as Nonqualified Stock Options.
In applying the limitation in the preceding sentence in the case of multiple
Option grants, Options which were intended to be Incentive Stock Options
shall be treated as
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Nonqualified Stock Options according to the order in which they were granted
such that the most recently granted Options are first treated as Nonqualified
Stock Options.
6. OPTION GRANTS FOR NONEMPLOYEE DIRECTORS.
6.1 GRANT. Formula Options shall be granted (i) to a
Nonemployee Director who becomes a member of the Board after June 17, 1999 upon
election or appointment and (ii) to all Nonemployee Directors who are members of
the Board as follows:
(a) INITIAL GRANT. Each Nonemployee Director who
becomes a Director after June 17, 1999 shall, upon becoming a Director, be
granted a Formula Option in respect of 5,000 Shares.
(b) ANNUAL GRANT. Each Nonemployee Director shall be
granted a Formula Option in respect of 5,000 Shares on the first business day of
January in each year that the Plan is in effect provided that the Nonemployee
Director is a Director on such date; PROVIDED, HOWEVER, that a Nonemployee
Director shall not be entitled to receive an annual grant pursuant to this
Section 6.1(b) for the calendar year in which such Nonemployee Director is first
elected or appointed to the Board.
(c) TERMS AND CONDITIONS. All Formula Options granted
pursuant to this Section 6 shall be evidenced by an Agreement containing such
other terms and conditions not inconsistent with the provisions of this Plan as
determined by the Board; PROVIDED, HOWEVER, that such terms shall not vary the
price, amount or timing of Formula Options provided under this Section 6,
including provisions dealing with vesting, forfeiture and termination of such
Formula Options.
6.2 PURCHASE PRICE. The purchase price for Shares under each
Formula Option shall be equal to 100% of the Fair Market Value of such Shares on
the date the Formula Option is granted.
6.3 VESTING. Each Formula Option shall be fully vested and
exercisable on the date of grant; PROVIDED, HOWEVER, that the Optionee is a
Director on such date.
6.4 DURATION. Subject to Section 7.5, each Formula Option
shall terminate on the date which is the tenth (10th) anniversary of the date of
grant; PROVIDED, HOWEVER, that if an Optionee dies while a Director and prior to
such tenth (10th) anniversary, the Formula Option may be exercised for up to one
(1) year following the date of the Optionee's death even if such period extends
beyond ten (10) years from the date the Formula Option is granted, unless
terminated earlier as follows:
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(a) If an Optionee's service as a Director terminates
for any reason other than Disability, death or Cause, the Optionee may for a
period of three (3) months after such termination exercise his or her Formula
Option, after which time the Formula Option shall automatically terminate in
full.
(b) If an Optionee's service as a Director terminates
by reason of the Optionee's resignation or removal from the Board due to
Disability, the Optionee or his or her guardian or legal representative may, for
a period of one (1) year after such termination, exercise his or her Formula
Option, after which time the Formula Option shall automatically terminate in
full.
(c) If an Optionee's service as a Director terminates
for Cause, the Formula Option granted to the Optionee hereunder shall
immediately terminate in full and no rights thereunder may be exercised.
(d) If an Optionee dies while a Director, the Formula
Option may be exercised at any time after the Optionee's death by the Optionee's
Beneficiary; PROVIDED, HOWEVER, that no Formula Option may be exercised after
the first anniversary of the Optionee's death. If an Optionee dies after his or
her service as a Director terminates, then the Formula Option may be exercised
by his or her Beneficiary within the period specified in Sections. 6.4(a) or 6.4
(b), as the case may be.
(e) Notwithstanding any other provision of this Section
6.4, in the event an Optionee's service as a Director of the Company is
terminated at any time on, or within one (1) year after, the occurrence of a
Change in Control, each Formula Option held by the Optionee shall remain
exercisable for a period ending not before the earlier of (A) the first
anniversary of the termination of the Optionee's employment or service or (B)
the expiration of the stated term of the Formula Option.
7. TERMS AND CONDITIONS APPLICABLE TO ALL OPTIONS.
7.1 ADDITIONAL TERMS. The provisions of this Section 7 shall
apply to all Options.
7.2 NON-TRANSFERABILITY. No Option granted hereunder shall
be transferable by the Optionee to whom it is granted otherwise than by will or
by the laws of descent and distribution or, in the case of an Option other than
an Incentive Stock Option, in the Committee's sole discretion, to a spouse or
former spouse in a transfer described in Section 1041(a) of the Code (a "Code
1041 Transfer"), and, except with respect to an Option transferred pursuant to a
Code 1041 Transfer, an Option shall be exercisable during the lifetime of such
Optionee only by the Optionee or his or her guardian or legal representative.
Notwithstanding the foregoing, the Committee may set
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forth in the Agreement evidencing an Option (other than an Incentive Stock
Option) at the time of grant or thereafter, that the Option may be transferred
to members of the Optionee's immediate family, to trusts solely for the benefit
of such immediate family members and to partnerships in which such family
members and/or trusts are the only partners. Following transfer, for purposes of
this Plan, a transferee of an Option shall be deemed to be the Optionee;
provided that the Option shall be exercisable by the transferee only to the
extent and for such periods that the Option would have been exercisable if held
by the original Optionee. For this purpose, immediate family means the
Optionee's spouse, parents, children, stepchildren and grandchildren and the
spouses of such parents, children, stepchildren and grandchildren. The terms of
an Option shall be final, binding and conclusive upon the beneficiaries,
executors, administrators, heirs and successors of the Optionee.
7.3 METHOD OF EXERCISE.
(a) The exercise of an Option shall be made only by a
written notice delivered in person or by mail to the Secretary of the Company at
the Company's principal executive office, specifying the number of Shares to be
purchased and, to the extent applicable, accompanied by payment therefor and
otherwise in accordance with such procedures which may be approved by the
Committee from time to time, and in accordance with the Agreement pursuant to
which the Option was granted; PROVIDED, HOWEVER, that Options may not be
exercised by an Optionee for twelve months following a hardship distribution to
the Optionee, to the extent such exercise is prohibited under Treasury
Regulation Section 1.401(k)-1(d)(2)(iv)(B)(4). The purchase price for any Shares
purchased pursuant to the exercise of an Option shall be paid, as determined by
the Committee in its sole discretion, by any one or a combination of the
following: (a) delivery of cash or a check to the order of the Company or (b)
transferring to the Company Shares that have been held by the Optionee for at
least six (6) months (or such lesser period as may be permitted by the
Committee) prior to the exercise of the Option and that have a Fair Market Value
equal in amount to the purchase price, such transfer to be upon such terms and
conditions as determined by the Committee. In addition, both Options and Formula
Options may be exercised through a registered broker-dealer pursuant to such
cashless exercise procedures which are, from time to time, deemed acceptable by
the Committee. Any Shares transferred to the Company as payment of the purchase
price under an Option shall be valued at their Fair Market Value on the day
preceding the date of exercise of such Option. If requested by the Committee,
the Optionee shall deliver the Agreement evidencing the Option to the Secretary
of the Company who shall endorse thereon a notation of such exercise and return
such Agreement to the Optionee. No fractional Shares (or cash in lieu thereof)
shall be issued upon exercise of an Option and the number of Shares that may be
purchased upon exercise shall be rounded to the nearest number of whole Shares.
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(b) If the Fair Market Value of the Shares with respect
to which the Option is being exercised exceeds the purchase price of such
Option, an Optionee may, instead of exercising an Option as provided in Section
7.3(a), request that the Committee authorize payment to the Optionee of the
difference between the Fair Market Value of part or all of the Shares which are
the subject of the Option and the purchase price of the Option, such difference
to be determined as of the date the Committee receives the request from the
Optionee. The Committee, in its sole discretion, may grant or deny such a
request from an Optionee with respect to part or all of the Shares as to which
the Option is then exercisable and, to the extent granted, shall direct the
Company to make the payment to the Optionee either in cash or in Shares or in
any combination thereof; PROVIDED, HOWEVER, that the payment in Shares shall be
based upon the Fair Market Value of Shares as of the date the Committee received
the request from the Optionee. An Option shall be deemed to have been exercised
and shall be canceled to the extent that the Committee grants a request pursuant
to this Section 7.3(b).
7.4 RIGHTS OF OPTIONEES. No Optionee shall be deemed for any
purpose to be the owner of any Shares subject to any Option unless and until (a)
the Option shall have been exercised pursuant to the terms thereof, (b) the
Company shall have issued and delivered Shares to the Optionee, and (c) the
Optionee's name shall have been entered as a stockholder of record on the books
of the Company. Thereupon, the Optionee shall have full voting, dividend and
other ownership rights with respect to such Shares, subject to such terms and
conditions as may be set forth in the applicable Agreement.
