<PAGE>
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON JUNE 15, 1999
REGISTRATION NO. 333-75205
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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
------------------------
AMENDMENT NO. 5 TO FORM S-1
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
------------------------
APPNET SYSTEMS, INC.
(Exact name of Registrant as specified in its charter)
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<S> <C> <C>
DELAWARE 7373 52-2077860
(State or other jurisdiction (Primary Standard Industrial (I.R.S. Employer
of Classification Code Number) Identification
incorporation or organization) No.)
</TABLE>
6707 DEMOCRACY BOULEVARD
BETHESDA, MD 20817
(301) 493-8900
(Address, including zip code, and telephone number, including
area code, of registrants' principal executive offices)
KEN S. BAJAJ, PRESIDENT AND CHIEF EXECUTIVE OFFICER
APPNET SYSTEMS, INC.
6707 DEMOCRACY BOULEVARD
BETHESDA, MD 20817
(301) 493-8900
(Name, address, including zip code, and telephone number, including
area code, of agent for service)
--------------------------
COPIES TO:
STEPHEN I. GLOVER, ESQ. WILLIAM J. WHELAN, III, ESQ.
FRIED, FRANK, HARRIS, SHRIVER & CRAVATH, SWAINE & MOORE
JACOBSON 825 EIGHTH AVENUE
1001 PENNSYLVANIA AVENUE, N.W. NEW YORK, NY 10019
WASHINGTON, DC 20004 (212) 474-1000
(202) 639-7000
--------------------------
APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO PUBLIC:
As soon as practicable after this registration statement becomes effective.
If any of the securities being registered on this Form are to be offered on
a delayed or continuous basis pursuant to Rule 415 under the Securities Act of
1933, check the following box. / /
If this Form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, please check the following box
and list the Securities Act registration statement number of the earlier
effective registration statement for the same offering. / /
If this Form is a post-effective amendment filed pursuant to Rule 462(c)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. / /
If this is a post-effective amendment filed pursuant to Rule 462(d) under
the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. / /
If delivery of the prospectus is expected to be made pursuant to Rule 434,
please check the following box. / /
--------------------------
CALCULATION OF REGISTRATION FEE
<TABLE>
<CAPTION>
PROPOSED
MAXIMUM
TITLE OF EACH CLASS AMOUNT TO BE OFFERING PRICE PROPOSED MAXIMUM AMOUNT OF
OF SECURITIES TO BE REGISTERED REGISTERED(1) PER SHARE OFFERING PRICE(2) REGISTRATION FEE
<S> <C> <C> <C> <C>
Common Stock, par value $0.0005 per share...... 6,900,000 $14.00 $96,600,000 $26,855
</TABLE>
(1) Includes a maximum of 900,000 shares that may be purchased by the
underwriters to cover over-allotments, if any.
(2) Estimated solely for the purpose of calculating the registration fee
pursuant to Rule 457(o) under the Securities Act of 1933. The proposed
maximum offering price includes amounts attributable to shares that may be
purchased by the underwriters to cover over-allotments, if any.
THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR
DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT SHALL
FILE A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS REGISTRATION
STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(A) OF
THE SECURITIES ACT OF 1933 OR UNTIL THE REGISTRATION STATEMENT SHALL BECOME
EFFECTIVE ON SUCH DATE AS THE SECURITIES AND EXCHANGE COMMISSION, ACTING
PURSUANT TO SAID SECTION 8(A), MAY DETERMINE.
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<PAGE>
SUBJECT TO COMPLETION, DATED JUNE 15, 1999
The information in this prospectus is not complete and may be changed. We may
not sell these securities until the registration statement filed with the
Securities and Exchange Commission is effective. This prospectus is not an offer
to sell these securities and it is not soliciting an offer to buy these
securities in any state where the offer or sale is not permitted.
<PAGE>
6,000,000 Shares
[LOGO]
APPNET SYSTEMS, INC.
Common Stock
-----------
The underwriters have an option to purchase a maximum of 900,000 additional
shares to cover over-allotments of shares.
Prior to this offering, there has been no public market for our common
stock. The initial public offering price is expected to be between $12.00 and
$14.00 per share. Our common stock has been approved for quotation on The Nasdaq
Stock Market's National Market under the symbol "APNT".
INVESTING IN OUR COMMON STOCK INVOLVES RISKS. SEE "RISK FACTORS" ON PAGE 4.
<TABLE>
<CAPTION>
UNDERWRITING PROCEEDS TO
PRICE TO DISCOUNTS AND APPNET
PUBLIC COMMISSIONS SYSTEMS, INC.
----------------- ----------------- -----------------
<S> <C> <C> <C>
Per Share............................................. $ $ $
Total................................................. $ $ $
</TABLE>
Delivery of the shares of common stock will be made on or about
, 1999.
Neither the Securities and Exchange Commission nor any state securities
commission has approved or disapproved of these securities or determined if this
prospectus is truthful or complete. Any representation to the contrary is a
criminal offense.
CREDIT SUISSE FIRST BOSTON HAMBRECHT & QUIST
DEUTSCHE BANC ALEX. BROWN
THE ROBINSON-HUMPHREY COMPANY
CHARLES SCHWAB & CO., INC.
The date of this prospectus is , 1999.
<PAGE>
--------------
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
-----
<S> <C>
PROSPECTUS SUMMARY............................. 1
RISK FACTORS................................... 4
CAUTIONARY NOTICE REGARDING FORWARD-LOOKING
STATEMENTS................................... 13
USE OF PROCEEDS................................ 14
DIVIDEND POLICY................................ 14
CAPITALIZATION................................. 15
DILUTION....................................... 17
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS....... 18
PRO FORMA CONSOLIDATED FINANCIAL DATA.......... 20
SELECTED FINANCIAL DATA........................ 27
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF
OPERATIONS................................... 28
<CAPTION>
PAGE
-----
<S> <C>
BUSINESS....................................... 38
MANAGEMENT..................................... 54
CERTAIN RELATIONSHIPS AND TRANSACTIONS......... 63
PRINCIPAL STOCKHOLDERS......................... 68
DESCRIPTION OF CAPITAL STOCK................... 69
SHARES ELIGIBLE FOR FUTURE SALE................ 75
U.S. FEDERAL TAX CONSIDERATIONS FOR NON-U.S.
HOLDERS...................................... 77
UNDERWRITING................................... 81
NOTICE TO CANADIAN RESIDENTS................... 83
LEGAL MATTERS.................................. 85
EXPERTS........................................ 85
WHERE YOU CAN FIND ADDITIONAL INFORMATION...... 85
INDEX TO FINANCIAL STATEMENTS.................. F-1
</TABLE>
--------------
YOU SHOULD RELY ONLY ON THE INFORMATION CONTAINED IN THIS DOCUMENT OR TO
WHICH WE HAVE REFERRED YOU. WE HAVE NOT AUTHORIZED ANYONE TO PROVIDE YOU WITH
INFORMATION THAT IS DIFFERENT. THIS DOCUMENT MAY ONLY BE USED WHERE IT IS LEGAL
TO SELL THESE SECURITIES. YOU SHOULD ASSUME THAT THE INFORMATION IN THIS
DOCUMENT IS ACCURATE ONLY AS OF THE DATE OF THIS DOCUMENT.
--------------
Unless otherwise indicated, (a) all references to "AppNet," "we," "us" and
"our" refer to AppNet Systems, Inc. and, after their respective acquisitions or
formations, its subsidiaries and (b) all references to "GTCR" refer to GTCR
Golder Rauner, L.L.C. and its affiliates, including GTCR Fund VI, L.P., GTCR VI
Executive Fund, L.P. and GTCR Associates VI.
AppNet has filed for trademark registration of "AppNet". This prospectus
also includes trademarks and tradenames of other parties.
--------------
DEALER PROSPECTUS DELIVERY OBLIGATION
UNTIL , 1999 (25 DAYS AFTER THE COMMENCEMENT OF THIS OFFERING), ALL
DEALERS THAT EFFECT TRANSACTIONS IN THESE SECURITIES, WHETHER OR NOT
PARTICIPATING IN THIS OFFERING, MAY BE REQUIRED TO DELIVER A PROSPECTUS. THIS IS
IN ADDITION TO THE DEALER'S OBLIGATION TO DELIVER A PROSPECTUS WHEN ACTING AS AN
UNDERWRITER AND WITH RESPECT TO THEIR UNSOLD ALLOTMENTS OR SUBSCRIPTIONS.
<PAGE>
PROSPECTUS SUMMARY
THE FOLLOWING SUMMARY MAY NOT CONTAIN ALL THE INFORMATION THAT MAY BE
IMPORTANT TO YOU. YOU SHOULD READ THE ENTIRE PROSPECTUS BEFORE DECIDING WHETHER
TO INVEST IN OUR COMMON STOCK. THE INFORMATION IN THIS PROSPECTUS HAS BEEN
ADJUSTED TO GIVE EFFECT TO A 2.85-FOR-ONE REVERSE STOCK SPLIT OF OUR COMMON
STOCK WHICH BECAME EFFECTIVE ON JUNE 15, 1999. EXCEPT AS OTHERWISE INDICATED,
THE INFORMATION IN THIS PROSPECTUS ASSUMES NO EXERCISE OF THE OVER-ALLOTMENT
OPTION TO PURCHASE ADDITIONAL SHARES OF COMMON STOCK GRANTED TO THE
UNDERWRITERS.
APPNET SYSTEMS, INC.
AppNet provides Internet and electronic commerce professional services and
solutions to medium-sized and large businesses. AppNet develops electronic
commerce solutions that facilitate and promote communication and commerce
between businesses and consumers as well as among businesses and their trading
partners. We focus on maximizing the opportunities presented by the Internet and
electronic commerce to enhance all aspects of our clients' operations, from the
front end of their business, creative Website design, to the back end,
back-office integration of existing systems and electronic commerce outsourcing,
creating an end-to-end solution. Our professional services include:
- strategic consulting;
- interactive media services such as creative Website design and
development, branding, which is the creation of a unique corporate
identity for a client and its products, media planning and buying;
- Internet-based application development, which is the development of
software applications that are capable of running on the Internet and are
written in languages such as Java, C++ and Visual Basic;
- electronic commerce systems integration, which is the integration of
electronic commerce systems, which are systems that automate the receipt,
processing and delivery of transaction data and other information, with
other corporate software and computer-based applications; and
- electronic commerce outsourcing, which is the performance of electronic
commerce services that would otherwise be handled by the client's internal
staff using the client's resources.
The rapid growth in the use of the Internet and electronic commerce has
transformed the way businesses operate and interact with their customers and
trading partners. Technology industry research firms predict that the market for
Internet and electronic commerce services worldwide will grow significantly over
the next few years. International Data Corporation estimates that this market
will increase from $4.6 billion in 1997 to $43.7 billion by 2002, which
represents a compound annual growth rate of 57%.
Over the past several years, we have completed more than 500 projects for
over 200 clients. Our client base is highly diverse and includes corporations
such as @rts @lliance, Baxter Healthcare, Ciena, Comshare, Dial, Ford,
GeoCities, Harmony House, Hyundai, K*B Toys, NEC, Norwest and Unilever.
AppNet was founded in late 1997 and, therefore, we have a brief operating
history upon which you can evaluate our business and prospects. We have incurred
substantial losses since AppNet was founded, and we anticipate we will continue
to incur substantial losses for the foreseeable future. See "Risk Factors--Our
brief operating history makes it difficult to predict our success" and "Risk
Factors--We have an accumulated deficit of $30.7 million and anticipate future
losses."
We compete in the highly competitive markets for Internet and electronic
commerce professional services. To compete more effectively, we plan to: expand
our client relationships; increase repeat and recurring revenues; build and
enhance complementary skill sets and maintain our technological
1
<PAGE>
expertise; pursue client-driven geographic expansion; expand and develop
industry-specific expertise; and attract and retain a highly specialized
workforce.
We currently have offices in 14 U.S. locations, including the metropolitan
areas of Boston, Denver, Detroit, Los Angeles, New York and Washington, DC. Our
principal executive office is located at 6707 Democracy Boulevard, Suite 1000,
Bethesda, Maryland 20817, and our telephone number is (301) 493-8900. We
maintain a site on the World Wide Web at http://www.appnet.net; however, the
information found on our Website is not part of this prospectus.
THE OFFERING
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<S> <C>
Common stock offered by AppNet.... 6,000,000 shares.
Common stock to be outstanding
after this offering............. 30,441,434 shares, or 31,341,434 shares if the
underwriters exercise their over-allotment option in
full. Excludes 5,967,209 shares of common stock reserved
for issuance upon the exercise of options, warrants and
convertible notes and in connection with contingent
payments payable to former owners of five of the
companies we acquired, New Media Publishing, Inc.,
Sigma6, Inc., Salzinger & Company, Inc., Internet
Outfitters, Inc. and TransForm IT, Incorporated,
assuming, where applicable, the initial public offering
price and the market price of our common stock when the
contingent payments are paid is $13.00 per share, the
mid-point of the range shown on the cover page of this
prospectus.
Use of proceeds................... Repay debt under our existing credit facilities; redeem
preferred stock; repay other debt; and fund general
corporate purposes.
Nasdaq National Market Symbol..... "APNT".
</TABLE>
2
<PAGE>
SUMMARY ACTUAL AND PRO FORMA CONSOLIDATED FINANCIAL DATA
The following summary actual and pro forma consolidated financial data have
been derived from:
- the audited financial statements of AppNet for the year ended December 31,
1998;
- the unaudited financial statements of AppNet for the three months ended
March 31, 1999; and
- the unaudited pro forma consolidated financial data included elsewhere in
this prospectus.
You should read the information set forth below in conjunction with our
consolidated financial statements and the related notes, "Use of Proceeds,"
"Capitalization," "Pro Forma Consolidated Financial Data" and "Management's
Discussion and Analysis of Financial Condition and Results of Operations"
included elsewhere in this prospectus.
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
THREE MONTHS ENDED
1998 MARCH 31, 1999
----------------------- -----------------------
PRO FORMA PRO FORMA
ACTUAL AS ADJUSTED ACTUAL AS ADJUSTED
---------- ----------- ---------- -----------
(IN THOUSANDS)
<S> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:
Revenues.............................................. $ 17,674 $ 69,182 $ 19,643 $ 22,271
Cost of revenues...................................... 11,699 41,941 11,457 13,132
---------- ----------- ---------- -----------
Gross profit...................................... 5,975 27,241 8,186 9,139
Total operating expenses(a)........................... 18,779 99,361 23,166 24,233
---------- ----------- ---------- -----------
Loss from operations.................................. (12,804) (72,120) (14,980) (15,094)
Interest and other expense............................ 1,775 1,801 1,262 236
Income tax provision (benefit)........................ (200) (100) 100 100
Dividends on and accretion of preferred stock......... 873 -- 1,039 --
---------- ----------- ---------- -----------
Net loss attributable to common stockholders.......... $ (15,252) $ (73,821) $(17,381) $(15,430 )
---------- ----------- ---------- -----------
---------- ----------- ---------- -----------
</TABLE>
<TABLE>
<CAPTION>
MARCH 31, 1999
--------------------------
PRO FORMA
ACTUAL AS ADJUSTED
---------- --------------
(IN THOUSANDS)
<S> <C> <C>
BALANCE SHEET DATA:
Cash and cash equivalents............................................................. $ 5,655 $ 11,408
Total assets.......................................................................... 163,471 169,224
Total debt............................................................................ 75,885 15,067
Class A Preferred Stock............................................................... 45,115 --
Stockholders' equity.................................................................. 16,221 131,674
</TABLE>
- ------------------------
(a) Total operating expenses, on a pro forma as adjusted basis, include pro
forma stock-based and acquisition-related compensation of $16.7 million and
pro forma depreciation and amortization of $60.3 million for the year ended
December 31, 1998 and $2.6 million and $12.8 million, respectively, for the
three months ended March 31, 1999.
3
<PAGE>
RISK FACTORS
INVESTING IN OUR COMMON STOCK INVOLVES RISK. YOU SHOULD CAREFULLY CONSIDER
THE RISKS DESCRIBED BELOW AND THE OTHER INFORMATION IN THIS PROSPECTUS,
INCLUDING OUR CONSOLIDATED FINANCIAL STATEMENTS AND THE RELATED NOTES, BEFORE
YOU PURCHASE ANY OF OUR COMMON STOCK. THE RISKS AND UNCERTAINTIES DESCRIBED
BELOW ARE NOT THE ONLY ONES WE FACE. ADDITIONAL RISKS AND UNCERTAINTIES,
INCLUDING THOSE THAT WE DO NOT KNOW ABOUT NOW OR THAT WE CURRENTLY DEEM
IMMATERIAL, MAY ALSO ADVERSELY AFFECT OUR BUSINESS.
OUR BRIEF OPERATING HISTORY MAKES IT DIFFICULT TO PREDICT OUR SUCCESS.
AppNet was formed in late 1997. We have a brief operating history upon which
you can evaluate our business and prospects. Our historical results of
operations do not fully give effect to the operations of the companies we have
acquired and the pro forma financial information included in this prospectus is
based in part on the separate pre-acquisition financial information of the
acquired companies. As a result, our historical results of operations and pro
forma financial information may not give you an accurate indication of our
future results of operations or prospects. Companies like us in an early stage
of development frequently encounter risks, expenses and difficulties associated
with starting a new business, many of which may be beyond their control. These
risks and difficulties apply particularly to AppNet because our markets,
Internet and electronic commerce professional services, are new and rapidly
changing.
WE HAVE AN ACCUMULATED DEFICIT OF $30.7 MILLION AND ANTICIPATE FUTURE LOSSES.
We have incurred substantial losses since AppNet was founded, and we
anticipate we will continue to incur substantial losses for the foreseeable
future. We had an accumulated deficit of approximately $30.7 million as of March
31, 1999 and a net loss of $14.4 million and $16.3 million for the year ended
December 31, 1998 and the quarter ended March 31, 1999, respectively. We intend
to continue to invest in internal expansion, infrastructure, integration of our
acquired companies into our existing operations, acquisitions and our marketing
and sales efforts. We cannot predict when we will operate profitably, if at all.
We cannot assure you that we will have earnings or cash flow sufficient to
cover our fixed charges or to comply with the financial covenants in our credit
facilities. In connection with the acquisitions we have completed, we expect to
continue to incur through the end of the year 2000, acquisition-related
compensation charges which will fluctuate based on the market price of our
common stock and the level of achievement of agreed-upon operating targets. In
addition, our acquisitions significantly increased our intangible assets, such
as goodwill, and the charges we expect to incur in connection with the
amortization of these intangible assets will have a material adverse impact on
our net income for the foreseeable future. See "--Our intangible assets
represent a significant portion of our assets; amortization of our intangible
assets will adversely impact our net income and we may never realize the full
value of our intangible assets" for a discussion of accounting treatment issues
regarding intangible assets that will affect our future results of operations.
QUARTER-TO-QUARTER FLUCTUATIONS IN OUR REVENUES AND OPERATING RESULTS COULD
AFFECT THE MARKET PRICE OF OUR COMMON STOCK.
Our revenues and operating results may vary from quarter-to-quarter as a
result of a number of factors including:
- number, size and type of client engagements commenced or completed during
a quarter;
- effectiveness of integrating acquisitions with existing operations;
- our ability to attract, train and retain skilled management, technical and
creative personnel;
4
<PAGE>
- timing of acquisitions and related costs; and
- timing and size of acquisition-related compensation charges which
fluctuate based on the market price of our common stock.
Because a high percentage of our expenses is fixed, such as compensation and
rent, any of the factors listed above could cause significant variations in our
operating results in any given quarter. Any decline in revenues or earnings or a
greater than expected loss for any quarter could materially adversely affect the
market price of our common stock, even if not reflective of any long-term
problems with our business.
OUR FUTURE SUCCESS DEPENDS ON OUR ABILITY TO EFFECTIVELY INTEGRATE ACQUIRED
COMPANIES AND MANAGE OUR GROWTH.
Our growth has placed, and will continue to place, significant demands on
our management and operational and financial resources. We have acquired 12
companies since March 1998. Our number of employees has increased from six as of
February 1, 1998 to approximately 755 as of May 1, 1999. We are in the process
of integrating the companies we have acquired since March 1998 into our
operational, financial and managerial systems. Members of our senior management
may be required to devote considerable amounts of their time to this integration
process, which will decrease the time they will have to service current clients,
attract new clients and develop new products and services. Our business,
financial condition and results of operations could be adversely affected if any
of the companies we have acquired experienced problems in the past of which we
are not currently aware. Claims asserted against us relating to the operation of
the companies we acquired prior to acquisition could exceed the indemnification
we are entitled to or can obtain from the former owners of the acquired
companies.
As we continue to grow, we expect we will hire more employees and expand the
scope of our operating and financial systems, which will increase our operating
complexity and the level of responsibility exercised by our management
personnel. To manage our growth effectively, we must continue to develop and
improve our own operational and financial systems, including our internal
systems and controls as well as those of the companies we acquired. The failure
to manage our growth effectively could have a material adverse effect on our
business, financial condition and results of operations.
WE MUST ATTRACT AND RETAIN PROFESSIONAL STAFF IN ORDER TO COMPLETE OUR PROJECTS
AND OBTAIN NEW PROJECTS.
Our failure to attract and retain qualified employees could impair our
ability to complete existing projects and bid for or obtain new projects and, as
a result, could have a material adverse effect on our business, financial
condition and results of operations. Our ability to grow and increase our market
share largely depends on our ability to hire, train, retain and manage highly
skilled employees, including project managers and technical, creative,
consulting and marketing and sales personnel. There is a significant shortage
of, and intense competition for, personnel who are qualified to perform the
services we provide. This shortage will probably continue for the foreseeable
future. In addition, to maintain our position as a provider of Internet and
electronic commerce end-to-end solutions, we must make sure our employees
maintain their technical expertise and business skills. We cannot assure you
that we will be able to attract a sufficient number of qualified employees or
that we will successfully train and manage the employees we hire.
In addition, our employees, including key technical personnel, may leave us
to join our competitors or start new businesses which may compete with us. We
cannot assure you that we will be able to prevent the unauthorized disclosure or
use of our proprietary knowledge, practices and procedures if our employees
leave us.
5
<PAGE>
WE ARE DEPENDENT ON ADDITIONAL CAPITAL FOR FUTURE GROWTH.
Our ability to remain competitive and expand our operations through
acquisitions and internal growth largely depends on our access to capital.
Historically, we have financed capital expenditures and acquisitions primarily
by incurring debt and issuing equity securities. We may incur additional debt
and issue equity securities in the future to finance our growth strategy or
capital expenditures. We cannot assure you that additional financing will be
available to us on satisfactory terms, or at all. Additional indebtedness would
make us more vulnerable to economic downturns and may limit our ability to
withstand competitive pressures. The terms of any additional indebtedness may
include restrictive financial and operating covenants which would limit our
ability to compete and expand. Additional issuances of our common stock may
significantly dilute the equity interests of our existing stockholders. Our
failure to obtain any required additional financing, on satisfactory terms, or
at all, could have a material adverse effect on our business, financial
condition or results of operations. See "Management's Discussion and Analysis of
Financial Condition and Results of Operations" for a further discussion of our
liquidity and capital requirements over the next 18 months.
OUR REVENUES ARE DIFFICULT TO PREDICT BECAUSE THEY ARE PRIMARILY GENERATED ON A
PROJECT-BY-PROJECT BASIS AND OUR PROJECTS CAN BE TERMINATED.
If our existing agreements with clients are terminated before we complete
our engagements, or if we are unable to enter into new engagements, our
business, financial condition and results of operations could be materially
adversely affected. Our success will depend on our ability to establish
relationships with additional medium-sized and large businesses and other
corporate users of Internet and electronic commerce professional services. We
derive our revenues in large part from fees for services generated on a
project-by-project basis. These projects vary in size, scope and duration. A
client that accounts for a significant portion of our revenues in a particular
period may not account for a similar portion of our revenues in future periods.
A client may or may not engage us for further services once a project is
completed. As a result, our revenues are not recurring from period to period,
which makes them more difficult to predict.
OUR CONTRACTS CONTAIN PRICING RISKS.
Generally, we charge our clients for the time, materials and expenses
incurred. Although we have limited experience pricing and managing fixed-price
contracts, we intend to increase the percentage of our work that is billed at a
fixed price. However, if we underestimate the resources and time required to
complete our projects, we could be subject to cost overruns leading to losses on
our engagements.
LOSS OF THE SERVICES OF OUR SENIOR MANAGEMENT COULD ADVERSELY AFFECT OUR
BUSINESS.
The loss of our senior managers' services or other key members of management
could have a material adverse effect on our business, financial condition and
results of operations. Our success depends heavily on the efforts of the members
of our senior management team. We cannot assure you that we will be able to
prevent the unauthorized disclosure or use of our proprietary knowledge,
practices and procedures if our senior managers leave us. See "Management" for
additional information about our senior managers.
WE FACE INTENSE COMPETITION.
The markets for Internet and electronic commerce professional services are
relatively new, intensely competitive, quickly evolving and subject to rapid
technological change. We expect competition to continue and intensify in the
foreseeable future. Our competitors can be divided into several groups:
6
<PAGE>
- Internet professional services providers, such as Agency.com, iXL,
Proxicom, Razorfish, Scient, Think New Ideas, US Interactive, USWeb/CKS
and Viant;
- large information technology consulting services providers, such as
Andersen Consulting, Cambridge Technology Partners, CSC, EDS, IBM and
Sapient;
- interactive advertising agencies, such as Darwin Digital, Giant Step, Grey
Interactive, Modem Media . Poppe Tyson and Thunderhouse;
- electronic commerce software and service providers, such as BroadVision,
Harbinger, Open Market and Sterling Commerce; and
- Internet access and service providers, such as Abovenet, Exodus and
Frontier/Global.
Our competitors have begun to offer multiple Internet and electronic
commerce professional services, rather than specialize in one area, or have
announced their intention to do so. These companies may continue to expand their
operations so that they offer a full range of Internet and electronic commerce
professional services and products. Some of our competitors, IBM, USWeb and EDS,
currently provide all of the services that we provide.
Many of our competitors have longer operating histories and client
relationships, greater financial, technical, marketing and public relations
resources, larger client bases and greater brand or name recognition than we
have. Our competitors may be able to respond more quickly to technological
developments and changes in clients' needs. We must promote and enhance our
reputation and brand in order to attract new clients and differentiate ourselves
from our competitors. See "Business-- Competition" for a further discussion of
competition within our industry.
THE BARRIERS TO ENTER OUR BUSINESS ARE LOW.
There are relatively low barriers to entry into our business. We do not own
any technologies that preclude or inhibit competitors from entering our markets.
Our competitors may independently develop and patent or copyright technologies
that are superior or substantially similar to our technologies. The costs to
develop and provide Internet or electronic commerce professional services are
low. Therefore, we expect to continue to face additional competition from new
entrants into our markets.
WE MUST RESPOND TO RAPID TECHNOLOGICAL ADVANCES.
Our success will depend, in part, on our ability to keep pace with:
- rapidly changing technology;
- evolving industry standards and practices;
- frequent new service and product introductions and enhancements; and
- changing user and client requirements and preferences.
Any delay or failure on our part in responding quickly, cost-effectively and
sufficiently to these developments could render our existing products and
services obsolete and have a material adverse effect on our business, financial
condition and results of operations. We may have to incur substantial
expenditures to modify or adapt our services or infrastructure to respond to the
widespread adoption of new Internet, networking or telecommunications
technologies or other technological changes. We must stay abreast of
cutting-edge technological developments and evolving service offerings to remain
competitive, increase the utility of our services and attract and retain
qualified employees. We must be able to incorporate new technologies into the
Internet and electronic commerce solutions we design and develop to address the
increasingly complex and varied needs of our customer base.
7
<PAGE>
OUR BUSINESS IS DEPENDENT ON THE CONTINUED USE AND GROWTH OF THE INTERNET AND
ELECTRONIC COMMERCE.
Our business would be adversely affected if use of the Internet and
electronic commerce does not continue to develop, or develops more slowly than
expected. Our market is relatively new and rapidly evolving. Our future success
depends on the acceptance by current and future clients of Internet and
electronic commerce professional services as an integral part of their
businesses. Demand and market acceptance for these new technological services
are subject to a high level of uncertainty.
In addition, if use of the Internet grows, the Internet infrastructure may
not be able to support the demands placed on it. The performance and reliability
of the Internet may decline as the number of users and the amount of traffic
increases. Internet sites have experienced interruptions in their service as a
result of outages and other delays occurring throughout the Internet network
infrastructure. To cope with growth in the use of the Internet, the Internet
will require a reliable network backbone with the necessary speed, data capacity
and security and the timely development of complementary products, such as
high-speed modems, for providing reliable Internet access and services. If the
necessary infrastructure, products, services or facilities are not developed or
if use of the Internet as a medium for communication and commerce does not
develop, our business, financial condition and results of operations could be
materially and adversely affected.
WE HAVE POTENTIAL LIABILITY TO CLIENTS WHO ARE DISSATISFIED WITH OUR SERVICES.
We design, develop, implement and manage Internet and electronic commerce
solutions that are crucial to the operation of our clients' businesses. Defects
in the solutions we develop could result in delayed or lost revenues, adverse
customer reaction and negative publicity about us or our services or require
expensive corrections, any of which could have a material adverse effect on our
business, financial condition or results of operations. Clients who are not
satisfied with our services could bring claims against us for substantial
damages. Any claims asserted against us could exceed the level of our insurance.
We cannot assure you that the insurance we carry will continue to be available
on economically reasonable terms, or at all. The successful assertion of one or
more large claims against us that are uninsured, exceed our insurance coverage
or result in changes to our insurance policies, including premium increases,
could have a material adverse effect on our business, financial condition or
results of operations.
OUR FAILURE TO PROTECT OUR INTELLECTUAL PROPERTY RIGHTS OR MAINTAIN OUR RIGHTS
TO USE LICENSED INTELLECTUAL PROPERTY COULD ADVERSELY AFFECT OUR BUSINESS.
We believe our success depends, in part, on protecting our proprietary
intellectual property. We have not received patent or copyright protection for
most of our intellectual property. We cannot assure you that we will be able to
prevent infringement or detect misappropriation of our intellectual property. A
failure to protect our intellectual property in a meaningful manner could have a
material adverse effect on our business, financial condition and results of
operations.
We rely on technologies licensed from third parties. We cannot assure you
that these licenses will continue to be available to us on commercially
reasonable terms. The loss of these technologies could require us to obtain
substitute technologies of lower quality or performance standards or at greater
cost, which could have a material adverse effect on our business, financial
condition or results of operations.
Third parties may assert or prosecute infringement claims against us in
connection with the services and products we offer, and we may or may not be
able to successfully defend any such claims. We generally indemnify our clients
against any third-party intellectual property claims. Any significant claim
against us or for which we have indemnified others could have a material adverse
effect on our business, financial condition and results of operations.
8
<PAGE>
In connection with our Internet and electronic commerce professional
services, we develop intellectual property for our clients. We frequently assign
ownership of such intellectual property to the client and retain only a license
for limited uses. Issues relating to ownership of and rights to use intellectual
property can be complicated. We may become involved in disputes that affect our
ability to resell or reuse this intellectual property. In addition, many of our
projects involve the use of material that is confidential or proprietary client
information. The successful assertion of one or more large claims against us by
our clients or other third parties could adversely affect us.
WE SOMETIMES AGREE NOT TO PERFORM SERVICES FOR OUR CLIENTS' COMPETITORS.
Our customer contracts may contain restrictive provisions which are in
effect during the term of the contract and may remain in effect for a limited
period, generally one year, thereafter. The scope of the restrictive provisions
varies and can include provisions restricting our employees who are engaged on a
project for a client from performing the same or substantially similar services
for a competitor of that client and provisions prohibiting us from developing
products or performing services for our clients' competitors. These restrictive
provisions may limit our ability to enter into engagements with new clients for
specified periods of time.
OUR INTERNATIONAL OPERATIONS AND EXPANSION INVOLVE FINANCIAL AND OPERATIONAL
RISKS.
We intend to expand our business into international markets. Revenues from
our existing international operations were insignificant in 1998. We may incur
significant costs in connection with our international expansion.
There are also risks inherent in doing business in foreign countries, such
as:
- changes in legal and regulatory requirements;
- export and import restrictions, tariffs and other trade barriers;
- currency fluctuations and the on-going conversion to the euro in several
member states of the European Union;
- difficulties in staffing and managing foreign offices as a result of,
among other things, distance, language and cultural differences;
- longer payment cycles and problems in collecting accounts receivable;
- political and economic instability;
- seasonal reductions in business activity; and
- potentially adverse tax consequences.
Any of these factors could have a material adverse effect on our
international and domestic business, financial condition and results of
operations.
OUR ELECTRONIC COMMERCE OUTSOURCING CENTERS COULD BE VULNERABLE TO SECURITY AND
TECHNICAL RISKS AND MAY REQUIRE ADDITIONAL INVESTMENT.
We provide electronic commerce outsourcing services to our customers. We
perform electronic commerce functions that would otherwise be handled by the
customer's internal staff using the customer's resources.
Our electronic commerce outsourcing services rely on encryption and
authentication technology licenses from third parties to provide the security
and authentication needed to safely transmit confidential information. Although
we have designed and implemented a variety of network security measures,
unauthorized access, computer viruses, accidental or intentional acts and other
disruptions
9
<PAGE>
may occur. Our electronic commerce outsourcing centers may experience delays or
service interruptions as a result of the accidental or intentional acts of
Internet users, current and former employees or others. Such acts could
potentially jeopardize the security of confidential information, such as credit
card and bank account numbers, stored in our and our clients' computer systems.
Such a breach in security could result in liability to us and in the loss of
existing clients or the deterrence of potential clients.
Although we plan to continue using industry-standard security measures, such
measures have been circumvented in the past, and ours may be circumvented in the
future. The costs required to eliminate computer viruses and alleviate other
security problems could be prohibitively expensive, and efforts to address such
problems could result in delays or interruption of service to our clients. These
could in turn have a material adverse effect on our business, financial
condition and results of operations.
In the event our hardware malfunctions and our back-up systems fail, we may
not be able to maintain our standard of service to our customers. In addition,
each of our electronic commerce outsourcing centers has been configured to
provide services that facilitate commerce and communication either between
businesses and consumers, known as business-to-consumer services, or between
businesses and their trading partners, known as business-to-business services,
but not both. If we were unable to provide outsourcing services at one of our
outsourcing centers, it would materially adversely impact our ability to
continue to provide the type of electronic commerce outsourcing services
processed through that center. We may be required to make additional investments
in our electronic commerce outsourcing centers in order to increase capacity and
respond to technological developments.
OUR INTANGIBLE ASSETS REPRESENT A SIGNIFICANT PORTION OF OUR ASSETS;
AMORTIZATION OF OUR INTANGIBLE ASSETS WILL ADVERSELY IMPACT OUR NET INCOME AND
WE MAY NEVER REALIZE THE FULL VALUE OF OUR INTANGIBLE ASSETS.
Our acquisitions have resulted in significant goodwill and other intangible
assets, which are being amortized over various periods, primarily two to three
years. At March 31, 1999, we had goodwill and other intangible assets of
approximately $133.1 million, net of accumulated amortization. Charges we would
have incurred in connection with the amortization of intangible assets during
the year ended December 31, 1998 and the three months ended March 31, 1999,
after giving pro forma effect to the acquisitions we made in 1998 and 1999,
would have decreased our net income by $49.1 million and $0.1 million,
respectively. The amount of goodwill associated with the acquisitions we made in
1998 and 1999 may increase in the future as a result of a portion of the
contingent purchase consideration that may become payable if the agreed-upon
operating targets for the following four acquired companies are fully met: LOGEX
International, L.L.C., New Media Publishing, Internet Outfitters and TransForm
IT. The actual amount of goodwill that will be recorded will depend in part on
the price per share of our common stock and such goodwill will be recorded
through the end of the year 2000. We will continue to incur non-cash charges in
connection with the amortization of our intangible assets over their respective
useful lives, and we expect such charges will have a significant adverse impact
on our net income for the foreseeable future.
We cannot assure you that we will ever realize the value of these intangible
assets. In the future, as events or changes in circumstances indicate that the
carrying amount of our intangible assets may not be recoverable, we will
evaluate the carrying value of our intangible assets and may take an additional
charge to our earnings. Any future determination requiring the write-off of a
significant portion of unamortized intangible assets could have a material
adverse effect on our business, financial condition or results of operations.
See "Management's Discussion and Analysis of Financial Condition and Results of
Operations" for a further discussion of our intangible assets.
10
<PAGE>
THE YEAR 2000 PROBLEM MAY ADVERSELY AFFECT OUR BUSINESS.
The risks posed by the Year 2000 problem could adversely affect our business
in a number of significant ways. Many of our clients and potential clients
maintain their operations on systems that could be impacted by Year 2000
problems. If our clients fail to ensure their systems are Year 2000 compliant
and Year 2000 problems materially adversely affect them, our business could be
materially adversely affected, particularly if demand for our services declines
while companies redirect their resources to upgrade their computer systems. We
also depend heavily on the availability of the Internet infrastructure to
conduct our business and provide services to our clients. Disruptions in the
Internet infrastructure arising from Year 2000 problems could materially affect
our business, financial condition and results of operations.
In addition, our business could be materially adversely affected if we
cannot obtain products, services or systems that are Year 2000 compliant when we
need them. We rely on our suppliers for hardware, software and services. We are
in the process of obtaining assurances from our suppliers that they are Year
2000 compliant. Our internal information systems may experience operations
difficulties because of undetected errors or defects in the technology used. The
expense to correct such defects could have a material adverse effect on our
business, results of operations and financial condition.
Because we provide computer-related services, the risk we will be involved
in a lawsuit relating to Year 2000 issues is likely to be greater than that of
companies in other industries. Because the solutions we deliver are sometimes
dependent upon third-party products and components, it may be difficult to
determine which component of our solution may cause a Year 2000 problem. As a
result, we may become involved in litigation concerning our services or products
and components of a third party. We sometimes provide an express warranty to
clients that our work is Year 2000 compliant. However, even absent an express
Year 2000 warranty, there is a risk that clients for whom we have provided
services will try to hold us liable for damages caused by the Year 2000 problem.
We cannot guarantee that we will be Year 2000 compliant in a timely manner.
Moreover, the costs related to Year 2000 compliance could be significant. See
"Management's Discussion and Analysis of
Financial Condition and Results of Operations" for a further discussion of the
potential effects of the Year 2000 problem on our business.
GOVERNMENT REGULATION AND LEGAL UNCERTAINTIES RELATING TO THE INTERNET COULD
ADVERSELY AFFECT OUR BUSINESS.
Increased regulation of the Internet might slow the growth in use of the
Internet, which could decrease demand for our services, increase our cost of
doing business or otherwise have a material adverse effect on our business,
financial condition and results of operations. Congress has recently passed
legislation regulating certain aspects of the Internet, including on-line
content, children's protection, copyright infringement, user privacy, taxation,
access charges, liability for third-party activities, transmission of sexually
explicit material and jurisdiction. In addition, federal, state and local
governmental organizations as well as foreign governments are considering other
legislative and regulatory proposals that would regulate the Internet. Areas of
potential regulation include libel, pricing, quality of products and services
and intellectual property ownership. We do not know how courts will interpret
laws governing the Internet or the extent to which they will apply existing laws
regulating issues such as property ownership, libel and personal privacy to the
Internet. Therefore, we are not certain how new laws governing the Internet or
other existing laws will affect our business.
APPNET IS CONTROLLED BY ITS SIGNIFICANT STOCKHOLDERS.
Upon completion of this offering, Ken Bajaj, AppNet's President and Chief
Executive Officer, and GTCR will beneficially own 9.8% and 43.6%, respectively,
of our outstanding common stock. As a result, GTCR and Mr. Bajaj will be able to
exercise a controlling influence over the outcome of matters
11
<PAGE>
submitted to our stockholders for approval, including the election of directors,
appointment of new management, amendments to our certificate of incorporation
and mergers or sales of all of our assets. GTCR and Mr. Bajaj will have the
power to delay, defer or prevent a change in control of AppNet. See
"Management--Board of Directors," "Principal Stockholders" and "Certain
Relationships and Transactions" for a further discussion of Mr. Bajaj's and
GTCR's ownership of our capital stock and their respective relationships with
us.
INVESTORS IN THIS OFFERING WILL EXPERIENCE IMMEDIATE AND SUBSTANTIAL DILUTION.
If you purchase common stock in this offering, you will pay more for your
shares than the amounts paid by existing stockholders for their shares. As a
result you will experience immediate and substantial dilution of approximately
$13.05, representing the difference between our net tangible book value per
share as of March 31, 1999, after giving pro forma effect to this offering, and
the acquisitions we made in 1999, and the assumed initial public offering price
of $13.00 per share. In addition, you may experience further dilution to the
extent that shares of our common stock are issued upon the exercise of stock
options and warrants, the conversion of promissory notes and the achievement of
targets for contingent payment consideration paid in connection with four of the
following acquisitions: New Media Publishing, Sigma6, Salzinger & Company and
Internet Outfitters. These shares generally will be issued at a purchase price
less than the public offering price per share in this offering. See "Dilution"
for a more complete description of how the value of your investment in our
common stock will be diluted upon the completion of this offering.
EXTERNAL FACTORS COULD ADVERSELY AFFECT THE MARKET PRICE OF OUR COMMON STOCK.
There is currently no public market for our common stock, and we cannot
assure you that an active trading market will develop or be sustained after this
offering. The initial public offering price will be determined through
negotiation between us and representatives of the underwriters and may not be
indicative of the market price for the common stock after this offering.
The market price of our common stock could fluctuate significantly as a
result of:
- variations in our operating results which may cause us to fail to meet
analysts' or investors' expectations;
- general economic and stock market conditions;
- changes in financial estimates by securities analysts;
- earnings and other announcements by, and changes in market evaluations of,
providers of Internet and electronic commerce professional services;
- changes in business or regulatory conditions affecting us;
- announcements by us or our competitors of technological innovations or new
products or services; and
- trading of our common stock.
The securities of many companies have experienced extreme price and volume
fluctuations in recent years, often unrelated to the companies' operating
performance. For example, market prices for securities of Internet-related and
technology companies have frequently reached elevated levels, often following
these companies' initial public offerings. These levels may not be sustainable
and may not bear any relationship to these companies' operating performances. If
the market price of our common stock reaches an elevated level following this
offering, it is likely to materially decline. In the past, following periods of
volatility in the market price of a company's securities, that company's
stockholders have often instituted securities class action litigation against
the company. If we were involved in such a
12
<PAGE>
class action suit, it could have a material adverse effect on our business,
financial condition and results of operations.
THE SALE OR AVAILABILITY FOR SALE OF SUBSTANTIAL AMOUNTS OF OUR COMMON STOCK
COULD ADVERSELY AFFECT ITS MARKET PRICE.
Sales of substantial amounts of our common stock in the public market after
the completion of this offering, or the perception that such sales could occur,
could adversely affect the market price of our common stock and could materially
impair our future ability to raise capital through offerings of our common
stock.
In connection with this offering, we, our officers, our directors, most of
the former owners of all of the businesses we acquired, GTCR and Smart
Technology have agreed not to offer or transfer any shares of common stock for
180 days after completion of this offering without the underwriters' consent;
however, the underwriters may release these shares from these restrictions at
any time. We cannot predict what effect, if any, market sales of shares held by
GTCR or any other shareholder or the availability of these shares for future
sale will have on the market price of our common stock. See "Shares Eligible for
Future Sale" for a more detailed description of the restrictions on selling
shares of our common stock after this offering.
ANTI-TAKEOVER PROVISIONS OF DELAWARE'S GENERAL CORPORATION LAW AND OUR
CERTIFICATE OF INCORPORATION COULD DELAY OR DETER A CHANGE IN CONTROL.
Amendments we intend to make to our amended and restated certificate of
incorporation and our bylaws, as well as various provisions of the Delaware
General Corporation Law, may make it more difficult to effect a change in
control of our company. The existence of these provisions may adversely affect
the price of our common stock, discourage third parties from making a bid for
our company or reduce any premiums paid to our stockholders for their common
stock. For example, we intend to amend our certificate of incorporation to
authorize our Board of Directors to issue up to 4,883,379 shares of "blank
check" preferred stock and to attach special rights and preferences to such
preferred stock. The issuance of this preferred stock may make it more difficult
for a third party to acquire control of us. See "Description of Capital
Stock--Preferred stock," and "Description of Capital Stock-- Anti-takeover
effects of AppNet's certificate of incorporation and bylaws and provisions of
Delaware law" for a more complete description of our capital stock, our
Certificate of Incorporation and the effects of the Delaware General Corporation
Law which could hinder a third party's attempts to acquire control of us.
CAUTIONARY NOTICE
REGARDING FORWARD-LOOKING STATEMENTS
This prospectus includes "forward-looking statements" for purposes of the
Securities Act of 1933 and the Securities Exchange Act of 1934. All statements
other than statements of historical fact in this prospectus, including
statements regarding our competitive strengths, business strategy, expected
benefits of any acquisition, future financial position, budgets, projected costs
and plans and objectives of management are forward-looking statements. In
addition, forward-looking statements generally can be identified by the use of
forward-looking terminology such as "may," "will," "expect," "should," "intend,"
"estimate," "anticipate," "believe," "continue" or similar terminology. Although
we believe that the expectations reflected in any forward-looking statements are
reasonable, we can give no assurance that these expectations will prove to have
been correct. Important factors that could cause actual results to differ
materially from our expectations are disclosed under "Risk Factors" and
elsewhere in this prospectus and expressly qualify all written and oral
forward-looking statements attributable to us.
13
<PAGE>
USE OF PROCEEDS
The net proceeds to AppNet from the sale of the 6,000,000 shares of our
common stock being offered by this prospectus are estimated to be approximately
$69.5 million, or $80.4 million if the underwriters exercise their
over-allotment option in full, based upon an assumed initial public offering
price of $13.00 per share, the mid-point of the range shown on the cover page of
this prospectus, after deducting underwriting discounts and commissions and
estimated offering expenses payable by AppNet.
We expect to use the net proceeds from this offering to:
- repay approximately $61.7 million of aggregate indebtedness, including
accrued interest under our existing credit facilities, a $26 million
revolving credit facility and a $40 million revolving credit facility,
both of which are with BankBoston, N.A. and Antares Capital Corporation;
- redeem 1,641 shares of Class A Preferred Stock at an aggregate redemption
price of $1.7 million, including related accrued dividends;
- redeem 418 shares of Class B Preferred Stock at an aggregate redemption
price of $0.4 million, including related accrued dividends;
- repay $3,300 on a note to Smart Technology, L.L.C., which bears interest
at a rate of 12% per annum, is due upon consummation of this offering and
evidences indebtness incurred to fund general working capital purposes;
- repay $16,000 in interest on a note to Fairfax Management Company II,
L.L.C., which bears interest at a rate of 5% per annum, the principal
amount of which will be converted into our common stock upon consummation
of this offering and evidences indebtedness incurred to repurchase shares
of our common stock; and
- fund general corporate purposes, including working capital requirements.
To the extent we receive additional proceeds from this offering, we will use
them to fund general corporate purposes and to redeem additional shares of our
Class A and Class B Preferred Stock on a pro rata basis. As additional shares of
Class A and Class B Preferred Stock are redeemed, the number of shares of Class
A and Class B Preferred Stock that we will exchange into shares of our common
stock will be reduced accordingly.
The amounts borrowed under our existing credit facilities are due in full on
August 24, 2001. The interest rate on indebtedness under the $26 million
revolving credit facility is variable and ranges from the prime rate plus 0.25%
to the prime rate plus 1.5% or from LIBOR plus 2.25% to LIBOR plus 3.5%. The $40
million revolving credit facility carries interest at the prime rate plus 0.5%
or LIBOR plus 2.5%. We intend to terminate the $40 million revolving credit
facility following the consummation of this offering and amend the $26 million
revolving credit facility to provide for maximum aggregate revolving borrowings
of up to $20 million. We will use amounts which may be reborrowed under the $20
million revolving credit facility following the consummation of this offering
for working capital and general corporate purposes, including acquisitions. See
"Management's Discussion and Analysis of Financial Condition and Results of
Operations--Liquidity and capital resources" for a discussion of our future
liquidity.
We anticipate that, in addition to the underwriting discounts and
commissions, we will pay fees and expenses of approximately $3.0 million in
connection with this offering. The principal components of that amount will be
the fees and expenses of our accountants and attorneys, the costs of printing
this prospectus and other offering materials, The Nasdaq Stock Market listing
fees and Securities and Exchange Commission and National Association of
Securities Dealers filing fees.
DIVIDEND POLICY
We have never declared or paid any cash dividends on our common stock and do
not expect to do so in the foreseeable future. The terms of our Class A and
Class B Preferred Stock and of our credit facilities restrict our ability to pay
dividends on our common stock. We intend to retain any earnings to finance the
expansion and development of our business. Subject to the restriction on
dividends in our credit facilities, any future determination to pay dividends
will be made at the discretion of our Board of Directors and will be based upon
our earnings, financial condition and capital requirements and any other
conditions our Board of Directors deems relevant.
14
<PAGE>
CAPITALIZATION
The following table sets forth AppNet's capitalization as of March 31, 1999
on an actual basis and on a pro forma as adjusted basis to reflect:
- the sale of 6,000,000 shares of common stock in this offering at an
assumed initial public offering price of $13.00 per share, the mid-point
of the range shown on the cover page of this prospectus, net of $8.5
million of offering expenses, and the application of the net proceeds of
this offering;
- the conversion of a promissory note for approximately $406,000 to Fairfax
Management Company II, L.L.C. into shares of common stock at 80% of the
initial public offering price in this offering;
- the conversion of promissory notes for approximately $1.0 million plus
accrued interest to former owners of Century Computing, Incorporated into
123,210 shares of common stock at a conversion price of $8.55 per share;
- the exchange of 43,789 shares of Class A Preferred Stock and 11,158 shares
of Class B Preferred Stock, including related accrued dividends, for
4,334,281 shares of common stock at an exchange rate based on an assumed
initial public offering price of $13.00 per share, the mid-point of the
range shown on the cover page of this prospectus;
- a compensation charge of approximately $2.7 million that we would have
incurred at March 31, 1999 upon consummation of this offering in
connection with the termination of our right to repurchase 210,119 shares
of our common stock from Mr. Bajaj at a per share price of $0.3007; and
- an interest charge of approximately $0.9 million related to beneficial
conversion rights of convertible notes.
You should read this table in conjunction with "Use of Proceeds," "Pro Forma
Consolidated Financial Data," "Management's Discussion and Analysis of Financial
Condition and Results of Operations" and our consolidated financial statements
and the related notes included elsewhere in this prospectus.
The amount shown for stockholders' equity and common stock excludes:
- 3,642,084 shares of common stock reserved for issuance in connection with
AppNet's stock incentive plans;
- 84,795 shares of common stock reserved for issuance at an exercise price
of $0.3007 per share in connection with outstanding warrants to purchase
common stock;
- 887,473 shares of common stock reserved for issuance in connection with
outstanding promissory notes convertible into shares of our common stock
at conversion prices of $8.55 and $11.40 per share;
- 461,539 shares of common stock reserved for issuance in connection with
outstanding promissory notes convertible into shares of our common stock
at a conversion price of 80% of the initial public offering price per
share in this offering, assuming an initial public offering price of
$13.00, the mid-point of the range shown on the cover page of this
prospectus; and
- 891,318 shares of common stock reserved for issuance in connection with
contingent payments payable to the former owners of four of the companies
we acquired, New Media Publishing, Sigma6, Salzinger & Company and
Internet Outfitters, assuming that the market price of our common stock at
the time the contingent payments are made is $13.00, the mid-point of the
range shown on the cover page of this prospectus.
15
<PAGE>
<TABLE>
<CAPTION>
MARCH 31, 1999
--------------------------
PRO FORMA
ACTUAL AS ADJUSTED
---------- --------------
(IN THOUSANDS)
<S> <C> <C>
Cash and cash equivalents............................................................. $ 5,655 $ 11,408
---------- --------------
---------- --------------
Credit facilities..................................................................... 59,400 --
Other long-term debt(a)............................................................... 1,479 1,479
Convertible notes..................................................................... 15,006 13,588
Class A Preferred Stock, $0.01 par value, actual, 96,621 shares authorized,
liquidation value of $1,000, 45,430 shares issued and outstanding; pro forma as
adjusted, no shares issued and outstanding(b) ...................................... 45,115 --
Common stock subject to put rights(c)................................................. 278 278
Stockholders' equity:
Class B Preferred Stock, $0.01 par value, 20,000 shares authorized, actual, 11,576
shares issued and outstanding, liquidation value of $1,000; pro forma as adjusted,
no shares issued and outstanding.................................................. 11,576 --
Common stock, $0.0005 par value, 75,000,000 shares authorized, actual, 19,917,545
shares issued and outstanding; pro forma as adjusted, 30,414,091 shares issued and
outstanding....................................................................... 10 15
Additional paid-in capital.......................................................... 36,518 167,085
Notes receivable.................................................................... (685) (685)
Accumulated deficit................................................................. (30,721) (34,264)
Deferred compensation............................................................... (477) (477)
---------- --------------
Total stockholders' equity........................................................ 16,221 131,674
---------- --------------
Total capitalization.............................................................. $ 137,499 $ 147,019
---------- --------------
---------- --------------
</TABLE>
- ------------------------
(a) Other long-term debt includes current and non-current debt obligations and
capital lease obligations.
(b) Class A Preferred Stock is recorded at its liquidation value, net of
issuance costs. Excludes, as of March 31, 1999, 121 shares of Class A
Preferred Stock reserved for issuance at an exercise price equal to the
liquidation value per share in connection with an outstanding warrant to
purchase Class A Preferred Stock.
(c) The holders of these shares of common stock had the right to require AppNet
to repurchase the shares for an aggregate purchase price of approximately
$278,000. This right terminated on April 11, 1999.
16
<PAGE>
DILUTION
AppNet's pro forma net tangible book value as of March 31, 1999 was a
deficit of $70.9 million or $(2.91) per share of common stock. Pro forma net
tangible book value per share of common stock represents the amount of total
tangible assets less the sum of (a) total liabilities and (b) the liquidation
preference of the Class A Preferred Stock and the Class B Preferred Stock and
the repurchase price of common stock subject to put rights and increased by the
effect of the conversion of the $406,000 promissory note into 39,055 shares of
common stock, the conversion of promissory notes of $1,012,000, plus accrued
interest, into 123,210 shares of common stock and the exchange of 43,789 and
11,158 shares of Class A and Class B Preferred Stock, plus related accrued
dividends, respectively into 4,334,281 shares of common stock, divided by the
number of shares of common stock outstanding. After giving effect to the sale of
6,000,000 shares of our common stock in this offering at an assumed initial
public offering price of $13.00 per share, the mid-point of the range shown on
the cover page of this prospectus, and the application of the estimated net
proceeds from this offering, AppNet's adjusted pro forma net tangible book value
at March 31, 1999 would have been a deficit of approximately $1.4 million or
$(0.05) per share of common stock. This represents an immediate increase in pro
forma net tangible book value of $2.86 per share of common stock to existing
stockholders and an immediate dilution in pro forma net tangible book value of
$13.05 per share of common stock to new investors purchasing shares in this
offering. Dilution is determined by subtracting pro forma net tangible book
value per share after the offering from the amount of cash paid by a new
investor for a share of common stock. The following table illustrates this per
share dilution as of March 31, 1999:
<TABLE>
<CAPTION>
PER SHARE
------------------------
<S> <C> <C>
Assumed initial public offering price....................................................... $ 13.00
Pro forma net tangible book value as of March 31, 1999.................................... $ (2.91)
Increase in pro forma net tangible book value attributable to new investors............... 2.86
-----------
Pro forma net tangible book value per share after this offering........................... (0.05)
-----------
Dilution to new investors................................................................. $ 13.05
-----------
-----------
</TABLE>
As of March 31, 1999, there were outstanding options to purchase 1,563,891
shares of common stock at a weighted average exercise price of $10.72 per share,
outstanding warrants to purchase 84,795 shares of common stock at a weighted
average exercise price of $0.3007 per share, and convertible notes, excluding
the convertible notes reflected above, to purchase 887,473 shares of common
stock at a weighted average exercise price of $11.03 per share. In addition,
$5.2 million of notes payable are convertible at 80% of the initial public
offering price. To the extent that these options and warrants are exercised, and
the convertible notes are converted, there will be further dilution to new
investors. New investors could also experience further dilution as a result of
the issuance of shares of common stock to the former owners of four of the
businesses we have acquired in connection with contingent payments payable to
them. These acquired businesses are New Media Publishing, Sigma6, Salzinger &
Company and Internet Outfitters.
The following table sets forth, as of March 31, 1999, the number of shares
of our common stock purchased from AppNet, the total consideration paid to
AppNet and the average price paid per share by existing stockholders and by new
investors at an assumed initial public offering price of $13.00 per share, the
mid-point of the range shown on the cover page of this prospectus.
<TABLE>
<CAPTION>
SHARES PURCHASED TOTAL CONSIDERATION
------------------------- --------------------------- AVERAGE PRICE
NUMBER PERCENT AMOUNT PERCENT PER SHARE
------------ ----------- -------------- ----------- -------------
<S> <C> <C> <C> <C> <C>
Existing stockholders (1)......................... 24,414,091 80.2% $ 83,797,000 51.8% $ 3.43
New investors..................................... 6,000,000 19.8 78,000,000 48.2 13.00
------------ ----- -------------- -----
Total........................................... 30,414,091 100.0% $ 161,797,000 100.0%
------------ ----- -------------- -----
------------ ----- -------------- -----
</TABLE>
- ------------------------
(1) Includes 39,055 shares resulting from the conversion of a note of
approximately $406,000 at $10.40 per share, 123,210 shares resulting from
the conversion of promissory notes of approximately $1.0 million plus
accrued interest at $8.55 per share, and 3,444,445 and 889,836 shares
resulting from the exchange of Class A Preferred Stock and Class B Preferred
Stock, respectively, plus related accrued dividends at a price of $13.00 per
share, the mid-point of the range shown on the cover page of this
prospectus.
17
<PAGE>
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To AppNet Systems, Inc.:
We have examined the pro forma and offering adjustments reflecting the
transactions described in the introduction to the pro forma consolidated
financial data contained on page 20 and in Notes (a) through (j) to this
statement and the application of those adjustments to the historical amounts in
the accompanying pro forma consolidated statement of operations of AppNet
Systems, Inc. for the year ended December 31, 1998. The historical consolidated
statement of operations is derived from the year ended December 31, 1998
historical financial statements of AppNet Systems, Inc., i33 communications
corp., Salzinger & Company, Inc. and Internet Outfitters, Inc., each of which
were audited by us, appearing elsewhere herein, the financial statements of
Arbor Intelligent Systems, Inc., Software Services Corporation, New Media
Publishing, Inc., Century Computing, Incorporated, Research & Planning, Inc. and
The Kodiak Group, Inc. acquired by AppNet Systems, Inc. during 1998 for the
period in 1998 prior to their acquisitions, each of which were also audited by
us, appearing elsewhere herein, the unaudited historical financial statements of
Logex International, L.L.C. for the period in 1998 prior to its acquisition and
the unaudited historical financial statements of Sigma6, Inc., and Transform IT,
Incorporated for the year ended December 31, 1998. Such pro forma and offering
adjustments are based upon management's assumptions described in the
introduction to the pro forma consolidated financial data contained on page 20
and in Notes (a) through (j). Our examination was made in accordance with
standards established by the American Institute of Certified Public Accountants
and, accordingly, included such procedures as we considered necessary in the
circumstances.
In addition, we have reviewed the related pro forma and offering adjustments
reflecting the transactions described in the introduction to the pro forma
consolidated financial data contained on page 20 and in Notes (a) through (j)
and the application of those adjustments to the historical amounts in the
accompanying pro forma consolidated statement of operations for the three months
ended March 31, 1999. The historical consolidated statement of operations is
derived from the historical unaudited statement of operations of AppNet Systems,
Inc., which was reviewed by us, appearing elsewhere herein, and the historical
unaudited statements of operations for i33 communications corp., Salzinger &
Company, Inc., Internet Outfitters, Inc., Sigma6, Inc. and Transform IT,
Incorporated for the period in 1999 prior to their acquisitions, each of which
were reviewed by us. Such pro forma and offering adjustments are based on
management's assumptions as described in the introduction to the pro forma
consolidated financial data contained on page 20 and in Notes (a) through (j).
Our review was made in accordance with standards established by the American
Institute of Certified Public Accountants.
The objective of this pro forma financial information is to show what the
significant effects on the historical financial information might have been had
the transactions occurred at an earlier date. However, the pro forma
consolidated statements of operations are not necessarily indicative of the
results of operations that would have been attained had the above-mentioned
transactions actually occurred earlier.
In our opinion, management's assumptions provide a reasonable basis for
presenting the significant effects directly attributable to the above-mentioned
transactions described in the introduction to the pro forma consolidated
financial data contained on page 20 and in Notes (a) through (j), the related
pro forma and offering adjustments give appropriate effect to those assumptions,
and the pro forma as adjusted columns reflect the proper application of those
adjustments to the historical financial amounts in the pro forma consolidated
statement of operations for the year ended December 31, 1998.
A review is substantially less in scope than an examination, the objective
of which is the expression of an opinion on management's assumptions, the pro
forma and offering adjustments and the application of those adjustments to
historical financial information. Accordingly, we do not express such an opinion
on the pro forma and offering adjustments or the application of such adjustments
to the pro
18
<PAGE>
forma consolidated statement of operations for the three months ended March 31,
1999. Based on our review, however, nothing came to our attention that caused us
to believe that management's assumptions do not provide a reasonable basis for
presenting the significant effects directly attributable to the above-mentioned
transaction described in the introduction to the pro forma consolidated
financial data contained on page 20 and in Notes (a) through (j), that the
related pro forma and offering adjustments do not give appropriate effect to
those assumptions, or that the pro forma as adjusted column does not reflect the
proper application of those adjustments to the historical financial statement
amounts in the pro forma consolidated statement of operations for the three
months ended March 31, 1999.
Washington, D.C.
May 24, 1999
19
<PAGE>
PRO FORMA CONSOLIDATED FINANCIAL DATA
The following tables set forth the unaudited pro forma consolidated
statements of operations of AppNet for the year ended December 31, 1998 and for
the three months ended March 31, 1999. The pro forma consolidated statements of
operations for the year ended December 31, 1998 give effect (1) on a pro forma
basis, to the acquisitions we made in 1998 and 1999 and GTCR's investment in
AppNet, as if these transactions had occurred on January 1, 1998 and (2) on a
pro forma, as adjusted, basis to reflect:
- the reduction of interest expense due to the conversion of a $406,000 note
payable which automatically converts into shares of our common stock upon
the offering;
- the reduction of interest expense due to the conversion of promissory
notes of approximately $1.0 million plus accrued interest into 123,210
shares of common stock;
- the reduction of the dividends on and accretion of preferred stock
resulting from the exchange of 43,789 and 11,158 shares of Class A and
Class B Preferred Stock, respectively, plus related accrued dividends, for
shares of common stock; and
- the reduction of interest expense and dividends on and accretion of
preferred stock resulting from the repayment of the credit facilities and
the redemption of shares of Class A and Class B Preferred Stock in
connection with the offering, as if such transactions had occurred on
January 1, 1998.
The pro forma consolidated statements of operations for the three months
ended March 31, 1999, give effect (1) on a pro forma basis, to the acquisitions
we made in 1998 and 1999, as if these acquisitions had occurred on January 1,
1998 and (2) on a pro forma, as adjusted, basis to reflect:
- the reduction of interest expense due to the conversion of a $406,000 note
payable which automatically converts into shares of our common stock upon
the offering;
- the reduction of interest expense due to the conversion of promissory
notes of approximately $1.0 million plus accrued interest into 123,210
shares of common stock;
- the reduction of the dividends on and accretion of preferred stock
resulting from the exchange of 43,789 and 11,158 shares of Class A and
Class B Preferred Stock, respectively, plus related accrued dividends, for
shares of common stock; and
- the reduction of interest expense and dividends on and accretion of
preferred stock resulting from the repayment of the credit facilities and
the redemption of shares of Class A and Class B Preferred Stock in
connection with the offering, as if such transactions had occurred on
January 1, 1998.
The information in the pro forma consolidated statement of operations for
the year ended December 31, 1998 has been derived from the audited statements of
operations for the year ended December 31, 1998 of AppNet, i33 communications
corp., Salzinger & Company, Inc. and Internet Outfitters, Inc., the unaudited
statements of operations of Sigma6, Inc. and TransForm IT, Incorporated for the
year ended December 31, 1998 and the audited statements of operations of the
companies we acquired in 1998 for the periods during 1998 prior to acquisition,
all of which, except the statements of operations for Sigma6, Inc. and TransForm
IT, Incorporated, are included elsewhere in this prospectus.
The information in the pro forma consolidated statement of operations for
the three months ended March 31, 1999 has been derived from the unaudited
statement of operations of AppNet for the three months ended March 31, 1999,
included elsewhere in this prospectus, and the unaudited statements of
operations for the companies acquired in 1999 for the periods during 1999 prior
to their acquisition.
The acquisitions we made were accounted for using the purchase method of
accounting. The purchase method of accounting allocates the aggregate purchase
price to the assets acquired and liabilities assumed based upon their respective
fair values. The excess of purchase price over the fair
20
<PAGE>
value of tangible and identifiable intangible assets acquired, net of
liabilities assumed, has been reflected as goodwill. AppNet believes that the
preliminary allocations set forth herein are reasonable; however, in some cases
the final allocations will be based upon valuations and other studies that are
not yet complete. As a result, the allocations set forth herein are subject to
revision as additional information becomes available, and such revised
allocations could differ from those set forth herein.
The unaudited pro forma consolidated statements of operations are based upon
currently available information and assumptions and estimates which management
believes are reasonable. These assumptions and estimates, however, are subject
to change, including, without limitation, adjustments for potential cost savings
or other synergies arising from the acquisitions we made in 1998 and 1999. These
statements are presented for comparative purposes only and do not purport to be
indicative of the actual results of operations that might have occurred or
expected future results. You should read the unaudited consolidated pro forma
financial data in conjunction with our consolidated financial statements and the
related notes and the audited financial statements and the related notes of the
companies we acquired included elsewhere in this prospectus.
21
<PAGE>
APPNET SYSTEMS, INC.
PRO FORMA CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE YEAR ENDED DECEMBER 31, 1998
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
CONSOLIDATED
APPNET ARBOR(A) SSC(A) CENTURY(A) NMP(A) R&P(A) KODIAK(A)
------------- ----------- --------- ----------- ----------- ----------- -----------
<S> <C> <C> <C> <C> <C> <C> <C>
Revenues........................ $ 17,674 $ 688 $ 10,788 $ 10,040 $ 3,711 $ 5,303 $ 6,289
Cost of revenues................ 11,699 471 7,392 6,192 1,542 2,667 3,221
------------- ----- --------- ----------- ----------- ----------- -----------
Gross profit.................. 5,975 217 3,396 3,848 2,169 2,636 3,068
Operating expenses:
Selling and marketing......... 964 14 567 112 227 260 66
General and administrative.... 6,507 226 1,856 2,639 1,868 644 1,691
Stock-based and other
acquisition-related
compensation................ 1,157 465 2,654 953 -- -- 250
Depreciation and
amortization................ 10,151 29 230 156 123 80 136
------------- ----- --------- ----------- ----------- ----------- -----------
Total operating expenses.... 18,779 734 5,307 3,860 2,218 984 2,143
------------- ----- --------- ----------- ----------- ----------- -----------
Income (loss) from operations... (12,804) (517) (1,911) (12) (49) 1,652 925
Interest expense (income)....... 1,052 29 28 (41) -- (11) 2
Other expense, net.............. 723 211 372 423 -- 99 8
------------- ----- --------- ----------- ----------- ----------- -----------
Income (loss) before income
taxes......................... (14,579) (757) (2,311) (394) (49) 1,564 915
Income taxes.................... (200) -- (598) (135) 13 29 5
------------- ----- --------- ----------- ----------- ----------- -----------
Net income (loss)............... $ (14,379) $ (757) $ (1,713) $ (259) $ (62) $ 1,535 $ 910
------------- ----- --------- ----------- ----------- ----------- -----------
------------- ----- --------- ----------- ----------- ----------- -----------
Dividends on and accretion of
preferred stock............... 873
-------------
Net loss attributable to common
stockholders.................. $ (15,252)
-------------
-------------
Basic and diluted net loss per
common share.................. $ (1.41)
-------------
-------------
Weighted average common shares
outstanding (h)............... 10,785,424
-------------
-------------
<CAPTION>
OTHER
INTERNET ACQUIRED PRO FORMA PRO FORMA
I33(A) SALZINGER(A) OUTFITTERS(A) COMPANIES(A) ADJUSTMENTS CONSOLIDATED
--------- ------------- ------------- --------------- ------------ ------------
<S> <C> <C>
Revenues........................ $ 4,360 $ 3,110 $ 2,343 $ 4,876 $ -- $ 69,182
Cost of revenues................ 2,251 1,738 1,287 3,481 -- 41,941
--------- ------ ------ ------ ------------ ------------
Gross profit.................. 2,109 1,372 1,056 1,395 -- 27,241
Operating expenses:
Selling and marketing......... 985 2 47 83 -- 3,327
General and administrative.... 1,343 425 859 973 -- 19,031
Stock-based and other
acquisition-related
compensation................ -- -- 57 -- 11,195(b) 16,731
Depreciation and
amortization................ 114 13 57 62 49,121(c) 60,272
--------- ------ ------ ------ ------------ ------------
Total operating expenses.... 2,442 440 1,020 1,118 60,316 99,361
--------- ------ ------ ------ ------------ ------------
Income (loss) from operations... (333) 932 36 277 (60,316) (72,120)
Interest expense (income)....... 11 (20) 47 (9) 4,774(d) 5,862
Other expense, net.............. 35 -- -- 15 (1,107) ) 779
--------- ------ ------ ------ ------------ ------------
Income (loss) before income
taxes......................... (379) 952 (11) 271 (63,983) (78,761)
Income taxes.................... (34) -- 52 (85) 853(f) (100)
--------- ------ ------ ------ ------------ ------------
Net income (loss)............... $ (345) $ 952 $ (63) $ 356 (64,836) (78,661)
--------- ------ ------ ------
--------- ------ ------ ------
Dividends on and accretion of
preferred stock............... 2,731(g) 3,604
------------ ------------
Net loss attributable to common
stockholders.................. $ (67,567) $ (82,265)
------------ ------------
------------ ------------
Basic and diluted net loss per
common share.................. $ (4.46)
------------
------------
Weighted average common shares
outstanding (h)............... 18,465,130
------------
------------
<CAPTION>
OFFERING PRO FORMA
ADJUSTMENTS AS ADJUSTED
------------- ------------
Revenues........................ $ -- $ 69,182
Cost of revenues................ -- 41,941
------------- ------------
Gross profit.................. -- 27,241
Operating expenses:
Selling and marketing......... -- 3,327
General and administrative.... -- 19,031
Stock-based and other
acquisition-related
compensation................ -- 16,731
Depreciation and
amortization................ -- 60,272
------------- ------------
Total operating expenses.... -- 99,361
------------- ------------
Income (loss) from operations... -- (72,120)
Interest expense (income)....... (4,840)(i) 1,022
Other expense, net.............. -- 779
------------- ------------
Income (loss) before income
taxes......................... 4,840 (73,921)
Income taxes.................... -- (100)
------------- ------------
Net income (loss)............... 4,840 (73,821)
Dividends on and accretion of
preferred stock............... (3,604)(j) --
------------- ------------
Net loss attributable to common
stockholders.................. $ 8,444 $ (73,821)
------------- ------------
------------- ------------
Basic and diluted net loss per
common share.................. $ (2.55)
------------
------------
Weighted average common shares
outstanding (h)............... 28,961,676
------------
------------
</TABLE>
22
<PAGE>
APPNET SYSTEMS, INC.
PRO FORMA CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE THREE MONTHS ENDED MARCH 31, 1999
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
OTHER
CONSOLIDATED INTERNET ACQUIRED PRO FORMA
APPNET I33(A) SALZINGER(A) OUTFITTERS(A) COMPANIES(A) ADJUSTMENTS
------------ ------ ------------ ------------- --------- -----------
<S> <C> <C> <C> <C> <C> <C>
Revenues........................... $ 19,643 $103 $ 417 $ 663 $1,445 $ --
Cost of revenues................... 11,457 48 214 431 982 --
------------ ------ ------------ ------ --------- -----------
Gross profit..................... 8,186 55 203 232 463 --
Operating expenses:
Selling and marketing............ 1,190 19 48 15 81 --
General and administrative....... 6,754 70 161 232 185 --
Stock-based and other
acquisition-related
compensation................... 2,487 -- 675 21 -- (552)(b)
Depreciation and amortization.... 12,735 3 3 18 8 80(c)
------------ ------ ------------ ------ --------- -----------
Total operating expenses....... 23,166 92 887 286 274 (472)
------------ ------ ------------ ------ --------- -----------
Income (loss) from operations...... (14,980) (37) (684) (54) 189 472
Interest expense (income).......... 1,262 -- (2) 17 3 196(d)
Other expense, net................. -- -- 472 -- -- (472)(e)
------------ ------ ------------ ------ --------- -----------
Income (loss) before income
taxes............................ (16,242) (37) (1,154) (71) 186 748
Income taxes....................... 100 -- -- (27) 70 (43)(f)
------------ ------ ------------ ------ --------- -----------
Net loss........................... $ (16,342) $(37) $(1,154) $ (44) $ 116 $ 791
------------ ------ ------------ ------ --------- -----------
------------ ------ ------------ ------ --------- -----------
Dividends on and accretion of
preferred stock.................. 1,039 93(g)
------------ -----------
Net loss attributable to common
stockholders..................... $ (17,381) $ 698
------------ -----------
------------ -----------
Basic and diluted net loss per
common share..................... $ (0.88)
------------
------------
Weighted average common shares
outstanding (h).................. 19,722,559
------------
------------
<CAPTION>
PRO FORMA OFFERING PRO FORMA
CONSOLIDATED ADJUSTMENTS AS ADJUSTED
------------ ----------- -----------
<S> <C> <C> <C>
Revenues........................... $ 22,271 $ -- $ 22,271
Cost of revenues................... 13,132 -- 13,132
------------ ----------- -----------
Gross profit..................... 9,139 -- 9,139
Operating expenses:
Selling and marketing............ 1,353 -- 1,353
General and administrative....... 7,402 -- 7,402
Stock-based and other
acquisition-related
compensation................... 2,631 -- 2,631
Depreciation and amortization.... 12,847 -- 12,847
------------ ----------- -----------
Total operating expenses....... 24,233 -- 24,233
------------ ----------- -----------
Income (loss) from operations...... (15,094) -- (15,094)
Interest expense (income).......... 1,476 (1,240)(i) 236
Other expense, net................. -- -- --
------------ ----------- -----------
Income (loss) before income
taxes............................ (16,570) 1,240 (15,330)
Income taxes....................... 100 -- 100
------------ ----------- -----------
Net loss........................... $ (16,670) $ 1,240 $ (15,430)
------------ ----------- -----------
------------ ----------- -----------
Dividends on and accretion of
preferred stock.................. 1,132 (1,132)(j) --
------------ ----------- -----------
Net loss attributable to common
stockholders..................... $ (17,802) $ 2,372 $ (15,430)
------------ ----------- -----------
------------ ----------- -----------
Basic and diluted net loss per
common share..................... $ (0.88) (0.50)
------------ -----------
------------ -----------
Weighted average common shares
outstanding (h).................. 20,284,523 30,781,069
------------ -----------
------------ -----------
</TABLE>
23
<PAGE>
NOTES TO PRO FORMA CONSOLIDATED STATEMENT OF OPERATIONS
FOR THE YEAR ENDED DECEMBER 31, 1998
AND FOR THE THREE MONTHS ENDED MARCH 31, 1999
(UNAUDITED)
(IN THOUSANDS)
The following adjustments were applied to AppNet's consolidated statement of
operations and the financial data of the companies we acquired in 1998 and 1999
to arrive at the unaudited pro forma consolidated statement of operations.
(a) In the pro forma consolidated statement of operations for the year ended
December 1998, these columns reflect the actual results of operations for the
acquisitions we completed in 1998 from January 1, 1998 to the date prior to
which each respective acquisition was consummated and for the companies we
acquired in 1999 for the full year ended December 31, 1998. In the pro forma
consolidated statement of operations for the three months ended March 31, 1999,
these columns reflect the actual results of operations for the acquisitions we
completed in 1999 from January 1, 1999 to the date prior to which each
respective acquisition was consummated as if they had occurred on January 1,
1998.
(b) This adjustment was made to record a full year of the estimated
compensation charge for contingent payments in connection with our acquisitions
in 1998 and 1999 and to reduce pro forma expense for stock-based and other
acquisition-related compensation expense recorded by the acquired companies
prior to their acquisition by AppNet which arose as a direct result of their
acquisition by AppNet:
<TABLE>
<CAPTION>
YEAR ENDED
DECEMBER 31, 1998
------------------
<S> <C>
Contingent payment compensation expense.................................................................... $ 15,574
Less: Acquisition-related compensation expense recorded by acquired companies.............................. (4,379)
------------------
$ 11,195
------------------
------------------
<CAPTION>
THREE MONTHS ENDED
MARCH 31, 1999
--------------------
<S> <C>
Contingent payment compensation expense.................................................................... $ 144
Less: Acquisition-related compensation expense recorded by acquired companies.............................. (696)
--------
$ (552)
--------
--------
</TABLE>
See Note 16 of AppNet's historical consolidated financial statements
included elsewhere in this prospectus which further explains the amount shown as
contingent payment compensation expense. This pro forma amount has been
calculated assuming the operating targets related to the contingent payments
payable to the former owners of five of the companies we acquired, New Media
Publishing, Sigma6, Salzinger & Company, Internet Outfitters and TransForm IT,
are fully met and a common stock price per share of $13.00, the mid-point of the
range shown on the cover page of this prospectus. Approximately 75% of the total
contingent payments which have a fair value of approximately $31.6 million based
on a per share price of common stock of $13.00, the mid-point of the range shown
on the cover page of this prospectus, will be reflected as compensation expense
over a weighted average period of 18 months. These charges will be fully
recognized by the end of the year 2000.
(c) This adjustment was made to record amortization expense related to
acquired identifiable intangible assets and goodwill. Such amounts are being
amortized over the estimated useful life of each asset, primarily two to three
years. Six of the acquisitions, LOGEX International, New Media Publishing,
Sigma6, Salzinger & Company, Internet Outfitters and TransForm IT, provide for
additional purchase consideration, primarily cash and stock, which is payable
upon the attainment of agreed-upon operating targets. A portion of this amount
will be recorded as additional goodwill. If the operating targets are fully met,
the aggregate amount of additional goodwill will be approximately $8.5 million,
assuming a per share price of common stock at the time the contingency is
resolved of $13.00, the mid-point of the range shown on the cover page of this
prospectus. See "Risk Factors--Our intangible assets represent a significant
portion of our assets; amortization of our intangible assets will adversely
impact our net income and we may never realize the full value of our intangible
assets" for additional information on these amortization expenses.
24
<PAGE>
(d) This adjustment was made to reflect a full year of interest expense on
acquisition debt financing. The increase in the interest expense is a result of
the amounts drawn under the credit facilities to the balance outstanding on
March 31, 1999 of approximately $59.4 million at a weighted average interest
rate of 8.0%. Additionally, the increase results from notes issued to selling
shareholders with a principal balance of approximately $15.6 million at March
31, 1999 which bear a weighted average interest rate of 5.7%. The adjustment is
as follows:
<TABLE>
<CAPTION>
YEAR ENDED
DECEMBER 31, 1998
------------------
<S> <C>
Interest on credit facility................................................................... $ 4,550,000
Interest on notes to selling shareholders..................................................... 948,000
Less: interest recorded by AppNet and acquired companies...................................... (724,000)
------------------
$ 4,774,000
------------------
------------------
<CAPTION>
THREE MONTHS ENDED
MARCH 31, 1999
--------------------
<S> <C>
Interest on credit facility................................................................... $ 1,178,000
Interest on notes to selling shareholders..................................................... 237,000
Less: interest recorded by AppNet and acquired companies...................................... (1,219,000)
--------------------
$ 196,000
--------------------
--------------------
</TABLE>
In addition, an interest charge of approximately $0.9 million will be
recorded related to the beneficial conversion rights of convertible notes, which
is not reflected in the pro forma consolidated statement of operations.
(e) This adjustment was made to eliminate costs of investment advisors and
other professionals incurred by the companies we acquired in 1998 and 1999 which
were directly attributable to the sale of those companies to AppNet.
(f) This adjustment was made to record the estimated tax benefit for the
full year of 1998 and the estimated tax provision for the three months ended
March 31, 1999 and to reflect the tax impact of the previous pro forma
adjustments, net of an applicable valuation allowance.
<TABLE>
<CAPTION>
YEAR ENDED
DECEMBER 31, 1998
------------------
<S> <C>
Income taxes............................................................................................... $ (100)
Less: historical tax (benefit)/provision recorded by AppNet and the companies we acquired.................. (953)
------------------
Net adjustment............................................................................................. $ 853
------------------
------------------
<CAPTION>
THREE MONTHS ENDED
MARCH 31, 1999
--------------------
<S> <C>
Income taxes............................................................................................... $ 100
Less: historical tax (benefit)/provision recorded by AppNet and the companies we acquired.................. 143
--------
Net adjustment............................................................................................. (43)
--------
--------
</TABLE>
(g) This adjustment was made to reflect a full year of preferred stock
dividends on the preferred stock issued to finance our acquisitions.
(h) Pro forma weighted average common shares outstanding for the year ended
December 31, 1998 reflects the effects of shares we issued in connection with
the acquisitions we made in 1998 and 1999 and GTCR's investment in AppNet, as if
all these shares had been issued as of January 1, 1998. Pro forma weighted
average common shares outstanding for the three months ended March 31, 1999
reflects the effects of shares we issued in connection with the acquisitions we
made in 1999 as if all these shares had been issued as of January 1, 1998.
Pro forma, as adjusted, weighted average shares outstanding for the year
ended December 31, 1998, and for the three months ended March 31, 1999, reflects
the pro forma weighted average shares outstanding for the respective periods
plus (1) the 6,000,000 shares to be issued in connection with this offering, (2)
the conversion of a $406,000 note payable into 39,055 shares of common stock,
(3) the conversion of promissory notes of $1,012,000 into 123,210 shares of
common stock and (4) the issuance of 4,334,281 shares of common stock in
connection with the exchange of Class A and Class B Preferred Stock and related
accrued dividends.
25
<PAGE>
(i) This adjustment was made to eliminate interest expense as a result of
the repayment of the credit facilities and the conversion of a $406,000 note
payable into shares of our common stock in connection with the offering:
<TABLE>
<CAPTION>
YEAR ENDED THREE MONTHS ENDED
DECEMBER 31, 1998 MARCH 31, 1999
------------------- --------------------
<S> <C> <C>
Repayment of credit facilities.......................................... $ (4,769) $ (1,213)
Conversion of notes payable............................................. (71) (27)
------- -------
$ (4,840) $ (1,240)
------- -------
------- -------
</TABLE>
(j) This adjustment was made to eliminate dividends on and accretion of
preferred stock as a result of the redemption and the exchange of preferred
stock in connection with this offering, as follows:
<TABLE>
<CAPTION>
YEAR ENDED THREE MONTHS ENDED
DECEMBER 31, 1998 MARCH 31, 1999
------------------- --------------------
<S> <C> <C>
Class A Preferred Stock................................................. (2,909) (958)
Class B Preferred Stock................................................. (695) (174)
------- -------
$ (3,604) $ (1,132)
------- -------
------- -------
</TABLE>
26
<PAGE>
SELECTED FINANCIAL DATA
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
The following tables contain selected financial data of AppNet for the year
ended December 31, 1998 and for the three months ended March 31, 1999 and for
its predecessor, Software Services Corporation, for each of the years in the
four-year period ended December 31, 1997 and for the period from January 1, 1998
to August 24, 1998. The consolidated statement of operations data and balance
sheet data for AppNet for the year ended December 31, 1998 are derived from
financial statements audited by Arthur Andersen LLP, independent public
accountants, and are included elsewhere in this prospectus. The statement of
operations data and balance sheet data for AppNet for the three months ended
March 31, 1999 are derived from the unaudited financial statements of AppNet
included elsewhere in this prospectus. The statement of operations data for
Software Services Corporation for the years ended December 31, 1996 and 1997 and
for the period from January 1, 1998 to August 24, 1998 and the balance sheet
data as of December 31, 1996 and 1997 and August 24, 1998 are derived from the
financial statements of Software Services Corporation, which have been audited
by Arthur Andersen LLP and are included elsewhere in this prospectus. The
statement of operations data for the years ended December 31, 1994 and 1995 and
the balance sheet data as of December 31, 1994 and 1995 are unaudited and have
been prepared on the same basis as the audited consolidated financial statements
of Software Services Corporation included elsewhere in this prospectus. In the
opinion of management, this unaudited information includes all adjustments,
consisting of only normally recurring adjustments, necessary for a fair
presentation of such information. The historical results are not necessarily
indicative of results to be expected for any future period. You should read the
data set forth below in conjunction with "Management's Discussion and Analysis
of Financial Condition and Results of Operations," our consolidated financial
statements and the related notes and Software Services Corporation's financial
statements and the related notes, included elsewhere in this prospectus.
<TABLE>
<CAPTION>
SOFTWARE SERVICES CORPORATION
------------------------------------------------------------- APPNET
EIGHT MONTHS ------------------------------
YEAR ENDED DECEMBER 31, ENDED YEAR ENDED THREE MONTHS
---------------------------------------------- AUGUST 24, DECEMBER 31, ENDED
1994 1995 1996 1997 1998 1998 MARCH 31, 1998
---------- ---------- ---------- ---------- ------------- ------------- ---------------
<S> <C> <C> <C> <C> <C> <C> <C>
(UNAUDITED)
STATEMENT OF OPERATIONS DATA:
Revenues.................... $ 9,563 $ 11,065 $ 11,789 $ 13,298 $ 10,788 $ 17,674 $ 197
Net income (loss)........... 282 181 (53) 431 (1,713) (14,379) (279)
Dividends on and accretion
of preferred stock........ -- -- -- -- -- 873 --
Net income (loss)
attributable to common
stockholders.............. 282 181 (53) 431 (1,713) (15,252) (279)
PER SHARE AMOUNTS:
Basic and diluted net loss
per common share.......... $ 0.05 $ 0.03 $ (0.01) $ 0.08 $ (0.30) $ (1.41) $ (0.23)
Weighted average common
shares outstanding........ 6,000,000 6,000,000 5,727,000 5,705,000 5,697,000 10,785,424 1,195,331
<CAPTION>
THREE MONTHS
ENDED
MARCH 31, 1999
---------------
<S> <C>
STATEMENT OF OPERATIONS DATA:
Revenues.................... $ 19,643
Net income (loss)........... (16,342)
Dividends on and accretion
of preferred stock........ (1,039)
Net income (loss)
attributable to common
stockholders.............. (17,381)
PER SHARE AMOUNTS:
Basic and diluted net loss
per common share.......... $ (0.88)
Weighted average common
shares outstanding........ 19,722,559
</TABLE>
<TABLE>
<CAPTION>
DECEMBER 31, THREE MONTHS
---------------------------------------------- AUGUST 24, DECEMBER 31, ENDED
1994 1995 1996 1997 1998 1998 MARCH 31, 1998
---------- ---------- ---------- ---------- ----------- ------------- ---------------
<S> <C> <C> <C> <C> <C> <C> <C>
(UNAUDITED)
BALANCE SHEET DATA:
Total assets.................... $ 2,239 $ 3,217 $ 3,155 $ 3,667 $ 4,973 $ 118,370 $ 3,857
Total debt(1)................... 6 575 992 666 -- 43,792 2,394
Class A Preferred Stock......... -- -- -- -- -- 37,646 --
Stockholders' equity............ 1,641 1,811 1,458 1,886 3,487 23,608 804
<CAPTION>
THREE MONTHS
ENDED
MARCH 31, 1999
---------------
<S> <C>
BALANCE SHEET DATA:
Total assets.................... $ 163,471
Total debt(1)................... 75,885
Class A Preferred Stock......... 45,115
Stockholders' equity............ 16,221
</TABLE>
- ----------------------------------
(1) Total debt includes the current and long-term portions of notes payable and
capital lease obligations for Software Services Corporation and includes the
current and long-term portions of long-term debt, convertible notes, capital
lease obligations and credit facilities for AppNet.
27
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
IN ADDITION TO HISTORICAL INFORMATION, THE FOLLOWING DISCUSSION MAY INCLUDE
FORWARD-LOOKING STATEMENTS THAT INVOLVE RISKS AND UNCERTAINTIES WHICH COULD
RESULT IN OPERATING PERFORMANCE THAT IS MATERIALLY DIFFERENT FROM MANAGEMENT'S
PROJECTIONS. FACTORS THAT COULD CAUSE OR CONTRIBUTE TO THESE DIFFERENCES INCLUDE
THOSE DISCUSSED IN "RISK FACTORS," AS WELL AS THOSE DISCUSSED ELSEWHERE IN THIS
PROSPECTUS. YOU SHOULD READ THE FOLLOWING DISCUSSION OF THE FINANCIAL CONDITION
AND RESULTS OF OPERATIONS OF APPNET AND ITS PREDECESSOR, SOFTWARE SERVICES
CORPORATION, IN CONJUNCTION WITH THEIR RESPECTIVE CONSOLIDATED FINANCIAL
STATEMENTS AND THE RELATED NOTES, "PRO FORMA CONSOLIDATED FINANCIAL DATA" AND
"SELECTED FINANCIAL DATA" INCLUDED ELSEWHERE IN THIS PROSPECTUS.
OVERVIEW
AppNet provides Internet and electronic commerce professional services and
solutions to medium-sized and large businesses. We develop end-to-end electronic
commerce solutions that improve communication and commerce between businesses
and consumers as well as among businesses and their trading partners. Through
strategic acquisitions and internal growth, we have built a company with the
ability to design, develop, implement and manage end-to-end Internet and
electronic commerce solutions.
AppNet's financial statements for the period from inception, November 6,
1997, through December 31, 1997, reflect immaterial transactions and, therefore,
these transactions have been included in our 1998 financial statements to
facilitate presentation. From inception through March 11, 1998, our operating
activities primarily consisted of developing a preliminary business plan,
recruiting personnel, engaging in discussions with prospective lenders and
strategic investors, identifying potential acquisition targets and developing
preliminary technical and marketing materials. Our strategic plan identified the
specific professional services which are required to provide clients with
end-to-end solutions. We then identified a group of companies which focused on
providing services in one or more of these professional services areas. After
reviewing and evaluating over 100 companies, we ultimately acquired a set of
companies that we believe fit together strategically and culturally and which,
when integrated with one another, could design, develop, implement and manage
end-to-end solutions. In March 1998, we completed our first acquisition. Since
that time, AppNet has completed 11 additional acquisitions.
Typically, the consideration we paid to make our acquisitions included cash,
shares of our common stock, promissory notes, promissory notes convertible into
shares of our common stock and, in six of our acquisitions, LOGEX International,
New Media Publishing, Sigma6, Salzinger & Company, Internet Outfitters and
TransForm IT, contingent payments payable in cash and/or shares of our common
stock payable upon the attainment of agreed-upon operating targets. The cash
portion of such consideration was financed primarily by an investment in our
company by GTCR and Smart Technology and borrowings under our credit facilities.
Our acquisitions have been accounted for using the purchase method of
accounting. Accordingly, the purchase price has been allocated, based on
preliminary estimates of fair value, to the tangible assets and liabilities
assumed, and in most cases, with the advice of independent valuation experts, to
the identifiable intangible assets, as of the acquisition dates. Final estimates
of fair value will be made upon the completion of independent valuations for our
1999 acquisitions and the final determination of preexisting contingencies.
Since the Internet and the electronic commerce industries are in an early stage
of development and continue to evolve rapidly and because competition in these
industries is expected to increase, the recorded goodwill and identified
intangibles from each of the acquisitions are being amortized on a straight-line
basis primarily over two to three years, the estimated period of benefit.
