<PAGE>
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON MARCH 29, 1999
REGISTRATION NO. 333-
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
------------------------
FORM S-1
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
------------------------
APPNET SYSTEMS, INC.
(Exact name of Registrant as specified in its charter)
<TABLE>
<S> <C> <C>
DELAWARE 7373 52-2077860
(State or other jurisdiction (Primary Standard Industrial (I.R.S. Employer
of Classification Code Number) Identification
incorporation or organization) No.)
</TABLE>
6707 DEMOCRACY BOULEVARD
BETHESDA, MD 20817
(301) 493-8900
(Address, including zip code, and telephone number, including
area code, of registrants' principal executive offices)
KEN S. BAJAJ, PRESIDENT AND CHIEF EXECUTIVE OFFICER
APPNET SYSTEMS, INC.
6707 DEMOCRACY BOULEVARD
BETHESDA, MD 20817
(301) 493-8900
(Name, address, including zip code, and telephone number, including
area code, of agent for service)
--------------------------
COPIES TO:
STEPHEN I. GLOVER, ESQ. WILLIAM J. WHELAN, III, ESQ.
FRIED, FRANK, HARRIS, SHRIVER & CRAVATH, SWAINE & MOORE
JACOBSON 825 EIGHTH AVENUE
1001 PENNSYLVANIA AVENUE, N.W. NEW YORK, NY 10019
WASHINGTON, DC 20004 (212) 474-1000
(202) 639-7000
--------------------------
APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO PUBLIC:
As soon as practicable after this registration statement becomes effective.
If any of the securities being registered on this Form are to be offered on
a delayed or continuous basis pursuant to Rule 415 under the Securities Act of
1933, check the following box. / /
If this Form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, please check the following box
and list the Securities Act registration statement number of the earlier
effective registration statement for the same offering. / /
If this Form is a post-effective amendment filed pursuant to Rule 462(c)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. / /
If this is a post-effective amendment filed pursuant to Rule 462(d) under
the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. / /
If delivery of the prospectus is expected to be made pursuant to Rule 434,
please check the following box. / /
--------------------------
CALCULATION OF REGISTRATION FEE
<TABLE>
<CAPTION>
TITLE OF EACH CLASS PROPOSED MAXIMUM AMOUNT OF
OF SECURITIES TO BE REGISTERED OFFERING PRICE(1) REGISTRATION FEE
<S> <C> <C>
Common Stock, par value $0.0005 per share................................... $172,500,000 $47,955
</TABLE>
(1) 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 MARCH 29, 1999
The information in this prospectus is not complete and may be changed. We may
not sell these securities until the registration with the Securities and
Exchange Commission is effective. This prospectus is not an offer to sell these
securities and it is not soliciting an offer to buy these securities in any
state where the offer or sale is not permitted.
<PAGE>
Shares
[LOGO]
APPNET SYSTEMS, INC.
Common Stock
-----------
Prior to this offering, there has been no public market for our common stock.
The initial public offering price is expected to be between $ and $ per
share. We will apply to list our common stock on The Nasdaq Stock
Market's National Market under the symbol "APPN".
The underwriters have an option to purchase a maximum of additional shares
to cover over-allotments of shares.
INVESTING IN OUR COMMON STOCK INVOLVES RISKS. SEE "RISK FACTORS" ON PAGE .
<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, against payment in immediately available funds.
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
THE ROBINSON-HUMPHREY COMPANY CHARLES SCHWAB & CO., INC.
Prospectus dated , 1999.
<PAGE>
--------------
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
-----
<S> <C>
PROSPECTUS SUMMARY............................. 3
RISK FACTORS................................... 5
CAUTIONARY NOTICE REGARDING FORWARD-LOOKING
STATEMENTS................................... 14
USE OF PROCEEDS................................ 14
DIVIDEND POLICY................................ 14
CAPITALIZATION................................. 15
DILUTION....................................... 16
PRO FORMA CONSOLIDATED FINANCIAL DATA.......... 17
SELECTED FINANCIAL DATA........................ 23
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF
OPERATIONS................................... 24
BUSINESS....................................... 31
<CAPTION>
PAGE
-----
<S> <C>
MANAGEMENT..................................... 46
CERTAIN RELATIONSHIPS AND TRANSACTIONS......... 55
PRINCIPAL STOCKHOLDERS......................... 59
DESCRIPTION OF CAPITAL STOCK................... 60
SHARES ELIGIBLE FOR FUTURE SALE................ 65
U.S. FEDERAL TAX CONSIDERATIONS FOR NON-U.S.
HOLDERS...................................... 67
UNDERWRITING................................... 71
NOTICE TO CANADIAN RESIDENTS................... 73
LEGAL MATTERS.................................. 74
EXPERTS........................................ 74
WHERE YOU CAN FIND ADDITIONAL INFORMATION...... 74
INDEX TO FINANCIAL STATEMENTS.................. F-1
</TABLE>
--------------
YOU SHOULD RELY ONLY ON THE INFORMATION CONTAINED IN THIS DOCUMENT OR TO
WHICH WE HAVE REFERRED YOU. WE HAVE NOT AUTHORIZED ANYONE TO PROVIDE YOU WITH
INFORMATION THAT IS DIFFERENT. THIS DOCUMENT MAY ONLY BE USED WHERE IT IS LEGAL
TO SELL THESE SECURITIES. YOU SHOULD ASSUME THAT THE INFORMATION IN THIS
DOCUMENT IS ACCURATE ONLY AS OF THE DATE OF THIS DOCUMENT.
--------------
Unless otherwise indicated, (a) all references to "AppNet," "we," "us" and
"our" refer to AppNet Systems, Inc. and, after their respective acquisitions or
formations, its subsidiaries and (b) all references to "GTCR" refer to GTCR
Golder Rauner, L.L.C. and its affiliates, including GTCR Fund VI, L.P., GTCR VI
Executive Fund, L.P. and GTCR Associates VI.
AppNet has filed for trademark registration of "AppNet". This prospectus
also includes trademarks and tradenames of other parties.
--------------
DEALER PROSPECTUS DELIVERY OBLIGATION
UNTIL , 1999 (25 DAYS AFTER THE COMMENCEMENT OF THIS OFFERING), ALL
DEALERS THAT EFFECT TRANSACTIONS IN THESE SECURITIES, WHETHER OR NOT
PARTICIPATING IN THIS OFFERING, MAY BE REQUIRED TO DELIVER A PROSPECTUS. THIS IS
IN ADDITION TO THE DEALER'S OBLIGATION TO DELIVER A PROSPECTUS WHEN ACTING AS AN
UNDERWRITER AND WITH RESPECT TO THEIR UNSOLD ALLOTMENTS OR SUBSCRIPTIONS.
2
<PAGE>
PROSPECTUS SUMMARY
THE FOLLOWING SUMMARY MAY NOT CONTAIN ALL THE INFORMATION THAT MAY BE
IMPORTANT TO YOU. YOU SHOULD READ THE ENTIRE PROSPECTUS, INCLUDING OUR
CONSOLIDATED FINANCIAL STATEMENTS AND THE RELATED NOTES AND THE UNAUDITED PRO
FORMA CONSOLIDATED FINANCIAL DATA, BEFORE DECIDING WHETHER TO INVEST IN OUR
COMMON STOCK. EXCEPT AS OTHERWISE INDICATED, THE INFORMATION IN THIS PROSPECTUS
HAS BEEN ADJUSTED TO GIVE EFFECT TO A TWO-FOR-ONE STOCK SPLIT OF OUR COMMON
STOCK WHICH OCCURRED ON JUNE 24, 1998.
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 is a leading provider of Internet and electronic commerce
professional services and solutions to medium-sized and large businesses. We
develop end-to-end 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 creative Website design to back-office integration of
existing systems and electronic commerce outsourcing. Our professional services
include strategic consulting, interactive media services, Internet-based
application development, electronic commerce systems integration and electronic
commerce outsourcing.
The rapid growth in the use of the Internet and electronic commerce has
transformed the way businesses operate and interact with their customers and
trading partners. To date, businesses have primarily focused on using Internet
and electronic commerce solutions to improve business-to-consumer relationships.
However, businesses are increasingly using the Internet and electronic commerce
to open cost-effective, highly efficient channels of communication with their
suppliers and distributors and are realizing that implementing Internet and
electronic commerce solutions is necessary to remain competitive. As a result,
technology industry research firms predict that the market for Internet and
electronic commerce services worldwide will grow significantly over the next few
years. International Data Corporation estimates that this market will increase
from $4.6 billion in 1997 to $43.7 billion by 2002, which represents a compound
annual growth rate of 57%.
We founded AppNet to address the growing need for end-to-end Internet and
electronic commerce solutions. Through strategic acquisitions and internal
growth, we have built a company which we believe is currently one of only a few
firms with the ability to design, develop, implement and manage end-to-end
Internet and electronic commerce solutions. Over the past several years, we have
completed more than 500 projects for over 200 clients. Our client base is highly
diverse and includes prominent corporations such as Baxter Healthcare, Ciena,
Dial, Ford, GeoCities, Hyundai, K*B Toys, NEC, Norwest and Unilever.
Our goal is to become the most recognized and sought-after provider of
Internet and electronic commerce solutions to medium-sized and large businesses.
To achieve this goal we plan to: expand our client relationships; increase
repeat and recurring revenues; build and enhance complementary skill sets and
maintain our technological expertise; expand and strengthen our strategic
partnerships with leading technology vendors; pursue client-driven geographic
expansion; expand and develop vertical market expertise; and attract and retain
a highly specialized workforce.
We currently have offices in 16 U.S. locations, including the metropolitan
areas of Atlanta, Boston, Denver, Detroit, Los Angeles, New York and Washington,
DC. Our principal executive office is located at 6707 Democracy Boulevard, Suite
1000, Bethesda, Maryland 20817, and our telephone number is (301) 493-8900. We
maintain a site on the World Wide Web at http://www.appnet.net; however, the
information found on our Website is not part of this prospectus.
3
<PAGE>
THE OFFERING
<TABLE>
<S> <C>
Common stock offered by AppNet.... shares.
Common stock to be outstanding
after this offering............. shares (or shares if the underwriters exercise
their over-allotment option in full). Excludes
shares of common stock reserved for issuance upon the
exercise of outstanding options, warrants and
convertible notes and in connection with contingent
payments payable to former stockholders of certain
companies we acquired (assuming, where applicable, the
initial public offering price and the market price of
our common stock when the contingent payments are paid
is $ 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; fund general corporate purposes; repay
other debt and make contingent payments to the former
stockholders of certain companies we acquired.
Proposed Nasdaq National Market
Symbol.......................... "APPN".
</TABLE>
SUMMARY ACTUAL AND PRO FORMA CONSOLIDATED FINANCIAL DATA
The following summary actual and pro forma consolidated financial data have
been derived from (a) the audited financial statements of AppNet for the year
ended December 31, 1998 and (b) 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, 1998
-----------------------------------------
PRO FORMA
ACTUAL PRO FORMA(A) AS ADJUSTED(B)
--------- ------------- ---------------
(IN THOUSANDS)
<S> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:
Revenues........................................................... $ 17,674 $ 69,182 $ 69,182
Cost of revenues................................................... 12,104 40,037 40,037
--------- ------------- -------
Gross profit................................................... 5,570 29,145 29,145
Total operating expenses........................................... 18,374 99,755 24,261
--------- ------------- -------
Income (loss) from operations...................................... (12,804) (70,610) 4,884
Interest and other expense......................................... 1,775 6,641
Income tax provision (benefit)..................................... (200) (100)
Dividends on and accretion of preferred stock...................... 873 3,604
--------- ------------- -------
Net income (loss) attributable to common stockholders.............. $ (15,252) $ (80,755) $
--------- ------------- -------
--------- ------------- -------
</TABLE>
<TABLE>
<CAPTION>
DECEMBER 31, 1998
-----------------------------------------
PRO FORMA
ACTUAL PRO FORMA(A) AS ADJUSTED
--------- -------------- --------------
(IN THOUSANDS)
<S> <C> <C> <C>
BALANCE SHEET DATA:
Cash and cash equivalents............................................... $ 2,447 $ 2,519
Total assets............................................................ 118,370 169,940
Total debt.............................................................. 43,792 75,922
Class A Preferred Stock................................................. 37,646 44,996
Stockholders' equity.................................................... 23,608 32,678
</TABLE>
- ------------------------------
(a) The pro forma statement of operations data gives effect to the acquisitions
we made in 1998 and 1999 and GTCR's investment in AppNet as if these
transactions had occurred on January 1, 1998. The pro forma balance sheet
data gives effect to the acquisitions we made in 1999 as if these
acquisitions had been made on December 31, 1998.
(b) Pro forma as adjusted data (1) excludes pro forma stock-based and
acquisition-related compensation of $16,851 and pro forma depreciation and
amortization of $58,643 and (2) gives effect to this offering and the
related use of proceeds.
4
<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 $14.4 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 $14.4 million as of
December 31, 1998 and a net loss of $14.4 million for the year ended December
31, 1998. Although our revenues have grown substantially throughout 1998, this
growth may not be sustainable or indicative of future results of operations. We
intend to continue to invest in internal expansion, infrastructure, integration
of our acquired companies into our existing operations, select acquisitions and
our marketing and sales efforts. We cannot predict when we will operate
profitably, if at all.
We cannot assure you that we will have earnings or cash flow sufficient to
cover our fixed charges or to comply with the financial covenants in our credit
facilities. In connection with the acquisitions we have completed, we expect to
continue to incur through the end of the year 2000, acquisition-related
compensation charges which will fluctuate based on the market price of our
common stock and the level of achievement of agreed-upon operating targets. In
addition, our acquisitions significantly increased our intangible assets, such
as goodwill, and the charges we expect to incur in connection with the
amortization of these intangible assets will have a material adverse impact on
our net income for the foreseeable future. See "--Our intangible assets
represent a significant portion of our assets; amortization of our intangible
assets will adversely impact our net income and we may never realize the full
value of our intangible assets" for a discussion of certain accounting treatment
issues 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;
- timing of acquisitions and related costs; and
5
<PAGE>
- 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 750 as of March 26, 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. We are indemnified by the former owners of the
companies we acquired for certain liabilities for which we may become
responsible but which relate to the operation of these companies prior to
acquisition. These indemnities, however, are typically capped at a particular
dollar amount and may not be sufficient to cover any or all of the liabilities
we may incur. In addition, the indemnifying parties may not have the financial
resources to satisfy their indemnification obligations.