7.5 EFFECT OF CHANGE IN CONTROL.
(a) Notwithstanding anything contained in Sections 5
or 6 to the contrary, in the event of a Change in Control, the Committee, in
its sole discretion, may provide in writing in connection with, or in
contemplation of, any such Change in Control for any or all of the following
alternatives (separately or in any combination): (i) for the assumption by
the Successor Corporation of the Options theretofore granted or the
substitution by such corporation for such Options of new options covering the
stock of the Successor Corporation with appropriate adjustments as to the
number and kinds of shares and the purchase prices; (ii) for the continuation
of the Plan in which event the Plan and the Options shall continue under such
terms as may be provided; (iii) for the accelerated vesting of the Options;
or (iv) for the payment in cash upon the surrender to the Company for
cancellation of any Option or portion of an Option to the extent vested and
not yet exercised in an amount equal to the excess, if any, of (i) (A) in the
case of a Nonqualified Stock Option, the greater of (1) the Fair Market
Value, on the date preceding the date of surrender, of the Shares subject to
the Option or portion thereof surrendered or (2) the Adjusted Fair Market
Value of the Shares subject to the Option or portion thereof surrendered or
(B) in the case of an Incentive Stock Option, the Fair Market Value, on the
date preceding the date of surrender, of the Shares subject to the Option or
portion thereof
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surrendered, over (ii) the aggregate purchase price for such Shares under the
Option or portion thereof surrendered. Any vesting of an Option or portion of
an Option pursuant to this Section 7.5(a) or surrender of an Option for a
cash payment shall be conditioned upon the consummation of the Change in
Control and shall be effective only immediately before the consummation of
the Change in Control. Upon consummation of the Change in Control, the Plan
and all outstanding but unexercised Options shall terminate, except to the
extent provision is made in writing in connection with such transaction for
continuation of the Plan, or the assumption or substitution of such Options.
The Committee shall send written notice of an event that will result in such
a termination to all individuals who hold Options not later than the time at
which the Company gives notice thereof to its stockholders.
(b) To the extent set forth in the applicable
Agreement, if, as a result of a Change in Control transaction, an Option
intended to qualify as an Incentive Stock Option fails to so qualify SOLELY
because of the failure to meet the holding requirements of Code Section
422(a)(1) (a "Disqualifying Disposition"), the Company shall make a cash payment
to the Optionee equal to the amount which will, after taking into account all
taxes imposed on the Disqualifying Disposition and the receipt of such payment,
leave the Optionee in the same after-tax position the Optionee would have been
in had the Code Section 422(a)(1) holding requirements been met at the time of
the Disqualifying Disposition; PROVIDED, HOWEVER, that no payment described in
this Section shall exceed the Tax Benefit to the Company resulting from
deductions relating to ordinary income recognized by the Optionee as a result of
the Disqualifying Disposition and the receipt of such payment. The payment
described in this Section shall be made by the Company within thirty (30) days
of the filing by the Company of the federal tax return which includes the tax
items associated with the income recognized by the Optionee as a result of the
Disqualifying Disposition (or, if the Tax Benefit described in the preceding
sentence is not realized until a later year, within thirty (30) days of the
filing by the Company of the federal tax return with respect to which such Tax
Benefit is realized); PROVIDED, HOWEVER, that if more than one Optionee is
entitled to a cash payment pursuant to this Section 7.5(b) in any single tax
year and the Tax Benefit realized by the Company in such year with respect to
all such Optionees is less than the aggregate amount of the payments due to such
Optionees hereunder, then (i) each such Optionee shall receive a portion of such
cash payment equal to an amount determined by multiplying the amount of the Tax
Benefit realized by the Company in such year by a fraction the numerator of
which is equal to the amount of payment due to such Optionee and the denominator
of which is equal to the aggregate amount due to all such Optionees entitled to
a payment hereunder, and (ii) subject to further application of this proviso,
shall be entitled to receive the remaining portion within thirty (30) days of
the filing by the Company of the federal tax return with respect to which such
Tax Benefit is realized.
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(c) To the extent set forth in the applicable Agreement
and provided that an Optionee is not entitled to payment under Section 7.5(b)
hereof, if, as a result of a Change in Control transaction, an Option intended
to qualify as an Incentive Stock Option fails to so qualify SOLELY because the
vesting of the Option is accelerated pursuant to Section 7.5(a) and such
acceleration causes the aggregate fair market value (determined at the time the
Option is granted) of the Shares with respect to which Options are exercisable
for the first time by an Optionee during the calendar year in which such vesting
occurs to exceed $100,000, within the meaning of Code Section 422(d) (a
"Disqualified Option"), then, upon exercise of such Disqualified Option, the
Company shall make a cash payment to the Optionee equal to the amount which
will, after taking into account all taxes imposed on the exercise of such
Disqualified Option and the receipt of such payment, leave the Optionee in the
same after-tax position the Optionee would have been in had the Disqualified
Option continued to qualify as an Incentive Stock Option on the date of exercise
and the Optionee sold the Shares received upon exercise of the Option at their
Fair Market Value on the date of exercise; PROVIDED, HOWEVER, that no payment
described in this Section shall exceed the Tax Benefit to the Company resulting
from deductions relating to ordinary income recognized by the Optionee as a
result of exercising the Disqualified Option and the receipt of such payment.
The payment described in this Section shall be made by the Company within thirty
(30) days of the filing by the Company of the federal tax return which includes
the tax items associated with the income recognized by the Optionee as a result
of exercising the Disqualified Option (or, if the Tax Benefit described in the
preceding sentence is not realized until a later year, within thirty (30) days
of the filing by the Company of the federal tax return with respect to which
such Tax Benefit is realized); PROVIDED, HOWEVER, that if more than one Optionee
is entitled to a cash payment pursuant to this Section 7.5(c) in any single tax
year and the Tax Benefit realized by the Company in such year with respect to
all such Optionees is less than the aggregate amount of the payments due to such
Optionees hereunder, then (i) each such Optionee shall receive a portion of such
cash payment equal to an amount determined by multiplying the amount of the Tax
Benefit realized by the Company in such year by a fraction the numerator of
which is equal to the amount of payment due to such Optionee and the denominator
of which is equal to the aggregate amount due to all such Optionees entitled to
a payment hereunder, and (ii) subject to further application of this proviso,
shall be entitled to receive the remaining portion within thirty (30) days of
the filing by the Company of the federal tax return with respect to which such
Tax Benefit is realized.
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8. STOCK APPRECIATION RIGHTS.
The Committee may in its sole discretion, either alone or in
connection with the grant of an Option, grant Stock Appreciation Rights in
accordance with the Plan, the terms and conditions of which shall be set forth
in an Agreement. If granted in connection with an Option, a Stock Appreciation
Right shall cover the same Shares covered by the Option (or such lesser number
of Shares as the Committee may determine) and shall, except as provided in this
Section 8, be subject to the same terms and conditions as the related Option.
8.1 TIME OF GRANT. A Stock Appreciation Right may be granted
(a) at any time if unrelated to an Option, or (b) if related to an Option,
either at the time of grant, or (except in the case of an Incentive Stock
Option) at any time thereafter during the term of the Option.
8.2 STOCK APPRECIATION RIGHT RELATED TO AN OPTION.
(a) EXERCISE. Subject to Section 8.9, a Stock
Appreciation Right granted in connection with an Option shall be exercisable at
such time or times and only to the extent that the related Options are
exercisable (including, without limitation, exercisability upon Termination of
Employment or a Change in Control), and will not be transferable except to the
extent the related Option may be transferable. A Stock Appreciation Right
granted in connection with an Incentive Stock Option shall expire no later than
the expiration of the related Incentive Stock Option and shall be exercisable
only if the Fair Market Value of a Share on the date of exercise exceeds the
purchase price of the Option specified in the related Incentive Stock Option
Agreement.
(b) TREATMENT OF RELATED OPTIONS AND STOCK APPRECIATION
RIGHTS UPON EXERCISE. Upon the exercise of a Stock Appreciation Right granted in
connection with an Option, the Option shall be canceled to the extent of the
number of Shares as to which the Stock Appreciation Right is exercised, and upon
the exercise of an Option granted in connection with a Stock Appreciation Right,
the Stock Appreciation Right shall be canceled to the extent of the number of
Shares as to which the Option is exercised or surrendered.