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<PAGE>
AppNet's revenues are comprised primarily of fees generated for professional
services billed. We also generate fees from outsourcing services although these
fees currently represent a small portion of our revenues. Our strategy is to
increase the percentage of our revenues generated by fees from outsourcing
services. During the development of our outsourcing business, we may incur
losses and operating margins may be reduced as we build our operations and
infrastructure to support this line of business.
In general, we bill our professional services on a time and materials basis;
however, a portion of our services is billed on a fixed-price basis. AppNet
recognizes revenue from time and materials projects based on fixed hourly rates
for direct labor hours expended and revenues from fixed-price projects based on
the percentage-of-completion method of accounting, with costs and estimated
profits recorded as work is performed. Provisions for estimated losses on
uncompleted contracts are made in the period in which the losses are determined.
Changes in contract scope and estimated profitability, including final contract
settlements, may result in adjustments to costs and revenues and are recognized
in the period in which the adjustments are determined.
AppNet's cost of revenues includes all direct labor and other direct costs
related to contract performance. Cost of revenues consists primarily of salaries
and related employee benefits of billable employees.
Selling and marketing expenses are comprised of the salaries and related
employee benefits of sales and marketing employees and the costs of sales,
marketing and advertising activities. We compensate our sales employees with a
combination of base salaries and commissions. We anticipate that selling and
marketing expenses may increase as a percentage of our revenues in future
periods as we continue to build our corporate sales team and expand our
marketing strategy.
AppNet's general and administrative costs include salaries and related
employee benefits for finance, legal, human resources and administrative
personnel. The general and administrative expenses also include facilities
costs, recruiting, training and other corporate costs. As a result of
anticipated additional hiring costs associated with the integration of the
businesses we acquired in 1998 and 1999, our general and administrative expenses
will increase, although they may decline as a percentage of our revenues.
Stock-based and other acquisition-related compensation includes expenses
related to the cash and stock-based contingent payments payable to former owners
of five businesses, New Media Publishing, Sigma6, Salzinger & Company, Internet
Outfitters and TransForm IT, we acquired if agreed-upon operating targets are
achieved and these former stockholders remain employed by AppNet. These
contingent payments are accounted for as operating expenses in accordance with
Emerging Issues Task Force 95-08, "Accounting for Contingent Consideration Paid
to the Shareholders of an Acquired Company in a Purchase Business Combination,"
instead of as additional purchase consideration at the time of the acquisition
because many of the former owners to whom payments are payable must remain
employed by AppNet in order for them to receive these payments. The amount of
this compensation expense recorded periodically will fluctuate based on the
probability of achievement of the operating targets by each of the acquired
businesses and the market price of our common stock at the end of each reporting
period. This expense is recognized over the period during which these former
stockholders must remain employed by us to be eligible to receive the contingent
payments. The remaining portion of these contingent payments that is payable to
former shareholders who are not our employees or who are not required to remain
employed by us during the contingent payment period will be recorded as
additional goodwill when such targets are met. If all of the operating targets
are fully met, the aggregate amounts of compensation expense and additional
goodwill that will be recognized will be approximately $23.1 and $8.5 million,
respectively, assuming a per share price of common stock of $13.00, the
mid-point of the range shown on the cover page of this prospectus, for all
29
<PAGE>
shares issued in connection with these contingent payments. The compensation
expense will be recognized during 1999 and 2000.
A compensation charge will be recorded within stock-based and
acquisition-related compensation upon completion of this offering in connection
with the termination of our right to repurchase shares of our common stock from
Mr. Bajaj. The amount of the compensation charge will be determined based on the
number of common shares that we could have repurchased from him and the
difference between $0.3007 and the initial public offering price of our common
stock. This compensation charge would have been approximately $2.7 million if
this offering had occurred on March 31, 1999. Also, we will incur an interest
charge of approximately $0.9 million related to the beneficial conversion of
convertible notes at the time of this offering.
Operating results may fluctuate from quarter to quarter and from year to
year based on such factors as the number, size, type and profitability of
projects in which we are engaged. Other factors that could cause our quarterly
results to fluctuate include:
- effectiveness of integrating acquisitions with existing operations;
- our ability to attract, train and retain skilled management, technical and
creative personnel;
- the entrance of new competitors; and
- timing and size of acquisition-related compensation charges which
fluctuate based on the market price of our stock and the level of
achievement of the agreed upon operating targets.
APPNET PRO FORMA RESULTS OF OPERATIONS
The pro forma statement of operations for the year ended December 31, 1998
gives effect to the 12 acquisitions we made in 1998 and 1999 and GTCR's
investment in AppNet, as if these transactions had occurred on January 1, 1998.
The pro forma statement of operations for the three months ended March 31, 1999
gives effect to the acquisitions we made in 1999 as if these transactions had
occurred on January 1, 1998. Our pro forma quarterly and annual results may not
be indicative of future operations as a result of our continued integration of
acquired companies and the development of our corporate infrastructure.
THREE MONTHS ENDED MARCH 31, 1999
REVENUES. Pro forma revenues for the three months ended March 31, 1999 were
$22.3 million.
COST OF REVENUES. For the three months ended March 31, 1999, cost of
revenues was $13.1 million, or 59% of pro forma revenues.
SELLING AND MARKETING. Pro forma selling and marketing expenses for the
three months ended March 31, 1999 were $1.4 million, or 6% of pro forma
revenues.
GENERAL AND ADMINISTRATIVE. Pro forma general and administrative expenses
were $7.4 million, or 33% of pro forma revenues. The increase in general and
administrative expenses as a percentage of revenue from pro forma 1998 fiscal
year activity is a result of the build up of corporate infrastructure through
1998 and into 1999 to assist in the integration of acquisitions.
STOCK-BASED AND OTHER ACQUISITION-RELATED COMPENSATION. For the three
months ended March 31, 1999, pro forma stock-based and other acquisition-related
compensation was $2.6 million. The amount is computed based on the assumption
that operating targets will be fully met and that the fair market value of our
common stock is $13.00 per share, the mid-point of the range shown on the cover
page of this prospectus, as if the 1999 acquisitions had occurred on January 1,
1998.
30
<PAGE>
DEPRECIATION AND AMORTIZATION. Pro forma depreciation and amortization for
the three months ended March 31, 1999 was $12.8 million, of which $12.3 million
represents amortization of intangible assets.
INTEREST EXPENSE. For the three months ended March 31, 1999, pro forma
interest expense was $1.5 million, the majority of which is a result of the
financing of acquisitions. We expect to repay existing borrowings under our
credit facilities with a portion of the proceeds from this offering which, along
with the conversion of a $406,000 note payable into common stock, would have
reduced interest expense on a pro forma as adjusted basis to $0.2 million.
YEAR ENDED DECEMBER 31, 1998
REVENUES. Pro forma revenues for the year ended December 31, 1998 were
$69.2 million. This amount consists primarily of revenues from fees for
professional services. We also generated revenues from fees for outsourcing
services; the amount of these fees represented a small portion of our revenues
for this period.
COST OF REVENUES. For the year ended December 31, 1998, pro forma cost of
revenues was $41.9 million, or 61% of revenues.
SELLING AND MARKETING. Pro forma selling and marketing expenses were $3.3
million for the year ended December 31, 1998, or 5% of revenues.
GENERAL AND ADMINISTRATIVE. For the year ended December 31, 1998, pro forma
general and administrative expenses were $19.0 million, or 28% of revenues.
STOCK-BASED AND OTHER ACQUISITION-RELATED COMPENSATION. Pro forma
stock-based and other acquisition-related compensation for the year ended
December 31, 1998 was $16.8 million. This amount represents an accrual for the
estimated amount of the cash and stock-based contingent consideration to be paid
to former owners of five of our acquired businesses, New Media Publishing,
Sigma6, Salzinger & Company, Internet Outfitters and TransForm IT, during the
12-month period following acquisition. The amount is based on assumptions that
operating targets will be fully met and that the fair market value of our common
stock is $13.00 per share, the mid-point of the range shown on the cover page of
this prospectus.
DEPRECIATION AND AMORTIZATION. For the year ended December 31, 1998, pro
forma depreciation and amortization was approximately $60.3 million, the
majority of which represents amortization expense of our intangible assets.
INTEREST EXPENSE. Pro forma interest expense for the year ended December
31, 1998 was $5.9 million, or 9% of revenues. This includes interest on
indebtedness borrowed under our credit facilities in connection with our
acquisitions of approximately $4.6 million and interest on notes issued in
connection with these acquisitions of approximately $1.0 million. We expect to
repay existing borrowings under our credit facilities with a portion of the
proceeds of this offering which, along with the conversion of a $406,000 note
payable into common stock, would have reduced interest expense on a pro forma as
adjusted basis to $1.0 million.
OTHER EXPENSE, NET. For the year ended December 31, 1998, pro forma other
expense includes a charge of $0.3 million related to the refinancing of our
credit facilities during 1998 and the write-off of approximately $0.3 million
related to an investment in a joint venture that was deemed to have no value due
to the failure of the venture to generate a customer base and to generate
sufficient revenues to cover operating expenses, which resulted in the
abandonment of the operations of the venture.
31
<PAGE>
INCOME TAXES. Pro forma income tax benefit for the year ended December 31,
1998 was $0.1 million. The effective income tax rate of 0.1% was lower than the
blended federal and statutory rate primarily as a result of amortization of a
portion of our intangible assets which are not deductible for income tax
purposes and the recognition of a valuation allowance in accordance with
generally accepted accounting principles.
APPNET HISTORICAL RESULTS OF OPERATIONS
AppNet's first quarter 1999 historical results of operations may not be
indicative of results to be expected for the full year in 1999 due to the impact
of acquisitions during the first quarter of 1999 and the continued integration
of our 1998 acquisitions.
THREE MONTHS ENDED MARCH 31, 1999 COMPARED TO THREE MONTHS ENDED MARCH 31, 1998
REVENUES. Revenues for the three months ended March 31, 1999 and 1998 were
$19.6 million and $0.2 million, respectively. The increase of $19.4 million is a
result of the acquisitions that occurred during 1998 and 1999.
COST OF REVENUES. For the three months ended March 31, 1999, cost of
revenues were $11.5 million as compared to the cost of revenues for the three
months ended March 31, 1998 of $0.1 million. The increase of $11.4 million was
primarily driven by an increase in average billable headcount resulting from the
acquisitions that occurred during 1998 and 1999.
SELLING AND MARKETING. Selling and marketing expenses for the three months
ended March 31, 1999 were $1.2 million. The increase is a result of the
acquisitions we completed and the development of our corporate sales and
marketing staff.
GENERAL AND ADMINISTRATIVE. General and administrative expenses were $6.8
million and $0.2 million for the three months ended March 31, 1999 and 1998,
respectively. The increase is primarily a result of the acquisitions that
occurred during 1998 and 1999 and the development of our corporate general and
administrative staff.
STOCK-BASED AND OTHER ACQUISITION-RELATED COMPENSATION. For the three
months ended March 31, 1999, stock-based and other acquisition-related
compensation was $2.5 million. The amount is primarily attributable to the
contingent payments due to former shareholders that must remain employed to
receive the contingent payments. The amount is computed based on the fair market
value of our common stock at the end of the reporting period and the assumptions
that operating targets will be fully met.
DEPRECIATION AND AMORTIZATION. For the three months ended March 31, 1999,
depreciation and amortization was $12.7 million as compared with $0.1 million
for the three months ended March 31, 1998. The increase is primarily due to the
amortization of intangible assets resulting from the acquisitions made during
1998 and 1999. AppNet's goodwill and related amortization may increase in future
periods if AppNet is required to pay additional consideration for its
acquisitions.
INTEREST EXPENSE. Interest expense for the three months ended March 31,
1999 was $1.3 million that primarily resulted from the interest on the
outstanding balance on the credit facility entered into in August 1998.
YEAR ENDED DECEMBER 31, 1998 COMPARED TO SOFTWARE SERVICES CORPORATION
(PREDECESSOR) FOR THE YEAR ENDED DECEMBER 31, 1997
REVENUES. Revenues for the year ended December 31, 1998 were $17.7 million
as compared with revenues of $13.3 million of Software Services Corporation for
the year ended December 31, 1997. The
32
<PAGE>
difference of $4.4 million is a result of the acquisitions by AppNet during
1998, as well as internal growth which increased headcount and operations.
COST OF REVENUES. For the year ended December 31, 1998, cost of revenues of
AppNet was $11.7 million as compared to the cost of revenues of Software
Services Corporation for the year ended December 31, 1997 of $8.4 million. The
change of $3.3 million was primarily driven by the increase in billable
headcount resulting from the acquisitions that occurred during 1998 and internal
growth.
SELLING AND MARKETING. Selling and marketing expenses for the year ended
December 31, 1998 were $1.0 million as compared to $1.0 million for Software
Services Corporation for the year ended December 31, 1997.
GENERAL AND ADMINISTRATIVE. General and administrative expenses of AppNet
were $6.5 million for the year ended December 31, 1998 as compared to $3.0
million of Software Services Corporation for the year ended December 31, 1997.
The difference is primarily a result of the acquisitions that occurred during
1998.
STOCK-BASED AND OTHER ACQUISITION-RELATED COMPENSATION. For the year ended
December 31, 1998, stock-based and other acquisition-related compensation of
AppNet was $1.2 million, which represents an accrual for the estimated amount of
cash and stock-based contingent consideration to be paid to former stockholders
of acquired businesses.
DEPRECIATION AND AMORTIZATION. For the year ended December 31, 1998,
depreciation and amortization of AppNet was $10.2 million as compared with $0.3
million for the year ended December 31, 1997. The change is primarily a result
of the amortization of intangible assets recorded by AppNet in connection with
the acquisitions made in 1998.
INTEREST EXPENSE. Interest expense of AppNet for the year ended December
31, 1998 was $1.1 million that primarily resulted from the interest on the
outstanding balance on the credit facility during the period.
OTHER EXPENSE, NET. Other expense of $0.7 million includes a charge of $0.3
million related to the refinancing of our credit facilities in 1998. Other
expense also includes the write-off of $0.3 million related to an investment in
a joint venture that was deemed to have no value due to the failure of the
venture to generate a customer base and to generate sufficient revenues to cover
operating expenses, which resulted in the abandonment of the operations of the
venture.
INCOME TAXES. Income tax benefit for the year ended December 31, 1998 was
$0.2 million. The effective income tax rate of 1.4% was lower than the blended
federal and state statutory rate primarily as a result of amortization of a
portion of our intangible assets which are not deductible for income tax
purposes and the recognition of a valuation allowance in accordance with
generally accepted accounting principles.
SOFTWARE SERVICES CORPORATION (PREDECESSOR COMPANY)
PERIOD ENDED AUGUST 24, 1998 COMPARED TO THE YEAR ENDED DECEMBER 31, 1997
REVENUES. Revenues for the period ended August 24, 1998 were $10.8 million,
compared to $13.3 million for the year ended December 31, 1997. The decrease is
primarily due to the fact that we are comparing a 12-month period to an
eight-month period, offset by increased activity in SSC's technical consulting
group.
COST OF REVENUES. Cost of revenues for the period ended August 24, 1998 was
$7.4 million, compared to $8.4 million for the year ended December 31, 1997. The
amount as a percentage of revenues remained relatively consistent between the
respective periods.
33
<PAGE>
OPERATING EXPENSES. Total operating expenses for the period ended August
24, 1998 were $5.3 million, compared to $4.4 million for the year ended December
31, 1997, representing an increase of $0.9 million. The increase is a result of
a $2.7 million stock-based and acquisition-related compensation charge, incurred
in connection with the acquisition of SSC by AppNet. The offsetting decrease is
a result of the decrease in selling and marketing and general and administrative
expenses of $1.6 million as larger projects required less overall support.
INCOME TAXES. An income tax benefit of $0.6 million was recorded for the
period ended August 24, 1998, compared with an income tax provision of $0.4
million for the year ended December 31, 1997 based on the income(loss) before
income taxes for the respective period.
YEAR ENDED DECEMBER 31, 1997 COMPARED TO THE YEAR ENDED DECEMBER 31, 1996
REVENUES. Revenues for the year ended December 31, 1997 were $13.3 million,
compared to $11.8 million for the year ended December 31, 1996. The increase of
$1.5 million is a result of an increase in the number of projects completed and
amount of professional services rendered during 1997.
COST OF REVENUES. Cost of revenues for the year ended December 31, 1997 was
$8.4 million, compared to $7.7 million for the year ended December 31, 1996. The
amount as a percentage of revenues remained substantially consistent.
OPERATING EXPENSES. Total operating expenses for the year ended December
31, 1997 were $4.4 million, compared to $4.0 million for the year ended December
31, 1996, representing an increase of $0.4 million. The increase is a result of
the overall increase in general and administrative expenses for the year ended
December 31, 1997.
INCOME TAXES. An income tax provision of $0.4 million was recorded for the
year ended December 31, 1997, compared with a provision of $0.1 million for the
year ended December 31, 1996. The increase is a result of the increase in income
before income taxes for the respective period.
LIQUIDITY AND CAPITAL RESOURCES
At March 31, 1999, we had approximately $5.7 million in cash and cash
equivalents. AppNet has financed its operations and acquisitions primarily
through the issuance of preferred stock, borrowings under credit facilities and
the issuance of common stock. For the year ended December 31, 1998, cash used in
operations was $2.6 million and $71.7 million was used in investing activities.
For the three months ended March 31, 1999, cash provided by operating activities
was $1.5 million and cash used in investing activities was $27.3 million. The
principal use of cash in investing activities was to finance acquisitions. As
AppNet continues to grow its business and integrate the businesses it has
acquired, AppNet expects to use cash from operations to fund these activities.
Net cash provided by financing activities was $76.7 million and $29.0
million during the year ended December 31, 1998 and the three months ended March
31, 1999, respectively. We received proceeds from net borrowings under our
credit facilities of $37.5 million and $21.9 million during the year ended
December 31, 1998 and the three months ended March 31, 1999, respectively. In
addition, we received $36.3 million and $3.0 million as consideration for the
issuance of our preferred and common stock, respectively, during the year ended
December 31, 1998. Additionally, we received $7.0 million during the three
months ended March 31, 1999 as consideration for the issuance of preferred
stock.
In connection with five of our acquisitions, LOGEX International, Century
Computing, Incorporated, Research & Planning, Inc., The Kodiak Group and i33
communications corp., we issued notes to the selling stockholders all of which
are convertible into shares of our common stock except for the notes issued in
connection with our acquisition of Research & Planning. The balance of the
34
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notes at March 31, 1999 was approximately $15.6 million, $14.6 million of which
is convertible into shares of our common stock. These notes have varying
maturities, from October 1999 through April 2003, and bear interest at rates
between 4.33% and 8.0% as of March 31, 1999. In addition, in connection with the
acquisition of Software Services Corporation, we issued shares of Class B
Preferred Stock. The holders of Class B Preferred Stock are entitled to a 6%
cumulative dividend.
At December 31, 1998, our revolving credit facilities provided for
borrowings up to $40 million. In 1999, we replaced these facilities with two new
revolving credit facilities which provide for up to $66 million in borrowings,
$40 million of which has been guaranteed by an affiliate. The new revolving
credit facilities will expire on August 24, 2001. The guaranteed portion bears
interest, at our option, at LIBOR plus 2.5% or the lenders' prime rate plus
0.5%. The unguaranteed portion bears interest, at our option, at LIBOR or the
lenders' prime rate plus an applicable margin based on our operating
performance. The credit facilities are secured by all of our assets and contain
various restrictive covenants that, among other things, require us to maintain
specified financial ratios and levels of liquidity and working capital and
restrict us from paying dividends to our common stockholders. At March 31, 1999,
approximately $4.1 million remained available for borrowing under our credit
facilities based on the level of financial ratios, as set forth in the credit
facility.
We plan to use the proceeds of this offering to repay all outstanding
borrowings under our credit facilities. We intend to terminate our $40 million
credit facility following the consummation of this offering and amend our $26
million credit facility to provide for maximum aggregate revolving borrowings of
up to $20 million. The termination and amendment of these credit facilities will
reduce our interest expense in future periods. In conjunction with the
modification of these facilities, we may incur a charge of up to $0.6 million
representing the write off of financing costs related to these facilities which
have been capitalized and are not fully amortized as of March 31, 1999.
AppNet's capital expenditures for 1998 were approximately $1.2 million.
Historically, capital expenditures have been used to make leasehold improvements
to AppNet's leased office space and to purchase computer hardware and software
and furniture and fixtures. AppNet does not have any material commitments for
capital expenditures for the foreseeable future. However, AppNet does plan to
make capital expenditures, which may include office space, over the next two
years to further develop our electronic commerce outsourcing services.
During the period from the consummation of this offering through November
2000, we may be required to make contingent payments to former owners of six of
the businesses we acquired, LOGEX International, New Media Publishing, Sigma6,
Salzinger & Company, Internet Outfitters and TransForm IT. These contingent
payments are payable in cash and stock, in one case at the option of the selling
stockholders. The amount of these payments will depend on the level of
achievement of the operating targets and the market price of our common stock.
The majority of the former stockholders must remain employed by us in order to
remain eligible to receive these payments. The maximum aggregate amount of the
cash portion of these payments, assuming the operating targets are fully met, is
approximately $20 million.
Based upon current expectations, we believe amounts which may be borrowed
under our credit facility and cash flow from operations will be adequate for us
to meet our capital requirements, to finance the cash portion of our contingent
payments and pursue our business strategy for the next 18 months. To the extent
AppNet is unable to fund its operations from cash flows and existing credit
facilities during or following the next 18 months, it may need to obtain
financing from external sources either by issuing additional equity or incurring
additional indebtedness.
RECENT ACCOUNTING PRONOUNCEMENTS
In June 1998, the Financial Accounting Standards Board issued SFAS No. 133,
"Accounting for Derivatives and Hedging Activities", which establishes
accounting and reporting standards for derivative
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instruments, including derivative instruments embedded in other contracts, and
for hedging activities. SFAS No. 133 is effective for all fiscal quarters of
fiscal years beginning after June 15, 1999. We have not yet determined whether
the adoption of SFAS No. 133 will have a material effect on our results of
operations, financial position or cash flows.
YEAR 2000
We have completed a preliminary assessment of our Year 2000 readiness and
are beginning to make our systems Year 2000 compliant. The risks posed by the
Year 2000 issue could adversely affect our business in a number of significant
ways. Many of our clients and potential clients maintain their operations on
systems that could be impacted by Year 2000 problems. If our clients fail to
ensure their systems are Year 2000 compliant and Year 2000 problems materially
adversely affect them, our business could be adversely affected, particularly if
demand for our services declines as companies spend their resources to upgrade
their computer systems. We rely on our suppliers for hardware, software and
services. Our business could be adversely affected if we cannot obtain products,
services or systems that are Year 2000 compliant when we need them. We also
depend on the availability of the Internet infrastructure to conduct our
business and provide services to our clients. Disruptions in the Internet
infrastructure arising from Year 2000 problems could materially adversely affect
our business, financial condition and results of operations. In addition, our
solutions are sometimes dependent upon third-party products and components.
Failure of a third party whose products or services we employ to adequately
address Year 2000 issues could result in our involvement in litigation
concerning our products and services or those of a third party. Futhermore,
because we provide computer-related services, the risk we will be involved in a
lawsuit relating to Year 2000 issues is likely to be greater than that of
companies in other industries. We sometimes provide express warranties to
clients that our work is Year 2000 compliant.
We are in the process of obtaining assurances from our suppliers that they
are Year 2000 compliant. We have established a Year 2000 Executive Steering
Committee, appointed a Year 2000 Compliance Program Manager and adopted a formal
compliance program to oversee and coordinate our Year 2000 compliance efforts
throughout our organization. This program is designed to ensure consistency and
minimize the impact of Year 2000 problems on our operations. Our Year 2000
compliance program consists of the following five phases: awareness, assessment,
remediation, testing and implementation. Based on the early stages of our Year
2000 compliance program, we cannot estimate the percentage of completion for
each of these phases.
In the event the Company does not complete the phases of its program, the
Company may fail to meet contractual obligations, provide adequate service or
meet customer requirements. The result of such failures could make the Company
subject to litigation for which the amount of potential liability and lost
revenue cannot be reasonably estimated at this time.
Our costs in connection with Year 2000 compliance to date are approximately
$90,000. At this time, we estimate the potential costs of becoming Year 2000
compliant to be between $0.2 million and $0.6 million, which includes the cost
to replace hardware and software, outside consulting services and some internal
labor costs. However, as we continue to implement our Year 2000 compliance
program, these cost estimates may need to be significantly revised, which could
have a material adverse effect on our business, financial condition or results
of operations.
As part of our plan to integrate the back-office functions of the businesses
we have acquired, we are implementing new, uniform internal information systems,
such as general ledger, billing, accounts payable and payroll, throughout our
organization. Although we have received assurances from our vendors that these
new systems are Year 2000 compliant, our internal systems may experience
operational difficulties because of undetected errors or defects in the
technology used.
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If we fail to address a Year 2000 compliance problem in one of our systems,
the result could be a failure or interruption of normal business operations. We
believe that our Year 2000 compliance program, when fully implemented, should
minimize the risk of significant interruptions to our operations. Currently, we
do not have an expected completion date for our compliance program. At this
point, we believe that the most reasonably likely worst case scenario may
involve areas we do not directly control, such as:
- Our suppliers may provide inaccurate or misleading information to us with
respect to their products' and/or services' Year 2000 compliance. If we
had to replace every information technology system developed by a third
party throughout our organization, we estimate the cost to be $7.2 million
and that it would result in significant interruption of our operations.
- Our clients may fail to ensure that their systems are Year 2000 compliant,
which may cause the Year 2000 problem to materially adversely affect them.
If this did occur, demand for our services could decline as companies
spend their resources to upgrade their computer systems.
- The failure of third-party products and components upon which our
solutions are sometimes dependent could result in our involvement in
litigation concerning our solutions or the products and components of
third parties. We cannot accurately predict the outcome of any legal
claims in which we may become involved as a result of such failure.
- Critical utilities such as electrical power and telecommunications may be
interrupted for a significant and protracted period of time. We have taken
steps to mitigate these risks by installing back-up power supplies and
redundant telecommunications. However, we could still be adversely
impacted by failures at companies that provide us with Internet services.
We currently do not have contingency plans in place in the event we do not
complete all phases of our Year 2000 compliance program. If we do not develop
our contingency plans, our potential Year 2000 liabilities may be materially
increased.
QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
AppNet is exposed to market risk related to changes in interest rates on its
long-term credit facilities. AppNet is able to manage its interest rate risk to
some degree through management's option to select the factor used to determine
its interest rate. AppNet's credit facilities are variable rate credit
facilities. The guaranteed portion of our credit facilities bears interest, at
our option, at LIBOR plus 2.5% or the lenders' prime rate plus 0.5%. The
unguaranteed portion bears interest, at our option, at LIBOR or the lenders'
prime rate plus an applicable margin based on our operating performance. The
balance outstanding as of December 31, 1998 was $37.5 million, of which $19.7
million bears interest at a rate of 8.25% and $17.8 million bears interest at a
rate of 7.75%. Assuming the amount outstanding at March 31, 1999, which was
$59.4 million, was outstanding for the entire year, we estimate that a one
percentage point change to the weighted average interest rate at March 31, 1999
(8.0%) would equal a $0.6 million change in interest expense. If the interest
rate increased, the net loss attributable to common stockholders for the three
months ended March 31, 1999 would have increased by $0.2 million to $17.5
million.
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BUSINESS
OVERVIEW
AppNet provides Internet and electronic commerce professional services and
solutions to medium-sized and large businesses. We develop electronic commerce
solutions that improve communication and commerce between businesses and
consumers as well as among businesses and their trading partners. We focus on
maximizing the opportunities presented by the Internet and electronic commerce
to enhance all aspects of our clients' operations, from the front end of their
business, creative Website design, to the back end, back-office integration of
existing systems and electronic commerce outsourcing, creating an end-to-end
solution. We were formed in 1997 as a Delaware corporation.
Our professional services include:
- strategic consulting;
- interactive media services such as creative Website design and
development, branding, which is the creation of a unique corporate
identity for a client and its products, media planning and buying;
- Internet-based application development, which is the development of
software applications that are capable of running on the Internet and are
written in languages such as Java, C++ and Visual Basic;
- electronic commerce systems integration, which is the integration of
electronic commerce systems, which are systems that automate the receipt,
processing and delivery of transaction data and other information, with
other corporate software and computer-based applications; and
- electronic commerce outsourcing, which is the performance of electronic
commerce services that would otherwise be handled by the client's internal
staff using the client's resources.
None of these services is more critical to our business operations and
revenues than the other services.
INDUSTRY BACKGROUND
The rapid growth in the use of the Internet and electronic commerce has
revolutionized the way businesses operate and interact with their customers and
trading partners. The Internet and electronic commerce have created new channels
of communication and distribution which raise the level and increase the speed
of interaction between a business and its trading partners and customers. The
demand for Internet and electronic commerce services is increasing as more and
more companies develop on-line businesses and employ Internet and electronic
commerce solutions.
The Internet enables businesses to establish an on-line presence through
which they can offer new and complementary products and services to new and
existing markets. As a result, businesses have been able to create new sources
of revenue, improve customer care and retention and streamline their internal
operations by processing orders and payments on-line.
To date, businesses have primarily focused on using Internet and electronic
commerce solutions to improve business-to-consumer relationships. However,
businesses are increasingly using the Internet and electronic commerce to open
cost-effective, reliable, highly efficient channels of communication and
commerce with their suppliers and distributors. Internet and electronic commerce
solutions can improve the way businesses interact with their trading partners by
linking businesses' back-office systems through electronic data interchange, or
EDI, and the Internet to trading partners and suppliers. EDI is a process
through which data is transferred from a paper format into a standard electronic
format and electronically transmitted to trading partners over a private network
or the Internet. In July 1997, International Data Corporation reported that 80%
of Fortune 500 companies employed EDI to
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improve their business processes. Businesses are increasingly finding that they
can reliably and cost-effectively manage a high volume of transactions on a
real-time basis using EDI and the Internet. In addition, by using EDI and the
Internet for communication with both consumers and trading partners, businesses
are creating electronically integrated supply chains that significantly improve
their operating efficiency.
Businesses are increasingly discovering that implementing Internet and
electronic commerce solutions is necessary to remain competitive and are
demanding end-to-end Internet and electronic commerce solutions that can improve
every aspect of their operations. As a result, technology industry research
firms predict that the market for Internet and electronic commerce services
worldwide will grow significantly over the next few years. International Data
Corp. estimates that this market will increase from $4.6 billion in 1997 to
$43.7 billion by 2002, which represents a compound annual growth rate of 57%.
According to a 1998 Dataquest survey of selected Fortune 1000 companies, 83% of
such companies are currently investing, or plan to invest, in Internet solutions
and 48% are currently investing, or plan to invest, in electronic commerce
solutions.
Most businesses rely on outside specialists to design and develop Internet
and electronic commerce solutions for a number of compelling reasons. Because
Internet and electronic commerce technologies have developed so rapidly, few
businesses have employees with the advanced skills necessary to effectively
evaluate and implement these technologies successfully. Given the pressure to
get to market quickly, waiting for in-house employees to be trained to use these
technologies is not practicable. In addition, hiring trained professionals is
difficult because they are in great demand. At the same time, as business
challenges grow increasingly complex, so must the Internet and electronic
commerce solutions required to address them. Given the significant cost to
design, develop, implement and manage Internet and electronic commerce
solutions, businesses cannot afford to expend resources developing solutions
themselves. Hiring a firm that provides a comprehensive range of Internet and
electronic commerce professional services is often the most efficient and
cost-effective solution for many companies.
THE APPNET SOLUTION
Our goal in founding AppNet was to address the growing need for end-to-end
Internet and electronic commerce solutions. We offer a comprehensive range of
services involving the design, development, implementation and management of
Internet and electronic commerce solutions that facilitate and promote
communication and commerce between businesses and consumers as well as among
businesses and their trading partners. Key elements of the AppNet solution are:
- END-TO-END SERVICE OFFERING
We can provide clients with end-to-end Internet and electronic commerce
solutions. Our clients recognize significant cost and time savings and receive
integrated solutions because they can obtain all of the Internet and electronic
commerce professional services they need from one company.
- UNIQUE ELECTRONIC COMMERCE OUTSOURCING SERVICES
We offer our clients an extensive range of electronic commerce outsourcing
services as part of our overall service offering. We perform electronic commerce
services that would otherwise be handled by the client's internal staff using
the client's resources. Our business-to-business outsourcing services include
processing transactions for our clients using our resources and infrastructure.
We also operate electronic data interchange programs through which businesses
and their trading partners exchange information electronically. We monitor and
analyze the transactions processed through these programs. Our
business-to-consumer outsourcing services include managing on-line stores,
processing transactions, managing and hosting Websites and operating and
managing electronic commerce systems. Our Website managing and hosting services
include adding and editing material on a Website and making sure the Website is
operating according to its specifications. Our outsourcing services include
maintaining
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security at a Website by ensuring only authorized users have access to the
Website. We also store data that is generated by activity at the Website.
Clients who take advantage of these services get to market quickly; do not have
to make the significant financial and technological investments required to
effectively build and manage their own infrastructures; receive reliable and
secure services; and can focus their attention and resources on their core
competencies.
- ABILITY TO SOLVE INCREASINGLY COMPLEX BUSINESS PROBLEMS
Our business-level and process-level strategic consulting services help our
clients solve their increasingly complex business problems with sophisticated,
vendor-neutral Internet and electronic commerce solutions. We employ
business-level strategic consulting services to develop and redefine clients'
business models to incorporate Internet and electronic commerce strategies. We
employ process-level strategic consulting services to improve the business
processes of clients who have already incorporated Internet and electronic
commerce strategies into their business models. These services, together with
the knowledge and experience we gain designing, developing, implementing and
managing each electronic commerce solution, enable us to develop comprehensive
strategies for growing on-line ventures, streamlining on-line marketing and
distribution strategies, improving operating efficiencies and reducing costs.
- ENHANCED SERVICES THROUGH THE USE OF ADVANCED PROPRIETARY TECHNOLOGIES
We use advanced proprietary technologies to design and develop more
effective Internet and electronic commerce solutions. ClientLink, a secure
Website we developed that is accessible only by us and our clients, also known
as an extranet, gives our clients on-line access to, and engages their active
participation in, the development of their Internet and electronic commerce
solutions. Within ClientLink, clients can, on a real-time basis, view any
changes that have been made to their solutions, communicate electronically with
project team members and check a calendar for information regarding product
reviews and launches. We use ClientLink to raise the level of interaction
between us and our clients, which, in turn, improves the quality, functionality
and adaptability of the solution we create.
AdMaximize, our proprietary interactive media service, enables us to
measure, on a real-time basis, a client's return on investment for its on-line
advertising dollars. AdMaximize tracks the performance of ads on the Internet
and collects real-time data on the number of users who click on the ad, the
number of new customers and the amount of sales generated by the ad. Based on
their analysis of this information, clients can make real-time adjustments to
their advertising campaigns to maximize the number of users who visit their
Websites and reduce the costs of acquiring new customers and generating sales.
As part of the outsourcing services we offer, we utilize proprietary
software, EDI Control/400 and STAR, in order to more effectively manage
electronic data interchange programs that process a high volume of transactions.
EDI Control/400 enables us to monitor and analyze our clients' transactions and
communications with their trading partners with fewer people and higher service
levels. Our client support services team uses STAR, or the Service Tracking and
Reporting System, to log, track and report on all aspects of a transaction.
- REUSABLE BUSINESS SOLUTIONS
We have developed reusable business solutions in the process of designing,
developing, implementing and managing end-to-end Internet and electronic
commerce solutions for clients in a number of industries. These reusable
business solutions were developed based on our industry-specific expertise and
utilize reusable software code and content objects. These solutions enable us to
give our clients the benefit of our knowledge and experience in addressing
complex business challenges, develop and implement Internet and electronic
commerce solutions more quickly and efficiently, focus our efforts on
customizing solutions to meet our clients' specific needs and deliver reliable
solutions based on components that have been tested and perfected through
repeated use in other solutions.
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OUR STRATEGY
Our goal is to become the most recognized and sought-after provider of
Internet and electronic commerce services to medium-sized and large business
clients. To achieve this goal we plan to:
- EXPAND CLIENT RELATIONSHIPS
We plan to cross-sell our comprehensive range of Internet and electronic
commerce professional services to existing clients. We believe that if we
continue to provide sophisticated solutions to our clients:
- our existing clients will increase the amount, scope and complexity of
services they obtain from us;
- we will strengthen our reputation as a creative source for Internet and
electronic commerce solutions; and
- we will attract new clients through referral-driven sales.
This strategy should increase our revenue predictability and result in
additional and more extensive engagements with our clients.
- INCREASE REPEAT AND RECURRING REVENUES
Our strategy is to increase the proportion of our revenues which represents
repeat business with the same clients as well as the proportion of our recurring
revenues from our electronic commerce outsourcing services. We intend to
generate repeat revenues by cross-selling services and entering into multiple
engagements with our existing clients. In addition, we plan to increase
recurring revenues by selling additional electronic commerce outsourcing
services to our new and existing clients. We charge clients who use our
electronic commerce outsourcing services either a fixed monthly rate or on a per
transaction basis, or both. Our target contract length for electronic commerce
services is one year. Increasing repeat and recurring revenues will enable us to
predict our revenues with greater accuracy and improve our operating margins.
- BUILD AND ENHANCE COMPLEMENTARY SKILL SETS AND MAINTAIN TECHNOLOGICAL
EXPERTISE
Each additional skill set we develop improves our ability to better serve
our existing and future clients. We believe it is imperative for us to stay
abreast of the newest technological developments and evolving service offerings
in order to maintain the high level of quality of our services, increase the
effectiveness of our solutions and attract and retain qualified employees. We
continually research, test and evaluate new Internet and electronic commerce
technologies which we can incorporate into our solutions. Each engagement we
complete broadens our expertise and increases our knowledge, thereby enhancing
our ability to provide the most effective Internet and electronic commerce
solutions.
- PURSUE CLIENT-DRIVEN GEOGRAPHIC EXPANSION
We intend to open additional offices both domestically and internationally
in order to better serve clients in locations where we have already attracted
business. This allows us to serve clients locally, cross-sell services to
existing local clients and win more local business. Each new office we have
opened has enhanced our ability to attract and service large clients and to hire
additional staff without relocation burdens. We currently have offices in 14
locations in the U.S., including the metropolitan areas of Boston, Denver,
Detroit, Los Angeles, New York City and Washington, DC.
- EXPAND AND DEVELOP INDUSTRY-SPECIFIC EXPERTISE
Through our experience designing, developing, implementing and managing
Internet and electronic commerce solutions for a wide variety of companies, we
have gained significant strategic knowledge and created industry-specific
reusable business solutions. This industry-specific expertise significantly
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enhances our ability to help other companies in the same industries successfully
adopt Internet and electronic commerce solutions. To date, we have developed
reusable business solutions for the retail services, financial services,
healthcare, manufacturing and telecommunications industries. We intend to
broaden the range of industries in which we have specialized knowledge and
maximize the benefits to our clients of such knowledge by creating additional
industry-specific solution templates and reusable software. We employ strategic
consultants, sales, marketing and technical staff with expertise in industries
which we believe can realize significant benefits from Internet and electronic
commerce solutions. Further developing and strengthening this expertise will
increase our knowledge of industry specific business challenges and increase the
industry-targeted services we can offer, thereby improving our ability to
penetrate specific industries.
- ATTRACT AND RETAIN A HIGHLY SPECIALIZED WORKFORCE
We will continue to recruit highly skilled and experienced professionals who
have industry-specific expertise and who are proficient in a broad range of
technological and business skills. We intend to continue to ensure that our
employees have the requisite expertise to provide our clients with a
comprehensive range of Internet and electronic commerce professional services.
We have 11 full-time recruiters and often use recruitment firms as well. We also
attract employees through referral bonus programs and advertising on the
Internet. We plan to retain and motivate our employees by giving them the
opportunity to work with cutting-edge technologies, paying competitive
compensation packages, granting stock options, reimbursing tuition expenses and
encouraging a corporate culture that is results-driven and rewards creativity,
communication and cooperation.
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SERVICES
We offer a comprehensive range of professional services involving the
design, development, implementation and management of end-to-end Internet and
electronic commerce solutions. Our services include strategic consulting,
interactive media services, Internet-based application development, electronic
commerce systems integration and electronic commerce outsourcing, each of which
is described below. Our engagements generally include more than one of these
services.
[Diagram entitled "Strategic Consulting" outlining the interaction among AppNet
Systems, Inc.'s broad-based service offerings, including "Interactive Media
Services," "Internet-Based Application Development Services," "Electronic
Commerce Systems Integration Services" and "Electronic Commerce Outsourcing
Services."]
- STRATEGIC CONSULTING
Our business- and process-level strategic consulting services help our
clients successfully develop on-line businesses and improve their overall
business processes. We employ business-level strategic consulting to study
and analyze our clients' market position, operating requirements, systems
and capabilities to determine how our clients should use the Internet and
electronic commerce to accomplish their objectives. We work with clients to
incorporate Internet and electronic commerce solutions into their businesses
and assist in developing on-line businesses and on-line marketing
strategies. We employ process-level strategic consulting with clients that
have already incorporated Internet and electronic commerce solutions into
their businesses to assist them in improving their overall business
processes by incorporating on-line system architecture and design with
existing Internet and electronic commerce solutions, thereby improving
operating efficiencies and reducing costs.
- INTERACTIVE MEDIA SERVICES
Our interactive media services include creative Website design and
development, branding, which is the creation of a unique corporate identity
for a client and its products and developing on-line advertising strategies.
Developing on-line advertising strategies includes media buying and
planning, on-line ad placement, management, tracking and reporting and
on-line promotion and campaign development. As part of an on-line
advertising strategy, we also develop affinity programs that link businesses
by rewarding one business' clients with products and services of another
business. These services are designed to maximize our clients' return on
their investments in on-line businesses by generating and increasing the
number of visitors to a Website, enhancing user experience and increasing
the effectiveness of our clients' marketing efforts. We integrate these
services into our clients' overall solutions.
- INTERNET-BASED APPLICATION DEVELOPMENT
Internet-based application development is the development of software
applications that are capable of running on the Internet and are written in
languages such as Java, C++ and Visual Basic. These services are designed to
help our clients rapidly develop highly flexible and cost-effective business
applications. We develop corporate intranets, which are secure Websites
accessible only within a particular company, and electronic commerce systems
and we Web-enable legacy systems, which are existing systems, so that they
can operate on the Internet. We design and develop more effective Internet
and electronic commerce solutions by giving our clients on-line access to
the development of their solutions. We design, build and implement solutions
that are secure, adaptable and easy to use and manage.
- ELECTRONIC COMMERCE SYSTEMS INTEGRATION
Electronic commerce systems integration is the integration of electronic
commerce systems, which are systems that automate the receipt, processing
and delivery of transaction data and other information, with other corporate
software and computer-based applications such as Websites and accounting and
financial systems. These services are designed to rapidly install and
integrate our
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solutions with our clients' existing operations so our solutions become an
integral part of our clients' critical business systems. We install our
solution, convert all necessary data, perform acceptance testing and put the
system into operation. We also integrate the solution with back-office
existing legacy systems to ensure that each client's computer-based
applications operate seamlessly and with maximum security.
- ELECTRONIC COMMERCE OUTSOURCING
We perform electronic commerce services that would otherwise be handled
by the client's internal staff using the client's internal resources. Our
electronic commerce outsourcing services help clients rapidly launch and
implement electronic commerce solutions and then cost-effectively manage,
operate, maintain and continue to develop those solutions. We provide
business-to-business outsourcing services such as operating electronic data
interchange programs and transaction processing at our outsourcing center in
Pittsfield, MA, as well as at our customer's sites. We provide
business-to-consumer outsourcing services such as managing on-line stores,
transaction processing, managing and hosting Websites and the ongoing
management, technical operation, maintenance and development of electronic
commerce solutions at our outsourcing center in Laurel, MD, as well as at
our customer's sites.
ELECTRONIC COMMERCE OUTSOURCING CENTERS
We believe our outsourcing capabilities are a key component of our full
range of Internet and electronic commerce professional service offerings and
differentiate us from our competitors. Outsourcing enables us to effectively
manage, operate and maintain the electronic commerce systems we have developed
for our clients. Fees from outsourcing services currently represent a small
portion of our revenues. However, we expect that demand for outsourcing services
will increase over time as customers recognize that outsourcing is a
cost-effective solution. For example, outsourcing is an attractive choice for
those customers who lack the internal resources required to effectively build
and manage their own infrastructure or their critical business processes and who
are under pressure to get to market quickly.
At our business-to-business electronic commerce outsourcing center, we
process and manage thousands of transactions among hundreds of trading partners
on a variety of hardware and software platforms, over private networks, and the
Internet. We use EDI Control/400, our administrative software product, to
operate, monitor and analyze electronic data interchange programs through which
businesses and their trading partners exchange information electronically. EDI
Control/400 provides our customers with detailed transaction reporting, on-line
storage of data about the transactions, and multiple levels of security ensuring
only authorized user have access to and can exchange information. At our
business-to-consumer electronic commerce outsourcing center we manage on-line
stores, process transactions and manage and host Websites. Our Website managing
and hosting services include adding and editing material on a Website and making
sure the Website is operating according to its specifications.
Our outsourcing centers operate seven days a week, 24 hours a day. Our
outsourcing center staff proactively manages and monitors the operation of each
center using network management software, including proprietary technologies we
developed. We collect, process and respond to systems-level event information
and build and maintain a central repository for inventory and asset management
information. In addition, each of our outsourcing centers features multiple
levels of security which we believe protect our clients' private information by
isolating our electronic commerce outsourcing centers from public network
infrastructures.
CLIENTS
We market our services to medium-sized and large companies from a range of
industries which we believe can benefit from Internet and electronic commerce
solutions. Our engagements vary in scope from strategic consulting assignments
to designing and implementing complex and highly functional
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intranets and extranets. Because we can offer every client a complete spectrum
of Internet and electronic commerce professional services, we can customize each
of our engagements to fit a client's specific needs. Two of our clients, Ford
and the U.S. Government, accounted for 15% and 12%, respectively, of our total
revenues for 1998. After giving pro forma effect to the acquisitions we made in
1998 and 1999 as if they had occurred on January 1, 1998, our top ten customers
would have represented approximately 35% of our 1998 pro forma revenues.
Because of the strategic and competitively sensitive nature of the services
we perform for our clients, in many cases we have agreed to keep our clients'
identities confidential. Set forth below is a partial list of the clients to
whom we provided services in 1998 that we believe is representative of our
overall client base:
<TABLE>
<S> <C>
RETAIL AND CONSUMER SERVICES TELECOMMUNICATIONS AND TECHNOLOGY
Biztravel.com Computer Sciences Corp.
Burton Snowboards Ciena
Harmony House Comshare
Hertz Lockheed Martin Integrated Business Solutions
K*B Toys FINANCIAL SERVICES
MANUFACTURING AND INDUSTRIAL @rts @lliance
Ciba Specialty Chemicals Ford Motor Credit
Dial Multex Systems
Hyundai Norwest
Johnson Controls HEALTHCARE AND PHARMACEUTICALS
NEC Acuson
Norrell Allergan Services
The Electronic Imaging Division of Toshiba Blue Cross and Blue Shield of Michigan
America Information Systems, Inc. Baxter Healthcare
Unilever 3M
MEDIA AND ENTERTAINMENT GOVERNMENT AND NONPROFIT
Cablevision AAA
Cisneros Group INTELSAT
GeoCities NASA
Grey Interactive National Library of Medicine
McCann-Erickson University of Michigan
Playboy Enterprises World Wildlife Fund
</TABLE>
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EXAMPLES OF OUR INTERNET AND ELECTRONIC COMMERCE SOLUTIONS
The following examples illustrate the kinds of Internet and electronic
commerce solutions we have developed for specific clients.
THE ELECTRONIC IMAGING DIVISION OF TOSHIBA AMERICA INFORMATION SYSTEMS, INC.
Challenge: Design and implement a restricted access dealer extranet system.
Solution: We developed the community, Web-interface and database elements of
Toshiba's FYI Dealer Extranet, an on-line system for dealers that provides a
common interface in addition to customized information that meets each
individual dealer's requirements. We designed security features which protect
market-sensitive information from unauthorized users. A conditional access
system, driven by a complex database user-authorization scheme, offers multiple
read-and-write user access levels. Employees, dealers and distributors have the
opportunity to build relationships on this Dealer Extranet. This electronic
commerce and informational site is designed to simplify ordering and shipping of
more than 10,000 spare-part SKUs for fax machines and copiers.
BURTON SNOWBOARDS
Challenge: Design and implement an on-line inventory and supply-chain
management system.
Solution: We designed and implemented an on-line inventory and supply-chain
management system that Burton management uses to control changing inventory,
manage materials and track product placement. Our solution accommodates multiple
languages and currencies and is able to generate detailed reports. Our solution
is designed to improve Burton's efficiency in managing its inventory and
supply-chain and reducing production overruns and overall costs.
AMERICA ONLINE, INC. OR AOL
Challenge: Develop a content investment strategy.
Solution: We helped AOL launch the AOL Greenhouse, a division of AOL
Studios. Our work included assisting the President of AOL Greenhouse to
establish a process for selecting and managing a portfolio of content
investments. We assisted with the development of the division's organizational
structure and portfolio management strategy. AOL invested in Internet companies,
including The Motley Fool, Inc., Hecklers On-Line and iVillage.
RETIRED PERSONS SERVICES, INC. OR RPS
Challenge: Provide technical assistance to Retired Persons Services, Inc.,
provider of the AARP Pharmacy Service, in the ongoing design, implementation and
management of its on-line pharmacy.
Solution: RPSPharmacy.com provides AARP members and others with the option
of ordering prescription refills and nonprescription pharmacy products over the
Internet. The on-line pharmacy incorporates features such as health information
to facilitate condition management and product selection, comparison of
brand-name and generic alternatives, information about related products and
special offers, patient profiling for drug utilization review and links to other
sources of health information.
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GOVERNMENT TECHNOLOGY SERVICES, INC. OR GTSI
Challenge: Design and implement an on-line computer store.
Solution: We designed and implemented an on-line computer store that enables
Federal customers to price and purchase approximately 150,000 computer products
over the Internet. The solution we developed provides customized shopping
experiences for many customers. Using our solution, GTSI hopes to streamline the
purchasing process for its customers.
K*B TOYS
Challenge: Design, implement and operate an EDI program that would
accurately process and track orders, shipping notices, invoices and other time
sensitive data, including point-of-sale information, to support streamlined
procurement and distribution center operations.
Solution: We designed and implemented an EDI program for K*B Toys to manage
inventory levels and merchandise replenishment at over 1300 mall-based stores.
Our solution incorporated features such as mapping schemes for translation of
data and network and Internet routing schemes for data delivery. Our solution is
designed to reduce communications costs, improve the efficiency of K*B Toys'
business processes and allow it to focus on its core retailing business.
HARMONY HOUSE
Challenge: Design and develop an on-line music store which would complement
its 34 retail outlets.
Solution: We designed and implemented an on-line music store that enables
customers to search for, listen to and purchase music products over the
Internet. Our solution incorporated features such as searchable databases and
music guides, selectable music samples and management features for site update
and promotion and order management. Our solution is designed to build brand
recognition and loyalty and establish an additional distribution channel.
MULTEX SYSTEMS
Challenge: Design and develop a Web-based ad campaign to increase site
traffic and trading volume and decrease the per customer acquisition cost.
Solution: We crafted a media plan which included the creation of multiple
banner ads. Using our proprietary service, AdMaximize, we served banner ads,
tracked banner ad performance and collected real-time data on click-through,
lead generation, customer acquisition and sales. Based on Multex Systems' and
our collective analysis of this data, we were able to make real-time adjustments
to Multex Systems' ad campaign. Our solution is designed to increase overall
membership for Multex Systems, increase its revenues per new member and decrease
its cost to acquire new members via the Web.
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SALES AND MARKETING
As of May 1, 1999, we employed 26 full-time sales professionals. Three
corporate sales professionals concentrate on our Internet and electronic
commerce professional services to clients in the industries in which they have
extensive expertise. The other 23 members of our sales force are service-focused
and concentrate on selling individual services as well as cross-selling all of
our service offerings. Our vice president of corporate sales coordinates the
efforts of our corporate and service-focused sales personnel.
Our marketing strategy is to demonstrate to our potential clients the
advantages of Internet and electronic commerce solutions, and our expertise and
success in designing, developing, implementing and managing end-to-end
solutions. In addition, we have retained an outside public relations and
advertising firm to assist us with our marketing efforts on a company-wide
basis. Our two full-time corporate marketing professionals concentrate on
promoting and enhancing our brand on a nationwide basis. Our five full-time
service-focused marketing professionals concentrate on marketing a set of our
services, often to a targeted audience or in their local markets.
Our sales and marketing strategy is built upon the following directives:
- ENHANCE OUR BRAND AND IMPROVE OUR MARKET POSITIONING
Our goal is to become the most recognized and sought-after provider of
Internet and electronic commerce professional services to medium-sized and
large business clients. To do so, we must continue to enhance our brand and
reputation. Our brand development programs deliver the message that we are a
national company with the experience and resources to meet all of our
clients' Internet and electronic commerce services needs. To build and
differentiate our brand, we use publicity campaigns that appear on the
Internet, in print advertising, at trade shows and in educational white
papers. We also take advantage of the opportunity to strengthen our brand by
developing relationships with strategic partners. As we enhance our
industry-specific expertise, we intend to develop sales and marketing
programs targeted to specific industries.
- MANAGE OUR CLIENTS' ACCOUNTS EFFECTIVELY
Corporate sales professionals direct client leads to the appropriate
service-focused salesperson. Our corporate sales professionals also manage
accounts for large clients with multiple locations and ensure each part of
our clients' accounts are served by the technical staff which can best meet
their needs.
- CROSS-SELL SERVICES
As we integrate the diverse client bases of the companies we acquired,
we intend to continue to take advantage of opportunities to cross-sell our
services to existing clients. We intend to train every member of our sales
force to cross-sell our entire range of services. In addition, we are
creating uniform marketing and sales materials which describe the wide range
of services we offer and position AppNet as a provider of end-to-end
Internet and electronic commerce solutions.
In each of our professional services engagements, a client can contract for
the specific services it requires. We bill most of our engagements on a time and
materials basis, although we have entered into several engagements on a
fixed-price basis. Clients who use our electronic commerce outsourcing services
are charged either a fixed monthly rate or on a per transaction basis, or both.
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COMPETITION
The markets for Internet and electronic commerce professional services are
relatively new, intensely competitive, quickly evolving and subject to rapid
technological change. We expect competition to continue and intensify in the
foreseeable future.
Our competitors can be divided into several groups:
- Internet professional services providers, such as Agency.com, iXL,
Proxicom, Razorfish, Scient, Think New Ideas, US Interactive, USWeb/CKS
and Viant;
- large information technology consulting services providers, such as
Andersen Consulting, Cambridge Technology Partners, CSC, EDS, IBM and
Sapient;
- interactive advertising agencies, such as Darwin Digital, Giant Step, Grey
Interactive, Modem Media . Poppe Tyson and Thunderhouse;
- electronic commerce software and service providers, such as BroadVision,
Harbinger, Open Market and Sterling Commerce; and
- Internet access and service providers, such as Abovenet, Exodus and
Frontier/Global.
We believe we can distinguish ourselves from our competitors by offering our
clients end-to-end Internet and electronic commerce solutions. We believe we can
compete effectively on the basis of our comprehensive range of services,
technical expertise, creative talent, brand or name recognition and the speed,
reliability and price of the services we provide. However, our competitors have
also begun to offer a variety of Internet and electronic commerce professional
services, rather than specialize in one area, or have announced their intention
to do so. These companies may continue to expand their operations so that they
offer a full range of business-to-business and business-to-consumer Internet and
electronic commerce professional services and products. Some of our competitors,
IBM, USWeb and EDS, currently provide all of the services that we provide.
There are relatively low barriers to entry into our business. We do not own
any patent technology that precludes or inhibits competitors from entering our
markets. The costs to develop and provide Internet or electronic commerce
professional services are low. Therefore, we expect to continue to face
additional competition from new entrants into our markets. Many of our
competitors have greater financial, technical, marketing and public relations
resources than AppNet. A number of our outsourcing competitors have made
substantial capital investments in their infrastructure. Because many of our
competitors have longer operating histories than we do, many of them also have
greater brand or name recognition, larger client bases and longer client
relationships on which they can rely for generating business.
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ACQUIRED COMPANIES
Our goal in founding AppNet was to build a company that could offer a
comprehensive range of Internet and electronic commerce professional services.
We began by developing a detailed strategic plan that identified the specific
professional services that are required to provide clients with end-to-end
solutions. These services were strategic consulting, interactive media services,
Internet-based application development, electronic commerce systems integration
and electronic commerce outsourcing. We then identified a group of companies
that excelled in providing services in one or more of these professional
services areas. After reviewing and evaluating over 100 companies, we ultimately
acquired a set of companies that we believe fit together strategically and
culturally and that, when integrated with one another, could design, develop,
implement and manage end-to-end solutions.
[Chart placing the companies acquired by AppNet Systems, Inc. into four
broad-based service categories, including "Strategic Consulting," "Interactive
Media Services," "Internet-Based Application Development Services" and
"Electronic Commerce Systems Integration and Outsourcing Services."]
ARBOR INTELLIGENT SYSTEMS, INC. We acquired substantially all of the assets
of Arbor Intelligent Systems on March 12, 1998. Arbor specialized in
Internet-based applications development, providing object-oriented development
services to our customers. It had approximately 30 consulting professionals as
of the date of the acquisition. We paid approximately $3.1 million for Arbor
with a combination of cash and shares of our Series A-1 Preferred Stock that
have since been converted into our common stock. During 1997, Arbor had revenues
of approximately $3.1 million.
LOGEX INTERNATIONAL, L.L.C. We acquired substantially all of the assets of
LOGEX International on April 30, 1998. LOGEX specialized in electronic commerce
systems integration and outsourcing, providing electronic commerce systems
integration services to our customers. It had approximately nine consulting
professionals as of the date of the acquisition. We paid approximately $600,000
for LOGEX with a combination of cash and a convertible promissory note. The
former LOGEX stockholders are also entitled to a potential contingent payment
payable in cash based on the achievement of agreed-upon performance criteria for
the one-year period ending on April 30, 1999.
SOFTWARE SERVICES CORPORATION. We acquired Software Services Corporation on
August 25, 1998. Software Services specialized in Internet-based applications
development, providing applications development, network architecture and design
services to our customers. It had approximately 190 consulting professionals as
of the date of the acquisition. We paid approximately $22.9 million for Software
Services with a combination of cash and shares of our common stock and Class B
Preferred Stock. During 1997, Software Services had revenues of approximately
$13.3 million.
NEW MEDIA PUBLISHING, INC. We acquired New Media Publishing on October 2,
1998. New Media Publishing specialized in interactive media services, providing
interactive community-building services to our customers. It had approximately
40 consulting professionals as of the date of the acquisition. We paid
approximately $19.0 million for New Media Publishing with a combination of cash,
shares of our common stock and options to purchase shares of our common stock.
The former New Media Publishing stockholders are also entitled to a potential
contingent payment payable in cash and in shares of our common stock of up to
$14.0 million based upon the achievement of agreed-upon performance criteria for
the 12-month period ending on September 30, 1999. During 1997, New Media
Publishing had revenues of approximately $3.0 million.
CENTURY COMPUTING, INCORPORATED. We acquired Century Computing on October
12, 1998. Century specialized in electronic commerce systems integration and
outsourcing, providing systems integration and processing services to our
customers. It had approximately 81 consulting professionals as of the date of
the acquisition. We paid approximately $29.0 million for Century with a
combination of cash, a
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convertible promissory note and options to purchase shares of our common stock.
During 1997, Century had revenues of approximately $10.9 million.
RESEARCH & PLANNING, INC. We acquired Research & Planning on October 20,
1998. Research & Planning specialized in electronic commerce systems integration
and outsourcing, providing enterprise resource planning and integration and data
warehousing services to our customers. It had approximately 40 consulting
professionals as of the date of the acquisition. We paid approximately $20.5
million for Research & Planning with a combination of cash, promissory notes and
shares of our common stock. During 1997, Research & Planning had revenues of
approximately $4.8 million.
THE KODIAK GROUP, INC. We acquired The Kodiak Group on December 14, 1998.
Kodiak specialized in electronic commerce systems integration and outsourcing,
providing EDI integration and processing services to our customers. It had
approximately 35 consulting professionals as of the date of the acquisition. We
paid approximately $15.6 million for Kodiak with a combination of cash,
convertible promissory notes and shares of our common stock. In addition, the
former Kodiak stockholders are entitled to a potential contingent payment
payable in cash of up to $4.0 million in the event that, during the three-year
period ending on December 14, 2001, Kodiak sells or licenses technology it
developed. During 1997, Kodiak had revenues of approximately $3.7 million.
I33 COMMUNICATIONS CORP. We acquired i33 communications corp. on January 8,
1999. i33 communications specialized in interactive media services, providing
media buying and planning services to our customers. It had approximately 40
consulting professionals as of the date of the acquisition. We paid
approximately $21.6 million for i33 communications with a combination of cash
and convertible promissory notes. During 1998, i33 communications had revenues
of approximately $4.4 million.
SIGMA6, INC. We acquired Sigma6, Inc. on March 4, 1999. Sigma6 specialized
in interactive media services, providing brand identity services to our
customers. Sigma6 had approximately 25 consulting professionals as of the date
of the acquisition. We paid approximately $2.5 million for Sigma6 with a
combination of cash and shares of our common stock. The former Sigma6
stockholders are also entitled to a potential contingent payment payable in cash
and in shares of our common stock of up to $2.8 million based on the achievement
of agreed-upon performance criteria during the 12-month period ending on
December 31, 1999. During 1998, Sigma6 had revenues of approximately $1.8
million.
SALZINGER & COMPANY, INC. We acquired substantially all of the assets of
Salzinger & Company on March 15, 1999. Salzinger & Company specialized in
strategic consulting, providing business-level strategic consulting services to
our customers. It had approximately eight consulting professionals as of the
date of the acquisition. We paid approximately $8.5 million for Salzinger &
Company with a combination of cash and shares of our common stock. Salzinger &
Company is also entitled to a potential contingent payment, payable in cash or,
at the seller's option, in cash and in shares of our common stock, of up to $5.0
million based on the achievement of agreed-upon performance criteria during the
period beginning on April 1, 1999 and ending on September 30, 2000. During 1998,
Salzinger & Company had revenues of approximately $3.1 million.
INTERNET OUTFITTERS, INC. We acquired Internet Outfitters on March 26,
1999. Internet Outfitters specialized in interactive media services, providing
localization and creative Web-development services to our customers. It had
approximately 25 consulting professionals as of the date of the acquisition. We
paid approximately $9.5 million for Internet Outfitters with a combination of
cash, shares of our common stock and options to purchase shares of our common
stock. The former Internet Outfitters stockholders are also entitled to receive
a potential contingent payment payable in cash and in shares of our common stock
of up to $3.5 million based on the achievement of agreed-upon performance
criteria for the year ending on December 31, 1999. During 1998, Internet
Outfitters had revenues of approximately $2.3 million.
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In connection with our acquisition of Internet Outfitters, approximately
$1.45 million of the purchase price, based upon the fair value of $17.10 per
share at the date of acquisition, in the form of shares of our common stock was
pledged to us and escrowed to be available to satisfy any potential liability in
connection with a license dispute. We also held back $750,000 of the cash
purchase price to be used to satisfy indemnification claims, including any
potential liability arising from such license dispute. These amounts will be
paid on the earlier of the date the dispute is resolved in a manner satisfactory
to us or June 30, 2001. A licensor of software used by a client of Internet
Outfitters has asserted that Internet Outfitters caused the client to underpay
the licensor in the amount of $2.2 million. Outfitters has denied any liability
for those additional amounts. In management's opinion, based on all known facts,
the software licensor's claim is without merit, however, if disposed of
unfavorably to Appnet, it could materially adversely affect us.
TRANSFORM IT, INCORPORATED. We acquired substantially all of the assets of
TransForm IT on March 29, 1999. TransForm IT specialized in strategic
consulting, providing process-level strategic consulting services to our
customers. It had approximately 10 consulting professionals as of the date of
the acquisition. We paid approximately $5.1 million for TransForm IT with a
combination of cash and shares of our common stock. TransForm IT is also
entitled to receive potential contingent payments payable in cash of up to $3.5
million based on the achievement of agreed-upon performance criteria during the
12-month period ending on March 31, 2000. In addition, the employees of
Transform Acquisition Corp., a subsidiary formed by AppNet to acquire TransForm
IT, are entitled to receive potential contingent payments payable in options to
purchase shares of our common stock based on the achievement of various revenue
levels during the 12-month period ending on March 31, 2000. During 1998,
TransForm IT had revenues of approximately $3.1 million.
We have developed a detailed process to fully integrate each acquisition
into our existing operations and create one seamless organization. We have begun
completing the integration tasks laid out in this detailed process. This
detailed process focuses on integrating the delivery of our professional
services, our sales and marketing functions, our knowledge management system and
our back-office functions.
By integrating the delivery of professional services, we can more
efficiently manage projects, provide better quality control, increase the
quality of our work and provide better customer service. By integrating our
sales and marketing functions, we can more efficiently generate leads and win
new business, provide superior customer service, coordinate the delivery of more
effective marketing messages and better train our sales personnel. By
integrating the way we manage our knowledge on a company-wide basis, we can more
efficiently interact and share information with our employees and customers,
reduce the time it takes to develop solutions for our clients, increase the
quality of our work and provide better customer service. By integrating our
back-office functions we can more efficiently monitor and manage our business,
recruit and retain employees, and administer corporate-wide benefit programs.
EMPLOYEES
As of May 1, 1999, we had approximately 755 employees. Our continuing
success will depend in large part on our ability to attract, motivate and retain
employees who are qualified to offer the services we provide. Competition for
qualified employees is intense. We believe we have been successful to date in
attracting and retaining qualified employees. Our strategy for attracting,
motivating and retaining our employees is to pay competitive salaries and cash
bonuses, grant stock options, reimburse tuition expenses and encourage a
corporate culture that is results-driven and rewards creativity, communication
and cooperation.
We believe our relationship with our employees is satisfactory. None of our
employees is represented by a union. Generally, our employees are retained on an
at-will basis and many of our key
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employees are subject to employment agreements. All of our senior managers, as
well as most of our key employees, are required to sign confidentiality
agreements and non-competition agreements which prohibit them from competing
with us during their employment and for various periods thereafter.
PROPERTIES
Our headquarters are located in Bethesda, MD and consist of approximately
13,400 square feet of leased space, the lease for which expires in May 2005. We
also lease office space in Santa Monica, CA, Golden, CO, Stamford, CT, Laurel,
MD, Cambridge, MA, Pittsfield, MA, Ann Arbor, MI, Detroit, MI, New York, NY,
Charlottesville, VA, Falls Church, VA, Vienna, VA and Amsterdam, The
Netherlands. We do not own any real estate. We do not consider any specific
leased location to be material to our operations and we believe that equally
suitable alternative locations are available in all areas where we currently do
business.
LEGAL PROCEEDINGS
We are not a party to any pending material legal proceedings.
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MANAGEMENT
EXECUTIVE OFFICERS AND DIRECTORS
Information regarding our executive officers and directors as of May 21,
1999 is set forth below. Each director's term of office will expire at our next
annual meeting of stockholders. Each officer's term of office will expire at the
first Board of Directors meeting held after our next annual meeting of
stockholders.
<TABLE>
<CAPTION>
NAME AGE POSITION
- ----------------------------------- --- ----------------------------------------------------------------------
<S> <C> <C>
Ken S. Bajaj....................... 57 Chairman of the Board of Directors, President and Chief Executive
Officer
Jack Pearlstein.................... 35 Senior Vice President, Chief Financial Officer, Treasurer and
Secretary
Toby Tobaccowala................... 60 Senior Vice President
Robert G. Harvey................... 49 Senior Vice President--Software Development Services
Robert D. McCalley................. 59 Senior Vice President--Electronic Commerce
John Cross......................... 56 Director, Executive Vice President--Strategic Consulting
William S. Dawson.................. 43 Vice President--General Counsel
Ronald B. Alexander................ 51 Senior Vice President--Finance
Philip A. Canfield................. 31 Director
Thomas M. Davidson................. 62 Director
Bruce V. Rauner.................... 43 Director
</TABLE>
KEN S. BAJAJ. Mr. Bajaj has been Chairman of our Board of Directors,
President and Chief Executive Officer since November 1997. Mr. Bajaj was Vice
Chairman of Wang Laboratories, Inc. from March 1997 until November 1997. He
joined Wang Laboratories, Inc. when that company acquired I-NET, Inc. in 1996;
at that time he was President of I-NET, Inc., a position he held from 1988 until
1996. Before joining I-NET, Inc., Mr. Bajaj had been a Vice President at
Electronic Data Systems, Inc. since 1978. Mr. Bajaj has an M.S. in electrical
engineering from the University of Toronto and a Ph.D. in systems science from
Michigan State University.
JACK PEARLSTEIN. Mr. Pearlstein has been our Senior Vice President since
July 1998 and our Chief Financial Officer, Treasurer and Secretary since May
1999. Prior to that time, Mr. Pearlstein was a Managing Director and principal
of Foxhall Capital, LLC from November 1996 until July 1998. Prior to this time,
he was Director--Mergers and Acquisitions at Digicon Corporation from November
1995 to November 1996. From September 1994 until November 1995, he was a senior
associate at Merge Global, Inc. From June 1993 until August 1994, he was a
financial analyst at Legg Mason. Mr. Pearlstein has a B.S. in Accounting from
New York University and an M.B.A. in Finance from the George Washington
University.
TOBY TOBACCOWALA. Mr. Tobaccowala has been our Senior Vice President since
August 1998. Prior to August 1998, Mr. Tobaccowala was Chief Executive Officer
and a director of Commerce Direct International for one year. Before joining
Commerce Direct International, Mr. Tobaccowala was employed by the Media
Strategic Business Unit of Electronic Data Systems, Inc. from 1973 until 1996,
most recently as President. He has an M.B.A. from the Bajaj Institute of
Management Studies.
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ROBERT G. HARVEY. Mr. Harvey has been our Senior Vice President--Software
Development Services since February 1998. Mr. Harvey was General Manager,
Midwest Operations of Wang Laboratories, Inc. from August 1996 until September
1997. He joined Wang Laboratories, Inc. when that company acquired I-NET, Inc.
in 1996; at that time he was General Manager, Midwest Operations at I-NET, Inc.,
a position he held from April 1994 until August 1996. Mr. Harvey has a B.S. in
mathematics from California State University and an M.S. in both computer
science and management from the University of California. Mr. Harvey serves in
the U.S. Army Reserve as a Colonel and in the Military Intelligence and Military
Police Corps.
ROBERT D. MCCALLEY. Mr. McCalley has been our Senior Vice
President--Electronic Commerce since February 1998. Prior to that time, Mr.
McCalley was Vice President, Wide Area Network Division of Wang Laboratories,
Inc. He joined Wang Laboratories, Inc. when that company acquired I-NET, Inc. in
1996; at that time he was Vice President, Commercial Services, at I-NET, Inc., a
company he joined in April 1991. Mr. McCalley has a B.S. in Mechanical
Engineering from George Washington University.
JOHN CROSS. Mr. Cross has been on our Board of Directors since June 1998
and our Executive Vice President--Strategic Consulting since March 1999. Mr.
Cross was the Group Vice President of Information Technology for BP Amoco
Corporation from 1998 until 1999. Mr. Cross was the Chief Information Officer
for the British Petroleum Group from 1993 until 1998. Prior to 1993, he was
General Manager for information technology in the Exploration and Production
Company of British Petroleum. Mr. Cross has a B.S. in economics and business
management from the University of Natal, South Africa.
WILLIAM S. DAWSON. Mr. Dawson has been our Vice President--General Counsel
since May 1999. Mr. Dawson was General Counsel and Secretary of SPACEHAB, Inc.
from April 1996 until May 1999. From February 1989 until April 1996, Mr. Dawson
was Senior Counsel, and subsequently Associate General Counsel, of Government
Technology Services, Inc. Prior to joining Government Technology Services, Inc.,
Mr. Dawson was an attorney with Seyforth, Shaw, Fairweather & Geraldson from
February 1986 until February 1989 and Watt, Tieder, Killian & Hoffar from May
1984 until February 1986. Mr. Dawson has a B.A. from Gordon College and a J.D.
from Catholic University Law School.
RONALD B. ALEXANDER. Mr. Alexander has been our Senior Vice President since
September 1998. He was our Chief Financial Officer from September 1998 to May
1999 and our Treasurer and Secretary from January 1999 to May 1999. Mr.
Alexander was Senior Vice President and Chief Financial Officer of GRC
International from April 1996 until September 1998. From 1994 until April 1996,
Mr. Alexander was Chief Financial Officer of Network Imaging Corporation. In
prior positions, Mr. Alexander was a Managing Director of the Blackstone Group,
a New York investment banking firm and Chief Financial Officer of Commodore
International, one of the original developers of the personal computer. Mr.
Alexander has a B.A. in physics and math from Columbia College, a J.D. from
Columbia Law School and an L.L.M. in taxation from New York University.
PHILIP A. CANFIELD. Mr. Canfield has been on our Board of Directors since
June 1998. He has been a principal at GTCR Golder Rauner, L.L.C. since 1997 and
an associate from 1992 until 1997. Prior to 1992, Mr. Canfield worked in the
corporate finance department of Kidder, Peabody & Co. He has a B.S. in finance
from the Honors Business Program at the University of Texas at Austin and an
M.B.A. from the University of Chicago. Mr. Canfield is also a director of AETEA
Information Technology, Inc., VISTA Information Technologies, Inc. and several
other private companies in GTCR's portfolio.
THOMAS M. DAVIDSON. Mr. Davidson has been on our Board of Directors since
June 1998. Mr. Davidson has been President and Chief Executive Officer of
Davidson Capital Group LLC since June 1998. From June 1997 until April 1998, Mr.
Davidson was a Managing Director of Washington Equity Partners. Prior to that,
he was a partner at the law firm of Reed, Smith, Shaw & McClay. From
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1995 until March 1997, Mr. Davidson was a partner at the law firm of Coffield,
Ungaretti & Harris. Mr. Davidson was a partner at the law firm of Verner,
Liipfert, Bernhard, McPherson & Hand from 1993 until 1995. He has a B.A. from
Williams College and an LL.D. from Duke University.
BRUCE V. RAUNER. Mr. Rauner has been on our Board of Directors since June
1998. Mr. Rauner is a managing principal of GTCR Golder Rauner, L.L.C. and has
been a principal of GTCR since 1981. Mr. Rauner has a B.A. from Dartmouth
College and an M.B.A. from Harvard University. Mr. Rauner is also a director of
AnswerThink Consulting Group, Inc., Lason, Inc., Coinmach Laundry Corporation,
Polymer Group, Inc., Province Healthcare, Inc., Esquire Communications Ltd. and
private companies in GTCR's portfolio.
RICHARD N. PERLE. Mr. Perle has agreed to join our Board of Directors for
an initial term of office to expire at our next annual meeting of stockholders.
Mr. Perle is currently director of the American Enterprise Institute's
Commission on Future Defenses. From 1981 until 1987, he was Assistant Secretary
of Defense for International Security Policy of the U.S. Department of Defense.
Mr. Perle is currently the Chairman of Hollinger Digital, Inc. and a director of
Hollinger International, Inc., Geobiotics, American Interactive Media, Inc. and
Morgan Crucible, PLC. Mr. Perle has a B.A. in International Relations from the
University of Southern California and an M.A. from Princeton University.
BOARD OF DIRECTORS
Our Board of Directors is currently composed of five directors. Each of the
current members of the Board of Directors has been elected in accordance with
the terms of the Stockholders' Agreement, dated as of June 29, 1998, by and
among AppNet and substantially all of our current stockholders, which will
terminate upon consummation of this offering. We intend to expand the Board to
include two outside directors after this offering. Prior to consummation of the
offering, AppNet and GTCR will enter into an agreement that provides that as
long as GTCR owns at least 15% of the shares owned by it immediately after the
consummation of the offering, AppNet will nominate at least one GTCR designee to
the Board.
COMMITTEES OF THE BOARD OF DIRECTORS
After completion of this offering, we intend to establish an Audit Committee
and a Compensation Committee, each composed of a majority of independent
directors. The Audit Committee will recommend the annual appointment of our
auditors with whom the Audit Committee will review the scope of audit and
non-audit assignments and related fees, accounting principles we use in
financial reporting, internal auditing procedures and the adequacy of our
internal control procedures. The Compensation Committee will make
recommendations to the Board of Directors regarding compensation for our
executive officers. GTCR will be entitled to appoint its designee to the
Compensation Committee.
COMPENSATION OF DIRECTORS
Directors who are also employees of AppNet receive no additional
compensation for their services as directors. Directors who are not AppNet
employees will not receive a fee for attendance in person at meetings of the
Board of Directors or committees of the Board of Directors, but they will be
reimbursed for travel expenses and other out-of-pocket costs incurred in
connection with the attendance of meetings. Non-employee directors will receive
options to purchase our common stock in connection with their appointment to the
Board of Directors. Non-employee directors will also receive automatic grants of
options to purchase our common stock each year that they are re-elected to the
Board of Directors.
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LIMITATIONS ON LIABILITY AND INDEMNIFICATION MATTERS
The Delaware General Corporation Law provides that a company may indemnify
its directors and officers against liabilities they may incur as a result of
their service as a director of officer. Our certificate of incorporation and
bylaws provide for the indemnification of our directors and officers to the
fullest extent permitted by law. The effect of such provisions is to indemnify
our directors and officers against all costs, expenses and liabilities incurred
by them in connection with actions, suits or proceedings in which they are
involved because of their affiliation with us. In addition, we intend to obtain
director and officer liability insurance to effectuate these provisions.
EXECUTIVE COMPENSATION
The following table sets forth a summary of compensation for services
rendered in all capacities to us by the Chief Executive Officer and President
and each of our four other most highly paid executive officers.
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
OTHER
ANNUAL COMPENSATION ANNUAL
----------------------------------- COMPEN-
NAME AND PRINCIPAL POSITIONS YEAR SALARY BONUS SATION
- --------------------------------------------------------- --------- ------------ ---------- ----------
<S> <C> <C> <C> <C>
Ken S. Bajaj
President and Chief Executive Officer(a)............... 1998 $ $ $
Toby Tobaccowala
Senior Vice President.................................. 1998 90,278(b) 15,000
Ronald B. Alexander
Senior Vice President--Finance......................... 1998 63,135(c) 10,000 50,000(f)
Robert G. Harvey
Senior Vice President--Software Development Services... 1998 114,250(d) 40,000(g)
Robert D. McCalley
Senior Vice President--Electronic Commerce............. 1998 114,330(d) 40,000(g)
Terrence M. McManus
Senior Vice President, Secretary & Treasurer(e)........ 1998 123,547(d) 40,000(g)
</TABLE>
- ------------------------
(a) Mr. Bajaj began to receive an annual base salary of $300,000 in May 1999.
Prior to May 1999, Mr. Bajaj elected not to receive any compensation.
(b) Mr. Tobaccowala began to work for us in July 1998. The salary set forth
above for 1998 represents his salary for the six-month period from July to
December 1998.
(c) Mr. Alexander began to work for us in September 1998. The salary set forth
above for 1998 represents his salary for the four-month period from
September to December 1998.
(d) Messrs. Harvey, McCalley and McManus each began to work for us in February
1998. The salaries set forth above for 1998 represents their respective
salaries for the eleven-month period from February to December 1998.
(e) Mr. McManus resigned as of December 31, 1998.
(f) Mr. Alexander earned a $50,000 signing bonus in 1998, which will be paid
upon consummation of this offering.
(g) Messrs. Harvey, McCalley and McManus each received 56,140 shares of our
common stock as partial compensation for services rendered from February 1,
1998 to May 31, 1998.
OPTION GRANTS AND EXERCISES DURING 1998
No stock options to purchase our common stock were granted to or exercised
by the executive officers named in the table above during 1998.
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EMPLOYMENT AGREEMENTS
We have entered into a senior management agreement with Mr. Bajaj, dated as
of June 29, 1998, which provides for his employment as our President and Chief
Executive Officer until he resigns, is disabled, as determined by the Board of
Directors in its good faith judgment, dies or is terminated by the Board of
Directors for any reason. Mr. Bajaj began to receive an annual base salary of
$300,000 in May 1999, subject to increases as determined by the Board of
Directors based upon AppNet's achievement of budgetary and other objectives set
by the Board of Directors. He will also be eligible to receive a bonus of up to
50% of his salary based upon AppNet's achievement of budgetary and other
objectives set by the Board of Directors.
The senior management agreement contains provisions requiring Mr. Bajaj to
protect the confidentiality of our proprietary and confidential information. In
addition, Mr. Bajaj is prohibited, during his employment at AppNet and for 18
months after such employment ends, from competing with AppNet, soliciting any of
our employees or interfering with any of our business relationships.
The senior management agreement also restricts the transfer of all shares of
AppNet common stock Mr. Bajaj owned as of the date of the agreement until June
29, 2003, subject to specific exceptions, including:
- sales in a registered public offering; and
- sales, subject to volume limitations imposed by the senior management
agreement, under Rule 144 under the Securities Act.
The registration agreement between AppNet and substantially all of its existing
stockholders dated as of June 29, 1998 states that Mr. Bajaj may request that
his shares of AppNet common stock be included on any registration statement
filed by AppNet:
- to register common stock held by GTCR and Smart Technology; or
- on its own behalf, other than in this offering.
The senior management agreement provides that if Mr. Bajaj's employment with
us terminates before June 30, 2001, AppNet may repurchase shares of its common
stock owned by Mr. Bajaj or his permitted transferees at a price of $0.0029 per
share. The number of shares which AppNet may repurchase upon these terms is
2,036,632 until June 29, 1999, 1,358,109 until June 29, 2000 and 679,004 until
June 29, 2001, after which AppNet's right to repurchase Mr. Bajaj's common stock
terminates. If AppNet does not exercise its repurchase right, GTCR and Smart
Technology may repurchase these shares at a price of $0.0029 per share and
contribute them to AppNet in exchange for a promissory note equal to the
aggregate purchase price of such shares. GTCR's and Smart Technology's
repurchase right terminates upon the earliest of:
- the sale of capital stock with the voting power to elect a majority of the
Board of Directors to persons or entities other than GTCR and Smart
Technology, other than in a public offering;
- the sale of all or substantially all of our assets;
- GTCR and its affiliates failing to own more than 50% of the common stock
GTCR purchased under the Purchase Agreement dated June 29, 1998, as
amended; and
- June 30, 2001.
AppNet also has the right, under Mr. Bajaj's senior management agreement, if
it issues or sells common stock or rights to acquire common stock to its
employees, to repurchase up to 1,251,228 shares of common stock at a price of
$0.3007 per share from Mr. Bajaj, whether held by Mr. Bajaj or his permitted
transferees, to be issued or sold to such employees. As of May 1, 1999, AppNet
had repurchased a total of 1,041,109 of such shares from Mr. Bajaj for an
aggregate purchase price of
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$313,035. Upon the termination of Mr. Bajaj's employment, AppNet has the right
to repurchase all of this common stock, whether held by Mr. Bajaj or his
permitted transferees. AppNet's rights to repurchase this common stock terminate
upon consummation of this offering.
We have entered into senior management agreements with each of Messrs.
Tobaccowala, McCalley, Alexander, McManus and Harvey. These agreements provide
for their respective employment by AppNet until resignation, disability, as
determined by the Board of Directors in its good faith judgment, death or
termination by the Board of Directors for any reason. Each senior management
agreement sets forth the annual base salary the executive is entitled to
receive, subject to increases as determined by the Board of Directors based upon
AppNet's achievement of budgetary and other objectives set by the Board of
Directors. Each executive is eligible to receive a bonus of up to 50% of his
salary based upon AppNet's achievement of budgetary and other objectives set by
the Board of Directors.
If an executive's employment is terminated without cause, he is entitled to
receive his annual salary and life, medical and disability insurance benefits
for one year. Cause is defined generally as:
- commission of a felony or crime involving moral turpitude;
- fraud, gross negligence or willful misconduct with respect to AppNet;
- substantial and repeated failure to perform duties; or
- breach of the confidentiality or noncompete provisions of the senior
management agreement.
Each senior management agreement contains provisions requiring the executive
to protect the confidentiality of our proprietary and confidential information.
In addition, each executive is prohibited, during his employment at AppNet and
for two years after such employment ends if he resigns or is terminated for
cause or for one year after such employment ends, if he is terminated without
cause, from competing with AppNet, soliciting any of our employees or
interfering with any of our business relationships.
The senior management agreements with Messrs. Tobaccowala, Harvey, McCalley,
Alexander and McManus provided for the sale of 175,439, 63,158, 110,175, 175,439
and 63,158 shares, respectively, or 587,369 shares in the aggregate, of our
common stock to these individuals at a per share price of $0.3007, for an
aggregate consideration of $176,607. In connection with these stock purchases,
each executive delivered a promissory note to AppNet for the full amount of the
purchase price, less the par value of the stock purchased. Each promissory note
is secured by a pledge of the purchased stock.
Each senior management agreement restricts the transfer of the AppNet common
stock owned by the executive as of the date of the agreement until June 29,
2003, subject to specific exceptions, including:
- sales in a registered public offering; and
- sales, subject to volume limitations imposed by the senior management
agreement, under Rule 144 under the Securities Act.
The registration agreement between AppNet and substantially all of its existing
stockholders dated June 29, 1998 states that each executive may request that his
shares of AppNet common stock be included in any registration statement filed by
AppNet:
- to register common stock held by GTCR and Smart Technology; or
- on its own behalf, other than in this offering.
Each senior management agreement also provides that upon termination of the
executive's employment, AppNet may repurchase all or any portion of its common
stock owned by such executive
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or his permitted transferees. A portion of the executive's common stock may be
repurchased at original cost, which is defined as the price originally paid by
the executive for such common stock; the remaining common stock may be
repurchased at the fair market value of such shares. If the executive's
employment is terminated for any reason before the first anniversary of his
senior management agreement, the amount of common stock which may be repurchased
at the original cost ranges from 75% to 100%, depending on the particular
executive. The portion of common stock to be repurchased at the original cost
decreases ratably each year until it reaches zero after the fourth anniversary
of the senior management agreement. If AppNet does not exercise its repurchase
right, GTCR, Smart Technology or Mr. Bajaj may repurchase the executive's AppNet
common stock upon the same terms and contribute them to AppNet in exchange for a
promissory note equal to the aggregate purchase price of such shares. This
repurchase right terminates upon:
- the sale of capital stock with the voting power to elect a majority of the
Board of Directors to persons or entities other than GTCR and Smart
Technology, other than in a public offering; or
- the sale of all or substantially all of our assets. We intend to amend the
senior management agreements to terminate the right to repurchase an
executive's shares of our common stock at their fair market value upon
completion of this offering.
Under the terms of the senior management agreement for Mr. McManus, whose
employment with us ended on December 31, 1998, we had the option to repurchase
some or all of his shares of our common stock upon the termination of his
employment. At the time of the termination of Mr. McManus' employment, we
entered into a stock purchase agreement with him which provided that we would
repurchase 89,474 shares of our common stock from him at purchase prices ranging
from $0.3007 to $0.7139 per share, and we would pay him $160,000 in severance
pay in accordance with his senior management agreement. The stock purchase
agreement with Mr. McManus gives us, GTCR, Smart Technology and Mr. Bajaj the
option to repurchase the remaining 29,825 shares of AppNet common stock owned by
Mr. McManus at fair market value until the earlier of September 30, 1999 or the
effective date of a registration statement filed by us in connection with a
public offering of our common stock. We have not determined whether we will
repurchase the remaining 29,825 shares.
STOCK INCENTIVE PLANS
1999 STOCK INCENTIVE PLAN
We intend to adopt the AppNet Systems, Inc. 1999 Stock Incentive Plan prior
to this offering. The 1999 Stock Incentive Plan will become effective upon its
adoption by the Board of Directors and ratification by our stockholders. The
purpose of the 1999 Stock Incentive Plan will be to strengthen AppNet by
providing an incentive to its employees, officers, consultants, directors and
advisors through the granting or awarding of incentive and nonqualified stock
options, stock appreciation and dividend equivalent rights, restricted stock,
performance units, performance shares, share awards and phantom stock awards,
thereby encouraging these individuals to devote their abilities and energies to
the success of AppNet.
The 1999 Stock Incentive Plan will be administered by a compensation
committee, which will consist of non-employee directors. Under the 1999 Stock
Incentive Plan, the committee will have the authority to, among other things:
- select the employees to whom stock options and other incentive awards will
be granted;
- determine the type, size and the terms and conditions of stock options and
other incentive awards; and
- establish the terms for treatment of stock options and other incentive
awards upon a termination of employment.
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We will initially authorize 2,000,000 shares of common stock for issuance
under the 1999 Stock Incentive Plan for the grant of stock options and other
incentive awards to eligible individuals. The amount of common stock authorized
for issuance under the 1999 Stock Incentive Plan may be increased annually by
the compensation committee. The total amount of shares authorized under the plan
may not exceed 10,000,000. The 1999 Stock Incentive Plan will terminate on the
day preceding the tenth anniversary of the date of its adoption by the Board of
Directors. The Board of Directors will be able to at any time and from time to
time amend or terminate the 1999 Stock Incentive Plan; provided, however, that,
to the extent necessary under applicable law, no such change will be effective
without the requisite approval of the stockholders. In addition, no such change
will alter or adversely impair any rights or obligations under any stock options
and other incentive awards previously granted, except with the written consent
of the grantee.
1998 STOCK OPTION AND INCENTIVE PLAN
We have adopted a stock incentive plan, the 1998 Stock Option and Incentive
Plan, and reserved 1,578,947 shares of our common stock for issuance in
connection with awards granted under such plan. Stock options and other
incentive awards under the 1998 Stock Option and Incentive Plan may be made in
the form of:
- incentive stock options;
- non-qualified stock options;
- stock appreciation rights;
- restricted stock; and
- restricted stock units.
Stock options and other incentive awards may be granted to such persons,
including officers, directors and employees, that our Board of Directors or a
Board-appointed committee shall in its discretion select.
As of May 26, 1999, options to purchase a total of 1,574,068 shares of our
common stock were outstanding under the 1998 Stock Option and Incentive Plan and
remain unexercised, 4,791 shares of our common stock have been issued upon the
exercise of options granted under the 1998 Stock Option and Incentive Plan and
options to purchase 154,936 shares of our common stock granted under the 1998
Stock Option and Incentive Plan are currently exercisable.
The Board of Directors or a Board-appointed committee is authorized to
construe, interpret and implement the provisions of the 1998 Stock Option and
Incentive Plan, to select the persons to whom awards will be made, to determine
the terms and provisions of awards and, with the consent of the grantee, to
amend the terms of any outstanding award. The determinations of the Board of
Directors or a Board-appointed committee are made in its sole discretion and are
conclusive.
The 1998 Stock Option and Incentive Plan has no termination date, however,
no incentive stock options may be granted under such plan on or after August 25,
2008. The Board of Directors may at any time and from time to time amend,
suspend or terminate the 1998 Stock Option and Incentive Plan; provided,
however, that, to the extent necessary under applicable law, no such change will
be effective without the requisite approval of the stockholders. In addition, no
such change will alter or adversely impair any rights or obligations under
awards previously granted, except with the written consent of the grantee. Upon
the adoption of our 1999 Stock Incentive Plan, no further awards will be made
under the 1998 Stock Option and Incentive Plan.
CENTURY COMPUTING, INCORPORATED INCENTIVE STOCK OPTION PLAN
In connection with our acquisition of Century Computing, we assumed its
Incentive Stock Option Plan and related award agreements with each grantee. Each
outstanding option to purchase the common stock of Century Computing was
converted into an incentive stock option to purchase our common stock based on a
conversion ratio. Originally, we reserved a total of 704,127 shares of our
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common stock for issuance in connection with options granted under the Century
Incentive Stock Option Plan.