As we continue to grow, we expect we will hire more employees and expand the
scope of our operating and financial systems, which will increase our operating
complexity and the level of responsibility exercised by our management
personnel. To manage our growth effectively, we must continue to develop and
improve our own operational and financial systems, including our internal
systems and controls as well as those of the companies we acquired. The failure
to manage our growth effectively could have a material adverse effect on our
business, financial condition and results of operations.
WE MUST ATTRACT AND RETAIN PROFESSIONAL STAFF IN ORDER TO COMPLETE OUR PROJECTS
AND OBTAIN NEW PROJECTS.
Our failure to attract and retain qualified employees could impair our
ability to complete existing projects and bid for or obtain new projects and, as
a result, could have a material adverse effect on our business, financial
condition and results of operations. Our ability to grow and increase our market
share largely depends on our ability to hire, train, retain and manage highly
skilled employees, including project managers and technical, creative,
consulting and marketing and sales personnel. There is a significant shortage
of, and intense competition for, personnel who are qualified to perform the
services we provide. This shortage will probably continue for the foreseeable
future. In addition, to maintain our position as a leading provider of Internet
and electronic commerce end-to-end solutions, we must make sure our employees
maintain their technical expertise and business skills. We cannot assure you
that we will be able to attract a sufficient number of qualified employees or
that we will successfully train and manage the employees we hire.
In addition, our employees, including key technical personnel, may leave us
to join our competitors or start new businesses which may compete with us.
Although our key employees are generally subject to confidentiality and
non-competition restrictions, 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.
6
<PAGE>
OUR REVENUES ARE DIFFICULT TO PREDICT BECAUSE THEY ARE PRIMARILY GENERATED ON A
PROJECT-BY-PROJECT BASIS. OUR CONTRACTS COULD BE TERMINATED AND CONTAIN
PRICING RISKS.
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.
Generally, we charge our clients for the time, materials and expenses
incurred on a particular project. Although we have limited experience pricing
and managing fixed-price contracts, we intend to increase the percentage of our
work that is billed at a fixed price. However, if we underestimate the resources
and time required to complete our projects, we could be subject to cost overruns
leading to losses on our engagements.
LOSS OF THE SERVICES OF OUR SENIOR MANAGEMENT COULD ADVERSELY AFFECT OUR
BUSINESS.
The loss of our senior managers' services or other key members of management
could have a material adverse effect on our business, financial condition and
results of operations. Our success depends heavily on the efforts of the members
of our senior management team. We generally enter into employment agreements
with each of our senior managers. Although these employment agreements contain
confidentiality and non-competition provisions, we cannot assure you that we
will be able to prevent the unauthorized disclosure or use of our proprietary
knowledge, practices and procedures if our senior managers leave us. See
"Management" for a more complete description of the terms of these employment
agreements.
WE FACE INTENSE COMPETITION; THE BARRIERS TO ENTER OUR BUSINESS ARE LOW.
The markets for Internet and electronic commerce professional services are
relatively new, intensely competitive, quickly evolving and subject to rapid
technological change. We expect competition to continue and intensify in the
foreseeable future. Our competitors fall into five major categories:
- Internet professional services providers, such as Agency.com, iXL,
Proxicom, Razorfish, Scient, Think New Ideas, US Interactive, USWeb/CKS
and Viant;
- large information technology consulting services providers, such as
Andersen Consulting, Cambridge Technology Partners, CSC, EDS, IBM and
Sapient;
- interactive advertising agencies, such as Darwin Digital, Giant Step, Grey
Interactive, Modem Media . Poppe Tyson and Thunderhouse;
- electronic commerce software and service providers, such as BroadVision,
Harbinger, Open Market and Sterling Commerce; and
- Internet access and value-added service providers, such as Abovenet,
Exodus and Frontier/ Global.
Some of our competitors have begun to offer multiple Internet and electronic
commerce professional services, rather than specialize in one particular area,
and several others have announced their intention to do so. These companies may
continue to expand their operations so that they offer a full range of
business-to-business and business-to-consumer Internet and electronic commerce
professional services and products.
7
<PAGE>
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.
In addition, 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. See
"Business--Competition" for a further discussion of competition within our
industry.
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.
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.
8
<PAGE>
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 rely primarily on nondisclosure and other contractual
arrangements and, to a lesser extent, on copyright, trademark and trade secret
laws to protect our intellectual property. Despite the precautions we take, it
may be possible for a third party to copy or otherwise obtain and use our
intellectual property without authorization. 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 certain 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.
In connection with our Internet and electronic commerce professional
services, we develop intellectual property for our clients. We frequently assign
ownership of such intellectual property to the client and retain only a license
for limited uses. Issues relating to ownership of and rights to use intellectual
property can be complicated. We may become involved in disputes that affect our
ability to resell or reuse this intellectual property. In addition, many of our
projects involve the use of material that is confidential or proprietary client
information. The successful assertion of one or more large claims against us by
our clients or other third parties could adversely affect us.
WE SOMETIMES AGREE NOT TO PERFORM SERVICES FOR OUR CLIENTS' COMPETITORS.
Some of our customer contracts contain certain 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.
9
<PAGE>
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.
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 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.
Furthermore, although we have installed back-up, or redundant, systems in
the event our hardware malfunctions, failure of such precautions could prevent
us from maintaining our standard of service to our customers. In addition, each
of our electronic commerce outsourcing centers has been configured to provide
either business-to-consumer or business-to-business electronic commerce
outsourcing 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.
10
<PAGE>
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 December 31, 1998, after giving pro forma effect to the acquisitions
we made in 1999, we would have had goodwill and other intangible assets of
approximately $146.3 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, after giving pro forma effect to the
acquisitions we made in 1999, would have decreased our net income by $48.5
million. The amount of goodwill associated with the acquisitions we made in 1998
and 1999 may increase in the future as a result of a portion of the contingent
purchase consideration that may become payable if the agreed-upon operating
targets for some of the acquired companies are fully met. The actual amount of
goodwill that will be recorded will depend in part on the price per share of our
common stock and such goodwill will be recorded through the end of the year
2000. We will continue to incur non-cash charges in connection with the
amortization of our intangible assets over their respective useful lives, and we
expect such charges will have a significant adverse impact on our net income for
the foreseeable future.
We cannot assure you that we will ever realize the value of these intangible
assets. In the future, as events or changes in circumstances indicate that the
carrying amount of our intangible assets may not be recoverable, we will
evaluate the carrying value of our intangible assets and may take an additional
charge to our earnings. Any future determination requiring the write-off of a
significant portion of unamortized intangible assets could have a material
adverse effect on our business, financial condition or results of operations.
See "Management's Discussion and Analysis of Financial Condition and Results of
Operations" for a further discussion of our intangible assets.
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.
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. Although as a general matter we do not
specifically warrant to clients that our work will be Year 2000 compliant, we
have provided an express warranty to certain 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.
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
11
<PAGE>
payable and payroll, throughout our organization. Although this new system is
Year 2000 compliant, our internal systems may experience operational
difficulties because of undetected errors or defects in the technology used.
We have made a preliminary assessment of our Year 2000 readiness. We plan to
implement, by May 1, 1999, a Year 2000 compliance program to oversee and
coordinate our Year 2000 compliance efforts throughout our organization.
However, 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 own % and %, 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 submitted to our
stockholders for approval, including the election of directors, appointment of
new management, amendments to our certificate of incorporation and mergers or
sales of all of our assets. GTCR and Mr. Bajaj will have the power to delay,
defer or prevent a change in control of AppNet. See "Principal Stockholders" and
"Certain Relationships and Transactions" for a further discussion of Mr. Bajaj's
and GTCR's ownership of our capital stock and their respective relationships
with us.
INVESTORS IN THIS OFFERING WILL EXPERIENCE IMMEDIATE AND SUBSTANTIAL DILUTION.
If you purchase common stock in this offering, you will pay more for your
shares than the amounts paid by existing stockholders for their shares. As a
result you will experience immediate and substantial dilution of approximately
$ , representing the difference between our net tangible book value per
share as of December 31, 1998, after giving pro forma effect to this offering,
and the acquisitions we made in 1999, and the public offering price of $ 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 certain of our
acquisitions. These shares generally will be issued at a purchase price less
than the public offering price per share in this offering. See "Dilution" for a
more complete description of how the value of your investment in our common
stock will be diluted upon the completion of this offering.
EXTERNAL FACTORS COULD ADVERSELY AFFECT THE MARKET PRICE OF OUR COMMON STOCK.
There is currently no public market for our common stock, and we cannot
assure you that an active trading market will develop or be sustained after this
offering. The initial public offering price
12
<PAGE>
will be determined through negotiation between us and representatives of the
underwriters and may not be indicative of the market price for the common stock
after this offering.
The market price of our common stock could fluctuate significantly as a
result of:
- variations in our operating results which may cause us to fail to meet
analysts' or investors' expectations;
- general economic and stock market conditions;
- changes in financial estimates by securities analysts;
- earnings and other announcements by, and changes in market evaluations of,
providers of Internet and electronic commerce professional services;
- changes in business or regulatory conditions affecting us;
- announcements by us or our competitors of technological innovations or new
products or services; and
- trading of our common stock.
The securities of many companies have experienced extreme price and volume
fluctuations in recent years, often unrelated to the companies' operating
performance. For example, market prices for securities of Internet-related and
technology companies have frequently reached elevated levels, often following
these companies' initial public offerings. These levels may not be sustainable
and may not bear any relationship to these companies' operating performances. If
the market price of our common stock reaches an elevated level following this
offering, it is likely to materially decline. In the past, following periods of
volatility in the market price of a company's securities, that company's
stockholders have often instituted securities class action litigation against
the company. If we were involved in such a class action suit, it could have a
material adverse effect on our business, financial condition and results of
operations.
THE SALE OR AVAILABILITY FOR SALE OF SUBSTANTIAL AMOUNTS OF OUR COMMON STOCK
COULD ADVERSELY AFFECT ITS MARKET PRICE.
Sales of substantial amounts of our common stock in the public market after
the completion of this offering, or the perception that such sales could occur,
could adversely affect the market price of our common stock and could materially
impair our future ability to raise capital through offerings of our common
stock.
In connection with this offering, we, our officers and directors and certain
stockholders have agreed not to sell any shares of common stock for days after
completion of this offering without the underwriters' consent; however, the
underwriters may release these shares from these restrictions at any time. We
cannot predict what effect, if any, market sales of shares held by GTCR or any
other shareholder or the availability of these shares for future sale will have
on the market price of our common stock. See "Shares Eligible for Future Sale"
for a more detailed description of the restrictions on selling shares of our
common stock after this offering.
ANTI-TAKEOVER PROVISIONS OF DELAWARE'S GENERAL CORPORATION LAW AND OUR
CERTIFICATE OF INCORPORATION COULD DELAY OR DETER A CHANGE IN CONTROL.
Amendments we intend to make to our amended and restated certificate of
incorporation and our bylaws, as well as various provisions of the Delaware
General Corporation Law, may make it more difficult to effect a change in
control of our company. The existence of these provisions may adversely affect
the price of our common stock, discourage third parties from making a bid for
our company or reduce any premiums paid to our stockholders for their common
stock. For example, we intend to amend our certificate of incorporation to
authorize our Board of Directors to issue up to shares of "blank check"
preferred stock and to attach special rights and preferences to such preferred
stock. The issuance of this preferred stock may make it more difficult for a
third party to acquire control of us. See "Description of Capital
Stock--Preferred stock," and "Description of Capital Stock--Delaware law and
certain provisions of certificate of incorporation and bylaws" 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.
13
<PAGE>
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 ("cautionary statements") are disclosed under
"Risk Factors" and elsewhere in this prospectus. All written and oral
forward-looking statements attributable to us are expressly qualified in their
entirety by the cautionary statements. We undertake no obligation to update
publicly or revise any forward-looking statements.
USE OF PROCEEDS
The net proceeds to AppNet from the sale of the shares of our common
stock being offered by this prospectus are estimated to be approximately
$ million (or $ million if the underwriters exercise their over-allotment
option in full), based upon an assumed initial public offering price of $ per
share, after deducting underwriting discounts and commissions and estimated
offering expenses payable by AppNet.
We expect to use the net proceeds from this offering to:
- repay approximately $ million of aggregate indebtedness under our
existing credit facilities, a $26 million revolving credit facility and a
$40 million revolving credit facility, both of which are with BankBoston,
N.A. and Antares Capital Corporation;
- redeem 45,430 shares of Class A Preferred Stock at an aggregate redemption
price of $ , including accrued dividends;
- redeem 11,576 shares of Class B Preferred Stock at an aggregate redemption
price of $ , including accrued dividends;
- repay $3,300 on a note to Smart Technology, L.L.C., which bears interest
at a rate of 12% per annum, is due upon consummation of this offering and
evidences indebtness incurred to fund general working capital purposes;
- repay $ in interest on a note to Fairfax Management Company II, L.L.C.,
which bears interest at a rate of 5% per annum, the principal amount of
which will be converted into our common stock upon consummation of this
offering and evidences indebtedness incurred to repurchase shares of our
common stock; and
- fund general corporate purposes, including working capital requirements,
select acquisitions and contingent payments to the former stockholders of
certain companies we acquired.
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%.
Pending use of the remaining net proceeds for general corporate purposes,
including acquisitions, we intend to invest these funds in short-term,
interest-bearing, investment-grade instruments.
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 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 the Board of Directors deems relevant.