8.3 STOCK APPRECIATION RIGHT UNRELATED TO AN OPTION.
(a) TERMS. Stock Appreciation Rights unrelated to
Options shall contain such terms and conditions as to exercisability (subject to
Section 8.9), vesting and duration as the Committee shall determine, but in no
event shall they have a term of greater than ten (10) years; PROVIDED, HOWEVER,
that the Committee may provide that Stock Appreciation right may, upon the death
of the Grantee, be exercised for up to one
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(1) year following the date of the Grantee's death even if such period extends
beyond ten (10) years from the date the Stock Appreciation Right is granted.
(b) TERMINATION. Subject to Section 13 and except as
provided in Section 8.9, and unless otherwise provided by the Committee, in its
sole discretion, in the applicable Agreement, upon a Grantee's Termination of
Employment, a Stock Appreciation Right shall be exercisable by the Grantee to
the same extent that an Option would be exercisable by an Optionee upon the
Optionee's Termination of Employment under the provisions of Section 5.5;
PROVIDED, HOWEVER, no Stock Appreciation Right may be exercised after the
expiration date specified for the particular Stock Appreciation Right in the
applicable Agreement.
8.4 AMOUNT PAYABLE. Subject to Section 8.7, upon the
exercise of a Stock Appreciation Right, the Grantee shall be entitled to receive
an amount determined by multiplying (x) the excess of the Fair Market Value of a
Share on the date preceding the date of exercise of such Stock Appreciation
Right over (A) in the case of a Stock Appreciation Right granted in connection
with an Option, the per Share purchase price under the related Option, or (B) in
the case of a Stock Appreciation Right unrelated to an Option, the Fair Market
Value of a Share on the date the Stock Appreciation Right was granted, by (y)
the number of Shares as to which such Stock Appreciation Right is being
exercised. Notwithstanding the foregoing, the Committee may limit in any manner
the amount payable with respect to any Stock Appreciation Right by including
such a limit in the Agreement evidencing the Stock Appreciation Right at the
time it is granted.
8.5 NON-TRANSFERABILITY. No Stock Appreciation Right shall
be transferable by the Grantee to whom it was granted otherwise than by will or
by the laws of descent and distribution or, in the Committee's sole discretion,
(except in the case of a Stock Appreciation Right granted in connection with an
Incentive Stock Option), to a spouse or former spouse in a transfer described in
Section 1041(a) of the Code (a "Code 1041 Transfer"), and, except with respect
to a Stock Appreciation Right transferred pursuant to a Code 1041 Transfer, such
Stock Appreciation Right shall be exercisable during the lifetime of such
Grantee only by the Grantee or his or her guardian or legal representative. The
terms of such Stock Appreciation Right shall be final, binding and conclusive
upon the beneficiaries, executors, administrators, heirs and successors of the
Grantee.
8.6 METHOD OF EXERCISE. Stock Appreciation Rights shall be
exercised by a Grantee only by a written notice delivered in person or by mail
to the Secretary of the Company at the Company's principal executive office,
specifying the number of Shares with respect to which the Stock Appreciation
Right is being exercised. If requested by the Committee, the Grantee shall
deliver the Agreement evidencing the Stock Appreciation Right being exercised
and the Agreement evidencing any related
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Option to the Secretary of the Company who shall endorse thereon a notation of
such exercise and return such Agreement to the Grantee.
8.7 FORM OF PAYMENT. Payment of the amount determined under
Section 8.4 may be made in the sole discretion of the Committee solely in whole
Shares in a number determined at their Fair Market Value on the date preceding
the date of exercise of the Stock Appreciation Right, or solely in cash, or in a
combination of cash and Shares. If the Committee decides to make full payment in
Shares and the amount payable results in a fractional Share, no fractional
Shares (or cash in lieu thereof) shall be issued upon the exercise of the Stock
Appreciation Right and the number of Shares that will be delivered shall be
rounded to the nearest number of whole Shares.
8.8 MODIFICATION. No modification of an Award shall
adversely alter or impair any rights or obligations under the Agreement without
the Grantee's consent.
8.9 EFFECT OF CHANGE IN CONTROL. Notwithstanding anything
contained in this Section 8 to the contrary, in the event of a Change in
Control, the Committee, in its sole discretion, may provide in writing in
connection with, or in contemplation of, any such Change in Control for any
or all of the following alternatives (separately or in any combination): (i)
for the assumption by the Successor Corporation of the Stock Appreciation
Rights theretofore granted or the substitution by such corporation for such
Stock Appreciation Rights of new stock appreciation rights covering the stock
of the Successor Corporation with appropriate adjustments as to the number
and kinds of shares and the purchase prices; (ii) for the continuation of the
Plan in which event the Plan and the Stock Appreciation Rights shall continue
under such terms as may be provided; (iii) for the accelerated vesting of the
Stock Appreciation Rights; or (iv) with respect to a Stock Appreciation Right
unrelated to an Option, for the payment in cash upon the surrender to the
Company for cancellation of any such Stock Appreciation Right or portion of a
Stock Appreciation Right to the extent vested and not yet exercised in an
amount equal to the excess, if any, of (A) the greater of (i) the Fair Market
Value, on the date preceding the date of surrender, of the underlying Shares
subject to the Stock Appreciation Right or portion thereof surrendered and
(ii) the Adjusted Fair Market Value, on the date preceding the date of
surrender, of the Shares over (B) the aggregate Fair Market Value, on the
date the Stock Appreciation Right was granted, of the Shares subject to the
Stock Appreciation Right or portion thereof surrendered. Any vesting of Stock
Appreciation Rights pursuant to this Section 8.9 or surrender of a Stock
Appreciation Right for a cash payment shall be conditioned upon the
consummation of the Change in Control and shall be effective only immediately
before the consummation of the Change in Control. Upon consummation of the
Change in Control, the Plan and all outstanding but unexercised Stock
Appreciation Rights shall terminate, except to the extent provision is made
in writing in connection with such transaction for the continuation of the
Plan, or the assumption or substitution of such Stock Appreciation
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Rights. The Committee shall send written notice of an event that will result
in such a termination to all individuals who hold Stock Appreciation Rights
not later than the time at which the Company gives notice thereof to its
stockholders.
9. DIVIDEND EQUIVALENT RIGHTS.
The Committee may in its sole discretion grant Dividend
Equivalent Rights to Eligible Individuals in tandem with an Option or Award or
as a separate Award. The terms and conditions (including, without limitation,
terms and conditions relating to a Change in Control) applicable to each
Dividend Equivalent Right shall be specified in the Agreement under which the
Dividend Equivalent Right is granted. In the sole discretion of the Committee,
amounts payable in respect of Dividend Equivalent Rights may be payable
currently or deferred until the lapsing of restrictions on such Dividend
Equivalent Rights or until the vesting, exercise, payment, settlement or other
lapse of restrictions on the Option or Award to which the Dividend Equivalent
Rights relate. In the event that the amount payable in respect of Dividend
Equivalent Rights are to be deferred, the Committee shall determine whether such
amounts are to be held in cash or reinvested in Shares or deemed (notionally) to
be reinvested in Shares. If amounts payable in respect of Dividend Equivalent
Rights are to be held in cash, there may be credited at the end of each year (or
portion thereof) interest on the amount of the account at the beginning of the
year at a rate per annum as the Committee, in its sole discretion, may
determine. In the sole discretion of the Committee, Dividend Equivalent Rights
may be settled in cash or Shares or a combination thereof, in a single
installment or multiple installments. With respect to Dividend Equivalent Rights
granted in tandem with an Option, the Agreement may provide that the Optionee
may elect to have amounts payable in respect of such Dividend Equivalent Rights
applied against the purchase price of such Option. To the extent necessary for
any Dividend Equivalent Right intended to qualify as Performance-Based
Compensation under Section 162(m) of the Code to so qualify, the terms and
conditions of the Dividend Equivalent Right shall be such that payment of the
Dividend Equivalent Right is contingent upon attainment of specified Performance
Objectives within the Performance Cycle, as provided for in Section 11, and such
Dividend Equivalent Right shall be treated as a Performance Award for purposes
of Sections 11 and 16.
10. RESTRICTED STOCK.
10.1 GRANT. The Committee may in its sole discretion grant
Awards to Eligible Individuals of Restricted Stock, which shall be evidenced by
an Agreement between the Company and the Grantee. Each Agreement shall contain
such restrictions, terms and conditions as the Committee may, in its sole
discretion, determine and (without limiting the generality of the foregoing)
such Agreements may require that an appropriate
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legend be placed on Share certificates. Awards of Restricted Stock shall be
subject to the terms and provisions set forth below in this Section 10.