As of May 26, 1999, options to purchase a total of 45,627 shares of our
common stock were outstanding under the Century Incentive Stock Option Plan and
remain unexercised, 658,499 shares of our common stock have been issued upon the
exercise of options granted under the Century Incentive Stock Option Plan and
options to purchase 45,627 shares of our common stock granted under the Century
Incentive Stock Option Plan are currently exercisable.
The Century Incentive Stock Option Plan is administered by Century
Computing's board of directors unless the board of directors delegates the power
and authorities related to the administration of the Century Incentive Stock
Option Plan to a board-appointed committee. The board of directors or a
board-appointed committee is authorized to construe, interpret and implement the
provisions of the Century Incentive Stock Option Plan, to select the persons to
whom awards will be made, to determine the terms and provisions of awards and,
with the consent of the grantee, to amend the terms of any outstanding award.
The determinations of the board of directors or a board-appointed committee are
made in its sole discretion and are conclusive.
The Century Incentive Stock Option Plan has no termination date, however, no
incentive stock options may be granted under the Century Incentive Stock Option
Plan after the expiration of the ten-year period beginning on the date the
Century Incentive Stock Option Plan was adopted. The board of directors may at
any time and from time to time amend or terminate the Century Incentive Stock
Option Plan; provided, however, that, to the extent necessary under applicable
law, no such change will be effective without the requisite approval of the
stockholders. AppNet does not intend to make any new grants under the Century
Incentive Stock Option Plan.
INTERNET OUTFITTERS, INC. 1996 INCENTIVE STOCK OPTION PLAN
In connection with our acquisition of Internet Outfitters, Inc., we assumed
its 1996 Incentive Stock Option Plan and related award agreements with each
grantee. Each outstanding option to purchase the common stock of Internet
Outfitters was converted into an incentive stock option to purchase our common
stock based on a conversion ratio. Originally, we reserved a total of 22,300
shares of our common stock for issuance in connection with options granted under
the Internet Outfitters Incentive Stock Option Plan.
As of May 26, 1999, options to purchase a total of 22,300 shares of our
common stock were outstanding under the Internet Outfitters Incentive Stock
Option Plan and remain unexercised, no options have been exercised and options
to purchase 1,916 shares of our common stock granted under the Internet
Outfitters Incentive Stock Option Plan are currently exercisable.
The Internet Outfitters Incentive Stock Option Plan is administered by the
Internet Outfitters board of directors unless the board of directors delegates
the power and authorities related to the administration of the Internet
Outfitters Incentive Stock Option Plan to a board-appointed committee. The board
of directors or a board-appointed committee is authorized to construe, interpret
and implement the provisions of the Internet Outfitters Incentive Stock Option
Plan, to select the persons to whom awards will be made, to determine the terms
and provisions of awards and, with the consent of the grantee, to amend the
terms of any outstanding award. The determinations of the board of directors or
a board-appointed committee are made in its sole discretion and are conclusive.
The Internet Outfitters Incentive Stock Option Plan will terminate upon the
expiration of the ten-year period beginning on the date the Internet Outfitters
Incentive Stock Option Plan was adopted. The board of directors may at any time
and from time to time amend or terminate the Internet Outfitters Incentive Stock
Option Plan; provided, however, that, to the extent necessary under applicable
law, no such change will be effective without the requisite approval of the
stockholders. AppNet does not intend to make any new grants under the Internet
Outfitters Incentive Stock Option Plan.
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CERTAIN RELATIONSHIPS AND TRANSACTIONS
GTCR AND SMART TECHNOLOGY PURCHASE AGREEMENT
GTCR, Smart Technology and AppNet are parties to a purchase agreement, dated
as of June 29, 1998, as amended and supplemented which provided for the purchase
by GTCR and Smart Technology, L.L.C., an entity controlled by Mr. Bajaj's
spouse, of 11,326,228 and 232,916 shares of our common stock, respectively, at a
price of $0.3007 per share. At that time, GTCR and Smart Technology also agreed
from time to time to purchase up to an aggregate of 96,500 shares of Class A
Preferred Stock at a price of $1,000 per share in the future on the terms
described below. GTCR is required to purchase Class A Preferred Stock at the
request of AppNet's Board of Directors and the approval of GTCR to fund AppNet's
working capital requirements and acquisitions. Upon any such purchase by GTCR of
Class A Preferred Stock, Smart Technology is required to purchase Class A
Preferred Stock in an amount equal to approximately 2% of the amount of Class A
Preferred Stock GTCR purchases. Under these provisions, GTCR and Smart
Technology have purchased aggregate amounts of approximately 44,167 and 900
shares of Class A Preferred Stock, respectively, since June 29, 1998 for
aggregate purchase prices of approximately $44,167,000 and $900,000,
respectively. The purchase agreement with GTCR and Smart Technology currently
provides that as long as GTCR owns at least 15% of the securities purchased
under the purchase agreement, AppNet must obtain GTCR's prior written consent
before taking various actions including paying any dividends, other than
dividends on the Class A Preferred Stock, issuing any equity securities or debt
securities with equity features, acquiring businesses or merging or
consolidating with another entity. The parties intend to terminate the
provisions of the purchase agreement that require GTCR and Smart to purchase
Class A Preferred Stock and that require AppNet to obtain GTCR's consent before
taking various actions upon consummation of this offering. AppNet will still be
required to obtain GTCR's consent before amending its senior management
agreements with Messrs. Bajaj, Harvey, McManus and McCalley.
In connection with AppNet's acquisition of Software Services Corporation and
the issuance of 11,576 shares of Class B Preferred Stock to the former
stockholders of that company, GTCR and Smart Technology transferred an aggregate
of 1,387,097 shares of AppNet common stock to us in exchange for an aggregate of
417.066 shares of our Class A Preferred Stock. In connection with a revolving
credit agreement between AppNet and BankBoston, N.A., GTCR and Smart Technology
sold an aggregate of 123,538 shares of our common stock and an aggregate of
approximately 362 shares of our Class A Preferred Stock to FSC Corp., an
affiliate of BankBoston, for an aggregate purchase price of $375,000. In
addition, the purchase agreement with GTCR and Smart Technology was amended in
August 1998 to decrease the commitment of GTCR and Smart Technology to purchase
96,500 shares of Class A Preferred Stock to 84,920 shares of Class A Preferred
Stock.
STOCKHOLDERS' AGREEMENT, REGISTRATION AGREEMENT AND SENIOR MANAGEMENT AGREEMENTS
In connection with the purchase agreement with GTCR and Smart Technology,
AppNet, GTCR, Smart Technology and substantially all of AppNet's existing
stockholders entered into a stockholders' agreement, dated as of June 29, 1998
and a registration agreement, dated as of June 29, 1998. In addition, each
member of AppNet's senior management entered into a senior management agreement
with AppNet upon commencement of their employment with us. The stockholders'
agreement provides, among other things, that the Board of Directors will consist
of two representatives designated by GTCR, one representative designated by Mr.
Bajaj and three or more representatives chosen jointly by GTCR and Mr. Bajaj.
The stockholder's agreement also includes provisions restricting the
transferability of our common stock, giving AppNet a right of first refusal to
purchase a stockholder's common stock and giving stockholders a conditional
right to participate if GTCR and Smart Technology transfer their shares of
common stock. The stockholders' agreement will terminate upon the consummation
of this offering. Prior to consummation of the offering, AppNet and GTCR will
enter into an agreement that provides that as long as GTCR owns at least 15% of
the shares owned by it
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immediately after the consummation of the offering, AppNet will nominate at
least one GTCR designee to the Board.
The registration agreement provides that the holders of a majority of our
common stock issued to GTCR and Smart Technology under the purchase agreement
with GTCR and Smart Technology may have the right to demand the filing of a
registration statement with the Securities and Exchange Commission to register
all or any portion of this common stock. Substantially all of the other current
stockholders of AppNet have the right to include all or any portion of their
AppNet common stock on registration statements filed by AppNet to register
shares of the common stock issued to GTCR and Smart Technology under the
purchase agreement with GTCR and Smart Technology; subject, however, to the
ability of the underwriters of any offering to limit the number of shares
included in such registration. Holders of the majority of our common stock
issued to GTCR and Smart Technology under the purchase agreement with GTCR and
Smart Technology may require AppNet to file, and pay the expenses in connection
with, up to four registration statements on Form S-1 and an unlimited number of
registration statements on Forms S-2 and S-3, if AppNet qualifies to use such
forms. If AppNet proposes to register securities for its own account, other than
in this offering. GTCR, Smart Technology and substantially all of AppNet's other
stockholders are entitled to notice of, and to include their shares in, such
registration; subject, however, to the ability of the underwriters of any
offering to limit the number of shares included in such registration. These
registration rights cover substantially all of the shares of our common stock
and will also cover any additional shares obtained by the parties to the
registration agreement. The existence and exercise of these registration rights
may make it more difficult for AppNet to arrange future financing and may have
an adverse effect on the market price of our common stock.
In addition, our acquisition agreement with Arbor Intelligent Systems, Inc.
grants the former Arbor stockholders rights to have their shares of our common
stock included in any registration statement we file, other than in connection
with this offering; subject, however, to the ability of the underwriters of any
offering to limit the number of shares included in such registration.
The senior management agreement with Mr. Bajaj provided for the sale of
1,251,228 shares of our common stock to Mr. Bajaj at a per share price of
$0.3007. The senior management agreement restricts the transferability of these
shares. AppNet, GTCR and Smart Technology have rights to repurchase these shares
upon the termination of Mr. Bajaj's employment.
Mr. Bajaj pledged the 1,251,228 shares of common stock which he purchased in
accordance with the terms of his senior management agreement to AppNet to secure
a promissory note in the principal amount of $374,430 which Mr. Bajaj delivered
in partial payment for these shares. The senior management agreement between Mr.
Bajaj and AppNet gives AppNet the right, if it issues or sells common stock or
rights to acquire common stock, to its employees, to repurchase these shares,
whether held by Mr. Bajaj or his permitted transferees, to be issued or sold to
such employees at a price of $0.3007 per share. Upon the termination of Mr.
Bajaj's employment, AppNet has the right to repurchase all of these shares,
whether held by Mr. Bajaj or his transferees. AppNet's rights to repurchase
these shares terminate upon consummation of this offering. As of May 1, 1999,
AppNet had repurchased a total of 1,041,109 of these shares from Mr. Bajaj for
an aggregate purchase price of $313,035 reducing the principal amount of his
promissory note to $62,878.
PROFESSIONAL SERVICES AGREEMENT WITH FAIRFAX MANAGEMENT COMPANY II, L.L.C. AND
FAIRFAX CONSULTING COMPANY, L.L.C.
Stephen W. Ritterbush, a former vice chairman of our Board of Directors and
Bruce Gouldey, our former chief financial officer, are members of Fairfax
Consulting Company, L.L.C. They resigned their positions on June 29, 1998 in
connection with the GTCR and Smart Technology purchases of stock in AppNet under
the purchase agreement. We entered into a professional services agreement, dated
as of June 29, 1998, with Fairfax Management Company II, L.L.C. and Fairfax
Consulting Company, L.L.C.,
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in which Fairfax Consulting Company agreed to provide to AppNet the services of
a financial and management consultant. In return for the consultant's services,
AppNet agreed to pay Fairfax Consulting Company a monthly retainer of $16,667 as
well as any fees for consulting services in excess of the monthly retainer. The
agreement also provided that if AppNet acquired a company which was introduced
to it by Fairfax Consulting Company, AppNet shall pay a finder's fee to Fairfax
Consulting Company equal to 1% of the purchase price for the acquired company.
We did not pay any finder's fees to Fairfax Consulting Company in 1998. In 1998,
AppNet paid approximately $336,000 in consulting fees to Fairfax Consulting
Company. The professional services agreement prohibited Fairfax Management
Company from owning, controlling, rendering services to or otherwise doing
business with one of our competitors while the agreement is in effect and for a
period of 18 months after it is terminated. We terminated the professional
services agreement with Fairfax Management Company and Fairfax Consulting
Company effective as of November 20, 1998.
Fairfax Management Company purchased 2,052,632 shares of our common stock in
March 1998 for an aggregate purchase price of $5,850. AppNet repurchased
1,350,877 of these shares on June 29, 1998 in exchange for a convertible
promissory note in the principal amount of $406,175. The professional services
agreement with Fairfax Management Company and Fairfax Consulting Company
restricts the transfer of the 684,211 shares of our common stock that Fairfax
Management Company retained until June 29, 2003, except:
- in a public offering;
- under Rule 144 through a broker, dealer or market maker (other than under
Rule 144(k)), in proportion to sales by GTCR and Smart Technology under
Rule 144;
- in the event of the sale of our capital stock with the voting power to
elect a majority of the Board of Directors to persons or entities other
than GTCR or Smart Technology, other than in a public offering; or
- in the event of the sale of all or substantially all of our assets.
The principal balance of the convertible promissory note held by Fairfax
Management Company will be converted into shares of AppNet common stock upon
consummation of this offering at a conversion rate equal to 80% of the offering
price per share.
DAVIDSON AGREEMENT
Thomas M. Davidson, one of our directors, and AppNet are parties to an
agreement dated as of June 29, 1998, under which Mr. Davidson received $350,000
in cash and 52,632 shares of common stock from AppNet as a finder's fee in
connection with the GTCR and Smart Technology investments in AppNet. The
Davidson agreement states that after GTCR and Smart Technology invest a total of
$15 million in shares of our common stock and Class A Preferred Stock, Mr.
Davidson shall receive additional finder's fees equal to 1% of all additional
purchases made by GTCR and Smart Technology of Class A Preferred Stock. AppNet's
obligation to pay this 1% commission to Mr. Davidson terminates when GTCR and
Smart Technology have invested an aggregate of $100 million in shares of AppNet
common stock and Class A Preferred Stock. As of March 31, 1999, GTCR and Smart
Technology have paid a total of $48.5 million in exchange for 11,559,144 shares
of our common stock and approximately 45,067 shares of Class A Preferred Stock,
and Mr. Davidson has earned a commission of approximately $685,000.
The Davidson agreement also provided for the purchase by Mr. Davidson of
86,651 shares of our common stock at a price of $0.3007 per share. Under that
agreement, Mr. Davidson has a consulting arrangement with AppNet, which entitles
him to receive annual payments of $200,000. AppNet may terminate this consulting
arrangement upon thirty days' notice, although upon any termination prior to
June 29, 1999 for reasons other than for cause, we are required to pay to Mr.
Davidson $200,000 less
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the aggregate amount of all consulting payments made prior to termination. On
May 17, 1999, AppNet gave Mr. Davidson thirty days' notice of the termination of
the consulting arrangement.
OTHER GTCR RELATIONSHIPS
GTCR and AppNet are parties to a professional services agreement, dated as
of June 29, 1998, which entitles GTCR to $200,000 per year in exchange for
financial and management consulting services. This agreement also entitles GTCR
to receive an investment fee equal to 1% of the purchase price of the common
stock and Class A Preferred Stock it purchases from AppNet under the purchase
agreement with GTCR and Smart Technology. GTCR has earned approximately $475,000
in investment fees. The GTCR professional services agreement will terminate upon
the consummation of this offering.
GTCR has guaranteed a portion of our outstanding indebtedness. We anticipate
that this guarantee will terminate upon the repayment of our credit facilities
with the proceeds of this offering and the termination of the guaranteed portion
of our credit facilities.
OTHER SMART TECHNOLOGY RELATIONSHIPS
During 1998, Smart Technology loaned approximately $1.1 million to AppNet.
On May 31, 1998, AppNet issued a warrant to purchase 35,088 shares of its common
stock for an aggregate purchase price of $50,000 to Smart Technology as
consideration, in part, for this loan. On June 29, 1998, a portion of the $1.1
million loan equal to the purchase price of the common stock Smart Technology
acquired from AppNet under the purchase agreement with GTCR and Smart Technology
was canceled, and AppNet issued a new promissory note in the principal amount of
$903,567 to Smart Technology. This note bears interest at the rate of 12% per
annum. The principal amount of this note is reduced from time to time by an
amount equal to the purchase price of any Class A Preferred Stock purchased by
Smart Technology under the purchase agreement with GTCR and Smart Technology.
The amount outstanding under this note has been reduced to $3,300 as of May 1,
1999 and will be repaid with the proceeds of this offering. Also on June 29,
1998, in accordance with the purchase agreement with GTCR and Smart Technology,
the original warrant issued to Smart Technology was canceled and AppNet issued a
new warrant to Smart Technology to purchase 70,175 shares of AppNet common stock
for an exercise price of $0.3007 per share.
In 1998, we paid Smart Technology approximately $25,000 in exchange for
consulting services.
CROSS SENIOR MANAGEMENT AGREEMENT
We entered into a senior management agreement with John Cross, one of our
directors, in March 1999, which provides for his employment as an Executive Vice
President until he resigns, is disabled, as determined by the Board of Directors
in its good faith judgment, dies or is terminated by the Board of Directors for
any reason. Mr. Cross is entitled to receive a salary of $300,000 per year,
subject to increases as determined by the Board of Directors based upon AppNet's
achievement of budgetary and other objectives set by the Board of Directors. Mr.
Cross is eligible to receive a bonus of up to 50% of his salary based upon
AppNet's achievement of budgetary and other objectives set by the Board of
Directors.
If Mr. Cross' employment is terminated without cause, he is entitled to
receive his annual salary and life, medical and disability insurance benefits
for one year. Cause is defined generally as:
- commission of a felony or crime involving moral turpitude;
- fraud, gross negligence or willful misconduct with respect to AppNet;
- substantial and repeated failure to perform duties; or
- breach of the confidentiality or noncompete provisions of the senior
management agreement.
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The senior management agreement contains provisions requiring Mr. Cross to
protect the confidentiality of our proprietary and confidential information. In
addition, Mr. Cross is prohibited, during his employment at AppNet and for two
years after his employment ends if he resigns or is terminated for cause or for
one year after his employment ends if he is terminated without cause, from
competing with AppNet, soliciting any of our employees or interfering with any
of our business relationships.
In 1999, John Cross also received options to purchase 337,776 shares of
AppNet common stock at an exercise price of $12.825 per share. The fair value of
the common stock underlying these options as of the date of grant was $14.25 per
share.
OTHER RELATIONSHIPS AND TRANSACTIONS
Foxhall Capital, LLC, an entity controlled by Jack Pearlstein, and AppNet
signed an agreement dated January 18, 1998, under which Foxhall Capital, LLC
received approximately $450,000 in cash from AppNet as a finder's fee in
connection with AppNet's acquisition of Century Computing, Incorporated in
October 1998. Mr. Pearlstein is one of our officers.
In 1998, AppNet loaned AppNet Commerce Services, Inc., in which AppNet owns
a 50% interest, an aggregate of $0.2 million to fund its operations. Three
officers of AppNet have also been officers of this subsidiary.
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PRINCIPAL STOCKHOLDERS
The following table sets forth, as of May 26, 1999, information with respect
to the beneficial ownership of our common stock by:
- each person known to AppNet to beneficially own more than 5% of the
outstanding shares of our common stock;
- each director of AppNet and each executive officer named in the Summary
Compensation Table; and
- all directors and executive officers as a group.
Unless otherwise indicated, each stockholder has sole voting and investment
power with respect to the shares beneficially owned by the stockholder and has
the same address as AppNet.
<TABLE>
<CAPTION>
NUMBER OF SHARES OF PERCENTAGE OWNERSHIP
COMMON STOCK --------------------------------------------
BENEFICIALLY OWNED AFTER THIS
BEFORE THIS OFFERING BEFORE THIS OFFERING OFFERING(D)
---------------------- --------------------- ---------------------
<S> <C> <C> <C>
GTCR (a)........................................ 9,924,607 49.5% 43.6%
Ken S. Bajaj (b)................................ 2,905,440 14.4 9.8
Toby Tobaccowala................................ 192,982 * *
Ronald B. Alexander............................. 175,439 * *
Robert D. McCalley.............................. 166,316 * *
Robert G. Harvey................................ 119,298 * *
Philip A. Canfield (a)(c)....................... -- * *
John Cross...................................... -- * *
Thomas M. Davidson.............................. 125,355 * *
Bruce V. Rauner (a)(c).......................... -- * *
Terrence McManus................................ 29,825 * *
All executive officers and directors as a group
(11 persons).................................. 3,812,900 18.9% 12.7%
</TABLE>
- ------------------------
* Less than 1%.
(a) The address for GTCR and Messrs. Canfield and Rauner is 6100 Sears Tower,
Chicago, Illinois, 60606.
(b) All of these shares are beneficially owned by Bajaj Enterprises, LLC, a
Maryland limited liability company, over which Mr. Bajaj exercises voting
and investment control. These shares include 274,268 shares transferred from
Smart Technology and exclude 701,754 shares owned by family trusts over
which Mr. Bajaj does not exercise any voting or investment control.
(c) Each of Messrs. Canfield and Rauner is a principal of GTCR and therefore may
be deemed to share investment and voting control over the shares of our
common stock held, directly or indirectly, by GTCR. Each of Messrs. Canfield
and Rauner disclaims beneficial ownership of the shares of our common stock
held by GTCR.
(d) Gives effect to (i) the sale of 6,000,000 shares of common stock in this
offering, (ii) the conversion of a promissory note into 39,055 shares of
common stock and (iii) the exchange of 43,789 shares of Class A Preferred
Stock and 11,158 shares of Class B Preferred Stock for 4,334,281 shares of
common stock.
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DESCRIPTION OF CAPITAL STOCK
Our authorized capital stock of consists of 75,000,000 shares of common
stock, par value $0.0005 per share, 96,621 shares of Class A Preferred Stock,
par value $0.01 per share, and 20,000 shares of Class B Preferred Stock, par
value $0.01 per share. Upon consummation of this offering, there will be
4,883,379 authorized and unissued shares of preferred stock. Also upon
consummation of this offering, there will be issued and outstanding 30,441,434
shares of common stock, including 39,055 shares that will be issued upon
consummation of this offering upon conversion of a convertible promissory note,
and 4,334,281 shares that will be issued upon consummation of this offering upon
the exchange of a maximum of 43,789 shares of Class A Preferred Stock and a
maximum of 11,158 shares of Class B Preferred Stock. As of May 26, 1999, there
were 133 holders of our common stock, five holders of our Class A Preferred
Stock and 11 holders of our Class B Preferred Stock. In addition,
- 3,642,084 shares of common stock have been reserved for issuance in
connection with AppNet's stock incentive plans;
- 84,795 shares of common stock have been reserved for issuance in
connection with warrants issued to Silicon Valley Bank and Smart
Technology, L.L.C.;
- 887,473 shares of common stock reserved for issuance in connection with
outstanding promissory notes convertible into shares of our common stock
at conversion prices of $8.55 and $11.40 per share;
- 461,539 shares of common stock have been reserved for issuance in
connection with outstanding promissory notes convertible into shares of
our common stock at a conversion price of 80% of the initial public
offering price per share in this offering, assuming an initial public
offering price of $13.00, the mid-point of the range shown on the cover
page of this prospectus;
- 891,318 shares of common stock have been reserved for issuance in
connection with contingent payments payable to the former owners of five
of the companies we acquired, New Media Publishing, Sigma6, Salzinger &
Company, Internet Outfitters and TransForm IT, assuming that the market
price of our common stock at the time the contingent payments are made is
$13.00, the mid-point of the range shown on the cover page of this
prospectus; and
- 121 shares of Class A Preferred Stock have been reserved for issuance in
connection with a warrant issued to Silicon Valley Bank.
COMMON STOCK
Each share of our common stock is identical in all respects and entitles the
holder thereof to the same rights and privileges enjoyed by all other holders of
shares of common stock, and subjects them to the same qualifications,
limitations and restrictions to which all such other holders are subject.
VOTING RIGHTS. Holders of our common stock are entitled to one vote per
share on all matters to be voted on by AppNet's stockholders and may act by
written consent if the consent is signed by the holders of common stock having
at least the minimum votes necessary to authorize or take such action at
meetings. Holders of common stock do not have cumulative rights, so that holders
of a plurality of the shares of common stock present at a meeting at which a
quorum is present are able to elect all of AppNet's directors eligible for
election in a given year. The holders of a majority of the voting power of the
issued and outstanding common stock constitutes a quorum. We intend to amend our
certificate of incorporation to provide that a vote of two-thirds of the holders
of our issued and outstanding common stock will be required to remove a director
or amend our bylaws.
DIVIDENDS. Holders of our common stock are entitled to receive ratably such
dividends, if any, as are declared by AppNet's Board of Directors out of funds
legally available for the declaration of dividends, subject to the preferential
rights of any holder of preferred stock that may from time to time
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be outstanding. The terms of our credit facilities restrict AppNet's ability to
pay dividends on the common stock.
LIQUIDATION. Upon the liquidation, dissolution or winding up of AppNet, the
holders of our common stock are entitled to share pro rata in the distribution
of all of AppNet's assets available for distribution after satisfaction of all
of AppNet's liabilities and the payment of the liquidation preference of any
preferred stock that may be outstanding.
OTHER PROVISIONS. The holders of our common stock have no preemptive or
other subscription rights to purchase common stock, and there are no redemptive
rights or sinking fund provisions. The holders of our common stock are not
liable for any calls or assessments.
REGISTRATION RIGHTS. AppNet is a party to a registration agreement, dated
as of June 29, 1998, to which substantially all current stockholders of AppNet
are party, which gives the holders of a majority of the common stock issued to
GTCR and Smart Technology under the purchase agreement with GTCR and Smart
Technology a conditional right to demand registration of all or any portion this
common stock. Substantially all of the other current stockholders of AppNet have
the right to include all or any portion of their AppNet common stock on
registration statements filed by AppNet to register the common stock issued to
GTCR and Smart Technology under the purchase agreement with GTCR and Smart
Technology. Subject to various conditions, substantially all of the current
stockholders of AppNet have the right to include all or any portion of their
AppNet common stock on registration statements that we file on our own behalf,
other than in connection with this offering. These rights cover substantially
all of the shares of our common stock and will also cover any additional shares
obtained by the parties to the registration agreement.
In addition, our acquisition agreement with Arbor gave the former
stockholders of Arbor rights to have their shares of our common stock included
in any registration statement we file, other than in connection with this
offering.
PREFERRED STOCK
We intend to amend AppNet's certificate of incorporation, a copy of which is
filed as an exhibit to the registration statement of which this prospectus is a
part, to authorize AppNet's Board of Directors to issue preferred stock in one
or more series and to establish the number of shares to be included in each such
series and to fix the designations, powers, preferences and rights of the shares
of each such series and any qualifications, limitations or restrictions of each
such series. Because the Board of Directors will have the power to establish the
preferences and rights of the shares of any such series of preferred stock, it
may afford the holders of any such series of preferred stock preferences, powers
and rights, including voting rights, senior to the rights of the holders of
common stock. The issuance of preferred stock may have the effect of delaying,
deferring or preventing a change in control of AppNet.
The Board of Directors has established a class of preferred stock designated
Class A Preferred Stock consisting of 96,621 authorized shares, par value $0.01
per share, and a class of preferred stock designated Class B Preferred Stock
consisting of 20,000 authorized shares, par value $0.01 per share. The Class B
Preferred Stock ranks PARI PASSU with the Class A Preferred Stock.
We intend to use the proceeds from this offering to redeem at least 1,641
shares of Class A Preferred Stock and 418 shares of Class B Preferred Stock. All
remaining outstanding shares of Class A and Class B Preferred Stock that are not
redeemed with proceeds from this offering will be exchanged for shares of our
common stock. These shares will be canceled and will not be reissued, sold or
transferred. The preferred stock has the dividend, redemption, liquidation and
other rights described below. The exchange ratio shall be determined by dividing
the liquidation value of each share of preferred stock plus accrued and unpaid
dividends by the initial public offering price per share of common stock.
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VOTING RIGHTS. Neither Class A nor Class B Preferred Stock is entitled to
any voting rights, other than those granted by the Delaware General Corporation
Law, provided that each holder of Class A and Class B Preferred Stock is
entitled to notice of all stockholders meetings at the same time and in the same
manner to which all stockholders entitled to vote at such meetings are entitled.
DIVIDEND RIGHTS. When and as declared by AppNet's Board of Directors and to
the extent permitted under the Delaware General Corporation Law, holders of
Class A and Class B Preferred Stock are entitled to preferential cash dividends.
Dividends on each share of Class A and Class B Preferred Stock accrue on a daily
basis at the rate of 6% per annum on the liquidation value per share of $1,000,
plus all accumulated and unpaid dividends from and including the date of
issuance of such share to and including the first to occur of:
- the date on which the liquidation value of such share, plus all accrued
and unpaid dividends, is paid to the holder in connection with the
liquidation of AppNet or the redemption of such share by AppNet; and
- the date on which such share is otherwise acquired by AppNet.
Dividends on the Class A and Class B Preferred Stock accrue whether or not
they have been declared and whether or not there are profits, surplus or other
funds legally available for the payment of dividends. To the extent dividends
are not paid on March 31, June 30, September 30, and December 31 of each year
for Class A Preferred Stock, and on September 30 of each year for Class B
Preferred Stock, the accrued dividends will accumulate on such dates. All
accrued and unpaid dividends will be fully paid or declared with funds
irrevocably set apart for payment before we are entitled to pay any dividends,
distributions, redemptions or other payments with respect to any stock of AppNet
other than Class A and Class B Preferred Stock.
DISTRIBUTION OF PARTIAL DIVIDEND PAYMENTS. Unless otherwise provided, if at
any time AppNet pays less than the total amount of accrued dividends with
respect to the Class A or Class B Preferred Stock, the payment will be
distributed pro rata among the holders of the class of preferred stock, based
upon the aggregate accrued but unpaid dividends on the shares held by each such
holder.
LIQUIDATION. Upon any liquidation, dissolution or winding up of AppNet,
voluntary or involuntary, each holder of Class A or Class B Preferred Stock will
be entitled to an amount in cash equal to the aggregate liquidation value of all
shares held by the holder, plus all accrued and unpaid dividends thereon, before
any distribution or payment is made upon any securities that are junior to the
Class A and Class B Preferred Stock. The holders of Class A and Class B
Preferred Stock will not be entitled to receive any further payment. Prior to
the time of any liquidation, dissolution or winding up of AppNet, to the extent
permitted by applicable law, AppNet will declare for payment all accrued and
unpaid dividends with respect to the Class A and Class B Preferred Stock.
PRIORITY OF PREFERRED STOCK. So long as any Class A or Class B Preferred
Stock remains outstanding, without the prior written consent of the holders of a
majority of the outstanding shares of such preferred stock, AppNet will not be
entitled, nor will it permit any subsidiary, to redeem, purchase or otherwise
acquire directly or indirectly any securities that are junior to the Class A and
Class B Preferred Stock, nor is AppNet entitled directly or indirectly to pay or
declare any dividend or make any distribution upon any securities that are
junior to the Class A and Class B Preferred Stock. However, even if any such
shares of Class A or Class B Preferred Stock are outstanding, AppNet is entitled
to purchase shares of its common stock under an arrangement approved by the
Board of Directors from present or former employees of AppNet or its
subsidiaries.
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REDEMPTION RIGHTS APPLICABLE ONLY TO CLASS A PREFERRED STOCK
OPTIONAL REDEMPTIONS BY APPNET. At any time and from time to time,
AppNet may redeem all or any portion of any outstanding shares of Class A
Preferred Stock. Upon any such redemption, AppNet will pay a price per share
equal to the liquidation value thereof, plus all accrued and unpaid
dividends thereon. No redemption may be made for less than 1,000 shares or
such lesser number of shares then outstanding.
REDEMPTIONS AFTER PUBLIC OFFERINGS. At the written request of the
holders of a majority of the shares of Class A Preferred Stock then
outstanding, AppNet will apply the net cash proceeds from any public
offering of AppNet common stock under an effective registration statement
under the Securities Act to redeem shares of Class A Preferred Stock at the
liquidation value of $1,000 per share, plus all accrued and unpaid dividends
thereon. Such redemption must take place not more than five days after
AppNet receives such public offering proceeds.
REDEMPTION PAYMENTS. On any date on which Class A Preferred Stock is to
be redeemed, if AppNet's funds that are legally available for redemption are
insufficient to redeem the total number of shares to be redeemed, those
funds which are legally available will be used to redeem the maximum
possible number of shares pro rata among the holders of the shares to be
redeemed. At any time thereafter when additional funds are legally available
for redemption of shares by AppNet, such funds will be immediately used to
redeem the balance of the shares which AppNet is obligated to redeem.
SPECIAL REDEMPTIONS. If either (a) a change in ownership, which is
defined as the transfer of more than 50% of the outstanding common stock to
a person or group of persons other than any stockholder of AppNet as of June
29, 1998, has occurred or AppNet obtains knowledge that a change in
ownership is proposed or (b) a fundamental change, which is defined as the
transfer of more than 50% of AppNet's assets or mergers or consolidations
involving AppNet where Appnet is not the surviving party, is proposed to
occur, then the holder or holders of a majority of the shares of Class A
Preferred Stock then outstanding may require AppNet to redeem all or any
portion of the Class A Preferred Stock owned by such holders at a price per
share equal to the liquidation value thereof, plus all accrued and unpaid
dividends thereon, by giving written notice of such election. AppNet must
give all holders of Class A Preferred Stock prompt notice of any proposed
change in ownership or fundamental change and notice of any election to
redeem shares because of such changes.
REDEMPTION AND CONVERSION RIGHTS APPLICABLE ONLY TO CLASS B PREFERRED STOCK.
AppNet has the contractual ability to redeem or convert all outstanding
shares of Class B Preferred Stock upon an initial public offering.
Contractual provisions provide that, upon a sale of AppNet, all outstanding
shares of Class B Preferred Stock will be redeemable at a price per share
equal to the liquidation value or the holders will receive the same
consideration per share as the holders of the Class A Preferred Stock.
ANTI-TAKEOVER EFFECTS OF APPNET'S CERTIFICATE OF INCORPORATION AND BYLAWS AND
PROVISIONS OF DELAWARE LAW
AppNet's certificate of incorporation and bylaws and Section 203 of the
Delaware General Corporation Law contain provisions that may make the
acquisition of control of AppNet by means of a tender offer, open market
purchase, proxy fight or otherwise, more difficult.
BUSINESS COMBINATIONS. We intend to amend our certificate of incorporation
to provide that we will be subject to Section 203 of the Delaware General
Corporation Law. In general, subject to specific exceptions, Section 203 of the
Delaware General Corporation Law prohibits a publicly held Delaware
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corporation from engaging in a "business combination" with an "interested
stockholder" for a period of three years after the date of the transaction in
which the person became an interested stockholder, unless:
- upon consummation of the transaction, the interested stockholder owned 85%
of the voting stock of the corporation outstanding at the time the
transaction commenced, excluding for purposes of determining the number of
shares outstanding those shares owned by persons who are directors and
also officers and employee stock plans in which employee participants do
not have the right to determine confidentially whether shares held subject
to the plan will be tendered in a tender or exchange offer;
- the business combination is, or the transaction in which such person
became an interested stockholder was, approved by the board of directors
of the corporation before the stockholder became an interested
stockholder; or
- the business combination is approved by the board of directors of the
corporation and authorized at an annual or special meeting of the
corporation's stockholders by the affirmative vote of at least 66 2/3% of
the outstanding voting stock which is not owned by the interested
stockholder.
For purposes of Section 203, a "business combination" includes mergers,
asset sales and other transactions resulting in a financial benefit to the
interested stockholder; an "interested stockholder" is a person who, together
with affiliates and associates, owns, or, in the case of affiliates and
associates of the issuer, did own within the last three years, 15% or more of
the corporation's voting stock. The restrictions set forth in Section 203 will
not apply to a business combination with an interested stockholder who became an
interested stockholder at a time when the restrictions of Section 203 did not
apply to AppNet.
STOCKHOLDER NOMINATIONS AND PROPOSALS. We intend to amend our bylaws to
provide that stockholders must follow an advance notification procedure for
stockholder nominations of candidates for the Board of Directors and for other
stockholder business to be conducted at an annual meeting. For business a
stockholder wishes to bring before an annual meeting of stockholders, the
stockholder must deliver notice to AppNet not less than 60 days nor more than 90
days prior to the date of the anniversary of the previous year's annual meeting.
For nominations of persons for election to our Board of Directors at an annual
meeting, a stockholder must deliver notice to AppNet not less than 90 days prior
to the date of the anniversary of the previous year's annual meeting unless the
annual meeting is delayed, in which case the stockholder must deliver the notice
not less than 90 days prior to such meeting nor more than 10 days after we
mailed notice of such meeting or public disclosure of the annual meeting was
made. These advance notification provisions in our bylaws could preclude the
conduct of business at a meeting or a nomination for the election of directors
if the proper procedures are not followed. Such provisions could operate to
delay, defer or prevent a change in control of AppNet.
AUTHORIZED AND UNISSUED PREFERRED STOCK. Upon consummation of this
offering, there will be 4,883,379 authorized and unissued shares of preferred
stock. We intend to amend our certificate of incorporation to authorize the
Board of Directors to issue one or more series of preferred stock and to
establish the designations, powers, preferences and rights of each series of
preferred stock. The existence of authorized and unissued preferred stock may
enable the Board of Directors to render more difficult or to discourage an
attempt to obtain control of AppNet by means of a merger, tender offer, proxy
contest or otherwise. For example, if in the due exercise of its fiduciary
obligations, the Board of Directors were to determine that a takeover proposal
is not in AppNet's best interests, the Board of Directors could cause shares of
preferred stock to be issued without stockholder approval in one or more private
offerings or other transactions that might dilute the voting or other rights of
the proposed acquiror or insurgent stockholder or stockholder group or create a
substantial voting block in
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institutional or other hands that might undertake to support the position of the
incumbent Board of Directors.
ABSENCE OF CUMULATIVE VOTING. Our certificate of incorporation does not
include a provision for cumulative voting in the election of directors. Under
cumulative voting, a minority stockholder holding a sufficient number of shares
may be able to ensure the election of one or more directors. The absence of
cumulative voting may have the effect of limiting the ability of minority
stockholders to effect changes in our Board of Directors and, as a result, may
operate to delay, defer or prevent a change in control of AppNet.
REMOVAL OF DIRECTORS; VACANCIES. We intend to amend our certificate of
incorporation to state that, subject to the rights of the holders of our
preferred stock, directors may be removed at any time by two-thirds stockholder
vote. In addition, a majority of the directors then in office will be able to
fill board vacancies and newly created directorships resulting from any increase
in the size of our Board of Directors. This is true even if those directors do
not constitute a quorum or if only one director is left in office. These
provisions could prevent stockholders, including parties who want to take over
or acquire AppNet, from removing incumbent directors and filling the resulting
vacancies with their own nominee.
SPECIAL MEETINGS OF STOCKHOLDERS. We intend to amend our bylaws to provide
that special meetings of AppNet's stockholders may be called only by the Board
of Directors of AppNet. This provision may render it more difficult for
stockholders to take action opposed by the Board of Directors.
INDEMNIFICATION AND LIMITATION OF LIABILITY
AppNet's bylaws provide that AppNet will indemnify each of its directors,
officers, employees and agents to the fullest extent permitted by law. The
certificate of incorporation limits the liability of AppNet's directors and
stockholders to AppNet for monetary damages. The certificate of incorporation
also provides that AppNet may purchase insurance on behalf of its directors,
officers, employees and agents against liabilities they may incur in such
capacity, whether or not AppNet would have the power to indemnify against such
liabilities.
TRANSFER AGENT AND REGISTRAR
The transfer agent and registrar for our common stock is BankBoston, N.A.
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SHARES ELIGIBLE FOR FUTURE SALE
Upon consummation of this offering, 30,441,434 shares of our common stock
will be outstanding, 31,341,434 shares if the over-allotment option is exercised
in full. Of these shares, the 6,900,000 shares of common stock sold in this
offering will be freely tradable without restriction or further registration
under the Act, unless held by an "affiliate" of AppNet. An affiliate is defined
under Rule 144 as a person that controls, is controlled by or is under common
control with AppNet. All of the shares of our common stock outstanding prior to
the offering are "restricted securities," as such term is defined under Rule
144. These shares are restricted securities because they were issued in private
transactions not involving a public offering and may not be sold in the absence
of registration other than in accordance with Rule 144 or Rule 701 promulgated
under the Securities Act or another exemption from registration. This prospectus
may not be used in connection with any resale of shares of our common stock
acquired in the offering by affiliates of AppNet.
Each of AppNet, our directors, our officers, most of the former owners of
all of the businesses we acquired, GTCR and Smart Technology have agreed not to
offer or transfer, or file with the Securities and Exchange Commission a
registration statement under the Securities Act relating to, any shares of our
common stock or securities convertible into or exchangeable or exercisable for
any shares of our common stock without the prior written consent of Credit
Suisse First Boston Corporation for a period of 180 days after the date of this
prospectus. The restrictions set forth in the previous sentence do not apply to
grants of employee stock options under the terms of AppNet's stock incentive
plans in effect on the date of this prospectus, issuances of securities as a
result of the exercise of such options outstanding on the date of this
prospectus and issuances of securities as a result of the conversion of any
convertible instruments outstanding on the date of this prospectus.
In general, under Rule 144 as currently in effect, if a minimum of one year
has elapsed since the later of the date of acquisition of the restricted
securities from the issuer or from an affiliate of the issuer, a person, or
persons whose shares of common stock are aggregated, including persons who may
be deemed affiliates of AppNet, would be entitled to sell within any three-month
period a number of shares of AppNet common stock that does not exceed the
greater of
(1) one percent of the then-outstanding shares of AppNet common stock, which
equals approximately 304,414 shares immediately after this offering, or
(2) the average weekly trading volume during the four calendar weeks
preceding the date on which notice of the sale is filed with the
Securities and Exchange Commission.
Sales under Rule 144 are also subject to restrictions as to the manner of
sale, notice requirements and the availability of current public information
about AppNet. In addition, under Rule 144(k), if a period of at least two years
has elapsed since the later of the date restricted securities were acquired from
AppNet or the date they were acquired from an affiliate of AppNet, a stockholder
who is not an affiliate of AppNet at the time of sale and who has not been an
affiliate of AppNet for at least three months prior to the sale would be
entitled to sell shares of our common stock in the public market immediately
without compliance with the requirements under Rule 144 set forth above. If
shares are transferred during this period, the holding period requirement may be
satisfied by including the time period during which such shares were previously
held. The foregoing summary of Rule 144 is not intended to be a complete
description thereof.
In addition, any of our employees, directors, officers or consultants who
acquired shares under a written compensatory plan or contract may be entitled to
rely on the resale provisions of Rule 701 of the Securities Act without having
to comply with the public information, holding period, volume limitation or
notice provisions of Rule 144, and affiliates of AppNet may be entitled to sell
their Rule 701 shares without having to comply with the holding period
restrictions of Rule 144, in each
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case, commencing 90 days after the date of this prospectus, although the
contractual limitations will continue through the 180th day following the date
of this prospectus.
In addition to the restrictions on transfer described above, our executives
with whom we have entered into senior management agreements are subject to
restrictions on the transfer of shares of our common stock owned by them as of
the date they entered into the senior management agreement.
Immediately following the offering, none of the 20,068,098 "restricted
securities" will be available for immediate sale in the public market under Rule
144. Beginning 90 days after the date of this prospectus, and without
consideration of the contractual restrictions described above, 1,741,831 shares
either issued under our stock incentive plans or compensation contracts or
acquired upon the exercise of options issued under our stock incentive plans
will be outstanding and eligible for sale in reliance upon Rule 701. Additional
shares may be available if options are exercised in the 90-day period following
the date of this prospectus. Shares of our common stock issued in reliance on
Rule 701 may be resold by holders who are not affiliates of AppNet under Rule
144 without compliance with the holding period, amount and notice limitations
and by holders who are affiliates of AppNet under Rule 144 without compliance
with the holding period limitation.
Following this offering, we intend to file a registration statement on Form
S-8 under the Securities Act to register 5,383,914 shares of our common stock
reserved for issuance or previously issued under our employee benefit plans and
compensation contracts. Shares of our common stock issued under our stock
incentive plans generally will be available for sale in the open market by
holders who are not affiliates of AppNet and, subject to the volume and other
applicable limitations of Rule 144, by holders who are affiliates of AppNet,
unless such shares are subject to vesting restrictions or the contractual
restrictions described above.
We are a party to a registration agreement, dated as of June 29, 1998, which
gives the holders of a majority of the common stock issued to GTCR and Smart
Technology under the purchase agreement with GTCR and Smart Technology a
conditional right to demand registration of all or any portion of this common
stock. Substantially all of our other current stockholders have the right to
include all or any portion of their AppNet common stock on registration
statements we file to register the common stock issued to GTCR and Smart
Technology under the purchase agreement with GTCR and Smart Technology. Subject
to specific conditions, substantially all of our current stockholders have the
right to include all or any portion of their AppNet common stock on registration
statements we file on our own behalf, other than in an initial public offering.
These rights cover substantially all of the shares of our common stock and will
also cover any shares obtained by parties to the registration agreement.
Registration of these shares of our common stock would permit the sale of these
shares without regard to the restrictions of Rule 144. In addition, our
acquisition agreement with Arbor gave the former stockholders of Arbor rights to
have their shares of our common stock included in any registration statement,
other than in connection with this offering.
Prior to this offering, there has been no public market for our common
stock. No information is currently available, and we cannot predict the timing
or amount of future sales of shares, or the effect, if any, that future sales of
shares, or the availability of shares for future sale, will have on the market
price of our common stock prevailing from time to time. Sales of substantial
amounts of our common stock, including shares issuable upon the exercise of
stock options, in the public market after the lapse of the restrictions
described above, or the perception that such sales may occur, could materially
and adversely affect the prevailing market price for our common stock and our
ability to raise equity capital in the future.
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U.S. FEDERAL TAX CONSIDERATIONS FOR NON-U.S. HOLDERS
The following is a general discussion of the principal United States federal
income and estate tax consequences of the ownership and disposition of common
stock by a non-U.S. holder. As used in this prospectus, a non-U.S. holder is
defined as a holder that for United States federal income tax purposes is an
individual or entity other than:
- a citizen or individual resident of the United States;
- a corporation or partnership created or organized in or under the laws of
the United States or of any political subdivision thereof, other than a
partnership treated as foreign under U.S. Treasury regulations;
- an estate the income of which is subject to U.S. federal income taxation
regardless of its source; or
- a trust if a U.S. court is able to exercise primary supervision over the
administration of the trust and one or more U.S. persons have the
authority to control all substantial decisions of the trust.
An individual may, subject to a number of exceptions, be deemed to be a
resident alien, as opposed to a nonresident alien, by virtue of being present in
the United States for at least 31 days in the calendar year and for an aggregate
of at least 183 days during a three-year period ending in the current calendar
year, counting for such purposes all of the days present in the current year,
one-third of the days present in the immediately preceding year and one-sixth of
the days present in the second preceding year. Resident aliens are subject to
U.S. federal tax as if they were U.S. citizens.
This discussion does not address all aspects of United States federal income
and estate taxes that may be relevant to non-U.S. holders in light of their
personal circumstances, including the fact that in the case of a non-U.S. holder
that is a partnership, the U.S. tax consequences of holding and disposing of
shares of common stock may be affected by determinations made at the partner
level, or that may be relevant to non-U.S. holders which may be subject to
special treatment under United States federal income tax laws such as insurance
companies, tax-exempt organizations, financial institutions, dealers in
securities and holders of securities held as part of a "straddle," "hedge" or
"conversion transaction." This discussion also does not address U.S. state or
local or foreign tax consequences. Furthermore, this discussion is based on
provisions of the Internal Revenue Code of 1986, as amended, existing and
proposed regulations promulgated thereunder and administrative and judicial
interpretations thereof, all as of the date hereof, and all of which are subject
to change, possibly with retroactive effect. The following summary is included
herein for general information. ACCORDINGLY, PROSPECTIVE INVESTORS ARE URGED TO
CONSULT THEIR TAX ADVISERS REGARDING THE UNITED STATES FEDERAL, STATE, LOCAL AND
NON-U.S. INCOME AND OTHER TAX CONSEQUENCES OF ACQUIRING, HOLDING AND DISPOSING
OF SHARES OF COMMON STOCK.
DIVIDENDS
We do not anticipate paying cash dividends on our common stock in the
foreseeable future. In the event, however, that dividends are paid on shares of
our common stock, dividends paid to a non-U.S. holder of common stock generally
will be subject to withholding of United States federal income tax at a 30%
rate, or such lower rate as may be provided by an income tax treaty between the
United States and a foreign country if the non-U.S. holder is treated as a
resident of such foreign country within the meaning of the applicable treaty.
Non-U.S. holders should consult their tax advisors regarding their entitlement
to benefits under a relevant income tax treaty.
Dividends that are effectively connected with a non-U.S. holder's conduct of
a trade or business in the United States or, if an income tax treaty applies,
attributable to a permanent establishment in the United States, are generally
subject to U.S. federal income tax on a net income basis at regular graduated
rates, but are not generally subject to the 30% withholding tax if the non-U.S.
holder files
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the appropriate U.S. Internal Revenue Service form with the payor, which form
under U.S. Treasury regulations generally requires the non-U.S. holder to
provide a U.S. taxpayer identification number. Any such U.S. trade or business
income received by a non-U.S. holder that is a corporation may also be subject
to an additional "branch profits tax" at a 30% rate or such lower rate as may be
specified by an applicable income tax treaty.
Under currently applicable U.S. Treasury regulations, dividends paid to an
address in a foreign country are presumed, absent actual knowledge to the
contrary, to be paid to a resident of such country for purposes of the
withholding discussed above and for purposes of determining the applicability of
a tax treaty rate. Under U.S. Treasury regulations generally effective for
payments made after December 31, 2000, however, a non-U.S. holder of our common
stock who wishes to claim the benefit of an applicable treaty rate generally
will be required to satisfy applicable certification and other requirements. In
addition, under these regulations, in the case of our common stock held by a
foreign partnership, the certification requirement will generally be applied to
the partners of the partnership and the partnership will be required to provide
specified information, including a United States taxpayer identification number.
The regulations generally effective for payments made after December 31, 2000,
also provide look-through rules for tiered partnerships. Further, the Internal
Revenue Service intends to issue regulations under which a foreign trustee or
foreign executor of a U.S. or foreign trust or estate, depending on the
circumstances, will be required to furnish the appropriate withholding
certificate on behalf of the beneficiaries, grantor trust or estate, as the case
may be.
A non-U.S. holder of our common stock that is eligible for a reduced rate of
U.S. withholding tax under an income tax treaty may obtain a refund of any
excess amounts withheld by filing an appropriate claim for a refund with the
Internal Revenue Service.
The U.S. Treasury regulations generally effective for payments made after
December 31, 2000 also provide special rules for dividend payments made to
foreign intermediaries, U.S. or foreign wholly owned entities that are
disregarded for U.S. federal income tax purposes and entities that are treated
as fiscally transparent in the United States, the applicable income tax treaty
jurisdiction, or both. In addition, recently enacted legislation, effective
August 5, 1997, denies income tax treaty benefits to foreigners receiving income
derived through a partnership, or otherwise fiscally transparent entity, in
certain circumstances. Prospective investors should consult with their own tax
advisers concerning the effect, if any, of these new Treasury regulations and
this recent legislation on an investment in our common stock.
GAIN ON DISPOSITION OF COMMON STOCK
A non-U.S. holder generally will not be subject to U.S. federal income tax
in respect of gain recognized on a disposition of our common stock unless:
- the gain is U.S. trade or business income, in which case, the branch
profits tax described above may also apply to a corporate non-U.S. holder;
- the non-U.S. holder is an individual who holds our common stock as a
capital asset within the meaning of Section 1221 of the Internal Revenue
Code, is present in the United States for 183 or more days in the taxable
year of the disposition and meets other requirements;
- the non-U.S. holder is subject to tax under the provisions of the U.S. tax
law applicable to certain United States expatriates; or
- AppNet is or has been a "U.S. real property holding corporation" for
federal income tax purposes at any time during the shorter of the
five-year period preceding such disposition or the period that the
non-U.S. holder held our common stock.
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Generally, a corporation is a "U.S. real property holding corporation" if the
fair market value of its "U.S. real property interests" equals or exceeds 50% of
the sum of the fair market value of its worldwide real property interests plus
its other assets used or held for use in a trade or business. We believe that we
have not been, are not currently, and do not anticipate becoming, a "U.S. real
property holding corporation" for U.S. federal income tax purposes. The tax with
respect to stock in a "U.S. real property holding corporation" does not apply to
a non-U.S. holder whose holdings, direct and indirect, at all times during the
applicable period, constituted 5% or less of our common stock, provided that our
common stock was regularly traded on an established securities market. If we
were, or were to become, a U.S. real property holding corporation, we believe
that our common stock would be treated as "regularly traded."
If a non-U.S. holder who is an individual is subject to tax on gain which is
U.S. trade or business income, such individual generally will be taxed on the
net gain derived from a sale of common stock under regular graduated United
States federal income tax rates. If an individual non-U.S. holder is subject to
tax because such individual holds our common stock as a capital asset, is
present in the United States for 183 or more days in the taxable year of the
disposition and meets other requirements, such individual generally will be
subject to a flat 30% tax on the gain derived from a sale, which may be offset
by United States capital losses, notwithstanding the fact that such individual
is not considered a resident alien of the United States. Thus, individual
non-U.S. holders who have spent (or expect to spend) more than a DE MINIMIS
period of time in the United States in the taxable year in which they
contemplate a sale of common stock are urged to consult their tax advisers prior
to the sale concerning the U.S. tax consequences of such sale.
If a non-U.S. holder that is a foreign corporation is subject to tax on gain
which is U.S. trade or business income, it generally will be taxed on its net
gain under regular graduated United States federal income tax rates and, in
addition, will be subject to the branch profits tax equal to 30% of its
"effectively connected earnings and profits," within the meaning of the Internal
Revenue Code for the taxable year, as adjusted for specific items, unless it
qualifies for a lower rate under an applicable tax treaty.
FEDERAL ESTATE TAX
Common stock owned or treated as owned by an individual who is neither a
United States citizen nor a United States resident, as defined for United States
federal estate tax purposes, at the time of death will be included in the
individual's gross estate for United States federal estate tax purposes, unless
an applicable estate tax or other treaty provides otherwise and, therefore, may
be subject to United States federal estate tax.
INFORMATION REPORTING AND BACKUP WITHHOLDING TAX
Under U.S. Treasury regulations, we must report annually to the Internal
Revenue Service and to each non-U.S. holder the amount of dividends paid to such
holder and the tax withheld with respect to such dividends. Copies of the
information returns reporting such dividends and withholding may also be made
available to the tax authorities in the country in which the non-U.S. holder is
a resident under the provisions of an applicable income tax treaty or agreement.
Currently, United States backup withholding, which generally is a
withholding tax imposed at the rate of 31% on payments to persons that fail to
furnish specified information under the United States information reporting
requirements, generally will not apply:
- to dividends paid to non-U.S. holders that are subject to the 30%
withholding discussed above, or that are not so subject because a tax
treaty applies that reduces or eliminates such 30% withholding; or
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- before January 1, 2001, to dividends paid to a non-U.S. holder at an
address outside of the United States unless the payor has actual knowledge
that the payee is a U.S. holder.
Backup withholding and information reporting generally will apply to dividends
paid to addresses inside the United States on shares of our common stock to
beneficial owners that are not "exempt recipients" and that fail to provide
identifying information in the manner required.
The payment of the proceeds of the disposition of our common stock by a
holder to or through the U.S. office of a broker or through a non-U.S. branch of
a U.S. broker generally will be subject to information reporting and backup
withholding at a rate of 31% unless the holder either certifies its status as a
non-U.S. holder under penalties of perjury or otherwise establishes an
exemption. The payment of the proceeds of the disposition by a non-U.S. holder
of common stock to or through a non-U.S. office of a non-U.S. broker will not be
subject to backup withholding or information reporting unless the non-U.S.
broker has particular types of U.S. relationships. In the case of the payment of
proceeds from the disposition of our common stock effected by a foreign office
of a broker that is a U.S. person or a U.S. related person, existing regulations
require information reporting on the payment unless the broker receives a
statement from the owner, signed under penalty of perjury, certifying its
non-U.S. status or the broker has documentary evidence in its files as to the
non-U.S. holder's foreign status and the broker has no actual knowledge to the
contrary. For this purpose, a U.S. related person is defined as:
- a "controlled foreign corporation" for U.S. federal income tax purposes;
or
- a foreign person 50% or more of whose gross income from all sources for
the three-year period ending with the close of its taxable year preceding
the payment, or for such part of the period that the broker has been in
existence, is derived from activities that are effectively connected with
the conduct of a U.S. trade or business.
The U.S. Treasury regulations generally effective for payments made after
December 31, 2000 alter the foregoing rules. Among other things, such
regulations provide presumptions under which a non-U.S. holder is subject to
backup withholding at the rate of 31% and information reporting unless we
receive certification from the holder of non-U.S. status. Depending on the
circumstances, this certification will need to be provided:
- directly by the non-U.S. holder;
- in the case of a non-U.S. holder that is treated as a partnership or other
fiscally transparent entity, by the partners, stockholders or other
beneficiaries of such entity; or
- by qualified financial institutions or other qualified entities on behalf
of the non-U.S. holder.
Any amounts withheld under the backup withholding rules from a payment to a
non-U.S. holder will be refunded, or credited against the holder's U.S. federal
income tax liability, if any, provided that the required information is
furnished to the Internal Revenue Service.
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UNDERWRITING
Under an underwriting agreement dated , 1999, we have agreed to
sell to the underwriters named below, for whom Credit Suisse First Boston
Corporation, Hambrecht & Quist LLC, BT Alex. Brown Incorporated, The
Robinson-Humphrey Company, LLC and Charles Schwab & Co., Inc. are acting as
representatives, the following respective numbers of shares of our common stock:
<TABLE>
<CAPTION>
NUMBER
UNDERWRITERS OF SHARES
----------
<S> <C>
Credit Suisse First Boston Corporation...........................................
Hambrecht & Quist LLC............................................................
Deutsche Bank Securities Inc.....................................................
The Robinson-Humphrey Company, LLC...............................................
Charles Schwab & Co., Inc........................................................
----------
Total........................................................................ 6,000,000
----------
----------
</TABLE>
The underwriting agreement provides that the underwriters are obligated to
purchase all of the shares of our common stock offered in this offering if any
are purchased, other than those shares covered by the over-allotment option
described below. The underwriting agreement also provides that if an underwriter
defaults, the purchase commitments of non-defaulting underwriters may be
increased or this offering of our common stock may be terminated.
We have granted to the underwriters a 30-day option to purchase on a pro
rata basis up to 900,000 additional shares of our common stock at the initial
public offering price less the underwriting discounts and commissions. This
option may be exercised only to cover over-allotments of our common stock.
The underwriters propose to offer our common stock initially at the public
offering price on the cover page of this prospectus and to the selling group
members at that price less a selling concession of $ per share. The
underwriters and the selling group members may allow a discount of $ per share
on sales to other broker/dealers. After the initial public offering, the public
offering price and selling concession and discount to dealers may be changed by
the representatives. As used in this section,
- Underwriters are securities broker/dealers that are parties to the
underwriting agreement and will have a contractual commitment to purchase
shares of our common stock from us, and the representatives are the five
firms acting on behalf of the underwriters.
- Selling group members are securities broker/dealers to whom the
underwriters may sell shares of common stock at the public offering price
less the selling concession above, but who do not have a contractual
commitment to purchase shares from us.
- Broker/dealers are firms registered under applicable securities laws to
sell securities to the public.
- The syndicate consists of the underwriters and the selling group members.
The following table summarizes the compensation and estimated expenses that
we will pay. The compensation we will pay to the underwriters will consist
solely of the underwriting discount, which is equal to the public offering price
per share of common stock less the amount the underwriters pay to us per share
of common stock. The underwriters have not received and will not receive from us
any other item of compensation or expense in connection with this offering
considered by the National Association of Securities Dealers, Inc. to be
underwriting compensation under its rules of fair practice. The underwriting fee
will be determined based on our negotiations with the underwriters at the time
the initial public offering price for our common stock is determined. We do not
expect the underwriting
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discount per share of common stock to exceed 7% of the initial public offering
price per share of common stock.
<TABLE>
<CAPTION>
PER SHARE TOTAL
-------------------------- ---------------------------
<S> <C> <C> <C> <C>
WITHOUT WITH OVER- WITHOUT WITH OVER-
OVER-ALLOTMENT ALLOTMENT OVER-ALLOTMENT ALLOTMENT
------------- ----------- ------------- ------------
Underwriting discounts and commissions paid by us in
cash................................................... $ $ $ $
Expenses payable by us................................... $0.50 $0.40 $ 3,000,000 $ 3,000,000
</TABLE>
The principal components of the offering expenses payable by us will include
the fees and expenses of our accountants and attorneys, the fees of our
registrar and transfer agent, the cost of printing this prospectus, The Nasdaq
Stock Market listing fees and filing fees paid to the Securities and Exchange
Commission and the National Association of Securities Dealers, Inc.
The underwriters have informed us that they do not expect sales to accounts
over which the underwriters exercise discretionary authority to exceed 5% of the
shares of our common stock being offered.
We, our officers, our directors, most of the former owners of all of the
businesses we acquired, GTCR and Smart Technology have agreed not to offer or
transfer, or file with the Securities and Exchange Commission a registration
statement under the Securities Act relating to, any additional shares of our
common stock or securities convertible into or exchangeable or exercisable for
any shares of our common stock without the prior written consent of Credit
Suisse First Boston Corporation for a period of 180 days after the date of this
prospectus, except in our case for grants of employee stock options under our
stock incentive plans in effect on the date hereof and issuances of securities
as a result of the exercise of any options outstanding on the date hereof and
issuances of securities as a result of the conversion of any convertible
instruments outstanding on the date hereof.
At our request, the underwriters intend to sell, at the initial public
offering price, approximately 5% of the shares of our common stock offered in
this offering to those of our employees, clients and vendors who have expressed
an interest in purchasing our common stock in this offering. The number of
shares of common stock available for sale to the general public in this offering
will be reduced to the extent these persons in fact purchase these shares. Any
of these shares not so purchased will be offered by the underwriters to the
general public on the same terms as the other shares.
We have agreed to indemnify the underwriters against liabilities under the
Securities Act, or to contribute to payments which the underwriters may be
required to make in that respect.
The shares of our common stock have been approved for quotation on The
Nasdaq Stock Market's National Market under the symbol "APNT".
Prior to this offering, there has been no public market for our common
stock. The initial public offering price for our common stock will be determined
by negotiation between us and the representatives and does not reflect the
market price for our common stock following this offering. Among the principal
factors considered in determining the initial public offering price will be:
- the information in this prospectus and otherwise available to the
representatives;
- market conditions for initial public offerings;
- the history of and prospects for the industry in which we compete;
- our past and present operations;
- our past and present earnings and current financial position;
- the capability of our management;
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- our prospects for future earnings;
- the present state of our development and our current financial condition;
- the recent market prices of, and the demand for, publicly traded common
stock of generally comparable companies; and
- the general condition of the securities markets at the time of this
offering.
We can offer no assurances that the initial public offering price will
correspond to the price at which our common stock will trade in the public
market subsequent to this offering or that an active trading market for our
common stock will develop and continue after this offering.
The representatives may engage in over-allotment, stabilizing transactions,
syndicate covering transactions and penalty bids in accordance with Regulation M
under the Securities Exchange Act of 1934. Over-allotment involves syndicate
sales in excess of the size of this offering, which creates a syndicate short
position. Stabilizing transactions permit bids to purchase the shares of our
common stock so long as the stabilizing bids do not exceed a specified maximum.
Syndicate covering transactions involve purchases of our common stock in the
open market after the distribution has been completed in order to cover
syndicate short positions. Penalty bids permit the representatives to reclaim a
selling concession from a syndicate member when our common stock originally sold
by the syndicate member is purchased in a syndicate covering transaction to
cover syndicate short positions. The representatives track such purchases
through the initial public offering tracking system operated by the Depository
Trust Company. The representatives may, at their discretion, reclaim a selling
concession from any syndicate member that appears to have permitted its
customers to purchase shares in the initial public offering and then promptly
resell all or a portion of such shares to such syndicate member. However, the
underwriters do not have any agreements with any potential purchasers of shares
of common stock in this offering that would restrict their transfer of such
shares following this offering.
Such stabilizing transactions, syndicate covering transactions and penalty
bids may cause the price of our common stock to be higher than it would
otherwise be in the absence of such transactions. These transactions may be
effected on The Nasdaq Stock Market's National Market or otherwise and, if
commenced, may be discontinued at any time.
NOTICE TO CANADIAN RESIDENTS
RESALE RESTRICTIONS
The distribution of our common stock in Canada is being made only on a
private placement basis exempt from the requirement that we prepare and file a
prospectus with the securities regulatory authorities in each province where
trades of our common stock are effected. Accordingly, any resale of our common
stock in Canada must be made in accordance with applicable securities laws which
will vary depending on the relevant jurisdiction and which may require resales
to be made in accordance with available statutory exemptions or under a
discretionary exemption granted by the applicable Canadian securities regulatory
authority. Purchasers are advised to seek legal advice prior to any resale of
our common stock.
REPRESENTATIONS OF PURCHASERS
Each purchaser of our common stock in Canada who receives a purchase
confirmation will be deemed to represent to us and the dealer from whom such
purchase confirmation is received that:
- such purchaser is entitled under applicable provincial securities laws to
purchase our common stock without the benefit of a prospectus qualified
under such securities laws;
- where required by law, that such purchaser is purchasing as principal and
not as agent; and
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- such purchaser has reviewed the text above under "Resale restrictions."
RIGHTS OF ACTION (ONTARIO PURCHASERS)
The securities being offered are those of a foreign issuer and Ontario
purchasers will not receive the contractual right of action prescribed by
Ontario securities law. As a result, Ontario purchasers must rely on other
remedies that may be available, including common law rights of action for
damages or rescission or rights of action under the civil liability provisions
of the U.S. federal securities law.
ENFORCEMENT OF LEGAL RIGHTS
All of the issuer's directors and officers as well as the experts named
herein may be located outside of Canada and, as a result, it may not be possible
for Canadian purchasers to effect service of process within Canada upon the
issuer or such persons. All or a substantial portion of the assets of the issuer
and such persons may be located outside of Canada and, as a result, it may not
be possible to satisfy a judgment against the issuer or such persons in Canada
or to enforce a judgment obtained in Canadian courts against such issuer or
persons outside of Canada.
NOTICE TO BRITISH COLUMBIA RESIDENTS
A purchaser of our common stock to whom the SECURITIES ACT (British
Columbia) applies is advised that such purchaser is required to file with the
British Columbia Securities Commission a report within ten days of the sale of
common stock acquired by such purchaser through this offering. Such report must
be in the form attached to British Columbia Securities Commission Blanket Order
BOR #95/17, a copy of which may be obtained from us. Only one such report must
be filed in respect of shares of our common stock acquired on the same date and
under the same prospectus exemption.
TAXATION AND ELIGIBILITY FOR INVESTMENT
Canadian purchasers of our common stock should consult their own legal and
tax advisors with respect to the tax consequences of an investment in our common
stock in their circumstances and with respect to the eligibility of our common
stock for investment by the purchaser under relevant Canadian legislation.
84
<PAGE>
LEGAL MATTERS
The validity of the shares of our common stock offered by this prospectus
will be passed upon for AppNet by Fried, Frank, Harris, Shriver & Jacobson (a
partnership including professional corporations), Washington, DC. The
underwriters have been represented by Cravath, Swaine & Moore, New York, NY.
EXPERTS
The audited financial statements and schedules included in this prospectus
and elsewhere in the registration statement have been audited by Arthur Andersen
LLP, independent public accountants, as indicated in their reports with respect
thereto, and are included herein in reliance upon the authority of said firm as
experts in giving said reports.
The pro forma consolidated statement of operations for the year ended
December 31, 1998 included in this prospectus has been examined by Arthur
Andersen LLP, independent public accountants, as indicated in their report with
respect thereto, and is included herein in reliance upon the authority of said
firm as experts in giving such reports.
WHERE YOU CAN FIND ADDITIONAL INFORMATION
AppNet has filed with the Securities and Exchange Commission a registration
statement on Form S-1 under the Securities Act and the rules and regulations
promulgated under the Securities Act with respect to its common stock offered by
this prospectus. This prospectus, which constitutes a part of the registration
statement, does not contain all of the information set forth in the registration
statement and its exhibits and schedules. For further information with respect
to AppNet and its common stock, we refer you to the registration statement,
including its exhibits and the schedules filed as a part of it. You may read and
copy the registration statement at the Securities and Exchange Commission's
following locations:
<TABLE>
<S> <C> <C>
Public Reference Room Office New York Regional Office Chicago Regional Office
450 Fifth Street, N.W. Seven World Trade Center Citicorp Center
Washington, DC 20549 Suite 1300 500 West Madison Street
New York, NY 10048 Chicago, IL 60661-2511
</TABLE>
You may also obtain copies of the registration statement by mail from the
Public Reference Section of the Securities and Exchange Commission at 450 Fifth
Street, N.W., Judiciary Plaza, Washington, DC 20549 or by telephone at
1-800-SEC-0330. The registration statement is available to the public from
commercial document retrieval services and at the Securities and Exchange
Commission's World Wide Website located at http://www.sec.gov. Upon approval of
our common stock for quotation on The Nasdaq Stock Market's National Market, you
can read AppNet's filings with the Securities and Exchange Commission at the
office of Nasdaq Operations, 1734 K Street, N.W. Washington, DC 20006.
Statements in this prospectus as to the contents of any contract or other
document are not necessarily complete, and in each instance we refer you to the
full text of such contract or document filed as an exhibit to the registration
statement, each such statement being qualified in all respects by such
reference.
We intend to furnish our stockholders with annual reports containing
financial statements audited by an independent public accounting firm and make
available to our stockholders quarterly reports for the first three quarters of
each fiscal year containing interim unaudited financial information.
85
<PAGE>
INDEX TO FINANCIAL STATEMENTS
<TABLE>
<S> <C>
APPNET SYSTEMS, INC.
Report of independent public accountants......................................... F--4
Consolidated balance sheets as of December 31, 1998 and March 31, 1999
(unaudited).................................................................... F--5
Consolidated statements of operations for the year ended December 31, 1998 and
for the three month periods ended March 31, 1998 and March 31, 1999
(unaudited).................................................................... F--6
Consolidated statements of stockholders' equity for the year ended December 31,
1998 and for the three month period ended March 31, 1999 (unaudited)........... F--7
Consolidated statements of cash flows for the year ended December 31, 1998 and
for the three month periods ended March 31, 1998 and March 31, 1999
(unaudited).................................................................... F--8
Notes to consolidated financial statements....................................... F--9
SOFTWARE SERVICES CORPORATION
Report of independent public accountants......................................... F--28
Balance sheets as of December 31, 1996 and 1997, and August 24, 1998............. F--29
Statements of operations for the years ended December 31, 1996 and 1997, for the
three month period ended March 31, 1998 (unaudited), and for the period from
January 1, 1998 to August 24, 1998............................................. F--30
Statements of stockholders' equity for the years ended December 31, 1996 and
1997, and for the period from January 1, 1998 to August 24, 1998............... F--31
Statements of cash flows for the years ended December 31, 1996 and 1997, for the
three month period ended March 31, 1998 (unaudited), and for the period from
January 1, 1998 to August 24, 1998............................................. F--32
Notes to financial statements.................................................... F--33
ARBOR INTELLIGENT SYSTEMS, INC.
Report of independent public accountants......................................... F--44
Balance sheets as of December 31, 1997 and March 11, 1998........................ F--45
Statements of operations for the year ended December 31, 1997 and for the period
from
January 1, 1998 to March 11, 1998.............................................. F--46
Statements of stockholders' deficit for the year ended December 31, 1997 and for
the period from January 1, 1998 to March 11, 1998.............................. F--47
Statements of cash flows for the year ended December 31, 1997 and for the period
from
January 1, 1998 to March 11, 1998.............................................. F--48
Notes to financial statements.................................................... F--49
</TABLE>
F-1
<PAGE>
<TABLE>
<S> <C>
NEW MEDIA PUBLISHING, INC.
Report of independent public accountants......................................... F--55
Balance sheets as of December 31, 1996 and 1997, and October 1, 1998............. F--56
Statements of operations for the years ended December 31, 1996 and 1997, and for
the period from January 1, 1998 to October 1, 1998............................. F--57
Statements of stockholders' equity for the year ended December 31, 1996 and 1997,
and for the period from January 1, 1998 to October 1, 1998..................... F--58
Statements of cash flows for the years ended December 31, 1996 and 1997, and for
the period from January 1, 1998 to October 1, 1998............................. F--59
Notes to financial statements.................................................... F--60
CENTURY COMPUTING, INCORPORATED
Report of independent public accountants......................................... F--68
Balance sheets as of December 31, 1996 and 1997 and October 11, 1998............. F--69
Statements of operations for the years ended December 31, 1996 and 1997, and for
the period from January 1, 1998 to October 11, 1998............................ F--70
Statements of stockholders' equity for the years ended December 31, 1996 and
1997, and for the period from January 1, 1998 to October 11, 1998.............. F--71
Statements of cash flows for the years ended December 31, 1996 and 1997, and for
the period from January 1, 1998 to October 11, 1998............................ F--72
Notes to financial statements.................................................... F--73
RESEARCH & PLANNING, INC.
Report of independent public accountants......................................... F--81
Balance sheets as of December 31, 1996 and 1997, and October 19, 1998............ F--82
Statements of operations for the years ended December 31, 1996 and 1997, and for
the period from January 1, 1998 to October 19, 1998............................ F--83
Statements of stockholders' equity for the years ended December 31, 1996 and
1997, and for the period from January 1, 1998 to October 19, 1998.............. F--84
Statements of cash flows for the Years Ended December 31, 1996 and 1997, and for
the period from January 1, 1998 to October 19, 1998............................ F--85
Notes to financial statements.................................................... F--86
</TABLE>
F-2
<PAGE>
<TABLE>
<S> <C>
THE KODIAK GROUP, INC.
Report of independent public accountants......................................... F--90
Balance sheets as of December 31, 1997 and December 13, 1998..................... F--91
Statements of operations for the year ended December 31, 1997 and for the period
from
January 1, 1998 to December 13, 1998........................................... F--92
Statements of stockholders' equity for the year ended December 31, 1997 and for
the period from January 1, 1998 to December 13, 1998........................... F--93
Statements of cash flows for the year ended December 31, 1997 and for the period
from
January 1, 1998 to December 13, 1998........................................... F--94
Notes to financial statements.................................................... F--95
I33 COMMUNICATIONS CORP.
Report of independent public accountants......................................... F--100
Balance sheets as of December 31, 1996, 1997 and 1998............................ F--101
Statements of operations for the years ended December 31, 1996, 1997 and 1998.... F--102
Statements of stockholders' equity (deficit) for the years ended December 31,
1996, 1997 and 1998............................................................ F--103
Statements of cash flows for the years ended December 31, 1996, 1997 and 1998.... F--104
Notes to financial statements.................................................... F--105
SALZINGER & COMPANY, INC.
Report of independent public accountants......................................... F--111
Balance sheet as of December 31, 1998............................................ F--112
Statement of operations for the year ended December 31, 1998..................... F--113
Statement of stockholder's equity for year ended December 31, 1998............... F--114
Statement of cash flows for year ended December 31, 1998......................... F--115
Notes to financial statements.................................................... F--116
INTERNET OUTFITTERS, INC.
Report of independent public accountants......................................... F--119
Balance sheet as of December 31, 1998............................................ F--120
Statement of operations for the year ended December 31, 1998..................... F--121
Statement of stockholders' equity for the year ended December 31, 1998........... F--122
Statement of cash flows for the year ended December 31, 1998..................... F--123
Notes to financial statements.................................................... F--124
</TABLE>
F-3
<PAGE>
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To AppNet Systems, Inc.:
We have audited the accompanying consolidated balance sheet of AppNet
Systems, Inc. (a Delaware corporation) and subsidiaries as of December 31, 1998
and the related consolidated statements of operations, stockholders' equity, and
cash flows for the year then ended. These financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these financial statements based on our audit.
We conducted our audit in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audit provides a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the financial position of AppNet
Systems, Inc. and subsidiaries as of December 31, 1998, and the results of their
operations and their cash flows for the year then ended, in conformity with
generally accepted accounting principles.
Washington, D.C.
March 29, 1999
(except with respect to the matter discussed
in Note 18, as to which the date is
June 15, 1999.)
F-4
<PAGE>
APPNET SYSTEMS, INC.
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
DECEMBER 31, MARCH 31,
1998 1999
-------------- --------------
<S> <C> <C>
(UNAUDITED)
ASSETS
Current assets:
Cash and cash equivalents...................................................... $ 2,447,000 $ 5,655,000
Accounts receivable, net of allowance for doubtful accounts of $1,124,000 and
$1,816,000, respectively..................................................... 11,238,000 16,997,000
Other current assets........................................................... 1,118,000 1,172,000
-------------- --------------
Total current assets......................................................... 14,803,000 23,824,000
Property and equipment, net...................................................... 3,012,000 4,596,000
Intangible assets, net........................................................... 99,380,000 133,061,000
Other assets..................................................................... 1,175,000 1,990,000
-------------- --------------
Total assets................................................................. $ 118,370,000 $ 163,471,000
-------------- --------------
-------------- --------------
LIABILITIES, REDEEMABLE STOCK AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable............................................................... $ 2,737,000 $ 2,978,000
Accrued liabilities............................................................ 6,911,000 20,720,000
Current portion of convertible notes and long-term debt........................ 2,426,000 3,454,000
-------------- --------------
Total current liabilities.................................................... 12,074,000 27,152,000
Credit facilities................................................................ 37,461,000 59,400,000
Convertible notes, net of current portion........................................ 2,706,000 13,006,000
Other long-term debt, net of current portion..................................... 1,199,000 25,000
Other long-term liabilities...................................................... 3,398,000 2,274,000
-------------- --------------
Total liabilities............................................................ 56,838,000 101,857,000
-------------- --------------
Commitments and contingencies (Note 16)
Class A Preferred Stock, $.01 par value, 96,621 shares authorized, 38,093 and
45,430 shares issued and outstanding as of December 31, 1998 and March 31,
1999, respectively, liquidation value $1,000................................... 37,646,000 45,115,000
Common stock subject to put rights, $.0005 par value; 48,771 shares issued and
outstanding.................................................................... 278,000 278,000
-------------- --------------
Stockholders' equity:
Class B Preferred Stock, $.01 par value, 20,000 shares authorized, 11,576
shares issued and outstanding, liquidation value $1,000...................... 11,576,000 11,576,000
Common stock, $.0005 par value; 75,000,000 shares authorized, 19,504,173 and
19,917,545 shares issued and outstanding as of December 31, 1998 and March
31, 1999, respectively....................................................... 10,000 10,000
Additional paid-in capital..................................................... 27,222,000 36,518,000
Notes receivable from management............................................... (821,000) (685,000)
Deferred compensation.......................................................... -- (477,000)
Accumulated deficit............................................................ (14,379,000) (30,721,000)
-------------- --------------
Total stockholders' equity................................................... 23,608,000 16,221,000
-------------- --------------
Total liabilities, redeemable stock and stockholders' equity................. $ 118,370,000 $ 163,471,000
-------------- --------------
-------------- --------------
</TABLE>
The accompanying notes are an integral part of these statements.
F-5
<PAGE>
APPNET SYSTEMS, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
THREE MONTHS ENDED
MARCH 31,
YEAR ENDED ------------------------------
DECEMBER 31, 1998 1998 1999
----------------- -------------- --------------
<S> <C> <C> <C>
(UNAUDITED)
Revenues...................................................... $ 17,674,000 $ 197,000 $ 19,643,000
Cost of revenues.............................................. 11,699,000 145,000 11,457,000
----------------- -------------- --------------
Gross profit.............................................. 5,975,000 52,000 8,186,000
Operating expenses:
Selling and marketing....................................... 964,000 3,000 1,190,000
General and administrative.................................. 6,507,000 246,000 6,754,000
Stock-based and other acquisition-related compensation...... 1,157,000 -- 2,487,000
Depreciation and amortization............................... 10,151,000 58,000 12,735,000
----------------- -------------- --------------
Total operating expenses.................................. 18,779,000 307,000 23,166,000
----------------- -------------- --------------
Loss from operations.......................................... (12,804,000) (255,000) (14,980,000)
Interest expense.............................................. 1,052,000 24,000 1,262,000
Other expense, net............................................ 723,000 -- --
----------------- -------------- --------------
Loss before income taxes...................................... (14,579,000) (279,000) (16,242,000)
Income tax (benefit) provision................................ (200,000) -- 100,000
----------------- -------------- --------------
Net loss...................................................... (14,379,000) (279,000) (16,342,000)
Dividends on and accretion of preferred stock................. (873,000) -- (1,039,000)
----------------- -------------- --------------
Net loss attributable to common stockholders.................. $ (15,252,000) $ (279,000) $(17,381,000)
----------------- -------------- --------------
----------------- -------------- --------------
Basic and diluted net loss per common share................... $ (1.41) $ (.23) $ (.88)
----------------- -------------- --------------
----------------- -------------- --------------
Weighted average common shares outstanding.................... 10,785,424 1,195,331 19,722,559
----------------- -------------- --------------
----------------- -------------- --------------
</TABLE>
The accompanying notes are an integral part of these statements.
F-6
<PAGE>
APPNET SYSTEMS, INC.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
<TABLE>
<CAPTION>
STOCKHOLDERS'
REDEEMABLE EQUITY SECURITIES EQUITY
-------------------------------------------------------------------- -----------
<S> <C> <C> <C> <C> <C> <C> <C>
COMMON STOCK CLASS B
SUBJECT TO CLASS A SERIES A-1 PREFERRED
PUT RIGHTS PREFERRED STOCK PREFERRED STOCK STOCK
-------------------- ----------------------- --------------------- -----------
SHARES AMOUNT SHARES AMOUNT SHARES AMOUNT SHARES
--------- --------- ----------- ---------- --------- ---------- -----------
Initial capitalization......................... -- $ -- -- $ -- -- $ -- --
Issuance of Series A-1 preferred stock in
connection with acquisition................ -- -- -- -- 266,796 1,067,000 --
GTCR Investment.............................. 48,771 278,000 -- -- (266,796) (1,067,000) --
Repurchase and cancellation of shares in
exchange for note payable.................. -- -- -- -- -- -- --
Repurchase and cancellation of common stock
shares..................................... -- -- -- -- -- -- --
Issuance of Class A Preferred Stock.......... -- -- 37,676 37,045,000 -- -- --
Conversion of common stock into Class A
Preferred Stock............................ -- -- 417 417,000 -- -- --
Dividends on and accretion of Class A
Preferred Stock............................ -- -- -- 184,000 -- -- --
Issuance of stock in connection with the 1998
acquired businesses........................ -- -- -- -- -- -- 11,576
Repurchase and cancellation of shares sold to
management................................. -- -- -- -- -- -- --
Purchase of shares by management............. -- -- -- -- -- -- --
Stock options exercised...................... -- -- -- -- -- -- --
Net loss..................................... -- -- -- -- -- -- --
--------- --------- ----------- ---------- --------- ---------- -----------
Total, December 31, 1998....................... 48,771 $ 278,000 38,093 $37,646,000 -- $ -- 11,576
--------- --------- ----------- ---------- --------- ---------- -----------
Issuance of Class A Preferred Stock
(unaudited)................................ -- -- 7,337 7,191,000 -- -- --
Dividends on and accretion of Class A
Preferred Stock (unaudited)................ -- -- -- 278,000 -- -- --
Issuance of stock in connection with the 1999
acquired businesses (unaudited)............ -- -- -- -- -- -- --
Repurchase and cancellation of shares to
management (unaudited)..................... -- -- -- -- -- -- --
Common stock sold for cash (unaudited)....... -- -- -- -- -- -- --
Stock options exercised (unaudited).......... -- -- -- -- -- -- --
Deferred compensation pursuant to issuance of
stock options (unaudited).................. -- -- -- -- -- -- --
Amortization of deferred compensation
(unaudited)................................ -- -- -- -- -- -- --
Net loss (unaudited)......................... -- -- -- -- -- -- --
--------- --------- ----------- ---------- --------- ---------- -----------
Total, March 31, 1999 (unaudited)............ 48,771 $ 278,000 45,430 $45,115,000 -- $ -- 11,576
--------- --------- ----------- ---------- --------- ---------- -----------
--------- --------- ----------- ---------- --------- ---------- -----------
<CAPTION>
<S> <C> <C>
COMMON
STOCK ADDITIONAL NOTES
---------------------- PAID-IN RECEIVABLE FROM DEFERRED
AMOUNT SHARES AMOUNT CAPITAL MANAGEMENT COMPENSATION
---------- --------- ----------- ---------- --------------- -------------
Initial capitalization......................... $ -- 5,343,860 $ 3,000 $ 132,000 $ -- $ --
Issuance of Series A-1 preferred stock in
connection with acquisition................ -- -- -- -- -- --
GTCR Investment.............................. -- 13,342,145 7,000 4,108,000 (447,000) --
Repurchase and cancellation of shares in
exchange for note payable.................. -- (1,350,877) (1,000) (405,000) -- --
Repurchase and cancellation of common stock
shares..................................... -- (138,455) -- (789,000) -- --
Issuance of Class A Preferred Stock.......... -- -- -- -- -- --
Conversion of common stock into Class A
Preferred Stock............................ -- (1,387,097) (1,000) (416,000) -- --
Dividends on and accretion of Class A
Preferred Stock............................ -- -- -- (873,000) -- --
Issuance of stock in connection with the 1998
acquired businesses........................ 11,576,000 3,397,329 2,000 24,811,000 -- --
Repurchase and cancellation of shares sold to
management................................. -- (681,053) (228,000) 197,000 --
Purchase of shares by management............. -- 552,982 572,000 (571,000) --
Stock options exercised...................... -- 425,339 310,000 -- --
Net loss..................................... -- -- -- -- -- --
---------- --------- ----------- ---------- --------------- -------------
Total, December 31, 1998....................... $11,576,000 19,504,173 $ 10,000 $27,222,000 $(821,000) $ --
---------- --------- ----------- ---------- --------------- -------------
Issuance of Class A Preferred Stock
(unaudited)................................ -- -- -- -- -- --
Dividends on and accretion of Class A
Preferred Stock (unaudited)................ -- -- -- (1,039,000) -- --
Issuance of stock in connection with the 1999
acquired businesses (unaudited)............ -- 595,711 9,399,000 -- --
Repurchase and cancellation of shares to
management (unaudited)..................... -- (449,530) (136,000) 136,000 --
Common stock sold for cash (unaudited)....... -- 29,240 -- 375,000 -- --
Stock options exercised (unaudited).......... -- 237,951 216,000 -- --
Deferred compensation pursuant to issuance of
stock options (unaudited).................. -- -- -- 481,000 -- (481,000)
Amortization of deferred compensation
(unaudited)................................ -- -- -- -- -- 4,000
Net loss (unaudited)......................... -- -- -- -- -- --
---------- --------- ----------- ---------- --------------- -------------
Total, March 31, 1999 (unaudited)............ $11,576,000 19,917,545 $ 10,000 36,518,000 $(685,000) $(477,000)
---------- --------- ----------- ---------- --------------- -------------
---------- --------- ----------- ---------- --------------- -------------
<CAPTION>
TOTAL
ACCUMULATED STOCKHOLDERS'
DEFICIT EQUITY
------------ ------------
Initial capitalization......................... $ -- $ 135,000
Issuance of Series A-1 preferred stock in
connection with acquisition................ -- --
GTCR Investment.............................. -- 3,668,000
Repurchase and cancellation of shares in
exchange for note payable.................. -- (406,000)
Repurchase and cancellation of common stock
shares..................................... -- (789,000)
Issuance of Class A Preferred Stock.......... -- --
Conversion of common stock into Class A
Preferred Stock............................ -- (417,000)
Dividends on and accretion of Class A
Preferred Stock............................ -- (873,000)
Issuance of stock in connection with the 1998
acquired businesses........................ -- 36,389,000
Repurchase and cancellation of shares sold to
management................................. -- (31,000)
Purchase of shares by management............. -- 1,000
Stock options exercised...................... -- 310,000
Net loss..................................... (14,379,000) (14,379,000)
------------ ------------
Total, December 31, 1998....................... ($14,379,000) $23,608,000
------------ ------------
Issuance of Class A Preferred Stock
(unaudited)................................ -- --
Dividends on and accretion of Class A
Preferred Stock (unaudited)................ -- (1,039,000)
Issuance of stock in connection with the 1999
acquired businesses (unaudited)............ -- 9,399,000
Repurchase and cancellation of shares to
management (unaudited)..................... -- --
Common stock sold for cash (unaudited)....... -- 375,000
Stock options exercised (unaudited).......... -- 216,000
Deferred compensation pursuant to issuance of
stock options (unaudited).................. -- --
Amortization of deferred compensation
(unaudited)................................ -- 4,000
Net loss (unaudited)......................... (16,342,000) (16,342,000)
------------ ------------
Total, March 31, 1999 (unaudited)............ ($30,721,000) $16,221,000
------------ ------------
------------ ------------
</TABLE>
The accompanying notes are an integral part of these statements.
F-7
<PAGE>
APPNET SYSTEMS, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
FOR THE THREE
FOR THE YEAR MONTHS ENDED
ENDED ------------------------------
DECEMBER 31, 1998 MARCH 31, 1998 MARCH 31, 1999
----------------- -------------- --------------
(UNAUDITED)
<S> <C> <C> <C>
Cash flows from operating activities:
Net loss.................................................... $ (14,379,000) $ (279,000) $(16,342,000)
Adjustments to reconcile net loss to net cash used in
operating activities:
Amortization.............................................. 9,867,000 56,000 12,289,000
Depreciation.............................................. 284,000 2,000 446,000
Stock-based and other acquisition-related compensation.... 1,157,000 -- 2,487,000
Write-off of deferred financing costs..................... 291,000 -- --
Deferred tax benefit...................................... (50,000) -- --
Change in assets and liabilities:
Accounts receivable, net................................ (1,762,000) 53,000 (3,131,000)
Other current assets.................................... 399,000 (39,000) 336,000
Accounts payable........................................ 1,012,000 221,000 (1,106,000)
Accrued liabilities..................................... 547,000 46,000 6,524,000
----------------- -------------- --------------
Net cash provided by (used in) operating activities... (2,634,000) 60,000 1,503,000
----------------- -------------- --------------
Cash flows from investing activities:
Purchase of property and equipment, net..................... (1,196,000) (10,000) (923,000)
Cash paid for acquired businesses, net of cash acquired..... (69,562,000) (1,832,000) (26,109,000)
Other assets................................................ (904,000) (150,000) (218,000)
----------------- -------------- --------------
Net cash used in investing activities................. (71,662,000) (1,992,000) (27,250,000)
----------------- -------------- --------------
Cash flows from financing activities:
Proceeds from long-term debt................................ 1,104,000 -- --
Repayments of long-term debt................................ (268,000) -- --
Borrowings under credit facilities.......................... 47,261,000 2,065,000 59,400,000
Repayments of credit facilities............................. (9,800,000) -- (37,461,000)
Debt issue costs............................................ (351,000) -- (621,000)
Proceeds from issuance of common stock...................... 3,015,000 15,000 375,000
Repurchase of common stock.................................. (789,000) -- --
Proceeds from issuance of preferred stock................... 36,292,000 -- 7,046,000
Repurchase of shares sold to management..................... (31,000) -- --
Proceeds from exercise of stock options..................... 310,000 -- 216,000
----------------- -------------- --------------
Net cash provided by financing activities............. 76,743,000 2,080,000 28,955,000
----------------- -------------- --------------
Net increase in cash.......................................... 2,447,000 148,000 3,208,000
Cash and cash equivalents, beginning of period................ -- -- 2,447,000
----------------- -------------- --------------
Cash and cash equivalents, end of period...................... $ 2,447,000 $ 148,000 $ 5,655,000
----------------- -------------- --------------
----------------- -------------- --------------
Supplementary information:
Cash paid for income taxes.................................. $ -- $ -- $ --
----------------- -------------- --------------
----------------- -------------- --------------
Cash paid for interest...................................... $ 775,000 $ 24,000 $ 157,000
----------------- -------------- --------------
----------------- -------------- --------------
</TABLE>
The accompanying notes are an integral part of these statements.