14
<PAGE>
CAPITALIZATION
The following table sets forth AppNet's capitalization as of December 31,
1998 (a) on an actual basis, (b) on a pro forma basis giving effect to the
acquisitions we made in 1999 as if such transactions had been consummated on
December 31, 1998 and (c) on a pro forma as adjusted basis to reflect (1) the
acquisitions we made in 1999 as if these transactions had been consummated on
December 31, 1998, (2) the sale of shares of common stock in this offering
at an assumed initial public offering price of $ per share (the
mid-point of the range shown on the cover page of this prospectus) and the
application of the proceeds of this offering and (3) a compensation charge of
approximately $ that we will incur upon consummation of this offering in
connection with the termination of our right to repurchase shares of our
common stock from Mr. Bajaj at a per share price of $0.1055. 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.
<TABLE>
<CAPTION>
DECEMBER 31, 1998
--------------------------------------
PRO FORMA
ACTUAL PRO FORMA AS ADJUSTED
--------- -------------- -----------
<S> <C> <C> <C>
(IN THOUSANDS)
Cash and cash equivalents................................................ $ 2,447 $ 2,519
--------- -------------- -----------
--------- -------------- -----------
Credit facilities........................................................ $ 37,461 $ 58,370
Other long-term debt(a).................................................. 1,625 1,546
Convertible notes........................................................ 4,706 16,006
Class A Preferred Stock, $0.01 par value, 96,621 shares authorized,
liquidation value of $1,000, 38,093 shares issued and outstanding
(actual)(b) ........................................................... 37,646 44,996
Common stock subject to put rights(c).................................... 278 278
Stockholders' equity:
Class B Preferred Stock, $0.01 par value, 20,000 shares authorized,
11,576 shares issued and outstanding, liquidation value of
$1,000(d)............................................................ 11,576 11,576
Common stock, $0.0005 par value, 75,000,000 shares authorized,
55,586,894 shares issued and outstanding (actual)(e)................. 28 29
Additional paid-in capital............................................. 27,204 36,273
Notes receivable....................................................... (821) (821)
Accumulated deficit.................................................... (14,379) (14,379)
--------- -------------- -----------
Total stockholders' equity........................................... 23,608 32,678
--------- -------------- -----------
Total capitalization................................................. $ 105,324 $ 153,874
--------- -------------- -----------
--------- -------------- -----------
</TABLE>
- --------------------------
(a) Other long-term debt includes current and non-current debt obligations and
capital lease obligations.
(b) Pro forma, 45,430 shares issued and outstanding; pro forma as adjusted, no
shares issued and outstanding. Class A Preferred Stock is recorded at its
liquidation value, net of issuance costs. Excludes, as of December 31, 1998,
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 have the right to require AppNet
to repurchase the shares for an aggregate purchase price of approximately
$278,000. This right terminates on April 11, 1999.
(d) Pro forma, 11,576 shares issued and outstanding; pro forma as adjusted, no
shares issued and outstanding.
(e) Pro forma, 57,603,979 shares issued and outstanding; pro forma as adjusted,
shares issued and outstanding. Excludes, as of December 31, 1998, (1)
4,766,959 shares of common stock reserved for issuance pursuant to AppNet's
stock incentive plans, (2) 241,666 shares of common stock reserved for
issuance at an exercise price of $0.1055 per share in connection with
outstanding warrants to purchase common stock, (3) 2,866,667 shares of
common stock reserved for issuance in connection with outstanding promissory
notes convertible into shares of our common stock at conversion prices of $3
and $4 per share, (4) 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 $ , the mid-point of the range shown on the cover page of this
prospectus) and (5) shares of common stock reserved for issuance in
connection with contingent payments payable to the former stockholders of
certain companies we acquired (assuming that the market price of our common
stock at the time the contingent payments are paid is $ ).
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<PAGE>
DILUTION
AppNet's net tangible book value as of December 31, 1998, after giving
effect to the acquisitions we made in 1999 as if they had occurred on such date,
was $ million or $ per share of common stock. Net tangible book value
per share of common stock represents the amount of total tangible assets less
the sum of (a) total liabilities and (b) the liquidation preference of the Class
A Preferred Stock and the Class B Preferred Stock, divided by the number of
shares of common stock outstanding. After giving effect to the sale of
shares of our common stock in this offering at an assumed initial public
offering price of $ 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
December 31, 1998 would have been approximately $ million or $ per
share of common stock. This represents an immediate increase in pro forma net
tangible book value of $ per share of common stock to existing stockholders
and an immediate dilution in pro forma net tangible book value of $ 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 December
31, 1998:
<TABLE>
<CAPTION>
PER SHARE
------------------------
<S> <C> <C>
Assumed initial public offering price....................................................... $
Pro forma net tangible book value as of December 31, 1998................................. $
Increase in pro forma net tangible book value attributable to new investors...............
-----------
Pro forma net tangible book value per share after this offering...........................
-----------
Dilution to new investors................................................................. $
-----------
-----------
</TABLE>
If all of our outstanding stock options, warrants and convertible notes
(assuming, where applicable, an initial public offering price of $ , the
mid-point of the range shown on the cover page of this prospectus) were
exercised pursuant to their terms and all the common stock issuable in
connection with contingent payments payable to former stockholders of certain
companies we acquired was issued (assuming that the market price of our common
stock when the contingent payments are paid is $ ) as of December 31, 1998,
our adjusted pro forma net tangible book value as of December 31, 1998, after
giving effect to this offering, would have been $ or $ per share, representing
an immediate dilution of $ per share of common stock to investors
purchasing shares in this offering.
The following table sets forth, as of December 31, 1998, 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 $ per share.
<TABLE>
<CAPTION>
SHARES PURCHASED TOTAL
------------------------ CONSIDERATION AVERAGE PRICE
NUMBER PERCENT AMOUNT PER SHARE
----------- ----------- --------------- ---------------
<S> <C> <C> <C> <C>
Existing stockholders............................................
New investors.................................................... % $ $
----- ----- -----
Total.......................................................... % $ $
----- ----- -----
----- ----- -----
</TABLE>
16
<PAGE>
PRO FORMA CONSOLIDATED FINANCIAL DATA
The following tables set forth the unaudited pro forma consolidated balance
sheet and statement of operations of AppNet as of and for the year ended
December 31, 1998. The pro forma consolidated balance sheet is adjusted to give
effect to the acquisitions we made in 1999 as if those acquisitions had been
made on December 31, 1998. The pro forma consolidated statement of operations
gives effect to the acquisitions we made in 1998 and 1999 and GTCR's investment
in AppNet, as if these transactions had occurred on January 1, 1998.
The information in the pro forma consolidated balance sheet has been derived
from the audited balance sheets of AppNet, i33 communications corp., Salzinger &
Company, Inc. and Internet Outfitters, Inc. included elsewhere in this
prospectus and the unaudited balance sheets of Sigma6, Inc. and Transform IT,
Incorporated, which are not included in this prospectus, each as of December 31,
1998. The information in the pro forma consolidated statement of operations 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 acquisitions we made are accounted for using the purchase method of
accounting. The purchase method of accounting allocates the aggregate purchase
price to the assets acquired and liabilities assumed based upon their respective
fair values. The excess of purchase price over the fair value of tangible and
identifiable intangible assets acquired, net of liabilities assumed, has been
reflected as goodwill. AppNet believes that the preliminary allocations set
forth herein are reasonable; however, in some cases the final allocations will
be based upon valuations and other studies that are not yet complete. As a
result, the allocations set forth herein are subject to revision as additional
information becomes available, and such revised allocations could differ
substantially from those set forth herein.
The unaudited consolidated financial data are based upon currently available
information and certain assumptions and estimates which management believes are
reasonable. These assumptions and estimates, however, are subject to change,
including, without limitation, adjustments for restructuring costs or potential
costs 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 certain of the companies we acquired included elsewhere in this
prospectus.
17
<PAGE>
PRO FORMA CONSOLIDATED BALANCE SHEET
AS OF DECEMBER 31, 1998
(UNAUDITED)
(IN THOUSANDS)
<TABLE>
<CAPTION>
1999
CONSOLIDATED ACQUIRED PRO FORMA
APPNET COMPANIES ADJUSTMENTS(A) PRO FORMA
------------ ----------- -------------- -----------
<S> <C> <C> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents.................................... $ 2,447 $ 265 $ (193)(b) $ 2,519
Accounts receivable, net..................................... 11,238 5,123 (1,707)(b) 14,654
Other current assets......................................... 1,118 83 1,201
------------ ----------- ------- -----------
Total current assets....................................... 14,803 5,471 (1,900) 18,374
------------ ----------- ------- -----------
Property and equipment, net.................................... 3,012 1,002 4,014
Intangible assets, net......................................... 99,380 46,964 146,344
Other assets................................................... 1,175 33 1,208
------------ ----------- ------- -----------
Total assets............................................... $ 118,370 $ 6,506 $ 45,064 $ 169,940
------------ ----------- ------- -----------
------------ ----------- ------- -----------
LIABILITIES, REDEEMABLE STOCK AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable............................................. $ 2,737 $ 1,471 $ (34)(b) $ 4,174
Accrued liabilities.......................................... 6,911 2,041 (492)(b) 8,460
Current portion of long-term debt............................ 2,426 1,352 (1,352) 2,426
------------ ----------- ------- -----------
Total current liabilities.................................. 12,074 4,864 (1,878) 15,060
Credit facilities.............................................. 37,461 20,909 58,370
Convertible notes, net of current portion...................... 2,706 11,300 14,006
Other long-term debt, net of current portion................... 1,199 108 (187) 1,120
Other long-term liabilities.................................... 3,398 34 3,432
------------ ----------- ------- -----------
Total liabilities.......................................... 56,838 5,006 30,144 91,988
Class A Preferred Stock........................................ 37,646 7,350 44,996
Common stock subject to put rights............................. 278 278
Stockholders' equity:
Class B Preferred Stock...................................... 11,576 11,576
Common stock................................................. 28 59 (58) 29
Additional paid-in capital................................... 27,204 57 9,012 36,273
Notes receivable............................................. (821) (821)
Retained earnings (accumulated deficit)...................... (14,379) 1,384 (1,384) (14,379)
------------ ----------- ------- -----------
Total stockholders' equity................................. 23,608 1,500 7,570 32,678
------------ ----------- ------- -----------
Total liabilities, redeemable stock and stockholders'
equity................................................... $ 118,370 $ 6,506 $ 45,064 $ 169,940
------------ ----------- ------- -----------
------------ ----------- ------- -----------
</TABLE>
18
<PAGE>
NOTES TO PRO FORMA CONSOLIDATED BALANCE SHEET
AS OF DECEMBER 31, 1998
(UNAUDITED)
(a) The following table reflects the preliminary allocation of the purchase
price and the related financing for the acquisitions AppNet made in 1999:
<TABLE>
<S> <C>
Aggregate purchase price........................................... $ 47,220
---------
---------
Allocation of purchase price:
Tangible assets--
Current........................................................ $ 3,571
Non-current.................................................... 1,035
Intangible assets................................................ 46,964
Liabilities--
Current........................................................ (4,208)
Non-current.................................................... (142)
---------
$ 47,220
---------
---------
</TABLE>
The aggregate purchase price of the acquisitions we made in 1999 reflects
the following mix of consideration:
<TABLE>
<S> <C>
Cash............................................................... $ 26,850
Convertible notes.................................................. 11,300
Common stock....................................................... 9,070
---------
Total.......................................................... $ 47,220
---------
---------
</TABLE>
The cash portion of the consideration was financed through $19 million of
borrowings under our credit facilities and the issuance of $7.4 million of Class
A Preferred Stock. In addition, we borrowed $1.9 million under our credit
facilities to repay debt of the companies we acquired in 1998. The total
purchase price shown above excludes contingent consideration which may be
payable upon the achievement of agreed-upon operating targets.
(b) These amounts include assets not purchased and liabilities not assumed
by AppNet in its 1999 acquisitions of Salzinger & Company, Inc. and Transform
IT, Incorporated. The amounts of cash and cash equivalents and accounts
receivable not purchased and accounts payable and accrued liabilities not
assumed have been adjusted out for the pro forma consolidated balance sheet as
of December 31, 1998.