10.2 RIGHTS OF GRANTEE. Shares of Restricted Stock granted
pursuant to an Award hereunder shall be issued in the name of the Grantee as
soon as reasonably practicable after the Award is granted PROVIDED that the
Grantee has executed an Agreement evidencing the Award, the appropriate blank
stock powers and, in the sole discretion of the Committee, an escrow agreement
and any other documents which the Committee may require as a condition to the
issuance of such Shares. If a Grantee shall fail to execute the Agreement
evidencing a Restricted Stock Award, the appropriate blank stock powers, an
escrow agreement or any other documents which the Committee may require within
the time period prescribed by the Committee at the time the Award is granted,
the Award shall be null and void. At the sole discretion of the Committee,
Shares issued in connection with a Restricted Stock Award shall be deposited
together with the stock powers with an escrow agent (which may be the Company)
designated by the Committee. Unless the Committee determines otherwise and as
set forth in the Agreement, upon delivery of the Shares to the escrow agent, the
Grantee shall have all of the rights of a stockholder with respect to such
Shares, including the right to vote the Shares and to receive all dividends or
other distributions paid or made with respect to the Shares.
10.3 NON-TRANSFERABILITY. Until all restrictions upon the
Shares of Restricted Stock awarded to a Grantee shall have lapsed in the manner
set forth in Section 10.4, such Shares shall not be sold, transferred or
otherwise disposed of and shall not be pledged or otherwise hypothecated, nor
shall they be delivered to the Grantee.
10.4 LAPSE OF RESTRICTIONS.
(a) GENERALLY. Subject to Section 10.4(b), restrictions
upon Shares of Restricted Stock awarded hereunder shall lapse at such time or
times and on such terms and conditions as the Committee may determine; PROVIDED,
HOWEVER, that except in the case of Shares of Restricted Stock issued in full or
partial settlement of another Award or other earned compensation, such
restrictions shall not fully lapse prior to the third anniversary of the date on
which such Shares of Restricted Stock were granted. The Agreement evidencing the
Award shall set forth any such restrictions.
(b) EFFECT OF CHANGE IN CONTROL. Notwithstanding
anything in this Section 10 to the contrary, in the event of a Change in
Control, the Committee, in its sole discretion, may provide in writing in
connection with, or in contemplation of, any such Change in Control for any or
all of the following alternatives (separately or in any combination): (i) for
the assumption by the Successor Corporation of the shares of Restricted Stock
theretofore granted or the substitution by such corporation for such
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shares of Restricted Stock of new shares of restricted stock of the Successor
Corporation with appropriate adjustments as to the number and kinds of shares;
(ii) for the continuation of the Plan in which event the Plan and the shares of
Restricted Stock shall continue under such terms as may be provided; or (iii)
for the lapse of all restrictions upon the shares of Restricted Stock. Any
vesting of shares of Restricted Stock pursuant to this Section 10.5(b) shall be
conditioned upon the consummation of the Change in Control and shall be
effective only immediately before the consummation of the Change in Control.
10.5 TERMS OF RESTRICTED STOCK.
(a) FORFEITURE OF RESTRICTED STOCK. Subject to Sections
10.4(b), 10.5(b) and 13, all Restricted Stock shall be forfeited and returned to
the Company and all rights of the Grantee with respect to such Restricted Stock
shall terminate unless the Grantee continues in the service of the Company as an
employee or director until the expiration of the forfeiture period for such
Restricted Stock and satisfies any and all other conditions set forth in the
Agreement. The Committee, in its sole discretion, shall determine the forfeiture
period (which may, but need not, lapse in installments) and any other terms and
conditions applicable with respect to any Restricted Stock Award.
(b) WAIVER OF FORFEITURE PERIOD. Notwithstanding
anything contained in this Section 10 to the contrary, the Committee may, in its
sole discretion, waive the forfeiture period and any other conditions set forth
in any Agreement under appropriate circumstances (including, without limitation,
the death, Disability or retirement of the Grantee or a material change in
circumstances arising after the date of grant) and subject to such terms and
conditions (including, without limitation, forfeiture of a proportionate number
of the Restricted Stock) as the Committee shall deem appropriate, PROVIDED that
the Grantee shall at that time have completed at least one (1) year of
employment or service after the date of grant.
10.6 MODIFICATION OR SUBSTITUTION. Subject to the terms of
the Plan, including, without limitation, Section 16, the Committee may modify
outstanding Awards of Restricted Stock or accept the surrender of outstanding
shares of Restricted Stock (to the extent the restrictions on such Shares have
not yet lapsed) and grant new Awards in substitution for them. Notwithstanding
the foregoing, no modification of an Award shall adversely alter or impair any
rights or obligations under the Agreement without the Grantee's consent.
10.7 TREATMENT OF DIVIDENDS. At the time an Award of Shares
of Restricted Stock is granted, the Committee may, in its sole discretion,
determine that the payment to the Grantee of dividends, or a specified portion
thereof, declared or paid on such Shares by the Company shall be (a) deferred
until the lapsing of the restrictions
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imposed upon such Shares and (b) held by the Company for the account of the
Grantee until such time. In the event that dividends are to be deferred, the
Committee shall determine whether such dividends are to be reinvested in
Shares (which shall be held as additional Shares of Restricted Stock) or held
in cash. If deferred dividends are to be held in cash, there may be credited
at the end of each year (or portion thereof) interest on the amount of the
account at the beginning of the year at a rate per annum as the Committee, in
its sole discretion, may determine. Payment of deferred dividends in respect
of Shares of Restricted Stock (whether held in cash or as additional Shares
of Restricted Stock), together with interest accrued thereon, if any, shall
be made upon the lapsing of restrictions imposed on the Shares in respect of
which the deferred dividends were paid, and any dividends deferred (together
with any interest accrued thereon) in respect of any Shares of Restricted
Stock shall be forfeited upon the forfeiture of such Shares.
10.8 DELIVERY OF SHARES. Upon the lapse of the restrictions
on Shares of Restricted Stock, the Committee shall cause a stock certificate to
be delivered to the Grantee with respect to such Shares, free of all
restrictions hereunder.
11. PERFORMANCE AWARDS.
11.1 PERFORMANCE OBJECTIVES
(a) ESTABLISHMENT. Performance Objectives for
Performance Awards may be expressed in terms of (i) earnings per Share, (ii)
Share price, (iii) pre-tax profits, (iv) net earnings, (v) return on equity or
assets, (vi) revenues, (vii) EBITDA (earnings before interest, taxes,
depreciation and amortization), (viii) market share, or market penetration, (ix)
any combination of the foregoing or (x) prior to the end of the Transition
Period, such other criteria as the Committee may determine, and may be
determined before or after accounting changes, special charges, foreign currency
effects, acquisitions, divestitures, or other extraordinary events as determined
by the Committee. Performance Objectives may be in respect of the performance of
the Company, any of its Subsidiaries, any of its Divisions or any combination
thereof. Performance Objectives may be absolute or relative (to prior
performance of the Company or to the performance of one or more other entities
or external indices) and may be expressed in terms of a progression within a
specified range. The Performance Objectives with respect to a Performance Cycle
shall be established in writing by the Committee by the earlier of (x) the date
on which a quarter of the Performance Cycle has elapsed or (y) the date which is
ninety (90) days after the commencement of the Performance Cycle, and in any
event while the performance relating to the Performance Objectives remains
substantially uncertain.
(b) EFFECT OF CERTAIN EVENTS. At the time of the
granting of a Performance Award, or at any time thereafter, in either case to
the extent permitted under
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Section 162(m) of the Code and the regulations thereunder without adversely
affecting the treatment of the Performance Award as Performance-Based
Compensation, the Committee may provide for the manner in which performance will
be measured against the Performance Objectives (or may adjust the Performance
Objectives) to reflect the impact of specified corporate transactions,
accounting or tax law changes and other extraordinary or nonrecurring events.
(c) DETERMINATION OF PERFORMANCE. Prior to the vesting,
payment, settlement or lapsing of any restrictions with respect to any
Performance Award that is intended to constitute Performance-Based Compensation
made to a Grantee who is subject to Section 162(m) of the Code, the Committee
shall certify in writing that the applicable Performance Objectives have been
satisfied.