F-8
<PAGE>
APPNET SYSTEMS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1998 AND MARCH 31, 1999
1. BUSINESS DESCRIPTION:
AppNet Systems, Inc. ("AppNet" or the "Company") was incorporated under the
name Internet Applications, Inc. in November 1997 ("Inception"), under the laws
of the state of Delaware. The Company changed its name to AppNet Systems, Inc.,
in March 1998. AppNet is based in Bethesda, Maryland and is a provider of
Internet and electronic commerce professional services and solutions, including
strategic consulting, interactive media services, Internet-based application
development, electronic commerce systems integration and electronic commerce
outsourcing.
The Company's financial statements for the period from Inception through
December 31, 1997 reflect immaterial transactions and, therefore, have been
included in the 1998 financial statements to facilitate presentation. From
Inception through March 11, 1998, the Company's operating activities related
primarily to recruiting personnel, raising capital, identifying operating assets
for acquisitions and developing technical and marketing materials. In March
1998, the Company completed its first acquisition and recognized its first
revenues.
There are significant risks associated with the Company, including the
susceptibility of the Company's services to rapid technological change,
increased competition from existing service providers and new entrants, lack of
an operating history, existence of fixed price contracts, realizability of
intangible assets, government regulations, the year 2000 issue and dependence
upon key members of the management team.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES AND PRACTICES:
PRINCIPLES OF CONSOLIDATION
The accompanying consolidated financial statements include the accounts of
AppNet and its wholly owned subsidiaries. All significant intercompany
transactions and accounts have been eliminated in consolidation.
USE OF ESTIMATES
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make assumptions that
affect the reported amounts of assets and liabilities and the disclosure of
contingent assets and liabilities at the date of the financial statements and
the reported amount of revenues and expenses during the reporting period. Actual
results could differ from those estimates.
CASH AND CASH EQUIVALENTS
The Company considers all highly liquid investments with original maturities
of three months or less to be cash equivalents.
F-9
<PAGE>
APPNET SYSTEMS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1998 AND MARCH 31, 1999
PROPERTY AND EQUIPMENT
Property and equipment are stated at cost, net of accumulated depreciation
and amortization. Depreciation and amortization are computed using the
straight-line method over the estimated useful lives of the related assets, as
follows:
<TABLE>
<S> <C>
three to five
Computers and equipment................................. years
five to seven
Furniture and fixtures.................................. years
</TABLE>
Leasehold improvements are amortized over the lesser of the estimated useful
life of the asset or the remaining lease term.
IMPAIRMENT OF LONG-LIVED ASSETS
In accordance with Statement of Financial Accounting Standards ("SFAS") No.
121, "Accounting for Impairment of Long-Lived Assets and for Long-Lived Assets
to Be Disposed Of," the Company reviews its recorded goodwill, other intangibles
and long-lived assets for impairment whenever events or changes in circumstances
indicate that the carrying amount of an asset may not be recoverable. When
deemed necessary, goodwill and other intangibles are assessed for possible
impairment based upon a number of factors, including turnover of the acquired
workforce and the undiscounted value of expected future operating cash flows in
relation to the Company's net investment in each subsidiary. Since Inception,
the Company has not recorded a provision for possible impairment of long-lived
assets or intangible assets associated with its acquired businesses.
INTERNAL USE COMPUTER SOFTWARE
In accordance with the American Institute of Certified Public Accountants
(the "AICPA") Statement of Position 98-1 "Accounting for the Costs of Computer
Software Developed or Obtained for Internal Use," the Company capitalizes costs
related to software and implementation in connection with its internal use
software systems. Such costs are amortized principally over three years.
FAIR VALUE OF FINANCIAL INSTRUMENTS
The Company's financial instruments consist primarily of cash and cash
equivalents, accounts receivable, accounts payable, credit facilities, long-term
debt, convertible notes and capital lease obligations. In management's opinion,
the carrying amounts of these financial instruments approximate their fair
values at December 31, 1998. Due to the related party nature of the Company's
Class A Preferred Stock, it is impracticable to estimate its fair value at
December 31, 1998.
STOCK-BASED COMPENSATION
The Company accounts for stock-based employee compensation arrangements
using the intrinsic value method in accordance with provisions of Accounting
Principles Board ("APB") Opinion No. 25, "Accounting for Stock Issued to
Employees," and complies with the disclosure provisions of SFAS No. 123,
"Accounting for Stock-Based Compensation." Under APB Opinion No. 25,
compensation cost is generally recognized based on the difference, if any, on
the date of grant between the fair value of the Company's stock and the amount
an employee must pay to acquire the stock.
F-10
<PAGE>
APPNET SYSTEMS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1998 AND MARCH 31, 1999
REVENUE RECOGNITION
Revenues from time and materials contracts are recognized based on fixed
hourly rates for direct labor hours expended. Revenues from fixed-price
contracts are recognized on the percentage-of-completion method, with costs and
estimated profits recorded as work is performed. Revenues from
cost-plus-fixed-fee contracts are recognized on the basis of direct costs plus
indirect costs incurred plus a fixed profit percentage. Revenues exclude the
cost of media and advertising purchases reimbursed by clients.
Cost of revenues includes all direct material and labor costs related to
contract performance and does not include any related depreciation expense.
Provisions for estimated losses on uncompleted contracts are made in the period
in which such losses are determined. Changes in contract performance and
estimated profitability, including final contract settlements, may result in
revisions to costs and revenues and are recognized in the period in which the
revisions are determined. Unbilled receivables on contracts are comprised of
costs, plus earnings on certain contracts in excess of contractual billings on
such contracts. Cash received in excess of costs incurred is classified as
deferred revenue.
BUSINESS CONCENTRATION AND CREDIT RISK
The following table summarizes the revenues and accounts receivable from
clients in excess of 10% of total revenues and accounts receivable:
<TABLE>
<CAPTION>
ACCOUNTS
RECEIVABLE
REVENUES FOR AS OF
THE YEAR ENDED DECEMBER 31,
DECEMBER 31, 1998 1998
------------------- ---------------
<S> <C> <C>
Customer A.................................................. 15% 12%
Customer B.................................................. 12% 13%
</TABLE>
INCOME TAXES
Income taxes are accounted for using an asset and liability approach that
requires the recognition of taxes payable or refundable for the current year and
deferred tax liabilities and assets for the future tax consequences of events
that have been recognized in the Company's financial statements or tax returns.
The measurement of current and deferred tax liabilities and assets are based on
provisions of the enacted tax law; the effects of future changes in tax laws or
rates are not anticipated. The measurement of deferred tax assets is reduced, if
necessary, by the amount of any tax benefits that, based on available evidence,
are not expected to be realized.
EARNINGS PER SHARE
SFAS No. 128 "Earnings Per Share," requires the presentation of basic and
diluted earnings per share. Basic net income (loss) per share is computed by
dividing income (loss) attributable to common stockholders by the weighted
average number of common shares outstanding for the period. The diluted net
income (loss) per share data is computed using the weighted average number of
common shares outstanding plus the dilutive effect of common stock equivalents,
unless the common stock equivalents are antidilutive.
F-11
<PAGE>
APPNET SYSTEMS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1998 AND MARCH 31, 1999
RECENT ACCOUNTING PRONOUNCEMENTS
In April 1998, the AICPA issued Statement of Position 98-5, "Reporting on
the Costs of Start-Up Activities" ("SOP 98-5"). SOP 98-5, which is effective for
fiscal years beginning after December 15, 1998, provides guidance on the
financial reporting of start-up costs and organization costs. It requires costs
for start-up activities and organization costs to be expensed as incurred. As
the Company has expensed these costs historically, the adoption of this standard
is not expected to have a significant impact on its results of operations,
financial position or cash flows.
In June 1998, the Financial Accounting Standards Board issued SFAS No. 133,
"Accounting for Derivatives and Hedging Activities" ("SFAS No. 133"), which
establishes accounting and reporting standards for derivative instruments,
including certain derivative instruments embedded in other contracts
(collectively referred to as derivatives), and for hedging activities. SFAS No.
133 is effective for all fiscal quarters of fiscal years beginning after June
15, 1999 and management has not yet determined its effect on the Company's
financial statements or disclosures.
RECLASSIFICATIONS
Certain amounts have been reclassified to conform with the current
presentation.
INTERIM FINANCIAL INFORMATION
The financial information as of March 31, 1999 and for the three months
ended March 31, 1998 and 1999 is unaudited but includes all adjustments,
consisting only of normal recurring adjustments, that AppNet's management
considers necessary for a fair presentation of AppNet's operating results and
cash flows for such periods. Results for the three month period ended March 31,
1999 are not necessarily indicative of results to be expected for the full
fiscal year of 1999 or for any future period.
3. ACQUISITIONS:
1998 ACQUISITIONS
From March 1998 through December 1998, the Company acquired businesses in
the Internet and electronic commerce professional services industry.
Collectively, these entities are referred to as the "1998 Acquired Businesses."
The accounts of the Acquired Businesses are included in the accompanying
consolidated financial statements from the date of their respective
acquisitions. These acquisitions are described as follows:
On March 12, 1998, the Company acquired the assets of Arbor Intelligent
Systems, Inc. ("Arbor"), for an aggregate purchase price of approximately
$3,100,000, including transaction costs, of which $1,100,000 was paid in the
form of the Company's Series A-1 Convertible Preferred Stock (266,796 shares
valued at $4 per share), and $2,000,000 was paid in cash. Arbor is engaged in
the business of providing object-oriented development services.
On April 30, 1998, the Company acquired the assets of LOGEX International,
L.L.C. ("LOGEX"), in exchange for approximately $300,000 in cash and a five-year
convertible note in the principal amount of $300,000 (Note 9). The former
shareholders of LOGEX are entitled to a contingent consideration payment in the
event that certain performance criteria are achieved by LOGEX during the year
ending April 30, 1999. LOGEX provides electronic commerce systems integration
services and is located in Falls Church, Virginia.
F-12
<PAGE>
APPNET SYSTEMS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1998 AND MARCH 31, 1999
On August 25, 1998, the Company acquired all the outstanding stock of
Software Services Corporation, Inc. ("SSC") for an aggregate purchase price of
approximately $23,000,000, including transaction costs, of which $12,000,000 was
paid in the form of company stock, and $11,000,000 was paid in cash. In
connection with the SSC acquisition, the Company issued 11,576 shares of its
Class B Preferred Stock at a price of $1,000 per share and 1,387,095 shares of
Company Common Stock at a price of $.3007 per share to the former SSC
shareholders. Since its inception in 1980, SSC has been in the business of
providing applications development, network design services and both full time
and temporary technical personnel, primarily in Michigan.
On October 2, 1998, the Company acquired all the outstanding stock of New
Media Publishing, Inc. ("NMP") for an aggregate purchase price of approximately
$19,470,000, including transaction costs, of which $8,820,000 was paid in cash,
$9,500,000 was paid in the form of Company Common Stock (1,111,111 shares valued
at $8.55 per share) and the remainder was paid in options to purchase 145,518
shares of Company Common Stock valued using the Black-Scholes pricing model, at
$1,150,000. These options were issued in exchange for previously outstanding
options of NMP, have exercise prices ranging from $.06 to $8.69 and have vesting
schedules ranging from three months to 32 months. The value associated with
these options has been classified as additional paid-in capital on the
accompanying consolidated balance sheet. If NMP meets certain revenue and
profitability targets and certain NMP executives remain employed by the Company,
an additional $14,000,000 is potentially payable to the former owners of NMP in
cash and Company Common Stock (Note 16). NMP is based in Falls Church, Virginia
and offers interactive community-building services to business and nonprofit
organizations.
On October 12, 1998, the Company acquired all the outstanding stock of
Century Computing, Incorporated ("Century"). Century is located in Laurel,
Maryland, and is a provider of system integration and processing services in
electronic commerce to the Federal government, Federal government contractors
and commercial enterprises. The aggregate purchase price was approximately
$29,168,000, including transaction costs, of which $2,000,000 was provided in
the form of a convertible note (Note 9), $21,600,000 was paid in cash and the
remainder was paid in options to purchase 704,127 shares of Company Common Stock
valued, using the Black-Scholes pricing model, at $5,568,000. These options were
issued in exchange for previously outstanding options of Century, have exercise
prices ranging from $.71 to $1.00 and were fully vested at the time of issuance.
The value associated with these options has been classified as additional paid
in capital on the accompanying consolidated balance sheet.
On October 20, 1998, the Company acquired all the outstanding stock of
Research and Planning, Inc. ("R&P") for an aggregate purchase price of
approximately $22,100,000, including transaction costs, of which $15,100,000 was
paid in cash, $6,000,000 was paid in the form of Company Common Stock (701,754
shares valued at $8.55 per share), and $1,000,000 was provided in the form of
notes to the previous R&P shareholders (Note 9). R&P was founded in 1979 in
Cambridge, Massachusetts and provides ERP integration and data warehousing
services.
On December 14, 1998, the Company acquired all the outstanding stock of The
Kodiak Group, Inc. ("Kodiak") for an aggregate purchase price of approximately
$16,350,000, including transaction costs, of which $12,100,000 was paid in cash,
$2,250,000 was paid in the form of Company Common Stock (197,368 shares valued
at $11.40 per share) and $2,000,000 was provided in the form of notes to the
previous Kodiak shareholders. In addition, the former Kodiak shareholders are
entitled to a potential contingent payment payable in cash of up to $4.0 million
in the event that Kodiak sells or
F-13
<PAGE>
APPNET SYSTEMS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1998 AND MARCH 31, 1999
licenses certain technology during the three-year period ending December 14,
2001. Kodiak has offices in Pittsfield, Massachusetts, Charlottesville, Virginia
and Denver, Colorado, and specializes in electronic data interchange integration
and processing services.
1999 ACQUISITIONS
From January 8, 1999 through March 29, 1999, the Company acquired an
additional five businesses in the Internet and electronic commerce professional
services industries. Collectively, these entities are referred to as the "1999
Acquired Businesses".
On January 8, 1999, the Company acquired all the outstanding stock of i33
communications corp. ("i33"), which is based in New York City. i33 provides
media buying and planning services, and, specializes in the design of creative
Internet solutions to its customers. The aggregate purchase price was
approximately $21,600,000, plus transaction costs, consisting of $10,300,000
paid in cash and $11,300,000 paid in the form of convertible notes to the
previous i33 shareholders.
On March 4, 1999, the Company acquired all of the issued and outstanding
stock of Sigma6, Inc. ("Sigma6") which is based in Michigan and specializes in
providing brand identity services to its customers. The aggregate purchase price
was approximately $2,500,000, plus transaction costs, consisting of $1,250,000
paid in cash and $1,250,000 paid in shares of Company Common Stock (97,465
shares valued at $12.83 per share). If certain performance criteria are met
during the 12-month period ending December 31, 1999, the former stockholders of
Sigma6 are entitled to a contingent payment of up to $2,800,000 consisting of
cash and Company Common Stock.
On March 15, 1999, the Company acquired certain assets of Salzinger &
Company, Inc. ("Salzinger"). The aggregate purchase price was approximately
$8,500,000, plus transaction costs, consisting of $5,000,000 in cash and
$3,500,000 in Company Common Stock (245,614 shares valued at $14.25 per share).
If certain performance criteria are met during the period ending September 30,
2000, Salzinger is entitled to a contingent payment of up to $5,000,000 in cash
or, at the seller's option, cash and Company Common Stock. Salzinger is based in
Vienna, Virginia and provides business-level strategic consulting services.
On March 26, 1999, the Company acquired all of the issued and outstanding
stock of Internet Outfitters, Inc. ("Internet Outfitters") which is based in
Santa Monica, California and provides localization and creative Web-development
services. The aggregate purchase price was approximately $9,500,000, plus
transaction costs, consisting of cash, $2,700,000 in Company Common Stock
(157,895 shares valued at $17.10 per share), and the issuance of 22,300 options
to purchase Company Common Stock. If certain performance criteria are met during
the year ending December 31, 1999, the former stockholders are entitled to a
contingent payment of up to $3,500,000 in cash and Company Common Stock.
On March 29, 1999, the Company acquired certain assets of Transform IT,
Incorporated ("Transform IT") which is based in Alexandria, Virginia and
provides process-level strategic consulting services. The aggregate purchase
price was approximately $5,120,000, plus transaction costs, consisting of
$3,500,000 in cash and $1,620,000 in Company Common Stock (94,737 shares valued
at $17.10 per share). If certain performance criteria are met during the
twelve-month period ending March 31, 2000, the seller is entitled to a
contingent payment of up to $3,500,000 in cash.
F-14
<PAGE>
APPNET SYSTEMS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1998 AND MARCH 31, 1999
ALLOCATION OF PURCHASE CONSIDERATION
The acquisitions have been accounted for using the purchase method of
accounting and, accordingly, the recognized purchase price has been allocated,
based on preliminary estimates of fair value, to the tangible assets acquired
and liabilities assumed and, with the advice of independent valuation experts,
to the identifiable intangible assets, on the acquisition dates. The Company has
recorded identifiable intangibles on the 1998 Acquired Businesses, as follows:
<TABLE>
<CAPTION>
APPRAISED
VALUE USEFUL LIFE
------------ ---------------
<S> <C> <C>
Customer lists................................................. $ 4,160,000 7-24 months
Non-competition agreements..................................... 2,800,000 36 months
Assembled workforce............................................ 4,803,000 12-48 months
Proprietary technology......................................... 4,325,000 12-24 months
</TABLE>
As of December 31, 1998, the purchase price in excess of identified tangible
and intangible assets and liabilities assumed in the amount of $93,159,000 was
allocated to goodwill.
In the three month period ended March 31, 1999, the Company recorded
identifiable intangibles related to the 1999 Acquisitions of $2,875,000. This
preliminary purchase price allocation also resulted in the allocation of
$43,225,000 to goodwill. Final estimates of fair value will be made upon the
completion of independent valuations for certain 1999 acquisitions and the final
determination of certain preexisting contingencies. As a result of the early
stage of development of the Internet and electronic commerce, the dynamics of
this rapidly evolving industry and the expectation of increasing competition,
the recorded goodwill is being amortized on a straight-line basis over three
years, the estimated period of its benefit.
The following unaudited pro forma consolidated amounts give effect to the
1998 acquisitions as if they had occurred on January 1, 1998, by consolidating
the results of operations of the 1998 Acquired Businesses with the results of
AppNet for the year ended December 31, 1998. The pro forma amounts do not
purport to be indicative of the results of operations that would have been
achieved had the transactions been in effect as of the beginning of 1998 and
should not be construed as being representative of future results of operations.
<TABLE>
<CAPTION>
DECEMBER 31, 1998
(UNAUDITED)
-----------------
<S> <C>
Revenues................................................................... $ 54,493,000
Net loss attributable to common stockholders............................... (50,273,000)
Basic and diluted net loss per share....................................... $ (2.81)
</TABLE>
The following unaudited pro forma consolidated amounts give effect to the
1998 and 1999 acquisitions as if they had occurred on January 1, 1998:
<TABLE>
<CAPTION>
FOR THE THREE MONTHS
ENDED MARCH 31,
------------------------
(UNAUDITED)
1998 1999
----------- -----------
<S> <C> <C>
Revenues......................................... $14,203,000 $22,271,000
Net loss attributable to common stockholders..... (18,081,000) (21,783,000)
Basic and diluted net loss per share............. $ (1.15) $ (1.07)
</TABLE>
F-15
<PAGE>
APPNET SYSTEMS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1998 AND MARCH 31, 1999
4. ACCOUNTS RECEIVABLE:
Accounts receivable consists of the following as of December 31, 1998:
<TABLE>
<S> <C>
Accounts receivable............................................ $9,571,000
Unbilled accounts receivable................................... 2,791,000
Allowance for doubtful accounts................................ (1,124,000)
----------
Accounts receivable, net................................... $11,238,000
----------
----------
</TABLE>
5. OTHER CURRENT ASSETS:
Other current assets consists of the following as of December 31, 1998:
<TABLE>
<S> <C>
Income tax receivable.......................................... $ 808,000
Other current assets........................................... 310,000
----------
Other current assets....................................... $1,118,000
----------
----------
</TABLE>
6. PROPERTY AND EQUIPMENT:
Property and equipment consists of the following as of December 31, 1998:
<TABLE>
<S> <C>
Computers and equipment........................................ $2,797,000
Furniture and fixtures......................................... 288,000
Leasehold improvements......................................... 211,000
----------
3,296,000
Accumulated depreciation....................................... (284,000)
----------
Property and equipment, net................................ $3,012,000
----------
----------
</TABLE>
7. INTANGIBLE ASSETS:
Intangible assets consists of the following as of December 31, 1998:
<TABLE>
<S> <C>
Customer lists................................................ $ 4,160,000
Non-competition agreements.................................... 2,800,000
Assembled workforce........................................... 4,803,000
Proprietary technology........................................ 4,325,000
Goodwill...................................................... 93,159,000
-----------
109,247,000
Accumulated amortization...................................... (9,867,000)
-----------
Intangible assets, net.................................... $99,380,000
-----------
-----------
</TABLE>
F-16
<PAGE>
APPNET SYSTEMS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1998 AND MARCH 31, 1999
8. ACCRUED LIABILITIES
Accrued liabilities consist of the following:
<TABLE>
<CAPTION>
DECEMBER MARCH 31,
31, 1999
1998 (UNAUDITED)
----------- -----------
Accrued compensation and benefits.................. $2,590,000 $4,770,000
<S> <C> <C>
Accrued dividends on Class A Preferred Stock and
Class B Preferred Stock.......................... 689,000 1,451,000
Payments due to former shareholders of Acquired
Businesses....................................... 1,500,000 3,100,000
Accrued stock-based and other acquisition-related
compensation..................................... -- 3,640,000
Other accrued liabilities.......................... 2,132,000 7,759,000
----------- -----------
Accrued liabilities............................ $6,911,000 2$0,720,000
----------- -----------
----------- -----------
</TABLE>
9. DEBT:
Debt consists of the following:
<TABLE>
<CAPTION>
MARCH 31,
1999
DECEMBER 31, --------------
1998
------------- (UNAUDITED)
<S> <C> <C>
Credit facilities:
Credit facility, bears interest at the lender's prime rate plus .5% (8.25% at
December 31, 1998), interest due monthly...................................... $ 19,730,000 $ --
Credit facility, bears interest at the lender's prime rate (7.75% at
December 31, 1998), interest due monthly...................................... 17,731,000 --
Credit facilities, bear interest at the lender's prime rate plus .25%--1.5% or
various LIBOR rates plus 2.25%--3.5%, interest due at varying monthly
intervals, interest rates ranging from 7.56% to 9.25% at March 31, 1999....... -- 59,400,000
------------- --------------
37,461,000 59,400,000
------------- --------------
Convertible notes:
Note payable, principal and interest due October 13, 1999, bears interest at 7%,
convertible at the option of the holder for common stock at $8.55 per share... 2,000,000 2,000,000
Note payable, principal and interest due June 29, 2003, bears interest at 5%,
convertible at 80% of common stock price upon a sale of Company or an initial
public offering............................................................... 406,000 406,000
Notes payable, principal and interest due December 14, 2001, bear interest at
8%, convertible at the option of the holder for common stock at $11.40 per
share......................................................................... 2,000,000 2,000,000
Note payable, principal and interest due April 30, 2003, bears interest at the
prime rate (7.75% at December 31, 1998), interest payable quarterly at July
31, October 31, January 31 and April 30, convertible at the option of the
holder at 80% of common stock price on a sale of Company or an initial public
offering...................................................................... 300,000 300,000
</TABLE>
F-17
<PAGE>
APPNET SYSTEMS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1998 AND MARCH 31, 1999
<TABLE>
<CAPTION>
MARCH 31,
1999
DECEMBER 31, --------------
1998
------------- (UNAUDITED)
<S> <C> <C>
Notes payable, principal and interest due January 8, 2002, bear interest at
rates ranging from 4.3% to 6%, two notes totaling $3,500,000 convertible at
the option of the holder at 80% of the common stock price on a sale of Company
or an initial public offering, two notes totalling $6,800,000 convertible at
the option of the holder for common stock at $11.40 per share................. -- 10,300,000
------------- --------------
4,706,000 15,006,000
------------- --------------
Other long-term debt:
Notes payable, principal and interest due January 1, 2000, bear interest at
6%............................................................................ 1,000,000 1,000,000
Note payable to Smart Technology, L.L.C., due the earlier of an initial public
offering or June 29, 2000, bears interest at 12%.............................. 150,000 3,000
Other notes payable............................................................. 425,000 426,000
Note payable to a member of Company management, due at earlier of an initial
public offering or December 31, 1999.......................................... 50,000 50,000
------------- --------------
1,625,000 1,479,000
------------- --------------
Total debt.................................................................. 43,792,000 75,885,000
Less current portion............................................................ (2,426,000) (3,454,000)
------------- --------------
Long-term debt, net of current portion...................................... $ 41,366,000 $ 72,431,000
------------- --------------
------------- --------------
</TABLE>
The future minimum principal payments of debt outstanding at December 31,
1998, as refinanced by the 1999 Credit Facilities, are as follows:
<TABLE>
<S> <C>
1999........................................................... $2,426,000
2000........................................................... 1,199,000
2001........................................................... 39,461,000
2002........................................................... --
2003........................................................... 706,000
----------
Total...................................................... $43,792,000
----------
----------
</TABLE>
1999 CREDIT FACILITIES
On January 8, 1999, the Company replaced its two existing credit agreements
("the 1998 Credit Facilities") with two credit agreements (together the "1999
Credit Facilities") entered into with a syndicate of lenders providing for
$55,000,000 in borrowings. The 1999 Credit Facilities consist of $40,000,000 in
credit loans (the "Guaranteed Loans") which have been guaranteed by a
significant stockholder and $15,000,000 of additional credit loans (the
"Unguaranteed Loans"). The 1999 Credit Facilities mature on August 24, 2001. On
March 10, 1999, the Company amended the Unguaranteed Loans increasing available
borrowings from $15,000,000 to $26,000,000. Under the terms of the Unguaranteed
Loans, the amount borrowed cannot, at any time, exceed the amount borrowed under
the Guaranteed Loans.
F-18
<PAGE>
APPNET SYSTEMS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1998 AND MARCH 31, 1999
The Guaranteed Loans bear interest, at the Company's option, at various
LIBOR rates plus 2.5 percent or the lenders' base rate plus .5 percent. The
Guaranteed Loans require the Company to pay a quarterly commitment fee of .5
percent on the unused amounts.
The Unguaranteed Loans bear interest, at the Company's option, at various
LIBOR rates or the lenders' base rate plus an applicable margin, as determined
by the Company's operating performance.
The 1999 Credit Facilities include certain restrictive covenants which
require the Company, among other things, to maintain minimum levels of earnings
before interest, taxes, depreciation, and amortization, ratios of cash flow to
debt service and place limits on capital expenditures.
1998 CREDIT FACILITIES
On August 25, 1998, the Company entered into a credit facility with a
commercial lender. The facility provided for borrowings of up to $15,000,000,
bore interest at the lender's base rate plus a defined percentage or at various
LIBOR rates, and was due on demand. For the period from August 25, 1998 to
October 13, 1998, the highest and weighted average balances outstanding under
the facility were $9,800,000 and $8,478,000, respectively.
On October 13, 1998, the Company modified its facility and entered into two
credit agreements (the "1998 Credit Facilities") with two commercial lenders.
Under the 1998 Credit Facilities, each lender provided a $20 million line of
credit which was payable upon demand, guaranteed by a significant stockholder
and bore interest at the option of the Company at the lenders' base rate plus a
defined percentage or at various LIBOR options plus 2.5 percent. For the period
from October 13, 1998, to December 31, 1998, the highest and weighted average
balances under the 1998 Credit Facilities were $37,461,000 and $36,040,000,
respectively. During this period, the average interest rate was 8.13 percent.
One of the facilities provided for a quarterly commitment fee equal to .05
percent. As a result of the 1999 Credit Facilities, which replaced the 1998
Credit Facilities and qualify for non-current classification, the amounts
outstanding under the 1998 Credit Facilities as of December 31, 1998 have been
classified as long-term in the accompanying balance sheet. In connection with
debt refinancings during 1998, the Company charged to other expense
approximately $291,000 of previously deferred financing fees.
CONVERTIBLE NOTES
In conjunction with certain of the Acquired Businesses, the Company issued
convertible notes, certain of which, at the option of the holders, allow the
holders to convert the notes to the Company Common Stock upon certain defined
events at either a stated price or a discount to the then current market price
for the Company Common Stock. Upon an initial public offering of the Company's
Common Stock, the Company may be required to record an interest charge of
approximately $875,000 related to certain beneficial conversion rights.
10. CAPITAL STOCK:
1998 COMMON STOCK SPLIT
In June 1998, upon adoption of the Company's Second Restated Certificate of
Incorporation, a two-for-one stock split of the Company Common Stock was
effected. All share and per-share amounts, including stock option information,
have been restated in these notes and the accompanying financial statements to
reflect this stock split and the 1999 Reverse Common Stock Split (see Note 18).
F-19
<PAGE>
APPNET SYSTEMS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1998 AND MARCH 31, 1999
GTCR INVESTMENT
In June 1998, the Company completed an investment transaction with GTCR
Golder Rauner, L.L.C. and certain related investment funds ("GTCR") and Smart
Technology, L.L.C. ("Smart Technology"), a party related to the Company's
President and Chief Executive Officer (the "GTCR Investment"). Prior to the GTCR
Investment, the Company had 5,343,860 shares of issued and outstanding common
stock all of which were owned by Company's initial investors (the "Initial
Investors"). Pursuant to the GTCR Investment, the Company made a net redemption
of 1,350,887 shares of Company Common Stock from certain of the Initial
Investors for $.3007 per share or $406,000 and sold an aggregate 11,559,144
shares to GTCR and Smart Technology for $.3007 per share or $3,476,000 before
deduction for expenses and fees. The Company also sold 1,251,228 shares of
Company Common Stock to the Company's President and Chief Executive Officer (the
"Reserved Stock") and 531,773 shares to other certain parties affiliated with
the GTCR Investment. These shares were sold for $.3007 per share.
GTCR and Smart Technology committed to provide up to an additional
$96,500,000 in capital to the Company to fund acquisitions as well as other
general corporate purposes. Upon the request of the Board and the approval of
GTCR and Smart Technology, shares of Class A Preferred Stock will be issued to
GTCR and Smart Technology in the ratio of 98 percent to 2 percent, respectively,
in exchange for $1,000 per share. No shares of Class A Preferred Stock were
issued at the time of the GTCR Investment. In connection with the issuance of
Class B Preferred Stock as part of the SSC transaction, the capital commitment
from GTCR and Smart Technology was decreased to $84,900,000.
In connection with the GTCR Investment, the Company entered into a
management services agreement with GTCR for $200,000 per year.
F-20
<PAGE>
APPNET SYSTEMS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1998 AND MARCH 31, 1999
COMMON STOCK SUBJECT TO PUT RIGHTS
In conjunction with its acquisition of Arbor, the Company issued 266,796
shares of Series A-1 Convertible Preferred Stock with a liquidation value of
$1,100,000. Pursuant to their terms, these shares were converted into 187,225
shares of Company Common Stock at the time of the GTCR Investment. As part of
the GTCR Investment, the Board of Directors authorized the repurchase of 138,455
shares of the common stock issued upon the conversion for $5.70 per share which
provided the holders a return equivalent to the liquidation value of the Series
A-1 Convertible Preferred Stock. In addition, the Board of Directors agreed to
grant the holders of the remaining 48,771 shares of Company Common Stock the
right to require the Company to repurchase their shares for cash at $5.70 per
share beginning on March 11, 1999, and extending for thirty days.
CLASS A PREFERRED STOCK
The holders of the Class A Preferred Stock ("Class A Preferred Stock") are
entitled to a 6 percent cumulative dividend which is paid when declared by the
Company's Board of Directors. The Company can redeem the shares at any time for
their liquidation value of $1,000 per share plus accrued but unpaid dividends.
The shares have no voting or conversion rights. Upon the earliest of the
liquidation of the Company, a change in the control of the Company, an initial
public offering ("IPO") or other fundamental change in the Company, as defined,
a majority of the holders of the Class A Preferred stock can require the Company
to redeem their shares for their liquidation value, plus accrued but unpaid
dividends. In the case of an IPO, the redemption is limited to the net funds
available from the IPO. GTCR holds approximately 97 percent of the outstanding
Class A Preferred Stock.
The Company incurred certain fees associated with the issuance of the Class
A Preferred Stock. Through December 31, 1998, the Company paid a one percent fee
of $369,000 to GTCR based on the issuance of the Company's Class A Preferred
Stock to GTCR. The Company also incurred a commission of $262,000 to one of the
Company's directors in connection with purchases of Class A Preferred Stock.
These costs were deducted from the proceeds of the Class A Preferred Stock shown
in the accompanying balance sheet. The Class A Preferred Stock is being accreted
to its liquidation value over the period to its estimated redemption date, which
is expected to occur in 1999. The accretion of the costs associated with the
Class A Preferred Stock was $184,000 for the year ended December 31, 1998 and is
classified as dividends on and accretion of preferred stock in the accompanying
statements of operations and stockholders' equity.
CLASS B PREFERRED STOCK
The holders of Class B Preferred Stock are entitled to a 6 percent
cumulative dividend which is paid when declared by the Company's Board of
Directors. The shares have no voting rights. The Company has the contractual
ability to redeem or convert all outstanding shares of Class B Preferred Stock
upon an initial public offering.
STOCK WARRANTS
The Company has issued warrants to purchase 84,795 shares of Company Common
Stock at $.3007 per share, of which 70,175 are held by Smart Technology. The
values attributable to these warrants at the time of issuance are not
significant and, therefore, have not been separately presented in the
F-21
<PAGE>
APPNET SYSTEMS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1998 AND MARCH 31, 1999
consolidated financial statements. The Company has also issued warrants to
purchase 121 shares of Class A Preferred Stock at $1,000 per share.
RESERVED STOCK
The Reserved Stock is subject to a Senior Management Agreement dated June
29, 1998 (the "Agreement") with the Company's President and Chief Executive
Officer. At the time of the GTCR Investment, 1,251,228 shares of Reserved Stock
were purchased at a price of $.3007 per share in exchange for cash equal to the
par value of the stock and a promissory note equal to the remaining balance.
Pursuant to the Agreement, the Company may, at its discretion, repurchase any or
all of the Reserved Stock for the $.3007 per share paid by the executive in
order to issue a corresponding number of shares and options to purchase shares
to certain employees. The Company's right to repurchase the Reserved Stock
expires on the first to occur of (a) a sale of the Company, (b) the failure by
GTCR to own 50 percent of the original number of Company Common Shares it
purchased in conjunction with the GTCR Investment and (c) an IPO ("Qualifying
Events"). As of December 31, 1998, the Company's President and Chief Executive
Officer had 659,649 shares of Reserved Stock remaining. Additional shares were
repurchased subsequent to year end reducing the total shares outstanding to
210,119 as of March 29, 1999.
Because the number of recorded shares to be held by the executive is not
fixed, the Company will record a charge to income equal to the difference
between the fair value of the Company's stock on the date of the Qualifying
Event and $.3007, multiplied by the number of remaining Reserved Shares retained
by the executive following the occurrence of the Qualifying Event.
SALES TO MANAGEMENT
Shortly after the GTCR Investment, the Company sold 503,860 shares of
Company Common Stock to management for $.3007 per share, the fair value at that
time. In November 1998, the Company sold 49,123 shares of Common Stock to a
member of management for $8.55 per share, the fair value at that time.
11. RETIREMENT PLAN:
During 1998, the Company maintained various 401(k) plans for its employees.
These plans had been established by the 1998 Acquired Businesses prior to
acquisition. Effective February 1, 1999, the employees of the 1998 Acquired
Businesses began making contributions to the AppNet plan. During 1998, the
Company's expense under these plans totaled $281,000.
Effective February 1, 1999, the Company established a 401(k) retirement plan
for the benefit of all eligible employees. Participants may contribute up to 15
percent of their annual compensation to the plan. Employee contributions are
fully vested. The Company will match 50 percent of each employees' contributions
up to six percent of each employees' salary. The Company may also elect to make
a discretionary contribution as determined by its Board of Directors on an
annual basis. Employees will fully vest in the Company's matching and any
discretionary contributions ratably over three years.
12. EMPLOYEE STOCK OPTION PLANS:
The Company had two stock option plans as of December 31, 1998, which were
the 1998 Stock Option and Incentive Plan and an incentive stock option plan
assumed in connection with the
F-22
<PAGE>
APPNET SYSTEMS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1998 AND MARCH 31, 1999
acquisition of Century (the "Century Plan"). Options under these plans expire no
later than ten years from the date of the grant or when employment ceases,
whichever comes first. The maximum number of shares of common stock which may be
issued pursuant to the stock option plans is 913,042 at December 31, 1998.
Options granted under the stock option plan are accounted for under APB
Opinion No. 25, and since options have been granted at prices equal to the fair
value of the Company's Common Stock on the date of grant, no compensation
expense has been recognized for the option grants. Certain options converted
from the 1998 Acquired Businesses have exercise prices ranging from $.06 to
$8.69. The value of these options was included in the purchase price of the 1998
Acquired Businesses. Had compensation cost for the plan been determined based on
the estimated fair value of the options at the grant dates consistent with the
method of SFAS No. 123, pro forma net loss attributable to common stockholders
would have been approximately $15,408,000 or a net loss of $1.43 per share for
1998. The weighted average fair value of the options granted by the Company
during 1998 is estimated to be $3.85 per option assuming the following: no
dividend yield, risk-free interest rate of 5 percent, an expected term of the
options of four years and an expected volatility of 45 percent.
The following summarizes option activity during 1998:
<TABLE>
<CAPTION>
WEIGHTED
NUMBER OF AVERAGE
SHARES EXERCISE PRICE
------------- ---------------
<S> <C> <C>
Granted in 1998................................................. 500,351 $ 7.67
Options converted from 1998 Acquired Businesses................. 849,641 .91
Exercised in 1998............................................... (425,339) .74
Cancelled in 1998............................................... (11,614) 1.08
------------- -----
Options outstanding, December 31, 1998, exercise prices range of
$.06 to $11.40................................................ 913,039 $ 4.67
------------- -----
------------- -----
Options exercisable, December 31, 1998.......................... 296,736 $ 1.37
------------- -----
------------- -----
</TABLE>
Subsequent to December 31, 1998, the Company issued options to purchase
882,883 shares of Company Common Stock.
In March 1999, the Company issued 337,776 stock options to a member of
management. These options have an exercise price of $12.83 and vest ratably over
4 years. As a result of this grant, the Company recorded deferred compensation
of $481,000. The amount of deferred compensation was based on the difference
between the estimated fair market value of the Company Common Stock at the date
of grant, as determined by the most recent third party stock transaction, and
the stated exercise price. The Company amortized $4,000 of the deferred
compensation for the three months ended March 31, 1999 in the unaudited
consolidated statement of operations.
13. EARNINGS PER SHARE:
Shares of common stock which are contingently payable pursuant to the
acquisition agreements (Note 16) are not included in the calculation of weighted
average shares outstanding for the period presented, as circumstances may arise
in which the shares would not be issued. In addition, the impact
F-23
<PAGE>
APPNET SYSTEMS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1998 AND MARCH 31, 1999
of other potentially dilutive securities are excluded from diluted earnings per
share due to their antidilutive effect as follows:
<TABLE>
<CAPTION>
DECEMBER 31,
1998
------------
<S> <C>
Stock options................................................................... 539,312
Warrants........................................................................ 84,010
Convertible notes............................................................... 413,554
</TABLE>
In addition, as of December 31, 1998, $706,000 of notes payable are
convertible, upon completion of an initial public offering of Company Common
Stock, at 80% of the IPO price.
14. INCOME TAXES:
The Company follows the provisions of SFAS No. 109, "Accounting for Income
Taxes," for financial reporting purposes. Deferred tax assets or liabilities at
the end of each period are determined using the currently enacted tax rates to
apply to taxable income in the period in which the deferred tax asset or
liability is expected to be settled or realized.
The sources of and differences between the financial accounting and tax
basis of AppNet's assets and liabilities which give rise to the net deferred tax
liability as of December 31, 1998, are as follows:
<TABLE>
<CAPTION>
DECEMBER
31, MARCH 31,
1998 1999
---------- ----------
(UNAUDITED)
<S> <C> <C>
Deferred tax liabilities:
Intangible assets........................................ $2,241,000 $1,835,000
Deferred tax assets:
Allowance for doubtful accounts.......................... 434,000 438,000
Net operating loss carryforward.......................... 1,624,000 3,078,000
Cumulative amortization differences on intangibles....... 994,000 2,480,000
Other.................................................... 506,000 522,000
Valuation allowance...................................... (1,317,000) (4,683,000)
---------- ----------
Net deferred tax liability............................. $ -- $ --
---------- ----------
---------- ----------
</TABLE>
The components of the benefit from income taxes during the year ended
December 31, 1998 are as follows:
<TABLE>
<CAPTION>
DECEMBER 31, 1998 MARCH 31, 1999
----------------- -----------------
<S> <C> <C>
(UNAUDITED)
Current--
Federal.............................................. $ (400,000) $ --
State................................................ 250,000 100,000
----------------- -----------------
Total.............................................. (150,000) 100,000
Deferred--
Federal.............................................. (50,000) --
State................................................ -- --
----------------- -----------------
Income tax benefit................................. $ (200,000) $ 100,000
----------------- -----------------
----------------- -----------------
</TABLE>
F-24
<PAGE>
APPNET SYSTEMS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1998 AND MARCH 31, 1999
For the year ended December 31, 1998, the income tax benefit differed from
the amounts computed at the statutory rate, as follows:
<TABLE>
<CAPTION>
DECEMBER 31, MARCH 31,
1998 1999
------------- -------------
<S> <C> <C>
(UNAUDITED)
Income tax benefit computed at federal statutory rates.......... $ (4,957,000) $ (5,842,000)
Nondeductible intangible amortization........................... 2,402,000 1,772,000
Nondeductible portion of stock-based and other
acquisition-related compensation, net......................... 497,000 811,000
State income taxes, net of federal income tax benefit........... 165,000 66,000
Changes in valuation allowance.................................. 1,317,000 3,671,000
Other, net...................................................... 376,000 (378,000)
------------- -------------
Total....................................................... $ (200,000) $ 100,000
------------- -------------
------------- -------------
</TABLE>
As of December 31, 1998 and March 31, 1999, the Company had approximately
$4.2 million and $7.9 million (unaudited), respectively, of net operating loss
carryforwards which begin to expire in 2018. The Company has recorded a
valuation allowance for deferred tax assets as of December 31, 1998, of
$1,317,000. In assessing the realizability of deferred tax assets, management
considers whether it is more likely than not that some portion or all of the
deferred tax assets will not be realized. The ultimate realization of deferred
tax assets is dependent upon the generation of future taxable income during the
periods in which those temporary differences become deductible. Management
considers the scheduled reversal of deferred tax liabilities, projected future
taxable income, and tax planning strategies in making this assessment.
15. RELATED PARTIES:
At December 31, 1998, the Company was owed $821,000 from members of
management. These borrowings are due at varying dates through November, 2008.
At December 31, 1998, the Company had outstanding borrowings of $150,000
from Smart Technology, $50,000 from a member of management, and $406,000 from
one of the Company's Initial Investors. Also, the convertible notes of
$4,306,000 as of December 31, 1998 and the notes payable for $1,000,000 are due
to former shareholders of the Acquired Businesses, the majority of whom are
current AppNet employees. Subsequent to December 31, 1998, the Company issued
convertible notes of $10,300,000 due to former shareholders of one of the 1999
Acquired Businesses, both of whom are current AppNet employees. The Company also
issued, subsequent to December 31, 1998, a convertible note of $1,000,000 to a
trust established for employees of one of the 1999 Acquired Businesses. Since
the trust is available to the Company's creditors, the trust's assets are
included in these financial statements. As such, the trust's note receivable and
the Company's convertible note payable held by the trust have been eliminated in
consolidation.
In December 1997, the Company entered into an agreement which was
consummated in 1998 to purchase a 50 percent ownership interest in AppNet
Commerce Services, Inc. ("ACS"). ACS was established to conduct electronic
commerce transaction processing. The remaining 50 percent interest in ACS is
owned by another company. In 1998, due to the failure of the venture to maintain
its customer base and to generate sufficient revenues to cover operating
expenses, the Company determined that its investment was impaired and recorded a
charge of approximately $300,000 which is included in the accompanying statement
of operations as a component of other expense. As of December 31, 1998, the
investment in ACS has a value of zero.
F-25
<PAGE>
APPNET SYSTEMS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1998 AND MARCH 31, 1999
During 1998, the Company was party to a professional services agreement with
one of its directors. The agreement provided for the payment of $17,000 per
month. The Company incurred approximately $200,000 related to this agreement in
1998. In addition, the Director received a fee of $350,000 in association with
the GTCR Investment. The professional services agreement also provides for a one
percent commission on certain issuances Class A Preferred Stock (Note 10). The
Company also paid approximately $336,000 related to certain fees and a
professional services agreement with one of its initial investors.
16. COMMITMENTS AND CONTINGENCIES:
LEASES
As of December 31, 1998, the Company has noncancellable operating leases,
primarily for real estate, that expire over the next six years. Rental expense
during 1998 was $512,000.
Future minimum lease payments under noncancellable operating leases are as
follows as of December 31, 1998:
<TABLE>
<S> <C>
1999............................................................ $1,424,000
2000............................................................ 1,294,000
2001............................................................ 1,187,000
2002............................................................ 1,082,000
2003............................................................ 872,000
Thereafter...................................................... 792,000
---------
Total minimum lease payments................................ $6,651,000
---------
---------
</TABLE>
LITIGATION AND CLAIMS
In connection with the acquisition of Internet Outfitters, approximately
$1,450,000 of the purchase price in the form of shares of Company Common Stock,
based upon the fair value of $17.10 per share at the date of acquisition, was
pledged to the Company and escrowed to be available to satisfy any potential
liability in connection with a license dispute. The Company also held back
$750,000 of the cash purchase price to be used to satisfy this and any other
indemnification claims.
The Company is subject to lawsuits, investigations and claims arising out of
the ordinary course of business, including those related to commercial
transactions, contracts, government regulation and employment matters. Certain
claims, suits and complaints have been filed or are pending against the Company.
In the opinion of management, based on all known facts, all matters are without
merit, and except as related to the aforementioned Internet Outfitters claim,
are of such kind, or involve such amounts, as would not have a material effect
on the financial position or results of operations of the Company if disposed of
unfavorably.
CONTINGENT PAYMENTS
The Company's acquisition of NMP provided for additional contingent payments
of up to $14,000,000 as of December 31, 1998 in the form of cash and Company
Common Stock to be made to the former owners of NMP if NMP reaches certain
revenue and earnings before interest, taxes, depreciation, and amortization
targets for the period from October 1, 1998 to September 30, 1999. The amount of
this contingent payment varies based on a sliding scale of revenues and earnings
before interest, taxes, depreciation, and amortization. If these goals are
reached, approximately 42 percent of
F-26
<PAGE>
APPNET SYSTEMS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1998 AND MARCH 31, 1999
the contingent consideration will be reflected as additional purchase
consideration if and when paid. The remaining 58 percent of the contingent
consideration will be paid only if the targets are reached and certain NMP
employees remain employed by the Company. Accordingly, pursuant to the consensus
reached in Emerging Issues Task Force Issue 95-08, "Accounting for Contingent
Consideration Paid to the Shareholders of an Acquired Company in a Purchase
Business Combination," ("EITF 95-08") an estimate of the amount expected to be
paid to these employees will be reflected as stock-based and other
acquisition-related compensation expense ratably over the period which these
employees must remain employed to receive the contingent consideration.
Revisions to this estimate will be reflected on a prospective basis each
reporting period until paid. The accompanying statement of operations reflects a
charge of $1,157,000 of stock-based and other acquisition related compensation
for this contingent payment.
The Company's acquisitions of Sigma6, Salzinger, Internet Outfitters and
Transform IT provided for contingent payments of up to $14,800,000 (unaudited)
in the form of cash and Company Common Stock to be made to the former owners of
these companies if these entities reach certain revenue and earnings targets for
periods ranging from 9 - 18 months from the date of their acquisition. The
amount of these contingent payments varies based on a sliding scale of revenues
and earnings, as defined in the acquisition agreements.
If these goals are reached for Salzinger and Sigma6, the amount will be paid
only if the targets are reached and certain Sigma6 and Salzinger employees
remain employed by the Company. Accordingly, pursuant to EITF 95-08, an estimate
of the amount to be paid to these employees will be reflected as stock-based and
other acquisition-related compensation expense ratably over the period which the
employees must remain employed to receive the contingent consideration.
Revisions to this estimate will be reflected on a prospective basis each
reporting period until paid.
If these goals are reached for Internet Outfitters and Transform IT,
approximately 23 and 33 percent, respectively, of the contingent payment will be
reflected as additional purchase price consideration if and when paid. The
remaining contingent amounts will be paid only if the targets are reached and
certain Internet Outfitters and Transform IT employees remain employed by the
Company. Accordingly, pursuant to EITF 95-08, an estimate of the amount to be
paid to these employees will be reflected as stock-based and other
acquisition-related compensation expense ratably over the period which the
employees must remain employed to receive the contingent consideration.
Revisions to this estimate will be reflected on a prospective basis each
reporting period until paid.
17. SEGMENT INFORMATION:
The Company currently operates in two operating segments: professional
services and electronic commerce processing. For the year ended December 31,
1998 and the three months ended March 31, 1999, the electronic commerce
processing segment was not significant to the overall financial statements.
18. 1999 COMMON STOCK SPLIT (UNAUDITED)
The Company is currently contemplating an initial public offering. Prior to
the effectiveness of the initial public offering, the Company intends to enter
into an agreement to exchange the Class A Preferred Stock and the Class B
Preferred Stock, not redeemed with the proceeds of the initial public offering,
into Company Common Stock based on the per share price in the initial public
offering, and declare a 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.
F-27
<PAGE>
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To Software Services Corporation:
We have audited the accompanying balance sheets of Software Services
Corporation (a Michigan corporation) as of December 31, 1996 and 1997, and
August 24, 1998, and the related statements of operations, stockholders' equity
and cash flows for the years ended December 31, 1996 and 1997, and for the
period from January 1, 1998 to August 24, 1998. These financial statements are
the responsibility of the Company's management. Our responsibility is to express
an opinion on these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audits to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of Software Services
Corporation as of December 31, 1996 and 1997, and August 24, 1998, and the
results of its operations and its cash flows for the years ended December 31,
1996 and 1997, and for the period from January 1, 1998 to August 24, 1998, in
conformity with generally accepted accounting principles.
ARTHUR ANDERSEN LLP
Ann Arbor, Michigan
February 5, 1999
F-28
<PAGE>
SOFTWARE SERVICES CORPORATION
BALANCE SHEETS
AS OF DECEMBER 31, 1996 AND 1997, AND AUGUST 24, 1998
<TABLE>
<CAPTION>
DECEMBER 31, DECEMBER 31, AUGUST 24,
1996 1997 1998
------------ ------------ ------------
<S> <C> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents............................................ $ 70,000 $ 252,000 $ 44,000
Accounts receivable, net of allowance for doubtful accounts of
$29,000, $25,000 and $255,000, respectively........................ 1,597,000 2,167,000 2,935,000
Other current assets................................................. 225,000 150,000 1,020,000
------------ ------------ ------------
Total current assets............................................... 1,892,000 2,569,000 3,999,000
Property and equipment, net............................................ 617,000 541,000 475,000
Intangible assets, net................................................. 450,000 311,000 216,000
Other assets........................................................... 196,000 246,000 283,000
------------ ------------ ------------
Total assets....................................................... $3,155,000 $3,667,000 $ 4,973,000
------------ ------------ ------------
------------ ------------ ------------
LIABILITIES AND STOCKHOLDERS' EQUITY:
Current liabilities:
Accounts payable..................................................... $ 56,000 $ 57,000 $ 725,000
Accrued liabilities.................................................. 649,000 1,058,000 761,000
Current portion of long-term debt.................................... 672,000 334,000 --
------------ ------------ ------------
Total current liabilities.......................................... 1,377,000 1,449,000 1,486,000
Long-term debt, net of current portion................................. 320,000 332,000 --
------------ ------------ ------------
Total liabilities.................................................. 1,697,000 1,781,000 1,486,000
------------ ------------ ------------
Commitments and contingencies (Note 9)
Stockholders' equity:
Common stock, no par value, 10,000,000 shares authorized, 5,700,000,
5,697,000 and 5,667,000 shares issued and outstanding,
respectively....................................................... 1,000 61,000 31,000
Additional paid-in capital (Note 1).................................. -- -- 3,344,000
Retained earnings.................................................... 1,457,000 1,825,000 112,000
------------ ------------ ------------
Total stockholders' equity......................................... 1,458,000 1,886,000 3,487,000
------------ ------------ ------------
Total liabilities and stockholders' equity......................... $3,155,000 $3,667,000 $ 4,973,000
------------ ------------ ------------
------------ ------------ ------------
</TABLE>
The accompanying notes are an integral part of these statements.
F-29
<PAGE>
SOFTWARE SERVICES CORPORATION
STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
FOR THE
FOR THE YEARS ENDED PERIOD FROM FOR THE
DECEMBER 31, JANUARY 1, 1998 THREE MONTHS
---------------------------- TO AUGUST 24, ENDED
1996 1997 1998 MARCH 31, 1998
------------- ------------- ----------------- -----------------
<S> <C> <C> <C> <C>
(UNAUDITED)
Revenues..................................... $ 11,789,000 $ 13,298,000 $ 10,788,000 $ 3,538,000
Costs of revenues............................ 7,680,000 8,416,000 7,392,000 2,483,000
------------- ------------- ----------------- -----------------
Gross profit............................. 4,109,000 4,882,000 3,396,000 1,055,000
Operating expenses:
Selling and marketing...................... 1,082,000 997,000 567,000 155,000
General and administrative................. 2,615,000 3,050,000 1,856,000 728,000
Stock-based and acquisition-related
compensation............................. -- -- 2,654,000 --
Depreciation and amortization.............. 300,000 341,000 230,000 89,000
------------- ------------- ----------------- -----------------
Total operating expenses................. 3,997,000 4,388,000 5,307,000 972,000
------------- ------------- ----------------- -----------------
Income (loss) from operations................ 112,000 494,000 (1,911,000) 83,000
Gain on sale of investment in affiliate...... -- 358,000 -- --
Interest expense, net........................ 52,000 35,000 28,000 7,000
Other expense, net........................... -- 9,000 372,000 124,000
------------- ------------- ----------------- -----------------
Income (loss) before income taxes............ 60,000 808,000 (2,311,000) (48,000)
Provision (benefit) for income taxes......... 113,000 377,000 (598,000) (225,000)
------------- ------------- ----------------- -----------------
Net (loss) income............................ $ (53,000) $ 431,000 $ (1,713,000) $ 177,000
------------- ------------- ----------------- -----------------
------------- ------------- ----------------- -----------------
Basic and diluted net (loss) income per
share...................................... $ (.01) $ .08 $ (.30) $ .03
------------- ------------- ----------------- -----------------
------------- ------------- ----------------- -----------------
Weighted average common shares outstanding... 5,727,000 5,705,000 5,697,000 5,697,000
------------- ------------- ----------------- -----------------
------------- ------------- ----------------- -----------------
</TABLE>
The accompanying notes are an integral part of these statements.
F-30
<PAGE>
SOFTWARE SERVICES CORPORATION
STATEMENTS OF STOCKHOLDERS' EQUITY
FOR THE YEARS ENDED DECEMBER 31, 1996 AND 1997,
AND FOR THE PERIOD FROM JANUARY 1, 1998 TO AUGUST 24, 1998
<TABLE>
<CAPTION>
COMMON STOCK ADDITIONAL TOTAL
---------------------- PAID-IN RETAINED STOCKHOLDERS'
SHARES AMOUNT CAPITAL EARNINGS EQUITY
---------- ---------- ------------ ------------- ------------
<S> <C> <C> <C> <C> <C>
Balance, December 31, 1995................... 6,000,000 $ 1,000 $ -- $ 1,810,000 $1,811,000
Repurchase of common stock shares.......... (300,000) -- -- (300,000) (300,000)
Net loss................................... -- -- -- (53,000) (53,000)
---------- ---------- ------------ ------------- ------------
Balance, December 31, 1996................... 5,700,000 1,000 -- 1,457,000 1,458,000
Repurchase of common stock shares.......... (63,000) -- -- (63,000) (63,000)
Issuance of common stock as compensation... 60,000 60,000 -- -- 60,000
Net income................................. -- -- -- 431,000 431,000
---------- ---------- ------------ ------------- ------------
Balance, December 31, 1997................... 5,697,000 61,000 -- 1,825,000 1,886,000
Repurchase of common stock shares.......... (30,000) (30,000) -- -- (30,000)
Capital contribution....................... -- -- 3,344,000 -- 3,344,000
Net loss................................... -- -- -- (1,713,000) (1,713,000)
---------- ---------- ------------ ------------- ------------
Balance, August 24, 1998..................... 5,667,000 $ 31,000 $ 3,344,000 $ 112,000 $3,487,000
---------- ---------- ------------ ------------- ------------
---------- ---------- ------------ ------------- ------------
</TABLE>
The accompanying notes are an integral part of these statements.
F-31
<PAGE>
SOFTWARE SERVICES CORPORATION
STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
FOR THE
PERIOD FROM
FOR THE YEARS ENDED JANUARY 1,
DECEMBER 31, 1998 TO FOR THE
-------------------- AUGUST 24, THREE MONTHS ENDED
1996 1997 1998 MARCH 31, 1998
--------- --------- --------------- --------------------
UNAUDITED
<S> <C> <C> <C> <C>
Cash flows from operating activities:
Net (loss) income................................. $ (53,000) $ 431,000 $ (1,713,000) $ 177,000
Adjustments to reconcile net (loss) income to net
cash provided by (used in) operating activities:
Depreciation and amortization................. 300,000 341,000 230,000 89,000
Deferred compensation agreements.............. -- 616,000 -- --
Gain on sale of investment in affiliate....... -- (358,000) -- --
Deferred income taxes......................... (34,000) (216,000) (935,000) (224,000)
Change in assets and liabilities:
Accounts receivable......................... 97,000 (570,000) (768,000) (62,000)
Other current assets........................ (74,000) 89,000 31,000 25,000
Other assets................................ -- (2,000) (3,000) (3,000)
Accounts payable............................ (109,000) 1,000 668,000 91,000
Accrued liabilities......................... (11,000) 409,000 (297,000) (397,000)
--------- --------- --------------- -----------
Net cash provided by (used in) operating
activities.............................. 116,000 741,000 (2,787,000) (304,000)
--------- --------- --------------- -----------
Cash flows from investing activities:
Purchase of property and equipment, net........... (221,000) (121,000) (69,000) (39,000)
Additional investment in affiliate................ -- (75,000) -- --
Proceeds from disposal of investment in
affiliate....................................... -- 490,000 -- --
--------- --------- --------------- -----------
Net cash (used in) provided by investing
activities.............................. (221,000) 294,000 (69,000) (39,000)
--------- --------- --------------- -----------
Cash flows from financing activities:
Repayments of long-term debt...................... (235,000) (236,000) (263,000) (17,000)
Net borrowings (repayments) under notes payable... 400,000 (400,000) -- 180,000
Repurchase of common stock........................ (300,000) (63,000) (30,000) --
Capital contribution.............................. -- -- 3,344,000 --
Payments under deferred compensation agreement.... -- (154,000) (403,000) (50,000)
--------- --------- --------------- -----------
Net cash (used in) provided by financing
activities.............................. (135,000) (853,000) 2,648,000 113,000
--------- --------- --------------- -----------
Net (decrease) increase in cash and cash
equivalents....................................... (240,000) 182,000 (208,000) (230,000)
Cash and cash equivalents, beginning of period...... 310,000 70,000 252,000 252,000
--------- --------- --------------- -----------
Cash and cash equivalents, end of period............ $ 70,000 $ 252,000 $ 44,000 $ 22,000
--------- --------- --------------- -----------
--------- --------- --------------- -----------
Supplementary information:
Cash paid for interest............................ $ 59,000 $ 56,000 $ 33,000 $ 15,000
--------- --------- --------------- -----------
--------- --------- --------------- -----------
Cash paid for income taxes........................ $ 182,000 $ 135,000 $ 653,000 $ 477,000
--------- --------- --------------- -----------
--------- --------- --------------- -----------
Assets financed under capital lease obligations... $ 252,000 $ -- $ -- $ --
--------- --------- --------------- -----------
--------- --------- --------------- -----------
</TABLE>
The accompanying notes are an integral part of these statements.
F-32
<PAGE>
SOFTWARE SERVICES CORPORATION
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 1996 AND 1997, AND AUGUST 24, 1998
1. BUSINESS DESCRIPTION:
Software Services Corporation (the Company) engages in application
development, computer software and networking projects, and provides both
full-time and temporary personnel to companies in the computer industry. The
Company is headquartered in Ann Arbor, Michigan.
On August 25, 1998, all of the outstanding Common Stock of the Company was
acquired by SSC Acquisition Sub. No. 1, Inc. (a Michigan Corporation and a
wholly owned subsidiary of AppNet Systems, Inc.; "AppNet"). In contemplation of
the acquisition, AppNet advanced the Company $3,344,000 to fund the repayment of
certain debt, the repurchase of certain shares, pay the Company's obligation
under a deferred compensation agreement and to fund certain acquisition expenses
paid by the Company. This amount has been included as paid in capital in the
accompanying financial statements.
There are significant risks associated with the Company, including the
subjectivity of the Company's services to rapid technological change and the
Year 2000 issue.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES AND PRACTICES:
USE OF ESTIMATES
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
INVESTMENT IN AFFILIATE
Investment in affiliate represented the Company's 10 percent interest in
Workwell Health & Safety Systems, Inc. ("Workwell"). In addition to the
investment in Workwell, the Company held an option to purchase an additional
2,353 to 2,667 shares of Workwell for $75,000. In January 1997, the Company
exercised this option and signed an agreement to sell its total investment in
Workwell for $490,000. In connection with the sale, certain employment
agreements and options were canceled and the owners of Workwell released the
Company from further payments owed under the non-competition agreements. Except
for the release of payments, all the terms and conditions of the non-competition
agreements remain in full force and effect. During 1997, the Company recognized
a $358,000 gain on this transaction; $93,000 of which represents the release of
payments by the Company under the non-competition agreements.
CASH AND CASH EQUIVALENTS
The Company considers all investments purchased with a maturity of three
months or less to be cash equivalents.
F-33
<PAGE>
SOFTWARE SERVICES CORPORATION
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1996 AND 1997, AND AUGUST 24, 1998
PROPERTY AND EQUIPMENT
Property and equipment are stated at cost, net of accumulated depreciation
and amortization. Depreciation and amortization are computed using the
straight-line method over the estimated useful lives of the related assets, as
follows:
<TABLE>
<S> <C>
three to five
Computers and equipment................................. years
Furniture and fixtures.................................. five years
</TABLE>
Purchased software and third-party costs incurred to develop software for
internal use are capitalized and amortized principally over three years.
In accordance with SFAS No. 121, "Accounting for the Impairment of
Long-Lived Assets and for Long-Lived Assets to Be Disposed Of," the Company
reviews its recorded long-lived assets for impairment whenever events or changes
in circumstances indicate that the carrying amount of an asset may not be
recoverable.
GOODWILL
Goodwill represents the excess of the purchase price over the fair value of
net assets acquired and is amortized on a straight-line basis over 5 years.
NON-COMPETITION AGREEMENTS
Non-compete agreements were entered into with former owners of various
acquisitions of the Company and are being amortized on a straight-line basis
over the lives of the related agreements, generally four to five years.
INTELLECTUAL PROPERTY
Intellectual property represents acquired and internally developed patents.
The Company capitalizes the direct external costs of acquiring the related
patents. Intellectual property is amortized on a straight-line basis over the
lives of the related assets, generally five years.
FAIR VALUE OF FINANCIAL INSTRUMENTS
The Company's financial instruments consist primarily of cash and cash
equivalents, accounts receivable, accounts payable, short-term borrowings,
long-term debt and capital lease obligations. In management's opinion, the
carrying amounts of these financial instruments approximated their fair values
at December 31, 1996 and 1997, and August 24, 1998.
SELF INSURANCE
The Company partially self insures its dental, vision and short-term
disability programs. There are stop-loss provisions on each of these programs.
Paid claims were $54,000 and $64,000 in 1996 and 1997, respectively, and $47,000
for the period from January 1, 1998 through August 24, 1998.
STOCK-BASED COMPENSATION
The Company accounts for stock-based compensation arrangements using the
intrinsic value method in accordance with provisions of Accounting Principles
Board ("APB") Opinion No. 25,
F-34
<PAGE>
SOFTWARE SERVICES CORPORATION
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1996 AND 1997, AND AUGUST 24, 1998
"Accounting for Stock Issued to Employees," and complies with the disclosure
provisions of SFAS No. 123, "Accounting for Stock-Based Compensation." Under APB
Opinion No. 25, compensation cost is recognized based on the difference, if any,
on the date of grant between the fair value of the Company's stock and the
amount an employee must pay to acquire the stock.
REVENUE RECOGNITION
Revenues from time and material contracts are recognized based on fixed
hourly rates for direct labor hours expended.
Costs of revenues include all direct, material and labor costs related to
contract performance and does not include any related depreciation expense.
BUSINESS CONCENTRATION AND CREDIT RISK
The following table summarizes the revenues and accounts receivable from
clients in excess of 10% of total revenues and accounts receivable:
<TABLE>
<CAPTION>
REVENUES ACCOUNTS RECEIVABLE
--------------------------------------------- -----------------------------------------------
FOR THE YEAR ENDED FOR THE PERIOD
ENDED AS OF AUGUST
DECEMBER 31, AUGUST 24, AS OF DECEMBER 31, 24,
------------------------ ------------------------------
1996 1997 1998 1996 1997 1998
----------- ----------- ------------------- ------------- --------------- ---------------
<S> <C> <C> <C> <C> <C> <C>
Customer A............. 62% 46% 33% 49% 37% 23%
Customer B............. * * 11% * 11% 14%
</TABLE>
- ------------------------
* Represents less than 10 percent of total.
INCOME TAXES
The Company accounts for income taxes under Statement of Financial
Accounting Standards ("SFAS") No. 109, "Accounting for Income Taxes". Under the
provisions of SFAS No. 109, deferred income taxes reflect the impact of
temporary differences between the amount of assets and liabilities recognized
for financial reporting purposes and such amounts recognized for tax reporting
purposes. Deferred tax assets may also be recognized to reflect the expected
future benefit from the utilization of net operating loss and tax credit
carryforwards. Deferred tax assets and liabilities are measured by applying
current enacted tax laws.
EARNINGS PER SHARE
SFAS No. 128, "Earnings Per Share," requires the presentation of basic and
diluted earnings per share. Basic net income (loss) per share is computed by
dividing income (loss) available to common stockholders by the weighted average
number of common shares outstanding for the period. The diluted net income
(loss) per share data is computed using the weighted average number of common
shares outstanding plus the dilutive effect of common stock equivalents, unless
the equivalents are antidilutive.
F-35
<PAGE>
SOFTWARE SERVICES CORPORATION
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1996 AND 1997, AND AUGUST 24, 1998
RECENT ACCOUNTING PRONOUNCEMENTS
In March 1998, the American Institute of Certified Public Accountants issued
Statement of Position ("SOP") 98-1, "Accounting for the Cost of Computer
Software Developed or Obtained for Internal Use." SOP 98-1 is effective for
financial statement years beginning after December 15, 1998. SOP 98-1 provides
guidance on accounting for computer software developed or obtained for internal
use, including the requirements to capitalize specified costs and the
amortization of such costs. The Company does not expect the adoption of this
standard to have a material effect on the Company's capitalization policy.
RECLASSIFICATIONS
Certain amounts from the prior year financial statements have been
reclassified to conform with the current presentation.
3. ACCOUNTS RECEIVABLE:
Accounts receivable consists of the following:
<TABLE>
<CAPTION>
DECEMBER 31, DECEMBER 31, AUGUST 24,
1996 1997 1998
------------ ------------ ------------
<S> <C> <C> <C>
Accounts receivable................................ $1,562,000 $2,014,000 $ 2,630,000
Unbilled accounts receivables...................... 64,000 178,000 560,000
Allowance for doubtful accounts.................... (29,000) (25,000) (255,000)
------------ ------------ ------------
Accounts receivable, net....................... $1,597,000 $2,167,000 $ 2,935,000
------------ ------------ ------------
------------ ------------ ------------
</TABLE>
4. OTHER CURRENT ASSETS:
Other current assets consist of the following:
<TABLE>
<CAPTION>
DECEMBER 31, DECEMBER 31, AUGUST 24,
1996 1997 1998
------------ ------------ ------------
<S> <C> <C> <C>
Prepaid expenses................................... $ 174,000 $ 91,000 $ 60,000
Other.............................................. 6,000 -- --
Deferred income tax asset.......................... 45,000 59,000 960,000
------------ ------------ ------------
Other current assets........................... $ 225,000 $ 150,000 $ 1,020,000
------------ ------------ ------------
------------ ------------ ------------
</TABLE>
F-36
<PAGE>
SOFTWARE SERVICES CORPORATION
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1996 AND 1997, AND AUGUST 24, 1998
5. PROPERTY AND EQUIPMENT:
Property and equipment consists of the following:
<TABLE>
<CAPTION>
DECEMBER 31, DECEMBER 31, AUGUST 24,
1996 1997 1998
------------ ------------ ------------
<S> <C> <C> <C>
Computer equipment and software.................... $ 874,000 $ 994,000 $ 1,054,000
Furniture and fixtures............................. 178,000 179,000 187,000
Leasehold improvements............................. 53,000 53,000 53,000
------------ ------------ ------------
1,105,000 1,226,000 1,294,000
Accumulated depreciation and amortization.......... (488,000) (685,000) (819,000)
------------ ------------ ------------
Net property and equipment..................... $ 617,000 $ 541,000 $ 475,000
------------ ------------ ------------
------------ ------------ ------------
</TABLE>
6. INTANGIBLE ASSETS:
Intangible assets consist of the following:
<TABLE>
<CAPTION>
DECEMBER 31, DECEMBER 31, AUGUST 24,
1996 1997 1998
------------ ------------ ------------
<S> <C> <C> <C>
Goodwill........................................... $ 120,000 $ 120,000 $ 120,000
Non-competition agreements......................... 380,000 380,000 380,000
Intellectual property, net......................... 150,000 155,000 155,000
Acquired contracts................................. 158,000 -- --
------------ ------------ ------------
808,000 655,000 655,000
Accumulated amortization........................... (358,000) (344,000) (439,000)
------------ ------------ ------------
Intangible assets, net......................... $ 450,000 $ 311,000 $ 216,000
------------ ------------ ------------
------------ ------------ ------------
</TABLE>
7. OTHER NON-CURRENT ASSETS:
Other non-current assets consist of the following:
<TABLE>
<CAPTION>
DECEMBER 31, DECEMBER 31, AUGUST 24,
1996 1997 1998
------------ ------------ ------------
<S> <C> <C> <C>
Other.............................................. $ 12,000 $ 10,000 $ 13,000
Deferred income tax benefit........................ 34,000 236,000 270,000
Investment in affiliate............................ 150,000 -- --
------------ ------------ ------------
Other non-current assets....................... $ 196,000 $ 246,000 $ 283,000
------------ ------------ ------------
------------ ------------ ------------
</TABLE>
F-37
<PAGE>
SOFTWARE SERVICES CORPORATION
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1996 AND 1997, AND AUGUST 24, 1998
8. ACCRUED LIABILITIES:
Accrued liabilities consists of the following:
<TABLE>
<CAPTION>
DECEMBER 31 DECEMBER 31, AUGUST 24,
1996 1997 1998
------------ ------------ ------------
<S> <C> <C> <C>
Accrued compensation and benefits.................. $ 477,000 $ 422,000 $ 440,000
Accrued commissions................................ 89,000 111,000 79,000
Income taxes payable............................... 33,000 477,000 161,000
Accrued professional fees.......................... 17,000 27,000 22,000
Other accrued liabilities.......................... 33,000 21,000 59,000
------------ ------------ ------------
Accrued liabilities............................ $ 649,000 $1,058,000 $ 761,000
------------ ------------ ------------
------------ ------------ ------------
</TABLE>
9. COMMITMENTS AND CONTINGENCIES:
The Company currently leases its facility under an operating lease. Rent
expense for the years ended December 31, 1996 and 1997, and for the period from
January 1, 1998 to August 24, 1998, totaled approximately $180,000, $243,000 and
$165,000, respectively. Future minimum lease payments at August 24, 1998, under
these agreements are as follows:
<TABLE>
<S> <C>
Period ended December 31, 1998.................................. $ 86,000
1999............................................................ 275,000
2000............................................................ 293,000
2001............................................................ 301,000
2002............................................................ 309,000
2003............................................................ 155,000
---------
Total....................................................... $1,419,000
---------
---------
</TABLE>
F-38
<PAGE>
SOFTWARE SERVICES CORPORATION
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1996 AND 1997, AND AUGUST 24, 1998
10. DEBT:
Debt consists of the following:
<TABLE>
<CAPTION>
DECEMBER 31 DECEMBER 31, AUGUST 24,
1996 1997 1998
------------ ------------ ----------
<S> <C> <C> <C>
Deferred compensation (see Note 17), repaid during the period ended
August 24, 1998 (see below)........................................... $ -- $ 403,000 $ --
Capital lease obligation, repaid during the period ended August 24, 1998
(see below)........................................................... 141,000 116,000 --
Promissory notes, repaid during the period ended August 24, 1998 (see
below)................................................................ 285,000 98,000 --
Capital lease obligation, repaid during the period ended August 24, 1998
(see below)........................................................... 73,000 49,000 --
Noncompete agreements, repaid during the year ended December 31, 1997... 93,000 -- --
Note payable, repaid during the year ended December 31, 1997............ 400,000 -- --
------------ ------------ ----------
992,000 666,000 --
Less--Current portion................................................... 672,000 334,000 --
------------ ------------ ----------
$ 320,000 $ 332,000 $ --
------------ ------------ ----------
------------ ------------ ----------
</TABLE>
As a condition of the sale of the Company to AppNet, all of the Company's
outstanding debt was repaid prior to August 24, 1998. In contemplation of the
repayment, AppNet advanced funds to the Company to repay the debt. The funds
received by AppNet have been included in additional paid-in capital in the
accompanying financial statements.
11. STOCKHOLDERS' EQUITY:
STOCK SPLIT
During 1997, the Company declared a stock split of six-to-one for each
holder of common stock. All share information included in the accompanying
financial statements has been restated to retroactively reflect the stock split.
STOCK OPTION PLAN
During 1995, the Company established a stock option plan (the "Plan") to
encourage ownership by selected employees of the Company and provide an
additional incentive to these employees to promote the success of the Company.
Under the Plan, options to purchase the Company's common stock may be granted at
the discretion of the Board of Directors. The maximum number of shares that may
be granted is 1,500,000. The Plan may be terminated at any time at the
discretion of the Board of Directors. According to the Plan, the options will be
granted at a price equal to 100 percent of the fair market value of the common
stock as determined by the Board of Directors. All options will expire ten years
after date of grant. During the years ended December 31, 1996 and 1997 and the
for the period from January 1, 1998 to August 24, 1998, the Company granted
108,000, 170,000 and 20,000 options, respectively, at an option price of $1.00,
all of which vest over four years. During the years ended December 31, 1996,
1997 and for the period from January 1, 1998 to August 24, 1998, 372,000, 90,000
and 54,000 options were cancelled due to termination of employment,
respectively. As of December 31,
F-39
<PAGE>
SOFTWARE SERVICES CORPORATION
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1996 AND 1997, AND AUGUST 24, 1998
1996 and 1997, and as of August 24, 1998, 180,000, 260,000 and zero options were
outstanding, respectively. In contemplation of the sale of the Company to
AppNet, certain option vesting was accelerated and all then vested options,
totaling 89,500, were redeemed and the remaining options of the Company were
converted to equivalent options of AppNet for $3.43 per share. The amount paid
to the stockholders, net of the option exercise price, has been recognized as
expense and included in stock-based and acquisition-related compensation in the
accompanying statement of operations. In contemplation of the redemption of the
shares, AppNet advanced approximately $217,000 to the Company to fund the
redemption. The funds advanced to the Company have been recorded as additional
paid in capital in the accompanying financial statements.
Utilizing the intrinsic value method of accounting for the value of stock
options issued during the years ended December 31, 1996 and 1997 and for the
period from January 1, 1998 to August 24, 1998, no compensation cost was
recorded in the accompanying statements of income. Had compensation cost been
determined based on the fair value at the date of grant for awards for the years
ended December 31, 1996 and 1997 and for the period from January 1, 1998 to
August 24, 1998, consistent with the provisions of SFAS No. 123, net income
(loss) would not have significantly differed from the reported amounts.
12. EARNINGS PER SHARE:
The impact of stock options are excluded from diluted earnings per share due
to their antidilutive effect and are 180,000, 260,000, and zero for the years
ended December 31, 1996 and 1997 and for the period from January 1, 1998 to
August 24, 1998.
13. INCOME TAXES:
The components of the provision (benefit) for income taxes as recorded under
SFAS No. 109 are as follows:
<TABLE>
<CAPTION>
DECEMBER 31,
---------------------- AUGUST 24,
1996 1997 1998
---------- ---------- -----------
<S> <C> <C> <C>
Federal income taxes:
Currently payable..................................... $ 12,000 $ 446,000 $ 213,000
Deferred income taxes................................. (34,000) (216,000) (935,000)
State taxes............................................. 135,000 147,000 124,000
---------- ---------- -----------
Provisions (benefit) for income taxes............... $ 113,000 $ 377,000 $ (598,000)
---------- ---------- -----------
---------- ---------- -----------
</TABLE>
The tax provision (benefit) differed from the amounts computed at the
statutory rate as follows:
<TABLE>
<CAPTION>
DECEMBER 31,
---------------------- AUGUST 24,
1996 1997 1998
---------- ---------- -----------
<S> <C> <C> <C>
Federal income taxes at the U.S. statutory rate......... $ (26,000) $ 275,000 $ (786,000)
State taxes, net of federal benefit..................... 135,000 97,000 82,000
Acquisition expenses not deductible for tax purposes.... -- -- 115,000
Other................................................... 4,000 5,000 (9,000)
---------- ---------- -----------
Total............................................... $ 113,000 $ 377,000 $ (598,000)
---------- ---------- -----------
---------- ---------- -----------
</TABLE>
F-40
<PAGE>
SOFTWARE SERVICES CORPORATION
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1996 AND 1997, AND AUGUST 24, 1998
The components of the net deferred tax asset as of December 31, 1996 and
1997, and August 24, 1998, are as follows:
<TABLE>
<CAPTION>
DECEMBER 31, DECEMBER 31, AUGUST 24,
1996 1997 1998
------------ ------------ ------------
<S> <C> <C> <C>
Current deferred income tax asset:
Deferred compensation............................ $ -- $ -- $ 829,000
Accrued expenses................................. 36,000 50,000 32,000
Accounts receivable.............................. 9,000 9,000 99,000
------------ ------------ ------------
45,000 59,000 960,000
------------ ------------ ------------
Long-term deferred income tax asset:
Deferred compensation............................ -- 137,000 137,000
Property and equipment........................... (25,000) 7,000 19,000
Other assets..................................... 59,000 92,000 114,000
------------ ------------ ------------
34,000 236,000 270,000
------------ ------------ ------------
Net deferred tax asset......................... $ 79,000 $ 295,000 $ 1,230,000
------------ ------------ ------------
------------ ------------ ------------
</TABLE>
14. RELATED-PARTY TRANSACTIONS:
The Company purchased consulting services from an affiliate for
approximately $90,000 in 1996 and 1997 and $58,000 in the period from January 1,
1998 through August 24, 1998.
15. RETIREMENT PLAN:
The Company maintains a profit sharing and retirement plan under the
provisions of section 401(k) of the Internal Revenue Code. The Plan provides for
contribution by employees and a discretionary contribution by the Company. The
Plan is for the benefit of all employees. Employees are eligible to participate
if they are at least 18 years of age and have met certain minimum service
requirements. Employee contributions are fully vested and subject to statutory
limits. The Company's contribution is discretionary and is determined by its
Board of Directors. Company contributions vest after three years of service.
There were no company contributions for the year ended December 31, 1996 and
1997, and for the period from January 1, 1998 to August 24, 1998.
16. TERMINATION AGREEMENT:
During 1997, the Company entered into an agreement to terminate an
employment agreement with a key employee of the Company (the "Termination
Agreement"). Under the terms of the Termination Agreement, the Company was to
pay the former employee a total of $662,000 as satisfaction of any claims the
former employee may have had under the employment agreement. The amount was
payable in the form of 10,000 shares of the Company's common stock valued at
$60,000 and $602,000 in the form of a note. The Note was payable in quarterly
installments of $50,000 through December 1999, with a final payment of $30,000
in March 2000. The Company recorded the net present value of this note,
discounted at 5.5 percent, in the accompanying financial statements as deferred
compensation, which is included in long-term debt. This note was fully repaid
during the period from January 1, 1998 through August 24, 1998.
F-41
<PAGE>
SOFTWARE SERVICES CORPORATION
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1996 AND 1997, AND AUGUST 24, 1998
17. DEFERRED COMPENSATION AGREEMENT:
The Company has entered into a deferred compensation agreement (the
"Agreement") with the president of the Company. Under the terms of the
Agreement, the president is to receive certain compensation should the Company
be sold or merged, as defined in the Agreement. As a result of the sale of the
Company to AppNet, the Company recognized $2,437,000 in compensation expense
during the period from January 1, 1998 through August 24, 1998, which has been
included in general and administrative expense in the accompanying statement of
operations. In contemplation of this compensation being paid, AppNet advanced
funds to the Company to pay its obligation under the Agreement. The funds
advanced from AppNet have been included as paid in capital in the accompanying
financial statements.
18. SEGMENT DISCLOSURE:
The Company has adopted SFAS No. 131, "Disclosures about Segments of an
Enterprise and Related Information." SFAS No. 131 establishes standards for
reporting information about operating segments in annual financial statements
and requires selected information about operating segments in interim financial
reports issued to stockholders. It also establishes standards for related
disclosures about products and services, geographic areas and major customers.
The Company operated in two operating segments: technical consulting and
managed services. The technical consulting group primarily provides information
technology consulting to companies on a per diem basis. The managed services
group provides information technology solutions to its customers through the
design and implementation of information systems technology on a project or
solutions basis. Substantially all of the Company's revenues are generated and
assets are located in the Midwestern United States.
The accounting policies of the segments are the same as those described in
the summary of significant accounting policies (Note 2) except that certain
deferred compensation, merger related costs, interest expense and income taxes
have not been allocated to the business segments. The Company evaluates the
performance of its operating segments based primarily upon revenues and
operating income. Assets are not allocated to the operating segments.
As summary of the Company's operating segments for the years ended December
31, 1996 and 1997 for the period from January 1, 1998 to August 24, 1998, is set
forth below.
F-42
<PAGE>
SOFTWARE SERVICES CORPORATION
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1996 AND 1997, AND AUGUST 24, 1998
The following table presents revenues and other financial information by
operating segment:
<TABLE>
<CAPTION>
FOR THE PERIOD
FOR THE YEARS ENDED ENDED
DECEMBER 31, --------------
---------------------------- AUGUST 24,
1996 1997 1998
------------- ------------- --------------
<S> <C> <C> <C>
Revenues to external customers:
Technical consulting........................................... $ 8,520,000 $ 10,205,000 $ 8,489,000
Managed services............................................... 3,269,000 3,093,000 2,299,000
------------- ------------- --------------
Total revenue to external customers.......................... 11,789,000 13,298,000 10,788,000
------------- ------------- --------------
Operating profit (loss):
Technical consulting........................................... 531,000 1,055,000 827,000
Managed services............................................... (395,000) 56,000 (84,000)
------------- ------------- --------------
Segment operating profit........................................... 136,000 1,111,000 743,000
Reconciliation to Company operating profit due to
costs not allocated to segments:
Deferred compensation.......................................... (24,000) (617,000) --
Costs associated with acquisition.............................. -- -- (2,654,000)
------------- ------------- --------------
Total operating profit......................................... $ 112,000 $ 494,000 $ (1,911,000)
------------- ------------- --------------
------------- ------------- --------------
</TABLE>
F-43
<PAGE>
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To Arbor Intelligent Systems, Inc.:
We have audited the accompanying balance sheets of Arbor Intelligent
Systems, Inc. (a Michigan corporation), as of December 31, 1997, and March 11,
1998, and the related statements of operations, stockholders' deficit, and cash
flows for the year ended December 31, 1997, and for the period from January 1,
1998 to March 11, 1998. These financial statements are the responsibility of the
Company's management. Our responsibility is to express an opinion on these
financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of Arbor Intelligent Systems,
Inc. as of December 31, 1997, and March 11, 1998, and the results of its
operations and its cash flows for the year ended December 31, 1997, and for the
period from January 1, 1998 to March 11, 1998, in conformity with generally
accepted accounting principles.
ARTHUR ANDERSEN LLP
Washington, D.C.
February 19, 1999
F-44
<PAGE>
ARBOR INTELLIGENT SYSTEMS, INC.
BALANCE SHEETS
AS OF DECEMBER 31, 1997 AND MARCH 11, 1998
<TABLE>
<CAPTION>
DECEMBER 31, MARCH 11,
1997 1998
------------ -------------
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents......................................................... $ 12,000 $ 145,000
Accounts receivable, net of allowance for doubtful accounts of $15,000 and
$20,000, respectively........................................................... 464,000 449,000
Other current assets.............................................................. 14,000 27,000
------------ -------------
Total current assets............................................................ 490,000 621,000
Property and equipment, net......................................................... 92,000 84,000
Other assets, net................................................................... 198,000 146,000
------------ -------------
Total assets.................................................................... $ 780,000 $ 851,000
------------ -------------
------------ -------------
LIABILITIES AND STOCKHOLDERS' DEFICIT
Current liabilities:
Short-term borrowings............................................................. $ 300,000 $ 300,000
Accounts payable.................................................................. 210,000 292,000
Accrued liabilities............................................................... 497,000 787,000
Current portion of long-term debt................................................. 685,000 678,000
Current portion of capital lease obligations...................................... 12,000 12,000
------------ -------------
Total current liabilities....................................................... 1,704,000 2,069,000
Capital lease obligations, net of current portion................................... 11,000 9,000
------------ -------------
Total liabilities............................................................... 1,715,000 2,078,000
------------ -------------
Commitments and contingencies (Note 7)
Stockholders' deficit:
Common stock, no par value; 50,000 shares authorized; 10,000 and 14,640 shares
issued and outstanding, respectively............................................ 1,000 1,000
Additional paid-in capital........................................................ 5,000 470,000
Accumulated deficit............................................................... (941,000) (1,698,000)
------------ -------------
Total stockholders' deficit..................................................... (935,000) (1,227,000)
------------ -------------
Total liabilities and stockholders' deficit..................................... $ 780,000 $ 851,000
------------ -------------
------------ -------------
</TABLE>
The accompanying notes are an integral part of these statements.
F-45
<PAGE>
ARBOR INTELLIGENT SYSTEMS, INC.
STATEMENTS OF OPERATIONS
FOR THE YEAR ENDED DECEMBER 31, 1997,
AND FOR THE PERIOD FROM JANUARY 1, 1998 TO MARCH 11, 1998
<TABLE>
<CAPTION>
FOR THE PERIOD
FOR THE YEAR FROM JANUARY 1,
ENDED 1998 TO
DECEMBER 31, MARCH 11,
1997 1998
------------ ---------------
<S> <C> <C>
Revenues.......................................................................... $3,106,000 $ 688,000
Cost of revenues.................................................................. 2,149,000 471,000
------------ ---------------
Gross profit.................................................................. 957,000 217,000
------------ ---------------
Operating expenses:
Selling and marketing........................................................... 105,000 14,000
General and administrative...................................................... 843,000 226,000
Stock-based compensation........................................................ -- 465,000
Depreciation and amortization................................................... 186,000 29,000
------------ ---------------
Total operating expenses...................................................... 1,134,000 734,000
------------ ---------------
Loss from operations.............................................................. (177,000) (517,000)
Interest expense, net............................................................. 187,000 29,000
Other expense, net................................................................ 41,000 211,000
------------ ---------------
Net loss.......................................................................... $ (405,000) $ (757,000)
------------ ---------------
------------ ---------------
</TABLE>
The accompanying notes are an integral part of these statements.
F-46
<PAGE>
ARBOR INTELLIGENT SYSTEMS, INC.
STATEMENTS OF STOCKHOLDERS' DEFICIT
FOR THE YEAR ENDED DECEMBER 31, 1997,
AND FOR THE PERIOD FROM JANUARY 1, 1998 TO MARCH 11, 1998
<TABLE>
<CAPTION>
COMMON STOCK ADDITIONAL TOTAL
-------------------- PAID-IN RETAINED STOCKHOLDERS'
SHARES AMOUNT CAPITAL DEFICIT DEFICIT
--------- --------- ---------- ------------- -------------
<S> <C> <C> <C> <C> <C>
Balance, December 31, 1996.......................... 10,000 $ 1,000 $ 5,000 $ (536,000) $ (530,000)
Net loss.......................................... -- -- -- (405,000) (405,000)
--------- --------- ---------- ------------- -------------
Balance, December 31, 1997.......................... 10,000 1,000 5,000 (941,000) (935,000)
Exercise of stock rights.......................... 4,640 -- 465,000 -- 465,000
Net loss.......................................... -- -- -- (757,000) (757,000)
--------- --------- ---------- ------------- -------------
Balance, March 11, 1998............................. 14,640 $ 1,000 $ 470,000 $ (1,698,000) $ (1,227,000)
--------- --------- ---------- ------------- -------------
--------- --------- ---------- ------------- -------------
</TABLE>
The accompanying notes are an integral part of these statements.
F-47
<PAGE>
ARBOR INTELLIGENT SYSTEMS, INC.
STATEMENTS OF CASH FLOWS
FOR THE YEAR ENDED DECEMBER 31, 1997,
AND FOR THE PERIOD FROM JANUARY 1, 1998 TO MARCH 11, 1998
<TABLE>
<CAPTION>
FOR THE PERIOD
FOR THE YEAR FROM JANUARY 1,
ENDED 1998 TO
DECEMBER 31, MARCH 11,
1997 1998
------------ ---------------
<S> <C> <C>
Cash flows from operating activities:
Net loss........................................................................ $ (405,000) $ (757,000)
Adjustments to reconcile net loss to net cash (used in) provided by operating
activities:
Depreciation and amortization................................................. 186,000 29,000
Loss on fixed asset disposal.................................................. -- 3,000
Write-off of commitment fees, net............................................. -- 28,000
Stock-based compensation...................................................... -- 465,000
Change in assets and liabilities:
Accounts receivable......................................................... 92,000 15,000
Other current assets........................................................ (10,000) (13,000)
Accounts payable............................................................ 2,000 82,000
Accrued liabilities......................................................... 12,000 290,000
------------ ---------------
Net cash (used in) provided by operating activities....................... (123,000) 142,000
------------ ---------------
Cash flows from investing activities:
Purchase of property and equipment, net......................................... (86,000) --
------------ ---------------
Cash flows from financing activities:
Proceeds from long-term debt.................................................... 172,000 --
Repayments of long-term debt.................................................... (86,000) (7,000)
Short-term borrowings........................................................... 150,000 --
Repayments of capital lease obligations......................................... -- (2,000)
------------ ---------------
Net cash provided by (used in) financing activities....................... 236,000 (9,000)
------------ ---------------
Net increase in cash and cash equivalents......................................... 27,000 133,000
Cash and cash equivalents, beginning of period.................................... (15,000) 12,000
------------ ---------------
Cash and cash equivalents, end of period.......................................... $ 12,000 $ 145,000
------------ ---------------
------------ ---------------
Supplementary information:
Cash paid for interest.......................................................... $ 186,000 $ 36,000
------------ ---------------
------------ ---------------
</TABLE>
The accompanying notes are an integral part of these statements.