19
<PAGE>
PRO FORMA CONSOLIDATED STATEMENT OF OPERATIONS
FOR THE YEAR ENDED DECEMBER 31, 1998
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
1998 AND 1999
CONSOLIDATED ACQUIRED PRO FORMA
APPNET COMPANIES(A) ADJUSTMENTS PRO FORMA
------------- ------------- ----------- -------------
<S> <C> <C> <C> <C>
Revenues.......................................... $ 17,674 $ 51,508 $ $ 69,182
Cost of revenues.................................. 12,104 27,933 40,037
------------- ------------- ----------- -------------
Gross profit.................................... 5,570 23,575 29,145
Operating expenses:
Selling and marketing........................... 1,175 2,584 3,759
General and administrative...................... 5,891 14,611 20,502
Stock-based and other acquisition-related
compensation.................................. 1,157 4,379 11,315(b) 16,851
Depreciation and amortization................... 10,151 1,000 47,492(c) 58,643
------------- ------------- ----------- -------------
Total operating expenses...................... 18,374 22,574 58,807 99,755
------------- ------------- ----------- -------------
(Loss) income from operations..................... (12,804) 1,001 (58,807) (70,610)
Interest expense.................................. 1,052 60 4,774(d) 5,886
Other expense, net................................ 723 1,139 (1,107)(e) 755
------------- ------------- ----------- -------------
Loss before income taxes.......................... (14,579) (198) (62,474) (77,251)
Income taxes...................................... (200) (753) 853(f) (100)
------------- ------------- ----------- -------------
Net (loss) income............................... (14,379) 555 (63,327) (77,151)
Dividends on and accretion of preferred stock..... 873 2,731(g) 3,604
------------- ------------- ----------- -------------
Net (loss) income attributable to common
stockholders..................................... $ (15,252) $ 555 $ (66,058) $ (80,755)
------------- ------------- ----------- -------------
------------- ------------- ----------- -------------
Basic and diluted net loss per common share....... $ (0.50) $ (1.53)
------------- -------------
------------- -------------
Weighted average common shares
outstanding (h).................................. 30,738,211 52,625,201
------------- -------------
------------- -------------
</TABLE>
20
<PAGE>
NOTES TO PRO FORMA CONSOLIDATED STATEMENT OF OPERATIONS
FOR THE YEAR ENDED DECEMBER 31, 1998
(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) This column reflects 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 year ended December 31, 1998. Selected financial data
for these periods is as follows:
<TABLE>
<CAPTION>
ACTUAL ADJUSTED
------------------------ OPERATING ACTUAL
OPERATING INCOME NET
ACQUIRED COMPANY DATE OF 1998 ACQUISITIONS REVENUES INCOME (LOSS) (LOSS)(2) INCOME (LOSS)
- -------------------------- ---------------------------- --------- ------------- --------------- -------------
<S> <C> <C> <C> <C> <C>
1998 Acquisitions(1):
Arbor Intelligent Systems,
Inc...................... March 12, 1998 $ 688 $ (517) $ (52) $ (757)
Software Services
Corporation ............. August 25, 1998 10,788 (1,911) 743 (1,713)
New Media Publishing,
Inc...................... October 2, 1998 3,711 (49) (49) (62)
Century Computing,
Incorporated............. October 12, 1998 10,040 (12) 941 (259)
Research & Planning,
Inc...................... October 20, 1998 5,303 1,652 1,652 1,535
The Kodiak Group, Inc..... December 14, 1998 6,289 925 1,175 910
1999 Acquisitions:
i33 communications
corp..................... -- 4,360 (333) (333) (345)
Sigma6, Inc............... -- 1,793 (250) (250) (178)
Salzinger & Company,
Inc...................... -- 3,110 932 932 952
Internet Outfitters,
Inc...................... -- 2,343 36 93 (63)
Transform IT,
Incorporated............. -- 3,083 528 528 535
--------- ------------- ------ -------------
Total..................... $ 51,508 $ 1,001 $ 5,380 $ 555
--------- ------------- ------ -------------
--------- ------------- ------ -------------
</TABLE>
- ------------------------------
(1) Historical results for LOGEX International, L.L.C. for the period
from January 1, 1998 through April 30, 1998 (date of acquisition)
were insignificant and, therefore, have been omitted.
(2) Adjusted operating income (loss) represents operating income (loss)
plus stock-based and other acquisition-related compensation.
(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 expense for stock-based and other
acquisition-related compensation expense directly related to these acquisitions.
See Note 16 of AppNet's historical consolidated financial statements included
elsewhere in this prospectus for further discussion. This amount has been
calculated assuming the operating targets related to the contingent payments
payable to the former stockholders of certain companies we
21
<PAGE>
acquired are fully met and a price per share of $6.00 (based on the price per
share used in AppNet's two most recent acquisitions). 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 and eliminate amortization
expense recorded by the companies we acquired from January 1, 1998 through the
earlier of the date of their acquisition or December 31, 1998. Such amounts are
being amortized over the estimated useful life of each asset, primarily two to
three years. Certain of the acquisitions provide for additional purchase
consideration, primarily cash and stock, which is payable upon the attainment of
certain 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 $ , assuming a per share price of common
stock of $ (the mid-point of the range shown on the cover page of the
prospectus). See "Risk Factors--Our intangible assets represent a significant
portion of our assets; amortization of our intangible assets will adversely
impact our net income and we may never realize the full value of our intangible
assets" for additional information on these amortization expenses.
(d) This adjustment was made to reflect a full year of interest expense on
acquisition debt financing.
(e) This adjustment was made to eliminate costs 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 a full
year and to reflect the tax impact of the previous pro forma adjustments, net of
an applicable valuation allowance (in thousands).
<TABLE>
<S> <C>
Tax benefit........................................................ $ (100)
Less: historical tax benefit recorded by AppNet and the companies
we acquired.................................................. (953)
---------
Net adjustment..................................................... $ 853
---------
---------
</TABLE>
(g) This adjustment was made to reflect a full year of preferred stock
dividends and related accretion on the preferred stock issued to finance our
acquisitions.
(h) Pro forma weighted average common shares outstanding 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.
22
<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 its predecessor, Software Services Corporation
("SSC"), for each of the four years ended December 31, 1997 and for the period
from January 1, 1998 to August 24, 1998. The consolidated statement of
operations data and balance sheet data for AppNet for the year ended December
31, 1998 are derived from financial statements audited by Arthur Andersen LLP,
independent public accountants, and are included elsewhere in this prospectus.
The statement of operations data for SSC 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 SSC, 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 SSC
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
SSC's financial statements and the related notes, included elsewhere in this
prospectus.
<TABLE>
<CAPTION>
SSC
--------------------------------------------------------------------- APPNET
EIGHT MONTHS -------------
YEAR ENDED DECEMBER 31, ENDED YEAR ENDED
------------------------------------------------------ AUGUST 24, DECEMBER 31,
1994 1995 1996 1997 1998 1998
------------ ------------ ------------ ------------ ------------- -------------
<S> <C> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:
Revenues.......................... $ 9,563 $ 11,065 $ 11,789 $ 13,298 $ 10,788 $ 17,674
Net income (loss)................. 282 181 (53) 431 (1,713) (14,379)
Dividends on and accretion of
preferred stock................. -- -- -- -- -- 873
Net income (loss) attributable to
common stockholders............. 282 181 (53) 431 (1,713) (15,252)
PER SHARE AMOUNTS:
Basic and diluted net loss per
common share.................... $ 0.05 $ 0.03 $ (0.01) $ 0.08 $ (0.30) $ (0.50)
Weighted average common shares
outstanding..................... 6,000,000 6,000,000 5,727,000 5,705,000 5,697,000 30,738,211
</TABLE>
<TABLE>
<CAPTION>
DECEMBER 31,
------------------------------------------------------ AUGUST 24, DECEMBER 31,
1994 1995 1996 1997 1998 1998
------------ ------------ ------------ ------------ ------------ -------------
<S> <C> <C> <C> <C> <C> <C>
BALANCE SHEET DATA:
Total assets....................... $ 2,239 $ 3,217 $ 3,155 $ 3,667 $ 4,973 $ 118,370
Total debt(1)...................... 6 575 992 666 -- 43,792
Class A Preferred Stock............ -- -- -- -- -- 37,646
Stockholders' equity............... 1,641 1,811 1,458 1,886 3,487 23,608
</TABLE>
- ------------------------
(1) Total debt includes the current and long-term portions of notes payable and
capital lease obligations for SSC and includes the current and long-term
portions of long-term debt, convertible notes, capital lease obligations and
credit facilities for AppNet.
23
<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, SSC, IN CONJUNCTION
WITH THEIR RESPECTIVE CONSOLIDATED FINANCIAL STATEMENTS AND THE RELATED NOTES,
"PRO FORMA CONSOLIDATED FINANCIAL DATA" AND "SELECTED FINANCIAL DATA" INCLUDED
ELSEWHERE IN THIS PROSPECTUS.
OVERVIEW
AppNet is a leading provider of Internet and electronic commerce
professional services and solutions to medium-sized and large businesses. We
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 its 1998 financial statements to
facilitate presentation. From inception through March 11, 1998, our operating
activities primarily consisted of developing a strategic plan, recruiting
personnel, raising capital, identifying potential acquisition targets and
developing technical and marketing materials. Our strategic plan identified the
specific professional services which are required to provide clients with
end-to-end solutions. We then identified a select group of companies which
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
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 eleven additional acquisitions.
Typically, the consideration we paid to make our acquisitions included cash,
shares of our common stock, promissory notes, promissory notes convertible into
shares of our common stock and, in some cases, contingent payments payable in
cash and/or shares of our common stock. The cash portion of such consideration
was financed primarily by an investment in our company by GTCR and Smart
Technology and borrowings under our credit facilities. Our acquisitions have
been accounted for using the purchase method of accounting. Accordingly, the
purchase price has been allocated, based on preliminary estimates of fair value,
to the tangible assets and liabilities assumed, and with the advice of
independent valuation experts, to the identifiable intangible assets, as of the
acquisition dates. Because the Internet and the electronic commerce industries
are in an early stage of development and continue to evolve rapidly, the
recorded goodwill and identified intangibles from each of the acquisitions are
being amortized on a straight-line basis primarily over two to three years, the
estimated period of benefit.
AppNet's revenues are comprised primarily of fees generated for professional
services billed. We also generate fees from outsourcing services although these
fees currently represent a small portion of our revenues. Our strategy is to
increase the percentage of our revenues generated by fees from outsourcing
services.
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
24
<PAGE>
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 certain
former stockholders of some businesses we acquired if certain operating targets
are achieved and these former stockholders remain employed by AppNet. 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.
These contingent payments are accounted for as operating expenses in accordance
with Emerging Issues Task Force 98-05, "Accounting for Contingent Consideration
Paid to the Shareholders of an Acquired Company in a Purchase Business
Combination," instead of as additional purchase consideration at the time of the
acquisition. 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. The remaining portion of these contingent payments
will be recorded as additional goodwill when such targets are met. If all of the
operating targets are fully met, the aggregate amount of additional goodwill
will be $ , assuming a per share price of common stock of $ (the mid-point
of the range shown on the cover page of this prospectus) for all shares issued
in connection with these contingent payments.
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 $0.1055 and the initial public offering price of our common
stock.
Quarterly results of operations may fluctuate from quarter to quarter based
on such factors as the number, size and type 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; timing of acquisitions and related costs; and timing and size of
acquisition-related compensation charges which fluctuate based on the market
price of our stock. If the operating targets are fully met, the aggregate amount
of compensation expense that will be recognized during 1999 and 2000, assuming a
price per share of $6.00 (based on the price per share used in AppNet's two most
recent acquisitions), will be approximately $23 million.
25
<PAGE>
APPNET PRO FORMA RESULTS OF OPERATIONS
The pro forma statement of operations gives effect to the 12 acquisitions we
made in 1998 and 1999 and GTCR's investment in AppNet, as if these transactions
had occurred as of January 1, 1998.
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 $40.0 million, or 58% of revenues.
SELLING AND MARKETING. Pro forma selling and marketing expenses were $3.8
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 $20.5 million, or 30% 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 $16.9 million. This amount represents an accrual for the
estimated amount of the cash and stock-based contingent consideration to be paid
to certain former stockholders of some acquired businesses during the 12-month
period following acquisition. The amount is based on assumptions that operating
targets will be fully met and that the fair market value of our common stock is
$6 per share (based on a determination by AppNet of its valuation as of the
completion of its latest two acquisitions).
DEPRECIATION AND AMORTIZATION. For the year ended December 31, 1998, pro
forma depreciation and amortization were approximately $58.6 million, the
majority of which is amortization expense.
INTEREST EXPENSE. Pro forma interest expense for the year ended December
31, 1998 was $5.9 million, or 9% of revenues. This includes interest on
indebtedness borrowed under our credit facilities in connection with our
acquisitions of approximately $4.6 million and interest on notes issued in
connection with these acquisitions of approximately $1.0 million. We expect to
repay existing borrowings under our credit facilities with a portion of the
proceeds of this offering.
OTHER EXPENSE, NET. For the year ended December 31, 1998, pro forma other
expense includes a charge of $0.3 million related to the refinancing of our
credit facilities during 1998 and the write-off of approximately $0.3 million
related to an investment in a joint venture that was deemed to have no value. In
addition, other expense includes transaction costs incurred by the companies we
acquired of approximately $0.7 million.
INCOME TAXES. Pro forma income tax benefit for the year ended December 31,
1998 was $0.1 million. The effective income tax rate of 0.1% was lower than the
blended federal and statutory rate primarily as a result of amortization of a
portion of our intangible assets which are not deductible for income tax
purposes and the recognition of a valuation allowance in accordance with
generally accepted accounting principles.
26
<PAGE>
APPNET HISTORICAL RESULTS OF OPERATIONS
YEAR ENDED DECEMBER 31, 1998
REVENUES. Revenues for the year ended December 31, 1998 were $17.7 million.
This amount includes revenues from fees for professional services generated by
the businesses we acquired in 1998 from their respective acquisition dates
through December 31, 1998.
COST OF REVENUES. Cost of revenues for the year ended December 31, 1998 was
$12.1 million, or 68% of revenues.
SELLING AND MARKETING. Selling and marketing expenses were $1.2 million for
the year ended December 31, 1998, or 7% of revenues.
GENERAL AND ADMINISTRATIVE. General and administrative expenses for the
year ended December 31, 1998 were $5.9 million, or 33% of revenues. These
amounts consisted of general and administrative expense of the businesses we
acquired.
STOCK BASED AND OTHER ACQUISITION-RELATED COMPENSATION. For the year ended
December 31, 1998, stock-based and other acquisition-related compensation was
$1.2 million, which represents an accrual for the estimated amount of the cash
and stock-based contingent consideration to be paid to certain former
stockholders of some acquired businesses.
DEPRECIATION AND AMORTIZATION. For the year ended December 31, 1998, $10.2
million was recorded for depreciation and amortization expense, which consisted
primarily of amortization expense.
INTEREST EXPENSE. Interest expense for the year ended December 31, 1998 was
$1.1 million, which includes $0.8 million of interest on indebtedness borrowed
under our credit facilities during 1998 in connection with the acquisitions we
made in 1998.
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.
INCOME TAXES. Income tax benefit for the year ended December 31, 1998 was
$0.2 million. The effective income tax rate of 1.4% was lower than the blended
federal and state statutory rate primarily as a result of amortization of a
portion of our intangible assets which are not deductible for income tax
purposes and the recognition of a valuation allowance in accordance with
generally accepted accounting principles.
SOFTWARE SERVICES CORPORATION (PREDECESSOR COMPANY)
PERIOD ENDED AUGUST 24, 1998 COMPARED TO THE YEAR ENDED DECEMBER 31, 1997
REVENUES. Revenues for the period ended August 24, 1998 were $10.8 million,
compared to $13.3 million for the year ended December 31, 1997. The decrease is
due to the fact that we are comparing a 12-month period to an eight-month
period.