11.2 PERFORMANCE UNITS. The Committee, in its sole
discretion, may grant Awards of Performance Units to Eligible Individuals, the
terms and conditions of which shall be set forth in an Agreement between the
Company and the Grantee. Performance Units may be denominated in Shares or a
specified dollar amount and, contingent upon the attainment of specified
Performance Objectives within the Performance Cycle, represent the right to
receive payment as provided in Section 11.2(b) of (i) in the case of
Share-denominated Performance Units, the Fair Market Value of a Share on the
date the Performance Unit was granted, the date the Performance Unit became
vested or any other date specified by the Committee, (ii) in the case of
dollar-denominated Performance Units, the specified dollar amount or (iii) a
percentage (which may be more than 100%) of the amount described in clause (i)
or (ii) depending on the level of Performance Objective attainment; PROVIDED,
HOWEVER, that, the Committee may at the time a Performance Unit is granted
specify a maximum amount payable in respect of a vested Performance Unit. Each
Agreement shall specify the number of Performance Units to which it relates, the
Performance Objectives which must be satisfied in order for the Performance
Units to vest and the Performance Cycle within which such Performance Objectives
must be satisfied.
(a) VESTING AND FORFEITURE. Subject to Sections 11.1(c)
and 11.4, Performance Units shall become vested in such installments (which need
not be equal) and at such times or times and on such terms, conditions and
satisfaction of Performance Objectives as the Committee may, in its sole
discretion, determine at the time an Award is granted.
(b) PAYMENT OF AWARDS. Subject to Section 11.1(c),
payment to Grantees in respect of vested Performance Units shall be made as soon
as practicable after the last day of the Performance Cycle to which such Award
relates unless the Agreement evidencing the Award provides for the deferral of
payment, in which event the terms and conditions of the deferral shall be set
forth in the Agreement. Subject to Section 11.4,
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such payments may be made entirely in Shares valued at their Fair Market Value
as of the day preceding the date of payment or such other date specified by the
Committee, entirely in cash, or in such combination of Shares and cash as the
Committee in its sole discretion shall determine at any time prior to such
payment; PROVIDED, HOWEVER, that if the Committee in its sole discretion
determines to make such payment entirely or partially in Shares of Restricted
Stock, the Committee must determine the extent to which such payment will be in
Shares of Restricted Stock and the terms of such Restricted Stock at the time
the Award is granted.
(c) NON-TRANSFERABILITY. Until the vesting of
Performance Units, such Performance Units shall not be sold, transferred or
otherwise disposed of and shall not be pledged or otherwise hypothecated.
11.3 PERFORMANCE SHARES. The Committee, in its sole
discretion, may grant Awards of Performance Shares to Eligible Individuals, the
terms and conditions of which shall be set forth in an Agreement between the
Company and the Grantee. Each Agreement may require that an appropriate legend
be placed on Share certificates. Awards of Performance Shares shall be subject
to the following terms and provisions:
(a) RIGHTS OF GRANTEE. The Committee shall provide at
the time an Award of Performance Shares is made the time or times at which the
actual Shares represented by such Award shall be issued in the name of the
Grantee; PROVIDED, HOWEVER, that no Performance Shares shall be issued until the
Grantee has executed an Agreement evidencing the Award, the appropriate blank
stock powers and, in the sole discretion of the Committee, an escrow agreement
and any other documents which the Committee may require as a condition to the
issuance of such Performance Shares. If a Grantee shall fail to execute the
Agreement evidencing an Award of Performance Shares, the appropriate blank stock
powers, an escrow agreement and any other documents which the Committee may
require within the time period prescribed by the Committee at the time the Award
is granted, the Award shall be null and void. At the sole discretion of the
Committee, Shares issued in connection with an Award of Performance Shares shall
be deposited together with the stock powers with an escrow agent (which may be
the Company) designated by the Committee. Except as restricted by the terms of
the Agreement, upon delivery of the Shares to the escrow agent, the Grantee
shall have, in the sole discretion of the Committee, all of the rights of a
stockholder with respect to such Shares, including the right to vote the Shares
and to receive all dividends or other distributions paid or made with respect to
the Shares.
(b) NON-TRANSFERABILITY. Until any restrictions upon
the Performance Shares awarded to a Grantee shall have lapsed in the manner set
forth in Sections 11.3(c) or 11.4, such Performance Shares shall not be sold,
transferred or otherwise disposed of and shall not be pledged or otherwise
hypothecated, nor shall they
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be delivered to the Grantee. The Committee may also impose such other
restrictions and conditions on the Performance Shares, if any, as it deems
appropriate.
(c) LAPSE OF RESTRICTIONS. Subject to Sections 11.1(c)
and 11.4, restrictions upon Performance Shares awarded hereunder shall lapse and
such Performance Shares shall become vested at such time or times and on such
terms, conditions and satisfaction of Performance Objectives as the Committee
may, in its sole discretion, determine at the time an Award is granted.
(d) TREATMENT OF DIVIDENDS. At the time the Award of
Performance Shares is granted, the Committee may, in its sole discretion,
determine that the payment to the Grantee of dividends, or a specified portion
thereof, declared or paid on Shares represented by such Award which have been
issued by the Company to the Grantee shall be (i) deferred until the lapsing of
the restrictions imposed upon such Performance Shares and (ii) held by the
Company for the account of the Grantee until such time. In the event that
dividends are to be deferred, the Committee shall determine whether such
dividends are to be reinvested in Shares (which shall be held as additional
Performance Shares) or held in cash. If deferred dividends are to be held in
cash, there may be credited at the end of each year (or portion thereof)
interest on the amount of the account at the beginning of the year at a rate per
annum as the Committee, in its sole discretion, may determine. Payment of
deferred dividends in respect of Performance Shares (whether held in cash or in
additional Performance Shares), together with interest accrued thereon, if any,
shall be made upon the lapsing of restrictions imposed on the Performance Shares
in respect of which the deferred dividends were paid, and any dividends deferred
(together with any interest accrued thereon) in respect of any Performance
Shares shall be forfeited upon the forfeiture of such Performance Shares.
(e) DELIVERY OF SHARES. Upon the lapse of the
restrictions on Performance Shares awarded hereunder, the Committee shall cause
a stock certificate to be delivered to the Grantee with respect to such Shares,
free of all restrictions hereunder.
11.4 EFFECT OF CHANGE IN CONTROL. Notwithstanding anything in
this Section 11 to the contrary, in the event of a Change in Control, the
Committee, in its sole discretion, may provide in writing in connection with, or
in contemplation of, any such Change in Control for any or all of the following
alternatives (separately or in any combination): (i) for the assumption by the
Successor Corporation of the Performance Awards theretofore granted or the
substitution by such corporation for such Performance Awards of new performance
awards of the Successor Corporation with appropriate adjustments as to the
applicable performance objectives and, if necessary, the number and kinds of
shares; (ii) for the continuation of the Plan in which event the Plan and the
Performance Awards shall continue under such terms as may be provided; or (iii)
for the vesting of outstanding Performance Awards as if all Performance
Objectives had been
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satisfied at the maximum level and, in the case of Performance Units which
become vested as a result of a Change in Control, for a payment which may be
made entirely in Shares valued at their Fair Market Value as of the day
preceding the payment, entirely in cash, or in such combination of Shares and
cash as the Committee shall determine in its sole discretion at any time prior
to such payment; provided that such payment shall be made within ten (10)
business days after such Change in Control. Any vesting of Performance Awards
pursuant to this Section 11.4 shall be conditioned upon the consummation of the
Change in Control and shall be effective only immediately before the
consummation of the Change in Control.
11.5 TERMINATION. Except as provided in Section 13, and
unless otherwise provided by the Committee, in its sole discretion, in the
applicable Agreement, the following provisions shall apply to Performance Awards
upon a Termination of Employment:
(a) TERMINATION OF EMPLOYMENT PRIOR TO END OF
PERFORMANCE CYCLE. Except as provided in Sections 11.5(b) and (d), in the case
of a Grantee's Termination of Employment, prior to the end of a Performance
Cycle, the Grantee will not be entitled to any Performance Awards, and any
Performance Shares shall be forfeited.
(b) DISABILITY, RETIREMENT OR DEATH PRIOR TO END OF
PERFORMANCE CYCLE. Unless otherwise provided by the Committee, in its sole
discretion, in the Agreement, if a Grantee's Disability Date or Termination of
Employment by reason of retirement on or after the Grantee's Normal Retirement
Date or death occurs following at least twelve (12) months of participation in
any Performance Cycle, but prior to the end of a Performance Cycle, the Grantee
or such Grantee's Beneficiary, as the case may be, shall be entitled to receive
a pro-rata share of his or her Performance Award as determined under Subsection
(c).
(c) PRO-RATA PAYMENT.