F-48
<PAGE>
ARBOR INTELLIGENT SYSTEMS, INC.
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 1997 AND MARCH 11, 1998
1. BUSINESS DESCRIPTION:
Arbor Intelligent Systems, Inc. ("Arbor" or the "Company") was incorporated
on August 31, 1988, under the laws of the state of Michigan. The Company is an
Internet-based applications development group providing object-oriented
development services. The Company is headquartered in Ann Arbor, Michigan, and
operates primarily in the surrounding Ann Arbor area.
On March 12, 1998, certain assets and liabilities of the Company were
acquired by AppNet Systems, Inc. ("AppNet"). The Company incurred $198,000 of
expenses in conjunction with the sale to AppNet primarily for early debt
retirement. This has been classified in other expenses in the accompanying
statements of operations.
There are significant risks associated with the Company, including the
subjectivity of the Company's services to rapid technological change and the
Year 2000 issue.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES AND PRACTICES:
USE OF ESTIMATES
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and the
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amount of revenues and expenses during the reporting
period. Actual results could differ from those estimates.
CASH AND CASH EQUIVALENTS
The Company considers all highly liquid investments with original maturities
of three months or less to be cash equivalents.
PROPERTY AND EQUIPMENT
Property and equipment are stated at cost, net of accumulated depreciation
and amortization. Depreciation and amortization are computed using the
straight-line method over the estimated useful lives of the related assets, as
follows:
<TABLE>
<S> <C>
three to five
Computers, equipment and software........................ years
Furniture and fixtures................................... seven years
</TABLE>
Purchased software and third-party costs incurred to develop software for
internal use are capitalized and amortized principally over three years.
In accordance with Statement of Financial Accounting Standards ("SFAS") No.
121, "Accounting for the Impairment of Long-Lived Assets and for Long-Lived
Assets to Be Disposed Of," the Company reviews its recorded long-lived assets
for impairment whenever events or changes in circumstances indicate that the
carrying amount of an asset may not be recoverable.
F-49
<PAGE>
ARBOR INTELLIGENT SYSTEMS, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1997 AND MARCH 11, 1998
SOFTWARE DEVELOPMENT COSTS
The Company has capitalized costs related to the development of certain
software products. In accordance with SFAS No. 86, "Accounting for the Costs of
Computer Software to Be Sold, Leased, or Otherwise Marketed," capitalization of
costs begins when technological feasibility has been established and ends when
the product is available for general release to customers. Amortization has been
computed and recognized based on the products' estimated economic lives of two
years. Capitalized costs and amortization periods are management's estimates and
are subject to change due to rapid technological changes in software
development.
FAIR VALUE OF FINANCIAL INSTRUMENTS
The Company's financial instruments consist primarily of cash and cash
equivalents, accounts receivable, accounts payable, short-term borrowings,
long-term debt and capital lease obligations. In management's opinion, the
carrying amounts of these financial instruments approximated their fair values
at December 31, 1997, and March 11, 1998.
STOCK-BASED COMPENSATION
The Company accounts for stock-based employee compensation arrangements
using the intrinsic value method in accordance with provisions of Accounting
Principles Board ("APB") Opinion No. 25, "Accounting for Stock Issued to
Employees," and complies with the disclosure provisions of SFAS No. 123,
"Accounting for Stock-Based Compensation." Under APB Opinion No. 25,
compensation cost is recognized based on the difference, if any, on the date of
grant between the fair value of the Company's stock and the amount an employee
must pay to acquire the stock.
REVENUE RECOGNITION
Revenues from time and material contracts are generally recognized based on
fixed hourly rates for direct labor hours expended.
Costs of revenues include all direct material and labor costs related to
contract performance and does not include any related depreciation expense.
Revenues from software product sales are recognized when the related product
is delivered, provided no significant vendor obligations remain. Revenues from
all maintenance agreements are recognized ratably over the term of the
agreement, generally one year.
BUSINESS CONCENTRATION AND CREDIT RISK
The following table summarizes the revenues and accounts receivable from
clients in excess of 10% of total revenues and accounts receivable:
<TABLE>
<CAPTION>
REVENUES
------------------------------------------ ACCOUNTS RECEIVABLE
FOR THE YEAR ENDED FOR THE PERIOD ENDED ----------------------------------------
DECEMBER 31, MARCH 11, AS OF DECEMBER 31, AS OF MARCH 11,
1997 1998 1997 1998
------------------- --------------------- --------------------- -----------------
<S> <C> <C> <C> <C>
Customer A.......................... 23% 48% 23% 19%
Customer B.......................... 18% 15% 17% 16%
</TABLE>
F-50
<PAGE>
ARBOR INTELLIGENT SYSTEMS, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1997 AND MARCH 11, 1998
INCOME TAXES
The Company, with the consent of its shareholders, has elected to be taxed
pursuant to Subchapter S of the Internal Revenue Code (an "S corporation"). In
lieu of corporation income taxes, the shareholders of an S corporation are taxed
on their proportionate share of the Company's taxable income. Therefore, no
provision for federal income taxes has been included in the accompanying
financial statements.
RECENT ACCOUNTING PRONOUNCEMENTS
In March 1998, the AIPCA issued Statement of Position 98-4 ("SOP 98-4"),
"Deferral of the Effective Date of a Provision of SOP 97-2." SOP 98-4 defers for
one year the application of certain provisions of Statement of Position 97-2
("SOP 97-2"), "Software Revenue Recognition." The Company does not expect the
adoption of SOP 97-2 or 98-4 to have a material effect on the Company's results
of operations, financial position or cash flows.
3. ACCOUNTS RECEIVABLE:
Accounts receivable consists of the following:
<TABLE>
<CAPTION>
DECEMBER 31, MARCH 11,
1997 1998
------------ ----------
<S> <C> <C>
Commercial clients................................................. $ 479,000 $ 469,000
Allowance for doubtful accounts.................................... (15,000) (20,000)
------------ ----------
Accounts receivable, net....................................... $ 464,000 $ 449,000
------------ ----------
------------ ----------
</TABLE>
4. PROPERTY AND EQUIPMENT:
Property and equipment consists of the following:
<TABLE>
<CAPTION>
DECEMBER 31, MARCH 11,
1997 1998
------------ -----------
<S> <C> <C>
Computers, equipment and software................................. $ 207,000 $ 204,000
Furniture and fixtures............................................ 30,000 30,000
------------ -----------
237,000 234,000
Accumulated depreciation and amortization......................... (145,000) (150,000)
------------ -----------
Property and equipment, net................................... $ 92,000 $ 84,000
------------ -----------
------------ -----------
</TABLE>
F-51
<PAGE>
ARBOR INTELLIGENT SYSTEMS, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1997 AND MARCH 11, 1998
5. OTHER NON-CURRENT ASSETS:
Other non-current assets consists of the following:
<TABLE>
<CAPTION>
DECEMBER 31, MARCH 11,
1997 1998
------------ -----------
<S> <C> <C>
Software development costs........................................ $ 423,000 $ 423,000
Commitment fees................................................... 43,000 --
------------ -----------
466,000 423,000
Accumulated amortization.......................................... (268,000) (277,000)
------------ -----------
Other non-current assets, net................................. $ 198,000 $ 146,000
------------ -----------
------------ -----------
</TABLE>
6. ACCRUED LIABILITIES:
Accrued liabilities consists of the following:
<TABLE>
<CAPTION>
DECEMBER 31, MARCH 11,
1997 1998
------------ ----------
<S> <C> <C>
Accrued compensation and benefits.................................. $ 423,000 $ 487,000
Accrued financing fees............................................. -- 198,000
Other.............................................................. 74,000 102,000
------------ ----------
Accrued liabilities............................................ $ 497,000 $ 787,000
------------ ----------
------------ ----------
</TABLE>
7. COMMITMENTS AND CONTINGENCIES:
LEASES
The Company has noncancelable operating leases, primarily for real estate,
that expire over the next three years. Rental expense for operating leases
during the year ended December 31, 1997 and for the period from January 1, 1998
to March 11, 1998, was $14,000 and $3,000, respectively.
The Company leases certain equipment under capital leases.
F-52
<PAGE>
ARBOR INTELLIGENT SYSTEMS, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1997 AND MARCH 11, 1998
Future minimum lease payments under capital leases and noncancelable
operating leases are as follows as of March 11, 1998:
<TABLE>
<CAPTION>
CAPITAL OPERATING
LEASES LEASES
--------- -----------
<S> <C> <C>
Period ended December 31, 1998.......................................... $ 12,000 $ 8,000
1999.................................................................... 12,000 6,000
2000.................................................................... -- 3,000
2001.................................................................... -- 1,000
--------- -----------
Total minimum lease payments........................................ 24,000 $ 18,000
-----------
-----------
Less: Amount representing interest...................................... (3,000)
---------
Present value of capital lease obligations.............................. 21,000
Less: Current portion of capital lease obligations...................... (12,000)
---------
Long-term portion of capital lease obligations.......................... $ 9,000
---------
---------
</TABLE>
Equipment under capital leases is summarized as follows:
<TABLE>
<CAPTION>
DECEMBER 31, MARCH 11,
1997 1998
------------ ----------
<S> <C> <C>
Computer equipment...................................................................... $ 34,000 $ 34,000
Accumulated depreciation................................................................ (9,000) (10,000)
------------ ----------
Computer equipment, net............................................................. $ 25,000 $ 24,000
------------ ----------
------------ ----------
</TABLE>
8. DEBT:
Debt consists of the following:
<TABLE>
<CAPTION>
DECEMBER 31, MARCH 11,
1997 1998
------------ ----------
<S> <C> <C>
Note payable, due 2001, bears interest at prime plus 4%, plus 1.5% of gross revenues,
payable in monthly installments, secured by the assets of Arbor Intelligent Systems,
Inc., guaranteed by former shareholder............................................... $ 434,000 $ 425,000
Note payable, due February 14, 1998, bears interest at 11.75%.......................... 1,000 --
Note payable, in default, due October 5, 1997, bears interest at 20%, payable in full,
guaranteed by former shareholder..................................................... 100,000 100,000
Note payable to related party, non-interest-bearing.................................... 150,000 153,000
------------ ----------
Total debt......................................................................... $ 685,000 $ 678,000
------------ ----------
------------ ----------
</TABLE>
The Company is not in compliance with debt covenants related to the note
payable, due 2001. As such, the note payable has been classified as current
since it is callable.
The Company has a line of credit which expired on December 31, 1997, and was
collateralized by substantially all of the assets of the Company and is
guaranteed by the majority shareholder. The line of credit had a maximum
borrowing of $300,000. Interest on the outstanding balance was calculated at
10.5 percent. As of December 31, 1997, and March 11, 1998, there were borrowings
under the line of credit totaling $300,000.
F-53
<PAGE>
ARBOR INTELLIGENT SYSTEMS, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1997 AND MARCH 11, 1998
The line of credit and notes payable contain restrictions on certain debt
and stock transactions.
9. RETIREMENT PLAN:
The Company maintains a profit-sharing and retirement plan under the
provisions of section 401(k) of the Internal Revenue Code. The Plan provides for
contributions by employees and a discretionary contribution by the Company. The
Plan is for the benefit of all employees. Participants may contribute up to 18%
of their compensation, subject to statutory limits. Employee contributions are
fully vested. The Company's contribution is discretionary and is determined by
its Board of Directors. Company contributions vest after five years of service.
There were no Company contributions for the year ended December 31, 1997 and for
the period from January 1, 1998 to March 11, 1998.
Effective February 1, 1999, Arbor employees are covered by the AppNet 401(k)
Plan.
10. EMPLOYEE STOCK RIGHTS:
The Company maintained a stock rights program for key employees. Pursuant to
the program, granted rights to acquire stock expired at the earlier of ten years
from the grant date or the termination of employment. The grants had value to
the employee only upon an equity transaction such as a public sale of common
stock or acquisition. Prior to the acquisition of the Company by AppNet, no
compensation expense had been recognized for these granted rights as such an
equity event was not deemed probable. Immediately prior to the AppNet
acquisition, rights to acquire 4,640 shares of common stock were exercised. A
charge of $465,000 which reflects the fair value of the Arbor common stock
acquired through exercise of these rights (as determined by the AppNet
acquisition) has been reflected as stock-based compensation in the accompanying
statement of operations in the period from January 1, 1998 to March 11, 1998.
The following summarizes rights during 1997 and for the period from January
1, 1998 to March 11, 1998:
<TABLE>
<CAPTION>
NUMBER OF
SHARES
-----------
<S> <C>
Stock rights outstanding December 31, 1996, exercise price of $0.................. 4,657
Granted in 1997................................................................. --
Exercised in 1997............................................................... --
Expired in 1997................................................................. (517)
-----------
Stock rights outstanding December 31, 1997, exercise price of $0.................. 4,140
Granted in 1998................................................................. 500
Exercised in 1998............................................................... (4,640)
Expired in 1998................................................................. --
-----------
Stock rights outstanding, March 11, 1998.......................................... --
-----------
-----------
Stock rights exercisable, December 31, 1997....................................... 1,673
-----------
-----------
</TABLE>
11. RELATED-PARTY TRANSACTIONS:
The Company has a non-interest bearing loan with the majority shareholder in
the amount of $150,000 and $153,000 as of December 31, 1997 and March 11, 1998,
respectively.
The Company leases its real estate from the majority shareholder for $8,250
per month, on a month-to-month basis.
F-54
<PAGE>
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To New Media Publishing, Inc.:
We have audited the accompanying balance sheets of New Media Publishing,
Inc. (a Virginia corporation), as of December 31, 1996 and 1997, and October 1,
1998, and the related statements of operations, stockholders' equity, and cash
flows for the years ended December 31, 1996 and 1997, and for the period from
January 1, 1998 to October 1, 1998. These financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of New Media Publishing, Inc.
as of December 31, 1996 and 1997, and October 1, 1998, and the results of its
operations and its cash flows for the years ended December 31, 1996 and 1997,
and for the period from January 1, 1998 to October 1, 1998, in conformity with
generally accepted accounting principles.
ARTHUR ANDERSEN LLP
Washington, D.C.
February 9, 1999
F-55
<PAGE>
NEW MEDIA PUBLISHING, INC.
BALANCE SHEETS
AS OF DECEMBER 31, 1996 AND 1997, AND OCTOBER 1, 1998
<TABLE>
<CAPTION>
DECEMBER 31,
-------------------------- OCTOBER 1,
1996 1997 1998
------------ ------------ ------------
<S> <C> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents............................................. $ 129,000 $ 317,000 $ 224,000
Accounts receivable, net of allowance for doubtful accounts of $0, $0,
and $208,000, respectively.......................................... 265,000 628,000 1,184,000
Other current assets.................................................. 2,000 19,000 69,000
------------ ------------ ------------
Total current assets................................................ 396,000 964,000 1,477,000
Property and equipment, net............................................. 102,000 275,000 403,000
Other assets............................................................ -- 10,000 10,000
------------ ------------ ------------
Total assets........................................................ $ 498,000 $ 1,249,000 $ 1,890,000
------------ ------------ ------------
------------ ------------ ------------
LIABILITIES, PREFERRED STOCK AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable...................................................... $ 62,000 $ 163,000 $ 149,000
Accrued liabilities................................................... 50,000 552,000 321,000
Current portion of long-term debt..................................... 250,000 51,000 --
Current portion of capital lease obligations.......................... -- 32,000 --
------------ ------------ ------------
Total current liabilities........................................... 362,000 798,000 470,000
Long-term debt, net of current portion.................................. -- 50,000 --
Other long-term debt.................................................... 4,000 7,000 1,000
Capital lease obligations............................................... -- 71,000 --
------------ ------------ ------------
Total liabilities................................................... 366,000 926,000 471,000
Commitments and contingencies (Note 11)
Mandatorily redeemable preferred stock, no par value; 0, 0, and
1,450,000 shares authorized; 0, 0, and 1,428,570 shares issued and
outstanding at December 31, 1996 and 1997, and October 1, 1998,
respectively; liquidation value $.875 per share....................... -- -- 1,230,000
Stockholders' equity:
Common stock, no par value; 8,550,000 authorized; 5,937,500,
5,000,000, and 5,000,000 shares issued and outstanding,
respectively........................................................ -- -- --
Less: Treasury stock, at cost, 1,250,000 shares....................... -- (51,000) (51,000)
Additional paid-in capital............................................ -- 1,000 1,000
Retained earnings..................................................... 132,000 373,000 239,000
------------ ------------ ------------
Total stockholders' equity.......................................... 132,000 323,000 189,000
------------ ------------ ------------
Total liabilities, preferred stock and stockholders' equity......... $ 498,000 $ 1,249,000 $ 1,890,000
------------ ------------ ------------
------------ ------------ ------------
</TABLE>
The accompanying notes are an integral part of these statements.
F-56
<PAGE>
NEW MEDIA PUBLISHING, INC.
STATEMENTS OF OPERATIONS
FOR THE YEARS ENDED DECEMBER 31, 1996 AND 1997,
AND FOR THE PERIOD FROM JANUARY 1, 1998 TO OCTOBER 1, 1998
<TABLE>
<CAPTION>
FOR THE YEARS ENDED FOR THE PERIOD
DECEMBER 31, FROM JANUARY 1,
-------------------------- 1998 TO
1996 1997 OCTOBER 1, 1998
------------ ------------ ------------------
<S> <C> <C> <C>
Revenues......................................................... $ 1,291,000 $ 3,028,000 $ 3,711,000
Cost of revenues................................................. 385,000 1,211,000 1,542,000
------------ ------------ ------------------
Gross profit................................................. 906,000 1,817,000 2,169,000
------------ ------------ ------------------
Operating expenses:
Selling and marketing.......................................... 3,000 88,000 227,000
General and administrative..................................... 498,000 1,246,000 1,868,000
Depreciation and amortization.................................. 38,000 68,000 123,000
------------ ------------ ------------------
Total operating expenses..................................... 539,000 1,402,000 2,218,000
------------ ------------ ------------------
Income (loss) from operations.................................... 367,000 415,000 (49,000)
Interest expense, net............................................ 24,000 17,000 --
------------ ------------ ------------------
Income (loss) before income taxes................................ 343,000 398,000 (49,000)
Provision for income taxes....................................... 69,000 157,000 13,000
------------ ------------ ------------------
Net income (loss)................................................ $ 274,000 $ 241,000 $ (62,000)
------------ ------------ ------------------
------------ ------------ ------------------
</TABLE>
The accompanying notes are an integral part of these statements.
F-57
<PAGE>
NEW MEDIA PUBLISHING, INC.
STATEMENTS OF STOCKHOLDERS' EQUITY
FOR THE YEARS ENDED DECEMBER 31, 1996
AND 1997, AND FOR THE PERIOD FROM JANUARY 1, 1998 TO OCTOBER 1, 1998
<TABLE>
<CAPTION>
REDEEMABLE EQUITY
SECURITIES
--------------------
STOCKHOLDERS' EQUITY
MANDATORILY -----------------------------------
REDEEMABLE
PREFERRED STOCK COMMON STOCK
-------------------- ---------------------- TREASURY
SHARES AMOUNT SHARES AMOUNT STOCK
--------- --------- --------- ----------- -----------
<S> <C> <C> <C> <C> <C>
Balance, December 31, 1995............................................... -- $ -- 5,937,500 $ -- $ --
Net income............................................................. -- -- -- -- --
--------- --------- --------- ----------- -----------
Balance, December 31, 1996............................................... -- -- 5,937,500 -- --
Issuance of 312,500 shares of common stock............................. -- -- 312,500 -- --
Repurchase of 1,250,000 shares of common stock......................... -- -- (1,250,000) -- (51,000)
Net income............................................................. -- -- -- -- --
--------- --------- --------- ----------- -----------
Balance, December 31, 1997............................................... -- -- 5,000,000 -- (51,000)
Issuance of 1,428,570 shares of Mandatorily Redeemable Preferred
Stock................................................................ 1,428,570 1,230,000 -- -- --
Accretion of preferred stock dividend.................................. -- -- -- -- --
Net loss............................................................... -- -- -- -- --
--------- --------- --------- ----------- -----------
Balance, October 1, 1998................................................. 1,428,570 $1,230,000 5,000,000 $ -- $ (51,000)
--------- --------- --------- ----------- -----------
--------- --------- --------- ----------- -----------
<CAPTION>
ADDITIONAL TOTAL
PAID-IN RETAINED STOCKHOLDERS'
CAPITAL EARNINGS EQUITY
----------- --------- ------------
<S> <C> <C> <C>
Balance, December 31, 1995............................................... $ -- $(142,000) $ (142,000)
Net income............................................................. -- 274,000 274,000
----------- --------- ------------
Balance, December 31, 1996............................................... -- 132,000 132,000
Issuance of 312,500 shares of common stock............................. 1,000 -- 1,000
Repurchase of 1,250,000 shares of common stock......................... -- -- (51,000)
Net income............................................................. -- 241,000 241,000
----------- --------- ------------
Balance, December 31, 1997............................................... 1,000 373,000 323,000
Issuance of 1,428,570 shares of Mandatorily Redeemable Preferred
Stock................................................................ -- -- --
Accretion of preferred stock dividend.................................. -- (72,000) (72,000)
Net loss............................................................... -- (62,000) (62,000)
----------- --------- ------------
Balance, October 1, 1998................................................. $ 1,000 $ 239,000 $ 189,000
----------- --------- ------------
----------- --------- ------------
</TABLE>
The accompanying notes are an integral part of these statements.
F-58
<PAGE>
NEW MEDIA PUBLISHING, INC.
STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED DECEMBER 31, 1996 AND 1997,
AND FOR THE PERIOD FROM JANUARY 1, 1998 TO OCTOBER 1, 1998
<TABLE>
<CAPTION>
FOR THE YEARS ENDED FOR THE PERIOD
DECEMBER 31, FROM JANUARY 1,
---------------------- 1998 TO
1996 1997 OCTOBER 1, 1998
---------- ---------- ---------------
<S> <C> <C> <C>
Cash flows from operating activities:
Net income (loss)..................................................... $ 274,000 $ 241,000 $ (62,000)
Adjustments to reconcile net income (loss) to net cash provided by
(used in) operating activities:
Depreciation and amortization..................................... 38,000 68,000 123,000
Deferred income taxes............................................. 3,000 1,000 (4,000)
Change in assets and liabilities:
Accounts receivable, net........................................ (251,000) (363,000) (556,000)
Other assets.................................................... 1,000 (25,000) (52,000)
Accounts payable................................................ (15,000) 101,000 (14,000)
Accrued liabilities............................................. 9,000 502,000 (303,000)
---------- ---------- ---------------
Net cash provided by (used in) operating activities........... 59,000 525,000 (868,000)
---------- ---------- ---------------
Cash flows from investing activities:
Purchase of property and equipment, net............................... (78,000) (138,000) (251,000)
---------- ---------- ---------------
Cash flows from financing activities:
Proceeds from long-term debt.......................................... 125,000 250,000 --
Repayments of long-term debt.......................................... -- (449,000) (101,000)
Repayments of capital lease obligations............................... -- -- (103,000)
Proceeds from issuance of preferred stock............................. -- -- 1,230,000
Proceeds from issuance of common stock................................ -- 1,000 --
Payments to repurchase common stock................................... -- (1,000) --
---------- ---------- ---------------
Net cash provided by (used in) financing activities........... 125,000 (199,000) 1,026,000
---------- ---------- ---------------
Net increase (decrease) in cash and cash equivalents.................... 106,000 188,000 (93,000)
Cash and cash equivalents, beginning of period.......................... 23,000 129,000 317,000
---------- ---------- ---------------
Cash and cash equivalents, end of period................................ $ 129,000 $ 317,000 $ 224,000
---------- ---------- ---------------
---------- ---------- ---------------
Supplementary information:
Cash paid for income taxes............................................ $ 43,000 $ 32,000 $ 218,000
---------- ---------- ---------------
---------- ---------- ---------------
Cash paid for interest................................................ $ 24,000 $ 23,000 $ 13,000
---------- ---------- ---------------
---------- ---------- ---------------
Non-cash financing and investing activities:
Issuance of note payable for repurchase of common stock (Note 6)...... $ -- $ 50,000 $ --
---------- ---------- ---------------
---------- ---------- ---------------
Capital lease additions (Note 11)..................................... $ -- $ 103,000 $ --
---------- ---------- ---------------
---------- ---------- ---------------
Accretion of preferred stock dividend (Note 2)........................ $ -- $ -- $ 72,000
---------- ---------- ---------------
---------- ---------- ---------------
</TABLE>
The accompanying notes are an integral part of these statements.
F-59
<PAGE>
NEW MEDIA PUBLISHING, INC.
NOTES TO FINANCIAL STATEMENTS
AS OF DECEMBER 31, 1996 AND 1997, AND OCTOBER 1, 1998
1. BUSINESS DESCRIPTION:
New Media Publishing, Inc. ("NMP" or the "Company") was incorporated in
1995, under the laws of the state of Virginia. NMP is a provider of
comprehensive interactive community-building services for commercial and
not-for-profit entities. The Company is headquartered in Falls Church, Virginia.
On October 2, 1998, all of the issued and outstanding stock of the Company
was acquired by AppNet Systems, Inc. ("AppNet").
There are significant risks associated with the Company, including the
subjectivity of the Company's services to rapid technological change and the
Year 2000 issue.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES AND PRACTICES:
USE OF ESTIMATES
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and the
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amount of revenues and expenses during the reporting
period. Actual results could differ from those estimates.
CASH AND CASH EQUIVALENTS
The Company considers all highly liquid investments with original maturities
of three months or less to be cash equivalents.
PROPERTY AND EQUIPMENT
Property and equipment are stated at cost, net of accumulated depreciation
and amortization. Depreciation and amortization are computed using the
straight-line method over the estimated useful lives of the related assets, as
follows:
<TABLE>
<S> <C>
three
Computer equipment............................................. years
seven
Furniture and fixtures......................................... years
</TABLE>
Purchased software is capitalized and amortized principally over three
years. Leasehold improvements are amortized over the lesser of the estimated
useful life of the asset or the remaining lease term.
In accordance with Statement of Financial Accounting Standards ("SFAS") No.
121, "Accounting for the Impairment of Long-Lived Assets and for Long-Lived
Assets to Be Disposed Of," the Company reviews its recorded long-lived assets
for impairment whenever events or changes in circumstances indicate that the
carrying amount of an asset may not be recoverable.
FAIR VALUE OF FINANCIAL INSTRUMENTS
The Company's financial instruments consist primarily of cash and cash
equivalents, accounts receivable, accounts payable, long-term debt, capital
lease obligations and Mandatorily Redeemable
F-60
<PAGE>
NEW MEDIA PUBLISHING, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
AS OF DECEMBER 31, 1996 AND 1997, AND OCTOBER 1, 1998
Preferred Stock. In management's opinion, the carrying amounts of these
financial instruments approximated their fair values at December 31, 1996 and
1997, and October 1, 1998.
CAPITAL STOCK
On December 8, 1997, the Board of Directors approved a common stock split of
625-to-1. In addition, on April 23, 1998, the Board of Directors approved a
common and preferred stock split of ten-to-one. All share amounts in the
accompanying financial statements have been retroactively adjusted to reflect
these splits.
In March 1998, the Company amended and restated its Articles of
Incorporation. The amended and restated Articles of Incorporation increased the
authorized number of shares of no par common stock to 7,500,000 shares and
authorized 1,428,570 shares of a new class of $0.0875 cumulative annual
dividend, nonparticipating, convertible, redeemable, voting, no par preferred
stock called the Series A Convertible Preferred Stock (the "Mandatorily
Redeemable Preferred Stock"). The Company issued 1,428,570 shares of the
Mandatorily Redeemable Preferred Stock for net proceeds of $1,230,000. Dividends
on the Mandatorily Redeemable Preferred Stock were to cease to accrue on the
sixth anniversary of the issue date. In the event of liquidation, holders of the
Mandatorily Redeemable Preferred Stock would have first received an amount per
share equal to the original issue price of the shares plus accrued but unpaid
dividends thereon and then participate pro rata with the holders of the
Company's common stock in the distribution of any remaining funds in excess of
$5,000,000. Each share of Mandatorily Redeemable Preferred Stock was convertible
at any time at the option of the holder into one share of common stock, subject
to adjustment as a result of the occurrence of certain events. Further,
beginning on March 5, 2004, the Company would have been required, at the request
of the holders, to redeem at the original issue price plus accrued but unpaid
dividends, at least 10 percent of the outstanding Mandatorily Redeemable
Preferred Stock on each successive calendar quarter until all shares had been
redeemed. The dividend on the Mandatorily Redeemable Preferred Stock was
originally due March 1999. The holders of the Mandatorily Redeemable Preferred
Stock forgave payment of this dividend in conjunction with NMP's purchase by
AppNet.
The Company's common stock, including common stock which may be authorized
and issued in the future, is subject to a Shareholders' Agreement, which
includes certain co-sale rights, transfer restrictions, and buy back rights. On
April 23, 1998, the Board of Directors approved an increase in the authorized
number of shares of common and preferred stock to 8,550,000 and 1,450,000,
respectively.
STOCK-BASED COMPENSATION
The Company accounts for stock-based employee compensation arrangements
using the intrinsic value method in accordance with provisions of Accounting
Principles Board ("APB") Opinion No. 25, "Accounting for Stock Issued to
Employees," and complies with the disclosure provisions of SFAS No. 123,
"Accounting for Stock-Based Compensation." Under APB Opinion No. 25,
compensation cost is recognized based on the difference, if any, on the date of
grant between the fair value of the Company's stock and the amount an employee
must pay to acquire the stock.
REVENUE RECOGNITION
Revenues from time and materials contracts are recognized based on fixed
hourly rates for direct labor hours expended. Revenues from fixed-price
contracts are recognized on the percentage-of-
F-61
<PAGE>
NEW MEDIA PUBLISHING, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
AS OF DECEMBER 31, 1996 AND 1997, AND OCTOBER 1, 1998
completion method, with costs and estimated profits recorded as work is
performed. Revenues exclude the costs of media and advertising purchases
reimbursed by clients.
Cost of revenues include all direct material and labor costs related to
contract performance, and does not include any related depreciation expense.
Provisions for estimated losses on uncompleted contracts are made in the period
in which such losses are determined. Changes in job performance and estimated
profitability, including final contract settlements, may result in revisions to
costs and income and are recognized in the period in which the revisions are
determined. Unbilled receivables on contracts are comprised of costs, plus
earnings on certain contracts in excess of contractual billings on such
contracts. Cash received in excess of costs incurred is classified as deferred
revenue.
BUSINESS CONCENTRATION AND CREDIT RISK
The following table summarizes the revenues and accounts receivable from
clients in excess of 10% of total revenues and accounts receivable:
<TABLE>
<CAPTION>
REVENUES ACCOUNTS RECEIVABLE
----------------------------------------- ---------------------------------
FOR THE YEAR ENDED FOR THE PERIOD AS OF
DECEMBER 31, ENDED DECEMBER 31, AS OF
-------------------- OCTOBER 1, -------------------- OCTOBER 1,
1996 1997 1998 1996 1997 1998
--------- --------- ------------------- --------- --------- -----------
<S> <C> <C> <C> <C> <C> <C>
Customer A........................... * 16.3% * * 21.7% *
</TABLE>
- ------------------------
* Represents less than 10% of total.
INCOME TAXES
Income taxes are accounted for using an asset and liability approach that
requires the recognition of taxes payable or refundable for the current year and
deferred tax liabilities and assets for the future tax consequences of events
that have been recognized in the Company's financial statements or tax returns.
The measurement of current and deferred tax liabilities and assets are based on
provisions of the enacted tax law; the effects of future changes in tax laws or
rates are not anticipated. The measurement of deferred tax assets is reduced, if
necessary, by the amount of any tax benefits that, based on available evidence,
are not expected to be realized.
3. ACCOUNTS RECEIVABLE:
Accounts receivable consists of the following:
<TABLE>
<CAPTION>
DECEMBER 31,
---------------------- OCTOBER 1,
1996 1997 1998
---------- ---------- ------------
<S> <C> <C> <C>
Accounts receivable.................................... $ 169,000 $ 486,000 $ 943,000
Unbilled accounts receivable........................... 96,000 142,000 449,000
Allowance for doubtful accounts........................ -- -- (208,000)
---------- ---------- ------------
Accounts receivable, net........................... $ 265,000 $ 628,000 $ 1,184,000
---------- ---------- ------------
---------- ---------- ------------
</TABLE>
F-62
<PAGE>
NEW MEDIA PUBLISHING, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
AS OF DECEMBER 31, 1996 AND 1997, AND OCTOBER 1, 1998
4. PROPERTY AND EQUIPMENT:
Property and equipment consists of the following:
<TABLE>
<CAPTION>
DECEMBER 31,
----------------------- OCTOBER 1,
1996 1997 1998
---------- ----------- -----------
<S> <C> <C> <C>
Computer equipment..................................... $ 145,000 $ 386,000 $ 627,000
Furniture and fixtures................................. 7,000 7,000 7,000
Leasehold improvements................................. -- -- 10,000
---------- ----------- -----------
152,000 393,000 644,000
Accumulated depreciation and amortization.............. (50,000) (118,000) (241,000)
---------- ----------- -----------
Property and equipment, net........................ $ 102,000 $ 275,000 $ 403,000
---------- ----------- -----------
---------- ----------- -----------
</TABLE>
5. ACCRUED LIABILITIES:
Accrued liabilities consists of the following:
<TABLE>
<CAPTION>
DECEMBER 31,
--------------------- OCTOBER 1,
1996 1997 1998
--------- ---------- ----------
<S> <C> <C> <C>
Accrued compensation and benefits.......................... $ 29,000 $ 198,000 $ 102,000
Accrued bonuses............................................ -- 200,000 --
Accrued Mandatorily Redeemable Preferred Stock dividends... -- -- 72,000
Deferred revenues.......................................... 21,000 154,000 147,000
--------- ---------- ----------
Accrued liabilities.................................... $ 50,000 $ 552,000 $ 321,000
--------- ---------- ----------
--------- ---------- ----------
</TABLE>
6. DEBT:
Debt consists of the following:
<TABLE>
<CAPTION>
DECEMBER 31,
--------------------- OCTOBER 1,
1996 1997 1998
---------- --------- ----------
<S> <C> <C> <C>
Note payable to former shareholder, due December 31, 1999,
bore interest at 8%, interest payable quarterly.......... $ -- $ 50,000 $ --
Bank note payable, due May 15, 2000, payable in monthly
installments of $6,944 plus interest at bank's prime rate
plus 1% secured by the Company's assets.................. -- 51,000 --
Note payable, principal due April 27, 1997, bears interest
at 10%, payable semi-annually............................ 250,000 -- --
---------- --------- ----------
Total debt............................................. 250,000 101,000 --
---------- --------- ----------
Less: Current portion...................................... 250,000 51,000 --
---------- --------- ----------
Long term-debt, net of current portion................. $ -- $ 50,000 $ --
---------- --------- ----------
---------- --------- ----------
</TABLE>
F-63
<PAGE>
NEW MEDIA PUBLISHING, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
AS OF DECEMBER 31, 1996 AND 1997, AND OCTOBER 1, 1998
In 1997, the Company had a line of credit which was collateralized by
substantially all of the assets of the Company. Under the terms of the line of
credit, borrowings were limited to 80 percent of qualified accounts receivable,
up to a maximum borrowing of $250,000. Interest on the outstanding balance was
calculated as the bank's prime rate of interest plus one and one-half percent.
As of December 31, 1997, there was no amount outstanding under the line of
credit. The agreement expired in May 1998.
The note payable issued to the former shareholder related to the
reacquisition of 1,250,000 shares of common stock. The note was paid in full in
February 1998.
The bank note payable contained certain restrictions on capital
expenditures, the incurrence of additional indebtedness, payment of cash
dividends and treasury stock transactions. This bank borrowing was paid in full
during February 1998.
7. RETIREMENT PLAN:
The Company maintains a retirement plan under the provisions of section
401(k) of the Internal Revenue Code. The plan was adopted January 1, 1997. The
Plan provides for contributions by employees and by the Company. Participants
may contribute up to 15 percent of their compensation, subject to statutory
limits. The Company's contribution is discretionary and is determined by its
Board of Directors. Company contributions vest immediately. Company
contributions totaled $32,000, and $40,000 for the year ended December 31, 1997,
and for the period from January 1, 1998 to October 1, 1998, respectively.
Effective February 1,1999, NMP employees are covered by the AppNet 401(k) plan.
8. EMPLOYEE STOCK OPTION PLAN:
On December 31, 1997, the Company adopted a stock option plan for employees,
directors, and consultants of the Company. Options expire no later than ten
years from the date of the grant or when employment ceases, whichever comes
first. The maximum number of shares of common stock which may be issued pursuant
to the stock option plan was 714,290.
The stock option plan is accounted for under APB Opinion No. 25 and no
compensation has been recognized for the plan. Had compensation cost for the
plan been determined based on the estimated fair value of the options at the
grant dates consistent with the method of SFAS No. 123, the effect to pro forma
net income would have been approximately $7,000 and $91,000, for the year ended
December 31, 1997, and for the period from January 1, 1998 to October 1, 1998,
respectively. The weighted average fair value of the options granted during
1997, and during the period from January 1, 1998 to October 1, 1998, is
estimated to be $.03, and $.22, respectively, per option assuming the following:
dividend yield of 0 percent, risk-free interest rate ranging from 5.40 to 6.00
percent, volatility of 0 percent, and an expected term of the options of 5
years.
F-64
<PAGE>
NEW MEDIA PUBLISHING, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
AS OF DECEMBER 31, 1996 AND 1997, AND OCTOBER 1, 1998
The following summarizes option activity during 1997 and for the period from
January 1, 1998 to October 1, 1998:
<TABLE>
<CAPTION>
STOCK OPTIONS
OUTSTANDING
--------------------
1997 1998
--------- ---------
<S> <C> <C>
Beginning of period....................................... -- 286,000
Granted................................................. 286,000 168,000
Exercised............................................... -- --
Cancelled............................................... -- (33,000)
--------- ---------
End of period............................................. 286,000 421,000
--------- ---------
--------- ---------
Exercisable at end of period.............................. -- 14,000
--------- ---------
--------- ---------
</TABLE>
<TABLE>
<CAPTION>
WEIGHTED AVERAGE
EXERCISE PRICE
--------------------
1997 1998
--------- ---------
<S> <C> <C>
Beginning of period....................................... $ -- $ .03
Granted................................................. .03 1.16
Exercised............................................... -- --
Cancelled............................................... -- .05
End of period............................................. $ .03 $ .48
--------- ---------
--------- ---------
Exercisable at end of period.............................. $ -- $ .04
--------- ---------
--------- ---------
</TABLE>
When AppNet acquired NMP (Note 1), the options outstanding under the stock
option plan were assumed as part of the purchase combination and converted to
AppNet options.
9. INCOME TAXES:
The Company follows the provisions of SFAS No. 109, "Accounting for Income
Taxes," for financial reporting purposes. Deferred tax assets or liabilities at
the end of each period are determined using the currently enacted tax rates to
apply to taxable income in the period in which the deferred tax asset or
liability is expected to be settled or realized.
F-65
<PAGE>
NEW MEDIA PUBLISHING, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
AS OF DECEMBER 31, 1996 AND 1997, AND OCTOBER 1, 1998
The sources of and differences between the financial accounting and tax
basis of NMP's assets and liabilities that give rise to the net deferred tax
liability (asset) are as follows:
<TABLE>
<CAPTION>
DECEMBER 31,
-------------------- OCTOBER 1,
1996 1997 1998
--------- --------- -----------
<S> <C> <C> <C>
Deferred tax liability
Depreciation................................................. $ 4,000 $ 8,000 $ 2,000
Deferred tax asset
Reserves..................................................... 1,000 4,000 71,000
--------- --------- -----------
Net deferred tax liability (asset)............................. $ 3,000 $ 4,000 (69,000)
--------- ---------
--------- ---------
Less: Valuation allowance...................................... 69,000
-----------
Net deferred tax liability (asset)............................. $ --
-----------
-----------
</TABLE>
The components of the provision for income taxes for the years ended
December 31, 1996 and 1997, and for the period from January 1, 1998 to October
1, 1998, are as follows:
<TABLE>
<CAPTION>
DECEMBER 31,
--------------------- OCTOBER 1,
1996 1997 1998
--------- ---------- -----------
<S> <C> <C> <C>
Federal income taxes:
Current.................................................. $ 55,000 $ 132,000 $ 13,000
Deferred provision (benefit)............................. 3,000 1,000 (4,000)
State taxes................................................ 11,000 24,000 4,000
--------- ---------- -----------
Provision for income taxes................................. $ 69,000 $ 157,000 $ 13,000
--------- ---------- -----------
--------- ---------- -----------
</TABLE>
For the years ended December 31, 1996 and 1997, and for the period from
January 1, 1998 to October 1, 1998, the provision for income taxes differed from
the amounts computed at the statutory rate, as follows:
<TABLE>
<CAPTION>
DECEMBER 31,
---------------------- OCTOBER 1,
1996 1997 1998
---------- ---------- -----------
<S> <C> <C> <C>
Income tax computed at statutory rates.................... $ 116,000 $ 135,000 $ (17,000)
State income taxes, net of federal income tax benefit..... 7,000 15,000 3,000
Change in valuation allowance............................. (53,000) -- 35,000
Other, net................................................ (1,000) 7,000 (8,000)
---------- ---------- -----------
$ 69,000 $ 157,000 $ 13,000
---------- ---------- -----------
---------- ---------- -----------
</TABLE>
The valuation allowance for deferred tax assets as of January 1, 1996 was
$53,000. In assessing the realizability of deferred tax assets, management
considers whether it is more likely than not that some portion or all of the
deferred tax assets will not be realized. Management considers the scheduled
reversal of deferred tax liabilities, projected future taxable income, and tax
planning strategies in making this assessment. For the year ended December 31,
1996, management determined that the deferred tax asset would be realized and
decreased the valuation allowance by $53,000. For the period
F-66
<PAGE>
NEW MEDIA PUBLISHING, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
AS OF DECEMBER 31, 1996 AND 1997, AND OCTOBER 1, 1998
from January 1, 1998 to October 1, 1998, management determined that a valuation
allowance of $35,000 was required.
10. RELATED PARTIES:
Certain directors and other parties related to the Company through common
shareholder interests provided administrative and management consulting services
to the Company totaling $115,000, $191,000 and $34,000 for the years ended
December 31, 1996 and 1997, and for the period from January 1, 1998 to October
1, 1998, respectively. Rent expense to companies related through common
shareholder interest totaled $34,000, $74,000, and $74,000 for the years ended
December 31, 1996 and 1997, and for the period from January 1, 1998 to October
1, 1998, respectively. Accounts payable included $40,000, $76,000 and $0 related
to these transactions at December 31, 1996 and 1997, and October 1, 1998,
respectively.
11. COMMITMENTS AND CONTINGENCIES:
COMMITMENTS
In connection with the repurchase by the Company of 1,250,000 shares of the
Company's common stock, the Company entered into a consulting and
non-competition agreement with a former shareholder on April 1, 1997, which
provided for monthly payments by the Company totaling $57,600 for the period
from January 1, 1998 to December 31, 1999. The Company accelerated the payment
schedule and paid the remaining balance as of October 1, 1998.
LEASES
The Company has noncancelable operating leases, primarily for real estate,
that expire over the next two years. Rental expense for operating leases during
the years ended December 31, 1996 and 1997, and for the period from January 1,
1998 to October 1, 1998, was $34,000, $79,000 and $154,000, respectively.
During 1997, the Company entered into a capital lease for certain equipment.
This capital lease was paid-off on October 1, 1998.
Future minimum lease payments under the noncancelable operating leases are
as follows as of October 1, 1998:
<TABLE>
<CAPTION>
OPERATING
LEASES
----------
<S> <C>
Period ended December 31, 1998.................................................... $ 30,000
1999.............................................................................. 122,000
----------
Total minimum lease payments.................................................. $ 152,000
----------
----------
</TABLE>
F-67
<PAGE>
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To Century Computing, Inc.:
We have audited the accompanying balance sheets of Century Computing, Inc.
(a Delaware corporation), as of December 31, 1996 and 1997, and October 11,
1998, and the related statements of operations, stockholders' equity, and cash
flows for the years ended December 31, 1996 and 1997, and for the period from
January 1, 1998 to October 11, 1998. These financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of Century Computing, Inc. as
of December 31, 1996 and 1997, and October 11, 1998, and the results of its
operations and its cash flows for the years ended December 31, 1996 and 1997,
and for the period from January 1, 1998 to October 11, 1998, in conformity with
generally accepted accounting principles.
ARTHUR ANDERSEN LLP
Washington, D.C.
February 22, 1999
F-68
<PAGE>
CENTURY COMPUTING, INC.
BALANCE SHEETS
AS OF DECEMBER 31, 1996 AND 1997, AND OCTOBER 11, 1998
<TABLE>
<CAPTION>
DECEMBER 31,
-------------------------- OCTOBER 11,
1996 1997 1998
------------ ------------ ------------
<S> <C> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents............................................ $ 549,000 $ 1,225,000 $ 8,000
Accounts receivable, net of allowance for doubtful accounts of $0, $0
and $129,000, respectively......................................... 1,260,000 2,023,000 2,178,000
Other current assets................................................. 62,000 62,000 684,000
------------ ------------ ------------
Total current assets............................................. 1,871,000 3,310,000 2,870,000
Property and equipment, net............................................ 416,000 573,000 653,000
Deferred income taxes.................................................. 30,000 -- --
Other assets........................................................... 11,000 11,000 11,000
------------ ------------ ------------
Total assets..................................................... $2,328,000 $ 3,894,000 $ 3,534,000
------------ ------------ ------------
------------ ------------ ------------
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable..................................................... $ 255,000 $ 280,000 $ 703,000
Accrued liabilities.................................................. 338,000 1,194,000 1,294,000
------------ ------------ ------------
Total current liabilities........................................ 593,000 1,474,000 1,997,000
Deferred income taxes................................................ -- -- 67,000
------------ ------------ ------------
Total liabilities................................................ 593,000 1,474,000 2,064,000
------------ ------------ ------------
Commitments and contingencies (Note 7)
Stockholders' equity
Class A common stock, voting, $.01 par value; 2,500,000 shares
authorized; 603,055, 603,055, and 606,929 shares issued and
outstanding, respectively.......................................... 6,000 6,000 6,000
Class B common stock, nonvoting, $.01 par value; 2,500,000 shares
authorized; 11,630, 14,380, and 17,461 shares issued and
outstanding, respectively.......................................... -- -- --
Less: Treasury stock, at cost--257,987, 258,056, and 258,306,
respectively....................................................... (1,175,000) (1,176,000) (1,178,000)
Additional paid-in capital........................................... 255,000 271,000 315,000
Retained earnings.................................................... 2,649,000 3,319,000 2,327,000
------------ ------------ ------------
Total stockholders' equity....................................... 1,735,000 2,420,000 1,470,000
------------ ------------ ------------
Total liabilities and stockholders' equity....................... $2,328,000 $ 3,894,000 $ 3,534,000
------------ ------------ ------------
------------ ------------ ------------
</TABLE>
The accompanying notes are an integral part of these statements.
F-69
<PAGE>
CENTURY COMPUTING, INC.
STATEMENTS OF OPERATIONS
FOR THE YEARS ENDED DECEMBER 31, 1996 AND 1997,
AND FOR THE PERIOD FROM JANUARY 1, 1998 TO OCTOBER 11, 1998
<TABLE>
<CAPTION>
FOR THE
FOR THE YEARS ENDED PERIOD FROM
DECEMBER 31, JANUARY 1, 1998
--------------------------- TO OCTOBER 11,
1996 1997 1998
------------ ------------- --------------------
<S> <C> <C> <C>
Revenues...................................................... $ 7,198,000 $ 10,850,000 $ 10,040,000
Cost of revenues.............................................. 3,356,000 5,309,000 6,192,000
------------ ------------- --------------------
Gross profit.............................................. 3,842,000 5,541,000 3,848,000
Operating expenses:
Selling, general and administrative......................... 2,992,000 3,890,000 2,751,000
Acquisition-related compensation............................ -- -- 953,000
Depreciation and amortization............................... 153,000 179,000 156,000
------------ ------------- --------------------
Total operating expenses.................................. 3,145,000 4,069,000 3,860,000
Income (loss) from operations................................. 697,000 1,472,000 (12,000)
Interest income, net.......................................... 8,000 29,000 41,000
Other income (expense)........................................ 20,000 -- (423,000)
------------ ------------- --------------------
Income (loss) before income taxes............................. 725,000 1,501,000 (394,000)
Provision (benefit) for income taxes.......................... 279,000 580,000 (135,000)
------------ ------------- --------------------
Net income (loss)............................................. $ 446,000 $ 921,000 $ (259,000)
------------ ------------- --------------------
------------ ------------- --------------------
</TABLE>
The accompanying notes are an integral part of these statements.
F-70
<PAGE>
CENTURY COMPUTING, INC.
STATEMENTS OF STOCKHOLDERS' EQUITY
FOR THE YEARS ENDED DECEMBER 31, 1996 AND 1997,
AND FOR THE PERIOD FROM JANUARY 1, 1998 TO OCTOBER 11, 1998
<TABLE>
<CAPTION>
COMMON STOCK COMMON STOCK
CLASS A CLASS B ADDITIONAL
-------------------- -------------------- TREASURY PAID-IN
SHARES AMOUNT SHARES AMOUNT STOCK CAPITAL
--------- --------- --------- --------- ------------- ----------
<S> <C> <C> <C> <C> <C> <C>
Balance, December 31, 1995.................................. 613,485 $ 6,000 -- $ -- $ (1,036,000) $ 258,000
Repurchase of 21,755 shares of common stock............... -- -- -- -- (139,000) --
Stock conversion.......................................... (10,430) -- 11,630 -- -- (3,000)
Dividends to stockholders................................. -- -- -- -- -- --
Net income................................................ -- -- -- -- -- --
--------- --------- --------- --------- ------------- ----------
Balance, December 31, 1996.................................. 603,055 6,000 11,630 -- (1,175,000) 255,000
Repurchase of 189 shares of common stock.................. -- -- -- -- (1,000) --
Exercise of stock options................................. -- -- 2,750 -- -- 16,000
Dividends to stockholders................................. -- -- -- -- -- --
Net income................................................ -- -- -- -- -- --
--------- --------- --------- --------- ------------- ----------
Balance, December 31, 1997.................................. 603,055 6,000 14,380 -- (1,176,000) 271,000
Repurchase of 250 shares of common stock.................. -- -- -- -- (2,000) --
Exercise of stock options................................. 3,874 -- 3,081 -- -- 44,000
Dividends to stockholders................................. -- -- -- -- -- --
Net loss.................................................. -- -- -- -- -- --
--------- --------- --------- --------- ------------- ----------
Balance, October 11, 1998................................... 606,929 $ 6,000 17,461 $ -- $ (1,178,000) $ 315,000
--------- --------- --------- --------- ------------- ----------
--------- --------- --------- --------- ------------- ----------
<CAPTION>
TOTAL
RETAINED STOCKHOLDERS'
EARNINGS EQUITY
------------ ------------
<S> <C> <C>
Balance, December 31, 1995.................................. $ 2,374,000 $1,602,000
Repurchase of 21,755 shares of common stock............... -- (139,000)
Stock conversion.......................................... -- (3,000)
Dividends to stockholders................................. (171,000) (171,000)
Net income................................................ 446,000 446,000
------------ ------------
Balance, December 31, 1996.................................. 2,649,000 1,735,000
Repurchase of 189 shares of common stock.................. -- (1,000)
Exercise of stock options................................. -- 16,000
Dividends to stockholders................................. (251,000) (251,000)
Net income................................................ 921,000 921,000
------------ ------------
Balance, December 31, 1997.................................. 3,319,000 2,420,000
Repurchase of 250 shares of common stock.................. -- (2,000)
Exercise of stock options................................. -- 44,000
Dividends to stockholders................................. (733,000) (733,000)
Net loss.................................................. (259,000) (259,000)
------------ ------------
Balance, October 11, 1998................................... $ 2,327,000 $1,470,000
------------ ------------
------------ ------------
</TABLE>
F-71
<PAGE>
CENTURY COMPUTING, INC.
STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED DECEMBER 31, 1996 AND 1997,
AND FOR THE PERIOD FROM JANUARY 1, 1998 TO OCTOBER 11, 1998
<TABLE>
<CAPTION>
FOR THE PERIOD
FOR THE YEARS FROM JANUARY 1,
ENDED DECEMBER 31, 1998 TO
------------------------- OCTOBER 11,
1996 1997 1998
----------- ------------ ---------------
<S> <C> <C> <C>
Cash flows from operating activities:
Net income (loss).................................................. $ 446,000 $ 921,000 $ (259,000)
Adjustments to reconcile net income (loss) to net cash provided by
(used in) operating activities:
Deferred income taxes.......................................... (25,000) 78,000 (156,000)
Depreciation and amortization.................................. 153,000 179,000 156,000
Change in assets and liabilities:
Accounts receivable.......................................... 53,000 (763,000) (155,000)
Other current assets......................................... (39,000) 28,000 (475,000)
Accounts payable............................................. 83,000 25,000 423,000
Accrued liabilities.......................................... 6,000 780,000 176,000
----------- ------------ ---------------
Net cash provided by (used in) operating activities........ 677,000 1,248,000 (290,000)
----------- ------------ ---------------
Cash flows from investing activities:
Purchase of property and equipment, net............................ (243,000) (336,000) (236,000)
----------- ------------ ---------------
Cash flows from financing activities:
Repayments of long-term debt....................................... (127,000) -- --
Payments to repurchase common stock................................ (139,000) (1,000) (2,000)
Dividends to stockholders.......................................... (171,000) (251,000) (733,000)
Proceeds from exercise of stock options............................ -- 16,000 44,000
Stock conversion................................................... (3,000) -- --
----------- ------------ ---------------
Net cash used in financing activities...................... (440,000) (236,000) (691,000)
----------- ------------ ---------------
Net (decrease) increase in cash and cash equivalents................. (6,000) 676,000 (1,217,000)
Cash and cash equivalents, beginning of period....................... 555,000 549,000 1,225,000
----------- ------------ ---------------
Cash and cash equivalents, end of period............................. $ 549,000 $ 1,225,000 $ 8,000
----------- ------------ ---------------
----------- ------------ ---------------
</TABLE>
The accompanying notes are an integral part of these statements.
F-72
<PAGE>
CENTURY COMPUTING, INC.
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 1996 AND 1997, AND OCTOBER 11, 1998
1. BUSINESS DESCRIPTION:
Century Computing, Inc. ("Century" or the "Company") was incorporated in
1979, under the laws of the state of Delaware. Century is a government
contractor that provides systems integration and processing services to improve
clients' business processes, including networking and data communications,
computer and Internet security, image processing, graphical user interfacing and
object-oriented design and development. Century is headquartered in Laurel,
Maryland, and operates primarily in the United States.
On October 11, 1998, all of the issued and outstanding stock of the Company
was acquired by AppNet Systems, Inc. ("AppNet").
There are significant risks associated with the Company, including the
subjectivity of the Company's services to rapid technological changes,
government regulations and the Year 2000 issue.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES AND PRACTICES:
USE OF ESTIMATES
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and the
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amount of revenues and expenses during the reporting
period. Actual results could differ from those estimates.
CASH AND CASH EQUIVALENTS
The Company considers all highly liquid investments with original maturities
of three months or less to be cash equivalents.
PROPERTY AND EQUIPMENT
Property and equipment are stated at cost, net of accumulated depreciation
and amortization. Depreciation and amortization are computed over the estimated
useful lives of the related assets, as follows:
<TABLE>
<S> <C>
Computers, equipment and software........................ three to five
years
Furniture and fixtures................................... seven years
</TABLE>
Purchased software and third-party costs incurred to develop software for
internal use are capitalized and amortized principally over five years.
Leasehold improvements are amortized over the lesser of the estimated useful
life of the asset or the remaining lease term.
In accordance with Statement of Financial Accounting Standards ("SFAS") No.
121, "Accounting for the Impairment of Long-Lived Assets and for Long-Lived
Assets to Be Disposed Of," the Company reviews its recorded long-lived assets
for impairment whenever events or changes in circumstances indicate that the
carrying amount of an asset may not be recoverable.
F-73
<PAGE>
CENTURY COMPUTING, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1996 AND 1997, AND OCTOBER 11, 1998
SOFTWARE DEVELOPMENT COSTS
The Company has capitalized costs related to the development of certain
software products. In accordance with SFAS No. 86, "Accounting for the Costs of
Computer Software to Be Sold, Leased, or Otherwise Marketed," capitalization of
costs begins when technological feasibility has been established and ends when
the product is available for general release to customers. Amortization has been
computed and recognized based on the products' estimated economic lives of two
years. Capitalized costs and amortization periods are management's estimates and
may have to be modified due to inherent technological changes in software
development.
FAIR VALUE OF FINANCIAL INSTRUMENTS
The Company's financial instruments consist primarily of cash, marketable
securities, accounts receivable, short-term borrowings and accounts payable. In
management's opinion, the carrying amounts of these financial instruments
approximated their fair values at December 31, 1996 and 1997, and October 11,
1998.
STOCK-BASED COMPENSATION
The Company accounts for its stock-based employee compensation arrangements
using the intrinsic value method in accordance with provisions of Accounting
Principles Board ("APB") Opinion No. 25, "Accounting for Stock Issued to
Employees," and complies with the disclosure provisions of SFAS No. 123,
"Accounting for Stock-Based Compensation." Under APB Opinion No. 25,
compensation cost is recognized based on the difference, if any, on the date of
grant between the fair value of the Company's stock and the amount an employee
must pay to acquire the stock.
REVENUE RECOGNITION
Revenues from time and material contracts are recognized based on fixed
hourly rates for direct labor hours expended. Revenues from fixed-price
contracts are recognized on the percentage-of-completion method, with costs and
estimated profits recorded as work is performed. Revenues from
cost-plus-fixed-fee contracts are recognized on the basis of direct costs, plus
indirect costs incurred, plus a fixed profit percentage.
Cost of revenues includes all direct material and labor costs related to
contract performance and does not include any related depreciation expense.
Provisions for estimated losses on uncompleted contracts are made in the period
in which such losses are determined. Changes in contract performance and
estimated profitability, including final contract settlements, may result in
revisions to costs and income and are recognized in the period in which the
revisions are determined. Unbilled receivables on contracts are comprised of
costs, plus earnings on certain contracts in excess of contractual billings on
such contracts.
Revenues from software sales are recognized when the related product is
sold, provided no significant vendor obligations remain.
BUSINESS CONCENTRATION AND CREDIT RISK
Revenues for the years ended December 31, 1996 and 1997 and for the period
from January 1, 1998 through October 11, 1998, were concentrated with 45, 74 and
62 percent of agencies of the United States Government, respectively.
F-74
<PAGE>
CENTURY COMPUTING, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1996 AND 1997, AND OCTOBER 11, 1998
Billed accounts receivable and unbilled accounts receivable as of December
31, 1996 and 1997, and October 11, 1998, were concentrated with 56, 78 and 55
percent and 51, 78 and 50 percent of agencies of the United States Government,
respectively.
INCOME TAXES
Income taxes are accounted for using an asset and liability approach that
requires the recognition of taxes payable or refundable for the current year and
deferred tax liabilities and assets for the future tax consequences of events
that have been recognized in the Company's financial statements or tax returns.
The measurement of current and deferred tax liabilities and assets are based on
provisions of the enacted tax law; the effects of future changes in tax laws or
rates are not anticipated. The measurement of deferred tax assets is reduced, if
necessary, by the amount of any tax benefits that, based on available evidence,
are not expected to be realized.
RECENT ACCOUNTING PRONOUNCEMENTS
In March 1998, AIPCA issued Statement of Position 98-4 ("SOP 98-4"),
"Deferral of the Effective Date of a Provision of SOP 97-2." SOP 98-4 defers for
one year the application of certain provisions of Statement of Position 97-2
("SOP 97-2"), "Software Revenue Recognition." The Company does not expect the
adoption of these standards to have a material effect on the Company's results
of operations, financial position, or cash flows.
RECLASSIFICATIONS
Certain amounts from the prior year financial statements have been
reclassified to conform with the current presentation.
3. ACCOUNTS RECEIVABLE:
Accounts receivable consists of the following:
<TABLE>
<CAPTION>
DECEMBER 31,
-------------------------- OCTOBER 11,
1996 1997 1998
------------ ------------ ------------
<S> <C> <C> <C>
Commercial clients................................. $ 258,000 $ 264,000 $ 663,000
Government agencies and contractors................ 330,000 938,000 823,000
------------ ------------ ------------
588,000 1,202,000 1,486,000
Allowance for doubtful accounts.................... -- -- (129,000)
------------ ------------ ------------
Accounts receivable, net....................... $ 588,000 $ 1,202,000 $ 1,357,000
------------ ------------ ------------
------------ ------------ ------------
</TABLE>
Unbilled accounts receivable consists of the following:
<TABLE>
<CAPTION>
DECEMBER 31,
-------------------------- OCTOBER 11,
1996 1997 1998
------------ ------------ ------------
<S> <C> <C> <C>
Commercial clients................................. $ 329,000 $ 179,000 $ 409,000
Government agencies and contractors................ 343,000 642,000 412,000
------------ ------------ ------------
Unbilled accounts receivable................... $ 672,000 $ 821,000 $ 821,000
------------ ------------ ------------
------------ ------------ ------------
</TABLE>
F-75
<PAGE>
CENTURY COMPUTING, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1996 AND 1997, AND OCTOBER 11, 1998
4. OTHER CURRENT ASSETS:
Other current assets consists of the following:
<TABLE>
<CAPTION>
DECEMBER 31,
---------------------------- OCTOBER 11,
1996 1997 1998
------------- ------------- -------------
<S> <C> <C> <C>
Deferred income taxes............................ $ 20,000 $ 48,000 $ 195,000
Income tax receivable............................ 26,000 -- 460,000
Other current assets............................. 16,000 14,000 29,000
------------- ------------- -------------
Total........................................ $ 62,000 $ 62,000 $ 684,000
------------- ------------- -------------
------------- ------------- -------------
</TABLE>
5. PROPERTY AND EQUIPMENT:
Property and equipment consists of the following:
<TABLE>
<CAPTION>
DECEMBER 31,
---------------------------- OCTOBER 11,
1996 1997 1998
------------- ------------- -------------
<S> <C> <C> <C>
Computers, equipment and software................ $ 1,709,000 $ 2,049,000 $ 2,218,000
Furniture and fixtures........................... 40,000 50,000 51,000
Leasehold improvements........................... 154,000 154,000 252,000
------------- ------------- -------------
1,903,000 2,253,000 2,521,000
Accumulated depreciation and amortization........ (1,487,000) (1,680,000) (1,868,000)
------------- ------------- -------------
Property and equipment, net.................. $ 416,000 $ 573,000 $ 653,000
------------- ------------- -------------
------------- ------------- -------------
</TABLE>
6. ACCRUED LIABILITIES:
Accrued liabilities consists of the following:
<TABLE>
<CAPTION>
DECEMBER 31,
---------------------------- OCTOBER 11,
1996 1997 1998
------------- ------------- -------------
<S> <C> <C> <C>
Accrued compensation and benefits................ $ 293,000 $ 914,000 $ 1,204,000
Income tax payable............................... -- 204,000 --
Deferred income taxes............................ -- 76,000 --
Other accrued liabilities........................ 45,000 -- 90,000
------------- ------------- -------------
Total........................................ $ 338,000 $ 1,194,000 $ 1,294,000
------------- ------------- -------------
------------- ------------- -------------
</TABLE>
7. LEASES:
The Company has entered into a noncancelable operating lease for real estate
that expires in 2005. Rental expense for the operating lease during the years
ended December 31, 1996 and 1997, and for the period from January 1, 1998 to
October 11, 1998, was $123,000, $127,000, and $109,000, respectively.
F-76
<PAGE>
CENTURY COMPUTING, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1996 AND 1997, AND OCTOBER 11, 1998
Future minimum lease payments under noncancelable operating leases are as
follows as of October 11, 1998:
<TABLE>
<S> <C>
Period ended December 31, 1998.................................. $ 40,000
1999............................................................ 195,000
2000............................................................ 195,000
2001............................................................ 195,000
2002............................................................ 195,000
2003............................................................ 195,000
Thereafter...................................................... 263,000
---------
Total minimum lease payments................................ $1,278,000
---------
---------
</TABLE>
8. SHORT-TERM BORROWING:
The Company had a revolving line of credit that expired April 30, 1998,
which was secured by the accounts receivable of the Company. Under the terms of
the line of credit, borrowings were available up to a maximum borrowing of
$1,500,000. Interest on the outstanding balance was calculated at the bank's
prime rate plus one-half of one percent per annum, payable monthly. As of
December 31, 1996 and 1997, and October 11, 1998, there were no outstanding
amounts.
9. NOTE PAYABLE:
During 1995, the Company purchased a portion of a stockholder's shares for
$379,000, payable in three annual installments in January 1996, 1997 and 1998.
The Company placed $252,000 into an interest bearing escrow account during 1995
to satisfy the first two annual payments. The remaining balance was placed into
the escrow account during 1996. As of December 31, 1996 and 1997, and for the
period ended October 11, 1998, there was no outstanding balance on the note
payable.
10. RETIREMENT PLAN:
The Company maintains a profit-sharing and retirement plan under the
provisions of section 401(k) of the Internal Revenue Code. The Plan provides for
contributions by employees and a discretionary contribution by the Company. The
plan is for the benefit of all employees who have attained the age of 21.
Participants may contribute up to 15 percent of their compensation, subject to
statutory limits. Employee contributions are fully vested. The Company's
contribution is discretionary and is determined by its Board of Directors.
Company contributions vest twenty percent per year over the five years, after
the first year. Company contributions totaled $125,000, $182,000 and $170,000
for the years ended December 31, 1996 and 1997, and for the period from January
1, 1998 to October 11, 1998, respectively.
Effective February 1, 1999, Century's employees are covered by AppNet's
401(k) plan.
11. STOCKHOLDER AGREEMENTS:
During the year ended December 31, 1996, the Company established Class B
common stock. This Class B common stock has no voting rights. The Company gave
the holders of the Class A common stock the option of retaining their Class A
voting stock, converting their Class A voting stock to
F-77
<PAGE>
CENTURY COMPUTING, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1996 AND 1997, AND OCTOBER 11, 1998
Class B stock or selling their Class A voting stock back to the Company. The
activity related to this program is presented in the statement of stockholders'
equity as stock conversion.
12. EMPLOYEE STOCK OPTION PLAN:
The Company maintained a stock option plan for key employees. The issued
options expire no later than ten years from the date of the grant or when
employment ceases, whichever comes first.
Options granted under the plan are accounted for pursuant to APB Opinion No.
25, "Accounting for Stock Issued to Employees," and no compensation has been
recognized for the plan. Had compensation cost for the plan been determined
based on the estimated fair value of the options at the grant dates consistent
with the method of SFAS No. 123, pro forma net income (loss) would have been
approximately $354,000, $844,000 and $380,000 for the years ended December 31,
1996 and 1997, and for the period from January 1, 1998 to October 11, 1998. The
weighted-average fair value of the options granted during 1996, 1997, and during
the period from January 1, 1998 to October 11, 1998, is estimated to be $5.58,
$5.50 and $5.84, respectively, per option. All stock options were granted at
fair market value at the date of grant.
The following summarizes option activity during 1996, 1997 and for the
period from January 1, 1998 to October 11, 1998:
<TABLE>
<CAPTION>
OPTIONS OUTSTANDING
----------------------------------------------------------------
1996 1997 OCTOBER 11, 1998
-------------------- -------------------- --------------------
CLASS A CLASS B CLASS A CLASS B CLASS A CLASS B
--------- --------- --------- --------- --------- ---------
<S> <C> <C> <C> <C> <C> <C>
Beginning of period............... -- 87,399 10,730 81,603 10,730 77,153
Granted......................... 10,730 21,604 -- 540 5,000 10,490
Exercised....................... -- -- -- (2,750) (3,874) (3,081)
Expired......................... -- (27,400) -- (2,240) -- (260)
--------- --------- --------- --------- --------- ---------
End of period..................... 10,730 81,603 10,730 77,153 11,856 84,302
--------- --------- --------- --------- --------- ---------
--------- --------- --------- --------- --------- ---------
Exercisable at end of period...... -- 75,334 10,730 77,153 11,856 84,302
--------- --------- --------- --------- --------- ---------
--------- --------- --------- --------- --------- ---------
</TABLE>
<TABLE>
<CAPTION>
WEIGHTED AVERAGE EXERCISE PRICE
-----------------------------------
<S> <C> <C> <C>
OCTOBER 11,
1996 1997 1998
--------- --------- -------------
Beginning of period.......................................... $ 5.23 $ 5.52 $ 5.50
Granted.................................................... 6.03 7.41 7.97
Exercised.................................................. -- 6.03 6.26
Expired.................................................... 5.19 6.03 7.41
--------- --------- -----
End of period................................................ $ 5.52 $ 5.50 $ 5.84
--------- --------- -----
--------- --------- -----
Exercisable at end of period................................. $ 5.58 $ 5.50 $ 5.84
--------- --------- -----
--------- --------- -----
</TABLE>
13. INCOME TAXES:
The Company follows the provisions of SFAS No. 109, "Accounting for Income
Taxes," for financial reporting purposes. Deferred tax assets or liabilities at
the end of each period are determined
F-78
<PAGE>
CENTURY COMPUTING, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1996 AND 1997, AND OCTOBER 11, 1998
using the currently enacted tax rates to apply to taxable income in the period
in which the deferred tax asset or liability is expected to be settled or
realized.
The components of the net deferred tax asset (liability) are as follows:
<TABLE>
<CAPTION>
DECEMBER 31,
---------------------- OCTOBER 11,
1996 1997 1998
---------- ---------- -----------
<S> <C> <C> <C>
Total deferred tax liabilities.......................... $ -- $ (76,000) $ (67,000)
Total deferred tax assets............................... 50,000 48,000 195,000
---------- ---------- -----------
Net deferred tax asset (liability)...................... $ 50,000 $ (28,000) $ 128,000
---------- ---------- -----------
---------- ---------- -----------
</TABLE>
The sources of and differences between the financial accounting and tax
basis of Century Computing, Inc.'s assets and liabilities that give rise to the
net deferred tax asset (liability) are as follows:
<TABLE>
<CAPTION>
DECEMBER 31,
---------------------- OCTOBER 11,
1996 1997 1998
---------- ---------- -----------
<S> <C> <C> <C>
Deferred tax liabilities
Software development costs............................ $ -- $ -- $ (21,000)
Other................................................. -- (76,000) (46,000)
---------- ---------- -----------
-- (76,000) (67,000)
---------- ---------- -----------
---------- ---------- -----------
Deferred tax assets
Depreciation and amortization......................... 30,000 21,000 12,000
Other................................................. 20,000 27,000 183,000
---------- ---------- -----------
$ 50,000 $ 48,000 $ 195,000
---------- ---------- -----------
---------- ---------- -----------
</TABLE>
The components of the provision (benefit) for income taxes as of December
31, 1996 and 1997, and October 11, 1998, are as follows:
<TABLE>
<CAPTION>
DECEMBER 31,
---------------------- OCTOBER 11,
1996 1997 1998
---------- ---------- -----------
<S> <C> <C> <C>
Federal income taxes:
Current............................................... $ 250,000 $ 409,000 $ 7,000
Deferred.............................................. (23,000) 64,000 (119,000)
State taxes............................................. 52,000 107,000 (23,000)
---------- ---------- -----------
Provision (benefit) for income taxes.................... $ 279,000 $ 580,000 $ (135,000)
---------- ---------- -----------
---------- ---------- -----------
</TABLE>
F-79
<PAGE>
CENTURY COMPUTING, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1996 AND 1997, AND OCTOBER 11, 1998
The tax provision (benefit) differed from the amounts computed at the
statutory rate, as follows:
<TABLE>
<CAPTION>
DECEMBER 31,
---------------------- OCTOBER 11,
1996 1997 1998
---------- ---------- -----------
<S> <C> <C> <C>
Federal income taxes at the U.S. statutory rate......... $ 246,000 $ 510,000 $ (134,000)
State taxes, net of federal benefit..................... 34,000 70,000 (15,000)
Other................................................... (1,000) -- 14,000
---------- ---------- -----------
Total............................................... $ 279,000 $ 580,000 $ (135,000)
---------- ---------- -----------
---------- ---------- -----------
</TABLE>
14. ACQUISITION-RELATED COMPENSATION:
In conjunction with AppNet Systems, Inc.'s purchase of Century, Century paid
an unconditional cash bonus of approximately $953,000 to certain employees for
past services.
F-80
<PAGE>
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To Research & Planning, Inc.:
We have audited the accompanying balance sheets of Research & Planning, Inc.
(a Massachusetts corporation), as of December 31, 1996 and 1997, and October 19,
1998, and the related statements of operations, stockholders' equity, and cash
flows for the years ended December 31, 1996 and 1997, and for the period from
January 1, 1998 to October 19, 1998. These financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of the Company as of December
31, 1996 and 1997, and October 19, 1998, and the results of its operations and
its cash flows for the years ended December 31, 1996 and 1997, and for the
period from January 1, 1998 to October 19, 1998 in conformity with generally
accepted accounting principles.
ARTHUR ANDERSEN LLP
Washington, D.C.
February 19, 1999
F-81
<PAGE>
RESEARCH & PLANNING, INC.
BALANCE SHEETS
AS OF DECEMBER 31, 1996, AND 1997, AND OCTOBER 19, 1998
<TABLE>
<CAPTION>
DECEMBER 31,
-------------------------- OCTOBER 19,
1996 1997 1998
------------ ------------ ------------
<S> <C> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents............................................. $ 74,000 $ 93,000 $ 310,000
Accounts receivable, net of allowance for doubtful accounts of $1,000,
$15,000 and $40,000, respectively................................... 865,000 1,374,000 1,407,000
Other current assets.................................................. 73,000 137,000 30,000
------------ ------------ ------------
Total current assets................................................ 1,012,000 1,604,000 1,747,000
Property and equipment, net............................................. 97,000 262,000 457,000
------------ ------------ ------------
Total assets........................................................ $ 1,109,000 $ 1,866,000 $ 2,204,000
------------ ------------ ------------
------------ ------------ ------------
LIABILITIES AND STOCKHOLDERS' EQUITY
Liabilities:
Short-term borrowing.................................................. $ -- $ 200,000 $ --
Accounts payable...................................................... 10,000 25,000 198,000
Accrued liabilities................................................... 116,000 301,000 457,000
------------ ------------ ------------
Total liabilities................................................... 126,000 526,000 655,000
------------ ------------ ------------
Commitments and contingencies (Note 6)
Stockholders' equity:
Common stock, $0.10 par value; 100,000 authorized; 11,111 shares
issued; and 10,000 outstanding...................................... 1,000 1,000 1,000
Less: Treasury stock, at cost--1,111 shares........................... (11,000) (11,000) (11,000)
Additional paid-in capital............................................ 12,000 12,000 12,000
Retained earnings..................................................... 981,000 1,338,000 1,547,000
------------ ------------ ------------
Total stockholders' equity.......................................... 983,000 1,340,000 1,549,000
------------ ------------ ------------
Total liabilities and stockholders' equity.......................... $ 1,109,000 $ 1,866,000 $ 2,204,000
------------ ------------ ------------
------------ ------------ ------------
</TABLE>
The accompanying notes are an integral part of these statements.
F-82
<PAGE>
RESEARCH & PLANNING, INC.
STATEMENTS OF OPERATIONS
FOR THE YEARS ENDED DECEMBER 31, 1996, AND 1997,
AND FOR THE PERIOD FROM JANUARY 1, 1998 TO OCTOBER 19, 1998
<TABLE>
<CAPTION>
FOR THE YEARS ENDED FOR THE PERIOD
DECEMBER 31, FROM JANUARY 1,
-------------------------- 1998 TO
1996 1997 OCTOBER 19, 1998
------------ ------------ ----------------
<S> <C> <C> <C>
Revenues........................................................... $ 3,329,000 $ 4,781,000 $ 5,303,000
Cost of revenues................................................... 1,753,000 2,434,000 2,667,000
------------ ------------ ----------------
Gross profit................................................... 1,576,000 2,347,000 2,636,000
------------ ------------ ----------------
Operating expenses:
Selling and marketing............................................ 93,000 86,000 260,000
General and administrative....................................... 418,000 657,000 644,000
Depreciation and amortization.................................... 30,000 53,000 80,000
------------ ------------ ----------------
Total operating expenses....................................... 541,000 796,000 984,000
------------ ------------ ----------------
Income from operations............................................. 1,035,000 1,551,000 1,652,000
Interest income, net............................................... 7,000 13,000 11,000
Other expense...................................................... -- -- 99,000
------------ ------------ ----------------
Income before income taxes......................................... 1,042,000 1,564,000 1,564,000
Provision for income taxes......................................... 3,000 23,000 29,000
------------ ------------ ----------------
Net income......................................................... $ 1,039,000 $ 1,541,000 $ 1,535,000
------------ ------------ ----------------
------------ ------------ ----------------
</TABLE>
The accompanying notes are an integral part of these statements.
F-83
<PAGE>
RESEARCH & PLANNING, INC.
STATEMENTS OF STOCKHOLDERS' EQUITY
FOR THE YEARS ENDED DECEMBER 31, 1996, AND, 1997,
AND FOR THE PERIOD FROM JANUARY 1, 1998 TO OCTOBER 19, 1998
<TABLE>
<CAPTION>
COMMON STOCK ADDITIONAL
------------------------ TREASURY PAID- IN RETAINED
SHARES AMOUNT STOCK CAPITAL EARNINGS
----------- ----------- ----------- ----------- ----------
<S> <C> <C> <C> <C> <C>
Balance, December 31, 1995............................. 10,000 $ 1,000 $ (11,000) $ 12,000 $ 604,000
Distributions to stockholders........................ -- -- -- -- (662,000)
Net income........................................... -- -- -- -- 1,039,000
----------- ----------- ----------- ----------- ----------
Balance, December 31, 1996............................. 10,000 1,000 (11,000) 12,000 981,000
Distributions to stockholders........................ -- -- -- -- (1,184,000)
Net income........................................... -- -- -- -- 1,541,000
----------- ----------- ----------- ----------- ----------
Balance, December 31, 1997............................. 10,000 1,000 (11,000) 12,000 1,338,000
Distributions to stockholders........................ -- -- -- -- (1,326,000)
Net income........................................... -- -- -- -- 1,535,000
----------- ----------- ----------- ----------- ----------
Balance, October 19, 1998.............................. 10,000 $ 1,000 $ (11,000) $ 12,000 $1,547,000
----------- ----------- ----------- ----------- ----------
----------- ----------- ----------- ----------- ----------
<CAPTION>
TOTAL
STOCKHOLDERS'
EQUITY
------------
<S> <C>
Balance, December 31, 1995............................. $ 606,000
Distributions to stockholders........................ (662,000)
Net income........................................... 1,039,000
------------
Balance, December 31, 1996............................. 983,000
Distributions to stockholders........................ (1,184,000)
Net income........................................... 1,541,000
------------
Balance, December 31, 1997............................. 1,340,000
Distributions to stockholders........................ (1,326,000)
Net income........................................... 1,535,000
------------
Balance, October 19, 1998.............................. $1,549,000
------------
------------
</TABLE>
The accompanying notes are an integral part of these statements.
F-84
<PAGE>
RESEARCH & PLANNING, INC.
STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED DECEMBER 31, 1996 AND, 1997,
AND FOR THE PERIOD FROM JANUARY 1, 1998 TO OCTOBER 19, 1998
<TABLE>
<CAPTION>
FOR THE PERIOD
FOR THE YEARS ENDED FROM JANUARY 1,
DECEMBER 31, 1998 TO
-------------------------- OCTOBER 19,
1996 1997 1998
------------ ------------ ---------------
<S> <C> <C> <C>
Cash flows from operating activities:
Net income........................................................ $ 1,039,000 $ 1,541,000 $ 1,535,000
Adjustments to reconcile net income to net cash provided by
operating activities:
Depreciation and amortization................................. 30,000 53,000 80,000
Change in assets and liabilities:
Accounts receivable, net.................................... (308,000) (509,000) (33,000)
Other current assets........................................ (45,000) (64,000) 107,000
Accounts payable............................................ (1,000) 15,000 173,000
Accrued liabilities......................................... 70,000 185,000 156,000
------------ ------------ ---------------
Net cash provided by operating activities................. 785,000 1,221,000 2,018,000
------------ ------------ ---------------
Cash flows from investing activities:
Purchase of property and equipment, net........................... (64,000) (218,000) (275,000)
------------ ------------ ---------------
Cash flows from financing activities:
Net proceeds (repayments) under short-term borrowings............. -- 200,000 (200,000)
Distributions to stockholders..................................... (662,000) (1,184,000) (1,326,000)
------------ ------------ ---------------
Net cash used in financing activities..................... (662,000) (984,000) (1,526,000)
------------ ------------ ---------------
Net increase in cash and cash equivalents........................... 59,000 19,000 217,000
Cash and cash equivalents, beginning of period...................... 15,000 74,000 93,000
------------ ------------ ---------------
Cash and cash equivalents, end of period............................ $ 74,000 $ 93,000 $ 310,000
------------ ------------ ---------------
------------ ------------ ---------------
Supplementary information:
Cash paid for interest............................................ $ -- $ -- $ 2,000
------------ ------------ ---------------
------------ ------------ ---------------
Cash paid for income taxes........................................ $ 3,000 $ 23,000 $ --
------------ ------------ ---------------
------------ ------------ ---------------
</TABLE>
The accompanying notes are an integral part of these statements.
F-85
<PAGE>
RESEARCH & PLANNING, INC.
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 1996 AND 1997, AND OCTOBER 19, 1998
1. BUSINESS DESCRIPTION:
Research & Planning, Inc. ("R&P" or the "Company") was incorporated in 1968,
under the laws of the state of Massachusetts. R&P is an information technology
services company providing Enterprise Resource Planning integration and support,
data warehousing, decision support applications and business-to-business
electronic commerce solutions. R&P is headquartered in Cambridge, Massachusetts
and operates primarily in the United States.
On October 20, 1998, all of the issued and outstanding stock of the Company
was acquired by AppNet Systems, Inc. ("AppNet"). The Company incurred $99,000 of
expenses in conjunction with the sale to AppNet for accounting and consulting
fees. This has been classified in other expenses in the accompanying statements
of operations.
There are significant risks associated with the Company, including the
subjectivity of the Company's services to rapid technological change and the
Year 2000 issue.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES AND PRACTICES:
USE OF ESTIMATES
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and the
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amount of revenues and expenses during the reporting
period. Actual results could differ from those estimates.
CASH AND CASH EQUIVALENTS
The Company considers all highly liquid investments with original maturities
of three months or less to be cash equivalents.
PROPERTY AND EQUIPMENT
Property and equipment are stated at cost, net of accumulated depreciation
and amortization. Depreciation and amortization are computed using the
straight-line method over the estimated useful lives of the related assets, as
follows:
<TABLE>
<S> <C>
five
Computers, equipment and software................................ years
five
Furniture and fixtures........................................... years
</TABLE>
Purchased software is capitalized and amortized principally over five years.
Leasehold improvements are amortized over the lesser of the estimated useful
life of the asset or the remaining lease term.
In accordance with Statement of Financial Accounting Standards No. 121,
"Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to
Be Disposed Of," the Company reviews its recorded long-lived assets for
impairment whenever events or changes in circumstances indicate that the
carrying amount of an asset may not be recoverable.
F-86
<PAGE>
RESEARCH & PLANNING, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1996 AND 1997, AND OCTOBER 19, 1998
FAIR VALUE OF FINANCIAL INSTRUMENTS
The Company's financial instruments consist primarily of cash and cash
equivalents, accounts receivable, accounts payable and short-term borrowings. In
management's opinion, the carrying amounts of these financial instruments
approximated their fair values at December 31, 1996 and 1997, and October 19,
1998.
REVENUE RECOGNITION
Revenues pursuant to fixed-fee contracts are recognized on the
percentage-of-completion method with costs and estimated profits recorded as
work is performed. Revenues from time and material contracts are recognized
based on fixed hourly rates for direct labor expended.
Cost of revenues includes all direct material and labor costs related to
contract performance and does not include any related depreciation expense.
Provisions for estimated losses on uncompleted contracts are made on a
contract by contract basis and are recognized in the period in which such losses
are determined. Changes in contract performance and estimated profitability,
including final contract settlements, may result in revisions to costs and
income and are recognized in the period in which revisions are determined.
Unbilled receivables on contracts are comprised of costs, plus earnings on
certain contracts in excess of contractual billings on such contracts.
BUSINESS CONCENTRATION AND CREDIT RISK
The following table summarizes the revenues and accounts receivable from
clients in excess of 10% of total revenues and accounts receivable:
<TABLE>
<CAPTION>
REVENUES
------------------------------------- ACCOUNTS RECEIVABLE
-------------------------------------
FOR THE
YEAR ENDED FOR THE AS OF
DECEMBER 31, PERIOD ENDED DECEMBER 31, AS OF
-------------------- OCTOBER 19, -------------------- OCTOBER 19,
1996 1997 1998 1996 1997 1998
--------- --------- --------------- --------- --------- ---------------
<S> <C> <C> <C> <C> <C> <C>
Customer A....................... 19% 28% 41% 18% 24% 44%
Customer B....................... * 16% 10% * 17% *
Customer C....................... 15% * * 11% * *
Customer D....................... * 10% 13% * 22% *
Customer E....................... 13% * * * * *
Customer F....................... * 12% * * * *
</TABLE>
- ------------------------
* Represents less than 10% of total.
INCOME TAXES
The Company, with the consent of its shareholders, has elected to be taxed
pursuant to Subchapter S of the Internal Revenue Code (an "S Corporation"). In
lieu of corporate income taxes, the shareholders of an S corporation are taxed
on their proportionate share of the Company's taxable income. Therefore, no
provision for federal income taxes has been included in the accompanying
financial statements.
F-87
<PAGE>
RESEARCH & PLANNING, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1996 AND 1997, AND OCTOBER 19, 1998
RECENT ACCOUNTING PRONOUNCEMENTS
In March 1998, the American Institute of Certified Public Accountants
("AICPA") issued Statement of Position 98-1 ("SOP 98-1"), "Accounting for the
Cost of Computer Software Developed or Obtained for Internal Use". SOP 98-1 is
effective for financial statements for years beginning after December 15, 1998.
SOP 98-1 provides guidance on accounting for computer software developed or
obtained for internal use, including the requirement to capitalize specified
costs and the amortization of such costs. The Company does not expect the
adoption of this standard to have a material effect on the Company's
capitalization policy.
3. ACCOUNTS RECEIVABLE:
Accounts receivable consists of the following:
<TABLE>
<CAPTION>
DECEMBER 31,
------------------------ OCTOBER 19,
1996 1997 1998
---------- ------------ ------------
<S> <C> <C> <C>
Accounts receivable................................... $ 586,000 $ 951,000 $ 1,084,000
Unbilled accounts receivable.......................... 280,000 438,000 363,000
Allowance for doubtful accounts....................... (1,000) (15,000) (40,000)
---------- ------------ ------------
Accounts receivable, net.......................... $ 865,000 $ 1,374,000 $ 1,407,000
---------- ------------ ------------
---------- ------------ ------------
</TABLE>
4. PROPERTY AND EQUIPMENT:
Property and equipment consists of the following:
<TABLE>
<CAPTION>
DECEMBER 31,
------------------------ OCTOBER 19,
1996 1997 1998
---------- ------------ ------------
<S> <C> <C> <C>
Computers, equipment and software..................... $ 275,000 $ 385,000 $ 507,000
Furniture and fixtures................................ 114,000 222,000 375,000
---------- ------------ ------------
389,000 607,000 882,000
Accumulated depreciation and amortization............. (292,000) (345,000) (425,000)
---------- ------------ ------------
Property and equipment, net....................... $ 97,000 $ 262,000 $ 457,000
---------- ------------ ------------
---------- ------------ ------------
</TABLE>
5. ACCRUED LIABILITIES:
Accrued liabilities consists of the following:
<TABLE>
<CAPTION>
DECEMBER 31,
---------------------- OCTOBER 19,
1996 1997 1998
---------- ---------- -----------
<S> <C> <C> <C>
Accrued compensation and benefits........................ $ 54,000 $ 113,000 $ 289,000
Accrued dividends........................................ 39,000 86,000 --
Deposits................................................. -- 54,000 73,000
Other.................................................... 23,000 48,000 95,000
---------- ---------- -----------
Total................................................ $ 116,000 $ 301,000 $ 457,000
---------- ---------- -----------
---------- ---------- -----------
</TABLE>
F-88
<PAGE>
RESEARCH & PLANNING, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1996 AND 1997, AND OCTOBER 19, 1998
6. LEASES:
The Company has noncancelable operating leases, primarily for real estate,
that expire over the next five years. Rental expense for operating leases during
the years ended December 31, 1996 and 1997, and for the period from January 1,
1998 to October 19, 1998, was $77,000, $185,000 and $300,000, respectively.
Future minimum lease payments under noncancelable operating leases are as
follows as of October 19, 1998:
<TABLE>
<S> <C>
Period ended December 31, 1998.................................. $ 102,000
1999............................................................ 410,000
2000............................................................ 410,000
2001............................................................ 391,000
2002............................................................ 332,000
2003............................................................ 332,000
Thereafter...................................................... 332,000
---------
Total future minimum lease payments......................... $2,309,000
---------
---------
</TABLE>
7. SUBLEASE INCOME:
The Company subleases certain portions of their leased buildings. These
subleases extend over varying dates through September 2000. For the years ended
December 31, 1996 and 1997, and for the period from January 1, 1998 to October
19, 1998, the Company earned $17,000, $46,000 and $153,000, respectively, in
sublease income, which is included in general and administrative expenses as an
offset to lease expense in the accompanying statements of operations.
8. SHORT-TERM BORROWING:
The Company has a line of credit which expired on October 19, 1998, and was
collateralized by substantially all of the assets of the Company and was
guaranteed by the stockholders of the Company. Under the terms of the line of
credit, borrowings are limited to $200,000. Interest on the outstanding balance
was calculated as the Bank's prime rate plus 1.50 percent. As of December 31,
1996 and 1997, and October 19, 1998, there were borrowings under the line of
credit totaling $0, $200,000, and $0, respectively.
9. RETIREMENT PLAN:
The Company maintained a profit-sharing and retirement plan under the
provisions of section 401(k) of the Internal Revenue Code. The Plan provided for
contributions by employees and a discretionary contribution by the Company as
determined by the Board of Directors. The plan was for the benefit of all
employees who had completed one year of service or 1,000 hours and had full-time
status. Participants could contribute up to 15 percent of their compensation,
subject to statutory limits. Employee contributions fully vest immediately upon
contribution. Company contributions vested fully after five years. Company
contributions totaled $66,000, $82,000, and $85,000 for the years ended December
31, 1996 and 1997, and for the period from January 1, 1998 to October 19, 1998,
respectively. Effective February 1, 1999, Research and Planning, Inc. employees
are covered by the AppNet 401(k) plan.
F-89
<PAGE>
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To The Kodiak Group, Inc.:
We have audited the accompanying balance sheets of The Kodiak Group, Inc. (a
Massachusetts corporation), as of December 31, 1997, and December 13, 1998, and
the related statements of operations, stockholders' equity, and cash flows for
the year ended December 31, 1997, and for the period from January 1, 1998 to
December 13, 1998. These financial statements are the responsibility of the
Company's management. Our responsibility is to express an opinion on these
financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of The Kodiak Group, Inc. as of
December 31, 1997, and December 13, 1998, and the results of its operations and
its cash flows for the year ended December 31, 1997, and for the period from
January 1, 1998 to December 13, 1998 in conformity with generally accepted
accounting principles.
ARTHUR ANDERSEN LLP
Washington, D.C.
February 19, 1999
F-90
<PAGE>
THE KODIAK GROUP, INC.