COST OF REVENUES. Cost of revenues for the period ended August 24, 1998 was
$6.9 million, compared to $8.4 million for the year ended December 31, 1997. The
amount as a percentage of revenues remained consistent over the respective
periods.
OPERATING EXPENSES. Total operating expenses for the period ended August
24, 1998 were $5.8 million, compared to $4.4 million for the year ended December
31, 1997, representing an increase of $1.4 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
27
<PAGE>
decrease is a result of the decrease in general and administrative expenses of
$1.0 million and the fact that we are comparing a 12-month period to an
eight-month period.
INCOME TAXES. An income tax benefit of $0.6 million was recorded for the
period ended August 24, 1998, compared with 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 December 31, 1998, we had approximately $2.4 million in cash and cash
equivalents. AppNet has financed its operations and acquisitions primarily
through proceeds received from the issuance of preferred stock and borrowings
under credit facilities. Through December 31, 1998, cash used in operations was
$2.6 million and $71.7 million was used in investing activities. Net cash used
in operating activities was primarily the result of a net loss and an increase
in accounts receivable. The principal use of cash in investing activities was to
finance acquisitions.
Net cash provided by financing activities during the year ended December 31,
1998 was $76.7 million. We received proceeds from net borrowings under our
credit facilities of $37.5 million. In addition, $37.0 million and $3.0 million
were received as consideration for the issuance of our preferred and common
stock, respectively.
In connection with some of our acquisitions during 1998, we issued notes to
the selling stockholders, certain of which are convertible into shares of our
common stock. The balance of these notes at December 31, 1998 was approximately
$5.7 million, $4.7 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 5% and 8.25% as of December 31, 1998.
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 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. At March 29, 1999, a maximum of
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approximately $61 million was available for borrowing under our credit
facilities based on our current operating performance. Based upon current
expectations, we believe the proceeds of this offering along with amounts which
may be borrowed under our credit facilities and cash flow from operations, will
be adequate for us to meet our capital requirements and pursue our business
strategy for the next 12 months. We intend to amend our credit facilities in
connection with this offering.
During the period from the consummation of this offering through November
2000, we may be required to make contingent payments to former stockholders of
certain businesses we acquired. These contingent payments are payable in cash
and stock, in certain cases 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.
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 they are
incurred. Because we have expensed these costs historically, we do not expect
the adoption of SOP 98-5 will have a material effect on our 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 133"), which
establishes accounting and reporting standards for derivative instruments,
including certain 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 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
begun 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.
We are in the process of obtaining assurances from our suppliers that they are
Year 2000 compliant. 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.
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 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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We plan to implement, by May 1, 1999, a Year 2000 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 costs in connection with
Year 2000 compliance to date are approximately $80,000. At this time, we do not
possess the information necessary to estimate the potential costs of becoming
Year 2000 compliant. We do not anticipate that our costs to become Year 2000
compliant will be significant. However, if these costs are significant, it could
have a material adverse effect on our business, financial condition or results
of operations.
QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
AppNet may be exposed to market risk related to changes in interest rate.
AppNet's borrowing arrangements are based on both fixed and variable rates of
varying maturities. At this time, we have not entered into any interest rate
risk arrangements. While we may engage in interest rate risk hedging activities
in the future, we cannot assure you that we will be able to enter into hedging
arrangements on commercially satisfactory terms. AppNet believes that the
effect, if any, of reasonably possible near-term changes in interest rates on
our financial position, results of operations and cash flows is not material.
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BUSINESS
OVERVIEW
We are a leading provider of Internet and electronic commerce professional
services and solutions to medium-sized and large businesses. We 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. We focus on maximizing the opportunities presented by the Internet and
electronic commerce to enhance all aspects of our clients' operations, from
creative Website design to back-office integration of existing systems and
electronic commerce outsourcing. Our professional services include strategic
consulting, interactive media services, Internet-based application development,
electronic commerce systems integration and electronic commerce outsourcing.
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. International Data
Corp. reports that 80% of Fortune 500 companies employ EDI to improve their
business processes. Businesses are increasingly finding that they can reliably
and cost-effectively manage high volume transaction environments on a real-time
basis using EDI and the Internet. In addition, by using EDI and the Internet for
communication with both consumers and trading partners, businesses are creating
electronically integrated supply chains that significantly improve their
operating efficiency.
Businesses are increasingly discovering that implementing Internet and
electronic commerce solutions is necessary to remain competitive and are
demanding end-to-end Internet and electronic commerce solutions that can improve
every aspect of their operations. As a result, technology industry research
firms predict that the market for Internet and electronic commerce services
worldwide will grow significantly over the next few years. International Data
Corp. estimates that this market will increase from $4.6 billion in 1997 to
$43.7 billion by 2002, which represents a compound annual growth rate of 57%.
According to a 1998 DataQuest survey of selected Fortune 1000 companies, 83% of
such companies are currently investing, or plan to invest, in Internet solutions
and 48% are currently investing, or plan to invest, in electronic commerce
solutions.
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
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addition, hiring trained professionals is difficult because they are in great
demand. At the same time, as business challenges grow increasingly complex, so
must the Internet and electronic commerce solutions required to address them.
Given the significant cost to design, develop, implement and manage Internet and
electronic commerce solutions, businesses cannot afford to expend resources
developing solutions themselves. Hiring a firm that provides a comprehensive
range of Internet and electronic commerce professional services is often the
most efficient and cost-effective solution for many companies.
THE APPNET SOLUTION
Our goal in founding AppNet was to address the growing need for end-to-end
Internet and electronic commerce solutions. We offer a comprehensive range of
services involving the design, development, implementation and management of
Internet and electronic commerce solutions that facilitate and promote
communication and commerce between businesses and consumers as well as among
businesses and their trading partners. Key elements of the AppNet solution are:
- END-TO-END SERVICE OFFERING
We can provide clients with end-to-end Internet and electronic commerce
solutions. Our services include strategic consulting, interactive media
services, Internet-based application development, electronic commerce systems
integration and electronic commerce outsourcing. Our clients recognize
significant cost and time savings and receive integrated, high-quality solutions
because they can obtain all of the Internet and electronic commerce professional
services they need from one company.
- UNIQUE ELECTRONIC COMMERCE OUTSOURCING SERVICES
We offer a compelling value proposition to our clients by providing an
extensive range of electronic commerce outsourcing services as part of our
overall service offering. Our business-to-business services include outsourced
transaction processing and EDI operations management. These services include
tracking, auditing, monitoring and reporting on high volume EDI environments.
Our business-to-consumer services include commerce storefront management,
transaction processing, managed Web-hosting and the operation and management of
electronic commerce systems. Clients who take advantage of our electronic
commerce outsourcing services get to market quickly; do not have to make the
significant financial and technological investments required to effectively
build and manage their own infrastructures; receive reliable, secure,
value-added services; and can focus their attention and resources on their core
competencies.
- ABILITY TO SOLVE INCREASINGLY COMPLEX BUSINESS PROBLEMS
Our business-level and process-level strategic consulting services help our
clients solve their increasingly complex business problems with sophisticated,
vendor-neutral Internet and electronic commerce solutions. We employ
business-level strategic consulting services to develop and redefine clients'
business models to incorporate Internet and electronic commerce strategies. We
employ process-level strategic consulting services to improve the business
processes of clients who have already incorporated Internet and electronic
commerce strategies into their business models. These services, together with
the knowledge and experience we gain designing, developing, implementing and
managing each electronic commerce solution, enable us to develop comprehensive
strategies for growing on-line ventures, streamlining on-line marketing and
distribution strategies, improving operating efficiencies and reducing costs.
- ENHANCED SERVICES THROUGH THE USE OF ADVANCED PROPRIETARY TECHNOLOGIES
We use advanced proprietary technologies to design and develop more
effective Internet and electronic commerce solutions and to deliver value-added
services. ClientLink, a secure extranet environment developed by AppNet, gives
our clients on-line access to, and engages their active participation in, the
strategic and developmental processes used to create their Internet and
electronic
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commerce solutions. Within ClientLink, clients can, on a real-time basis, view
any changes that have been made to their solutions, communicate electronically
with project team members and check a calendar for information regarding product
reviews and launches. We use ClientLink to raise the level of interaction
between us and our clients, which, in turn, improves the quality, functionality
and scalability of the solution we create.
AdMaximize, our proprietary interactive media service, enables us to
measure, on a real-time basis, a client's return on investment for its on-line
advertising dollars. AdMaximize tracks banner ad performance and collects
real-time data on click-through, lead generation, customer acquisition and
sales. Based on their analysis of this information, clients can make real-time
adjustments to their advertising campaigns to maximize site traffic and reduce
the costs of acquiring new customers and generating sales.
As part of the electronic commerce outsourcing services we offer, we utilize
proprietary software, EDI Control/400 and STAR, in order to more effectively
manage high transaction EDI programs. EDI Control/400 enables us to manage
complex EDI programs and monitor, audit and report on our clients' transaction
traffic and communications with their trading partners, with fewer people and
higher service levels. Our client support services team uses STAR, or the
Service Tracking and Reporting System, to log, track and report incidents from
identification through resolution.
- REUSABLE BUSINESS SOLUTIONS
We have developed reusable business solutions in the process of designing,
developing, implementing and managing end-to-end Internet and electronic
commerce solutions for clients in a number of industries. These reusable
business solutions were developed based on our industry-specific expertise and
utilize reusable software code and content objects. These solutions enable us to
give our clients the benefit of our knowledge and experience in addressing
complex business challenges, develop and implement Internet and electronic
commerce solutions more quickly and efficiently, focus our efforts on
customizing solutions to meet our clients' specific needs and deliver reliable
solutions based on components that have been tested and perfected through
repeated use in other solutions.
OUR STRATEGY
Our goal is to become the most recognized and sought-after provider of
Internet and electronic commerce services to medium-sized and large business
clients. To achieve this goal we plan to:
- EXPAND CLIENT RELATIONSHIPS
We plan to cross-sell our comprehensive range of Internet and electronic
commerce professional services to existing clients. We believe that if we
continue to provide high-quality, sophisticated solutions to our clients, (a)
our existing clients will increase the amount, scope and complexity of services
they obtain from us, (b) we will strengthen our reputation as a creative source
for Internet and electronic commerce solutions and (c) 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.
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- BUILD AND ENHANCE COMPLEMENTARY SKILL SETS AND MAINTAIN TECHNOLOGICAL
EXPERTISE
Each additional skill set we develop improves our ability to better serve
our existing and future clients. We believe it is imperative for us to stay
abreast of cutting-edge technological developments and evolving service
offerings in order to maintain the high level of quality of our services,
increase the effectiveness of our solutions and attract and retain qualified
employees. We continually research, test and evaluate new Internet and
electronic commerce technologies which we can incorporate into our solutions.
Each engagement we complete broadens our expertise and increases our knowledge,
thereby enhancing our ability to provide the most effective Internet and
electronic commerce solutions.
- EXPAND AND STRENGTHEN STRATEGIC PARTNERSHIPS WITH LEADING TECHNOLOGY
VENDORS
We intend to further expand our relationships with several leading
technology vendors and build other strategic partnerships that will promote our
growth and enhance our position in the marketplace. We have relationships with
vendors such as Harbinger, Microsoft, Oracle, SAP and TSI International
Software. These strategic alliances increase our name recognition and visibility
in the marketplace, provide us with new sales opportunities and early access to
cutting-edge technologies, enable us to cross-sell our services with prominent
technology vendors and increase our access to vendor technical training and
support. See "--Strategic Relationships."
- PURSUE CLIENT-DRIVEN GEOGRAPHIC EXPANSION
We intend to open additional offices both domestically and internationally
in order to better serve clients in locations where we have already attracted
business. This allows us to serve clients locally, cross-sell services to
existing local clients and win more local business. Each new office we have
opened has enhanced our ability to attract and service large clients and to hire
additional staff without relocation burdens. We currently have offices in 16
locations in the U.S., including the metropolitan areas of Atlanta, Boston,
Denver, Detroit, Los Angeles, New York City and Washington, DC.
- EXPAND AND DEVELOP VERTICAL MARKET EXPERTISE
Through our experience designing, developing, implementing and managing
Internet and electronic commerce solutions for a wide variety of companies, we
have gained significant strategic knowledge and created industry-specific
reusable business solutions. This industry-specific expertise significantly
enhances our ability to help other companies in the same industries successfully
adopt Internet and electronic commerce solutions. To date, we have developed
reusable business solutions for the retail services, financial services,
healthcare, manufacturing and telecommunications industries. We intend to
broaden the range of industries in which we have specialized knowledge and
maximize the benefits to our clients of such knowledge by creating additional
industry-specific solution templates and reusable software. We employ strategic
consultants, sales, marketing and technical staff with expertise in industries
which we believe can realize significant benefits from Internet and electronic
commerce solutions. Further developing and strengthening this expertise will
increase our knowledge of industry specific business challenges and increase the
value-added industry-targeted services we can offer, thereby improving our
ability to penetrate specific industries.
- 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
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packages, granting stock options, reimbursing tuition expenses and encouraging a
corporate culture that is results-driven and rewards creativity, communication
and cooperation.
SERVICES
We offer a comprehensive range of professional services involving the
design, development, implementation and management of end-to-end Internet and
electronic commerce solutions. Our services include strategic consulting,
interactive media services, Internet-based application development, electronic
commerce systems integration and electronic commerce outsourcing. Our
engagements generally include more than one of these services.
[Diagram to be inserted]
- STRATEGIC CONSULTING
Our business- and process-level strategic consulting services help our
clients successfully develop on-line businesses and improve their overall
business processes. We employ business-level strategic consulting to study
and analyze our clients' market position, operating requirements, systems
and capabilities to determine how our clients should use the Internet and
electronic commerce to accomplish their objectives. We work with clients to
incorporate Internet and electronic commerce solutions into their businesses
and assist in developing on-line businesses and on-line marketing
strategies. We employ process-level strategic consulting with clients that
have already incorporated Internet and electronic commerce solutions into
their businesses to assist them in improving their overall business
processes by incorporating system architecture and design with existing
Internet and electronic commerce solutions, thereby improving operating
efficiencies and reducing costs.