(i) PERFORMANCE UNITS. With respect to
Performance Units, the amount of any payment made to a Grantee (or Beneficiary)
under circumstances described in Section 11.5(b) will be the amount determined
by multiplying the amount of the Performance Units payable in Shares or dollars
which would have been earned, determined at the end of the Performance Cycle,
had such employment not been terminated, by a fraction, the numerator of which
is the number of whole months such Grantee was employed during the Performance
Cycle, and the denominator of which is the total number of months of the
Performance Cycle. Any such payment shall be made as soon as practicable after
the end of the respective Performance Cycle, and shall relate to attainment of
Performance Objectives over the entire Performance Cycle.
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(ii) PERFORMANCE SHARES. With respect to
Performance Shares, the amount of Performance Shares held by a Grantee (or
Beneficiary) with respect to which restrictions shall lapse under circumstances
described in Section 11.5(b) will be the amount determined by multiplying the
amount of the Performance Shares with respect to which restrictions would have
lapsed, determined at the end of the Performance Cycle, had such employment not
been terminated, by a fraction, the numerator of which is the number of whole
months such Grantee was employed during the Performance Cycle, and the
denominator of which is the total number of months of the Performance Cycle. The
Committee shall determine the amount of Performance Shares with respect to which
restrictions shall lapse under this Section 11.5(c)(ii) as soon as practicable
after the end of the respective Performance Cycle, and such determination shall
relate to attainment of Performance Objectives over the entire Performance
Cycle. At that time, all Performance Shares relating to that Performance Cycle
with respect to which restrictions shall not lapse shall be forfeited.
(d) OTHER EVENTS. Notwithstanding anything to the
contrary in this Section 11, the Committee may, in its sole discretion,
determine to pay all or any portion of a Performance Award to a Grantee who has
a Termination of Employment prior to the end of a Performance Cycle under
certain circumstances (including, without limitation, a material change in
circumstances arising after the date of grant) and subject to such terms and
conditions as the Committee shall deem appropriate, provided that the Grantee
shall have completed at his or her date of Termination of Employment at least
one (1) year of employment after the date of grant.
(e) TERMINATION OF EMPLOYMENT AFTER END OF PERFORMANCE
CYCLE. Subject to Section 11.5(f), in the case of a Grantee's Termination of
Employment after the end of a Performance Cycle in which the applicable
Performance Objectives have been satisfied, the Grantee shall not be entitled to
any Performance Awards that have not yet vested as of the date of the Grantee's
Termination of Employment.
(f) WAIVER OF FORFEITURE. Notwithstanding anything to
the contrary in Section 11(e), in the case of a Grantee's Termination of
Employment after the end of a Performance Cycle in which the applicable
Performance Objectives have been satisfied, the Committee may, in its sole
discretion, waive the forfeiture of Performance Awards and any other conditions
set forth in any Agreement under appropriate circumstances (including, without
limitation, the death, Disability, or retirement of the Grantee or a material
change in circumstances arising after the date of grant) and subject to such
terms and conditions as the Committee shall deem appropriate.
11.6 MODIFICATION OR SUBSTITUTION. Subject to the terms of
the Plan, including, without limitation, Section 16, the Committee may modify
outstanding Performance Awards or accept the surrender of outstanding
Performance Awards and
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grant new Performance Awards in substitution for them. Notwithstanding the
foregoing, no modification of a Performance Award shall adversely alter or
impair any rights or obligations under the Agreement without the Grantee's
consent.
12. OTHER SHARE BASED AWARDS.
12.1 SHARE AWARDS. The Committee may, in its sole discretion,
grant a Share Award to any Eligible Individual on such terms and conditions as
the Committee may, in its sole discretion, determine. Share Awards may be made
as additional compensation for services rendered by the Eligible Individual or
may be in lieu of cash or other compensation to which the Eligible Individual is
entitled from the Company.
12.2 PHANTOM STOCK AWARDS.
(a) GRANT. The Committee may, in its sole discretion,
grant shares of Phantom Stock to any Eligible Individual. Such Phantom Stock
shall be subject to the terms and conditions established by the Committee and
set forth in the applicable Agreement.
(b) PAYMENT OF AWARDS. Upon the vesting of a Phantom
Stock Award, the Grantee shall be entitled to receive a cash payment in respect
of each share of Phantom Stock which shall be equal to the Fair Market Value of
a Share as of the date the Phantom Stock Award was granted, or such other date
as determined by the Committee at the time the Phantom Stock Award was granted.
The Committee may, at the time a Phantom Stock Award is granted, provide a
limitation on the amount payable in respect of each share of Phantom Stock. In
lieu of a cash payment, the Committee may settle Phantom Stock Awards with
Shares having a Fair Market Value on the date of vesting equal to the cash
payment to which the Grantee has become entitled.
13. EMPLOYMENT AGREEMENT GOVERNS TERMINATION OF EMPLOYMENT. An
employment agreement, if applicable, between an Optionee or Grantee and the
Company shall govern with respect to the terms and conditions applicable to such
Option or Award upon a termination or change in the status of the employment of
the Optionee or Grantee, to the extent that such employment agreement provides
for terms and conditions that differ from the terms and conditions provided for
in the applicable Agreement or the Plan; PROVIDED, HOWEVER, that to the extent
necessary for an Option or Award intended to qualify as performance-based
compensation under Section 162(m) of the Code to so qualify, the terms of the
applicable Agreement or the Plan shall govern the Option or Award; and, PROVIDED
FURTHER, that the Committee shall have reviewed and, in its sole discretion,
approved the employment agreement.
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14. ADJUSTMENT UPON CHANGES IN CAPITALIZATION.
(a) In the event of a Change in Capitalization, the
Committee shall conclusively determine the appropriate adjustments, if any, to
(i) the maximum number and class of Shares or other stock or securities with
respect to which Options or Awards may be granted under the Plan, (ii) the
maximum number and class of Shares or other stock or securities with respect to
which Options or Awards may be granted to any Eligible Individual during any
calendar year period, (iii) the number and class of Shares or other stock or
securities which are subject to outstanding Options or Awards granted under the
Plan and the purchase price therefor, if applicable, (iv) the number and class
of Shares or other securities in respect of which Formula Options are to be
granted under Section 6 and (v) the Performance Objectives.
(b) Any such adjustment in the Shares or other stock or
securities subject to outstanding Incentive Stock Options (including any
adjustments in the purchase price) shall be made in such manner as not to
constitute a modification as defined by Section 424(h)(3) of the Code and only
to the extent otherwise permitted by Sections 422 and 424 of the Code and, to
the extent necessary for any Option or Award intended to qualify as
Performance-Based Compensation to continue to so qualify, any such adjustment in
the Shares or other stock or securities subject to such Options and Awards shall
be made in such manner as to comply with Section 162(m) of the Code and the
regulations promulgated thereunder.
(c) If, by reason of a Change in Capitalization, a
Grantee of an Award shall be entitled to, or an Optionee shall be entitled to
exercise an Option with respect to, new, additional or different shares of stock
or securities of the Company or any other corporation, such new, additional or
different shares shall thereupon be subject to all of the conditions,
restrictions and performance criteria which were applicable to the Shares
subject to the Award or Option, as the case may be, prior to such Change in
Capitalization.
15. EFFECT OF CERTAIN TRANSACTIONS. Subject to Sections 7.5, 8.9,
10.4(b) and 11.4 or as otherwise provided in an Agreement, in the event of (a)
the liquidation or dissolution of the Company or (b) a merger or consolidation
of the Company (a "Transaction"), the Plan and the Options and Awards issued
hereunder shall continue in effect in accordance with their respective terms,
except that following a Transaction each Optionee and Grantee shall be entitled
to receive in respect of each Share subject to any outstanding Options or
Awards, as the case may be, upon exercise of any Option or payment or transfer
in respect of any Award, the same number and kind of stock, securities, cash,
property or other consideration that each holder of a Share was entitled to
receive in the Transaction in respect of a Share; PROVIDED, HOWEVER, that such
stock, securities, cash, property, or other consideration shall remain subject
to all of the
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conditions, restrictions and performance criteria which were applicable to the
Options and Awards prior to such Transaction.