BALANCE SHEETS
AS OF DECEMBER 31, 1997 AND DECEMBER 13, 1998
<TABLE>
<CAPTION>
DECEMBER 31, DECEMBER 13,
1997 1998
------------ ------------
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents.......................................................... $ 300,000 $ --
Accounts receivable, net of allowance for doubtful accounts of $39,000 and $97,000,
respectively..................................................................... 768,000 1,247,000
Other current assets............................................................... 18,000 48,000
------------ ------------
Total current assets............................................................. 1,086,000 1,295,000
Property and equipment, net.......................................................... 278,000 319,000
Other assets......................................................................... 12,000 72,000
------------ ------------
Total assets..................................................................... $1,376,000 $1,686,000
------------ ------------
------------ ------------
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable................................................................... $ 50,000 $ 61,000
Accrued liabilities................................................................ 113,000 845,000
Current portion of long-term debt.................................................. 49,000 --
Current portion of capital lease obligation........................................ 18,000 23,000
------------ ------------
Total current liabilities........................................................ 230,000 929,000
Long-term debt, net of current portion............................................... 32,000 --
Capital lease obligation, net of current portion..................................... 39,000 16,000
------------ ------------
Total liabilities................................................................ 301,000 945,000
------------ ------------
Commitments and contingencies (Note 6)
Stockholders' equity:
Common stock, $.01 par value; 1,000 shares authorized; 400 shares issued and
outstanding...................................................................... -- --
Additional paid-in capital......................................................... 4,000 4,000
Retained earnings.................................................................. 1,071,000 737,000
------------ ------------
Total stockholders' equity....................................................... 1,075,000 741,000
------------ ------------
Total liabilities and stockholders' equity....................................... $1,376,000 $1,686,000
------------ ------------
------------ ------------
</TABLE>
The accompanying notes are an integral part of these statements.
F-91
<PAGE>
THE KODIAK GROUP, INC.
STATEMENTS OF OPERATIONS
FOR THE YEAR ENDED DECEMBER 31, 1997,
AND FOR THE PERIOD FROM JANUARY 1, 1998 TO DECEMBER 13, 1998
<TABLE>
<CAPTION>
FOR THE PERIOD
FOR THE YEAR FROM JANUARY 1,
ENDED 1998 TO
DECEMBER 31, DECEMBER 13,
1997 1998
------------ ----------------
<S> <C> <C>
Revenues.......................................................................... $3,687,000 $ 6,289,000
Cost of revenues.................................................................. 2,065,000 3,221,000
------------ ----------------
Gross profit.................................................................. 1,622,000 3,068,000
------------ ----------------
Operating expenses:
Selling and marketing........................................................... 48,000 66,000
General and administrative...................................................... 1,061,000 1,691,000
Acquisition related compensation................................................ -- 250,000
Depreciation and amortization................................................... 136,000 136,000
------------ ----------------
Total operating expenses...................................................... 1,245,000 2,143,000
------------ ----------------
Income from operations............................................................ 377,000 925,000
Interest expense, net............................................................. 5,000 2,000
Other expense, net................................................................ -- 8,000
------------ ----------------
Income before income taxes........................................................ 372,000 915,000
Provision for income taxes........................................................ 1,000 5,000
------------ ----------------
Net income........................................................................ $ 371,000 $ 910,000
------------ ----------------
------------ ----------------
</TABLE>
The accompanying notes are an integral part of these statements.
F-92
<PAGE>
THE KODIAK GROUP, INC.
STATEMENTS OF STOCKHOLDERS' EQUITY
FOR THE YEAR ENDED DECEMBER 31, 1997,
AND FOR THE PERIOD FROM JANUARY 1, 1998 TO DECEMBER 13, 1998
<TABLE>
<CAPTION>
COMMON STOCK ADDITIONAL TOTAL
------------------------ PAID-IN RETAINED STOCKHOLDERS'
SHARES AMOUNT CAPITAL EARNINGS EQUITY
----------- ----------- ----------- ------------- -------------
<S> <C> <C> <C> <C> <C>
Balance, December 31, 1996........................... 400 $ -- $ 4,000 $ 740,000 $ 744,000
Distributions to stockholders...................... -- -- -- (40,000) (40,000)
Net income......................................... -- -- -- 371,000 371,000
--- ----- ----------- ------------- -------------
Balance, December 31, 1997........................... 400 -- 4,000 1,071,000 1,075,000
Distributions to stockholders...................... -- -- -- (1,244,000) (1,244,000)
Net income......................................... -- -- -- 910,000 910,000
--- ----- ----------- ------------- -------------
Balance, December 13, 1998........................... 400 $ -- $ 4,000 $ 737,000 $ 741,000
--- ----- ----------- ------------- -------------
--- ----- ----------- ------------- -------------
</TABLE>
The accompanying notes are an integral part of these statements.
F-93
<PAGE>
THE KODIAK GROUP, INC.
STATEMENTS OF CASH FLOWS
FOR THE YEAR ENDED DECEMBER 31, 1997,
AND FOR THE PERIOD FROM JANUARY 1, 1998 TO DECEMBER 13, 1998
<TABLE>
<CAPTION>
FOR THE PERIOD
FOR THE YEAR FROM JANUARY 1,
ENDED 1998 TO
DECEMBER 31, DECEMBER 13,
1997 1998
------------- ---------------
<S> <C> <C>
Cash flows from operating activities:
Net income..................................................................... $ 371,000 $ 910,000
Adjustments to reconcile net income to net cash provided by operating
activities--
Depreciation and amortization.............................................. 136,000 136,000
Loss on fixed asset disposals.............................................. -- 7,000
Change in assets and liabilities:
Accounts receivable, net................................................. (50,000) (479,000)
Other assets............................................................. (4,000) (90,000)
Accounts payable......................................................... (12,000) 11,000
Accrued liabilities...................................................... 16,000 732,000
------------- ---------------
Net cash provided by operating activities.............................. 457,000 1,227,000
------------- ---------------
Cash flows from investing activities:
Purchase of property and equipment, net........................................ (177,000) (184,000)
------------- ---------------
Cash flows from financing activities:
Proceeds from long-term debt................................................... 118,000 --
Repayments of long-term debt................................................... (96,000) (81,000)
Repayments on capital lease obligations........................................ (55,000) (18,000)
Distributions to stockholders.................................................. (40,000) (1,244,000)
------------- ---------------
Net cash used in financing activities.................................. (73,000) (1,343,000)
------------- ---------------
Net increase (decrease) in cash and cash equivalents............................. 207,000 (300,000)
Cash and cash equivalents, beginning of period................................... 93,000 300,000
------------- ---------------
Cash and cash equivalents, end of period......................................... $ 300,000 $ --
------------- ---------------
------------- ---------------
Supplementary information:
Cash paid for interest......................................................... $ 16,000 $ 11,000
------------- ---------------
------------- ---------------
Cash paid for income taxes..................................................... $ 1,000 $ --
------------- ---------------
------------- ---------------
</TABLE>
The accompanying notes are an integral part of these statements.
F-94
<PAGE>
THE KODIAK GROUP, INC.
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 1997 AND DECEMBER 13, 1998
1. BUSINESS DESCRIPTION:
The Kodiak Group, Inc. ("Kodiak" or the "Company") was incorporated in 1994,
under the laws of the state of Massachusetts. Kodiak is an electronic commerce
services company which provides electronic data interchange ("EDI") integration
and processing services to clients who are looking to create, maintain or expand
their EDI systems. Kodiak is headquartered in Pittsfield, Massachusetts and
operates primarily in the Northeast.
On December 13, 1998, all of the issued and outstanding stock of the Company
was acquired by AppNet Systems, Inc. ("AppNet").
There are significant risks associated with the Company, including the
subjectivity of the Company's services to rapid technological change, government
regulations and the Year 2000 issue.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES AND PRACTICES:
USE OF ESTIMATES
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and the
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amount of revenues and expenses during the reporting
period. Actual results could differ from those estimates.
CASH AND CASH EQUIVALENTS
The Company considers all highly liquid investments with original maturities
of three months or less to be cash equivalents.
PROPERTY AND EQUIPMENT
Property and equipment are stated at cost, net of accumulated depreciation
and amortization. Depreciation and amortization are computed using the
straight-line method over the estimated useful lives of the related assets, as
follows:
<TABLE>
<S> <C>
three to five
Computers, equipment and software........................ years
Furniture and fixtures................................... five years
</TABLE>
Purchased software and third-party costs incurred to develop software for
internal use are capitalized and amortized principally over three years.
Leasehold improvements are amortized over the lesser of the estimated useful
life of the asset or the remaining lease term.
In accordance with Statement of Financial Accounting Standards ("SFAS") No.
121, "Accounting for the Impairment of Long-Lived Assets and for Long-Lived
Assets to Be Disposed Of," the Company reviews its recorded long-lived assets
for impairment whenever events or changes in circumstances indicate that the
carrying amount of an asset may not be recoverable.
F-95
<PAGE>
THE KODIAK GROUP, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1997 AND DECEMBER 13, 1998
SOFTWARE DEVELOPMENT COSTS
The Company has capitalized costs related to the development of certain
software products. In accordance with SFAS No. 86, "Accounting for the Costs of
Computer Software to Be Sold, Leased, or Otherwise Marketed," capitalization of
costs begins when technological feasibility has been established and ends when
the product is available for general release to customers. Amortization will be
computed and recognized based on the products' estimated economic lives of three
years. Capitalized costs and amortization periods are management's estimates and
may have to be modified due to inherent technological changes in software
development.
FAIR VALUE OF FINANCIAL INSTRUMENTS
The Company's financial instruments consist primarily of cash and cash
equivalents, accounts receivable, accounts payable, and capital lease
obligations. In management's opinion, the carrying amounts of these financial
instruments approximated their fair values at December 31, 1997, and December
13, 1998.
REVENUE RECOGNITION
Revenues from time and material contracts are recognized based on fixed
hourly rates for direct labor hours expended. Revenues from fixed-price
contracts are recognized on the percentage-of-
completion method, with costs and estimated profits recorded as work is
performed.
Cost of revenues includes all direct material and labor costs related to
contract performance and does not include any related depreciation expense.
Provisions for estimated losses on uncompleted contracts are made in the period
in which such losses are determined. Changes in contract performance and
estimated profitability, including final contract settlements, may result in
revisions to costs and income and are recognized in the period in which the
revisions are determined. Unbilled receivables on contracts are comprised of
costs, plus earnings on certain contracts in excess of contractual billings on
such contracts. Cash received in excess of costs incurred is classified as
deferred revenue.
Revenues from software sales are recognized when the related product is
sold, provided no significant vendor obligations remain.
BUSINESS CONCENTRATION AND CREDIT RISK
The following table summarizes the revenues and accounts receivable from
clients in excess of 10% of total revenues and accounts receivable:
<TABLE>
<CAPTION>
REVENUES ACCOUNTS RECEIVABLE
------------------------------------------ --------------------------------
FOR THE YEAR ENDED FOR THE PERIOD ENDED AS OF DECEMBER AS OF DECEMBER
DECEMBER 31, DECEMBER 13, 31, 13,
1997 1998 1997 1998
------------------- --------------------- --------------- ---------------
<S> <C> <C> <C> <C>
Customer A.................................. 52% 32% 62% 13%
Customer B.................................. * 28% * 43%
Customer C.................................. * 14% * 23%
</TABLE>
- ------------------------
* Represents less than 10% of total
F-96
<PAGE>
THE KODIAK GROUP, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1997 AND DECEMBER 13, 1998
INCOME TAXES
The Company, with the consent of its shareholders, has elected to be taxed
pursuant to subchapter S of the Internal Revenue Code (an "S corporation"). In
lieu of corporation income taxes, the shareholders of an S corporation are taxed
on their proportionate share of the Company's taxable income. Therefore, no
provision for federal income taxes has been included in the accompanying
financial statements.
RECENT ACCOUNTING PRONOUNCEMENTS
In March 1998, AIPCA issued Statement of Position 98-4 ("SOP 98-4"),
"Deferral of the Effective Date of a Provision of SOP 97-2." SOP 98-4 defers for
one year the application of certain provisions of Statement of Position 97-2
("SOP 97-2"), "Software Revenue Recognition." Different informal and
unauthoritative interpretations of certain provisions of SOP 97-2 have arisen
and, as a result, the AICPA is deliberating amendments to SOP 97-2, so it can
issue interpretations regarding the applicability and the method of application
of those provisions. The Company does not expect the adoption of this standard
to have a material effect on the Company's results of operations, financial
position, or cash flows.
3. ACCOUNTS RECEIVABLE:
Accounts receivable consists of the following:
<TABLE>
<CAPTION>
DECEMBER 31, DECEMBER 13,
1997 1998
------------ ------------
<S> <C> <C>
Accounts receivable.............................................. $ 613,000 $1,077,000
Unbilled accounts receivable..................................... 194,000 267,000
Allowance for doubtful accounts.................................. (39,000) (97,000)
------------ ------------
Accounts receivable, net..................................... $ 768,000 $1,247,000
------------ ------------
------------ ------------
</TABLE>
4. PROPERTY AND EQUIPMENT:
Property and equipment consists of the following:
<TABLE>
<CAPTION>
DECEMBER 31, DECEMBER 13,
1997 1998
------------ ------------
<S> <C> <C>
Computers, equipment and software................................ $ 398,000 $ 508,000
Furniture and fixtures........................................... 138,000 199,000
Leasehold improvements........................................... 25,000 28,000
------------ ------------
561,000 735,000
Accumulated depreciation and amortization........................ (283,000) (416,000)
------------ ------------
Property and equipment, net.................................. $ 278,000 $ 319,000
------------ ------------
------------ ------------
</TABLE>
F-97
<PAGE>
THE KODIAK GROUP, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1997 AND DECEMBER 13, 1998
5. ACCRUED LIABILITIES:
Accrued liabilities consists of the following:
<TABLE>
<CAPTION>
DECEMBER 31, DECEMBER 13,
1997 1998
------------ ------------
<S> <C> <C>
Accrued compensation and benefits................................ $ 39,000 $ 406,000
Accrued professional fees........................................ 29,000 131,000
Deferred revenue................................................. 42,000 107,000
Other accrued liabilities........................................ 3,000 201,000
------------ ------------
$ 113,000 $ 845,000
------------ ------------
------------ ------------
</TABLE>
6. LEASES:
The Company has noncancelable operating leases, primarily for real estate,
that expire over the next three years. Rental expense for operating leases
during the year ended December 31, 1997, and for the period from January 1, 1998
to December 13, 1998, was $77,000, and $105,000, respectively.
The Company leases certain equipment under a capital lease.
Future minimum lease payments under the capital lease and noncancelable
operating leases are as follows as of December 13, 1998:
<TABLE>
<CAPTION>
CAPITAL OPERATING
LEASES LEASES
--------- ----------
<S> <C> <C>
Period ended December 31, 1998......................................... $ 2,000 $ 7,000
1999................................................................... 26,000 160,000
2000................................................................... 14,000 153,000
2001................................................................... -- 59,000
--------- ----------
Total future minimum lease payments................................ 42,000 $ 379,000
--------- ----------
----------
Less: Amount representing interest..................................... (3,000)
---------
Present value of capital lease obligation.............................. 39,000
Less: Current portion of capital lease obligation...................... (23,000)
---------
Long-term portion of capital lease obligation.......................... $ 16,000
---------
---------
</TABLE>
Equipment under the capital lease is summarized as follows:
<TABLE>
<CAPTION>
DECEMBER 31, DECEMBER 13,
1997 1998
------------ ------------
<S> <C> <C>
Computer equipment............................................... $ 84,000 $ 84,000
Less: Accumulated amortization................................... (47,000) (75,000)
------------ ------------
Total........................................................ $ 37,000 $ 9,000
------------ ------------
------------ ------------
</TABLE>
F-98
<PAGE>
THE KODIAK GROUP, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1997 AND DECEMBER 13, 1998
7. SHORT-TERM BORROWINGS:
The Company had a line of credit, which expired in October 1998. The line of
credit was collateralized by substantially all of the assets of the Company.
Under the terms of the line of credit, borrowings were limited to $80,000.
Interest on the outstanding balance was calculated at the Bank's prime rate plus
1.75 percent. There were no borrowings under the line of credit during the year
ended December 31, 1997, or the period from January 1, 1998 through October
1998.
8. DEBT:
Debt consists of the following:
<TABLE>
<CAPTION>
DECEMBER 31, DECEMBER 13,
1997 1998
------------ ------------
<S> <C> <C>
Note payable, due October 30, 1999 bears interest at 9.25
percent, payable in 24 installments of $4,083, secured by
capital assets................................................. $ 81,000 $ --
Less: Current maturities......................................... (49,000) --
------------ ------------
Long-term debt, net of current portion....................... $ 32,000 $ --
------------ ------------
------------ ------------
</TABLE>
This loan was paid in full in November 1998. Kodiak has not entered into any
additional loan agreements with outside parties.
9. RETIREMENT PLAN:
The Company maintains a profit-sharing and retirement plan under the
provisions of section 401(k) of the Internal Revenue Code. The Plan provides for
contributions by employees and a discretionary contribution by the Company. The
plan is for the benefit of all employees who have reached one year of service.
Participants may contribute up to 12 percent of their compensation, subject to
statutory limits. Employee contributions are fully vested. The Company's
contribution is discretionary and is determined by its Board of Directors. In
1997 and 1998, the discretionary rate was 3 percent of gross salary. Company
contributions vest at a rate of 25 percent a year, beginning in the employee's
first eligible year. Company contributions totaled $39,000, and $51,000 for the
year ended December 31, 1997, and for the period from January 1, 1998 to
December 13, 1998, respectively.
Effective February 1, 1999, Kodiak employees are covered by the AppNet
401(k) Plan.
F-99
<PAGE>
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To i33 Communications Corporation:
We have audited the accompanying balance sheets of i33 Communications
Corporation (a Delaware corporation), as of December 31, 1996, 1997, and 1998,
and the related statements of operations, stockholders' equity (deficit), and
cash flows for the years then ended. These financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of i33 Communications
Corporation as of December 31, 1996, 1997, and 1998, and the results of its
operations and its cash flows for the years then ended in conformity with
generally accepted accounting principles.
ARTHUR ANDERSEN LLP
Washington, D.C.
February 23, 1999
F-100
<PAGE>
I33 COMMUNICATIONS CORPORATION
BALANCE SHEETS
AS OF DECEMBER 31, 1996, 1997, AND 1998
<TABLE>
<CAPTION>
1996 1997 1998
---------- ---------- ------------
<S> <C> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents................................................ $ 1,000 $ 23,000 $ 1,000
Accounts receivable, net of allowance for doubtful accounts of $0,
$86,000 and $417,000, respectively..................................... 444,000 541,000 1,741,000
Other current assets..................................................... 1,000 1,000 12,000
---------- ---------- ------------
Total current assets................................................... 446,000 565,000 1,754,000
Property and equipment, net................................................ 124,000 262,000 568,000
Other assets............................................................... -- 7,000 12,000
---------- ---------- ------------
Total assets........................................................... $ 570,000 $ 834,000 $ 2,334,000
---------- ---------- ------------
---------- ---------- ------------
LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT)
Current liabilities:
Short-term borrowings.................................................... $ -- $ -- $ 500,000
Accounts payable......................................................... 39,000 250,000 1,076,000
Accrued liabilities...................................................... 292,000 356,000 1,082,000
Current portion of long-term debt........................................ 104,000 -- --
Current portion of capital lease obligations............................. 3,000 24,000 41,000
---------- ---------- ------------
Total current liabilities.............................................. 438,000 630,000 2,699,000
Capital lease obligations, net of current portion.......................... 7,000 21,000 15,000
---------- ---------- ------------
Total liabilities...................................................... 445,000 651,000 2,714,000
---------- ---------- ------------
Commitments and contingencies (Note 6)
Stockholders' equity (deficit):
Common stock, no par value; 100 shares authorized; issued and
outstanding............................................................ 1,000 1,000 1,000
Retained earnings (accumulated deficit).................................. 124,000 182,000 (381,000)
---------- ---------- ------------
Total stockholders' equity (deficit)................................... 125,000 183,000 (380,000)
---------- ---------- ------------
Total liabilities and stockholders' equity (deficit)................... $ 570,000 $ 834,000 $ 2,334,000
---------- ---------- ------------
---------- ---------- ------------
</TABLE>
The accompanying notes are an integral part of these statements.
F-101
<PAGE>
I33 COMMUNICATIONS CORPORATION
STATEMENTS OF OPERATIONS
FOR THE YEARS ENDED DECEMBER 31, 1996, 1997, AND 1998
<TABLE>
<CAPTION>
1996 1997 1998
---------- ------------ ------------
<S> <C> <C> <C>
Revenues.................................................................. $ 980,000 $ 2,266,000 $ 4,360,000
Cost of revenues.......................................................... 524,000 982,000 2,251,000
---------- ------------ ------------
Gross profit.......................................................... 456,000 1,284,000 2,109,000
---------- ------------ ------------
Operating expenses:
Selling and marketing................................................... 41,000 471,000 985,000
General and administrative.............................................. 173,000 550,000 1,343,000
Depreciation............................................................ 12,000 45,000 114,000
---------- ------------ ------------
Total operating expenses.............................................. 226,000 1,066,000 2,442,000
---------- ------------ ------------
Income (loss) from operations............................................. 230,000 218,000 (333,000)
Other expense............................................................. -- -- 35,000
Interest expense, net..................................................... -- (1,000) 11,000
---------- ------------ ------------
Income (loss) before income taxes......................................... 230,000 217,000 (379,000)
Provision (benefit) for income taxes...................................... 106,000 159,000 (34,000)
---------- ------------ ------------
Net income (loss)......................................................... $ 124,000 $ 58,000 $ (345,000)
---------- ------------ ------------
---------- ------------ ------------
</TABLE>
The accompanying notes are an integral part of these statements.
F-102
<PAGE>
I33 COMMUNICATIONS CORPORATION
STATEMENTS OF STOCKHOLDERS' EQUITY (DEFICIT)
FOR THE YEARS ENDED DECEMBER 31, 1996, 1997, AND 1998
<TABLE>
<CAPTION>
RETAINED TOTAL
COMMON STOCK EARNINGS STOCKHOLDERS'
---------------------- (ACCUMULATED EQUITY
SHARES AMOUNT DEFICIT) (DEFICIT)
----------- --------- ----------------- ------------
<S> <C> <C> <C> <C>
Balance, January 1, 1996...................................... -- $ -- $ -- $ --
Issuance of 100 shares of common stock...................... 100 1,000 -- 1,000
Net income.................................................. -- -- 124,000 124,000
--- --------- ----------------- ------------
Balance, December 31, 1996.................................... 100 1,000 124,000 125,000
Net income.................................................. -- -- 58,000 58,000
--- --------- ----------------- ------------
Balance, December 31, 1997.................................... 100 1,000 182,000 183,000
Distributions to stockholders............................... -- -- (218,000) (218,000)
Net loss.................................................... -- -- (345,000) (345,000)
--- --------- ----------------- ------------
Balance, December 31, 1998.................................... 100 $ 1,000 $ (381,000) $ (380,000)
--- --------- ----------------- ------------
--- --------- ----------------- ------------
</TABLE>
The accompanying notes are an integral part of these statements.
F-103
<PAGE>
I33 COMMUNICATIONS CORPORATION
STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED DECEMBER 31, 1996, 1997, AND 1998
<TABLE>
<CAPTION>
1996 1997 1998
---------- ----------- -------------
<S> <C> <C> <C>
Cash flows from operating activities:
Net income (loss)....................................................... $ 124,000 $ 58,000 $ (345,000)
Adjustments to reconcile net income (loss) to net cash provided by
operating activities--
Depreciation........................................................ 12,000 45,000 114,000
Deferred income taxes............................................... 106,000 133,000 (45,000)
Change in assets and liabilities:
Accounts receivable, net.......................................... (444,000) (97,000) (1,200,000)
Other assets...................................................... -- (7,000) (16,000)
Accounts payable.................................................. 39,000 211,000 826,000
Accrued liabilities............................................... 186,000 (69,000) 771,000
---------- ----------- -------------
Net cash provided by operating activities....................... 23,000 274,000 105,000
---------- ----------- -------------
Cash flows used in investing activities:
Purchase of property and equipment, net................................. (125,000) (140,000) (362,000)
---------- ----------- -------------
Cash flows from financing activities:
Proceeds from short-term borrowings..................................... -- -- 500,000
Proceeds from long-term debt............................................ 104,000 -- --
Payments on capital lease obligations................................... (1,000) (112,000) (47,000)
Distributions to stockholders........................................... -- -- (218,000)
---------- ----------- -------------
Net cash provided by (used in) financing activities............. 103,000 (112,000) 235,000
---------- ----------- -------------
Net increase (decrease) in cash and cash equivalents...................... 1,000 22,000 (22,000)
Cash and cash equivalents, beginning of year.............................. -- 1,000 23,000
---------- ----------- -------------
Cash and cash equivalents, end of year.................................... $ 1,000 $ 23,000 $ 1,000
---------- ----------- -------------
---------- ----------- -------------
Supplementary information:
Cash paid for interest.................................................. $ -- $ 13,000 $ 11,000
---------- ----------- -------------
---------- ----------- -------------
Cash paid for income taxes.............................................. $ -- $ 1,000 $ 5,000
---------- ----------- -------------
---------- ----------- -------------
Non-cash financing and investing activities:
Property capital lease additions........................................ $ 11,000 $ 42,000 $ 59,000
---------- ----------- -------------
---------- ----------- -------------
</TABLE>
The accompanying notes are an integral part of these statements.
F-104
<PAGE>
I33 COMMUNICATIONS CORPORATION
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 1996, 1997, AND 1998
1. BUSINESS DESCRIPTION:
i33 Communications Corporation ("i33" or the "Company") was incorporated in
January 1996, under the laws of the state of Delaware. The Company is an
interactive agency specializing in strategy, design, technology and online
advertising management for mid-sized to large companies. Revenues are generated
from web site design and development, online media buying and planning, online
advertising management, site audits, web publishing and project management
tools, custom application and database development and hosting services. i33 is
headquartered and operates primarily in New York.
On January 8, 1999, all of the issued and outstanding stock of the Company
was acquired by AppNet Systems, Inc. The Company incurred $35,000 in consulting
fees in conjunction with the sale to AppNet. This has been classified as other
expense in the accompanying statements of operations.
There are significant risks associated with the Company, including the
subjectivity of the Company's services to rapid technological change and the
Year 2000 issue.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES AND PRACTICES:
USE OF ESTIMATES
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and the
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amount of revenues and expenses during the reporting
period. Actual results could differ from those estimates.
CASH AND CASH EQUIVALENTS
The Company considers all highly liquid investments with original maturities
of three months or less to be cash equivalents.
PROPERTY AND EQUIPMENT
Property and equipment are stated at cost, net of accumulated depreciation
and amortization. Depreciation and amortization are computed using the
straight-line method over the estimated useful lives of the related assets, as
follows:
<TABLE>
<S> <C>
Computer equipment............................................. five years
seven
Furniture and fixtures......................................... years
</TABLE>
Purchased software for internal use is capitalized and amortized principally
over three years. Leasehold improvements are amortized over the lesser of the
estimated useful life of the asset or the remaining lease term.
In accordance with Statement of Financial Accounting Standards No. 121
("SFAS"), "Accounting for the Impairment of Long-Lived Assets and for Long-Lived
Assets to Be Disposed Of," the Company reviews its recorded long-lived assets
for impairment whenever events or changes in circumstances indicate that the
carrying amount of an asset may not be recoverable.
F-105
<PAGE>
I33 COMMUNICATIONS CORPORATION
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1996, 1997, AND 1998
FAIR VALUE OF FINANCIAL INSTRUMENTS
The Company's financial instruments consist primarily of cash and cash
equivalents, accounts receivable, accounts payable, short-term borrowings, and
capital lease obligations. In management's opinion, the carrying amounts of
these financial instruments approximated their fair values at December 31, 1996,
1997, and 1998.
REVENUE RECOGNITION
Revenues from time and material contracts are recognized based on fixed
hourly rates for direct labor hours expended. Revenues from fixed-price
contracts are recognized on the percentage-of-
completion method, with costs and estimated profits recorded as work is
performed. Revenues from fixed-price advertising contracts in which the Company
delivers advertising impressions for its customers on third-party websites are
recognized ratably over the period the advertising impressions are delivered. In
accordance with industry practice, the cost of third-party advertising placed by
the Company on behalf of its clients is offset against the related customer
reimbursement in the accompanying statements of operations.
Cost of revenues includes all direct material and labor costs related to
contract performance and does not include any related depreciation expense.
Provisions for estimated losses on uncompleted contracts are made in the period
in which such losses are determined. Changes in contract performance and
estimated profitability, including final contract settlements, may result in
revisions to costs and income and are recognized in the period in which the
revisions are determined. Unbilled receivables on contracts are comprised of
costs, plus earnings on certain contracts in excess of contractual billings on
such contracts. Cash received in excess of costs incurred is classified as
deferred revenue.
BUSINESS CONCENTRATION AND CREDIT RISK
The following table summarizes the revenues and receivables from clients in
excess of 10% of total revenues and receivables:
<TABLE>
<CAPTION>
REVENUES
FOR THE ACCOUNTS
YEARS ENDED RECEIVABLE
DECEMBER 31, AS OF DECEMBER 31,
------------------------------- -------------------------------
<S> <C> <C> <C> <C> <C> <C>
1996 1997 1998 1996 1997 1998
--------- --------- --------- --------- --------- ---------
Customer A..................................... * * * * * 20%
Customer B..................................... * * * * * 12%
Customer C..................................... * * 10% * * 16%
Customer D..................................... * 14% * * 16% *
Customer E..................................... * 13% * * * *
Customer F..................................... * 11% * * * *
Customer G..................................... 25% * * 50% 14% *
Customer H..................................... 11% * * 12% * *
</TABLE>
- ------------------------
* Represents less than 10% of total.
F-106
<PAGE>
I33 COMMUNICATIONS CORPORATION
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1996, 1997, AND 1998
INCOME TAXES
In 1996, the Company was taxed as a C corporation. As such, income taxes are
accounted for using an asset and liability approach that requires the
recognition of taxes payable or refundable for the current year and deferred tax
liabilities and assets for the future tax consequences of events that have been
recognized in the Company's financial statements or tax returns. The measurement
of current and deferred tax liabilities and assets are based on provisions of
the enacted tax law; the effects of future changes in tax laws or rates are not
anticipated. The measurement of deferred tax assets is reduced, if necessary, by
the amount of any tax benefits that, based on available evidence, are not
expected to be realized.
In 1997 and 1998, the Company, with the consent of its shareholders, has
elected to be taxed pursuant to subchapter S of the Internal Revenue Code ("an S
corporation"). In lieu of corporation income taxes, the shareholders of an S
corporation are taxed on their proportionate share of the Company's taxable
income. Therefore, no provision for federal income taxes has been included in
the accompanying financial statements. The Company is subject to state and city
income taxes based on the Company's taxable income and alternative minimum tax.
The recorded tax provision for 1997 and 1998 relates to these state and city
taxes. The significant components of differences between income reported for
financial statement purposes and income reported for tax purposes relates to tax
basis adjustments for accounts receivable, payroll and corporate tax
liabilities.
3. ACCOUNTS RECEIVABLE:
Accounts receivable consists of the following:
<TABLE>
<CAPTION>
DECEMBER 31,
------------------------------------
<S> <C> <C> <C>
1996 1997 1998
---------- ---------- ------------
Accounts receivable.................................... $ 444,000 $ 599,000 $ 2,009,000
Unbilled accounts receivable........................... -- 28,000 149,000
Allowance for doubtful accounts........................ -- (86,000) (417,000)
---------- ---------- ------------
Accounts receivable, net........................... $ 444,000 $ 541,000 $ 1,741,000
---------- ---------- ------------
---------- ---------- ------------
</TABLE>
4. PROPERTY AND EQUIPMENT:
Property and equipment consists of the following:
<TABLE>
<CAPTION>
DECEMBER 31,
------------------------------------
<S> <C> <C> <C>
1996 1997 1998
---------- ---------- ------------
Computer equipment..................................... $ 79,000 $ 169,000 $ 474,000
Furniture and fixtures................................. 44,000 112,000 131,000
Leasehold improvements................................. 13,000 38,000 134,000
---------- ---------- ------------
136,000 319,000 739,000
Accumulated depreciation and amortization.............. (12,000) (57,000) (171,000)
---------- ---------- ------------
Property and equipment, net........................ $ 124,000 $ 262,000 $ 568,000
---------- ---------- ------------
---------- ---------- ------------
</TABLE>
F-107
<PAGE>
I33 COMMUNICATIONS CORPORATION
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1996, 1997, AND 1998
5. ACCRUED LIABILITIES:
Accrued liabilities consists of the following:
<TABLE>
<CAPTION>
DECEMBER 31,
------------------------------------
<S> <C> <C> <C>
1996 1997 1998
---------- ---------- ------------
Deferred revenue....................................... $ 24,000 $ -- $ --
Deferred tax liability................................. 106,000 239,000 194,000
Accrued media expense.................................. -- -- 798,000
Accrued compensation................................... 147,000 -- --
Other accrued liabilities.............................. 15,000 117,000 90,000
---------- ---------- ------------
Total accrued liabilities.......................... $ 292,000 $ 356,000 $ 1,082,000
---------- ---------- ------------
---------- ---------- ------------
</TABLE>
6. LEASES:
The Company has noncancelable operating leases, primarily for real estate,
that expire over the next 3 years. Rental expense for operating leases during
the years ended December 31, 1996, 1997, and 1998, was $21,000, $73,000 and
$102,000, respectively.
The Company leases certain equipment under capital leases.
Future minimum lease payments under capital leases and noncancelable
operating leases are as follows as of December 31, 1998:
<TABLE>
<CAPTION>
CAPITAL OPERATING
LEASES LEASES
--------- ----------
<S> <C> <C>
Year ended December 31, 1999................................................. $ 39,000 $ 93,000
2000......................................................................... 21,000 63,000
2001......................................................................... 5,000 42,000
--------- ----------
Total minimum lease payments............................................. 65,000 $ 198,000
----------
----------
Less: Amount representing interest........................................... (9,000)
---------
Present value of capital lease obligations................................... 56,000
Less: Current portion of capital lease obligations........................... 41,000
---------
Long-term portion of capital lease obligation................................ $ 15,000
---------
---------
</TABLE>
Equipment under capital leases is summarized as follows:
<TABLE>
<CAPTION>
DECEMBER 31,
-------------------------------
<S> <C> <C> <C>
1996 1997 1998
--------- --------- ---------
Computer equipment........................................... $ 11,000 $ 54,000 $ 93,000
Accumulated depreciation..................................... (1,000) (7,000) (14,000)
--------- --------- ---------
Total.................................................... $ 10,000 $ 47,000 $ 79,000
--------- --------- ---------
--------- --------- ---------
</TABLE>
F-108
<PAGE>
I33 COMMUNICATIONS CORPORATION
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1996, 1997, AND 1998
7. INCOME TAXES:
The Company follows the provisions of SFAS No. 109, "Accounting for Income
Taxes," for financial reporting purposes. Deferred tax assets or liabilities at
the end of each period are determined using the currently enacted tax rates to
apply to taxable income in the period in which the deferred tax asset or
liability is expected to be settled or realized.
The components of the net deferred tax liability as of December 31, 1996,
1997, and 1998 are as follows:
<TABLE>
<CAPTION>
DECEMBER 31,
----------------------------------
<S> <C> <C> <C>
1996 1997 1998
---------- ---------- ----------
Total deferred tax liabilities........................... $ 106,000 $ 242,000 $ 199,000
Total deferred tax assets................................ -- (3,000) (5,000)
---------- ---------- ----------
Net deferred tax liability............................... $ 106,000 $ 239,000 $ 194,000
---------- ---------- ----------
---------- ---------- ----------
</TABLE>
The sources of and differences between the financial accounting and tax
basis of i33's assets and liabilities that give rise to the net deferred tax
liability are as follows:
<TABLE>
<CAPTION>
DECEMBER 31,
----------------------------------
<S> <C> <C> <C>
1996 1997 1998
---------- ---------- ----------
Deferred tax liabilities:
Differences from accrual to cash basis................. $ 106,000 $ 242,000 $ 199,000
Deferred tax assets:
Other.................................................. -- (3,000) (5,000)
---------- ---------- ----------
$ 106,000 $ 239,000 $ 194,000
---------- ---------- ----------
---------- ---------- ----------
</TABLE>
The components of the provision (benefit) for income taxes as of December
31, 1996, 1997, and 1998, are as follows:
<TABLE>
<CAPTION>
DECEMBER 31,
----------------------------------
<S> <C> <C> <C>
1996 1997 1998
---------- ---------- ----------
Federal income taxes:
Current................................................. $ -- $ -- $ --
Deferred................................................ 66,000 136,000 --
State taxes:
Current................................................. -- 26,000 11,000
Deferred................................................ 40,000 (3,000) (45,000)
---------- ---------- ----------
Provisions (benefit) for income taxes..................... $ 106,000 $ 159,000 $ (34,000)
---------- ---------- ----------
---------- ---------- ----------
</TABLE>
F-109
<PAGE>
I33 COMMUNICATIONS CORPORATION
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1996, 1997, AND 1998
For the years ended December 31, 1996, 1997, and 1998, the provision
(benefit) for income taxes differed from the amounts computed at the statutory
rate, as follows:
<TABLE>
<CAPTION>
DECEMBER 31,
----------------------------------
<S> <C> <C> <C>
1996 1997 1998
---------- ---------- ----------
Income tax computed at statutory rate..................... $ 78,000 $ -- $ --
State income taxes, net of federal income tax benefit..... 27,000 23,000 (34,000)
C Corporation Federal tax................................. -- 136,000 --
Other, net................................................ 1,000 -- --
---------- ---------- ----------
$ 106,000 $ 159,000 $ (34,000)
---------- ---------- ----------
---------- ---------- ----------
</TABLE>
8. RELATED PARTIES:
The Company conducts certain transactions with a related party. These
transactions include the borrowing of funds for which the balances outstanding
at December 31, 1996, 1997, and 1998 were $104,000, $0 and $0, respectively. In
addition, the Company shares office space and has purchased equipment from a
related party during the years ended December 31, 1996, 1997, and 1998.
The Company has a note with a relative of one of the shareholders, which is
collateralized by substantially all of the assets of the Company and is
personally guaranteed by the Company's President and Chief Technical Officer.
Under the terms of the agreement, the loan was interest free and payment was due
upon the sale of the Company. As of December 31, 1998, the balance due on the
note was $500,000. The note was repaid on January 8, 1999.
During the years ended December 31, 1997 and 1998, the Company wrote off
amounts due from a related party of $5,000 and $18,000, respectively.
F-110
<PAGE>
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To Salzinger & Company:
We have audited the accompanying balance sheet of Salzinger & Company (a
Virginia corporation), as of December 31, 1998, and the related statements of
operations, stockholder's equity, and cash flows for the year then ended. These
financial statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audit.
We conducted our audit in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audit provides a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of Salzinger & Company as of
December 31, 1998, and the results of its operations and its cash flows for the
year then ended in conformity with generally accepted accounting principles.
ARTHUR ANDERSEN LLP
Washington, D.C.
March 15, 1999
F-111
<PAGE>
SALZINGER & COMPANY
BALANCE SHEET
AS OF DECEMBER 31, 1998
<TABLE>
<S> <C>
ASSETS
Current assets:
Cash.......................................................................... $ 193,000
Accounts receivable........................................................... 1,707,000
---------
Total current assets........................................................ 1,900,000
Property and equipment, net..................................................... 43,000
Other assets.................................................................... 14,000
---------
Total assets................................................................ $1,957,000
---------
---------
LIABILITIES AND STOCKHOLDER'S EQUITY
Liabilities:
Short-term borrowing.......................................................... $ 130,000
Accounts payable.............................................................. 34,000
Accrued liabilities........................................................... 177,000
---------
Total current liabilities................................................... 341,000
---------
Commitments and contingencies (Note 6)
Stockholder's equity:
Common stock, $1.00 par value; 5,000 shares authorized; 1,000 shares issued
and outstanding............................................................. 1,000
Retained earnings............................................................. 1,615,000
---------
Total stockholder's equity.................................................. 1,616,000
---------
Total liabilities and stockholder's equity.................................. $1,957,000
---------
---------
</TABLE>
The accompanying notes are an integral part of this statement.
F-112
<PAGE>
SALZINGER & COMPANY
STATEMENT OF OPERATIONS
FOR THE YEAR ENDED DECEMBER 31, 1998
<TABLE>
<S> <C>
Revenues........................................................................ $3,110,000
Cost of revenues................................................................ 1,738,000
---------
Gross profit................................................................ 1,372,000
---------
Operating expenses:
Selling and marketing......................................................... 2,000
General and administrative.................................................... 425,000
Depreciation and amortization................................................. 13,000
---------
Total operating expenses.................................................... 440,000
---------
Income from operations.......................................................... 932,000
Interest income................................................................. 20,000
---------
Net income...................................................................... $ 952,000
---------
---------
</TABLE>
The accompanying notes are an integral part of this statement.
F-113
<PAGE>
SALZINGER & COMPANY
STATEMENT OF STOCKHOLDER'S EQUITY
FOR THE YEAR ENDED DECEMBER 31, 1998
<TABLE>
<CAPTION>
COMMON STOCK TOTAL
---------------------- RETAINED STOCKHOLDER'S
SHARES AMOUNT EARNINGS EQUITY
----------- --------- ------------ -------------
<S> <C> <C> <C> <C>
Balance, December 31, 1997........................................ 1,000 $ 1,000 $ 663,000 $ 664,000
Net income...................................................... -- -- 952,000 952,000
----- --------- ------------ -------------
Balance, December 31, 1998........................................ 1,000 $ 1,000 $ 1,615,000 $ 1,616,000
----- --------- ------------ -------------
----- --------- ------------ -------------
</TABLE>
The accompanying notes are an integral part of this statement.
F-114
<PAGE>
SALZINGER & COMPANY
STATEMENT OF CASH FLOWS
FOR THE YEAR ENDED DECEMBER 31, 1998
<TABLE>
<S> <C>
Cash flows from operating activities:
Net income.................................................................... $ 952,000
Adjustments to reconcile net income to net cash used in operating activities:
Depreciation and amortization............................................... 13,000
Change in assets and liabilities:
Accounts receivable....................................................... (1,152,000)
Other assets.............................................................. (5,000)
Accounts payable.......................................................... 19,000
Accrued liabilities....................................................... 11,000
----------
Net cash used in operating activities................................... (162,000)
----------
Cash flows from financing activities:
Short-term borrowing.......................................................... 130,000
----------
Net decrease in cash............................................................ (32,000)
Cash, beginning of year......................................................... 225,000
----------
Cash, end of year............................................................... $ 193,000
----------
----------
</TABLE>
The accompanying notes are an integral part of this statement.
F-115
<PAGE>
SALZINGER & COMPANY
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 1998
1. BUSINESS DESCRIPTION:
Salzinger & Company ("Salzinger" or the "Company") was incorporated in 1995,
under the laws of the state of Virginia. Salzinger is a consulting company
providing business-level strategic consulting in website marketing strategy
development, planning and implementation. It is headquartered in Virginia and
operates primarily in the Northeast, with some international clients.
On March 15, 1999, certain assets of the Company were acquired by AppNet
Systems, Inc.
There are significant risks associated with the Company, including the
subjectivity of the Company's services to rapid technological change and the
Year 2000 issue.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES AND PRACTICES:
USE OF ESTIMATES
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and the
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amount of revenues and expenses during the reporting
period. Actual results could differ from those estimates.
PROPERTY AND EQUIPMENT
Property and equipment are stated at cost, net of accumulated depreciation
and amortization. Depreciation and amortization are computed using the
straight-line method over the estimated useful lives of the related assets, as
follows:
<TABLE>
<S> <C>
three
Computer equipment and software................................. years
Furniture and fixtures.......................................... five years
Automobile...................................................... five years
</TABLE>
Purchased software is capitalized and amortized principally over three
years.
In accordance with Statement of Financial Accounting Standards No. 121,
"Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to
Be Disposed Of," the Company reviews its recorded long-lived assets for
impairment whenever events or changes in circumstances indicate that the
carrying amount of an asset may not be recoverable.
FAIR VALUE OF FINANCIAL INSTRUMENTS
The Company's financial instruments consist primarily of cash, accounts
receivable, accounts payable and short-term borrowing. In management's opinion,
the carrying amounts of these financial instruments approximated their fair
values at December 31, 1998.
REVENUE RECOGNITION
Revenues from time and material contracts are recognized based on fixed
hourly rates for direct labor hours expended. The Company also enters into
arrangements in which a portion of its fee is based on the successful completion
of a transaction. Revenue under these contracts is recognized when
F-116
<PAGE>
SALZINGER & COMPANY
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1998
the transaction has closed and the Company is due its success fee. Included
within revenues in the accompanying statement of operations are success fees of
approximately $730,000.
Cost of revenues includes all direct material and labor costs related to
contract performance and does not include any related depreciation expense.
Unbilled receivables on contracts are comprised of costs, plus earnings on
certain contracts in excess of contractual billings on such contracts. Cash
received in excess of costs incurred is classified as deferred revenue.
BUSINESS CONCENTRATION AND CREDIT RISK
The following table summarizes the revenues and accounts receivable from
clients in excess of 10% of total revenues and accounts receivable:
<TABLE>
<CAPTION>
REVENUES ACCOUNTS RECEIVABLE
FOR THE YEAR ENDED AS OF
DECEMBER 31, 1998 DECEMBER 31, 1998
------------------- ---------------------
<S> <C> <C>
Company A............................................. 31% 50%
Company B............................................. 21% 27%
Company C............................................. 15% *
Company D............................................. 15% 13%
</TABLE>
- ------------------------
* Represents less than 10% of total.
INCOME TAXES
The Company, with the consent of its shareholders, has elected to be taxed
pursuant to Subchapter S of the Internal Revenue Code (an "S Corporation"). In
lieu of corporation income taxes, the shareholders of an S corporation are taxed
on their proportionate share of the Company's taxable income. Therefore, no
provision for federal or state income taxes has been included in the
accompanying financial statements.
3. ACCOUNTS RECEIVABLE:
Accounts receivable consists of the following:
<TABLE>
<S> <C>
Accounts receivable............................................. $1,522,000
Unbilled accounts receivable.................................... 185,000
---------
Total....................................................... $1,707,000
---------
---------
</TABLE>
There was no allowance for doubtful accounts recorded as management believes
that all amounts will be collected.
F-117
<PAGE>
SALZINGER & COMPANY
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1998
4. PROPERTY AND EQUIPMENT:
Property and equipment consists of the following:
<TABLE>
<S> <C>
Computer equipment and software................................... $ 21,000
Furniture and fixtures............................................ 9,000
Automobile........................................................ 35,000
---------
65,000
Accumulated depreciation and amortization......................... (22,000)
---------
Property and equipment, net................................... $ 43,000
---------
---------
</TABLE>
5. ACCRUED LIABILITIES:
Accrued liabilities consists of the following:
<TABLE>
<S> <C>
Accrued compensation and benefits................................. $ 151,000
Deferred revenue.................................................. 25,000
Other............................................................. 1,000
---------
Accrued liabilities........................................... $ 177,000
---------
---------
</TABLE>
6. LEASES:
The Company is party to a sublease agreement under which it rents its
corporate office. The sublease is renewable on a month-to-month basis. The
Company is also party to a second lease which is renewed annually. Rental
expense for operating leases during the year ended December 31, 1998 was
$130,000.
The Company leases certain equipment under noncancelable operating leases.
Future minimum lease payments under noncancelable operating leases for
office space and equipment are as follows as of December 31, 1998:
<TABLE>
<S> <C>
1999............................................................... $ 81,000
2000............................................................... 13,000
---------
Total minimum lease payments................................... $ 94,000
---------
---------
</TABLE>
7. RELATED PARTIES:
The Company's sole stockholder loaned $130,000 to the Company in December
1998. The Company repaid the loan in January 1999.
8. RETIREMENT PLAN:
The Company maintains a profit-sharing and retirement plan under the
provisions of section 408(p) of the Internal Revenue Code. The Plan provides for
contributions by employees and a discretionary contribution by the Company. The
plan is for the benefit of all employees. Participants may contribute up to
$6,000 annually. Employee contributions are fully vested. The Company
contributes 2 percent of employees total salary. The Company's contribution
vests immediately. Company contributions totaled $23,000 for the year ended
December 31, 1998.
F-118
<PAGE>
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To Internet Outfitters, Inc.:
We have audited the accompanying balance sheet of Internet Outfitters, Inc.
(a California corporation), as of December 31, 1998, and the related statements
of operations, stockholders' equity, and cash flows for the year then ended.
These financial statements are the responsibility of the Company's management.
Our responsibility is to express an opinion on these financial statements based
on our audit.
We conducted our audit in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audit provides a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of the Company as of December
31, 1998, and the results of its operations and its cash flows for the year then
ended, in conformity with generally accepted accounting principles.
ARTHUR ANDERSEN LLP
Washington, D.C.
March 26, 1999
F-119
<PAGE>
INTERNET OUTFITTERS, INC.
BALANCE SHEET
AS OF DECEMBER 31, 1998
<TABLE>
<S> <C>
ASSETS
Current assets:
Cash............................................................................ $ 70,000
Accounts receivable, net........................................................ 555,000
Other current assets............................................................ 71,000
---------
Total current assets........................................................ 696,000
Property and equipment, net....................................................... 239,000
Other assets...................................................................... 6,000
---------
Total assets................................................................ $ 941,000
---------
---------
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable................................................................ $ 227,000
Accrued liabilities............................................................. 184,000
Current portion of long-term debt............................................... 316,000
Current portion of capital lease obligations.................................... 17,000
---------
Total current liabilities................................................... 744,000
Long-term debt, net of current portion............................................ 53,000
Capital lease obligations, net of current portion................................. 3,000
Deferred tax liability............................................................ 29,000
---------
Total liabilities........................................................... 829,000
---------
Commitments and contingencies (Note 11)
Stockholders' equity:
Common stock, no par value; 20,000,000 shares authorized; 7,695,641 shares
issued and outstanding........................................................ 8,000
Additional paid-in capital...................................................... 221,000
Deferred compensation........................................................... (164,000)
Retained earnings............................................................... 47,000
---------
Total stockholders' equity.................................................. 112,000
---------
Total liabilities and stockholders' equity.................................. $ 941,000
---------
---------
</TABLE>
The accompanying notes are an integral part of this statement.
F-120
<PAGE>
INTERNET OUTFITTERS, INC.
STATEMENT OF OPERATIONS
FOR THE YEAR ENDED DECEMBER 31, 1998
<TABLE>
<S> <C>
Revenues........................................................................ $2,343,000
Cost of revenues................................................................ 1,287,000
---------
Gross profit........................................................ 1,056,000
---------
Operating expenses:
Selling and marketing......................................................... 47,000
General and administrative.................................................... 859,000
Stock-based compensation...................................................... 57,000
Depreciation and amortization................................................. 57,000
---------
Total operating expenses............................................ 1,020,000
---------
Income from operations.......................................................... 36,000
Interest expense, net........................................................... 47,000
---------
Loss before income taxes........................................................ (11,000)
Provision for income taxes...................................................... 52,000
---------
Net loss........................................................................ $ (63,000)
---------
---------
</TABLE>
The accompanying notes are an integral part of this statement.
F-121
<PAGE>
INTERNET OUTFITTERS, INC.
STATEMENT OF STOCKHOLDERS' EQUITY
FOR THE YEAR ENDED DECEMBER 31, 1998
<TABLE>
<CAPTION>
COMMON STOCK ADDITIONAL TOTAL
----------------------- PAID-IN DEFERRED RETAINED STOCKHOLDERS'
SHARES AMOUNT CAPITAL COMPENSATION EARNINGS EQUITY
------------ --------- ---------- ------------- ----------- ------------
<S> <C> <C> <C> <C> <C> <C>
Balance, December 31, 1997........ 7,695,641 $ 8,000 $ -- $ -- $ 110,000 $ 118,000
Stock-based compensation........ -- -- 221,000 (164,000) -- 57,000
Net loss........................ -- -- -- -- (63,000) (63,000)
------------ --------- ---------- ------------- ----------- ------------
Balance, December 31, 1998........ 7,695,641 $ 8,000 $ 221,000 $ (164,000) $ 47,000 $ 112,000
------------ --------- ---------- ------------- ----------- ------------
------------ --------- ---------- ------------- ----------- ------------
</TABLE>
The accompanying notes are an integral part of this statement.
F-122
<PAGE>
INTERNET OUTFITTERS, INC.
STATEMENT OF CASH FLOWS
FOR THE YEAR ENDED DECEMBER 31, 1998
<TABLE>
<S> <C>
Cash flows from operating activities:
Net loss....................................................................... $ (63,000)
Adjustments to reconcile net loss to net cash used in operating activities:
Deferred income taxes........................................................ (29,000)
Stock-based compensation..................................................... 57,000
Depreciation and amortization................................................ 57,000
Change in assets and liabilities:
Accounts receivable, net................................................... (217,000)
Other assets............................................................... (8,000)
Accounts payable........................................................... 5,000
Accrued liabilities........................................................ 138,000
---------
Net cash used in operating activities.................................... (60,000)
---------
Cash flows from investing activities:
Purchase of property and equipment, net........................................ (124,000)
---------
Cash flows from financing activities:
Proceeds from long-term debt................................................... 292,000
Repayments of long-term debt................................................... (28,000)
Repayments of capital lease obligations........................................ (13,000)
---------
Net cash provided by financing activities................................ 251,000
---------
Net increase in cash............................................................. 67,000
Cash, beginning of year.......................................................... 3,000
---------
Cash, ending of year............................................................. $ 70,000
---------
---------
Supplementary information:
Cash paid for interest......................................................... $ 45,000
---------
---------
Cash paid for income taxes..................................................... $ 63,000
---------
---------
</TABLE>
The accompanying notes are an integral part of this statement.
F-123
<PAGE>
INTERNET OUTFITTERS, INC.
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 1998
1. BUSINESS DESCRIPTION:
Internet Outfitters, Inc. ("IO" or the "Company") was incorporated in 1994
under the laws of the state of California. IO is an information technology
services company providing internet and web-based solutions designed to improve
clients' business processes, including strategy consulting, applications
development, electronic commerce, systems design, technology development,
integration, and operation. The Company is headquartered in Santa Monica,
California and operates primarily in the western region of the United States.
On March 22, 1999, the Company entered into a Stock Purchase Agreement with
AppNet Systems, Inc. ("AppNet"). The transaction was completed on March 26,
1999.
There are significant risks associated with the Company, including the
subjectivity of the Company's services to rapid technological change and the
Year 2000 issue.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES AND PRACTICES:
USE OF ESTIMATES
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and the
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amount of revenues and expenses during the reporting
period. Actual results could differ from those estimates.
PROPERTY AND EQUIPMENT
Property and equipment are stated at cost, net of accumulated depreciation
and amortization. Depreciation and amortization are computed using the
straight-line method over the estimated useful lives of the related assets, as
follows:
<TABLE>
<S> <C>
three to five
Computer equipment and software.......................... years
Furniture and fixtures................................... seven years
</TABLE>
Purchased software and third-party costs incurred to develop software for
internal use are capitalized and amortized principally over three years.
In accordance with Statement of Financial Accounting Standards ("SFAS") No.
121, "Accounting for the Impairment of Long-Lived Assets and for Long-Lived
Assets to Be Disposed Of," the Company reviews its recorded long-lived assets
for impairment whenever events or changes in circumstances indicate that the
carrying amount of an asset may not be recoverable.
FAIR VALUE OF FINANCIAL INSTRUMENTS
The Company's financial instruments consist primarily of cash, accounts
receivable, accounts payable, long-term debt and capital lease obligations. In
management's opinion, the carrying amounts of these financial instruments
approximated their fair values at December 31, 1998.
F-124
<PAGE>
INTERNET OUTFITTERS, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1998
STOCK-BASED COMPENSATION
The Company accounts for stock-based employee compensation arrangements
using the intrinsic value method in accordance with provisions of Accounting
Principles Board ("APB") Opinion No. 25, "Accounting for Stock Issued to
Employees," and complies with the disclosure provisions of SFAS No. 123,
"Accounting for Stock-Based Compensation." Under APB Opinion No. 25,
compensation cost is recognized based on the difference, if any, on the date of
grant between the fair value of the Company's stock and the amount an employee
must pay to acquire the stock.
REVENUE RECOGNITION
Revenues from time and material contracts are recognized based on fixed
hourly rates for direct labor hours expended. Revenues from fixed-price
contracts are recognized on the percentage-of-
']completion method, with costs and estimated profits recorded as work is
performed. Revenues from fixed-price advertising contracts in which the Company
delivers advertising impressions for its customers on third-party websites are
recognized ratably over the period the advertising impressions are delivered. In
accordance with industry practice, the cost of third party advertising placed by
the Company on behalf of its clients is offset against the related customer
reimbursement in the accompanying statement of operations. Revenues from
cost-plus-fixed-fee contracts are recognized on the basis of direct costs plus
indirect costs incurred plus a fixed profit percentage.
Costs of revenues includes all direct material and labor costs related to
contract performance and does not include any related depreciation expense.
Provisions for estimated losses on uncompleted contracts are made in the period
in which such losses are determined. Changes in contract performance and
estimated profitability, including final contract settlements, may result in
revisions to costs and income and are recognized in the period in which the
revisions are determined. Unbilled revenues on contracts are comprised of costs,
plus earnings on certain contracts in excess of contractual billings on such
contracts. Cash received in excess of costs incurred is classified as deferred
revenue.
BUSINESS CONCENTRATION AND CREDIT RISK
The following table summarizes the revenues and receivables from clients in
excess of 10% of total revenues and receivables:
<TABLE>
<CAPTION>
REVENUES ACCOUNTS
FOR THE YEAR RECEIVABLE
ENDED AS OF
DECEMBER 31, 1998 DECEMBER 31, 1998
----------------- -----------------
<S> <C> <C>
Customer A............................................. 42.2% 27.0%
Customer B............................................. 18.1% 33.9%
Customer C............................................. 12.5% *
</TABLE>
- ------------------------
* Represents less than 10 percent of total.
INCOME TAXES
Income taxes are accounted for using an asset and liability approach that
requires the recognition of taxes payable or refundable for the current year and
deferred tax liabilities and assets for the future tax consequences of events
that have been recognized in the Company's financial statements or tax returns.
The measurement of current and deferred tax assets and liabilities are based on
provisions of
F-125
<PAGE>
INTERNET OUTFITTERS, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1998
the enacted tax law; the effects of future changes in tax laws or rates are not
anticipated. The measurement of deferred tax assets is reduced, if necessary, by
the amount of any tax benefits that, based on available evidence, are not
expected to be realized.
3. ACCOUNTS RECEIVABLE:
Accounts receivable consists of the following as of December 31, 1998:
<TABLE>
<S> <C>
Commercial clients................................................ $ 560,000
Unbilled accounts receivable...................................... 41,000
Less: Allowance for doubtful accounts............................. (46,000)
---------
Accounts receivable, net...................................... $ 555,000
---------
</TABLE>
In February 1998, the Company entered into a factoring agreement to sell,
with recourse, on an ongoing basis, certain accounts receivable to a third
party. Collections received on these accounts may be replaced by new receivables
in order to maintain the aggregate outstanding balance. Proceeds from the sale
of receivables are collateralized by substantially all of the assets of the
Company. At no time may the total accounts receivable factored exceed $350,000.
Fees associated with these transactions are included in interest expense in the
accompanying statement of operations. The factoring agreement has an initial
term of one year and is renewed from year to year thereafter unless terminated
by either party.
As of December 31, 1998, accounts receivable totaling $224,000 had been
pledged as collateral against this asset-based borrowing.
In accordance with SFAS No. 125, "Accounting for Transfers and Servicing of
Financial Assets and Extinguishments of Liabilities," the Company's accounts
receivable program will be accounted for as a secured borrowing. The receivables
and the corresponding debt are included as an asset and liability, respectively,
on the accompanying balance sheet.
4. OTHER CURRENT ASSETS:
Other current assets consists of the following as of December 31, 1998:
<TABLE>
<S> <C>
Deferred tax asset................................................ $ 58,000
Other assets...................................................... 13,000
---------
Total......................................................... $ 71,000
---------
---------
</TABLE>
F-126
<PAGE>
INTERNET OUTFITTERS, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1998
5. PROPERTY AND EQUIPMENT:
Property and equipment consists of the following as of December 31, 1998:
<TABLE>
<S> <C>
Computer equipment and software................................... $ 332,000
Furniture and fixtures............................................ 8,000
---------
340,000
Accumulated depreciation and amortization......................... 101,000
---------
Property and equipment, net................................... $ 239,000
---------
---------
</TABLE>
6. ACCRUED LIABILITIES:
Accrued liabilities consists of the following as of December 31, 1998:
<TABLE>
<S> <C>
Accrued compensation and benefits................................. $ 96,000
Taxes payable..................................................... 33,000
Deferred revenue.................................................. 30,000
Other accrued liabilities......................................... 25,000
---------
Total......................................................... $ 184,000
---------
</TABLE>
7. DEBT:
In July 1996, the Company issued a $41,000 note payable to an officer of the
Company with a maturity of December 31, 1999. Interest on this note was payable
monthly at a rate of 8 percent. In April 1998, the Company issued a second note
in the amount of $51,000 payable to this officer, which contained a maturity of
June 30, 1999. Interest on this note was payable monthly at a rate of 12
percent.
In December 1998, the Company refinanced the outstanding balances of the
above notes and issued a single $92,000 note payable to this officer. This note
bears interest monthly at a rate of 10 percent and matures on December 31, 2000.
The Company issued a $50,000 note payable to a related party in March 1996,
which bears interest monthly at a rate of 8 percent. Principal payments were due
on a quarterly basis with a scheduled maturity of March 1, 1999. In December
1998, the Company rescheduled the payments of the remaining outstanding balance
of $45,000. The amended note has a scheduled maturity of December 31, 1999. All
other terms remained unchanged from the original note.
In 1998, the Company entered into a factoring agreement, the proceeds from
which are treated as a secured borrowing (see Note 3). The outstanding balance
at December 31, 1998 will be repaid through the subsequent sale of additional
accounts receivable from the Company. Finance charges of 2.25 percent are
payable monthly on the average outstanding balance for the respective period. In
addition, the Company is required to pay a monthly administrative fee of 0.75
percent of the face amount of each purchased receivable during the respective
period. The outstanding balance is secured by substantially all of the assets of
the Company. As of December 31, 1998, $224,000 was outstanding related to this
agreement.
F-127
<PAGE>
INTERNET OUTFITTERS, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1998
In March 1998, IO issued a note payable to an employee of the Company in the
amount of $17,000. This note bears interest annually at a rate of 12 percent. At
December 31, 1998, $8,000 was outstanding related to this note. The remaining
principal is secured by a $26,000 billed receivable of the Company and will be
repaid upon receipt of payment from those receivables.
As of December 31, 1998, the maturities of long-term debt were as follows:
<TABLE>
<S> <C>
1999.............................................................. $ 316,000
2000.............................................................. 53,000
---------
Total......................................................... $ 369,000
---------
</TABLE>
8. EMPLOYEE STOCK OPTION PLAN:
The Company has a stock option plan for key employees. Options expire no
later than ten years from the date of the grant or when employment ceases,
whichever comes first. One-third of the granted options vest on the grant date.
The remaining options vest ratably on the first and second anniversaries of the
date of grant. The maximum number of shares of common stock that may be issued
pursuant to the stock option plan is 5,000,000 shares at December 31, 1998.
The stock option plan is accounted for under APB Opinion No. 25, "Accounting
for Stock Issued to Employees." Had compensation cost for the plan been
determined based on the estimated fair value of the options at the grant dates
consistent with the method of SFAS No. 123, pro forma net loss would have been
approximately $289,000 for the year ended December 31, 1998. The weighted
average fair value of the options granted during 1998 is estimated to be $0.84
per option assuming the following: dividend yield of 0 percent, risk-free
interest rate of 5 percent and an expected term of the options of 3.4 years.
The following summarizes option activity during 1998:
<TABLE>
<CAPTION>
WEIGHTED-
NUMBER OF AVERAGE
SHARES EXERCISE PRICE
---------- ---------------
<S> <C> <C>
Options outstanding December 31, 1997, exercise price range of
$0.10 to $0.16.................................................. 2,431,000 $ 0.13
Granted in 1998............................................... 345,000 0.20
----------
Options outstanding, December 31, 1998, exercise price range of
$0.10 to $0.20.................................................. 2,776,000 0.14
---------- -----
---------- -----
Options exercisable, December 31, 1998............................ 1,716,000 $ 0.13
---------- -----
---------- -----
</TABLE>
9. INCOME TAXES:
The Company follows the provisions of SFAS No. 109, "Accounting for Income
Taxes," for financial reporting purposes. Deferred tax assets or liabilities at
the end of each period are determined using the currently enacted tax rates to
apply to taxable income in the period in which the deferred tax asset or
liability is expected to be settled or realized.
F-128
<PAGE>
INTERNET OUTFITTERS, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1998
The components of the net deferred tax asset are as follows as of December
31, 1998:
<TABLE>
<S> <C>
Total deferred tax liabilities.................................... $ (29,000)
Total deferred tax assets......................................... 58,000
---------
Net deferred tax asset........................................ $ 29,000
---------
---------
</TABLE>
The sources of and differences between the financial accounting and tax
basis of Internet Outfitters, Inc.'s assets and liabilities that give rise to
the net deferred tax asset are as follows as of December 31, 1998:
<TABLE>
<S> <C>
Deferred tax liabilities
Depreciation.................................................... $ (29,000)
Deferred tax assets
Reserves........................................................ 35,000
Stock-based compensation........................................ 23,000
---------
Net deferred tax asset........................................ $ 29,000
---------
---------
</TABLE>
The components of the provision for income taxes as of December 31, 1998,
are as follows:
<TABLE>
<S> <C>
Federal income taxes:
Current......................................................... $ 68,000
Deferred........................................................ (29,000)
State taxes....................................................... 13,000
---------
Provision for income taxes........................................ $ 52,000
---------
---------
</TABLE>
For the year ended December 31, 1998, the provision for income taxes
differed from the amounts computed at the statutory rate, as follows:
<TABLE>
<S> <C>
Income tax computed at statutory rates............................ $ (4,000)
State income taxes, net of federal income tax benefit............. 9,000
Permanent differences............................................. 48,000
Other, net........................................................ (1,000)
---------
$ 52,000
---------
---------
</TABLE>
10. RELATED PARTIES:
See Note 7 for a description of certain long-term debt obligations with
related parties.
In 1998, IO has entered into a service agreement with a relative of an
officer of the Company. Under this agreement, this individual will act as
financial advisor for any sale, merger or financing transaction entered into by
the Company and, in exchange, will receive a fee equal to three percent of the
transaction consideration. No fees were paid in 1998 in connection with this
agreement.
F-129
<PAGE>
INTERNET OUTFITTERS, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1998
11. COMMITMENTS AND CONTINGENCIES:
LEASES
The Company has noncancelable operating leases, primarily for real estate,
that expire over the next 2 years. One of the operating leases maintains an
escalation provision that requires annual incremental increases of at least 3
percent. Rental expense for operating leases during the year ended December 31,
1998 was $63,000.
The Company leases certain equipment under capital leases.
Future minimum lease payments under capital leases and noncancelable
operating leases are as follows as of December 31, 1998:
<TABLE>
<CAPTION>
CAPITAL OPERATING
LEASES LEASES
---------- -----------
<S> <C> <C>
1999................................................................... $ 17,000 $ 68,000
2000................................................................... 5,000 11,000
---------- -----------
Total minimum lease payments....................................... 22,000 $ 79,000
-----------
-----------
Less: Amount representing interest..................................... (2,000)
----------
Present value of capital lease obligations............................. 20,000
Less: Current portion of capital lease obligations..................... (17,000)
----------
Long-term portion of capital lease obligations......................... $ 3,000
----------
----------
</TABLE>
Equipment under capital leases is summarized as follows as of December 31,
1998:
<TABLE>
<S> <C>
Computer equipment................................................ $ 49,000
Accumulated depreciation.......................................... (15,000)
---------
Total......................................................... $ 34,000
---------
---------
</TABLE>
LITIGATION AND CLAIMS
In 1998, one of the Company's suppliers informed IO that it believed the
Company had caused a third-party client of the Company to enter into an
incorrect license for a supplier's software. The supplier asserted that the
correct license required additional payments of approximately $2,200,000 in
license fees and technical support fees. The Company denies any liability for
additional licensing fees. While the Company intends to vigorously contest any
claim by the supplier that additional fees are owed in connection with the third
party, the ultimate resolution of this matter cannot be determined at this time.
F-130
<PAGE>
[LOGO]
<PAGE>
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 13. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION.
The following table sets forth expenses and costs payable by AppNet (other
than underwriting discounts and commissions) expected to be incurred in
connection with the issuance and distribution of the securities described in
this registration statement. All amounts are estimated except for the Securities
and Exchange Commission's registration fee and the National Association of
Securities Dealers' filing fee.
<TABLE>
<CAPTION>
AMOUNT
------------
<S> <C>
Registration fee under Securities Act........................................... $ 47,955
NASD filing fee................................................................. 17,750
The Nasdaq National Market fees................................................. 95,000
Legal fees and expenses......................................................... 850,000
Accounting fees and expenses.................................................... 1,000,000
Printing and engraving expenses................................................. 600,000
Registrar and transfer agent fees............................................... 5,000
Miscellaneous expenses.......................................................... 100,000
------------
Total........................................................................... $ 2,715,705
------------
------------
</TABLE>
ITEM 14. INDEMNIFICATION OF DIRECTORS AND OFFICERS.
AppNet's bylaws provide that AppNet shall indemnify to the fullest extent
authorized by the Delaware General Corporation Law, each person who is involved
in any litigation or other proceeding because such person is or was a director
or officer of AppNet, against all expense, loss or liability reasonably incurred
or suffered in connection therewith. AppNet's bylaws provide that a director or
officer may be paid expenses incurred in defending any proceeding in advance of
its final disposition upon receipt by AppNet of an undertaking, by or on behalf
of the director or officer, to repay all amounts so advanced if it is ultimately
determined that such director or officer is not entitled to indemnification.
Section 145 of the Delaware General Corporation Law permits a corporation to
indemnify any director or officer of the corporation against expenses (including
attorneys' fees), judgments, fines and amounts paid in settlement actually and
reasonably incurred in connection with any action, suit or proceeding brought by
reason of the fact that such person is or was a director or officer of the
corporation, if such person acted in good faith and in a manner that he
reasonably believed to be in or not opposed to the best interests of the
corporation, and, with respect to any criminal action or proceeding, if he had
no reason to believe his conduct was unlawful. In a derivative action, (I.E.,
one brought by or on behalf of the corporation), indemnification may be made
only for expenses, actually and reasonably incurred by any director or officer
in connection with the defense or settlement of such an action or suit, if such
person acted in good faith and in a manner that he reasonably believed to be in
or not opposed to the best interests of the corporation, except that no
indemnification shall be made if such person shall have been adjudged to be
liable to the corporation, unless and only to the extent that the court in which
the action or suit was brought shall determine that the defendant is fairly and
reasonably entitled to indemnity for such expenses despite such adjudication of
liability.
Pursuant to Section 102(b)(7) of the Delaware General Corporation Law,
AppNet's certificate of incorporation eliminates the liability of a director to
the corporation or its stockholders for monetary damages for such breach of
fiduciary duty as a director, except for liabilities arising (a) from any breach
of the director's duty of loyalty to the corporation or its stockholders; (b)
from acts or omissions
II-1
<PAGE>
not in good faith or which involve intentional misconduct or a knowing violation
of law; (c) under Section 174 of the Delaware General Corporation Law; or (d)
from any transaction from which the director derived an improper personal
benefit.
AppNet intends to obtain primary and excess insurance policies insuring its
directors and officers and those of its subsidiaries against certain liabilities
they may incur in their capacity as directors and officers. Under such policies,
the insurer, on behalf of AppNet, may also pay amounts for which AppNet has
granted indemnification to the directors or officers.
Additionally, reference is made to the Underwriting Agreement filed as
Exhibit 1.1 hereto, which provides for indemnification by the Underwriters of
AppNet, its directors and officers who sign the registration statement and
persons who control AppNet, under certain circumstances.
ITEM 15. RECENT SALES OF UNREGISTERED SECURITIES.
AppNet has issued securities in the following transactions, each of which,
unless otherwise indicated, was exempt from the registration requirements of the
Securities Act by virtue of Section 4(2).
On March 10, 1998, AppNet issued a warrant to purchase 31,250 shares of
Class B Preferred Stock for an aggregate purchase price of $125,000 to Silicon
Valley Bank as consideration, in part, for a loan from Silicon Valley Bank in
the principal amount of $2,262,500. Pursuant to the terms of an Exchange
Agreement, dated as of June 12, 1998, between AppNet and Silicon Valley Bank,
the warrant to purchase Class B Preferred Stock was exchanged for two new
warrants: (a) a warrant to purchase 14,620 shares of AppNet common stock for an
aggregate purchase price of $4,396 and (b) a warrant to purchase 121 shares of
Class A Preferred Stock for an aggregate purchase price of $121,000. This
exchange was exempt from the registration requirements of the Securities Act by
virtue of Section 3(a)(9) of the Securities Act.
On March 11, 1998, AppNet issued a total of 5,378,947 shares of its common
stock to its founders in the following amounts and for the following
consideration: (1) 3,157,895 shares to Ken Bajaj for an aggregate purchase price
of $9,000; (2) 2,052,632 shares to Fairfax Management Company for an aggregate
purchase price of $5,850; (3) 56,140 shares to Terrence McManus in exchange for
$80, as consideration for past services and in exchange for a binding obligation
to provide future services; (4) 56,140 shares to Robert Harvey in exchange for
$80, as consideration for past services and in exchange for a binding obligation
to provide future services; and (5) 56,140 shares to Robert McCalley in exchange
for $80, as consideration for past services and in exchange for a binding
obligation to provide future services. On June 29, 1998, AppNet repurchased a
portion of the shares issued to Fairfax Management Company in return for a
convertible promissory note in the principal amount of $406,175. The principal
amount of this note will automatically convert into shares of AppNet common
stock upon the consummation of this offering using a per share purchase price
equal to 80% of the offering price per common share.
On March 12, 1998, AppNet issued an aggregate of 266,796 shares of Series
A-1 Convertible Preferred Stock, par value $0.001, to Arbor and 20 employees of
Arbor, as partial payment for the assets of Arbor. The Series A-1 Convertible
Preferred Stock issued to Arbor and the Arbor employees was valued at
approximately $1,067,184. On June 29, 1998, all of the shares of the Series A-1
Convertible Preferred Stock were converted into 187,225 shares of our common
stock. On June 29, 1998, AppNet redeemed 138,455 shares of its common stock that
were issued to Arbor for $789,192.
On April 30, 1998, as partial payment for the assets of LOGEX, AppNet issued
a convertible promissory note to LOGEX in the principal amount of $300,000. The
principal amount of this note, and, with AppNet's consent, accrued interest on
the note, is convertible into AppNet common stock at the holder's option upon
(a) the consummation of this offering, using a per share purchase price equal
II-2
<PAGE>
to 80% of the offering price per common share or (b) a change in control of
AppNet, using a per share purchase price equal to 80% of the fair market value
at the time of the change in control.
On May 31, 1998, AppNet issued a warrant to purchase 35,088 shares of its
common stock for an aggregate purchase price of $50,000 to Smart Technology as
consideration, in part, for a loan from Smart Technology in the maximum
principal amount of $1,000,000. On June 29, 1998, in accordance with the
Purchase Agreement, this warrant was canceled, and AppNet issued a new warrant
to Smart Technology to purchase 70,175 shares of AppNet common stock for an
aggregate purchase price of approximately $21,100.
On June 29, 1998, GTCR and Smart Technology purchased 11,326,228 and 232,916
shares of AppNet common stock, respectively, for aggregate purchase prices of
$3,405,514 and $70,032, respectively, from AppNet under a purchase agreement,
dated as of June 29, 1998). Each of these offerings was exempt from registration
under Section 4(2) of the Securities Act and satisfied the terms and conditions
of Rule 506 of the Securities Act. A Form D was filed on July 10, 1998. Under
the purchase agreement, GTCR and Smart Technology have also purchased aggregate
amounts of approximately 44,167 and 900 shares of Class A Preferred Stock,
respectively, since June 29, 1998, for aggregate purchase prices of
approximately $44,167,000 and $900,000, respectively.
On June 29, 1998, AppNet issued 1,251,228, 63,158, 110,175 and 63,158 shares
of its common stock to Ken Bajaj, Robert Harvey, Robert McCalley and Terrence
McManus, respectively, for an aggregate purchase price of $447,320.
On June 29, 1998, AppNet issued an aggregate of 35,088 shares of its common
stock to Anchor Financial Group, Inc., Pascal Luck and Robert Stewart in
satisfaction in full of all obligations of AppNet for finder's fees in
connection with investments by GTCR and Smart Technology in AppNet under the
purchase agreement with GTCR and Smart Technology. These shares had an aggregate
value of $10,550.
On June 29, 1998, AppNet issued 52,632 shares of its common stock to Thomas
Davidson for payment, in part, of a finder's fee in connection with the GTCR and
Smart Technology investments in AppNet. These shares had an aggregate value of
$15,825. AppNet also issued 86,651 shares of its common stock to Mr. Davidson
for an aggregate purchase price of $26,053. This offering was exempt from
registration under Section 4(2) of the Securities Act and satisfied the terms
and conditions of Rule 506 of the Securities Act. A Form D was filed on July 10,
1998.
Since June 29, 1998, AppNet issued an aggregate of 552,983 shares of its
common stock to twelve of its employees for an aggregate purchase price of
$571,498.
On August 1, 1998, GTCR and Smart Technology exchanged an aggregate of
1,387,097 shares of our common stock for an aggregate of 417.066 shares of Class
A Preferred Stock. This exchange was exempt from the registration requirements
of the Securities Act by virtue of Section 3(a)(9) of the Securities Act.
On August 25, 1998, AppNet issued an aggregate of 11,576 shares of Class B
Preferred Stock and 1,387,095 shares of its common stock to the ten stockholders
of SSC in connection with the acquisition of SSC. The Class B Preferred Stock
issued to the SSC stockholders was valued at $11,576,000 and the common stock
was valued at approximately $417,066.
On October 2, 1998, AppNet issued an aggregate of 1,111,111 shares of its
common stock to the five stockholders of NMP as payment, in part, for all of the
issued and outstanding capital stock of NMP. The common stock issued to the NMP
stockholders was valued at $9,500,000. Also in connection with the acquisition
of NMP, AppNet assumed options to purchase an aggregate of 145,518 shares of its
common stock to the NMP stockholders.
II-3
<PAGE>
On October 12, 1998, as payment, in part, for all of the issued and
outstanding capital stock of Century, AppNet issued a convertible promissory
note to Riggs & Co., as nominee on behalf of the twenty-nine stockholders of
Century, in the aggregate principal amount of $2,000,000. Each of the
twenty-nine Century stockholders obtained a percentage beneficial interest in
the note. All or any portion of the unpaid balance of the note is convertible at
the holder's option, at any time prior to payment in full, into shares of AppNet
common stock, using a per share purchase price of $8.55. Also in connection with
the acquisition of Century, AppNet assumed options to purchase an aggregate of
704,127 shares of its common stock to the Century stockholders. This offering
was exempt from registration under Section 4(2) of the Securities Act and
satisfied the terms and conditions of Rule 506 of the Securities Act. A Form D
was filed October 27, 1998.
On October 20, 1998, AppNet issued an aggregate of 701,754 shares of its
common stock to the two stockholders of R&P as payment, in part, for all of the
issued and outstanding capital stock of R&P. The common stock issued to the R&P
stockholders was valued at $6,000,000.
On December 14, 1998, AppNet issued an aggregate of 197,368 shares of its
common stock and four convertible promissory notes in an aggregate principal
amount of $2,000,000 to the four stockholders of Kodiak as payment, in part, for
all of the issued and outstanding capital stock of Kodiak. The common stock
issued to the Kodiak stockholders was valued at $2,250,000. All or any portion
of the unpaid balance of each of these notes is convertible at the holder's
option, at any time prior to payment in full, into shares of AppNet common
stock, using a per share purchase price of $11.40. This offering was exempt from
registration under Section 4(2) of the Securities Act and satisfied the terms
and conditions of Rule 506 of the Securities Act. A Form D was filed on December
29, 1998.
On January 6, 1999, AppNet issued 29,240 shares of its common stock to
Antares Capital Corporation for an aggregate purchase price of $375,003. This
offering was exempt from registration under Section 4(2) of the Securities Act
and satisfied the terms and conditions of Rule 506 of the Securities Act. A Form
D was filed on January 22, 1999.
On January 8, 1999, AppNet issued two convertible promissory notes in an
aggregate principal amount of $3,500,000 to the two former stockholders of i33
as partial payment for their shares of the capital stock of i33. The principal
amount of, and accrued interest on, these notes is convertible into AppNet
common stock at the holder's option commencing upon (a) the consummation of this
offering, using a per share purchase price equal to 80% of the offering price
per common share, or (b) a change in control of AppNet, using a per share
purchase price equal to 80% of the fair market value at the time of the change
in control. In addition, AppNet issued two convertible subordinated promissory
notes in an aggregate principal amount of $6,800,000 to the two former i33
stockholders as partial payment for their shares of the capital stock of i33.
All or any portion of the principal of, and accrued interest on, each of these
notes is convertible, at the holder's option, commencing upon the consummation
of this offering or a change in control of AppNet, into shares of common stock,
using a per share purchase price of $11.40. Also in connection with the
acquisition of i33, AppNet issued a convertible promissory note in a principal
amount of $1,000,000 to a trust for the benefit of i33 employees. The principal
amount of, and accrued interest on, this note is convertible into AppNet common
stock at the holder's option commencing upon (a) the consummation of this
offering, using a per share purchase price equal to 80% of the offering price
per common share, or (b) a change in control of AppNet, using a per share
purchase price equal to 80% of the fair market value at the time of the change
in control. This offering was exempt from registration under Section 4(2) of the
Securities Act and satisfied the terms and conditions of Rule 506 of the
Securities Act. A Form D was filed on January 22, 1999.
On March 4, 1999, AppNet issued an aggregate of 97,465 shares of its common
stock to the four stockholders of Sigma6 as payment, in part, for all of the
issued and outstanding capital stock of
II-4
<PAGE>
Sigma6. The common stock issued to the Sigma6 stockholders was valued at
$1,250,000. This offering was exempt from registration under Section 4(2) of the
Securities Act and satisfied the terms and conditions of Rule 506 of the
Securities Act. A Form D was filed on March 19, 1999.
On March 15, 1999, AppNet issued an aggregate of 245,614 shares of its
common stock to Salzinger & Company, Inc. as payment, in part, for substantially
all of the assets of Salzinger & Company. The common stock issued to Salzinger &
Company was valued at $3,500,000. This offering was exempt from registration
under Section 4(2) of the Securities Act and satisfied the terms and conditions
of Rule 506 of the Securities Act. A Form D was filed on March 30, 1999.
On March 25, 1999, AppNet issued an aggregate of 157,895 shares of its
common stock to the 19 stockholders of Internet Outfitters as payment, in part,
for all of the issued and outstanding capital stock of Internet Outfitters. The
common stock issued to the Internet Outfitters stockholders was valued at
$2,700,000. Also in connection with the acquisition of Internet Outfitters,
AppNet assumed options to purchase an aggregate of 22,300 shares of its common
stock to the Internet Outfitters' stockholders. This offering was exempt from
registration under Section 4(2) of the Securities Act and satisfied the terms
and conditions of Rule 506 of the Securities Act. A Form D was filed on April
12, 1999.
On March 29, 1999, AppNet issued an aggregate of 94,737 shares of its common
stock to TransForm IT as payment, in part, for substantially all of the assets
of TransForm IT. The common stock issued to TransForm IT was valued at
$1,620,000.
From August 1998 through May 26, 1999, AppNet granted options under the 1998
Plan to purchase an aggregate of 1,574,068 shares of its common stock at
exercise prices ranging from $0.04341 to $17.10 to employees and officers and
directors. AppNet issued an aggregate of 4,791 shares of its common stock
pursuant to option exercises under the 1998 Plan at exercise prices ranging from
$0.04341 to $0.14464.
From August 1998 through May 26, 1999, AppNet assumed options under the
Century Plan to purchase an aggregate of 704,127 shares of its common stock at
exercise prices ranging from $0.7159 to $1.4099. AppNet issued an aggregate of
658,499 of its common stock pursuant to option exercises under the Century Plan
at exercise prices ranging from $0.7159 to $1.4099.
From August 1998 through May 26, 1999, AppNet assumed options under the
Internet Outfitters' Plan to purchase an aggregate of 22,300 shares of its
common stock at exercise prices ranging from $2.25 to $3.76, none of which has
been exercised.
ITEM 16. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES.
The following documents are filed as exhibits to this registration
statement:
<TABLE>
<CAPTION>
EXHIBIT DESCRIPTION
- ----------- --------------------------------------------------------------------------------------------------------
<C> <S>
1.1 Form of Underwriting Agreement**
3.1 Restated Certificate of Incorporation of AppNet Systems, Inc.
3.2 Form of Amended and Restated Bylaws of AppNet Systems, Inc.**
4.1 Form of certificate of common stock of AppNet Systems, Inc.**
4.2 Registration Agreement, dated as of June 29, 1998, by and among AppNet Systems, Inc., GTCR Golder
Rauner, L.L.C., Fairfax Management Company II, L.L.C., Smart Technology, L.L.C. and certain stockholders
of AppNet Systems, Inc.**
5.1 Opinion of Fried, Frank, Harris, Shriver & Jacobson
</TABLE>
II-5
<PAGE>
<TABLE>
<CAPTION>
EXHIBIT DESCRIPTION
- ----------- --------------------------------------------------------------------------------------------------------
<C> <S>
10.1 Purchase Agreement, dated as of June 29, 1998, as amended, by and among AppNet Systems, Inc., Smart
Technology, L.L.C. and GTCR Golder Rauner, L.L.C.
10.2 Agreement of Purchase and Sale of Assets, dated March 12, 1998, by and between AppNet Systems, Inc.,
Arbor Intelligent Systems, Inc., AppNet of Michigan, Inc. and Ronald Suarez, Robert Simms and Robert
Royce for purchase and sale of substantially all of the assets of Arbor Intelligent Systems, Inc.**
10.3 Merger Agreement, dated June 31, 1998, by and among AppNet Systems, Inc., SSC Acquisition Sub #1, Inc.,
Software Services Corporation and its stockholders for the purchase of all of the issued and outstanding
capital stock of Software Services Corporation**
10.4 Merger Agreement, dated October 2, 1998, by and among AppNet Systems, Inc., NMP Acquisition Sub #1,
Inc., New Media Publishing, Inc. and its stockholders for the purchase of all of the issued and
outstanding capital stock of New Media Publishing, Inc.**
10.5 Agreement and Plan of Merger, dated September 17, 1998, by and among AppNet Systems, Inc.,
AppNet/Century, Inc., Century Computing, Incorporated and its stockholders for the purchase of all of
the issued and outstanding capital stock of Century Computing, Incorporated**
10.6 Stock Purchase Agreement, dated October 20, 1998, by and among AppNet Systems, Inc., Research &
Planning, Inc., Thomas H. Rauh and William Rosenfeld for the purchase of all of the issued and
outstanding capital stock of Research & Planning, Inc.**
10.7 Stock Purchase Agreement, dated as of November 25, 1998, by and among AppNet Systems, Inc., The Kodiak
Group, Inc. and its stockholders for the purchase of all of the issued and outstanding capital stock of
The Kodiak Group, Inc.**
10.8 Stock Purchase Agreement, dated December 23, 1998, by and among AppNet Systems, Inc., i33 communications
corp., Drew Rayman and Enno Vandermeer for the purchase of all of the issued and outstanding capital
stock of i33 communications corp.**
10.9 Merger Agreement, dated as of February 25, 1999, as amended, by and among AppNet Systems, Inc., AppNet
Sigma6, Inc., Sigma6, Inc. and the stockholders of Sigma6, Inc., for the purchase of all of the issued
and outstanding capital stock of Sigma6, Inc.**
10.10 Asset Purchase Agreement, dated as of March 1, 1999, by and among AppNet Systems, Inc., Salzinger
Acquisition Corp., Salzinger & Company, Inc. and Steven Salzinger for the purchase of substantially all
of the assets of Salzinger & Company, Inc.**
10.11 Stock Purchase Agreement, dated as of March 22, 1999, by and among AppNet Systems, Inc., Internet
Outfitters, Inc. and its stockholders for the purchase of all of the issued and outstanding capital
stock of Internet Outfitters, Inc.**
10.12 Asset Purchase Agreement, dated as of March 29, 1999, by and among AppNet Systems, Inc., Transform
Acquisition Corp., TransForm IT, Incorporated and John C. King, Thomas E. Hunt and Roy A. Chandler for
the purchase of substantially all of the assets of TransForm IT, Incorporated**
10.13 Form of Recapitalization Agreement by and among AppNet Systems, Inc. and owners of AppNet's preferred
stock**
10.14 Revolving Credit Agreement, dated as of January 8, 1999, by and among AppNet Systems, Inc., BankBoston,
N.A. and Antares Capital Corporation**
</TABLE>
II-6
<PAGE>
<TABLE>
<CAPTION>
EXHIBIT DESCRIPTION
- ----------- --------------------------------------------------------------------------------------------------------
<C> <S>
10.15 Second Amendment to Revolving Credit Agreement, dated as of May 24, 1999, by and among AppNet Systems,
Inc., BankBoston, N.A. and Antares Capital Corporation**
10.16 First Amendment to Revolving Credit Agreement, dated as of March 10, 1999, by and among AppNet Systems,
Inc., BankBoston, N.A. and Antares Capital Corporation**
10.17 Form of Lock-Up Agreement**
10.18 Century Computing, Incorporated Incentive Stock Plan, as amended**
10.19 AppNet Systems, Inc. 1998 Stock Option and Incentive Plan (as amended and restated)**
10.20 Form of AppNet Systems, Inc. 1999 Stock Incentive Plan
10.21 Internet Outfitters, Inc. 1996 Incentive Stock Option Plan, as amended**
10.22 Form of Senior Management Agreement, as amended**
10.23 Senior Management Agreement, dated as of June 29, 1998, by and between AppNet Systems, Inc. and Ken S.
Bajaj**
10.24 Letter Agreement, dated as of May 28, 1999, by and among AppNet Systems, Inc., BankBoston, N.A. and
Antares Capital Corporation**
21.1 Subsidiaries of AppNet Systems, Inc.**
23.1 Consent of Arthur Andersen LLP
23.2 Consent of Fried, Frank, Harris, Shriver & Jacobson (included in Exhibit 5.1 above)
23.3 Consent of Gartner Group/Dataquest**
23.4 Consent of International Data Corporation**
24.1 Power of Attorney**
27.1 Financial data schedule**
</TABLE>
- ------------------------
* To be filed by amendment.
** Previously filed.
II-7
<PAGE>
ITEM 17. UNDERTAKINGS.
The undersigned registrant hereby undertakes that, for purposes of
determining any liability under the Securities Act, each filing of the
registrant's annual reports pursuant to section 13(a) or section 15(d) of the
Securities Exchange Act of 1934 (and, where applicable, each filing of an
employee benefit plan's annual report pursuant to section 15(d) of the
Securities Exchange Act of 1934) that is incorporated by reference in the
registration statement shall be deemed to be a new registration statement
relating to the securities offered therein, and the offering of such securities
at that time shall be deemed to be the initial bona fide offering thereof.
Insofar as indemnification for liabilities arising under the Securities Act
may be permitted to directors, officers and controlling persons of the
registrant pursuant to the foregoing provisions, or otherwise, the registrant
has been advised that in the opinion of the Securities and Exchange Commission
such indemnification is against public policy as expressed in the Act and is,
therefore, unenforceable. In the event that a claim for indemnification against
such liabilities (other than payment by the registrant of expenses incurred or
paid by a director, officer or controlling person of the registrant in the
successful defense of any action, suit or proceeding) is asserted by such
director, officer or controlling person in connection with the securities being
registered, the registrant will, unless in the opinion of its counsel the matter
has been settled by controlling precedent, submit to a court of appropriate
jurisdiction the question whether such indemnification by it is against public
policy as expressed in the Act and will be governed by the final adjudication of
such issue.