- INTERACTIVE MEDIA SERVICES
The primary focus of our interactive media services is creative Website
design and development, branding, media planning and buying. These services
are designed to maximize our clients' return on their investments in on-line
businesses by generating and increasing Website traffic, enhancing user
experience and increasing the effectiveness of their marketing efforts. We
integrate our creative Website design, development and branding services, as
well as on-line media buying and planning, on-line ad serving, management,
tracking and reporting and on-line promotion and campaign development, into
our clients' overall solutions.
- INTERNET-BASED APPLICATION DEVELOPMENT
Our Internet-based application development services are designed to help
our clients rapidly develop highly flexible and cost-effective business
applications. We develop corporate intranets and electronic commerce systems
and we Web-enable legacy, or existing, systems. We design and develop more
effective Internet and electronic commerce solutions by giving our clients
on-line access to the strategic and developmental processes used to create
their solutions. We design, build and implement solutions that are scalable,
secure, adaptable and easy to use and manage.
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- ELECTRONIC COMMERCE SYSTEMS INTEGRATION
Our electronic commerce systems integration services are designed to
rapidly install and integrate our solutions with our clients' existing
operations so our solutions become an integral part of their critical
business systems. We install our solution, convert and initialize all
necessary data, perform acceptance testing and put the system into
operation. We also integrate the solution with back-office legacy systems to
ensure that each client's critical applications operate seamlessly and with
maximum security.
- ELECTRONIC COMMERCE OUTSOURCING
Our electronic commerce outsourcing services help clients rapidly launch
and implement electronic commerce solutions and then cost-effectively
manage, operate, maintain and continue to develop those solutions. We
provide business-to-business outsourcing services such as EDI management and
transaction processing at our outsourcing center in Pittsfield, MA, as well
as at our customer's sites. We provide business-to-consumer outsourcing
services such as commerce storefront management, transaction processing,
managed Web-hosting and the ongoing management, technical operation,
maintenance and development of electronic commerce systems at our
outsourcing center in Laurel, MD, as well as at our customer's sites.
ELECTRONIC COMMERCE OUTSOURCING CENTERS
We believe our outsourcing capabilities are a key component of our full
range of Internet and electronic commerce professional service offerings and
differentiate us from our competitors. Outsourcing enables us to effectively
manage, operate and maintain the electronic commerce systems we have developed
for our clients. We expect that demand for outsourcing services will increase
over time as customers recognize that outsourcing is a cost-effective solution.
For example, outsourcing is an attractive choice for those customers who lack
the internal resources required to effectively build and manage their own
infrastructure or their mission critical business processes and who are under
pressure to get to market quickly.
At our business-to-business electronic commerce outsourcing center, we
process and manage thousands of transactions among hundreds of trading partners
on a variety of hardware and software platforms, over value added networks,
leased lines and the Internet. We use EDI Control/400, our administrative
software product, to control and regulate these high-volume, EDI transaction
environments. EDI Control/400 provides our customers with detailed transaction
reporting, on-line data retention, management and archiving, and multiple levels
of security. At our business-to-consumer electronic commerce outsourcing center
we provide commerce storefront management and transaction processing, managed
Web-hosting services and the ongoing management, technical operation,
maintenance and development of electronic commerce systems.
Our outsourcing centers operate seven days a week, 24 hours a day. To
maintain maximum reliability, we minimize the use and operation of multiple
platforms, implement hardware component redundancy and use network management
software. Our outsourcing center staff proactively manages and monitors
systems-level events, processes and thresholds using a variety of network
management software, including certain proprietary technologies we developed.
These systems operations management processes enable us to collect, process and
respond to systems-level event information from a variety of sources and to
build and maintain a central repository for inventory and asset management
information. In addition, each of our outsourcing centers features multiple
levels of security which we believe protect our clients' private information by
isolating our electronic commerce outsourcing centers from public network
infrastructures.
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CLIENTS
We market our services to medium-sized and large companies from a range of
industries which we believe can benefit from Internet and electronic commerce
solutions. Our engagements vary in scope from strategic consulting assignments
to designing and implementing complex and highly functional intranets and
extranets. Because we can offer every client a complete spectrum of Internet and
electronic commerce professional services which incorporate elements of
strategic consulting, interactive media services, Internet-based application
development, electronic commerce systems integration and electronic commerce
outsourcing, we can customize each of our engagements to fit a client's specific
needs. Two of our clients, Ford and the U.S. Government, accounted for 15% and
12%, respectively, of our total revenues for 1998. After giving pro forma effect
to the acquisitions we made in 1998 and 1999 as if they had occurred on January
1, 1998, our top ten customers would have represented approximately 34% of our
1998 pro forma revenues.
Set forth below is a list of some of the clients to whom we provided
services in 1998:
<TABLE>
<S> <C>
RETAIL AND CONSUMER SERVICES TELECOMMUNICATIONS AND TECHNOLOGY
Biztravel.com Computer Sciences Corp.
Burton Snowboards Ciena
Harmony House Comshare
Hertz Lockheed Martin Integrated Business Solutions
K*B Toys FINANCIAL SERVICES
MANUFACTURING AND INDUSTRIAL @rts @lliance
Ciba-Geigy Ford Motor Credit
Dial Multex Systems
Hyundai Norwest
Johnson Controls HEALTHCARE AND PHARMACEUTICALS
NEC Acuson
Norrell Allergen Services
The Electronic Imaging Division of Toshiba Blue Cross and Blue Shield of Michigan
America Information System, Inc. Baxter Healthcare
Unilever 3M
MEDIA AND ENTERTAINMENT GOVERNMENT AND NONPROFIT
Cablevision AAA
Cisneros Group INTELSAT
GeoCities NASA
Grey Interactive National Library of Medicine
McCann-Erickson University of Michigan
Playboy Enterprises World Wildlife Fund
</TABLE>
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EXAMPLES OF OUR INTERNET AND ELECTRONIC COMMERCE SOLUTIONS
The following examples illustrate the kinds of Internet and electronic
commerce solutions we have developed for specific clients.
THE ELECTRONIC IMAGING DIVISION OF TOSHIBA AMERICA INFORMATION SYSTEMS, INC.
Challenge: Design and implement a restricted access dealer extranet system.
Solution: We developed the community, Web-interface and database elements of
Toshiba's FYI Dealer Extranet, an on-line system for dealers that provides a
common interface in addition to customized information that meets each
individual dealer's requirements. We designed security features which protect
market-sensitive information from unauthorized users. A conditional access
system, driven by a complex database user-authorization scheme, offers multiple
read-and-write user access levels.
The FYI Dealer Extranet moves an essential Toshiba business process to the
Internet, which has resulted in substantial time and cost savings. Employees,
dealers and distributors build strong relationships on this electronic commerce
and informational site. The site simplifies ordering and shipping of more than
10,000 spare-part SKUs for fax machines and copiers.
BURTON SNOWBOARDS
Challenge: Design and implement an on-line inventory and supply-chain
management system.
Solution: We designed and implemented a complex, yet easy to use on-line
inventory and supply-chain management system that Burton management uses to
quickly and efficiently control changing inventory, manage materials and track
product placement. Our solution accommodates multiple languages and currencies
and is able to generate fast, detailed reports. Using our solution, Burton has
improved its efficiency in managing its inventory and supply-chain and reduced
production overuns and overall costs.
AMERICA ONLINE, INC. OR AOL
Challenge: Develop a content investment strategy.
Solution: We helped AOL launch the AOL Greenhouse, a division of AOL
Studios. Our work included assisting the President of AOL Greenhouse establish a
process for selecting and managing a portfolio of content investments. We
assisted with the development of the division's organizational structure,
portfolio management strategy and revenue development. Our work resulted in
successful investments in leading Internet companies, including The Motley Fool,
Inc., Hecklers On-Line and iVillage.
RETIRED PERSONS SERVICES, INC. OR RPS
Challenge: Provide technical assistance to Retired Persons Services, Inc.,
provider of the AARP Pharmacy Service, in the ongoing design, implementation and
management of its on-line pharmacy.
Solution: RPSPharmacy.com provides AARP members and others with the option
of ordering prescription refills and nonprescription pharmacy products over the
Internet. The on-line pharmacy incorporates features such as health information
to facilitate condition management and product selection, comparison of
brand-name and generic alternatives, information about related products and
special offers, patient profiling for drug utilization review and links to other
important sources of health information.
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GOVERNMENT TECHNOLOGY SERVICES, INC. OR GTSI
Challenge: Design and implement an on-line computer store.
Solution: We designed and implemented a user-friendly on-line computer store
that enables Federal customers to price and purchase approximately 150,000
computer products over the Internet. The solution we developed provides
customized shopping experiences for many customers. Using our solution, GTSI
hopes to streamline the purchasing process for its customers.
K*B TOYS
Challenge: Design, implement and operate an EDI program that would
accurately process and track orders, shipping notices, invoices and other time
sensitive data, including point-of-sale information, to support streamlined
procurement and distribution center operations.
Solution: We designed and implemented an EDI program for K*B Toys to
effectively manage inventory levels and merchandise replenishment at over 1300
mall-based stores. Our solution incorporated features such as comprehensive
mapping schemes for easy translation of data, cost-efficient value-added network
and Internet routing schemes and scalability to accommodate increasing
transaction volume. Using our solution, K*B Toys has reduced its communications
costs by approximately 75%, improved the efficiency of its overall processes and
allowed it to focus on its core retailing business.
HARMONY HOUSE
Challenge: Design and develop an on-line music store which would complement
its 34 retail outlets.
Solution: We designed and implemented a user-friendly on-line music store
that enables customers to search for, listen to and purchase music products over
the Internet. Our solution incorporated features such as easily searchable
databases and music guides, easily selectable music samples and robust
management features for site update and promotion and order management. Using
our solution, Harmony House has built brand recognition and loyalty and
established an additional distribution channel.
MULTEX SYSTEMS
Challenge: Design and develop a Web-based ad campaign to increase site
traffic and trading volume and decrease the per customer acquisition cost.
Solution: We crafted a media plan which included the creation of multiple
banner ads. Using our proprietary service, AdMaximize, we served banner ads,
instantly tracked banner ad performance and collected real-time data on
click-through, lead generation, customer acquisition and sales. Based on
Multex's and our collective analysis of this data, we were able to make
real-time adjustments to Multex's ad campaign and optimize all Web site ad
performance. Using our solution, Multex has increased its overall membership,
increased its revenues per new member and has decreased its cost to acquire new
members via the Web.
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<PAGE>
STRATEGIC RELATIONSHIPS
We have formed strategic, non-exclusive alliances with a number of leading
technology companies. These strategic alliances, among other things:
- increase our name recognition and visibility in the marketplace;
- provide us with new sales opportunities;
- provide us with early access to cutting edge technologies;
- enable us to cross-sell our services with prominent technology vendors;
and
- increase our access to vendor technical training and support.
We have formed strategic alliances with Harbinger, Microsoft, Oracle, SAP
and TSI International Software among others. We intend to continue to build
strategic relationships that will promote our growth and enhance our position in
the marketplace.
SALES AND MARKETING
We employ 26 full-time sales professionals. Three corporate sales
professionals concentrate on our Internet and electronic commerce professional
services to clients in particular industries in which they have extensive
expertise. The other 23 members of our sales force are service-focused and
concentrate on selling individual services as well as cross-selling all of our
service offerings. Our vice president of corporate sales coordinates the efforts
of our corporate and service-focused sales personnel.
Our marketing strategy is to demonstrate to our potential clients the
advantages of Internet and electronic commerce solutions, and our expertise and
success in designing, developing, implementing and managing end-to-end
solutions. In addition, we have retained an outside public relations and
advertising firm to assist us with our marketing efforts on a company-wide
basis. Our two full-time corporate marketing professionals concentrate on
promoting and enhancing our brand on a nationwide basis. Our five full-time
service-focused marketing professionals concentrate on marketing a particular
set of our services, often to a targeted audience or in their local markets.
Our sales and marketing strategy is built upon the following directives:
- ENHANCE OUR BRAND AND IMPROVE OUR MARKET POSITIONING
Our goal is to become the most recognized and sought-after provider of
Internet and electronic commerce professional services to medium-sized and
large business clients. To do so, we must continue to enhance our brand and
reputation. Our brand development programs deliver the message that we are a
national company with the experience and resources to meet all of our
clients' Internet and electronic commerce services needs. To build and
differentiate our brand, we use publicity campaigns that appear on the
Internet, in print advertising, at trade shows and in educational white
papers. We also take advantage of the opportunity to strengthen our brand by
developing relationships with strategic partners. As we enhance our
industry-specific expertise, we intend to develop sales and marketing
programs targeted to specific industries.
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- MANAGE OUR CLIENTS' ACCOUNTS EFFECTIVELY
Corporate sales professionals direct client leads to the appropriate
service-focused salesperson. Our corporate sales professionals also manage
accounts for large clients with multiple locations and ensure each part of
our clients' accounts are served by the technical staff which can best meet
their needs.
- CROSS-SELL SERVICES
As we integrate the diverse client bases of the companies we acquired,
we intend to continue to take advantage of opportunities to cross-sell our
services to existing clients. We intend to train every member of our sales
force to cross-sell our entire range of services. In addition, we are
creating uniform marketing and sales materials which describe the wide range
of services we offer and position AppNet as a leading provider of end-to-end
Internet and electronic commerce solutions.
In each of our professional services engagements, a client can contract for
the specific services it requires. We bill most of our engagements on a time and
materials basis, although we have entered into several engagements on a
fixed-price basis. Clients who use our electronic commerce outsourcing services
are charged either a fixed monthly rate or on a per transaction basis, or both.
COMPETITION
The markets for Internet and electronic commerce professional services are
relatively new, intensely competitive, quickly evolving and subject to rapid
technological change. We expect competition to continue and intensify in the
foreseeable future.