16. INTERPRETATION. Following the required registration of any equity
security of the Company pursuant to Section 12 of the Exchange Act, unless
otherwise expressly stated in the relevant Agreement, each Option, Stock
Appreciation Right and Performance Award granted under the Plan to a "covered
employee" within the meaning of Section 162(m)(3) of the Code is intended to be
Performance-Based Compensation (except that, in the event of a Change in
Control, payment of Performance Awards to a Grantee who remains a "covered
employee" with respect to such payment may not qualify as Performance-Based
Compensation). The Committee shall not be entitled to exercise any discretion
otherwise authorized hereunder with respect to such Options or Awards if the
ability to exercise such discretion or the exercise of such discretion itself
would cause the compensation attributable to such Options or Awards to fail to
qualify as Performance-Based Compensation. Notwithstanding anything to the
contrary in the Plan, the provisions of the Plan may at any time be bifurcated
by the Board or the Committee in any manner so that certain provisions of the
Plan or any Performance Award intended (or required in order) to satisfy the
applicable requirements of Section 162(m) of the Code are only applicable to
persons whose compensation is subject to Section 162(m).
17. POOLING TRANSACTIONS. Notwithstanding anything contained in the
Plan or any Agreement to the contrary, in the event of a Change in Control which
is also intended to constitute a Pooling Transaction, the Committee shall take
such actions, if any, as are specifically recommended by an independent
accounting firm retained by the Company to the extent reasonably necessary in
order to assure that the Pooling Transaction will qualify as such, including,
without limitation, (a) deferring the vesting, exercise, payment, settlement or
lapsing of restrictions with respect to any Option or Award, (b) providing that
the payment or settlement in respect of any Option or Award be made in the form
of cash, Shares or securities of a successor or acquirer of the Company, or a
combination of the foregoing, and (c) providing for the extension of the term of
any Option or Award to the extent necessary to accommodate the foregoing, but
not beyond the maximum term permitted for any Option or Award.
18. EFFECTIVE DATE, TERMINATION AND AMENDMENT OF THE PLAN.
18.1 EFFECTIVE DATE. The effective date of this Plan shall be
the date the Plan is adopted by the Board, subject only to the approval of the
affirmative vote of the holders of a majority of the securities of the Company
present, or represented, and entitled to vote at a meeting of the stockholders
duly held in accordance with the applicable laws of the State of Delaware within
twelve (12) months of the adoption of the Plan by the Board.
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18.2 PLAN AMENDMENT OR TERMINATION. The Plan shall terminate
on the day preceding the tenth anniversary of the date of its adoption by the
Board and no Option or Award may be granted thereafter. The Board may sooner
terminate the Plan and the Board may at any time and from time to time amend,
modify or suspend the Plan; PROVIDED, HOWEVER, that:
(a) no such amendment, modification, suspension or
termination shall impair or adversely alter any Options or Awards theretofore
granted under the Plan, except with the consent of the Optionee or Grantee, nor
shall any amendment, modification, suspension or termination deprive any
Optionee or Grantee of any Shares which he or she may have acquired through or
as a result of the Plan; and
(b) to the extent necessary under any applicable law,
regulation or exchange requirement no amendment shall be effective unless
approved by the stockholders of the Company in accordance with applicable law,
regulation or exchange requirement.
19. NON-EXCLUSIVITY OF THE PLAN. The adoption of the Plan by the Board
shall not be construed as amending, modifying or rescinding any previously
approved incentive arrangement or as creating any limitations on the power of
the Board to adopt such other incentive arrangements as it may deem desirable,
including, without limitation, the granting of stock options otherwise than
under the Plan, and such arrangements may be either applicable generally or only
in specific cases.
20. LIMITATION OF LIABILITY. As illustrative of the limitations of
liability of the Company, but not intended to be exhaustive thereof, nothing in
the Plan shall be construed to:
(a) give any person any right to be granted an Option
or Award other than at the sole discretion of the Committee;
(b) give any person any rights whatsoever with respect
to Shares except as specifically provided in the Plan;
(c) limit in any way the right of the Company or any
Subsidiary to terminate the employment of any person at any time; or
(d) be evidence of any agreement or understanding,
expressed or implied, that the Company will employ any person at any particular
rate of compensation or for any particular period of time.
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21. REGULATIONS AND OTHER APPROVALS; GOVERNING LAW.
21.1 Except as to matters of federal law, the Plan and the
rights of all persons claiming hereunder shall be construed and determined in
accordance with the laws of the State of Delaware without giving effect to
conflicts of laws principles thereof.
21.2 The obligation of the Company to sell or deliver Shares
with respect to Options and Awards granted under the Plan shall be subject to
all applicable laws, rules and regulations, including all applicable federal and
state securities laws, and the obtaining of all such approvals by governmental
agencies as may be deemed necessary or appropriate by the Committee.
21.3 The Board may make such changes as may be necessary or
appropriate to comply with the rules and regulations of any government
authority, or to obtain for Eligible Individuals granted Incentive Stock Options
the tax benefits under the applicable provisions of the Code and regulations
promulgated thereunder.
21.4 Each Option and Award is subject to the requirement
that, if at any time the Committee determines, in its sole discretion, that the
listing, registration or qualification of Shares issuable pursuant to the Plan
is required by any securities exchange or under any state or federal law, or the
consent or approval of any governmental regulatory body is necessary or
desirable as a condition of, or in connection with, the grant of an Option or
Award or the issuance of Shares, no Options or Awards shall be granted or
payment made or Shares issued, in whole or in part, unless listing,
registration, qualification, consent or approval has been effected or obtained
free of any conditions as acceptable to the Committee.
21.5 Notwithstanding anything contained in the Plan or any
Agreement to the contrary, in the event that the disposition of Shares acquired
pursuant to the Plan is not covered by a then current registration statement
under the Securities Act of 1933, as amended (the "Securities Act"), and is not
otherwise exempt from such registration, such Shares shall be restricted against
transfer to the extent required by the Securities Act and Rule 144 or other
regulations thereunder. The Company may place on any certificate representing
any such Shares any legend deemed desirable by the Company's counsel to comply
with federal or state securities laws and the Committee may require any
individual receiving Shares pursuant to an Option or Award granted under the
Plan, as a condition precedent to receipt of such Shares, to represent and
warrant to the Company in writing that the Shares acquired by such individual
are acquired without a view to any distribution thereof and will not be sold or
transferred other than pursuant to an effective registration thereof under said
Act or pursuant to an exemption applicable under the Securities Act or the rules
and regulations promulgated thereunder.
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22. MISCELLANEOUS.
22.1 MULTIPLE AGREEMENTS. The terms of each Option or Award
may differ from other Options or Awards granted under the Plan at the same time,
or at some other time. The Committee may also grant more than one Option or
Award to a given Eligible Individual during the term of the Plan, either in
addition to, or in substitution for, one or more Options or Awards previously
granted to that Eligible Individual.
22.2 CAPTIONS. The use of captions in this Plan or any
Agreement is for the convenience of reference only and shall not affect the
meaning of any provision of the Plan or such Agreement.
22.3 SEVERABILITY. Whenever possible, each provision of the
Plan or an Agreement shall be interpreted in such manner as to be effective and
valid under applicable law, but if any provision of the Plan or an Agreement
shall be held by a court of competent jurisdiction to be prohibited by or
invalid or unenforceable under applicable law, then (a) such provision shall be
deemed to be amended to accomplish the objectives of the provision as originally
written to the fullest extent permitted by law and (b) all other provisions of
the Plan or an Agreement shall remain in full force and effect.
22.4 WITHHOLDING OF TAXES.
(a) At such times as an Optionee or Grantee recognizes
taxable income in connection with the receipt of Shares or cash hereunder (a
"Taxable Event"), the Optionee or Grantee shall pay to the Company an amount
equal to the federal, state and local income taxes and other amounts as may be
required by law to be withheld by the Company in connection with the Taxable
Event (the "Withholding Taxes") prior to the issuance, or release from escrow,
of such Shares or the payment of such cash. The Company shall have the right to
deduct from any payment of cash to an Optionee or Grantee an amount equal to the
Withholding Taxes in satisfaction of the obligation to pay Withholding Taxes. In
satisfaction of the obligation to pay Withholding Taxes to the Company, the
Optionee or Grantee may make a written election (the "Tax Election"), which may
be accepted or rejected in the sole discretion of the Committee, to have
withheld a portion of the Shares then issuable to him or her having an aggregate
Fair Market Value, on the date preceding the date of such issuance, equal to the
Withholding Taxes.
(b) If an Optionee makes a disposition, within the
meaning of Section 424(c) of the Code and regulations promulgated thereunder, of
any Share or Shares issued to such Optionee pursuant to the exercise of an
Incentive Stock Option within the two-year period commencing on the day after
the date of the grant or within the one-year period commencing on the day after
the date of transfer of such Share or
-38-
<PAGE>
Shares to the Optionee pursuant to such exercise, the Optionee shall, within ten
(10) days of such disposition, notify the Company thereof, by delivery of
written notice to the Company at its principal executive office.