The undersigned registrant hereby undertakes that:
(1) To provide to the Underwriters at the closing specified in the
underwriting agreement certificates in such denominations and registered in such
names as required by the Underwriters to permit proper delivery to each
purchaser.
(2) For purposes of determining any liability under the Securities Act, the
information omitted from the form of prospectus filed as part of this
registration statement in reliance upon Rule 430A and contained in a form of
prospectus filed by the registrant pursuant to Rule 424b(1) or (4) or 497(h)
under the Securities Act shall be deemed to be part of this registration
statement as of the time it was declared effective.
(3) For purposes of determining any liability under the Securities Act, each
post-effective amendment that contains a form of prospectus shall be deemed to
be a new registration statement relating to the securities offered therein, and
the offering of such securities at that time shall be deemed to be the initial
bona fide offering thereof.
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, the registrant
has duly caused this Amendment No. 5 to the registration statement to be signed
on its behalf by the undersigned, thereunto duly authorized, in the City of
Bethesda, State of Maryland, on June 15, 1999.
APPNET SYSTEMS, INC.
By: /s/ KEN S. BAJAJ
-----------------------------------------
Ken S. Bajaj
CHIEF EXECUTIVE OFFICER
(PRINCIPAL EXECUTIVE OFFICER)
II-8
<PAGE>
Pursuant to the requirements of the Securities Act of 1933, this Amendment
No. 5 to the registration statement has been signed by the following persons in
the capacities and on the dates indicated.
<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
- ------------------------------ -------------------------- -------------------
<C> <S> <C>
President, Chief Executive
/s/ KEN S. BAJAJ Officer and Director
- ------------------------------ (Principal Executive June 15, 1999
Ken S. Bajaj Officer)
/s/ JOHN CROSS*
- ------------------------------ Executive Vice President June 15, 1999
John Cross and Director
/s/ THOMAS M. DAVIDSON*
- ------------------------------ Director June 15, 1999
Thomas M. Davidson
/s/ BRUCE RAUNER*
- ------------------------------ Director June 15, 1999
Bruce Rauner
/s/ PHILIP A. CANFIELD*
- ------------------------------ Director June 15, 1999
Philip A. Canfield
/s/ JACK PEARLSTEIN Chief Financial Officer
- ------------------------------ (Principal Financial and June 15, 1999
Jack Pearlstein Accounting Officer)
</TABLE>
<TABLE>
<S> <C> <C> <C>
*By: /s/ KEN S. BAJAJ
-------------------------
Ken S. Bajaj
CHIEF EXECUTIVE OFFICER
(PRINCIPAL EXECUTIVE
OFFICER)
Attorney in fact
</TABLE>
II-9
<PAGE>
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To AppNet Systems, Inc.:
We have audited, in accordance with generally accepted auditing standards,
the consolidated financial statements of AppNet Systems, Inc. and the financial
statements of Software Services Corporation included in this registration
statement and have issued our reports thereon dated March 29, 1999 (except with
respect to the matter discussed in Note 18, as to which the date is June 15,
1999) and February 5, 1999, respectively. Our audits were made for the purpose
of forming an opinion on the basic financial statements taken as a whole. The
accompanying Schedule II -- Valuation and Qualifying Accounts for AppNet
Systems, Inc. and Software Services Corporation are the responsibility of the
Company's management and are presented for purposes of complying with the
Securities and Exchange Commission's rules and are not part of the basic
financial statements. This schedule has been subjected to the auditing
procedures applied in the audit of the basic financial statements and, in our
opinion, fairly states in all material respects the financial data required to
be set forth therein in relation to the basic financial statements taken as a
whole.
ARTHUR ANDERSEN LLP
Washington, D.C.
March 29, 1999
S-1
<PAGE>
SCHEDULE II
APPNET SYSTEMS, INC.
VALUATION AND QUALIFYING ACCOUNTS
<TABLE>
<CAPTION>
ADDITIONS
----------------------
CHARGED
BEGINNING TO ENDING
BALANCE DEDUCTIONS EXPENSE OTHER(1) BALANCE
---------- ----------- ---------- ---------- ------------
<S> <C> <C> <C> <C> <C>
PERIOD ENDING DECEMBER 31, 1998
Allowance for Doubtful Accounts................. $ -- $ 166,000 $ 539,000 $ 751,000 $ 1,124,000
</TABLE>
SOFTWARE SERVICES CORPORATION (PREDECESSOR)
VALUATION AND QUALIFYING ACCOUNTS
<TABLE>
<CAPTION>
ADDITIONS
----------------------
CHARGED
BEGINNING TO ENDING
BALANCE DEDUCTIONS EXPENSE OTHER(1) BALANCE
---------- ----------- ---------- ---------- ------------
<S> <C> <C> <C> <C> <C>
PERIOD ENDING DECEMBER 31, 1996
Allowance for Doubtful Accounts................. $ 49,000 $ 37,000 $ 17,000 -- $ 29,000
PERIOD ENDING DECEMBER 31, 1997
Allowance for Doubtful Accounts................. $ 29,000 $ 10,000 $ 6,000 -- $ 25,000
PERIOD FROM JANUARY 1 TO AUGUST 24, 1998
Allowance for Doubtful Accounts................. $ 25,000 $ (1,000) $ 229,000 -- $ 255,000
</TABLE>
- ------------------------
(1) Amounts reflected in opening balance sheets of acquired companies in
accordance with the purchase method of accounting.
S-2
<PAGE>
INDEX TO EXHIBITS
The following documents are filed as exhibits to this registration
statement:
<TABLE>
<CAPTION>
EXHIBIT DESCRIPTION
- ----------- --------------------------------------------------------------------------------------------------------
<C> <S>
1.1 Form of Underwriting Agreement**
3.1 Restated Certificate of Incorporation of AppNet Systems, Inc.
3.2 Form of Amended and Restated Bylaws of AppNet Systems, Inc.**
4.1 Form of certificate of common stock of AppNet Systems, Inc.**
4.2 Registration Agreement, dated as of June 29, 1998, by and among AppNet Systems, Inc., GTCR Golder
Rauner, L.L.C., Fairfax Management Company II, L.L.C., Smart Technology, L.L.C. and certain stockholders
of AppNet Systems, Inc.**
5.1 Opinion of Fried, Frank, Harris, Shriver & Jacobson
10.1 Purchase Agreement, dated as of June 29, 1998, as amended, by and among AppNet Systems, Inc., Smart
Technology, L.L.C. and GTCR Golder Rauner, L.L.C.
10.2 Agreement of Purchase and Sale of Assets, dated March 12, 1998, by and between AppNet Systems, Inc.,
Arbor Intelligent Systems, Inc., AppNet of Michigan, Inc. and Ronald Suarez, Robert Simms and Robert
Royce for purchase and sale of substantially all of the assets of Arbor Intelligent Systems, Inc.**
10.3 Merger Agreement, dated June 31, 1998, by and among AppNet Systems, Inc., SSC Acquisition Sub #1, Inc.,
Software Services Corporation and its stockholders for the purchase of all of the issued and outstanding
capital stock of Software Services Corporation**
10.4 Merger Agreement, dated October 2, 1998, by and among AppNet Systems, Inc., NMP Acquisition Sub #1,
Inc., New Media Publishing, Inc. and its stockholders for the purchase of all of the issued and
outstanding capital stock of New Media Publishing, Inc.**
10.5 Agreement and Plan of Merger, dated September 17, 1998, by and among AppNet Systems, Inc.,
AppNet/Century, Inc., Century Computing, Incorporated and its stockholders for the purchase of all of
the issued and outstanding capital stock of Century Computing, Incorporated**
10.6 Stock Purchase Agreement, dated October 20, 1998, by and among AppNet Systems, Inc., Research &
Planning, Inc., Thomas H. Rauh and William Rosenfeld for the purchase of all of the issued and
outstanding capital stock of Research & Planning, Inc.**
10.7 Stock Purchase Agreement, dated as of November 25, 1998, by and among AppNet Systems, Inc., The Kodiak
Group, Inc. and its stockholders for the purchase of all of the issued and outstanding capital stock of
The Kodiak Group, Inc.**
10.8 Stock Purchase Agreement, dated December 23, 1998, by and among AppNet Systems, Inc., i33 communications
corp., Drew Rayman and Enno Vandermeer for the purchase of all of the issued and outstanding capital
stock of i33 communications corp.**
10.9 Merger Agreement, dated as of February 25, 1999, as amended, by and among AppNet Systems, Inc., AppNet
Sigma6, Inc., Sigma6, Inc. and the stockholders of Sigma6, Inc., for the purchase of all of the issued
and outstanding capital stock of Sigma6, Inc.**
10.10 Asset Purchase Agreement, dated as of March 1, 1999, by and among AppNet Systems, Inc., Salzinger
Acquisition Corp., Salzinger & Company, Inc. and Steven Salzinger for the purchase of substantially all
of the assets of Salzinger & Company, Inc.**
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
EXHIBIT DESCRIPTION
- ----------- --------------------------------------------------------------------------------------------------------
<C> <S>
10.11 Stock Purchase Agreement, dated as of March 22, 1999, by and among AppNet Systems, Inc., Internet
Outfitters, Inc. and its stockholders for the purchase of all of the issued and outstanding capital
stock of Internet Outfitters, Inc.**
10.12 Asset Purchase Agreement, dated as of March 29, 1999, by and among AppNet Systems, Inc., Transform
Acquisition Corp., TransForm IT, Incorporated and John C. King, Thomas E. Hunt and Roy A. Chandler for
the purchase of substantially all of the assets of TransForm IT, Incorporated**
10.13 Form of Recapitalization Agreement by and among AppNet Systems, Inc. and owners of AppNet's preferred
stock**
10.14 Revolving Credit Agreement, dated as of January 8, 1999, by and among AppNet Systems, Inc., BankBoston,
N.A. and Antares Capital Corporation**
10.15 Second Amendment to Revolving Credit Agreement, dated as of May 24, 1999, by and among AppNet Systems,
Inc., BankBoston, N.A. and Antares Capital Corporation**
10.16 First Amendment to Revolving Credit Agreement, dated as of March 10, 1999, by and among AppNet Systems,
Inc., BankBoston, N.A. and Antares Capital Corporation**
10.17 Form of Lock-Up Agreement**
10.18 Century Computing, Incorporated Incentive Stock Plan, as amended**
10.19 AppNet Systems, Inc. 1998 Stock Option and Incentive Plan (as amended and restated)**
10.20 Form of AppNet Systems, Inc. 1999 Stock Incentive Plan
10.21 Internet Outfitters, Inc. 1996 Incentive Stock Option Plan, as amended**
10.22 Form of Senior Management Agreement, as amended**
10.23 Senior Management Agreement, dated as of June 29, 1998, by and between AppNet Systems, Inc. and Ken S.
Bajaj**
10.24 Letter Agreement, dated as of May 28, 1999, by and among AppNet Systems, Inc., BankBoston, N.A. and
Antares Capital Corporation**
21.1 Subsidiaries of AppNet Systems, Inc.**
23.1 Consent of Arthur Andersen LLP
23.2 Consent of Fried, Frank, Harris, Shriver & Jacobson (included in Exhibit 5.1 above)
23.3 Consent of Gartner Group/Dataquest**
23.4 Consent of International Data Corporation**
24.1 Power of Attorney**
27.1 Financial data schedule**
</TABLE>
- ------------------------
* To be filed by amendment.
** Previously filed.
<PAGE>
Exhibit 3.1
RESTATED CERTIFICATE OF INCORPORATION
OF
APPNET SYSTEMS, INC.
AppNet Systems, Inc., a corporation existing under the laws of the
State of Delaware (the "Corporation"), hereby certifies as follows:
1. The name of the Corporation is AppNet Systems, Inc. AppNet Systems,
Inc. was originally incorporated under the name Internet Applications, Inc., and
the original Certificate of Incorporation was filed with the Secretary of State
of the State of Delaware on November 6, 1997.
2. This Restated Certificate of Incorporation restates and integrates
and further amends the provisions of the Certificate of Incorporation of the
Corporation and has been adopted pursuant to the provisions of Sections 242 and
245 of the General Corporation Law of the State of Delaware.
3. The text of the Restated Certificate of Incorporation as heretofore
amended or supplemented is hereby restated and further amended to read in its
entirety as follows:
FIRST: The name of the Corporation is AppNet Systems, Inc.
SECOND: The address of the Corporation's registered office in the State
of Delaware is Corporation Service Company, 1013 Centre Road, in the City of
Wilmington, County of New Castle, Delaware 19805. The name of its registered
agent at such address is Corporation Service Company.
THIRD: The purpose of the Corporation is to engage in any lawful act or
activity for which corporations may be organized under the General Corporation
Law of the State of Delaware (the "DGCL").
FOURTH: The aggregate number of shares of all classes of capital stock
which the Corporation shall have the authority to issue is 80,000,000 of which
(i) 75,000,000 shall be designated common stock, par value $.0005 per share
("Common Stock"), and (ii) 5,000,000 shall be designated preferred stock, par
value $.01 per share ("Preferred Stock").
A. Common Stock
Except as otherwise provided in this Part A or as otherwise
required by applicable law, all shares of Common Stock shall be identical in all
respects and shall entitle the holders thereof to the same rights and
privileges, subject to the same qualifications, limitations and restrictions.
<PAGE>
1. DIVIDENDS. Subject to the preferential rights, if any, of
the Preferred Stock, the holders of shares of Common Stock shall be entitled to
receive, when and if declared by the Board of Directors, out of the assets of
the Corporation which are by law available therefor, dividends payable either in
cash, in property, or in shares of capital stock.
2. VOTING RIGHTS. At every annual or special meeting of the
stockholders of the Corporation, every holder of Common Stock shall be entitled
to one vote, in person or by proxy, for each share of Common Stock standing in
his name on the books of the Corporation.
3. LIQUIDATION, DISSOLUTION, OR WINDING UP. In the event of
any voluntary or involuntary liquidation, dissolution, or winding up of the
affairs of the Corporation after payment or provision for payment of the debts
and other liabilities of the Corporation and of the preferential amounts, if
any, to which holders of Preferred Stock shall be entitled, the holders of all
outstanding shares of Common Stock shall be entitled to share ratably in the
remaining net assets of the Corporation.
B. Preferred Stock
Shares of the Preferred Stock of the Corporation may be issued
from time to time in one or more classes or series, each of which class or
series shall have such distinctive designation or title as shall be fixed by the
Board of Directors of the Corporation prior to the issuance of any shares
thereof. Each such class or series of Preferred Stock shall have such voting
powers, full or limited or no voting powers and such preferences and relative,
participating, optional or other special rights and such qualifications,
limitations or restrictions thereof, as shall be stated in such resolution or
resolutions providing for the issue of such class or series of Preferred Stock
as may be adopted from time to time by the Board of Directors prior to the
issuance of any shares thereof pursuant to the authority hereby expressly vested
in it, all in accordance with the laws of the State of Delaware.
C. Class A and Class B Preferred Stock
1. DESIGNATION, PAR VALUE AND AMOUNT.
a. CLASS A PREFERRED STOCK. The shares of such class
shall be designated as "Class A Preferred," the shares of such class shall be
with par value of $.01 per share, and the number of shares constituting such
class shall be 96,621.
b. CLASS B PREFERRED STOCK. The shares of such class
shall be designated as "Class B Preferred," the shares of such class shall be
with par value of $.01 per share, and the number of shares constituting such
class shall be 20,000.
-2-
<PAGE>
2. DIVIDENDS.
a. GENERAL OBLIGATION. When and as declared by the
Corporation's Board of Directors and to the extent permitted under the DGCL, the
Corporation shall pay preferential dividends in cash to the holders of the Class
A and Class B Preferred as provided in this Section 2. Dividends on each share
of the Class A and Class B Preferred (a "SHARE") shall accrue on a daily basis
at the rate of 6% per annum of the sum of the Liquidation Value thereof plus all
accumulated and unpaid dividends thereon from and including the date of issuance
of such Share to and including the first to occur of (i) the date on which the
Liquidation Value of such Share (plus all accrued and unpaid dividends thereon)
is paid to the holder thereof in connection with the liquidation of the
Corporation or the redemption of such Share by the Corporation or (ii) the date
on which such Share is otherwise acquired by the Corporation. Such dividends
shall accrue whether or not they have been declared and whether or not there are
profits, surplus or other funds of the Corporation legally available for the
payment of dividends, and such dividends shall be cumulative such that all
accrued and unpaid dividends shall be fully paid or declared with funds
irrevocably set apart for payment before any dividends, distributions,
redemptions or other payments may be made with respect to any Junior Securities.
The date on which the Corporation initially issues any Share shall be deemed to
be its "date of issuance" regardless of the number of times transfer of such
Share is made on the stock records maintained by or for the Corporation and
regardless of the number of certificates which may be issued to evidence such
Share.
b. DIVIDEND REFERENCE DATES. To the extent not paid
on March 31, June 30, September 30 and December 31 of each year, beginning June
30, 1998 for the Class A Preferred and September 30, 1998 for the Class B
Preferred (the "DIVIDEND REFERENCE DATES"), all dividends which have accrued on
each Share outstanding during the three-month period (or other period in the
case of the initial Dividend Reference Date) ending upon each such Dividend
Reference Date shall be accumulated and shall remain accumulated dividends with
respect to such Share until paid to the holder thereof.
c. DISTRIBUTION OF PARTIAL DIVIDEND PAYMENTS. Except
as otherwise provided herein, if at any time the Corporation pays less than the
total amount of dividends then accrued with respect to the Class A or Class B
Preferred such payment shall be distributed pro rata among the holders thereof
based upon the aggregate accrued but unpaid dividends on the Shares held by each
such holder.
3. LIQUIDATION. Upon any liquidation, dissolution or winding
up of the Corporation (whether voluntary or involuntary), each holder of Class A
or Class B Preferred shall be entitled to be paid, before any distribution or
payment is made upon any Junior Securities, an amount in cash equal to the
aggregate Liquidation Value of all Shares held by such holder (plus all accrued
and unpaid dividends thereon), and the holders of Class A or Class B Preferred
shall not be entitled to any further payment. If upon any such liquidation,
dissolution or winding up of the Corporation the Corporation's assets to be
distributed among the holders of the Class A and Class B Preferred are
insufficient to permit payment to such holders of the aggregate amount which
they are entitled to be paid under this Section 3, then the entire assets
-3-
<PAGE>
available to be distributed to the Corporation's stockholders shall be
distributed pro rata among such holders based upon the aggregate Liquidation
Value (plus all accrued and unpaid dividends) of the Class A and Class B
Preferred held by each such holder. Not less than 60 days prior to the payment
date stated therein, the Corporation shall mail written notice of any such
liquidation, dissolution or winding up to each record holder of Class A or Class
B Preferred, setting forth in reasonable detail the amount of proceeds to be
paid with respect to each Share and each share of Common Stock in connection
with such liquidation, dissolution or winding up.
4. PRIORITY OF PREFERRED STOCK. So long as any Class A or
Class B Preferred remains outstanding, without the prior written consent of the
holders of a majority of the outstanding Shares of Class A or Class B Preferred,
the Corporation shall not, nor shall it permit any Subsidiary to, redeem,
purchase or otherwise acquire directly or indirectly any Junior Securities, nor
shall the Corporation directly or indirectly pay or declare any dividend or make
any distribution upon any Junior Securities; provided that the Corporation may
purchase shares of Common Stock pursuant to arrangements approved by the Board
from present or former employees of the Corporation or its Subsidiaries.
5. VOTING RIGHTS. Except as otherwise provided herein and as
otherwise required by applicable law, the Class A and Class B Preferred shall
have no voting rights, provided that each holder of Class A or Class B Preferred
shall be entitled to notice of all stockholders meetings at the same time and in
the same manner as notice is given to all stockholders entitled to vote at such
meetings.
D. Class A Preferred Stock
1. REDEMPTIONS.
a. OPTIONAL REDEMPTIONS. The Corporation may at any
time and from time to time redeem all or any portion of the Shares of Class A
Preferred then outstanding. Upon any such redemption, the Corporation shall pay
a price per Share equal to the Liquidation Value thereof (plus all accrued and
unpaid dividends thereon). No redemption pursuant to this Section may be made
for less than 1,000 Shares (or such lesser number of Shares then outstanding).
b. REDEMPTION AFTER PUBLIC OFFERING. The Corporation
shall, at the request (by written notice given to the Corporation) of the
holders of a majority of the Class A Preferred, apply the net cash proceeds from
any Public Offering remaining after deduction of all discounts, underwriters'
commissions and other reasonable expenses to redeem Shares of Class A Preferred
at a price per Share equal to the Liquidation Value thereof (plus all accrued
and unpaid dividends thereon). Such redemption shall take place on a date fixed
by the Corporation, which date shall be not more than five days after the
Corporation's receipt of such proceeds.
c. REDEMPTION PAYMENTS. For each Share which is to be
redeemed hereunder, the Corporation shall be obligated on the Redemption Date to
pay to the holder thereof (upon surrender by such holder at the Corporation's
principal office of the certificate representing such Share) an amount in
immediately available funds equal to the Liquidation
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Value of such Share (plus all accrued and unpaid dividends thereon). If the
funds of the Corporation legally available for redemption of Shares on any
Redemption Date are insufficient to redeem the total number of Shares to be
redeemed on such date, those funds which are legally available shall be used to
redeem the maximum possible number of Shares pro rata among the holders of the
Shares to be redeemed based upon the aggregate Liquidation Value of such Shares
held by each such holder (plus all accrued and unpaid dividends thereon). At any
time thereafter when additional funds of the Corporation are legally available
for the redemption of Shares, such funds shall immediately be used to redeem the
balance of the Shares which the Corporation has become obligated to redeem on
any Redemption Date but which it has not redeemed.
d. NOTICE OF REDEMPTION. Except as otherwise provided
herein, the Corporation shall mail written notice of each redemption of any
Class A Preferred to each record holder thereof not more than 60 nor less than
30 days prior to the date on which such redemption is to be made. In case fewer
than the total number of Shares represented by any certificate are redeemed, a
new certificate representing the number of unredeemed Shares shall be issued to
the holder thereof without cost to such holder within five business days after
surrender of the certificate representing the redeemed Shares.
e. DETERMINATION OF THE NUMBER OF EACH HOLDER'S
SHARES TO BE REDEEMED. The number of Shares of Class A Preferred to be redeemed
from each holder thereof in redemptions hereunder shall be the number of Shares
of Class A Preferred determined by multiplying the total number of Shares of
Class A Preferred to be redeemed times a fraction, the numerator of which shall
be the total number of Shares of Class A Preferred then held by such holder and
the denominator of which shall be the total number of Shares of Class A
Preferred then outstanding.
f. DIVIDENDS AFTER REDEMPTION DATE. No Share shall be
entitled to any dividends accruing after the date on which the Liquidation Value
of such Share (plus all accrued and unpaid dividends thereon) is paid to the
holder of such Share. On such date, all rights of the holder of such Share shall
cease, and such Share shall no longer be deemed to be issued and outstanding.
g. REDEEMED OR OTHERWISE ACQUIRED SHARES. Any Shares
which are redeemed or otherwise acquired by the Corporation shall be canceled
and retired to authorized but unissued shares and shall not be reissued, sold or
transferred.
h. OTHER REDEMPTIONS OR ACQUISITIONS. The Corporation
shall not, nor shall it permit any Subsidiary to, redeem or otherwise acquire
any Shares of Class A Preferred, except as expressly authorized herein.
i. SPECIAL REDEMPTIONS.
(i) If a Change in Ownership has occurred or
the Corporation obtains knowledge that a Change in Ownership is proposed to
occur, the Corporation shall give prompt written notice of such Change in
Ownership describing in reasonable detail the material
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terms and date of consummation thereof to each holder of Class A Preferred, but
in any event such notice shall not be given later than five days after the
occurrence of such Change in Ownership, and the Corporation shall give each
holder of Class A Preferred prompt written notice of any material change in the
terms or timing of such transaction. The holder or holders of a majority of the
Class A Preferred then outstanding may require the Corporation to redeem all or
any portion of the Class A Preferred owned by such holders at a price per Share
equal to the Liquidation Value thereof (plus all accrued and unpaid dividends
thereon) by giving written notice to the Corporation of such election prior to
the later of (a) twenty-one days after receipt of the Corporation's notice and
(b) five days prior to the consummation of the Change in Ownership (the
"EXPIRATION DATE"). The Corporation shall give prompt written notice of any such
election to all other holders of Class A Preferred within five days after the
receipt thereof, and each such holder shall have until the later of (a) the
Expiration Date or (b) ten days after receipt of such second notice to request
redemption hereunder (by giving written notice to the Corporation) of all or any
portion of the Class A Preferred owned by such holder.
Upon receipt of such election(s), the Corporation shall be obligated to
redeem the aggregate number of Shares specified therein on the later of (a) the
occurrence of the Change in Ownership or (b) five days after the Corporation's
receipt of such election(s). If any proposed Change in Ownership does not occur,
all requests for redemption in connection therewith shall be automatically
rescinded, or if there has been a material change in the terms or the timing of
the transaction, any holder of Class A Preferred may rescind such holder's
request for redemption by delivering written notice thereof to the Corporation
prior to the consummation of the transaction.
The term "CHANGE IN OWNERSHIP" means any sale, transfer or issuance or
series of sales, transfers and/or issuances of Common Stock by the Corporation
or any holders thereof which results in any Person or group of Persons (as the
term "GROUP" is used under the Securities Exchange Act of 1934), other than the
holders of Common Stock or Class A Preferred as of the date of the Purchase
Agreement, owning more than 50% of the Common Stock outstanding at the time of
such sale, transfer or issuance or series of sales, transfers and/or issuances;
provided, however, that a Change in Ownership shall not occur as a result of a
Public Offering of Common Stock.
(ii) If a Fundamental Change is proposed to
occur, the Corporation shall give written notice of such Fundamental Change
describing in reasonable detail the material terms and date of consummation
thereof to each holder of Class A Preferred not more than forty-five days nor
less than twenty days prior to the consummation of such Fundamental Change, and
the Corporation shall give each holder of Class A Preferred prompt written
notice of any material change in the terms or timing of such transaction. The
holder or holders of a majority of the Shares then outstanding may require the
Corporation to redeem all or any portion of the Class A Preferred owned by such
holders at a price per Share equal to the Liquidation Value thereof (plus all
accrued and unpaid dividends thereon) by giving written notice to the
Corporation of such election prior to the later of (a) ten days prior to the
consummation of the Fundamental Change or (b) ten days after receipt of notice
from the Corporation. The Corporation shall give prompt written notice of such
election to all other
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holders of Class A Preferred (but in any event within five days prior to the
consummation of the Fundamental Change), and each such holder shall have until
two days after the receipt of such notice to request redemption (by written
notice given to the Corporation) of all or any portion of the Class A Preferred
owned by such holder.
Upon receipt of such election(s), the Corporation shall be obligated to
redeem the aggregate number of Shares specified therein upon the consummation of
such Fundamental Change. If any proposed Fundamental Change does not occur, all
requests for redemption in connection therewith shall be automatically
rescinded, or if there has been a material change in the terms or the timing of
the transaction, any holder of Class A Preferred may rescind such holder's
request for redemption by delivering written notice thereof to the Corporation
prior to the consummation of the transaction.
The term "FUNDAMENTAL CHANGE" means (a) any sale or transfer of more
than 50% of the assets of the Corporation and its Subsidiaries on a consolidated
basis (measured either by book value in accordance with generally accepted
accounting principles consistently applied or by fair market value determined in
the reasonable good faith judgment of the Corporation's Board of Directors) in
any transaction or series of transactions (other than sales in the ordinary
course of business) and (b) any merger or consolidation to which the Corporation
is a party, except for a merger in which the Corporation is the surviving
corporation, the terms of the Class A Preferred are not changed and the Class A
Preferred is not exchanged for cash, securities or other property, and after
giving effect to such merger, the holders of the Corporation's outstanding
capital stock possessing a majority of the voting power (under ordinary
circumstances) to elect a majority of the Corporation's Board of Directors
immediately prior to the merger shall continue to own the Corporation's
outstanding capital stock possessing the voting power (under ordinary
circumstances) to elect a majority of the Corporation's Board of Directors.
E. MISCELLANEOUS PROVISIONS APPLICABLE TO CLASS A AND CLASS B PREFERRED
STOCK.
1. DEFINITIONS FOR PURPOSES OF CLASS A AND CLASS B PREFERRED.
"CHANGE IN OWNERSHIP" has the meaning set forth in Section
1.i(i) of Part D of this Article Fourth.
"FUNDAMENTAL CHANGE" has the meaning set forth in Section
1.i(ii) of Part D of this Article Fourth.
"JUNIOR SECURITIES" means any capital stock or other equity
securities of the Corporation, except for the Class A and Class B Preferred.
"LIQUIDATION VALUE" of any Share as of any particular date
shall be equal to $1,000.00.
"PERSON" means an individual, a partnership, a corporation,
a limited liability company, a limited liability, an association, a joint stock
company, a trust, a joint
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venture, an unincorporated organization and a governmental entity or any
department, agency or political subdivision thereof.
"PUBLIC OFFERING" means any offering by the Corporation of
its capital stock, or equity securities to the public pursuant to an effective
registration statement under the Securities Act of 1933, as then in effect, or
any comparable statement under any similar federal statute then in force.
"PURCHASE AGREEMENT" means the Purchase Agreement, dated as
of June 29, 1998, by and among the Corporation and certain investors, as such
agreement may from time to time be amended in accordance with its terms.
"REDEMPTION DATE" as to any Share means the date specified
in the notice of any redemption at the Corporation's option or at the holder's
option or the applicable date specified herein in the case of any other
redemption; provided that no such date shall be a Redemption Date unless the
Liquidation Value of such Share (plus all accrued and unpaid dividends thereon
and any required premium with respect thereto) is actually paid in full on such
date, and if not so paid in full, the Redemption Date shall be the date on which
such amount is fully paid.
"SUBSIDIARY" means, with respect to any Person, any
corporation, limited liability company, partnership, association, joint venture
or other business entity of which (i) if a corporation, fifty percent (50%) or
more 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, fifty percent (50%) or more
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 fifty percent (50%) or greater
ownership interest in a limited liability company, partnership, association or
other business entity if such Person or Persons shall be allocated fifty percent
(50%) or more of limited liability company, partnership, association or other
business entity gains or losses or shall be or control the managing general
partner of such limited liability company, partnership, association or other
business entity.
2. AMENDMENT AND WAIVER. No amendment, modification or waiver
shall be binding or effective with respect to any provision of (i) Part C or E
without the prior written consent of the holders of a majority of the Class A
and Class B Preferred Stock outstanding at the time such action is taken or (ii)
Part D without the prior written consent of the holders of a majority of the
Class A Preferred outstanding at the time such action is taken; provided that no
change in the terms hereof may be accomplished by merger or consolidation of the
Corporation with another corporation or entity unless the Corporation has
obtained the prior written consent of the holders of the applicable percentage
of the class or classes of the Preferred Stock then outstanding.
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3. NOTICES. Except as otherwise expressly provided hereunder,
all notices referred to herein to holders of Class A and Class B Preferred shall
be in writing and shall be delivered by registered or certified mail, return
receipt requested and postage prepaid, or by reputable overnight courier
service, charges prepaid, and shall be deemed to have been given when so mailed
or sent (i) to the Corporation, at its principal executive offices and (ii) to
any Class A or Class B stockholder, at such holders address as it appears in the
stock records of the Corporation (unless otherwise indicated by any such
holder).
F. Reverse Stock Split
1. MECHANICS. Effective upon the filing of this Restated
Certificate of Incorporation, each 2.85 shares of Common Stock issued and
outstanding shall be automatically changed into and combined as one fully paid
and nonassessable share of Common Stock pursuant to a reverse stock split,
subject to the treatment of fractional share interests as described below (the
"Reverse Stock Split"). Such change and combination shall not change the par
value per share of the shares changed and combined, which par value shall remain
$.0005 per share.
2. CERTIFICATES. Promptly after the filing of this Restated
Certificate of Incorporation, the Corporation shall deliver to each holder of
issued and outstanding shares of Common Stock which surrender for cancellation,
a certificate or certificates representing outstanding shares of Common Stock
prior to the Reverse Stock Split, a certificate or certificates representing the
number of shares of Common Stock issuable by reason of the Reverse Stock Split
in the name of such holder. This issuance of certificates for shares of Common
Stock upon the Reverse Stock Split shall be made without charge for any issuance
tax in respect thereof or other cost incurred by the Corporation in connection
with such Reverse Stock Split and the related issuance of shares of Common
Stock. Until surrendered as provided herein, from and after the filing of this
Restated Certificate of Incorporation, certificates representing outstanding
shares of Common Stock prior to the Reverse Stock Split shall thereupon be
deemed for all corporate purposes to evidence ownership of the number of shares
of Common Stock into which the Common Stock shall have been changed and combined
by reason of the Reverse Stock Split, subject to the treatment of fractional
share interests as described below.
3. FRACTIONAL SHARES. No fractional shares of Common Stock
shall be created or outstanding upon the Reverse Stock Split. Any holder of
Common Stock who by reason of the Reverse Stock Split would have been entitled
to receive a fraction of a share of Common Stock by reason of the Reverse Stock
Split, shall receive cash from the Corporation for his fractional interest in an
amount equal to the percentage of a share represented by such fractional
interest multiplied by the fair market value of one share of Common Stock of the
Corporation as established by the Corporation's Board of Directors in good
faith.
FIFTH: The business and affairs of the Corporation shall be managed by
or under the direction of the Board of Directors. The Board of Directors may
exercise all such authority and powers of the Corporation and do all such lawful
acts and things as are not by statute or this
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Restated Certificate of Incorporation directed or required to be exercised or
done by the stockholders.
A. DIRECTORS. The number of directors of the Corporation shall
be established as set forth in the Amended and Restated By-laws of the
Corporation, but in no event shall the number of directors be fewer than three
(3) nor more than eleven (11). Any change to the number of directors set forth
herein may only be made by amendment to this Article FIFTH. No such change shall
affect the term of any director then in office. No director need be a
stockholder. Each director elected shall hold office until a successor is duly
elected and qualified or until his or her earlier death, resignation or removal
as hereinafter provided.
B. NEWLY CREATED DIRECTORSHIPS AND VACANCIES. Subject to the
rights of the holders of any class or series of Preferred Stock then
outstanding, newly created directorships resulting from any increase in the
number of directors or any vacancies in the Board of Directors resulting from
death, resignation, retirement, disqualification, removal from office or any
other cause may be filled by the Board of Directors, provided that a quorum is
then in office and present, or by a majority of the directors then in office, if
less than a quorum is then in office, or by the sole remaining director.
Directors elected to fill a newly created directorship or other vacancies shall
hold office until such director's successor has been duly elected and qualified
or until his or her earlier death, resignation or removal as hereinafter
provided.
C. REMOVAL OF DIRECTORS. Subject to the rights of the holders
of any class or series of Preferred Stock then outstanding, the directors or any
director may be removed from office at any time, at a meeting called for that
purpose, and only by the affirmative vote of the holders of at least 66-2/3% of
the voting power of all shares of the Corporation entitled to vote generally in
the election of directors, voting together as a single class.
D. RIGHTS OF HOLDERS OF PREFERRED STOCK. Notwithstanding the
foregoing provisions of this Article FIFTH, whenever the holders of any one or
more classes or series of Preferred Stock issued by the Corporation shall have
the right, voting separately by class or series, to elect directors at an annual
or special meeting of stockholders, the election, term of office, filling of
vacancies and other features of such directorships shall be governed by the
rights and preferences of such Preferred Stock as set forth in this Restated
Certificate of Incorporation or in the resolution or resolutions of the Board of
Directors relating to the issuance of such Preferred Stock.
SIXTH: The Corporation is to have perpetual existence.
SEVENTH: The Board of Directors is expressly authorized to adopt, amend
or repeal the by-laws of the Corporation. Any by-laws made by the directors
under the powers conferred hereby may be amended or repealed by the directors or
by the stockholders. Notwithstanding the foregoing and anything contained in
this Restated Certificate of Incorporation to the contrary, the Amended and
Restated By-laws of the Company shall not be amended or repealed by the
stockholders, and no provision inconsistent therewith shall be adopted by the
stockholders, without the affirmative vote of the holders of 66-2/3% of the
voting power of all shares of the
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Corporation entitled to vote generally in the election of directors, voting
together as a single class.
EIGHTH: A director of the Corporation shall not be personally liable to
the Corporation or its stockholders for monetary damages for breach of fiduciary
duty as a director; PROVIDED, HOWEVER, that the foregoing shall not eliminate or
limit the liability of a director (i) for any breach of the director's duty of
loyalty to the Corporation or its stockholders, (ii) for acts or omissions not
in good faith or which involve intentional misconduct or a knowing violation of
law, (iii) under Section 174 of the DGCL or (iv) for any transaction from which
the director derived an improper personal benefit. If the DGCL is hereafter
amended to permit further elimination or limitation of the personal liability of
directors, then the liability of a director of the Corporation shall be
eliminated or limited to the fullest extent permitted by the DGCL as so amended.
Any repeal or modification of this Article EIGHTH by the stockholders of the
Corporation or otherwise shall not adversely affect any right or protection of a
director of the Corporation existing at the time of such repeal or modification
with respect to acts or omissions occurring prior to such repeal or
modification.
NINTH: Each person who was or is made a party or is threatened to be
made a party to or is involved (including, without limitation, as a witness) in
any actual or threatened action, suit or proceeding, whether civil, criminal,
administrative or investigative (hereinafter a "Proceeding"), by reason of the
fact that he is or was a director or officer of the Corporation or is or was
serving at the request of the Corporation as a director or officer of another
corporation or of a partnership, joint venture, trust or other enterprise,
including service with respect to an employee benefit plan (hereinafter an
"Indemnitee"), whether the basis of such Proceeding is alleged action in an
official capacity as a director or officer or in any other capacity while so
serving, shall be indemnified and held harmless by the Corporation to the
fullest extent authorized by the DGCL, as the same exists or may hereafter be
amended (but, in the case of any such amendment, only to the extent that such
amendment permits the Corporation to provide broader indemnification rights than
said law permitted the Corporation to provide prior to such amendment), or by
other applicable law as then in effect, against all expense, liability and loss
(including attorneys' fees and related disbursements, judgments, fines, excise
taxes or penalties under the Employee Retirement Income Security Act of 1974, as
amended from time to time ("ERISA"), penalties and amounts paid or to be paid in
settlement) actually and reasonably incurred or suffered by such Indemnitee in
connection therewith, and such indemnification shall continue as to a person who
has ceased to be a director, officer, partner, member or trustee and shall inure
to the benefit of his or her heirs, executors and administrators. Each person
who is or was serving as a director or officer of a subsidiary of the
Corporation shall be deemed to be serving, or have served, at the request of the
Corporation.
A. PROCEDURE. Any indemnification under this Article NINTH
(unless ordered by a court) shall be made by the Corporation only as authorized
in the specific case upon a determination that indemnification of the director
or officer is proper in the circumstances because he has met the applicable
standard of conduct set forth in the DGCL, as the same exists or hereafter may
be amended (but, in the case of any such amendment, only to the extent that such
amendment permits the Corporation to provide broader indemnification rights than
said law
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permitted the Corporation to provide prior to such amendment). Such
determination shall be made with respect to a person who is a director or
officer at the time of such determination (a) by a majority vote of the
directors who were not parties to such Proceeding (the "Disinterested
Directors"), even though less than a quorum, (b) by a committee of Disinterested
Directors designated by a majority vote of such Disinterested Directors, even
though less than a quorum, (c) if there are no such directors, or if such
directors so direct, by independent legal counsel in a written opinion, or (d)
by the stockholders.
B. ADVANCES FOR EXPENSES. Costs, charges and expenses
(including attorneys' fees) incurred by a director or officer of the Corporation
in defending a Proceeding shall be paid by the Corporation in advance of the
final disposition of such Proceeding upon receipt of an undertaking by or on
behalf of the director or officer to repay all amounts so advanced in the event
that it shall ultimately be determined that such director or officer is not
entitled to be indemnified by the Corporation as authorized in this Article
NINTH. The majority of the Disinterested Directors may, in the manner set forth
above, and upon approval of such director or officer of the Corporation,
authorize the Corporation's counsel to represent such person, in any Proceeding,
whether or not the Corporation is a party to such Proceeding.
C. PROCEDURE FOR INDEMNIFICATION. Any indemnification or
advance of costs, charges and expenses under this Article NINTH shall be made
promptly, and in any event within 60 days upon the written request of the
director or officer, and shall be accompanied by a written undertaking by or on
behalf of Indemnitee to repay such amount if it shall ultimately be determined
that Indemnitee is not entitled to be indemnified therefor pursuant to the terms
of this Article NINTH. The right to indemnification of advances as granted by
this Article NINTH shall be enforceable by the director or officer in any court
of competent jurisdiction, if the Corporation denies such request, in whole or
in part, or if no disposition thereof is made within 60 days. Such person's
costs and expenses incurred in connection with successfully establishing his
right to indemnification, in whole or in part, in any such action shall also be
indemnified by the Corporation. It shall be a defense to any such action (other
than an action brought to enforce a claim for the advance of costs, charges and
expenses under this Article NINTH where the required undertaking, if any, has
been received by the Corporation) that the claimant has not met the standard of
conduct set forth in the DGCL, as the same exists or hereafter may be amended
(but, in the case of any such amendment, only to the extent that such amendment
permits the Corporation to provide broader indemnification rights than said law
permitted the Corporation to provide prior to such amendment), but the burden of
proving such defense shall be on the Corporation. Neither the failure of the
Corporation (including its Board of Directors, its independent legal counsel and
its stockholders) to have made a determination prior to the commencement of such
action that indemnification of the claimant is proper in the circumstances
because he has met the applicable standard of conduct set forth in the DGCL, as
the same exists or hereafter may be amended (but, in the case of any such
amendment, only to the extent that such amendment permits the Corporation to
provide broader indemnification rights that said law permitted the Corporation
to provide prior to such amendment), nor the fact that there has been an actual
determination by the Corporation (including its Board of Directors, its
independent legal counsel and its stockholders) that the claimant has not met
such applicable standard of
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conduct, shall be a defense to the action or create a presumption that the
claimant has not met the applicable standard of conduct.
D. OTHER RIGHTS; CONTINUATION OF RIGHT TO INDEMNIFICATION. The
indemnification and advancement of expenses provided by this Article NINTH shall
not be deemed exclusive of any other rights to which a person seeking
indemnification or advancement of expenses may be entitled under any law (common
or statutory), by-law, agreement, vote of stockholders or disinterested
directors or otherwise, both as to action in his official capacity and as to
action in another capacity while holding office or while employed by or acting
as agent for the Corporation, and shall continue as to a person who has ceased
to be a director or officer, and shall inure to the benefit of the estate,
heirs, executors and administrators of such person. All rights to
indemnification under this Article NINTH shall be deemed to be a contract
between the Corporation and each director or officer of the Corporation who
serves or served in such capacity at any time while this Article NINTH is in
effect. Any repeal or modification of this Article NINTH or any repeal or
modification of relevant provisions of the DGCL or any other applicable laws
shall not in any way diminish any rights to indemnification of such director or
officer or the obligations of the Corporation arising hereunder with respect to
any Proceeding arising out of, or relating to, any actions, transactions or
facts occurring prior to the final adoption of such modification or repeal. For
the purposes of this Article NINTH, references to "the Corporation" include all
constituent corporations absorbed in a consolidation or merger as well as the
resulting or surviving corporation, so that any person who is or was a director
or officer of such a constituent corporation or is or was serving at the request
of such constituent corporation as a director or officer of another corporation,
partnership, joint venture, trust or other enterprise shall stand in the same
position under the provisions of this Article NINTH, with respect to the
resulting or surviving corporation, as he would if he had served the resulting
or surviving corporation in the same capacity.
E. INSURANCE. The Corporation shall have power to purchase and
maintain insurance on behalf of any person who is or was or has agreed to become
a director or officer of the Corporation, or is or was serving at the request of
the Corporation as a director or officer of another corporation, partnership,
joint venture, trust or other enterprise against any liability asserted against
him and incurred by him or on his behalf in any such capacity, or arising out of
his status as such, whether or not the Corporation would have the power to
indemnify him against such liability under the provisions of this Article NINTH,
PROVIDED, HOWEVER, that such insurance is available on acceptable terms, which
determination shall be made by a vote of a majority of the Board of Directors.
F. SAVINGS CLAUSE. If this Article NINTH or any portion hereof
shall be invalidated on any ground by any court of competent jurisdiction, then
the Corporation shall nevertheless indemnify or advance expenses to each person
entitled to indemnification or advancement of expenses, as the case may be, as
to all expense, liability and loss (including attorneys' fees and related
disbursements, judgments, fines, ERISA excise taxes and penalties, penalties and
amounts paid or to be paid in settlement) actually and reasonably incurred or
suffered by such person and for which indemnification or advancement of
expenses, as the case may be, is available to such person pursuant to this
Article NINTH to the full extent permitted by
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any applicable portion of this Article NINTH that shall not have been
invalidated and to the full extent permitted by applicable law.
TENTH: The Corporation reserves the right to amend, alter, change or
repeal any provision contained in this Restated Certificate of Incorporation, in
the manner now or hereafter prescribed herein and by the laws of the State of
Delaware, and all rights conferred upon stockholders herein are granted subject
to this reservation.
* * * * *
This Restated Certificate of Incorporation has been duly adopted by the
written consent of the stockholders of the Corporation in accordance with the
provisions of Sections 228, 242 and 245 of the DGCL, as amended.
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IN WITNESS WHEREOF, this Restated Certificate of Incorporation has been
signed by Ken S. Bajaj, its authorized officer, this 14th day of
June, 1999.
APPNET SYSTEMS, INC.
By: /s/Ken S. Bajaj
------------------------------------
Name: Ken S. Bajaj
Title: President and
Chief Executive Officer
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Exhibit 5.1
June 15, 1999
Board of Directors
AppNet Systems, Inc.
6707 Democracy Boulevard
Suite 1000
Bethesda, Maryland 20817
Gentlemen:
We are acting as special counsel for AppNet Systems, Inc., a Delaware
corporation (the "Company"), in connection with the initial public offering (the
"Offering") pursuant to the Registration Statement on Form S-1 (File No.
333-75205) filed on March 29, 1999, as amended (the "Registration Statement")
under the Securities Act of 1933, as amended (the "Act") covering 6,000,000
shares of the Company's common stock, par value $.0005 per share (the "Shares"),
and an over-allotment option of up to 900,000 shares of the Company's common
stock, par value $.0005 per share (the "Additional Shares"). All assumptions and
statements of reliance herein have been made without any independent
investigation or verification on our part except to the extent otherwise
expressly stated, and we express no opinion with respect to the subject matter
or accuracy of such assumptions or items relied upon.
In connection with this opinion, we have (i) investigated such
questions of law, (ii) examined originals or certified, conformed or
reproduction copies of such agreements, instruments, documents and records of
the Company and its subsidiaries, such certificates of public officials,
officers or other representatives of the Company and its subsidiaries and other
persons and such other documents and (iii) received such information from
officers and representatives of the Company and others as we have deemed
necessary or appropriate for the purposes of this opinion.
In all such examinations, we have assumed the legal capacity of all
natural persons executing documents (other than the capacity of officers of the
Company executing documents in such capacity), the genuineness of all
signatures, the authenticity of original and certified documents, and the
conformity to original or certified documents of all
<PAGE>
BOARD OF DIRECTORS
APPNET SYSTEMS, INC..
JUNE 15, 1999
PAGE 2
copies submitted to us as conformed or reproduction copies. As to various
questions of fact relevant to the opinions expressed herein, we have relied
upon, and assumed the accuracy of, certificates and oral or written statements
and other information of or from public officials, officers or other
representatives of the Company and its subsidiaries, and other persons.
Based upon the foregoing, and subject to the limitations,
qualifications and assumptions set forth herein, we are of the opinion that (i)
the Shares to be offered by the Company, when issued, delivered and paid for as
contemplated by the Registration Statement, will be legally issued, fully paid
and non-assessable and (ii) the Additional Shares that may be offered by the
Company, when issued, delivered and paid for as contemplated by the Registration
Statement, will be legally issued, fully paid and non-assessable.
The opinions expressed herein are limited to the General Corporation
Law of the State of Delaware. We assume no obligations to supplement this letter
if any applicable laws change after the date hereof or if we become aware of any
facts that might change the opinions expressed herein after the date hereof.
We hereby consent to the filing of this opinion as an exhibit to the
Registration Statement and to the reference to this firm under the caption
"Legal Matters" in the Prospectus forming a part of the Registration Statement.
In giving this consent, we do not hereby admit that we are in the category of
persons whose consent is required under Section 7 of the Act.
FRIED, FRANK, HARRIS, SHRIVER & JACOBSON
By: /s/ Stephen I. Glover
----------------------------------
Stephen I. Glover
<PAGE>
Exhibit 10.1
PURCHASE AGREEMENT
THIS PURCHASE AGREEMENT (this "AGREEMENT") is made as of June 29, 1998,
among AppNet Systems, Inc., a Delaware corporation (the "COMPANY"), Smart
Technology, L.L.C. ("SMART TECHNOLOGY") and GTCR Golder Rauner, L.L.C., a
Delaware limited liability company ("GTCR"). GTCR and Smart Technology are
referred to herein collectively as the "PURCHASERS." Except as otherwise
indicated herein, capitalized terms used herein are defined in Section 7 hereof.
WHEREAS, the Company was incorporated on November 6, 1997;
WHEREAS, the Company entered into a joint venture arrangement with
Commerce Direct, Inc., a Delaware corporation, on December 18, 1997;
WHEREAS, the Company acquired the assets of Arbor Intelligent Systems,
Inc., a Michigan corporation, on March 12, 1998;
WHEREAS, the Company acquired the assets of LOGEX International,
L.L.C., a Delaware limited liability company, on April 30, 1998;
WHEREAS, the Company currently has outstanding (i) 15,230,000 shares of
its common stock, par value $.0005 per share (the "COMMON STOCK"), (ii) 266,796
shares of Series A-1 Convertible Preferred Stock, par value $.001 per share,
(iii) a warrant to purchase 31,250 shares of its Series B-1 Convertible
Preferred Stock, par value $.001 per share; and (iv) a warrant to purchase
200,000 shares of Common Stock;
WHEREAS, the Company has debt outstanding to the following entities in
the following amounts: (i) $2,262,500 in principal, plus accrued interest owing
on notes payable to Silicon Valley Bank, a California-chartered bank, (ii)
$973,599 in principal, plus accrued interest owing on a subordinated note
payable to Smart Technology, L.L.C. (the "SMART TECHNOLOGY LOAN"), (iii)
$300,000 in principal, plus accrued interest due on a convertible note payable
to LOGEX International, L.L.C. and (iv) a second loan from Smart Technology,
L.L.C. in the amount of $100,000 (the "SECOND SMART TECHNOLOGY LOAN");
WHEREAS, the Company, in consultation with GTCR, has determined that
the Company's budgetary needs for the seven-month period beginning June 1, 1998
are as set forth in the pro forma monthly budget attached as EXHIBIT A hereto;
and
WHEREAS, the Purchasers desire to invest in the Company.
NOW, THEREFORE, for good and valuable consideration, the receipt and
sufficiency of which are hereby acknowledged, the parties, intending to be
legally bound, hereto agree as follows:
<PAGE>
Section 1. AUTHORIZATION AND CLOSING.
1A. AUTHORIZATION OF THE STOCK. The Company shall authorize the
issuance and sale to the Purchasers of up to 96,500 shares of its Class A
Cumulative Redeemable Preferred Stock, par value $.01 per share (the "CLASS A
PREFERRED"), and 32,943,560 shares of Common Stock, each having the rights and
preferences set forth in EXHIBIT C attached hereto. The Class A Preferred and
the Common Stock are collectively referred to herein as the "STOCK."
1B. PURCHASE AND SALE OF THE STOCK.
(a) PURCHASE AND SALE BY GTCR. (i) At the Closing (as defined
in Section 1C below), the Company shall sell to GTCR and, subject to
the terms and conditions set forth herein, GTCR shall purchase from the
Company 32,279,750 shares of Common Stock at a price of $0.1055 per
share (together with the shares purchased by Smart Technology pursuant
to Section 1B(b)(i), the "PURCHASED SHARES").
(ii) The Company operates a business in the information
technology services industry and intends to make acquisitions which are
synergistic with or otherwise complementary to its existing business.
GTCR is committing to providing $98 million (including the amount
invested to purchase the Purchased Shares) in equity financing to the
Company as the equity portion of the debt and equity financing
necessary to fund the Company's working capital and such acquisitions,
in each case as approved by the Company's board of directors (the
"BOARD") and GTCR (an "APPROVED USE"). In order to implement the
foregoing, GTCR shall purchase from time to time after the Closing,
upon the written request of the Board in connection with such an
Approved Use, up to 94,570 shares of Class A Preferred at a price of
$1,000 per share as adjusted from time to time as a result of stock
dividends, stock splits, recapitalization and similar events). At the
time of any such purchase, GTCR shall be entitled to receive, and the
Company shall be obligated to deliver, satisfactory representations and
warranties and all other information and documentation as GTCR may
reasonably request. At the time of any such purchase, GTCR shall
reaffirm substantially the representations in Sections 6F and 6G of
this Agreement. At the time of any such purchase, the Company will
deliver to GTCR the certificates representing such shares of Class A
Preferred purchased by GTCR, and GTCR will deliver to the Company a
cashier's or certified check or a wire transfer of funds in the
aggregate amount of the price per share of such shares MULTIPLIED BY
the number of shares so purchased by GTCR. At the time of any such
purchase, the Company shall provide notice of such purchase to Smart
Technology (a "GTCR PURCHASE NOTICE").
(b) PURCHASE AND SALE BY SMART TECHNOLOGY. (i) At the Closing
(as defined in Section 1C below), the Company shall sell to Smart
Technology and, subject to the terms and conditions set forth herein,
Smart Technology shall purchase from the Company, 663,810 shares of
Common Stock at a price of $0.1055 per share. Smart Technology shall
pay the purchase price for the shares purchased pursuant to this
Section 1B(b)(i) by
<PAGE>
cancellation of a pro rata portion of the principal amount of the Smart
Technology Loan equal to such purchase price. At the Closing, Smart
Technology shall surrender to the Company the existing promissory note
evidencing the Smart Technology Loan and shall terminate the Loan
Agreement between the Company and Smart Technology dated April 23,
1998, and the Company shall (i) pay Smart Technology the accrued
interest on the Smart Technology Loan as of Closing and (ii) issue to
Smart Technology a subordinated note (the "SUBORDINATED NOTE") with an
interest rate of 12% per annum representing the remaining amount due
under the Smart Technology Loan, in the form attached hereto as EXHIBIT
B.
(ii) Upon the purchase from time to time by GTCR of up to
94,570 shares of Class A Preferred pursuant to Section 1B(a) of the
Purchase Agreement, Smart Technology will purchase, and the Company
will sell up to an aggregate of 1,930 shares of Class A Preferred at a
price of $1,000.00 per share (as adjusted from time to time as a result
of stock splits, stock dividends, recapitalizations and similar
events). The number of shares of Class A Preferred to be sold by the
Company and purchased by Smart Technology at any time shall equal (i)
1,930 shares of Class A Preferred MULTIPLIED BY (ii) a fraction (A) the
numerator of which will be the number of shares of Class A Preferred to
be concurrently purchased by GTCR and (B) the denominator of which will
be 94,570 shares. At the time of any such purchase, Smart Technology
shall be entitled to receive, and the Company shall be obligated to
deliver, the representations, warranties, information and documentation
provided to GTCR pursuant to Section1B(a)(ii). At the time of any such
purchase, the Company will deliver to Smart Technology the certificates
representing such shares of Class A Preferred purchased by Smart
Technology. At the time of any such purchase, Smart Technology shall
reaffirm substantially the representations in Sections 6F and 6G of
this Agreement. Smart Technology shall pay the purchase price for the
shares purchased pursuant to this Section 1B(b)(ii), first, by
cancellation of a pro rata portion of the principal amount of the Smart
Technology Loan equal to such purchase price until the principal amount
due under the Smart Technology Loan has been reduced to zero, and,
thereafter, by delivery to the Company of a cashier's or certified
check or a wire transfer of funds in the aggregate amount of the price
per share of such shares MULTIPLIED BY the number of shares so
purchased by Smart Technology.
(iii) In the event that Smart Technology does not purchase for
any reason (regardless of any default or breach by the Company or any
of its Subsidiaries) the shares of Class A Preferred to be purchased by
it pursuant to Section 1B(b)(ii) above within 30 days of receipt of a
GTCR Purchase Notice, the Company shall have the right to purchase, in
which event Smart Technology and its transferees shall be obligated to
sell, all shares of Common Stock purchased pursuant to Section 1B(b)(i)
(a "STOCK REPURCHASE"), at a time and place designated by the Company
(a "STOCK REPURCHASE CLOSING). At a Stock Repurchase Closing, Smart
Technology and its transferees, as applicable, shall deliver to the
Company duly executed instruments transferring good and marketable
title to such shares of Common Stock to the Company free and clear of
all liens and encumbrances (other than the Stockholders Agreement, as
defined in Section
<PAGE>
2E), against payment of the Stock Repurchase Price (1) by cashier's or
certified check payable to Smart Technology or its transferee, as
applicable, (2) in the form of a promissory note from the Company
having a term no longer than five years, payable in sixty equal
installments, at a market rate of interest and having other typical
market terms, or (3) by wire transfer of immediately available funds to
an account designated by Smart Technology or its transferee, as
applicable. The "STOCK REPURCHASE PRICE" of the shares of Common Stock
to be sold by Smart Technology pursuant to this Section 1B(b)(iii)
shall be the lower of (A) $0.1055 per share or (B) the Fair Market
Value of each share as of the Stock Repurchase Closing.
1C. THE CLOSING. The closing of the purchase and sale of the Stock to
be purchased pursuant to Sections 1B(a)(i) and 1B(b)(i) (the "CLOSING") shall
take place at the offices of Kirkland & Ellis, 200 East Randolph Drive, Chicago,
Illinois 60601 at 10:00 a.m. on June 29, 1998, or at such other place or on such
other date as may be mutually agreeable to the Company and the Purchasers. At
the Closing, the Company shall deliver to each Purchaser stock certificates
evidencing the Purchased Shares, registered in each Purchaser's name, upon
payment of the purchase price thereof by a cashier's or certified check, or by
wire transfer of immediately available funds to such account as designated by
the Company (or, in the case of Smart Technology, in the manner described in
Section 1B(b)(i)).
Section 2. CONDITIONS OF THE PURCHASERS' OBLIGATION AT THE CLOSING. The
obligation of the Purchasers to purchase and pay for the Stock at the Closing is
subject to the satisfaction or waiver as of the Closing of the following
conditions:
2A. REPRESENTATIONS AND WARRANTIES; COVENANTS. The representations and
warranties contained in Section 5 hereof shall be true and correct at and as of
the Closing as though then made, except to the extent of changes caused by the
transactions expressly contemplated herein, and the Company shall have performed
in all material respects all of the covenants required to be performed by it
hereunder prior to the Closing
2B. SECOND RESTATED CERTIFICATE OF INCORPORATION. The Company's
certificate of incorporation shall have been amended and restated in the form
set forth in EXHIBIT C hereto (the "SECOND RESTATED CERTIFICATE OF
INCORPORATION"), shall be in full force and effect under the laws of Delaware as
of the Closing as so amended and restated and shall not have been further
amended or modified.
2C. AMENDMENT OF BYLAWS. The Company's bylaws shall have been amended
and adopted by the Board in the form set forth in EXHIBIT D hereto and shall not
have been further amended or modified.
2D. MANAGEMENT AGREEMENTS. The Company shall have entered into senior
management agreements, in form and substance substantially similar to EXHIBITS
E-1, E-2, E-3 and E-4 attached hereto (the "MANAGEMENT AGREEMENTS"), with each
of Ken S. Bajaj, Robert G. Harvey, Robert C. McCalley and Terrence M. McManus
(collectively, the "EXECUTIVES"), and the
<PAGE>
Management Agreements shall not have been amended or modified and shall be in
full force and effect as of the Closing.
2E. STOCKHOLDERS AGREEMENT. The Company, the Purchasers, the
Executives, the J. Sunny Bajaj Trust, the Rueben Bajaj Trust, Silicon Valley
Bank, Anchor Financial Group, Inc. ("ANCHOR"), Pascal Luck, Robert M. Stewart,
Thomas M. Davidson and Fairfax Management Company II, L.L.C., a Delaware limited
liability company ("FMC"), shall have entered into a stockholders agreement in
form and substance substantially similar to EXHIBIT F attached hereto (the
"STOCKHOLDERS AGREEMENT"), and the Stockholders Agreement shall be in full force
and effect as of the Closing.
2F. PUT AGREEMENT. The Company and certain holders of the Company's
stock identified on the attached ARBOR STOCKHOLDERS SCHEDULE (the "ARBOR
STOCKHOLDERS") shall have entered into a stockholders agreement in form and
substance substantially similar to EXHIBIT G attached hereto (the "PUT
AGREEMENT"), and the Put Agreement shall be in full force and effect as of the
Closing.
2G. AIS LIQUIDATING CO., INC. REPURCHASE The Company and AIS
Liquidating Co., Inc. ("AIS") shall have entered into an agreement to repurchase
the shares of the Company's stock held by AIS in form and substance
substantially similar to EXHIBIT H attached hereto (the "AIS AGREEMENT"), and
the AIS Agreement shall be in full force and effect as of the Closing.
2H. PROFESSIONAL SERVICES AGREEMENTS. The Company and GTCR shall have
entered into a professional services agreement in form and substance
substantially similar to EXHIBIT I attached hereto (the "GTCR PROFESSIONAL
SERVICES AGREEMENT"), and the GTCR Professional Services Agreement shall be in
full force and effect as of the Closing. The Company, FMC and Fairfax Consulting
Company, L.L.C., a Delaware limited liability company ("FCC") shall have entered
into a professional services agreement in form and substance substantially
similar to EXHIBIT J attached hereto (the "FMC PROFESSIONAL SERVICES
AGREEMENT"), and the FMC Professional Services Agreement shall be in full force
and effect as of the Closing. The GTCR Professional Services Agreement and the
FMC Professional Services Agreement shall be collectively referred to herein as
the "PROFESSIONAL SERVICES AGREEMENTS."
2I. REGISTRATION AGREEMENT. The Company, the Purchasers, the
Executives, the J. Sunny Bajaj Trust, the Ruben Bajaj Trust, Silicon Valley
Bank, Anchor, Pascal Luck, Robert M. Stewart, and Thomas M. Davidson and FMC
shall have entered into a registration agreement in form and substance
substantially similar to EXHIBIT K attached hereto (the "REGISTRATION
AGREEMENT"), and the Registration Agreement shall be in full force and effect as
of the Closing.
2J. COMMON STOCK REPURCHASE AGREEMENT. The Company and FMC shall have
entered into a stock repurchase agreement in form and substance substantially
similar to EXHIBIT L attached hereto (the "COMMON STOCK REPURCHASE AGREEMENT")
pursuant to which the Company shall purchase shares of the Company's Common
Stock from FMC and the Common Stock Repurchase Agreement shall be in full force
and effect as of the Closing.
<PAGE>
2K. EXCHANGE OF SILICON VALLEY BANK WARRANT. Pursuant to an Exchange
Agreement dated June 12, 1998 between Silicon Valley Bank and the Company which
is attached hereto as EXHIBIT M, the warrant to purchase the Company's Series B
Convertible Preferred Stock, par value $.001 per shares (the "SERIES B
PREFERRED") held by Silicon Valley Bank, a California-chartered bank (the "SVB
WARRANT") shall have been exchanged for (i) a warrant that on exercise entitles
Silicon Valley Bank to receive 41,666 shares of Common Stock in form and
substance substantially similar to EXHIBIT N attached hereto (the "SVB COMMON
STOCK WARRANT") and (ii) a warrant that on exercise entitles Silicon Valley Bank
to receive 121 shares of Class A Preferred in form and substance substantially
similar to EXHIBIT O attached hereto (the "SVB PREFERRED STOCK WARRANT").
2L. SMART TECHNOLOGY LOAN. The warrant to purchase 200,000 shares of
Common Stock held by Smart Technology (the "SMART TECHNOLOGY WARRANT") that was
issued to Smart Technology in connection with the Smart Technology Loan shall
have been amended in the form set forth in EXHIBIT P and shall be in full force
and effect.
2M. JOINT VENTURE AGREEMENT. The Joint Venture Agreement between the
Company (under its previous name, InterNet Applications, Inc.) and Commerce
Direct International, Inc., a Delaware corporation, dated December 18, 1997
shall have been amended by the First Amendment to Joint Venture Agreement in the
form set forth in EXHIBIT Q which shall be in full force and effect.
2N. BROKERAGE RELEASES. The Company shall have obtained a release from
Anchor as to any brokerage claims or finder's fees in the form set forth in
EXHIBIT R which shall be in full force and effect (the "ANCHOR RELEASE"), and a
release from Thomas Davidson as to any brokerage claims or finder's fees in the
form set forth in EXHIBIT S which shall be in full force and effect (the
"DAVIDSON RELEASE").
2O. SILICON VALLEY BANK CONSENT. The Company shall have obtained the
consent of Silicon Valley Bank to the transactions contemplated hereunder in the
form set forth in EXHIBIT T which shall be in full force and effect (the "SVB
CONSENT").
2P. CLOSING DOCUMENTS. The Company shall have delivered to the
Purchasers all of the following documents:
(i) an Officer's Certificate, dated the date of the Closing, stating
that the conditions specified in Sections 2A through 2O, inclusive, have been
fully satisfied;
(ii) certified copies of (a) the resolutions duly adopted by the Board
authorizing the execution, delivery and performance of this Agreement, the
Management Agreements, the Stockholders Agreement, the Put Agreement, the AIS
Agreement, the Professional Services Agreements, the Registration Agreement, the
Common Stock Repurchase Agreement and each of the other agreements contemplated
hereby, the filing of the Second Restated Certificate of Incorporation referred
to in Section 2B, the amendment of the Company's bylaws, the issuance and sale
of the Stock and the consummation of all other transactions contemplated by this
<PAGE>
Agreement, and (b) the resolutions duly adopted by the Company's stockholders
adopting the Second Restated Certificate of Incorporation referred to in Section
2B;
(iii) certified copies of the Second Restated Certificate of
Incorporation and the Company's bylaws, each as in effect at the Closing; and
(iv) such other documents relating to the transactions contemplated by
this Agreement as the Purchasers or its counsel may reasonably request.
2Q. FEES AND EXPENSES. The Company shall have reimbursed the Purchasers
for the fees and expenses as provided in Section 8A hereof.
2R. WAIVER. Any condition specified in this Section 2 may be waived
only if such waiver is set forth in a writing executed by the Purchasers.
Section 3. COVENANTS.
3A. FILING OF THIRD RESTATED CERTIFICATE OF INCORPORATION. As soon as
possible following Closing (but in any event no later than one business day
following Closing), the Company shall amend and restate its certificate of
incorporation in the form set forth in EXHIBIT U hereto (the "THIRD RESTATED
CERTIFICATE OF INCORPORATION"), and shall file the Third Restated Certificate of
Incorporation with the Delaware Secretary of State so that it shall be in full
force and effect under the laws of Delaware as so amended and restated.
3B. FINANCIAL STATEMENTS AND OTHER INFORMATION. Prior to the initial
public offering of the Common Stock of the Company, the Company shall deliver to
each Purchaser (so long as such Purchaser holds any Stock) and to each holder of
at least 15% of the Investor Preferred and each holder of at least 15% of the
Investor Common:
(i) as soon as available but in any event within 30 days after
the end of each quarterly accounting period in each fiscal year,
unaudited consolidating and consolidated statements of income and cash
flows of the Company and its Subsidiaries for such quarterly period and
for the period from the beginning of the fiscal year to the end of such
quarter, and consolidating and consolidated balance sheets of the
Company and its Subsidiaries as of the end of such quarterly period,
all prepared in accordance with generally accepted accounting
principles, consistently applied ("GAAP"), subject to the absence of
footnote disclosures and to normal year-end adjustments;
(ii) accompanying the financial statements referred to in (i)
above, an Officer's Certificate stating that neither the Company nor
any of its Subsidiaries is in default under any of its other material
agreements or, if any such default exists, specifying the nature and
period of existence thereof and what actions the Company and its
Subsidiaries have taken and propose to take with respect thereto;
<PAGE>
(iii) within 120 days after the end of each fiscal year,
consolidating and consolidated statements of income and cash flows of
the Company and its Subsidiaries for such fiscal year, and
consolidating and consolidated balance sheets of the Company and its
Subsidiaries as of the end of such fiscal year, setting forth in each
case comparisons to the annual budget and to the preceding fiscal year,
all prepared in accordance with GAAP and accompanied by (a) with
respect to the consolidated portions of such statements (except with
respect to budget data), an opinion containing no exceptions or
qualifications (except for qualifications regarding specified
contingent liabilities) of an independent accounting firm of recognized
national standing acceptable to the holders of a majority of each of
the Investor Preferred and the Investor Common, and (b) a copy of such
firm's annual management letter to the Board;
(iv) promptly upon receipt thereof, any additional reports,
management letters or other detailed information concerning significant
aspects of the Company's operations or financial affairs given to the
Company by its independent accountants (and not otherwise contained in
other materials provided hereunder);
(v) at least 10 days prior to the beginning of each fiscal
year, an annual budget prepared on a monthly basis for the Company and
its Subsidiaries for such fiscal year (displaying anticipated
statements of income and cash flows), and promptly upon preparation
thereof any other significant budgets prepared by the Company and any
revisions of such annual or other budgets, and within 30 days after any
monthly period in which there is a material adverse deviation from the
annual budget, an Officer's Certificate explaining the deviation and
what actions the Company has taken and proposes to take with respect
thereto;
(vi) promptly (but in any event within five business days)
after the discovery or receipt of notice of any default under any
material agreement to which it or any of its Subsidiaries is a party or
any other event or circumstance affecting the Company or any Subsidiary
which is reasonably likely to have a material adverse effect on the
financial condition, operating results, assets, operations or business
prospects of the Company and its Subsidiaries, taken as a whole
(including the filing of any material litigation against the Company or
any Subsidiary or the existence of any material dispute with any Person
which involves a reasonable likelihood of such litigation being
commenced) (a "MATERIAL ADVERSE EFFECT"), an Officer's Certificate
specifying the nature and period of existence thereof and what actions
the Company and its Subsidiaries have taken and propose to take with
respect thereto; and
(vii) with reasonable promptness, such other information and
financial data concerning the Company and its Subsidiaries as any
Person entitled to receive information under this Section 3B may
reasonably request.
Each of the financial statements referred to in subsections (i) and (iii) shall
be true and correct in all material respects as of the dates and for the periods
stated therein, subject in the case of the unaudited financial statements to
changes resulting from normal year-end audit adjustments
<PAGE>
(none of which would alone or in the aggregate, be materially adverse to the
financial condition, operating results, assets, operations or business prospects
of the Company and its Subsidiaries taken as a whole).
3C. INSPECTION OF PROPERTY. The Company shall permit any
representatives designated by a Purchaser (so long as such Purchaser holds any
Stock) or any holder of at least 15% of the outstanding Investor Preferred or at
least 15% of the outstanding Investor Common, upon reasonable notice and during
normal business hours and such other times as any such holder may reasonably
request, to (i) visit and inspect any of the properties of the Company and its
Subsidiaries, (ii) examine the corporate and financial records of the Company
and its Subsidiaries and make copies thereof or extracts therefrom and (iii)
discuss the affairs, finances and accounts of any such corporations with the
directors, officers, key employees and independent accountants of the Company
and its Subsidiaries; provided that the Company shall have the right to have its
chief financial officer present at any meetings with the Company's independent
accountants.
3D. RESTRICTIONS. The Company shall not, without the prior written
consent of the holders of a majority of the Investor Preferred or, in the event
no Investor Preferred is outstanding, without the prior written consent of the
holders of a majority of the Investor Common:
(i) directly or indirectly declare or pay any dividends or
make any distributions upon any of its equity securities, other than
payments of dividends on, or redemption payments in respect of, the
Class A Preferred pursuant to the Third Restated Certificate of
Incorporation;
(ii) directly or indirectly redeem, purchase or otherwise
acquire, or permit any Subsidiary to redeem, purchase or otherwise
acquire, any of the Company's equity securities (including, without
limitation, warrants, options and other rights to acquire equity
securities), other than (a) purchases of Common Stock held by AIS in an
amount not to exceed $789,192 and (b) purchases of Common Stock
pursuant to the Put Agreements;
(iii) except as expressly contemplated by this Agreement and
the Management Agreements and except for the issuance of the Company's
capital stock upon exercise or conversion of the SVB Common Stock
Warrant, the SVB Preferred Stock Warrant, the Smart Technology Warrant
and the issuance pursuant to the Anchor Release, authorize, issue, sell
or enter into any agreement providing for the issuance (contingent or
otherwise), or permit any Subsidiary to authorize, issue, sell or enter
into any agreement providing for the issuance (contingent or otherwise)
of, (a) any notes or debt securities containing equity features
(including, without limitation, any notes or debt securities
convertible into or exchangeable for equity securities, issued in
connection with the issuance of equity securities or containing profit
participation features) or (b) any equity securities (or any securities
convertible into or exchangeable for any equity securities) or
<PAGE>
rights to acquire any equity securities, other than the issuance of
equity securities by a Subsidiary to the Company or another Subsidiary;
(iv) merge or consolidate with any Person or permit any
Subsidiary to merge or consolidate with any Person (other than a wholly
owned Subsidiary);
(v) sell, lease or otherwise dispose of, or permit any
Subsidiary to sell, lease or otherwise dispose of, more than 10% of the
consolidated assets of the Company and its Subsidiaries (computed on
the basis of book value, determined in accordance with generally
accepted accounting principles consistently applied, or fair market
value, determined by the Board in its reasonable good faith judgment)
in any transaction or series of related transactions (other than sales
of inventory in the ordinary course of business);
(vi) liquidate, dissolve or effect a recapitalization or
reorganization in any form of transaction (including, without
limitation, any reorganization into partnership form);
(vii) acquire, or permit any Subsidiary to acquire, any
interest in any business (whether by a purchase of assets, purchase of
stock, merger or otherwise), or enter into any joint venture;
(viii) enter into, or permit any Subsidiary to enter into, the
ownership, active management or operation of any business other than
the information technology services business;
(ix) enter into, or permit any Subsidiary to enter into, any
transaction with any of its or any Subsidiary's officers, directors,
employees or Affiliates or any individual related by blood, marriage or
adoption to any such Person (a "RELATIVE") or any entity in which any
such Person or individual owns a beneficial interest (a "RELATED
ENTITY"), except for normal employment arrangements and benefit
programs on reasonable terms and except as otherwise expressly
contemplated by this Agreement, the Management Agreements and the
Professional Services Agreements; or
(x) create, incur, assume or suffer to exist, or permit any
Subsidiary to create, incur, assume or suffer to exist, Indebtedness
exceeding 105% of the amounts approved therefor by the Board in the
annual budget.
This Section 3D shall terminate upon GTCR and the GTCR Funds collectively
failing to hold at least 15% of the Investor Common.
3E. AFFIRMATIVE COVENANTS. So long as the Purchasers hold any Stock,
the Company shall, and shall cause each Subsidiary to:
(i) comply with all applicable laws, rules and regulations of
all Governmental authorities, the violation of which would reasonably
be expected to have a Material
<PAGE>
Adverse Effect, and pay and discharge when payable all taxes,
assessments and governmental charges (except to the extent the same are
being contested in good faith and adequate reserves therefor have been
established); and
(ii) enter into and maintain appropriate nondisclosure and
noncompete agreements with its key employees.
3F. CURRENT PUBLIC INFORMATION. At all times after the Company has
filed a registration statement with the Securities and Exchange Commission
pursuant to the requirements of either the Securities Act or the Securities
Exchange Act, the Company shall file all reports required to be filed by it
under the Securities Act and the Securities Exchange Act and the rules and
regulations adopted by the Securities and Exchange Commission thereunder and
shall take such further action as any holder or holders of Restricted Securities
may reasonably request, all to the extent required to enable such holders to
sell Restricted Securities pursuant to (i) Rule 144 adopted by the Securities
and Exchange Commission under the Securities Act (as such rule may be amended
from time to time) or any similar rule or regulation hereafter adopted by the
Securities and Exchange Commission or (ii) a registration statement on Form S-2
or S-3 or any similar registration form hereafter adopted by the Securities and
Exchange Commission. Upon request, the Company shall deliver to any holder of
Restricted Securities a written statement as to whether it has complied with
such requirements.
3G. AMENDMENT OF OTHER AGREEMENTS. The Company shall not amend, modify
or waive any provision of any Management Agreement or the FMC Professional
Services Agreement without the prior written consent of the holders of a
majority of the Investor Preferred (or, if no Investor Preferred is then
outstanding, the holders of a majority of the Investor Common), and the Company
shall enforce the provisions of the Management Agreements and the FMC
Professional Services Agreement and shall exercise all of its rights and
remedies thereunder including, without limitation, any repurchase options and
first refusal rights) unless it is otherwise directed by the holders of a
majority of the Investor Preferred (or, if no Investor Preferred is then
outstanding, the holders of a majority of the Investor Common). This Section 3G
shall terminate upon GTCR and the GTCR Funds collectively failing to hold at
least 15% of the Investor Common.
3H. PUBLIC DISCLOSURES. The Company shall not, nor shall it permit any
Subsidiary to, disclose a Purchaser's name or identity as an investor in the
Company in any press release or other public announcement or in any document or
material filed with any governmental entity, without the prior written consent
of such Purchasers, unless such disclosure is required by applicable law or
governmental regulations or by order of a court of competent jurisdiction, in
which case prior to making such disclosure the Company shall give written notice
to such Purchasers describing in reasonable detail the proposed content of such
disclosure and shall permit such Purchasers to review and comment upon the form
and substance of such disclosure.
3I. UNRELATED BUSINESS TAXABLE INCOME. The Company shall not engage in
any transaction which is reasonably likely to cause GTCR or any of its limited
partners which are exempt from income taxation under Section 501 (a) of the IRC
and, if applicable, any pension
<PAGE>
plan that any such trust may be a part of, to recognize unrelated business
taxable income as defined in Section 512 and Section 514 of the IRC.
3J. HART-SCOTT-RODINO COMPLIANCE. In connection with any transaction in
which the Company is involved which is required to be reported under the
Hart-Scott-Rodino Antitrust Improvements Act of 1976, as amended from time to
time (the "HSR ACT"), the Company shall prepare and file all documents with the
Federal Trade Commission and the United States Department of Justice which may
be required to comply with the HSR Act, and shall promptly furnish all materials
thereafter requested by any of the regulatory agencies having jurisdiction over
such filings, in connection with the transactions contemplated thereby. The
Company shall take all reasonable actions and shall file and use reasonable best
efforts to have declared effective or approved all documents and notifications
with any governmental or regulatory bodies, as may be necessary or may
reasonably be requested under federal antitrust laws for the consummation of the
subject transaction.
Section 4. TRANSFER OF RESTRICTED SECURITIES.
(i) Restricted Securities are transferable only pursuant to
(a) public offerings registered under the Securities Act, (b) Rule 144
or Rule 144A of the Securities and Exchange Commission (or any similar
rule or rules then in force) if such rule or rules are available and
(c) subject to the conditions specified in Section (ii) below, any
other legally available means of transfer.
(ii) In connection with the transfer of any Restricted
Securities (other than a transfer described in Section 4(i)(a) above),
the holder thereof shall deliver written notice to the Company
describing in reasonable detail the transfer or proposed transfer,
together with an opinion of Kirkland & Ellis or other counsel which (to
the Company's reasonable satisfaction) is knowledgeable in securities
law matters to the effect that such transfer of Restricted Securities
may be effected without registration of such Restricted Securities
under the Securities Act. In addition, if the holder of the Restricted
Securities delivers to the Company an opinion of Kirkland & Ellis or
such other counsel that no subsequent transfer of such Restricted
Securities shall require registration under the Securities Act, the
Company shall promptly upon such contemplated transfer deliver new
certificates for such Restricted Securities which do not bear the
Securities Act legend set forth in Section 4(iv). If the Company is not
required to deliver new certificates for such Restricted Securities not
bearing such legend, the holder thereof shall not transfer the same
until the prospective transferee has confirmed to the Company in
writing its acknowledgment of, and agreement to be bound by, the
conditions and representations contained in this Section, Section 6F
and Section 6G. This Section 4(ii) shall not apply to any transfer of
any Restricted Securities between and among GTCR and its Affiliates.
(iii) Upon the request of any Purchaser, the Company shall
promptly supply to any Purchaser or its prospective transferees all
information regarding the Company required to be delivered in
connection with a transfer pursuant to Rule 144A of the Securities and
Exchange Commission.
<PAGE>
(iv) Each certificate for Restricted Securities shall be
imprinted with a legend in substantially the following form:
The securities represented by this certificate were originally
issued on [DATE OF ISSUANCE] and have not been registered
under the Securities Act of 1933, as amended (the "Act"), and
may not be sold or transferred in the absence of an effective
registration statement under the Act or an exemption from
registration thereunder. The transfer of the securities
represented by this certificate is subject to the conditions
specified in the Purchase Agreement, dated as of June 29,
1998, between the issuer (the "Company") and a certain
investor, and the Company reserves the right to refuse the
transfer of such securities until such conditions have been
fulfilled with respect to such transfer. A copy of such
conditions shall be furnished by the Company to the holder
hereof upon written request and without charge.
Section 5. REPRESENTATIONS AND WARRANTIES OF THE COMPANY. As a material
inducement to the Purchasers to enter into this Agreement and purchase the
Stock, the Company hereby represents and warrants to each Purchaser that:
5A. ORGANIZATION AND CORPORATE POWER. The Company is a corporation duly
organized, validly existing and in good standing under the laws of Delaware and
is qualified to do business in every jurisdiction in which the failure to
qualify might be expected to have a Material Adverse Effect. The Company has all
requisite corporate power and authority and all material licenses, permits and
authorizations necessary to own and operate its properties, to carry on its
businesses as now conducted and presently proposed to be conducted and to carry
out the transactions contemplated by this Agreement. The copies of the Company's
Second Restated Certificate of Incorporation and bylaws which have been
furnished to the Purchasers' counsel reflect all amendments made thereto at any
time prior to the date of this Agreement and are correct and complete. The
Company is not in default under or in violation of any provision of its Second
Restated Certificate of Incorporation or bylaws. The minute books containing the
records of meetings of the stockholders and board of directors, the stock
certificate books and the stock record books of the Company are correct and
complete.
5B. CAPITAL STOCK AND RELATED MATTERS.
(i) The attached CAPITALIZATION SCHEDULE sets forth the
authorized capital stock of the Company, the name of each Person
holding any such capital stock (including any options, warrants or
other rights to purchase any equity securities or capital stock) and
any securities convertible or exchangeable into any equity securities
or capital stock of the Company and the amount and type of such
securities held by such Persons as of the date hereof. Except as set
forth in the CAPITALIZATION SCHEDULE, as of the Closing, the Company
shall not have outstanding any stock or securities convertible or
exchangeable
<PAGE>
for any shares of its capital stock or containing any profit
participation features, nor shall it have outstanding any rights or
options to subscribe for or to purchase its capital stock or any stock
or securities convertible into or exchangeable for its capital stock or
any stock appreciation rights or phantom stock plans other than
pursuant to and as contemplated by this Agreement, the Management
Agreements and the Redemption Option Agreement between the Company and
Arbor Intelligent Systems, Inc. dated as of March 12, 1998 (the
"REDEMPTION OPTION AGREEMENT"). As of the Closing, the Company shall
not be subject to any obligation (contingent or otherwise) to
repurchase or otherwise acquire or retire any shares of its capital
stock or any warrants, options or other rights to acquire its capital
stock, except pursuant to this Agreement, the Put Agreement, the AIS
Agreement, the Common Stock Repurchase Agreement, the FMC Professional
Services Agreement, the Management Agreements and the Company's Second
Restated Certificate of Incorporation, as amended and restated pursuant
to EXHIBIT B hereof, or except as set forth in the CAPITALIZATION
SCHEDULE. As of the Closing, all of the outstanding shares of the
Company's capital stock shall be validly issued, fully paid and
nonassessable and were not issued in violation of any statutory or
contractual preemptive rights or similar restrictions.
(ii) There are no statutory or, to the Company's Knowledge,
contractual stockholders preemptive rights or rights of refusal with
respect to the issuance of the Stock hereunder or the issuance of the
Stock pursuant to Section 1B hereof, except as expressly provided
herein. Based in part on the investment representations of the
Purchasers in Section 6F and Section 6G hereof and of the Executives in
the Management Agreements, the Company has not violated any applicable
federal or state securities laws in connection with the offer, sale or
issuance of any of its capital stock, and the offer, sale and issuance
of the Stock hereunder and pursuant to Section 1B hereof do not and
will not require registration under the Securities Act or any
applicable state securities laws. To the Company's Knowledge, there are
no agreements between the Company's stockholders with respect to the
voting or transfer of the Company's capital stock or with respect to
any other aspect of the Company's affairs, except for the Stockholders
Agreement, the Put Agreement, the AIS Agreement, the Common Stock
Repurchase Agreement, the FMC Professional Services Agreement, the
Management Agreements, the Redemption Option Agreement and the
Subscription Agreements dated February 10, 1998 between the Company and
each of Ken S.
Bajaj and FMC that will be amended as of the Closing.
5C. SUBSIDIARIES; INVESTMENTS. The SUBSIDIARY SCHEDULE sets forth for
each Subsidiary of the Company (i) its name and jurisdiction of incorporation,
(ii) the number of shares of authorized capital stock of each class of its
capital stock, (iii) the number of issued and outstanding shares of each class
of its capital stock, the names of the holders thereof, and the number of shares
held by each such holder, and (iv) the number of shares of its capital stock
held in treasury. All of the issued and outstanding shares of capital stock of
each Subsidiary of the Company have been duly authorized and are validly issued,
fully paid, and nonassessable. Either the Company or one of its Subsidiaries
holds of record and owns beneficially all of the outstanding shares of each
Subsidiary of the Company, free and clear of any restrictions on
<PAGE>
transfer (other than restrictions under the Securities Act and state securities
laws), taxes, Security Interests, options, warrants, purchase rights, contracts,
commitments, equities, claims, and demands. There are no outstanding or
authorized options, warrants, purchase rights, subscription rights, conversion
rights, exchange rights, or other contracts or commitments that could require
any of the Company and its Subsidiaries to sell, transfer, or otherwise dispose
of any capital stock of any of its Subsidiaries or that could require any
Subsidiary of the Company to issue, sell, or otherwise cause to become
outstanding any of its own capital stock. Except as set forth on the SUBSIDIARY
SCHEDULE, there are no outstanding stock appreciation, phantom stock, profit
participation, or similar rights with respect to any Subsidiary of the Company.
There are no voting trusts, proxies, or other agreements or understandings with
respect to the voting of any capital stock of any Subsidiary of the Company.
None of the Company and its Subsidiaries controls directly or indirectly or has
any direct or indirect equity participation in any corporation, partnership,
trust, or other business association which is not a Subsidiary of the Company.
5D. AUTHORIZATION; NO BREACH. The execution, delivery and performance
of this Agreement, the Management Agreements, the Stockholders Agreement, the
Put Agreement, the Professional Services Agreements the Registration Agreement,
the Common Stock Repurchase Agreement and all other agreements contemplated
hereby to which the Company is a party and the filing of the Second Restated
Certificate of Incorporation have been duly authorized by the Company and no
other corporate act or proceeding on the part of the Company, its board of
directors or its stockholders is necessary to authorize the execution, delivery
or performance by the Company of this Agreement or any other agreement
contemplated hereby to which it is a party or the consummation of any of the
transactions contemplated hereby or thereby. This Agreement, the Management
Agreements, the Stockholders Agreement, the Put Agreement, the Professional
Services Agreements, the Registration Agreement, the Common Stock Repurchase
Agreement, the Second Restated Certificate of Incorporation and all other
agreements contemplated hereby each constitutes a valid and binding obligation
of the Company, enforceable in accordance with its terms. The execution and
delivery by the Company of this Agreement, the Management Agreements, the
Stockholders Agreement, the Put Agreement, the Professional Services Agreements,
the Registration Agreement, the Common Stock Repurchase Agreement and all other
agreements contemplated hereby to which the Company is a party, the offering,
sale and issuance of the Stock hereunder and pursuant to Section 1B, the
amendment and restatement of the Company's certificate of incorporation and the
fulfillment of and compliance with the respective terms hereof and thereof by
the Company do not and will 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 capital stock or assets of the Company or any of its Subsidiaries
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 to
any court or administrative or governmental body pursuant to, the Company's
certificate of incorporation or bylaws of the Company or any of its
Subsidiaries, or any law, statute, rule or regulation to which the Company or
any of its Subsidiaries is subject, or any agreement, instrument, order,
judgment or decree to which the Company or any of its Subsidiaries is a party or
by which it is bound (except for the SVB Consent, which will be delivered at
Closing).
<PAGE>
5E. FINANCIAL STATEMENTS. Attached hereto as the FINANCIAL STATEMENTS
SCHEDULE is the unaudited consolidated and consolidating balance sheet as of May
31, 1998 (the "LATEST BALANCE SHEET") and the related statements of income and
cash flows for the 5-month period then ended. The foregoing financial statements
(including in all cases the notes thereto, if any) is accurate and complete in
all material respects, is consistent with the books and records of the Company
(which, in turn, are accurate and complete in all material respects) (i) has
been prepared in accordance with GAAP and (ii) presents fairly the financial
condition, results of operations, shareholders' equity, and cash flows of the
Company, as applicable, as of the times and for the periods referred to therein
in accordance with GAAP subject, in the case of interim financial statements, to
the absence of footnotes and to normal year-end adjustments (none of which would
be material, individually or in the aggregate).
5F. INDEBTEDNESS. Except as set forth on the attached INDEBTEDNESS
SCHEDULE, the Company has no Indebtedness. The INDEBTEDNESS SCHEDULE accurately
reflects the amount required to prepay as of the Closing Date all of the
Company's Indebtedness, including all accrued interest and prepayment premiums
or penalties.
5G. LIABILITIES. Except as set forth on the attached LIABILITIES
SCHEDULE, the Company and its Subsidiaries do not have any material obligations
or liability (whether accrued, absolute, contingent, unliquidated or otherwise,
whether or not known to the Company or any Subsidiary, whether due or to become
due and regardless of when asserted) other than: (i) liabilities set forth on
the Latest Balance Sheet; (ii) liabilities and obligations which have arisen
after the date of the Latest Balance Sheet in the ordinary course of business
(none of which is a liability resulting from breach of contract, breach of
warranty, tort, infringement, claim or lawsuit); (iii) other liabilities and
obligations expressly disclosed in the other schedules to this Agreement.
5H. NO MATERIAL ADVERSE EFFECT. Since the date of the Latest Balance
Sheet, there has occurred no fact, event or circumstance which has had, or could
reasonably be expected to have, a Material Adverse Effect. Except as set forth
on the attached EXTRAORDINARY TRANSACTIONS SCHEDULE, since the date of the
Latest Balance Sheet, the Company and its Subsidiaries have conducted its
business only in the ordinary course of business consistent with past practice.
5I. ABSENCE OF CERTAIN DEVELOPMENTS.