Our competitors fall into five major categories:
- Internet professional services providers, such as Agency.com, iXL,
Proxicom, Razorfish, Scient, Think New Ideas, US Interactive, USWeb/CKS
and Viant;
- large information technology consulting services providers, such as
Andersen Consulting, Cambridge Technology Partners, CSC, EDS, IBM and
Sapient;
- interactive advertising agencies, such as Darwin Digital, Giant Step, Grey
Interactive, Modem Media . Poppe Tyson and Thunderhouse;
- electronic commerce software and service providers, such as BroadVision,
Harbinger, Open Market and Sterling Commerce; and
- Internet access and value-added service providers, such as Abovenet,
Exodus and Frontier/ Global.
We believe we can distinguish ourselves from our competitors by offering our
clients end-to-end Internet and electronic commerce solutions. We believe we can
compete effectively on the basis of our comprehensive range of services,
technical expertise, creative talent, brand or name recognition and the speed,
reliability and price of the services we provide. We also believe the services
we provide at our electronic commerce outsourcing centers further distinguish us
from our competitors. However, some of our competitors have also begun to offer
a variety of Internet and electronic commerce professional services, rather than
specialize in one particular area, and several others have announced their
intention to do so. These companies may continue to expand their operations so
that they offer a full range of business-to-business and business-to-consumer
Internet and electronic commerce professional services and products.
There are relatively low barriers to entry into our business. We do not own
any patent technology that precludes or inhibits competitors from entering our
markets. The costs to develop and provide
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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.
ACQUIRED COMPANIES
Our goal in founding AppNet was to build a company that could offer a
comprehensive range of Internet and electronic commerce professional services.
We began by developing a detailed strategic plan that identified the specific
professional services that are required to provide clients with end-to-end
solutions. These services were strategic consulting, interactive media services,
Internet-based application development, electronic commerce systems integration
and electronic commerce outsourcing. We then identified a select group of
companies that excelled in providing services in one or more of these
professional services areas. After reviewing and evaluating over 100 companies,
we ultimately acquired a set of companies that we believe fit together
strategically and culturally and that, when integrated with one another, could
design, develop, implement and manage end-to-end solutions.
[Chart to be inserted]
ARBOR INTELLIGENT SYSTEMS, INC. We acquired certain assets of Arbor
Intelligent Systems, Inc. ("Arbor") on March 12, 1998. Arbor became part of our
Internet-based applications development group, providing object-oriented
development services to our customers. Arbor 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 certain assets of LOGEX
International, L.L.C. ("LOGEX") on April 30, 1998. LOGEX became part of our
electronic commerce systems integration and outsourcing group, providing
electronic commerce systems integration services to our customers. LOGEX had
approximately nine consulting professionals as of the date of the acquisition.
We paid
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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 of up to $300,000 based on the achievement of
certain performance criteria for the one-year period ending on April 30, 1999.
SOFTWARE SERVICES CORPORATION. We acquired Software Services Corporation
("SSC") on August 25, 1998. SSC became part of our Internet-based applications
development group, providing applications development, network architecture and
design services to our customers. SSC had approximately 190 consulting
professionals as of the date of the acquisition. We paid approximately $22.9
million for SSC with a combination of cash and shares of our common stock and
Class B Preferred Stock. During 1997, SSC had revenues of approximately $13.3
million.
NEW MEDIA PUBLISHING, INC. We acquired New Media Publishing, Inc. ("NMP")
on October 2, 1998. NMP became part of our interactive media services group,
providing interactive community-building services to our customers. NMP had
approximately 40 consulting professionals as of the date of the acquisition. We
paid approximately $19.0 million for NMP with a combination of cash, shares of
our common stock and options to purchase shares of our common stock. The former
NMP 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 certain performance criteria for the twelve-month period ending
on September 30, 1999. During 1997, NMP had revenues of approximately $3.0
million.
CENTURY COMPUTING, INCORPORATED. We acquired Century Computing,
Incorporated ("Century") on October 12, 1998. Century became a part of our
electronic commerce systems integration and outsourcing group, providing systems
integration and processing services to our customers. Century had approximately
81 consulting professionals as of the date of the acquisition. We paid
approximately $29.0 million for Century with a combination of cash, a
convertible promissory note and options to purchase shares of our common stock.
During 1997, Century had revenues of approximately $10.9 million.
RESEARCH & PLANNING, INC. We acquired Research & Planning, Inc. ("R&P") on
October 20, 1998. R&P became part of our electronic commerce systems integration
and outsourcing group, providing ERP integration and data warehousing services
to our customers. R&P had approximately 40 consulting professionals as of the
date of the acquisition. We paid approximately $20.5 million for R&P with a
combination of cash, promissory notes and shares of our common stock. During
1997, R&P had revenues of approximately $4.8 million.
THE KODIAK GROUP, INC. We acquired The Kodiak Group, Inc. ("Kodiak") on
December 13, 1998. Kodiak became part of our electronic commerce systems
integration and outsourcing group, providing EDI integration and processing
services to our customers. Kodiak 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 Kodiak sells or licenses certain technology during the three-year period
ending December 14, 2001. During 1997, Kodiak had revenues of approximately $3.7
million.
I33 COMMUNICATIONS CORP. We acquired i33 communications corp. ("i33") on
January 8, 1999. i33 became part of our interactive media services group,
providing media buying and planning services to our customers. i33 had
approximately 40 consulting professionals as of the date of the acquisition. We
paid approximately $21.6 million for i33 with a combination of cash and
convertible promissory notes. During 1998, i33 had revenues of approximately
$4.4 million.
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SIGMA6, INC. We acquired Sigma6, Inc. ("Sigma6") on March 4, 1999. Sigma6
became part of our interactive media services group, providing brand identity
services to our customers. Sigma6 had approximately 25 consulting professionals
as of the date of the acquisition. We paid approximately $2.5 million for 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 certain 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 certain assets of Salzinger &
Company, Inc. ("Salzinger") on March 15, 1999. Salzinger became part of our
strategic consulting group, providing business-level strategic consulting
services to our customers. Salzinger had approximately eight consulting
professionals as of the date of the acquisition. We paid approximately $8.5
million for Salzinger with a combination of cash and shares of our common stock.
Salzinger 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 certain performance criteria during the
period beginning April 1, 1999 and ending September 30, 2000. During 1998,
Salzinger had revenues of approximately $3.1 million.
INTERNET OUTFITTERS, INC. We acquired Internet Outfitters, Inc.
("Outfitters") on March 26, 1999. Outfitters became part of our interactive
media services group, providing localization and creative Web-development
services to our customers. Outfitters had approximately 25 consulting
professionals as of the date of the acquisition. We paid approximately $9.5
million for Outfitters with a combination of cash, shares of our common stock
and options to purchase shares of our common stock. The former 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 certain performance criteria for the year ending December 31,
1999. During 1998, Outfitters had revenues of approximately $2.3 million.
In connection with our acquisition of Outfitters, approximately $2.2 million
of the purchase price in the form of cash and our common stock has been escrowed
to be available to satisfy any potential liability in connection with a license
dispute. This amount will remain in escrow until the earlier of June 30, 2001 or
the date the dispute is resolved. A licensor of software used by a client of
Outfitters has asserted that Outfitters caused the client to underpay the
licensor in the amount of $2.2 million. Outfitters has denied any liability for
those additional amounts.
TRANSFORM IT, INCORPORATED. We acquired certain assets of Transform IT,
Incorporated ("Transform IT") on March 29, 1999. Transform IT became part of our
strategic consulting group, providing process-level strategic consulting
services to our customers. Transform IT had approximately 14 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. The former Transform IT stockholders are also entitled to receive
potential contingent payments payable in cash of up to approximately $3.5
million as well as in options to purchase shares of our common stock based on
the achievement of certain performance criteria during the 12-month period
ending March 31, 2000. During 1998, Transform IT had revenues of approximately
$3.1 million.
We have developed a detailed process to fully integrate each acquisition
into our existing operations and create one seamless organization. We have begun
completing the integration tasks laid out in this detailed process. This
detailed process focuses on integrating the delivery of our professional
services, our sales and marketing functions, our knowledge management system and
our back-office functions.
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By integrating the delivery of professional services, we can more
efficiently manage projects, provide better quality control, increase the
quality of our work and provide better customer service. By integrating our
sales and marketing functions, we can more efficiently generate leads and win
new business, provide superior customer service, coordinate the delivery of more
effective marketing messages and better train our sales personnel. By
integrating the way we manage our knowledge on a company-wide basis, we can more
efficiently interact and share information with our employees and customers,
reduce the time it takes to develop solutions for our clients, increase the
quality of our work and provide better customer service. By integrating our
back-office functions we can more efficiently monitor and manage our business,
recruit and retain employees, and administer corporate-wide benefit programs.
EMPLOYEES
As of March 26, 1999, we had approximately 750 employees. Our continuing
success will depend in large part on our ability to attract, motivate and retain
employees who are qualified to offer the services we provide. Competition for
qualified employees is intense. We believe we have been successful to date in
attracting and retaining qualified employees. Our strategy for attracting,
motivating and retaining our employees is to pay competitive salaries and cash
bonuses, grant stock options, reimburse tuition expenses and encourage a
corporate culture that is results-driven and rewards creativity, communication
and cooperation.
We believe our relationship with our employees is satisfactory. None of our
employees is represented by a union. Generally, our employees are retained on an
at-will basis and many of our key employees are subject to employment
agreements. All of our senior managers, as well as most of our key employees,
are required to sign confidentiality agreements and non-competition agreements
which prohibit them from competing with us during their employment and for
various periods thereafter.
PROPERTIES
Our headquarters are located in Bethesda, MD and consist of approximately
13,400 square feet of leased space, the lease for which expires in May 2005. We
also lease office space in Santa Monica, CA, Golden, CO, Stamford, CT, Laurel,
MD, Cambridge, MA, Pittsfield, MA, Ann Arbor, MI, Detroit, MI, New York, NY,
Alexandria, VA, 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
Certain information regarding our executive officers and directors (ages as
of March 26, 1999) is set forth below:
<TABLE>
<CAPTION>
NAME AGE POSITION
- ----------------------------------- --- ----------------------------------------------------------------------
<S> <C> <C>
Ken S. Bajaj....................... 57 Chairman of the Board of Directors, President and Chief Executive
Officer
Ronald B. Alexander................ 51 Senior Vice President, Chief Financial Officer, Secretary and
Treasurer
Jack Pearlstein.................... 35 Senior Vice President--Acquisitions
Toby Tobaccowala................... 60 Senior Vice President
Robert G. Harvey................... 49 Senior Vice President--Software Development Services
Robert D. McCalley................. 59 Senior Vice President--Electronic Commerce
John Cross......................... 56 Director, Executive Vice President--Strategic Consulting
Philip A. Canfield................. 31 Director
Thomas M. Davidson................. 61 Director
Bruce V. Rauner.................... 42 Director
</TABLE>
KEN S. BAJAJ. Mr. Bajaj has been Chairman of our Board of Directors,
President and Chief Executive Officer since November 1997. Mr. Bajaj was Vice
Chairman of Wang Laboratories, Inc. from March 1997 until November 1997. He
joined Wang Laboratories, Inc. when that company acquired I-NET, Inc. in 1996;
at that time he was President of I-NET, Inc., a position he held from 1988 until
1996. Before joining I-NET, Inc., Mr. Bajaj had been a Vice President at
Electronic Data Systems, Inc. since 1978. Mr. Bajaj has an M.S. in electrical
engineering from the University of Toronto and a Ph.D. in systems science from
Michigan State University.
RONALD B. ALEXANDER. Mr. Alexander has been our Senior Vice President and
Chief Financial Officer since September 1998 and our Treasurer and Secretary
since January 1999. Mr. Alexander was Senior Vice President and Chief Financial
Officer of GRC International from April 1996 until September 1998. From 1994
until April 1996, Mr. Alexander was Chief Financial Officer of Network Imaging
Corporation. In prior positions, Mr. Alexander was a Managing Director of the
Blackstone Group, a New York investment banking firm and Chief Financial Officer
of Commodore International, one of the original developers of the personal
computer. Mr. Alexander has a B.A. in physics and math from Columbia College, a
J.D. from Columbia Law School and an L.L.M. in taxation from New York
University.
JACK PEARLSTEIN. Mr. Pearlstein has been our Senior Vice
President--Acquisitions since July 1998. Prior to that time, Mr. Pearlstein was
a Managing Director and principal of Foxhall Capital, LLC from November 1996
until July 1998. Prior to this time, he was Director--Mergers and Acquisitions
at Digicon Corporation from November 1995 to November 1996. From September 1994
until November 1995, he was a senior associate at Merge Global, Inc. From June
1993 until August 1994, he 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.
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TOBY TOBACCOWALA. Mr. Tobaccowala has been our Senior Vice President since
August 1998. Prior to August 1998, Mr. Tobaccowala was Chief Executive Officer
and a director of Commerce Direct International for one year. Before joining
Commerce Direct International, Mr. Tobaccowala was employed by the Media
Strategic Business Unit of Electronic Data Systems, Inc. from 1973 until 1996,
most recently as President. He has an M.B.A. from the Bajaj Institute of
Management Studies.
ROBERT G. HARVEY. Mr. Harvey has been our Senior Vice President--Software
Development Services since February 1998. Mr. Harvey was General Manager,
Midwest Operations of Wang Laboratories, Inc. from August 1996 until September
1997. He joined Wang Laboratories, Inc. when that company acquired I-NET, Inc.
in 1996; at that time he was General Manager, Midwest Operations at I-NET, Inc.,
a position he held from April 1994 until August 1996. Mr. Harvey has a B.S. in
mathematics from California State University and an M.S. in both computer
science and management from the University of California. Mr. Harvey serves in
the U.S. Army Reserve as a Colonel and in the Military Intelligence and Military
Police Corps.
ROBERT D. MCCALLEY. Mr. McCalley has been our Senior Vice
President--Electronic Commerce since February 1998. Prior to that time, Mr.
McCalley was Vice President, Wide Area Network Division of Wang Laboratories,
Inc. He joined Wang Laboratories, Inc. when that company acquired I-NET, Inc. in
1996; at that time he was Vice President, Commercial Services, at I-NET, Inc., a
company he joined in April 1991. Mr. McCalley has a B.S. in Mechanical
Engineering from George Washington University.