22.5 POST-TRANSITION PERIOD. Any Option or Award granted
under the Plan after the expiration of the Transition Period which is intended
to be Performance-Based Compensation shall be subject to the approval of the
material terms of the Plan by a majority of the stockholders of the Company in
accordance with Section 162(m) of the Code and the regulations promulgated
thereunder.
-39-
<PAGE>
Exhibit 10.3
August 16, 1999
VIA OVERNIGHT COURIER
AppNet Systems, Inc.
6707 Democracy Boulevard, Suite 1000
Bethesda, Maryland 20817
Attention: Mr. Jack Pearlstein
RE: LIMITED CONSENT
Ladies and Gentlemen:
Reference is hereby made to each of (a) that certain Revolving Credit
Agreement, dated as of January 8, 1999 (as amended and in effect from time to
time, the "Credit Agreement"), by and among AppNet Systems, Inc. (the
"Borrower"), BankBoston, N.A. and the other lending institutions set forth on
SCHEDULE 1 thereto (collectively, the "Banks"), BankBoston, N.A. as agent for
itself and the Banks (in such capacity, the "Agent") and Antares Capital
Corporation as co-agent for itself and the Banks; and (b) that certain letter
agreement dated as of May 28, 1999 (the "IPO Consent Letter") by and among the
Borrower, the Banks, the Agent, each Subsidiary (as such term is defined in the
Credit Agreement) of the Borrower and GTCR Fund VI, L.P. Capitalized terms used
herein and which are not otherwise defined shall have the respective meanings
ascribed thereto in the Credit Agreement.
Pursuant to the terms of the IPO Consent Letter, the Borrower has
agreed, among other things, (a) to at all times maintain not less than
$10,000,000 of cash and Cash Equivalents (as defined in the IPO Consent Letter)
on its balance sheet and located at the Agent's Head Office (the "Minimum Cash
Requirement"); and (b) cause Claymore Partners to deliver to the Agent the
results of its commercial finance examination by not later than September 30,
1999, with the results of such examination being satisfactory to Claymore
Partners, the Agent and the Majority Banks in their sole discretion.
The Borrower has advised the Agent and the Banks that the results of
the Claymore Partners commercial finance examination were delivered on August
12, 1999 and have requested that the Agent and the Majority Banks acknowledge
that the results thereof are satisfactory to the Agent and the Majority Banks.
In addition, the Borrower has asked the Agent and the Majority Banks consent to
a modification of the IPO Consent Letter so as to not require the Borrower to at
all times maintain a minimum of $10,000,000 of cash and Cash Equivalents on its
balance sheet. By its signature below, each of the Agent and each Bank hereby
acknowledges that the results of the Claymore Partners examination are
satisfactory to
<PAGE>
AppNet Systems, Inc.
August 16, 1999
Page-2-
each such Person. In addition, the Agent and the Banks hereby agree to waive the
Minimum Cash Requirement contained in the IPO Consent Letter on the conditions
that:
(a) no Default or Event of Default (as such terms are defined in the
Credit Agreement) has occurred and is continuing;
(b) the Borrower agrees that notwithstanding anything to the contrary
contained in the Credit Agreement (including without limitation the covenant
contained ss.10.5 thereof), the Borrower's Quick Ratio at all times from and
after the date hereof shall not be less than 1.25:1.00, and, in addition, the
definition of "Consolidated Current Liabilities" used to calculate such Quick
Ratio shall, from and after the date hereof, be amended to include in such
calculation all outstanding Revolving Credit Loans, with such definition to be
amended and restated as follows: "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 on which Consolidated
Current Liabilities are to be determined, and all Revolving Credit Loans
outstanding on such date, and such other liabilities as may properly be
classified as current liabilities in accordance with generally accepted
accounting principles; PROVIDED, HOWEVER, any nonrecurring one-time liabilities
relating to any acquisitions permitted hereunder which are required to be
capitalized shall not be included as a Consolidated Current Liability and the
outstanding amount of all Seller Subordinated Debt shall not be included as a
Consolidated Current Liability";
(c) the Borrower agrees that it shall maintain a monthly "Maximum DSO
Requirement" (as hereinafter defined) of not greater than (i) 86 for the months
ended July 31, 1999 and August 31, 1999; (ii) 84 for the months ended September
30, 1999 through November 30, 1999; and (iii) 82 for each month ending
thereafter, which Maximum DSO Requirement shall be tested at the end of each
calendar month, at which time the Borrower shall provide all calculations
requested by the Agent and the Banks to demonstrate such compliance. "Maximum
DSO Requirement" shall mean the billed and unbilled Accounts Receivable of the
Borrower and its Subsidiaries (net of credits, rebates, offsets, holdbacks or
other adjustments or commissions payable to third parties that are adjustments
to such Accounts Receivable) as of the last day of the most recent calendar
month end (the "Test Date") divided by the revenue of the Borrower and its
Subsidiaries for the three consecutive months ending on the Test Date, with the
result thereof being multiplied by 90.
(d) the Borrower agrees to otherwise comply with all the conditions
contained in the IPO Consent Letter and the Loan Documents.
Subject to such conditions, the Majority Banks and the Agent hereby
consent to waive the Minimum Cash Requirement pursuant to ss.26 of the Credit
Agreement. This consent shall not be construed, however, as a waiver of any
other provisions of the IPO Consent Letter or any
<PAGE>
AppNet Systems, Inc.
August 16, 1999
Page-3-
of the Loan Documents or to permit the Borrower or any Subsidiary to take any
other action which is prohibited by the terms of the IPO Consent Letter or any
of the Loan Documents.
The Borrower hereby acknowledges and agrees that the Borrower agrees,
upon the execution and delivery of this consent, to be bound by the covenants
contained in paragraphs (b) and (c), and any failure to so comply with any such
covenant contained therein shall constitute an Event of Default under the Credit
Agreement.
<PAGE>
AppNet Systems, Inc.
August 16, 1999
Page-4-
Except as expressly stated herein, neither the execution of this
consent nor the failure of the Banks to exercise any right or remedy constitutes
a waiver of any Default or Event of Default or of such right or remedy or any
other right or remedy under the Credit Agreement.
Sincerely,
BANKBOSTON, N.A., individually and
as Agent
By: /s/
---------------------------------
Title:
ANTARES CAPITAL CORPORATION
By: /s/
---------------------------------
Title:
ACNOWLEDGED AND AGREED:
APPNET SYSTEMS, INC.
By: /s/
---------------------------------
Title:
APPNET OF MICHIGAN, INC.
By: /s/
---------------------------------
Title:
APPNET OF MARYLAND, INC.
By: /s/
---------------------------------
Title:
<PAGE>
AppNet Systems, Inc.
August 16, 1999
Page-5-
SOFTWARE SERVICES CORPORATION
By: /s/
---------------------------------
Title:
NEW MEDIA PUBLISHING, INC.
By: /s/
---------------------------------
Title:
RESEARCH & PLANNING, INC.
By: /s/
---------------------------------
Title:
CENTURY COMPUTING, INCORPORATED
By: /s/
---------------------------------
Title:
THE KODIAK GROUP, INC.
By: /s/
---------------------------------
Title:
I33 COMMUNICATION CORP.
By: /s/
---------------------------------
Title:
SIGMA6, INC.
By: /s/
---------------------------------
Title:
<PAGE>
AppNet Systems, Inc.
August 16, 1999
Page-2-
SALZINGER ACQUISITION CORP.
By: /s/
---------------------------------
Title:
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-START> JAN-01-1999
<PERIOD-END> SEP-30-1999
<CASH> 3,236,000
<SECURITIES> 0
<RECEIVABLES> 28,607,000
<ALLOWANCES> 1,597,000
<INVENTORY> 0
<CURRENT-ASSETS> 31,674,000
<PP&E> 9,082,000
<DEPRECIATION> 1,723,000
<TOTAL-ASSETS> 142,928,000
<CURRENT-LIABILITIES> 36,200,000
<BONDS> 0
0
0
<COMMON> 16,000
<OTHER-SE> 89,671,000
<TOTAL-LIABILITY-AND-EQUITY> 142,928,000
<SALES> 0
<TOTAL-REVENUES> 74,802,000
<CGS> 0
<TOTAL-COSTS> 42,205,000
<OTHER-EXPENSES> 559,000
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 3,948,000
<INCOME-PRETAX> (59,676,000)
<INCOME-TAX> 328,000
<INCOME-CONTINUING> (60,004,000)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (60,004,000)
<EPS-BASIC> (2.57)
<EPS-DILUTED> (2.57)
</TABLE>