(i) Except as expressly contemplated by this Agreement or as
set forth on the attached DEVELOPMENTS SCHEDULE, since the date of the
Latest Balance Sheet, the Company and its Subsidiaries have not:
(a) issued any notes, bonds or other debt securities
or any capital stock or other equity securities or any
securities convertible, exchangeable or exercisable into any
capital stock or other equity securities;
(b) borrowed any amount or incurred or become subject
to any liabilities, except current liabilities incurred in the
ordinary course of business and liabilities under contracts
entered into in the ordinary course of business;
<PAGE>
(c) discharged or satisfied any Lien or paid any
obligation or liability, other than current liabilities paid
in the ordinary course of business;
(d) declared or made any payment or distribution of
cash or other property to holders of its capital stock or
ownership interests with respect to such stock or ownership
interests or purchased or redeemed any shares of its capital
stock or other equity securities or ownership interests
(including, without limitation, any warrants, options or other
rights to acquire its capital stock or other equity securities
or ownership interests);
(e) mortgaged or pledged any of its properties or
assets or subjected them to any material Lien, except for any
Permitted Liens;
(f) sold, assigned, leased or transferred any of its
tangible assets, except in the ordinary course of business, or
canceled any material debts or claims;
(g) sold, assigned, leased, licensed or transferred
any Intellectual Property Rights or other intangible assets,
or disclosed any material proprietary confidential information
to any Person, or abandoned or permitted to lapse any
Intellectual Property Rights or other intangible asset;
(h) suffered any extraordinary losses or waived any
rights of material value, whether or not in the ordinary
course of business or consistent with past practice;
(i) delayed or postponed the payment of any accounts
or commissions payable or any other liability or obligations
or agreed or negotiated with any party to extend the payment
date of any accounts or commissions payable or accelerated the
collection of any notes, accounts or commissions receivable;
(j) made capital expenditures or commitments that
aggregate in excess of $10,000;
(k) made any charitable contributions or pledges;
(l) suffered any damage, destruction or casualty loss
exceeding in the aggregate $10,000 whether or not covered by
insurance;
(m) made any loans or advances to, Investment in, or
guarantees for the benefit of, any Person or taken steps to
incorporate any Subsidiary;
(n) made any change in any method of accounting or
accounting policies;
<PAGE>
(o) entered into any other transaction, other than in
the ordinary course of business, or entered into any other
material transactions, whether or not in the ordinary course
of business;
(p) entered into any employment or consulting
contract (written or oral) or changed the employment terms for
any employee or agent or made or granted any bonus or any
wage, salary or compensation increase to any director,
officer, employee or sales representative, group of employees
or consultant or made or granted any increase in any employee
benefit plan or arrangement, or amended or terminated any
existing employee benefit plan or arrangement or adopted any
new employee benefit plan or arrangement; or
(q) agreed, whether orally or in writing, to do any
of the foregoing.
(ii) The Company and its Subsidiaries have not at any time
made any payments for political contributions or made any bribes,
kickback payments or other illegal payments.
5J. ASSETS. Except as set forth on the attached ASSETS SCHEDULE, the
Company and its Subsidiaries have good and marketable title to, or a valid
leasehold interest in, or a valid license to use, the properties and assets,
tangible or intangible, used by it, located on its premises or, if applicable,
shown on the Latest Balance Sheet or acquired thereafter, free and clear of all
Liens, except for inventory disposed of in the ordinary course of business since
the date of the Latest Balance Sheet and except for Permitted Liens. Except as
described on the ASSETS SCHEDULE, all of the Company and its Subsidiaries's
equipment and other tangible assets (whether owned or leased) are in good
condition (except for ordinary wear and tear) and are fit for use in the
ordinary course of business. Except as set forth on the ASSETS SCHEDULE, as of
the Closing, the Company and its Subsidiaries shall own, or have a valid
leasehold interest in, or a valid license to use, all the assets or rights
necessary for the conduct of its businesses as presently conducted.
<PAGE>
5K. REAL PROPERTY.
(i) LEASED PROPERTIES. The attached LEASED REAL PROPERTY
SCHEDULE sets forth a list of all of the leases and subleases
("LEASES") and each leased and subleased parcel of real property in
which the Company and its Subsidiaries have a leasehold and
subleasehold interest (the "LEASED REAL PROPERTY"). The Company and its
Subsidiaries hold a valid and existing leasehold or subleasehold
interest under each of the Leases. With respect to each Lease listed on
the LEASED REAL PROPERTY SCHEDULE, there are no disputes, oral
agreements, or forbearance programs in effect as to such Lease and the
Company and its Subsidiaries have not assigned, transferred, conveyed,
mortgaged, deeded in trust or encumbered any interest in such Lease.
With respect to each lease and sublease listed on the LEASED REAL
PROPERTY SCHEDULE: (a) the lease or sublease is legal, valid, binding,
enforceable and in full force and effect and will continue to be so on
identical terms immediately following the Closing; (b) neither the
Company and its Subsidiaries nor any other party to the lease or
sublease is in material breach or default, and no event has occurred
which, with notice of lapse of time, would constitute such a material
breach or default or permit termination, modification or acceleration
under the lease or sublease; (c) neither the Company and its
Subsidiaries nor any Seller has assigned, transferred, conveyed,
mortgaged, deeded in trust or encumbered any interest in the leasehold
or subleasehold; (d) all buildings, improvements or other property
leased or subleased thereunder are supplied with utilities and other
services necessary for the operation thereof (including gas,
electricity, water, telephone, sanitary and storm sewer, and access to
public roads); and (e) with respect to each sublease, to the Knowledge
of the Company the representations and warranties set forth in
subparagraphs (a) through (d) above are true and correct with respect
to the underlying lease.
(ii) REAL PROPERTY DISCLOSURE. Except as disclosed on the
attached LEASED REAL PROPERTY SCHEDULE, there is no real property
leased or owned which is used in the business of the Company and its
Subsidiaries. The Company and its Subsidiaries do not own any real
property.
(iii) CURRENT USE. There is no known violation of any
covenant, condition, restriction, easement, agreement or order of any
governmental authority having jurisdiction over any the Leased Real
Property that affects such real property or the use or occupancy
thereof. No damage or destruction has occurred with respect to any of
the Leased Real Property that, individually or in the aggregate, has
had or resulted in, or will have or result in, a significant adverse
effect on the operation of the business the Company and its
Subsidiaries. To the Company's Knowledge, no current use by the Company
and its Subsidiaries of the Leased Real Property is dependent on a
nonconforming use or other approval from a governmental authority, the
absence of which would significantly limit the use of any of the
properties or assets in the operation of the business.
<PAGE>
(iv) CONDITION AND OPERATION OF IMPROVEMENTS. All buildings
and all components of all buildings, structures and other improvements
included within the Leased Real Property (the "IMPROVEMENTS"), are in
good condition and repair and adequate to operate such facilities as
currently used. All utilities and other similar systems serving the
Leased Real Property are installed and operating and are sufficient to
enable the Leased Real Property to continue to be used and operated in
the manner currently being used and operated.
5L. TAX MATTERS. Except as set forth on the attached TAXES SCHEDULE:
(i) The Company and its Subsidiaries have filed all Tax
Returns which they are required to file under applicable laws and
regulations, and all such Tax Returns are complete and correct and have
been prepared in compliance with all applicable laws and regulations;
the Company and its Subsidiaries have paid all Taxes due and owing by
them (whether or not such Taxes are shown or required to be shown on a
Tax Return) and has withheld and paid over to the appropriate taxing
authority all Taxes which they are required to withhold from amounts
paid or owing to any employee, shareholder, creditor or other third
party;
(ii) The Company and its Subsidiaries have not (a) waived any
statute of limitations with respect to any Taxes or agreed to any
extension of time for filing any Tax Return which has not been filed or
(b) consented to extend to a date later than the date hereof the period
in which any Tax may be assessed or collected by any foreign, federal,
state or local taxing authority;
(iii) The accrual for Taxes on the Latest Balance Sheet would
be adequate to pay all Tax liabilities of the Company and its
Subsidiaries if their current tax year were treated as ending on the
Closing Date (excluding any amount recorded which is attributable
solely to timing differences between book and Tax income);
(iv) The Company and its Subsidiaries have not received from
any foreign, federal, state or local taxing authority (including, but
not limited to, jurisdictions where the Company and its Subsidiaries
have filed Tax Returns) any (a) notice indicating an intent to open an
audit or other review, (b) request for information related to Tax
matters or (c) notice of deficiency or proposed adjustment for any
amount of Tax proposed, asserted or assessed by any taxing authority
against the Company and its Subsidiaries and furthermore, the Company
and its Subsidiaries have no pending foreign, federal, state or local
Tax audits or administrative or judicial proceedings;
(v) The Company and its Subsidiaries have never been a member
of an Affiliated Group, other than one in which the Company was the
common parent, or filed or been included in a combined, consolidated or
unitary income Tax Return other than one filed by the Company;
(vi) The Company and its Subsidiaries have not made an
election under Section 341(f) of the IRC and Purchasers will not be
required to deduct and withhold any amount pursuant to IRC Section
1445(a) upon the purchase of the Stock; and
(vii) The Company and its Subsidiaries have not made any
payments, and are not and will not become obligated (under any contract
entered into on or before the Closing Date) to make any payments, that
will be non-deductible under Section 280G of the IRC (or any
corresponding provision of state, local or foreign income Tax law).
<PAGE>
5M. CONTRACTS AND COMMITMENTS.
(i) Except as expressly contemplated by this Agreement or as
set forth on the attached CONTRACTS SCHEDULE or the attached EMPLOYEE
BENEFITS SCHEDULE, the Company and its Subsidiaries are not party to or
bound by any written or oral: (a) pension, profit sharing, stock
option, employee stock purchase or other plan or arrangement providing
for deferred or other compensation to employees or any other employee
benefit plan or arrangement, or any collective bargaining agreement or
any other contract with any labor union, or severance agreements,
programs, policies or arrangements; (b) contract for the employment of
any officer, individual, employee or other Person on a full-time,
part-time, consulting or other basis providing annual compensation in
excess of $50,000 or contract relating to loans to officers, directors
or Affiliates or contract providing for the payment of any cash
compensation or benefits upon the consummation of the transactions
contemplated hereby; (c) contract under which the Company and its
Subsidiaries have advanced, loaned or invested or agreed to advance,
loan or invest monies to or in any other Person; (d) agreement or
indenture relating to borrowed money or other Indebtedness or the
mortgaging, pledging or otherwise placing a Lien on any material asset
or material group of assets of the Company and its Subsidiaries; (e)
guaranty of any obligation or any letter of credit arrangement; (f)
lease or agreement under which the Company or its Subsidiaries are
lessees of or holds or operates any property, real or personal, owned
by any other party, except for any lease of real or personal property
under which the aggregate annual rental payments do not exceed $10,000;
(g) lease or agreement under which the Company or its Subsidiaries is a
lessor of or permits any third party to hold or operate any property,
real or personal, owned or controlled by the Company and its
Subsidiaries; (h) contract or group of related contracts with the same
party or group of affiliated parties the performance of which involves
consideration in excess of $10,000; (i) assignment, license,
indemnification or agreement with respect to any intangible property
(including, without limitation, any Intellectual Property); (j)
warranty agreement with respect to its services rendered or any
products sold or leased; (k) agreement under which it has granted any
Person any registration rights (including, without limitation, demand
and piggyback registration rights); (l) sales representative, sales,
distribution or franchise agreement; (m) outstanding power of attorney
or other agency agreement; (n) nondisclosure or confidentiality
agreements; (o) contract relating to the marketing, advertising or
promotion of its services or products; (p) agreement with a term of
more than six (6) months which is not terminable by the Company and its
Subsidiaries upon 30 days' or less notice without penalty; (q)
contract, agreement or other arrangement with any officer, director,
stockholder, employee or Affiliate or any Affiliate of any officer,
director, stockholder or employee, or any Affiliate of the Company and
its Subsidiaries or any individual related by blood, marriage or
adoption to any such individual or any entity in which any such Person
or individual owns any beneficial interest; (r) contract or agreement
prohibiting it from freely engaging in any business or competing
anywhere in the world; or (s) any other agreement which is material to
its operations and business prospects or involves a consideration in
excess of $10,000 annually, whether or not in the ordinary course of
business.
(ii) All of the contracts, agreements and instruments set
forth or required to be set forth on the CONTRACTS SCHEDULE are valid,
binding and enforceable in accordance with
<PAGE>
their respective terms and shall be in full force and effect without
penalty in accordance with their terms upon consummation of the
transactions contemplated hereby. The Company and its Subsidiaries have
performed all material obligations required to be performed by it under
such contracts, agreements and instruments and are not in material
default under or in material breach of nor in receipt of any claim of
default or breach under any contract, agreement or instrument to which
the Company and its Subsidiaries are subject; no event has occurred
which it is foreseeable with the passage of time or the giving of
notice or both would result in a material default, breach or event of
noncompliance by the Company and its Subsidiaries under any contract,
agreement or instrument to which the Company and its Subsidiaries are
subject; the Company and its Subsidiaries do not have any present
expectation or intention of not fully performing all such obligations
on a timely basis; the Company has no Knowledge of any material breach
or anticipated breach by the other parties to any contract, agreement,
instrument or commitment to which the Company and its Subsidiaries are
a party; and the Company and its Subsidiaries are not a party to any
contract or commitment that might reasonably be expected to have a
Material Adverse Effect.
(iii) The Purchasers' special counsel has been supplied with a
true and correct copy of, or been provided access to, each of the
written instruments, plans, contracts and agreements and an accurate
description of each of the oral arrangements, contracts and agreements
which are referred to on the CONTRACTS SCHEDULE, together with all
amendments, waivers or other changes thereto.
5N. INTELLECTUAL PROPERTY RIGHTS.
(a) The attached INTELLECTUAL PROPERTY SCHEDULE contains a complete and
accurate list of all (a) patented or registered Intellectual Property Rights
owned or used by the Company and its Subsidiaries, (b) pending patent
applications and applications for registrations of other Intellectual Property
Rights filed by the Company and its Subsidiaries, and (c) material unregistered
Intellectual Property Rights owned or used by the Company and its Subsidiaries.
The INTELLECTUAL PROPERTY SCHEDULE also contains a complete and accurate list of
all material licenses and other rights granted by the Company and its
Subsidiaries to any third party with respect to any Intellectual Property Rights
and all licenses and other rights granted by any third party to the Company and
its Subsidiaries with respect to any Intellectual Property Rights, in each case
identifying the subject Intellectual Property Rights. The Company and its
Subsidiaries own all right, title and interest to, free and clear of all Liens,
or has the right to use pursuant to a valid license, all Intellectual Property
Rights necessary for the operation of the businesses of the Company and its
Subsidiaries as presently conducted. Except as set forth on the INTELLECTUAL
PROPERTY SCHEDULE, the loss or expiration of any Intellectual Property Right or
related group of Intellectual Property Rights owned or used by the Company and
its Subsidiaries would not reasonably be expected to have a Material Adverse
Effect, and no such loss or expiration is pending or, to the Company's
Knowledge, threatened. The Company has taken all reasonably necessary actions to
maintain and protect the Intellectual Property Rights which it owns.
<PAGE>
(b) Except as set forth on the INTELLECTUAL PROPERTY SCHEDULE, (a) the
Company and its Subsidiaries own all right, title and interest in and to all of
the Intellectual Property Rights listed on such schedule, free and clear of all
Liens, (b) there have been no claims made asserting the invalidity, misuse or
unenforceability of any of such Intellectual Property Rights, and, to the
Company's Knowledge, there are no valid grounds for the same, (c) to the
Company's Knowledge, there is no infringement or misappropriation by, or
conflict with, any third party with respect to such Intellectual Property Rights
(including, without limitation, any demand or request that the Company license
any rights from a third party), (d) the conduct of the businesses of the Company
and its Subsidiaries has not infringed, misappropriated or conflicted with and
does not infringe, misappropriate or conflict with any Intellectual Property
Rights of other Persons and (e) to the Company's Knowledge, the Intellectual
Property Rights owned by or licensed to the Company and its Subsidiaries have
not been infringed, misappropriated or conflicted by other Persons. The
transactions contemplated by this Agreement shall have no material adverse
effect on the right, title and interest of the Company and its Subsidiaries in
and to the Intellectual Property Rights listed on the INTELLECTUAL PROPERTY
SCHEDULE.
(c) To the Company's Knowledge, none of the computer software (other
than commercially available licensed software), computer firmware, computer
hardware (whether general or special purpose) or other similar or related items
of automated, computerized or software systems that are used or relied on by the
Company or its Subsidiaries in the conduct of their respective businesses will
malfunction, will cease to function, will generate incorrect data or will
produce incorrect results when processing, providing or receiving (i)
date-related data from, into and between the twentieth and twenty-first
centuries or (ii) date-related data in connection with any valid date in the
twentieth and twenty-first centuries.
(d) None of the products and services sold, licensed, rendered, or
otherwise provided by the Company or its Subsidiaries in the conduct of their
respective businesses will malfunction, will cease to function, will generate
incorrect data or will produce incorrect results when processing, providing or
receiving (i) date-related data from, into and between the twentieth and
twenty-first centuries or (ii) date-related data in connection with any valid
date in the twentieth and twenty-first centuries; and, accordingly, neither the
Company nor its Subsidiaries will be subject to any claim, demand, action, suit,
liability, damage, material loss, or material expense arising from, or related
to, circumstances where such products and services malfunction, cease to
function, generate incorrect data, or produce incorrect results when processing,
providing or receiving (i) date-related data from, into and between the
twentieth and twenty-first centuries or (ii) date-related data in connection
with any valid date in the twentieth and twenty-first centuries.
5O. GOVERNMENT LICENSES AND PERMITS. The attached PERMITS SCHEDULE
contains a complete listing and summary description of all permits, licenses,
franchises, certificates, approvals and other authorizations of foreign,
federal, state and local governments or agencies or other similar rights owned,
possessed or used by the Company and its Subsidiaries in the conduct of their
business and the ownership of their properties (collectively, the "LICENSES").
The Company and its Subsidiaries own or possess all right, title and interest in
and to all of the Licenses and the Licenses constitute all permits, licenses,
franchises, certificates, approvals and other authorizations necessary for the
conduct of the business of the Company and its
<PAGE>
Subsidiaries. The Company and its Subsidiaries are in compliance with the terms
and conditions of the Licenses and have received no notices that they are in
violation of any of the terms or conditions of such Licenses or alleging the
failure to hold or obtain any permit, license, franchise, certificate, approval
or authorization. The Company and its Subsidiaries have taken all necessary
action to maintain such Licenses. No loss or expiration of any License is
pending or, to the Knowledge of the Company, threatened, other than expiration
in accordance with the terms thereof and all of such Licenses shall be owned or
available for use by the Company and its Subsidiaries on substantially identical
terms immediately after the Closing.
5P. LITIGATION, ETC. There are no actions, suits, proceedings, orders,
investigations or claims pending or, to the Company's Knowledge, threatened
against or affecting the Company and its Subsidiaries (or to the Company's
Knowledge, pending or threatened against or affecting any of the officers,
directors or employees of the Company and its Subsidiaries with respect to their
businesses or proposed business activities) at law or in equity, or before or by
any governmental department, commission, board, bureau, agency or
instrumentality (including, without limitation, any actions, suit, proceedings
or investigations with respect to the transactions contemplated by this
Agreement) which could have a Material Adverse Effect; the Company and its
Subsidiaries are not subject to any arbitration proceedings under collective
bargaining agreements or otherwise or, to the Company's Knowledge, any
governmental investigations or inquiries; and, to the Company's Knowledge, there
is no basis for any of the foregoing. The Company and its Subsidiaries are not
subject to any judgment, order or decree of any court or other governmental
agency.
5Q. BROKERAGE. Except as set forth on the attached BROKERAGE SCHEDULE,
there are no claims for brokerage commissions, finders' fees or similar
compensation in connection with the transactions contemplated by this Agreement
based on any arrangement or agreement binding upon the Company and its
Subsidiaries. The Company and its Subsidiaries shall pay, and hold the
Purchasers harmless against, any liability, loss or expense (including, without
limitation, attorneys' fees and out-of-pocket expenses) arising in connection
with any such claim.
5R. GOVERNMENTAL CONSENT, ETC. No permit, consent, approval or
authorization of, or declaration to or filing with, any governmental authority
is required in connection with the execution, delivery and performance by the
Company and its Subsidiaries of this Agreement or the other agreements
contemplated hereby, or the consummation by the Company and its Subsidiaries of
any other transactions contemplated hereby or thereby.
5S. INSURANCE. The attached INSURANCE SCHEDULE contains a list of each
insurance policy maintained by the Company and its Subsidiaries with respect to
their properties, assets and businesses, and each such policy is in full force
and effect. The Company and its Subsidiaries are not in default with respect to
its obligations under any insurance policy maintained by it, and has not been
denied insurance coverage. Except as set forth on the INSURANCE SCHEDULE, the
Company and its Subsidiaries do not have any self-insurance or co-insurance
programs, and the reserves set forth on the Latest Balance Sheet are adequate to
cover all of the anticipated liabilities of the Company and its Subsidiaries
with respect to any such self-insurance or co-insurance programs.
<PAGE>
5T. EMPLOYEES. Except as set forth on the attached EMPLOYEES SCHEDULE,
the Company has no Knowledge that any executive or any key employee of the
Company and its Subsidiaries or any group of employees of the Company and its
Subsidiaries has any plans to terminate his or her employment with the Company
or its Subsidiaries. The Company and its Subsidiaries have complied in all
material respects with all laws relating to the employment of labor (including,
without limitation, provisions thereof relating to wages, hours, equal
opportunity, collective bargaining and the payment of social security and other
taxes), and the Company has no Knowledge of and has never experienced any
material labor relations problems (including, without limitation, any union
organization activities, threatened or actual strikes or work stoppages or
material grievances). Neither the Company nor, to the Company's Knowledge, any
of the employees of the Company and its Subsidiaries are subject to any
noncompete, nondisclosure, confidentiality, employment, consulting or similar
agreements relating to, affecting or in conflict with the present or proposed
business activities of the Company, except for agreements between the Company
and its present and former employees.
5U. ERISA. Except as set forth on the attached EMPLOYEE BENEFITS
SCHEDULE, the Company and its Subsidiaries do not maintain or have any
obligation to contribute to or any other liability with respect to or under
(including but not limited to current or potential withdrawal liability), nor
has it ever maintained or had any obligation to contribute to or any other
liability with respect to or under, (i) any plan or arrangement whether or not
terminated, which provides medical, health, life insurance or other welfare type
benefits for current or future retired or terminated employees (except for
limited continued medical benefit coverage required to be provided under Section
4980B of the IRC or as required under applicable state law), (ii) any
"multiemployer plan"(as defined in Section 3(37) of the Employee Retirement
Income Security Act of 1974, as amended ("ERISA"), (iii) any employee plan which
is a tax-qualified "defined benefit plan" (as defined in Section 3(35) of
ERISA), whether or not terminated, (iv) any employee plan which is a
tax-qualified "defined contribution plan" as defined in Section 3(34) of ERISA),
whether or not terminated, or (v) any other plan or arrangement providing
benefits to current or former employees, including any bonus plan, plan for
deferred compensation, employee health or other welfare benefit plan or other
arrangement, whether or not terminated. For purposes of this Section 5U, the
term "Company" includes all organizations under common control with the Company
pursuant to Section 414(b) or (c) of the IRC. With respect to the plans set
forth on the EMPLOYEE BENEFITS SCHEDULE (the "PLANS"), all required or
recommended (in accordance with historical practices) payments, premiums,
contributions, reimbursements or accruals for all periods ending prior to or as
of the Closing shall have been made or properly accrued. The Plans and all
related, insurance contracts and funds have been maintained, funded and
administered in compliance in all material respects with the applicable
provisions of ERISA, the IRC and other applicable laws. The Company has timely
complied in all material respects with all reporting and disclosure obligations
as they apply to the Plans, and the Company has complied in all material
respects with the requirements of COBRA.
5V. LEGAL COMPLIANCE. Each of the Company and its Subsidiaries has
complied with all applicable laws (including rules, regulations, codes, plans,
injunctions, judgments, orders, decrees, rulings, and charges thereunder) of
federal, state, local, and foreign governments (and all
<PAGE>
agencies thereof), and no action, suit, proceeding, hearing, investigation,
charge, complaint, claim, demand, or notice has been filed or commenced against
any of them alleging any failure so to comply, except where the failure to
comply would not have a Material Adverse Effect.
5W. AFFILIATED TRANSACTIONS. Except as set forth on the attached
AFFILIATED TRANSACTIONS SCHEDULE, no officer, director, employee, shareholder or
Affiliate of the Company and its Subsidiaries or any individual related by
blood, marriage or adoption to any such individual or any entity in which any
such Person or individual owns any beneficial interest, is a party to any
agreement, contract, commitment or transaction with the Company or its
Subsidiaries or has any interests in any property used by the Company or its
Subsidiaries.
5X. OFFICERS AND DIRECTORS; BANK ACCOUNTS. The attached OFFICERS,
DIRECTORS AND BANK ACCOUNTS SCHEDULE lists all officers and directors of the
Company and its Subsidiaries, and all of the bank accounts of the Company and
its Subsidiaries (designating each authorized signatory and the level of each
signatory's authorization).
5Y. PRODUCT WARRANTY. All of the products manufactured, sold, leased,
and delivered by the Company and its Subsidiaries have conformed with all
applicable contractual commitments and all express and implied warranties, and
except as set forth on the attached PRODUCT WARRANTY SCHEDULE, none of the
Company and its Subsidiaries has any liability (whether known or unknown,
whether asserted or unasserted, whether absolute or contingent, whether accrued
or unaccrued, whether liquidated or unliquidated, and whether due or to become
due) for replacement or repair thereof or other damages in connection therewith,
subject only to the reserve for product warranty claims set forth on the face of
the Latest Balance Sheet (rather than in any notes thereto) as adjusted for
operations and transactions through the Closing Date in accordance with the past
custom and practice of the Company and its Subsidiaries. All of the products
manufactured, sold, leased, and delivered by the Company and its Subsidiaries
are subject to standard terms and conditions of sale or lease. The PRODUCT
WARRANTY SCHEDULE includes copies of the standard terms and conditions of sale
or lease for each of the Company and its Subsidiaries (containing applicable
guaranty, warranty, and indemnity provisions).
5Z. ENVIRONMENTAL AND SAFETY MATTERS. Except as set forth on the
attached ENVIRONMENTAL SCHEDULE, the Company and its Subsidiaries have complied
and are in compliance with all Environmental and Safety Requirements (including
without limitation all permits and licenses required thereunder). The Company
and its Subsidiaries have received no oral or written notice of any violation
of, or any liability (contingent or otherwise), investigatory, corrective or
remedial obligation under, any Environmental and Safety Requirements. Neither
this Agreement nor the consummation of the transaction that is the subject of
this Agreement will result in any obligations for site investigation or cleanup,
or notification to or consent of government agencies or third parties, pursuant
to any so-called "transaction-triggered" or "responsible property transfer"
Environmental and Safety Requirements. To the Company's Knowledge, the Company
and its Subsidiaries have not released, disposed of or transported or arranged
for the disposal of any hazardous substance or owned or operated any property or
facility (and no such property or facility is contaminated by any such
substance) in a manner that has given or would give rise to liabilities under
CERCLA, the Resource Conservation and Recovery Act (as amended) or any
<PAGE>
other Environmental and Safety Requirements. To the Company's Knowledge, there
are no underground storage tanks, asbestos-containing material in any form and
condition, polychlorinated biphenyls or landfills, surface impoundments or
disposal areas at any property or facility owned or operated by the Company or
its Subsidiaries. To the Company's Knowledge, no Environmental Lien has attached
to any property owned, leased or operated by the Company or its Subsidiaries. To
the Company's Knowledge, no facts or circumstances with respect to the past or
current operation or facilities of the Company and its Subsidiaries or any
predecessor or affiliate thereof (including, without limitation any onsite or
offsite disposal or release of hazardous materials, substances or wastes) would
give rise to any liability or corrective or remedial obligation under any
Environmental and Safety Requirements. Except as set forth on the Environmental
Schedule, to the Company's Knowledge, neither the Company and its Subsidiaries,
nor any of its predecessors or affiliates has, either expressly or by operation
of law, assumed or undertaken any liability or obligation of any other Person
relating to Environmental and Safety Requirements.
5AA. SUPPLIERS AND CUSTOMERS. The SUPPLIERS AND CUSTOMERS SCHEDULE
attached hereto accurately sets forth a list of the top ten vendors and service
providers and the top fifteen customers of the Company by volume of commissions
for the fiscal year ended December 31, 1997. No material supplier, vendor or
service provider of the Company or its Subsidiaries has given the Company or its
Subsidiaries notice that it shall stop, or materially decrease the rate of, or
materially and adversely change the terms with respect to, paying any
commissions to the Company and its Subsidiaries or supplying materials, products
or services to the Company and its Subsidiaries (whether as a result of the
transaction contemplated hereby or otherwise). No material customer of the
Company or its Subsidiaries has given the Company or its Subsidiaries notice
that it shall stop, or materially decrease the rate of, buying services or any
materials or products from the Company or its Subsidiaries (whether as a result
of the transaction contemplated hereby or otherwise).
5BB. DISCLOSURE. Neither this Agreement nor any of the schedules,
attachments, written statements, documents, certificates or other items prepared
or supplied to the Purchasers by or on behalf of the Company and its
Subsidiaries with respect to the transactions contemplated hereby contain any
untrue statement of a material fact or omit a material fact necessary to make
each statement contained herein or therein not misleading. There is no fact
which the Company and its Subsidiaries have not disclosed to the Purchasers and
of which any of its officers, directors or executive employees is aware and
which has had or might reasonably be anticipated to have a material adverse
effect upon the existing or expected financial condition, operating results,
assets, customer or supplier relations, employee relations or business prospects
of the Company and its Subsidiaries.
5CC. ACQUISITION PROPOSALS. The Company and its Subsidiaries are not a
party to or bound by any agreement with respect to any Acquisition Proposal
(other than this Agreement) and the Company and its Subsidiaries have terminated
all discussions with any third party (other than Purchasers) regarding any
Acquisition Proposal.
<PAGE>
Section 6. REPRESENTATION AND WARRANTIES OF THE PURCHASERS. As a
material inducement to the Company to enter into this Agreement and sell the
Purchased Shares hereunder, each Purchaser hereby represents and warrants, as to
itself (as applicable) and not as to any other Purchaser, that:
6A. ORGANIZATION, CORPORATE POWERS AND LICENSES OF SMART TECHNOLOGY.
Smart Technology is duly organized, validly existing and in good standing under
the laws of the jurisdiction in which Smart Technology is organized. Smart
Technology possesses all requisite power and authority and all material
licenses, permits and authorizations necessary to carry on its businesses as now
conducted and to carry out the transactions contemplated by this Agreement.
6B. AUTHORIZATION; NO BREACH BY SMART TECHNOLOGY. The execution,
delivery and performance of this Agreement, the Management Agreements, the
Stockholders Agreement, the Professional Services Agreements, the Registration
Agreement, and all other agreements contemplated hereby to which Smart
Technology is a party or a beneficiary have been duly authorized by Smart
Technology. This Agreement, the Management Agreements, the Stockholders
Agreement, the FMC Professional Services Agreement, the Registration Agreement,
and all other agreements contemplated hereby to which Smart Technology is a
party or beneficiary each constitutes a valid and binding obligation of Smart
Technology, enforceable in accordance with its terms. This Agreement, the
Management Agreements, the Stockholders Agreement, the FMC Professional Services
Agreements, the Registration Agreement, and all other agreements contemplated
hereby and the fulfillment of and compliance with the respective terms hereof
and thereof by Smart Technology, do not and shall not (i) conflict with or
result in a breach of the terms, conditions or provisions, (ii) constitute a
default under, (iii) result in the violation of, or require any authorization,
consent, approval, exemption or other action by or notice or declaration to, or
filing with any court, administrative or governmental body or agency pursuant
to, the organizational documents of Smart Technology, or any law, statute, rule
or regulation to which Smart Technology is subject, or any agreement,
instrument, order, judgement or decree to which Smart Technology is subject.
6C. ORGANIZATION, CORPORATE POWERS AND LICENSES OF GTCR. GTCR is duly
organized, validly existing and in good standing under the laws of the
jurisdiction in which GTCR is organized. GTCR possesses all requisite power and
authority and all material licenses, permits and authorizations necessary to
carry on its businesses as now conducted and to carry out the transactions
contemplated by this Agreement.
6D. AUTHORIZATION; NO BREACH BY GTCR. The execution, delivery and
performance of this Agreement, the Management Agreements, the Stockholders
Agreement, the Professional Services Agreements, the Registration Agreement, and
all other agreements contemplated hereby to which GTCR is a party or a
beneficiary have been duly authorized by GTCR. This Agreement, the Management
Agreements, the Stockholders Agreement, the Professional Services Agreements,
the Registration Agreement,
<PAGE>
and all other agreements contemplated hereby to which GTCR is a party or a
beneficiary each constitutes a valid and binding obligations of GTCR,
enforceable in accordance with its terms. This Agreement, the Management
Agreements, the Stockholders Agreement, the Professional Services Agreements,
the Registration Agreement, and all other agreements contemplated hereby and the
fulfillment of and compliance with the respective terms hereof and thereof by
GTCR, do not and shall not (i) conflict with or result in a breach of the terms,
conditions or provisions, (ii) constitute a default under, (iii) result in the
violation of, or require any authorization, consent, approval, exemption or
other action by or notice or declaration to, or filing with any court,
administrative or governmental body or agency pursuant to, the organizational
documents of GTCR, or any law, statute, rule or regulation to which GTCR is
subject, or any agreement, instrument, order, judgement or decree to which GTCR
is subject.
6E. BROKERAGE. There are no claims for brokerage commissions, finder's
fees or similar compensation in connection with the transactions contemplated by
this Agreement based on any arrangement or agreement binding upon such
Purchaser.
6F. INVESTMENT INTENTION. Such Purchaser is acquiring the Purchased
Shares to be acquired by it solely for its own account as an investment and not
with a view to any distribution or resale thereof within the meanings of such
terms under the Securities Act. Such Purchaser has been advised that the
Purchased Shares have not been registered under the Securities Act or under the
provisions of any state securities or "blue sky" law. Such Purchaser, by
accepting the Purchased Shares, agrees and acknowledges that it will not,
directly or indirectly, offer, transfer, sell, assign, pledge, encumber,
hypothecate or dispose of such Purchased Shares (or solicit any offers to
purchase or otherwise acquire or take a pledge of any of the Purchased Shares)
unless such offer, transfer, sale, assignment, pledge, encumbrance,
hypothecation or other disposition is made (i) pursuant to an effective
registration statement under the Securities Act and in compliance with all
applicable state securities or "blue sky" laws or (ii) pursuant to an available
exemption from registration under, or otherwise in compliance with, the
Securities Act and all applicable state securities or "blue sky" laws. Nothing
contained herein shall prevent such Purchaser and subsequent holders of
Purchased Shares from transferring such securities in compliance with the
provisions of Section 4 hereof.
6G. ACCREDITED INVESTOR, ABILITY TO BEAR RISK; EVALUATION OF RISKS.
Such Purchaser is an "Accredited Investor" (as such term is defined in Rule 501
of Regulation D of the Securities Act). The financial situation of the Purchaser
is such that it can afford to bear the economic risk of holding the unregistered
Purchased Shares for an indefinite period of time. Such Purchaser can afford to
suffer the complete loss of their investment in the Purchased Shares. The
knowledge and experience of such Purchaser in financial and business matters is
such that it is capable of evaluating the risk of the investment in the
Purchased Shares. Such Purchaser acknowledges that it has had access to such
financial and other information, and has been afforded the opportunity to ask
questions of representatives of the Company and receive answers thereto, as such
Purchaser has deemed necessary in connection with its decision to purchase the
Purchased Shares, and that no representation or warranties, express or implied,
are being made by the Company with respect to the Company or the Purchased
Shares, other than those expressly set forth herein.
Section 7. DEFINITIONS. For the purposes of this Agreement, the
following terms have the meanings set forth below:
<PAGE>
"ACQUISITION PROPOSAL" means any proposal or offer to acquire
all or a substantial part of the business or properties of the Company
or any capital stock of the Company, whether by merger, tender offer,
exchange offer, sale of assets or similar transaction involving the
Company, division or operating or principal business unit of the
Company.
"AFFILIATE" of any particular person or entity means any other
person or entity controlling, controlled by or under common control
with such particular person or entity and with respect to a Purchaser
shall also include any general or limited partner of such Purchaser.
"AFFILIATED GROUP" means an affiliated group as defined in
Section 1504 of the IRC (or any analogous combined, consolidated or
unitary group defined under state, local or foreign income Tax law) of
which the Company or any Subsidiary is or has been a member.
"CERCLA" means the Comprehensive Environmental Response,
Compensation and Liability Act of 1980, as amended.
"COBRA" means part 6 of Subtitle B of Title I of ERISA.
"ENVIRONMENTAL AND SAFETY REQUIREMENTS" means all federal,
state, local and foreign statutes, regulations, ordinances and other
provisions having the force or effect of law, all judicial and
administrative orders and determinations, all contractual obligations
and all common law in each case concerning public health and safety,
worker health and safety and pollution or protection of the
environment.
"ENVIRONMENTAL LIEN" means any Lien, whether recorded or
unrecorded, in favor of any governmental entity, relating to any
liability of the Company arising under any Environmental and Safety
Requirements.
"GTCR FUNDS" means GTCR Fund VI, L.P., a Delaware limited
partnership, GTCR VI Executive Fund, L.P., a Delaware limited
partnership, and GTCR Associates VI, a Delaware general partnership.
"INDEBTEDNESS" means at a particular time, without
duplication, (i) any indebtedness for borrowed money or issued in
substitution for or exchange of indebtedness for borrowed money, (ii)
any indebtedness evidenced by any note, bond, debenture or other debt
security, (iii) any indebtedness for the deferred purchase price of
property or services with respect to which a Person is liable,
contingently or otherwise, as obligor or otherwise (other than trade
payables and other current liabilities incurred in the ordinary course
of business which are not more than six months past due), (iv) any
commitment by which a Person assures a creditor against loss
(including, without limitation, contingent reimbursement obligations
with respect to letters of credit), (v) any indebtedness guaranteed
in any manner by a Person (including, without limitation,
<PAGE>
guarantees in the form of an agreement to repurchase or reimburse),
(vi) any obligations under capitalized leases with respect to which
a Person is liable, contingently or otherwise, as obligor,
guarantor or otherwise, or with respect to which obligations a
Person assures a creditor against loss.
"INTELLECTUAL PROPERTY RIGHTS" means all (i) patents, patent
applications, patent disclosures and inventions, (ii) trademarks,
service marks, trade dress, trade names, logos and corporate names and
registrations and applications for registration thereof together with
all of the goodwill associated therewith, (iii) copyrights (registered
or unregistered) and copyrightable works and registrations and
applications for registration thereof, (iv) mask works and
registrations and applications for registration thereof, (v) computer
software, data, data bases and documentation thereof, (vi) trade
secrets and other confidential information (including, without
limitation, ideas, formulas, compositions, inventions (whether
patentable or unpatentable and whether or not reduced to practice),
know-how, manufacturing and production processes and techniques,
research and development information, drawings, specifications,
designs, plans, proposals, technical data, copyrightable works,
financial and marketing plans and customer and supplier lists and
information), (vii) other intellectual property rights and (viii)
copies and tangible embodiments thereof (in whatever form or medium).
"INVESTMENT" as applied to any Person means (i) any direct or
indirect purchase or other acquisition by such Person of any notes,
obligations, instruments, stock, securities or ownership interest
(including partnership interests and joint venture interests) of any
other Person and (ii) any capital contribution by such Person to any
other Person.
"INVESTOR COMMON" means (i) the Common Stock issued hereunder
and (ii) any Common Stock issued or issuable with respect to the Common
Stock referred to in clause (i) above by way of stock dividends or
stock splits or in connection with a combination of shares,
recapitalization, merger, consolidation or other reorganization. As to
any particular shares of Investor Common, such shares shall cease to be
Investor Common when they have been (a) effectively registered under
the Securities Act and disposed of in accordance with the Registration
statement covering them or (b) distributed to the public through a
broker, dealer or market maker pursuant to Rule 144 under the
Securities Act (or any similar rule then in force).
"INVESTOR PREFERRED" means (i) the Class A Preferred issued
hereunder and (ii) any Class A Preferred issued or issuable with
respect to the Class A Preferred referred to in clause (i) above by way
of stock dividends or stock splits or in connection with a combination
of shares, recapitalization, merger, consolidation or other
reorganization. As to any particular shares of Investor Preferred, such
shares shall cease to be Investor Preferred when they have been (a)
effectively registered under the Securities Act and disposed of in
accordance with the Registration Statement covering them or (b)
distributed to the public through a broker, dealer or market maker
pursuant to Rule 144 under the Securities Act (or any similar rule then
in force).
<PAGE>
"INVESTOR STOCK" means the Investor Preferred and the Investor
Common.
"IRC" means the Internal Revenue Code of 1986, as amended, and
any reference to any particular IRC Section shall be interpreted to
include any revision of or successor to that Section regardless of how
numbered or classified.
"KNOWLEDGE" means the actual knowledge, without investigation,
of Ken S. Bajaj, Robert G. Harvey, Robert D. McCalley and Terrence M.
McManus.
"LIEN" or "LIENS" means any mortgage, pledge, security
interest, encumbrance, lien or charge of any kind (including, without
limitation, any conditional sale or other title retention agreement or
lease in the nature thereof, any sale of receivables with recourse
against such Person, any of its Subsidiaries or any Affiliate, any
filing or agreement to file a financing statement as debtor under the
Uniform Commercial Code or any similar statute other than to reflect
ownership by a third party of property leased to such Person under a
lease which is not in the nature of a conditional sale or title
retention agreement, or any subordination arrangement in favor of
another Person (other than any subordination arising in the ordinary
course of business)).
"LOSS" or "LOSSES" means all actions, suits, proceedings,
hearings, investigations, charges, complaints, claims, demands,
injunctions, orders, decrees, rulings, damages, dues, penalties, fines,
costs, amounts paid in settlement, liabilities, obligations, Taxes,
liens, losses, expenses, and fees, including court costs and reasonable
attorneys' fees and expenses.
"OFFICER'S CERTIFICATE" means a certificate signed by the
Company's president or its chief financial officer, stating that (i)
the officer signing such certificate has made or has caused to be made
such investigations as is intended to permit him to verify the accuracy
of the information set forth in such certificate and (ii) to the best
of such officer's knowledge, such certificate does not misstate any
material fact and does not omit to state any fact necessary to make the
certificate not misleading.
"ORDINARY COURSE OF BUSINESS" means the ordinary course of
business consistent with past custom and practice (including with
respect to quantity and frequency).
"PERMITTED LIENS" means (i) Tax Liens with respect to Taxes
not yet due and payable or which are being contested in good faith by
appropriate proceedings and for which appropriate reserves have been
established in accordance with GAAP; (ii) deposits or pledges made in
connection with, or to secure payment of, utilities or similar
services, workers' compensation, unemployment insurance, old age
pensions or other social security obligations; (iii) interests or title
of a lessor under any of the Leases; (iv) mechanics', materialmen's or
contractors' Liens or encumbrances or any similar Lien or restriction
for amounts not yet due and payable; and (v) easements, rights-of-way,
restrictions and other similar charges and encumbrances not interfering
with the ordinary
<PAGE>
conduct of the business of such Person or detracting from the value of
the assets of such Person.
"PERSON" means an individual, a partnership, a limited
liability company, a corporation, an association, a joint stock
company, a trust, a joint venture, an unincorporated organization and a
governmental entity or any department, agency or political subdivision
thereof.
"RESTRICTED SECURITIES" means (i) the Stock issued hereunder
and pursuant to Section 1B(a) and Section 1B(b) hereof and (ii) any
securities issued with respect to the securities referred to in clause
(i) above by way of a stock dividend or stock split or in connection
with a combination of shares, recapitalization, merger, consolidation
or other reorganization. As to any particular Restricted Securities,
such securities shall cease to be Restricted Securities when they have
(a) been effectively registered under the Securities Act and disposed
of in accordance with the registration statement covering them, (b)
become eligible for sale pursuant to Rule 144(k) (or any similar
provision then in force) under the Securities Act or otherwise
transferred and new certificates for them not bearing the Securities
Act legend set forth in Section 4(iv) have been delivered by the
Company in accordance with Section 4(ii). Whenever any particular
securities cease to be Restricted Securities, the holder thereof shall
be entitled to receive from the Company, without expense, new
certificates of like tenor not bearing a Securities Act legend of the
character set forth in Section 4(iv).
"SECURITIES ACT" means the Securities Act of 1933, as amended,
or any similar federal law then in force.
"SECURITIES EXCHANGE ACT" means the Securities Exchange Act of
1934, as amended, or any similar federal law then in force.
"SECURITIES AND EXCHANGE COMMISSION" includes any governmental
body or agency succeeding to the functions thereof.
"SECURITY INTEREST" means any mortgage, pledge, lien,
encumbrance, charge or other security interest, other than (a)
mechanic's, materialmen's, and similar liens, (b) liens for taxes not
yet due and payable, (c) purchase money liens and liens securing rental
payments under capital lease arrangements, and (d) other liens arising
in the Ordinary Course of Business and not incurred in connection with
the borrowing of money.
"SUBSIDIARY" means, with respect to any Person, any
corporation, limited liability company, partnership, association, joint
venture or other business entity of which (i) if a corporation, fifty
percent (50%) or more 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
<PAGE>
other business entity, fifty percent (50%) or more 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 fifty percent
(50%) or greater ownership interest in a limited liability company,
partnership, association or other business entity if such Person or
Persons shall be allocated fifty percent (50%) or more of limited
liability company, partnership, association or other business entity
gains or losses or shall be or control the managing general partner of
such limited liability company, partnership, association or other
business entity. The term Subsidiary shall include, without limitation,
the Company's joint venture arrangement with Commerce Direct
International, Inc., a Delaware corporation.
"TAX" means any (A) federal, state, local or foreign income,
gross receipts, franchise, estimated, alternative minimum, add-on
minimum, sales, use, transfer, registration, value added, excise,
natural resources, severance, stamp, occupation, premium, windfall
profit, environmental, customs, duties, real property, personal
property, capital stock, social security, unemployment, disability,
payroll, license, employee or other withholding, or other tax, of any
kind whatsoever, including any interest, penalties or additions to tax
or additional amounts in respect of the foregoing; (B) liability of the
Company or any Subsidiary for the payment of any amounts of the type
described in clause (A) arising as a result of being (or ceasing to be)
a member of any Affiliated Group (or being included (or required to be
included) in any Tax Return relating thereto); and (C) liability of the
Company for the payment of any amounts of the type described in clause
(A) as a result of any express or implied obligation to indemnify or
otherwise assume or succeed to the liability of any other person.
"TAX RETURNS" means returns, declarations, reports, claims for
refund, information returns or other documents (including any related
or supporting schedules, statements or information) filed or required
to be filed in connection with the determination, assessment or
collection of Taxes of any party or the administration of any laws,
regulations or administrative requirements relating to any Taxes.
Section 8. MISCELLANEOUS.
8A. EXPENSES. The Company agrees to pay, and hold the Purchasers and
all holders of Investor Stock harmless against liability for the payment of, (i)
the reasonable fees and expenses of their counsel arising in connection with the
negotiation and execution of this Agreement and the consummation of the
transactions contemplated by this Agreement (including but not limited to fees
and expenses arising with respect to any subsequent purchase of Stock pursuant
to Section 1B(a)(ii) and Section 1B(b)(ii) hereof), (ii) the reasonable fees and
expenses incurred with respect to any amendments or waivers (whether or not the
same become effective) under or in respect of this Agreement, the Management
Agreements, the Stockholders Agreement, the Put Agreement, the Professional
Services Agreements, the Registration Agreement, the Common Stock Repurchase
Agreement and the other agreements contemplated hereby and the Second and Third
Restated Certificates of Incorporation, (iii) stamp and other taxes which may be
payable in
<PAGE>
respect of the execution and delivery of this Agreement or the issuance,
delivery or acquisition of any shares of Stock purchased hereunder or in
accordance with Section 1B(a) or Section 1B(b) hereof, and (iv) the fees and
expenses incurred with respect to the interpretation or enforcement of the
rights granted under this Agreement, the Management Agreements, the Stockholders
Agreement, the Put Agreement, the Professional Services Agreements, the
Registration Agreement, the Common Stock Repurchase Agreement and the other
agreements contemplated hereby and the Second and Third Restated Certificate of
Incorporation and the Company's bylaws.
8B. REMEDIES. Each holder of Investor Stock shall have all rights and
remedies set forth in this Agreement and the Second and Third Restated
Certificate of Incorporation and all rights and remedies which such holders have
been granted at any time under any other agreement or contract and all of the
rights which such holders have under any law. 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.
8C. 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 Investor Stock. In addition, any amendment of
Section 1B(b) of this Agreement shall require the written consent of Smart
Technology. No other course of dealing between the Company and the holder of any
Stock or any delay in exercising any rights hereunder or under the Second or
Third Restated Certificates of Incorporation shall operate as a waiver of any
rights of any such holders. For purposes of this Agreement, shares of Stock held
by the Company or any Subsidiaries shall not be deemed to be outstanding.
8D. COMPLETE AGREEMENT. This Agreement, those documents expressly
referred to herein and other documents of even date herewith embody the complete
agreement and understanding among the parties and supersede and preempt any
prior understandings, agreements or representations by or among the parties,
written or oral, which may have related to the subject matter hereof in any way.
8E. 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 Purchaser or on its behalf, and shall terminate on the
second anniversary of this Agreement.
8F. 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 the Purchasers' benefit as a
purchaser
<PAGE>
or holder of Stock are also for the benefit of, and enforceable by, any
subsequent holder of such Stock. The rights and obligations of GTCR under this
Agreement and the agreements contemplated hereby may be assigned at any time, in
whole or in part, to any investment fund managed by GTCR, or any successor
thereto; provided that (i) such investment fund has adequate capital to purchase
the rights and obligations to be assigned by the assigning party, (ii) such
investment fund provides the representations pursuant to Sections 6F and 6G of
this Agreement and (iii) the assigning party shall only assign its rights under
this Agreement to the assignee in proportion to the amount of stock to be
transferred by the assignor to the assignee (as compared to the total amount of
Company stock owned by the assignor).
8G. GENERALLY ACCEPTED ACCOUNTING PRINCIPLES. Where any accounting
determination or calculation is required to be made under this Agreement or the
exhibits hereto, such determination or calculation (unless otherwise provided)
shall be made in accordance with GAAP, except that if because of a change in
GAAP the Company would have to alter a previously utilized accounting method or
policy in order to remain in compliance with GAAP, such determination or
calculation shall continue to be made in accordance with the Company's previous
accounting methods and policies.
8H. 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.
8I. 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.
8J. DESCRIPTIVE HEADINGS; INTERPRETATION. The descriptive headings of
this Agreement are inserted for convenience only and do not constitute a Section
of this Agreement. The use of the word "including" in this Agreement shall be by
way of example rather than by limitation.
8K. GOVERNING LAW. The corporate law of Delaware shall govern all
issues concerning the relative rights of the Company and its stockholders. All
other questions concerning the construction, validity and interpretation of this
Agreement and the exhibits and schedules hereto shall be governed by and
construed in accordance with the internal laws of the State of Delaware, without
giving effect to any choice of law or conflict of law provision or rule (whether
of the State of Delaware or any other jurisdiction) that would cause the
application of the laws of any jurisdiction other than the State of Delaware.
8L. 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 express courier service (charges
prepaid) or mailed to the recipient by certified or registered mail,
<PAGE>
return receipt requested and postage prepaid. Such notices, demands and other
communications shall be sent to the Purchasers and to the Company at the address
indicated below:
IF TO THE COMPANY:
AppNet Systems, Inc.
6700A Rockledge Drive
Suite 525
Bethesda, MD 20817
Attention: President
WITH A COPY TO:
GTCR Golder Rauner, L.L.C.
Sears Tower
Chicago, Illinois 60606-6402
Attention: Bruce V. Rauner
Phillip A. Canfield
AND
Kirkland & Ellis
East Randolph Drive
Chicago, Illinois 60601
Attention: Stephen L. Ritchie
AND
Tucker, Flyer & Lewis
L Street, N.W.
Washington, D.C. 20036-5612
Attention: Arthur E. Cirulnick
IF TO THE PURCHASERS:
GTCR Golder Rauner, L.L.C.
Sears Tower
Chicago, Illinois 60606-6402
Attention: Bruce V. Rauner
Philip A. Canfield
AND
Smart Technology, L.L.C.
Norton Road
Potomac, MD 20854
<PAGE>
WITH A COPY TO:
Kirkland & Ellis
East Randolph Drive
Chicago, Illinois 60601
Attention: Stephen L. Ritchie
AND
Tucker, Flyer & Lewis
L Street, N.W.
Washington, D.C. 20036-5612
Attention: Arthur E. Cirulnick
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.
* * * * *
<PAGE>
IN WITNESS WHEREOF, the parties hereto have executed this Purchase
Agreement on the date first written above.
APPNET SYSTEMS, INC.
By: /s/ Ken S. Bajaj
------------------------------
Name: Ken S. Bajaj
Its: Chairman and President
GTCR GOLDER RAUNER, L.L.C.
By: /s/ Philip A. Canfield
------------------------------
Name: Philip A. Canfield
Its: Principal
SMART TECHNOLOGY, L.L.C.
By: /s/ K Bajaj
------------------------------
Name: K. R. Bajaj
Its: Managing Partner
<PAGE>
LIST OF EXHIBITS
Exhibit A Pro Forma Monthly Budget
Exhibit B Smart Technology Subordinated Note
Exhibit C Second Restated Certificate of Incorporation
Exhibit D Company's Bylaws
Exhibits E1 to E4 Form of Management Agreements
Exhibit F Stockholders Agreement
Exhibit G Put Agreement
Exhibit H AIS Agreement
Exhibit I GTCR Professional Services Agreement
Exhibit J FMC Professional Services Agreement
Exhibit K Registration Agreement
Exhibit L Common Stock Repurchase Agreement
Exhibit M Exchange Agreement
Exhibit N SVB Common Stock Warrant
Exhibit O SVB Preferred Stock Warrant
Exhibit P Amended Smart Technology Warrant
Exhibit Q First Amendment to Joint Venture Agreement
Exhibit R Anchor Release
Exhibit S Davidson Release
Exhibit T SVB Consent
Exhibit U Third Restated Certificate of Incorporation
LIST OF SCHEDULES
Arbor Stockholders Schedule
Capitalization Schedule
Subsidiary Schedule
Financial Statements Schedule
Indebtedness Schedule
Liabilities Schedule
Extraordinary Transactions Schedule
Developments Schedule
Assets Schedule
Leased Real Property Schedule
Taxes Schedule
Contracts Schedule
Employee Benefits Schedule
Intellectual Property Schedule
Permits Schedule
Brokerage Schedule
Insurance Schedule
Employees Schedule
<PAGE>
Employee Benefits Schedule
Affiliated Transactions Schedule
Officer, Director and Bank Accounts Schedule
Product Warranty Schedule
Environmental Schedule
Suppliers and Customers Schedule
<PAGE>
FIRST AMENDMENT TO PURCHASE AGREEMENT
THIS FIRST AMENDMENT TO PURCHASE AGREEMENT (this "AMENDMENT") is made
as of August 1, 1998 by and among AppNet Systems, Inc., a Delaware corporation
("APPNET"), Smart Technology, L.L.C. ("SMART TECHNOLOGY"), GTCR Golder Rauner,
L.L.C., a Delaware limited liability company ("GTCR"), GTCR Fund VI, L.P., a
Delaware limited partnership ("GTCR FUND VI"), GTCR VI Executive Fund, L.P., a
Delaware limited partnership ("EXECUTIVE FUND"), and GTCR Associates VI, a
Delaware general partnership ("ASSOCIATES FUND" and together with GTCR Fund VI
and the Executive Fund, the "GTCR FUNDS").
WHEREAS, GTCR, Smart Technology and AppNet entered into a
Purchase Agreement dated as of June 29, 1998 (the "PURCHASE AGREEMENT");
WHEREAS, pursuant to a Stock Purchase Agreement by and among
GTCR, GTCR Fund VI, the Executive Fund and the Associates Fund dated July 1,
1998 (the "STOCK PURCHASE AGREEMENT"), each of the GTCR Funds purchased from
GTCR the following number of shares of Common Stock at a price of $0.1055 per
share: (i) GTCR Fund VI, 31,978,095 shares; (ii) Executive Fund, 229,251 shares;
and (iii) Associates Fund, 72,404 shares (the "GTCR TRANSFER");
WHEREAS, in connection with the GTCR Transfer, GTCR assigned
to the GTCR Funds the obligation of GTCR to purchase shares of AppNet's Class A
Cumulative Redeemable Preferred Stock, par value $.01 per share (the "CLASS A
PREFERRED") pursuant to Section 1(B)(a)(ii) of the Purchase Agreement;
WHEREAS, pursuant to a Merger Agreement dated July 31, 1998 by
and among AppNet, SSC Acquisition Sub #1, Inc., a wholly owned subsidiary of
AppNet, Software Services Corporation ("SSC") and certain shareholders of SSC,
SSC Acquisition Sub #1, Inc. has agreed to merge with SSC (the "PROPOSED
MERGER") and as partial consideration therefore the SSC shareholders and
optionholders will receive 11,580 shares of Class A Preferred (the "PREFERRED
STOCK CONSIDERATION");
WHEREAS, the Preferred Stock Consideration affects the
commitments of the GTCR Funds and Smart Technology to purchase shares of Class A
Preferred pursuant to the terms of the Purchase Agreement;
NOW, THEREFORE, in consideration of the premises, the mutual covenants
and agreements set forth herein, and for the purpose of setting forth the terms
and conditions of this Amendment, the parties, intending to be bound, hereby
agree as follows:
1. INCORPORATION OF PURCHASE AGREEMENT. All capitalized terms which are
not defined herein shall have the same meanings as set forth in the Purchase
Agreement. Except as specifically set forth herein, the Purchase Agreement shall
remain in full force and effect and its provisions shall be binding on the
parties hereto.
<PAGE>
2. AMENDMENT OF PURCHASE AGREEMENT. The Purchase Agreement is hereby
amended as follows:
The second and third sentences of Section 1B(a)(ii) of the Purchase
Agreement are amended to read as follows:
GTCR is committing to providing $86,627,114 (including the amount
invested to purchase the Purchased Shares) in equity financing to the
Company as the equity portion of the debt and equity financing
necessary to fund the Company's working capital and such acquisitions,
in each case as approved by the Company's board of directors (the
"BOARD") and GTCR (an "APPROVED USE"). In order to implement the
foregoing, GTCR shall purchase from time to time after the Closing,
upon the written request of the Board in connection with such an
Approved Use, up to 83,221.6 shares of Class A Preferred at a price of
$1,000 per share as adjusted from time to time as a result of stock
dividends, stock splits, recapitalization and similar events).
The first two sentences of Section 1B(b)(ii) of the Purchase Agreement
are amended to read as follows:
Upon the purchase from time to time by GTCR of up to 83,221.6 shares of
Class A Preferred pursuant to Section 1B(a) of the Purchase Agreement,
Smart Technology will purchase, and the Company will sell up to an
aggregate of 1,698.4 shares of Class A Preferred at a price of
$1,000.00 per share (as adjusted from time to time as a result of stock
splits, stock dividends, recapitalizations and similar events). The
number of shares of Class A Preferred to be sold by the Company and
purchased by Smart Technology at any time shall equal (i) 1,698.4
shares of Class A Preferred MULTIPLIED BY (ii) a fraction (A) the
numerator of which will be the number of shares of Class A Preferred to
be concurrently purchased by GTCR and (B) the denominator of which will
be 83,221.6 shares.
3. EFFECTUATION. The amendments to the Purchase Agreement contemplated
by this Amendment shall be deemed effective upon the consummation of the
Proposed Merger without any further action required by the parties hereto.
4. CHOICE OF LAW. The construction, validity, interpretation and
enforcement of this Amendment shall be governed by the internal law, and not the
law of conflicts, of the State of Delaware.
5. COUNTERPARTS. This Amendment may be executed in two or more
counterparts, each of which shall be deemed an original, but all of which
together shall constitute one and the same instrument.
* * * * *
<PAGE>
IN WITNESS WHEREOF, this Amendment has been duly executed by the
parties as of the date first above written.
GTCR GOLDER RAUNER, L.L.C.
By: /s/ Philip A. Canfield
-----------------------------------
Name: Philip A. Canfield
Its: Principal
GTCR FUND VI, L.P.
By: GTCR Partners VI, L.P.
Its: General Partner
By: GTCR Golder Rauner, L.L.C.
Its: General Partner
By: /s/ Philip A. Canfield
-----------------------------------
Name: Philip A. Canfield
Its: Principal
GTCR VI EXECUTIVE FUND, L.P.
By: GTCR Partners VI, L.P.
Its: General Partner
By: GTCR Golder Rauner, L.L.C.
Its: General Partner
By: /s/ Philip A. Canfield
-----------------------------------
Name: Philip A. Canfield
Its: Principal
[Continuation of Purchase Agreement Amendment Signature Page]
<PAGE>
GTCR ASSOCIATES VI
By: GTCR Partners VI, L.P.
Its: Managing General Partner
By: GTCR Golder Rauner, L.L.C.
Its: General Partner
By: /s/ Philip A. Canfield
-----------------------------------
Name: Philip A. Canfield
Its: Principal
APPNET SYSTEMS, INC.
By: /s/ Ken S. Bajaj
-----------------------------------
Name:
-----------------------------------
Title:
-----------------------------------
SMART TECHNOLOGY, L.L.C.
By: /s/ K. Bajaj
-----------------------------------
Name: K. BAJAJ
-----------------------------------
Its: MANAGING PARTNER
-----------------------------------
<PAGE>
FORM OF SECOND AMENDMENT TO THE PURCHASE AGREEMENT
THIS SECOND AMENDMENT TO THE PURCHASE AGREEMENT (this "Amendment") is
made as of June ____, 1999, among AppNet Systems, Inc., a Delaware corporation
(the "Company"), Smart Technology, L.L.C. ("Smart Technology"), GTCR Fund VI,
L.P., a Delaware limited partnership ("GTCR Fund VI"), GTCR VI Executive Fund,
L.P., a Delaware limited partnership ("Executive Fund"), and GTCR Associates VI,
a Delaware general partnership ("Associates Fund" and together with GTCR Fund VI
and Executive Fund, the "GTCR Funds"). The GTCR Funds and Smart Technology are
referred to herein collectively as the "Purchasers".
WHEREAS, the Company, Smart Technology and GTCR Golder Rauner, L.L.C.,
a Delaware limited liability company ("Golder Rauner"), entered into a Purchase
Agreement, dated as of June 29, 1998, as amended (the "Purchase Agreement"),
which set forth the terms pursuant to which Smart Technology and Golder Rauner
would purchase Common Stock, par value .0005 per share of the Company ("Common
Stock") and Class A Preferred Stock, par value $.01 per share, of the Company
(the "Class A Preferred Stock");
WHEREAS, pursuant to the Stock Purchase Agreement by and among Golder
Rauner, GTCR Fund VI, Executive Fund and Associates Fund dated July 1, 1998, the
GTCR Funds purchased all of the Common Stock from Golder Rauner and Golder
Rauner assigned to the GTCR Funds its obligations to purchase shares of Class A
Preferred Stock pursuant to Section 1(B)(a)(ii) of the Purchase Agreement;
WHEREAS, the Company expects to offer its Common Stock, par value
$.0005 per share, for sale to the public in an initial public offering pursuant
to a Registration Statement on Form S-1 registered with the Securities and
Exchange Commission (the "Initial Public Offering");
WHEREAS, the Company intends to use certain proceeds of the Initial
Public Offering to redeem the issued and outstanding shares of Class A Preferred
Stock; and
WHEREAS, the Company and the Purchasers desire to amend the Purchase
Agreement as set forth herein.
NOW THEREFORE, for good and valuable consideration, the receipt and
sufficiency of which are hereby acknowledged, the parties, intending to be
legally bound, hereby agree as follows:
1. INCORPORATION OF PURCHASE AGREEMENT. All capitalized terms which are
not defined herein shall have the same meanings as set forth in the Purchase
Agreement. Except as specifically set forth herein, the Purchase Agreement shall
remain in full force and effect and its provisions shall be binding on the
parties hereto.
<PAGE>
2. TERMINATION OF CERTAIN PROVISIONS OF THE PURCHASE AGREEMENT. Upon
the consummation of the Initial Public Offering, each of the following
provisions of the Purchase Agreement shall terminate and shall have no further
force or effect:
(a) Section 1B(a)(ii);
(b) Section 1B(b)(ii);
(c) Section 1B(b)(iii);
(d) Section 3C;
(e) Section 3D;
(f) Section 3E; and
(g) Section 3I.
3. AMENDMENT TO SECTION 3H OF THE PURCHASE AGREEMENT. Section 3H of the
Purchase Agreement is hereby amended and restated in its entirety as follows:
"The Company shall not, nor shall it permit any Subsidiary to, disclose
a Purchaser's name or identity as an investor in the Company in any
press release or other public announcement or in any document or
material filed with any governmental entity, without the prior written
consent of such Purchasers, unless such disclosure is required by
applicable law or governmental regulations or by order of a court of
competent jurisdiction, in which case prior to making any such required
disclosure which is materially inconsistent with the Company's
then-previous disclosure the Company shall give written notice to such
Purchasers describing in reasonable detail the proposed content of such
disclosure and shall permit such Purchasers to review and comment upon
the form and substance of such disclosure."
4. COMPOSITION OF BOARD OF DIRECTORS; COMPENSATION COMMITTEE. The
Company covenants that it shall, subject to any limitations imposed by Delaware
law, use its best efforts to nominate and ensure that the GTCR Funds will be
entitled to appoint one designee to the Company's Board of Directors and to the
Company's Compensation and Stock Option Committee of the Board of Directors.
This Section 4 shall terminate upon the GTCR Funds collectively failing to hold
at least 15% of the GTCR Funds' holdings, as of the date hereof, of the
Corporation's Common Stock.
5. EFFECTUATION. The amendments to the Purchase Agreement contemplated
by this Amendment shall be deemed effective upon the consummation of the
Company's Initial Public Offering without any further action required by the
parties.
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<PAGE>
6. GOVERNING LAW. This Amendment shall be governed by and construed and
enforced in accordance with the laws of the State of Delaware, without giving
effect to the conflict of law principles thereof.
7. AMENDMENT. No provision of this Amendment may be modified, waived or
discharged unless such waiver, modification or discharge is agreed to in writing
and signed by holders of a majority of the Investor Stock and the Company;
provided that no amendment may be made to the terms of Sections 2(a), 2(b) or
2(c) hereof without the written consent of Smart Technology.
8. COUNTERPARTS. This Amendment may be executed in two or more
counterparts, each of which shall be deemed to be an original, but all such
counterparts shall together constitute one and the same Amendment.
[Execution Page Follows]
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<PAGE>
IN WITNESS WHEREOF, the parties hereto have executed this Second
Amendment to the Purchase Agreement as of the date first written above.
APPNET SYSTEMS, INC.
By:
-------------------------------
Name:
Title:
SMART TECHNOLOGY, L.L.C.
By:
-------------------------------
Name:
Title:
GTCR FUND VI, L.P.
By: GTCR Partners VI, L.P.
Its: General Partner
By: GTCR Golder Rauner, L.L.C.
Its: General Partner
By:
-------------------------------
Name: Philip A. Canfield
Its: Principal
GTCR VI EXECUTIVE FUND, L.P.
By: GTCR Partners VI, L.P.
Its: General Partner
By: GTCR Golder Rauner, L.L.C.
Its: General Partner
By:
-------------------------------
Name: Philip A. Canfield
Its: Principal
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<PAGE>
GTCR ASSOCIATES VI
By: GTCR Partners VI, L.P.
Its: General Partner
By: GTCR Golder Rauner, L.L.C.
Its: General Partner
By:
-------------------------------
Name: Philip A. Canfield
Its: Principal
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<PAGE>
Exhibit 10.20
APPNET SYSTEMS, INC.
1999 STOCK INCENTIVE PLAN
AS OF JUNE __, 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 Optionee's or
Grantee's death.
2.7 "BOARD" means the Board of Directors of the Company.
2.8 "CAUSE" means:
(a) for purposes of Section 6.4, the term
"Cause" shall mean (i) intentional failure to perform duties as a Director, (ii)
intentional misrepresentation or the commission of an act of fraud in the
performance of such duties, (iii) breach of fiduciary duty involving personal
profit including, without limitation, embezzlement, misappropriation or
conversion of assets or opportunities of the Company or any of its Subsidiaries
or (iv) willful violation of any law, rule or regulation (other than traffic
violations or similar offenses) in connection with the performance of duties as
a Director; PROVIDED, HOWEVER, that if the term "Cause" is defined in the
Articles of Incorporation of the Company, Cause shall have the meaning given
such term in such Articles, or
(b) in the case of an Optionee or Grantee whose
employment with the Company or a Subsidiary is, as the date of the applicable
Agreement, subject to the terms of an employment agreement between such Optionee
or Grantee and the Company or Subsidiary, which employment agreement includes a
definition of "Cause," the term "Cause" as used in this Plan or any Agreement
shall have the meaning set forth in such employment agreement during the period
that such employment agreement remains in effect; or
(c) in all other cases, the term "Cause" as
used in this Plan or any Agreement shall mean (i) intentional failure to perform
reasonably assigned duties, (ii) dishonesty or willful misconduct in the
performance of duties, (iii) involvement in a transaction in connection with the
performance of duties to the Company or any of its Subsidiaries which
transaction is adverse to the interests of the Company or any of its
Subsidiaries and which is engaged in for personal profit or (iv) willful
violation of any law, rule or regulation (other than traffic violations or
similar offenses) in connection with the performance of duties.
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<PAGE>
2.9 "CHANGE IN CAPITALIZATION" means any increase or reduction
in the number of Shares, or any change (including, without limitation, in the
case of a spin-off, dividend or other distribution in respect of Shares, a
change in value) in the Shares or exchange of Shares for a different number or
kind of shares or other securities of the Company or another corporation, by
reason of a reclassification, recapitalization, merger, consolidation,
reorganization, spin-off, split-up, issuance of warrants or rights or
debentures, stock dividend, stock split or reverse stock split, cash dividend,
property dividend, combination or exchange of shares, repurchase of shares,
change in corporate structure or a substantially similar transaction.
2.10 A "CHANGE IN CONTROL" shall mean the occurrence of
any of the following:
(a) An acquisition in one transaction or a
series of related transactions (other than directly from the Company or pursuant
to Options or Awards granted under this Plan or otherwise by the Company) of any
Voting Securities of the Company by any Person, immediately after which such
Person has Beneficial Ownership of fifty percent (50%) or more of the combined
voting power of the Company's then outstanding Voting Securities; PROVIDED,
HOWEVER, in determining whether a Change in Control has occurred pursuant to
this Section 2.10(a), Voting Securities which are acquired in a "Non-Control
Acquisition" (as hereinafter defined) shall not constitute an acquisition which
would cause a Change in Control. A "Non-Control Acquisition" shall mean an
acquisition by (i) an employee benefit plan (or a trust forming a part thereof)
maintained by (A) the Company or (B) any corporation or other Person of which a
majority of its voting power or its voting equity securities or equity interest
is owned, directly or indirectly, by the Company (for purposes of this
definition, a "Related Entity"), (ii) the Company or any Related Entity, or
(iii) any Person in connection with a "Non-Control Transaction" (as hereinafter
defined);
(b) The individuals who, as of the date
hereof, are members of the Board (the "Incumbent Board"), cease for any reason
to constitute at least a majority of the members of the Board; PROVIDED,
HOWEVER, that if the election, or nomination for election by the Company's
common stockholders, of any new director was approved by a vote of at least a
majority of the Incumbent Board, such new director shall, for purposes of this
Plan, be considered as a member of the Incumbent Board; PROVIDED FURTHER,
HOWEVER, that no individual shall be considered a member of the Incumbent Board
if such individual initially assumed office as a result of either an actual or
threatened "Election Contest" (as described in Rule 14a-11 promulgated under the
Exchange Act) or other actual or threatened solicitation of proxies or consents
by or on behalf of a Person other than the Board (a "Proxy Contest") including
by reason of any agreement intended to avoid or settle any Election Contest or
Proxy Contest; or
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<PAGE>
(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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<PAGE>
(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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<PAGE>
(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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<PAGE>
2.25 "INITIAL PUBLIC OFFERING" means the consummation of the
first public offering of Shares pursuant to a registration statement (other than
on Form S-8 or successor form) filed with, and declared effective by, the
Securities and Exchange Commission.
2.26 "NONEMPLOYEE DIRECTOR" means a director of the Company
who is a "nonemployee director" within the meaning of Rule 16b-3 promulgated
under the Exchange Act.
2.27 "NONQUALIFIED STOCK OPTION" means an Option which is not
an Incentive Stock Option.
2.28 "NORMAL RETIREMENT DATE" means the date on which an
Optionee or Grantee terminates active employment with the Company on or after
attainment of age 65, but does not include termination by the Company for Cause.
2.29 "OPTION" means a Nonqualified Stock Option, an Incentive
Stock Option, a Formula Option, or any or all of them.
2.30 "OPTIONEE" means a person to whom an Option has been
granted under the Plan.
2.31 "OUTSIDE DIRECTOR" means a director of the Company who is
an "outside director" within the meaning of Section 162(m) of the Code and the
regulations promulgated thereunder.
2.32 "PARENT" means any corporation which is a parent
corporation (within the meaning of Section 424(e) of the Code) with respect to
the Company.
2.33 "PERFORMANCE AWARDS" means Performance Units,
Performance Shares or either or both of them.
2.34 "PERFORMANCE-BASED COMPENSATION" means any Option or
Award that is intended to constitute "performance based compensation" within the
meaning of Section 162(m)(4)(C) of the Code and the regulations promulgated
thereunder.
2.35 "PERFORMANCE CYCLE" means the time period specified by
the Committee at the time Performance Awards are granted during which the
performance of the Company, a Subsidiary or a Division will be measured.
2.36 "PERFORMANCE OBJECTIVES" has the meaning set forth in
Section 11.
2.37 "PERFORMANCE SHARES" means Shares issued or transferred
to an Eligible Individual under Section 11.
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<PAGE>
2.38 "PERFORMANCE UNITS" means Performance Units granted to an
Eligible Individual under Section 11.
2.39 "PERSON" means `person' as such term is used for purposes
of Section 13(d) or 14(d) of the Exchange Act, including without limitation, any
individual, corporation, limited liability company, partnership, trust,
unincorporated organization, government or any agency or political subdivision
thereof, or any other entity or any group of Persons.
2.40 "PHANTOM STOCK" means a right granted to an Eligible
Individual under Section 12 representing a number of hypothetical Shares.
2.41 "PLAN" means the AppNet Systems, Inc. 1999 Stock
Incentive Plan, as amended and restated from time to time.
2.42 "POOLING TRANSACTION" means an acquisition of the Company
in a transaction which is intended to be treated as a "pooling of interests"
under generally accepted accounting principles.
2.43 "RESTRICTED STOCK" means Shares issued or transferred to
an Eligible Individual pursuant to Section 10.
2.44 "SHARE AWARD" means a grant of Shares pursuant to Section
12.
2.45 "SHARES" means the common stock, par value $.0005 per
share, of the Company.
2.46 "STOCK APPRECIATION RIGHT" means a right to receive all
or some portion of the increase in the value of the Shares as provided in
Section 8 hereof.
2.47 "SUBSIDIARY" means (i) except as provided in subsection
(ii) below, any corporation which is a subsidiary corporation (within the
meaning of Section 424(f) of the Code) with respect to the Company, and (ii)
with respect to provisions relating to the eligibility to receive Options or
Awards other than Incentive Stock Options and to continued employment for
purposes of Options and Awards (unless the Committee determines otherwise), any
entity, whether or not incorporated, in which the Company directly or indirectly
owns fifty percent (50%) or more of the outstanding equity or other ownership
interests.
2.48 "SUCCESSOR CORPORATION" means a corporation, or a parent
or subsidiary thereof, which issues or assumes an Option or Award in a
transaction described in Section 424(a) of the Code without regard to
Sections 424(a)(1) and (2) thereof.
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<PAGE>
2.49 "TAX BENEFIT" means an actual decrease in the
Company's liability for taxes in any period.
2.50 "TEN-PERCENT STOCKHOLDER" means an Eligible Individual,
who, at the time an Incentive Stock Option is to be granted to him or her, owns
(within the meaning of Section 422(b)(6) of the Code) stock possessing more than
ten percent (10%) of the total combined voting power of all classes of stock of
the Company, or of a Parent or a Subsidiary.
2.51 "TERMINATION OF EMPLOYMENT" means the later of (i)
severance of the employer-employee relationship with the Company or (ii) the
resignation, removal or termination of an officer or Director of the Company.
2.52 "TRANSITION PERIOD" means the period beginning with an
Initial Public Offering and ending as of the earlier of (i) the date of the
first annual meeting of stockholders of the Company at which Directors are to
be elected that occurs after the close of the third (3rd) calendar year
following the calendar year in which the Initial Public Offering occurs, (ii)
the expiration of the Plan, (iii) a material modification of the Plan within
the meaning of Treasury Regulation 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.
3.2 For purposes of the preceding sentence, if one or more
members of the Committee is not a Nonemployee Director and, if necessary for any
Option or Award
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<PAGE>
intended to qualify as Performance-Based Compensation to so qualify, an Outside
Director, but recuses himself or herself or abstains from voting with respect to
a particular action taken by the Committee, then the Committee, with respect to
that action, shall be deemed to consist only of the members of the Committee who
have not recused themselves or abstained from voting. Subject to applicable law,
the Committee may delegate its authority under the Plan to any other person or
persons.
3.3 No member of the Committee shall be liable for any action,
failure to act, determination or interpretation made in good faith with respect
to this Plan or any transaction hereunder. The Company hereby agrees to
indemnify each member of the Committee for all costs and expenses and, to the
extent permitted by applicable law, any liability incurred in connection with
defending against, responding to, negotiating for the settlement of or otherwise
dealing with any claim, cause of action or dispute of any kind arising in
connection with any actions in administering this Plan or in authorizing or
denying authorization to any transaction hereunder.
3.4 Subject to the express terms and conditions set forth
herein, the Committee shall have the power from time to time to:
(a) determine those Eligible Individuals to
whom Options shall be granted under the Plan and the number of such Options to
be granted and to prescribe the terms and conditions (which need not be
identical) of each such Option, including the purchase price per Share subject
to each Option, and make any amendment or modification to any Option Agreement
consistent with the terms of the Plan;
(b) select those Eligible Individuals to whom Awards
shall be granted under the Plan and to determine the number of Shares in respect
of which each Award is granted, the terms and conditions (which need not be
identical) of each such Award, including the restrictions or Performance
Objectives relating to Awards and the maximum value of any Award, and make any
amendment or modification to any Award Agreement consistent with the terms of
the Plan;
(c) construe and interpret the Plan and the
Options and Awards granted hereunder and to establish, amend and revoke rules
and regulations for the administration of the Plan, including, without
limitation, correcting any defect or supplying any omission, or reconciling any
inconsistency in the Plan or in any Agreement, in the manner and to the extent
it shall deem necessary or advisable, including so that the Plan and the
operation of the Plan complies with the Code to the extent applicable and other
applicable law, and otherwise to make the Plan fully effective. All decisions
and determinations by the Committee in the exercise of this power shall be
final, binding and conclusive upon the Company, its Subsidiaries, the Optionees
and Grantees, and all other persons having any interest therein;
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<PAGE>
(d) determine the duration and purposes for
leaves of absence which may be granted to an Optionee or Grantee on an
individual basis without constituting a termination of employment or service for
purposes of the Plan;
(e) exercise its sole discretion with respect to
the powers and rights granted to it as set forth in the Plan; and
(f) generally, exercise such powers and to
perform such acts as are deemed necessary or advisable to promote the best
interests of the Company with respect to the Plan.
4. STOCK SUBJECT TO THE PLAN; GRANT LIMITATIONS.
4.1 The aggregate number of Shares that may be made the
subject of Options and Awards granted under the Plan shall not exceed 2,000,000
plus the additional Shares described in Section 4.2; PROVIDED, HOWEVER, that the
aggregate maximum number of Shares that may be made the subject of Options and
Awards granted under the Plan shall not exceed 10,000,000; and PROVIDED,
FURTHER, HOWEVER, that in the aggregate, not more than one-third of the number
of allotted Shares may be made the subject of Restricted Stock Awards under
Section 10 of the Plan (other than shares of Restricted Stock made in settlement
of Performance Units pursuant to Section 11.2(b)). Upon a Change in
Capitalization, the maximum number of Shares referred to in the first sentence
of this Section 4.1 shall be adjusted in number and kind pursuant to Section 14.
The Company shall reserve for the purposes of the Plan, out of its authorized
but unissued Shares or out of Shares held in the Company's treasury, or partly
out of each, such number of Shares as shall be determined by the Board.
4.2 As of January 1 of each year, commencing with the year
2000, the aggregate number of Shares that may be made the subject of Options and
Awards granted under the Plan shall automatically increase by a number equal to
an amount determined by the Committee in its sole discretion.
4.3 Upon the granting of an Option or an Award, the number of
Shares available under Section 4.1 for the granting of further Options and
Awards shall be reduced as follows:
(a) In connection with the granting of an Option
or an Award (other than the granting of a Performance Unit denominated in
dollars), the number of Shares shall be reduced by the number of Shares in
respect of which the Option or Award is granted or denominated.
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(b) In connection with the granting of a
Performance Unit denominated in dollars, the number of Shares shall be reduced
by an amount equal to the quotient of (i) the dollar amount in which the
Performance Unit is denominated, divided by (ii) the Fair Market Value of a
Share on the date the Performance Unit is granted.
4.4 Whenever any outstanding Option or Award or portion
thereof expires, is canceled, or is otherwise terminated for any reason without
having been exercised or payment having been made in respect of the entire
Option or Award, the Shares allocable to the expired, canceled, or otherwise
terminated portion of the Option or Award may again be the subject of Options or
Awards granted hereunder.
5. OPTION GRANTS FOR ELIGIBLE INDIVIDUALS.
5.1 AUTHORITY OF COMMITTEE. Subject to the provisions of the
Plan, the Committee shall have full and final authority to select those Eligible
Individuals who will receive Options, the terms and conditions of which shall be
set forth in an Agreement; PROVIDED, HOWEVER, that no Eligible Individual shall
receive any Incentive Stock Options unless he is an employee of the Company, a
Parent or a Subsidiary at the time the Incentive Stock Option is granted.
5.2 PURCHASE PRICE. The purchase price (which may be greater
than, less than or equal to the Fair Market Value on the date of grant) or the
manner in which the purchase price is to be determined for Shares under each
Option shall be determined by the Committee and set forth in the Agreement
pursuant to which each Option is granted; PROVIDED, HOWEVER, that the purchase
price per Share under each Incentive Stock Option shall not be less than 100% of
the Fair Market Value of a Share on the date the Option is granted (110% in the
case of an Incentive Stock Option granted to a Ten-Percent Stockholder).
5.3 MAXIMUM DURATION. Options granted hereunder shall be for
such term as the Committee shall determine, PROVIDED, HOWEVER, that an Option
shall not be exercisable after the expiration of ten (10) years from the date it
is granted (five (5) years in the case of an Incentive Stock Option granted to a
Ten-Percent Stockholder); PROVIDED, FURTHER, HOWEVER, that the Committee may
provide that an Option (other than an Incentive Stock Option) may, upon the
death of the Optionee, be exercised for up to one (1) year following the date of
the Optionee's death even if such period extends beyond ten (10) years from the
date the Option is granted. The Committee may, subsequent to the granting of any
Option, extend the term thereof, but in no event shall the term as so extended
exceed the maximum term provided for in the preceding sentence.
5.4 EXERCISABILITY. Subject to Sections 5.5 and 7.5, each
Option shall become exercisable in such installments (which need not be equal)
and at such times as
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may be designated by the Committee and set forth in the Agreement. To the extent
not exercised, installments shall accumulate and be exercisable, in whole or in
part, at any time after becoming exercisable, but not later than the date the
Option expires. The Committee may accelerate the exercisability of any Option or
portion thereof at any time.
5.5 TERMINATION. Subject to Sections 7.5 and 13 and unless
otherwise provided by the Committee, in its sole discretion, in the applicable
Agreement, the following provisions shall apply to Options upon a Termination of
Employment:
(a) Subject to Section 5.3, unless otherwise
determined by the Committee at the time of grant (and set forth in the
applicable Agreement) or at a later date, except in the case of Disability,
retirement on or after the Optionee's Normal Retirement Date and death as
provided in Sections 5.5(c) and 5.5(d) below, upon an Optionee's Termination of
Employment with the Company, a Parent or a Subsidiary for any reason other than
a termination for Cause, any unexercised Option held by such Optionee shall
expire three (3) months after the Optionee has a Termination of Employment and
such Option may only be exercised by the Optionee or his or her Beneficiary to
the extent that the Option or a portion thereof was exercisable on the date of
Termination of Employment; PROVIDED, HOWEVER, that no Option may be exercised
after the expiration date specified for the particular Option in the Agreement.
(b) If the Optionee's Termination of Employment
arises as a result of a termination for Cause, then, unless the Committee
determines otherwise at the time of the Termination of Employment, any
unexercised Options held by such Optionee shall terminate and expire
concurrently with the Optionee's Termination of Employment and no rights
thereunder may be exercised.
(c) Subject to Section 5.3, unless otherwise
determined by the Committee at the time of grant (and set forth in the
applicable Agreement) or at a later date, if an Optionee suffers a Disability or
retires on or after the Optionee's Normal Retirement Date, any unexercised
Option held by such disabled or retired Optionee shall expire one (1) year after
the Disability Date or date of Termination of Employment by reason of
retirement, as the case may be, and such Option may only be exercised by the
Optionee or his or her guardian or legal representative to the extent that the
Option or a portion thereof was exercisable on the Disability Date or the date
of Termination of Employment by reason of retirement, as the case may be;
PROVIDED, HOWEVER, no Option may be exercised after the expiration date
specified for the particular Option in the Agreement.
(d) Subject to Section 5.3, unless otherwise
determined by the Committee at the time of grant (and set forth in the
applicable Agreement) or at a later date, if an Optionee dies while still
employed by the Company, the Options which the
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Optionee was entitled to exercise on the date of the Optionee's death may be
exercised at any time after the Optionee's death by the Optionee's Beneficiary;
PROVIDED, HOWEVER, that no Option may be exercised after the earlier of: (i) one
(1) year after the Optionee's death or (ii) the expiration date specified for
the particular Option in the Agreement. If an Optionee dies after his or her
Termination of Employment, then the Options which the Optionee was entitled to
exercise on the date of the Optionee's death may be exercised by his or her
Beneficiary within the period specified in Sections 5.5(a) or 5.5(c), as the
case may be.
(e) Subject to Section 5.3 and notwithstanding
any other provision of this Section 5.5, upon an Optionee's Termination of
Employment at any time on, or within one (1) year after, the occurrence of a
Change in Control, each Option held by the Optionee that was exercisable as of
the date of such Termination of Employment shall remain exercisable for a period
ending not before the earlier of (A) the first anniversary of the Termination of
Employment or (B) the expiration of the stated term of the Option.
(f) Unless otherwise determined by the Committee
at the time of grant (and set forth in the applicable Agreement) or at a later
date, the Option (or portion thereof), to the extent not yet vested and
exercisable as of the date of the Optionee's Termination of Employment, shall
terminate immediately upon such date.
5.6 DEFERRED DELIVERY OF OPTION SHARES. The Committee may, in
its sole discretion, permit Optionees to elect to defer the issuance of Shares
upon the exercise of one or more Nonqualified Stock Options granted pursuant to
the Plan. The terms and conditions of such deferral shall be determined at the
time of the grant of the Option or thereafter and shall be set forth in the
Agreement evidencing the Option.
5.7 MODIFICATION. No modification of a Option shall adversely
alter or impair any rights or obligations under the Option without the
Optionee's consent.
5.8 LIMITATIONS ON INCENTIVE STOCK OPTIONS. To the extent that
the aggregate Fair Market Value (determined as of the date of the grant) of
Shares with respect to which Incentive Stock Options granted under the Plan and
"incentive stock options" (within the meaning of Section 422 of the Code)
granted under all other plans of the Company or its Subsidiaries (in either case
determined without regard to this Section 5.8) are exercisable by an Optionee
for the first time during any calendar year exceeds $100,000, such Incentive
Stock Options shall be treated as Nonqualified Stock Options. In applying the
limitation in the preceding sentence in the case of multiple Option grants,
Options which were intended to be Incentive Stock Options shall be treated as
Nonqualified Stock Options according to the order in which they were granted
such that the most recently granted Options are first treated as Nonqualified
Stock Options.
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6. OPTION GRANTS FOR NONEMPLOYEE DIRECTORS.
6.1 GRANT. Formula Options shall be granted (i) to a
Nonemployee Director who becomes a member of the Board after June __, 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 ___, 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:
(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)
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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 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
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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.
(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
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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 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
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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.
(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
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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.
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
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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 (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
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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 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
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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 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.
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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 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.
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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 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
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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 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
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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 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
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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, 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
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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 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.
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(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 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
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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.
(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
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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 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.
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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,
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securities, cash, property, or other consideration shall remain subject to all
of the conditions, restrictions and performance criteria which were applicable
to the Options and Awards prior to such Transaction.
16. INTERPRETATION. Following the required registration of any equity
security of the Company pursuant to Section 12 of the Exchange Act, unless
otherwise expressly stated in the relevant Agreement, each Option, Stock
Appreciation Right and Performance Award granted under the Plan to a "covered
employee" within the meaning of Section 162(m)(3) of the Code is intended to be
Performance-Based Compensation (except that, in the event of a Change in
Control, payment of Performance Awards to a Grantee who remains a "covered
employee" with respect to such payment may not qualify as Performance-Based
Compensation). The Committee shall not be entitled to exercise any discretion
otherwise authorized hereunder with respect to such Options or Awards if the
ability to exercise such discretion or the exercise of such discretion itself
would cause the compensation attributable to such Options or Awards to fail to
qualify as Performance-Based Compensation. Notwithstanding anything to the
contrary in the Plan, the provisions of the Plan may at any time be bifurcated
by the Board or the Committee in any manner so that certain provisions of the
Plan or any Performance Award intended (or required in order) to satisfy the
applicable requirements of Section 162(m) of the Code are only applicable to
persons whose compensation is subject to Section 162(m).
17. POOLING TRANSACTIONS. Notwithstanding anything contained in the
Plan or any Agreement to the contrary, in the event of a Change in Control which
is also intended to constitute a Pooling Transaction, the Committee shall take
such actions, if any, as are specifically recommended by an independent
accounting firm retained by the Company to the extent reasonably necessary in
order to assure that the Pooling Transaction will qualify as such, including,
without limitation, (a) deferring the vesting, 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
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applicable laws of the State of Delaware within twelve (12) months of the
adoption of the Plan by the Board.
18.2 PLAN AMENDMENT OR TERMINATION. The Plan shall terminate
on the day preceding the tenth anniversary of the date of its adoption by the
Board and no Option or Award may be granted thereafter. The Board may sooner
terminate the Plan and the Board may at any time and from time to time amend,
modify or suspend the Plan; PROVIDED, HOWEVER, that:
(a) no such amendment, modification, suspension or
termination shall impair or adversely alter any Options or Awards theretofore
granted under the Plan, except with the consent of the Optionee or Grantee, nor
shall any amendment, modification, suspension or termination deprive any
Optionee or Grantee of any Shares which he or she may have acquired through or
as a result of the Plan; and
(b) to the extent necessary under any applicable law,
regulation or exchange requirement no amendment shall be effective unless
approved by the stockholders of the Company in accordance with applicable law,
regulation or exchange requirement.
19. NON-EXCLUSIVITY OF THE PLAN. The adoption of the Plan by the Board
shall not be construed as amending, modifying or rescinding any previously
approved incentive arrangement or as creating any limitations on the power of
the Board to adopt such other incentive arrangements as it may deem desirable,
including, without limitation, the granting of stock options otherwise than
under the Plan, and such arrangements may be either applicable generally or only
in specific cases.
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
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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.
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EXHIBIT 23.1
Consent of Arthur Andersen LLP
As independent public accountants, we hereby consent to the use of our
reports (and to all references to our Firm) included in or made a part of
this prospectus.
/s/ ARTHUR ANDERSEN LLP
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June 15, 1999 ARTHUR ANDERSEN LLP