PHILIP A. CANFIELD. Mr. Canfield has been on our Board of Directors since
June 1998. He has been a principal at GTCR Golder Rauner, L.L.C. since 1997 and
an associate from 1992 until 1997. Prior to 1992, Mr. Canfield worked in the
corporate finance department of Kidder, Peabody & Co. He has a B.S. in finance
from the Honors Business Program at the University of Texas at Austin and an
M.B.A. from the University of Chicago. Mr. Canfield is also a director of AETEA
Information Technology, Inc., VISTA Information Technologies, Inc. and several
other private companies in GTCR's portfolio.
JOHN CROSS. Mr. Cross has been on our Board of Directors since June 1998
and our Executive Vice President--Strategic Consulting since March 1999. Mr.
Cross was the Group Vice President of Information Technology for BP Amoco
Corporation from 1998 until 1999. Mr. Cross was the Chief Information Officer
(CIO) for the British Petroleum Group (BP) from 1993 until 1998. Prior to 1993,
he was General Manager for information technology in the Exploration and
Production Company of British Petroleum. Mr. Cross has a B.S. in economics and
business management from the University of Natal, South Africa.
THOMAS M. DAVIDSON. Mr. Davidson has been on our Board of Directors since
June 1998. Mr. Davidson has been President and Chief Executive Officer of
Davidson Capital Group since June 1998. From June 1997 until April 1998, Mr.
Davidson was a Managing Director of Washington Equity Partners. Prior to that,
he was a partner at the law firm of Reed, Smith, Shaw & McClay. From 1995 until
March 1997, Mr. Davidson was a partner at the law firm of Coffield, Ungaretti &
Harris. Mr. Davidson was a partner at the law firm of Verner, Liipfert,
Bernhard, McTheron & 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
other private companies in GTCR's portfolio.
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<PAGE>
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 pursuant to 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
outside directors within months after this offering; these directors will be
appointed by the current members of the Board.
COMMITTEES OF THE BOARD OF DIRECTORS
After completion of this offering, we intend to establish an Audit Committee
and a Compensation Committee, each composed of independent directors. The Audit
Committee will recommend the annual appointment of our auditors with whom the
Audit Committee will review the scope of audit and non-audit assignments and
related fees, accounting principles we use in financial reporting, internal
auditing procedures and the adequacy of our internal control procedures. The
Compensation Committee will make recommendations to the Board of Directors
regarding compensation for our executive officers.
COMPENSATION OF DIRECTORS
Directors who are also employees of AppNet receive no additional
compensation for their services as directors. Directors who are not AppNet
employees will not receive a fee for attendance in person at meetings of the
Board of Directors or committees of the Board of Directors, but they will be
reimbursed for travel expenses and other out-of-pocket costs incurred in
connection with the attendance of meetings. Non-employee directors will be
eligible to receive options to purchase our common stock in connection with
their appointment to the Board of Directors.
LIMITATIONS ON LIABILITY AND INDEMNIFICATION MATTERS
The Delaware General Corporation Law provides that a company may indemnify
its directors and officers against certain liabilities. 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
may obtain director and officer liability insurance to effectuate these
provisions.
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EXECUTIVE COMPENSATION
The following table sets forth a summary of compensation for services
rendered in all capacities to us by the Chief Executive Officer and President
and each of our four other most highly paid executive officers (collectively,
the "Named Executive Officers").
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
OTHER
ANNUAL COMPENSATION ANNUAL
----------------------------------- COMPEN-
NAME AND PRINCIPAL POSITIONS YEAR SALARY BONUS SATION
- --------------------------------------------------------- --------- ------------ ---------- ----------
<S> <C> <C> <C> <C>
Ken S. Bajaj
President and Chief Executive Officer(a)............... 1998 $ $ $
Toby Tobaccowala
Senior Vice President.................................. 1998 90,278(b) 15,000
Ronald B. Alexander
Chief Financial Officer, Secretary & Treasurer......... 1998 63,135(c) 10,000 50,000(f)
Robert G. Harvey
Senior Vice President--Software Development Services... 1998 114,250(d) 40,000(g)
Robert D. McCalley
Senior Vice President--Electronic Commerce............. 1998 114,330(d) 40,000(g)
Terrence M. McManus
Senior Vice President, Secretary & Treasurer(e)........ 1998 123,547(d) 40,000(g)
</TABLE>
- ------------------------
(a) Mr. Bajaj expects to receive an annual base salary of $300,000 beginning in
May 1999. To date, Mr. Bajaj has 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 160,000 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 Named Executive Officers during 1998. None of the Named Executive
Officers currently holds any options to purchase our common stock.
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EMPLOYMENT AGREEMENTS
We have entered into a Senior Management Agreement with Mr. Bajaj, dated as
of June 29, 1998, which provides for his employment as our President and Chief
Executive Officer until he resigns, is disabled (as determined by the Board of
Directors in its good faith judgment), dies or is terminated by the Board of
Directors for any reason. Mr. Bajaj expects to receive an annual base salary of
$300,000 beginning 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 certain exceptions, including (a) sales in a registered
public offering and (b) sales, subject to volume limitations imposed by the
Senior Management Agreement, pursuant to Rule 144 under the Securities Act.
Pursuant to the Registration Agreement, Mr. Bajaj may request that his shares of
AppNet common stock be included on any registration statement filed by AppNet
(a) to register common stock held by GTCR and/or Smart Technology or (b) 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 $0.001 per
share. The number of shares which AppNet may repurchase upon these terms is
5,804,402 in the first year of the agreement, 3,870,610 in the second year and
1,935,162 in the third year at the end of which AppNet's right to repurchase Mr.
Bajaj's common stock terminates. If AppNet does not exercise its repurchase
right, GTCR and/or Smart Technology may repurchase these shares at a price of
$0.001 per share 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 earliest of (a) 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 an initial public offering; (b)
the sale of all or substantially all of our assets; (c) GTCR and its affiliates
failing to own more than 50% of the common stock GTCR purchased pursuant to the
Purchase Agreement dated June 29, 1998, as amended; and (d) June 30, 2001.
AppNet also has the right, pursuant to 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 3,566,000 shares of common stock at
a price of $0.1055 per share from Mr. Bajaj (whether held by Mr. Bajaj or his
permitted transferees) to be issued or sold to such employees. As of March 26,
1999, AppNet had repurchased a total of 2,967,161 of such shares from Mr. Bajaj
for an aggregate purchase price of $313,035. Upon the termination of Mr. Bajaj's
employment, AppNet has the right to repurchase all of 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
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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 (a) commission of a felony or
crime involving moral turpitude; (b) fraud, gross negligence or willful
misconduct with respect to AppNet; (c) substantial and repeated failure to
perform duties; or (d) 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
(a) for two years after such employment ends if he resigns or is terminated for
Cause or (b) 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 500,000, 180,000, 314,000,
500,000 and 180,000 shares, respectively (1,674,000 shares in the aggregate) of
our common stock to these individuals at a per share price of $0.1055, 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 certain exceptions, including (a) sales in a registered public
offering and (b) sales, subject to volume limitations imposed by the Senior
Management Agreement, pursuant to Rule 144 under the Securities Act. Pursuant to
the Registration Agreement between AppNet and substantially all of its existing
stockholders dated June 29, 1998, each executive may request that his shares of
AppNet common stock be included in any registration statement filed by AppNet
(a) to register common stock held by GTCR and/or Smart Technology or (b) on its
own behalf, other than in this offering.
Each Senior Management Agreement also provides that upon termination of the
executive's employment, AppNet may repurchase all or any portion of its common
stock owned by such executive or his permitted transferees. A portion of the
executive's common stock may be repurchased at "Original Cost," I.E., the price
originally paid by the executive for such common stock; the remaining common
stock may be repurchased at the fair market value of such shares. If the
executive's employment is terminated for any reason before the first anniversary
of his Senior Management Agreement, the amount of common stock which may be
repurchased at Original Cost ranges from 75% to 100%, depending on the
particular executive. The portion of common stock to be repurchased at Original
Cost decreases ratably each year until it reaches zero after the fourth
anniversary of the Senior Management Agreement. If AppNet does not exercise its
repurchase right, GTCR, Smart Technology or Mr. Bajaj may repurchase the
executive's AppNet common stock upon the same terms and contribute them to
AppNet in exchange for a promissory note equal to the aggregate purchase price
of such shares. This repurchase right terminates upon (a) 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 this
offering) or (b) 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.
Pursuant to 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
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that we would repurchase 255,000 shares of our common stock from him at purchase
prices ranging from $0.1055 to $0.2505 per share, and we would pay him $160,000
in severance pay in accordance with his Senior Management Agreement. Pursuant to
the Stock Purchase Agreement, we, GTCR, Smart Technology and Mr. Bajaj, have the
option to repurchase the remaining 85,000 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 85,000 shares.
STOCK INCENTIVE PLANS
1999 STOCK INCENTIVE PLAN
We intend to adopt the AppNet Systems, Inc. 1999 Stock Incentive Plan (the
"1999 Plan"). The 1999 Plan will become effective upon its adoption by the Board
of Directors and ratification by the stockholders. The purpose of the 1999 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 and performance shares
(collectively, or individually, "Awards"), thereby encouraging these individuals
to devote their abilities and energies to the success of AppNet.
The 1999 Plan will be administered by a Compensation Committee, which will
consist of non-employee directors. Under the 1999 Plan, the Committee will have
the authority to, among other things: (i) select the employees to whom Awards
will be granted, (ii) determine the type, size and the terms and conditions of
Awards and (iii) establish the terms for treatment of Awards upon a termination
of employment.
We will authorize shares of common stock for issuance under the 1999 Plan
for the grant of Awards to eligible individuals. The 1999 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 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 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 (the "1998 Plan") and reserved 4,500,000 shares of our common stock for
issuance in connection with awards granted under the 1998 Plan. Awards under the
1998 Plan may be made in the form of (a) incentive stock options, (b)
non-qualified stock options, (c) stock appreciation rights, (d) restricted stock
and (e) restricted stock units. Awards may be granted to such persons, including
officers, directors and employees, that our Board of Directors or a
Board-appointed committee shall in its discretion select.
As of March 29, 1999, options to purchase a total of 4,239,701 shares of our
common stock were outstanding under the 1998 Plan and remain unexercised, 13,655
shares of our common stock have been issued upon the exercise of options granted
under the 1998 Plan and options to purchase 532,472 shares of our common stock
granted under the 1998 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 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.
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The 1998 Plan has no termination date, however, no incentive stock options
may be granted under the 1998 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 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 Option and Incentive
Plan, no further awards will be made under the 1998 Plan.
CENTURY COMPUTING, INCORPORATED INCENTIVE STOCK OPTION PLAN
In connection with our acquisition of Century Computing, Incorporated, we
assumed its Incentive Stock Option Plan (the "Century 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. Originally, we reserved a total of 2,006,761 shares
of our common stock for issuance in connection with options granted under the
Century Plan.
As of March 26, 1999, options to purchase a total of 203,404 shares of our
common stock were outstanding under the Century Plan and remain unexercised,
1,803,357 shares of our common stock have been issued upon the exercise of
options granted under the Century Plan and options to purchase 203,404 shares of
our common stock granted under the Century Plan are currently exercisable.
The Century 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 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 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 Plan has no termination date, however, no incentive stock
options may be granted under the Century Plan after the expiration of the
ten-year period beginning on the date the Century Plan was adopted. The board of
directors may at any time and from time to time amend or terminate the Century
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
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 (the "Internet Outfitters' 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. Originally, we reserved a total of 63,555
shares of our common stock for issuance in connection with options granted under
the Internet Outfitters' Plan.
As of March 26, 1999, options to purchase a total of 63,555 shares of our
common stock were outstanding under the Internet Outfitters' Plan and remain
unexercised, no options have been exercised and options to purchase 2,268 shares
of our common stock granted under the Internet Outfitters' Plan are currently
exercisable.
The Internet Outfitters' 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' 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'
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Plan, to select the persons to whom awards will be made, to determine the terms
and provisions of awards and, with the consent of the grantee, to amend the
terms of any outstanding award. The determinations of the board of directors or
a board-appointed comittee are made in its sole discretion and are conclusive.
The Internet Outfitters' Plan will terminate upon the expiration of the
ten-year period beginning on the date the Internet Outfitters' Plan was adopted.
The board of directors may at any time and from time to time amend or terminate
the Internet Outfitters' 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' Plan.
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CERTAIN RELATIONSHIPS AND TRANSACTIONS
GTCR AND SMART TECHNOLOGY PURCHASE AGREEMENT
GTCR, Smart Technology and AppNet are parties to a Purchase Agreement, dated
as of June 29, 1998, as amended and supplemented (the "Purchase Agreement")
pursuant to which GTCR and Smart Technology, L.L.C., an entity controlled by Mr.
Bajaj's spouse, purchased 32,279,750 and 663,810 shares of our common stock,
respectively, at a price of $0.1055 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. Pursuant to these
provisions, GTCR and Smart Technology have purchased aggregate amounts of
approximately 44,113 and 900 shares of Class A Preferred Stock, respectively,
since June 29, 1998 for aggregate purchase prices of approximately $44,113,000
and $900,000, respectively. The Purchase Agreement currently provides that as
long as GTCR owns at least 15% of the securities purchased under the Purchase
Agreement, AppNet must obtain GTCR's prior written consent before taking certain
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 Purchase Agreement effective upon
consummation of this offering.
In connection with AppNet's acquisition of Software Services Corporation and
the issuance of 11,576 shares of Class B Preferred Stock to the former
stockholders of that company, GTCR and Smart Technology transferred an aggregate
of 3,953,227 shares of AppNet common stock to us in exchange for an aggregate of
417.066 shares of our Class A Preferred Stock. In addition, the Purchase
Agreement was amended in August 1998 to decrease the commitment of GTCR and
Smart Technology to purchase 96,500 shares of Class A Preferred Stock to 84,920
shares of Class A Preferred Stock.
STOCKHOLDERS' AGREEMENT, REGISTRATION AGREEMENT AND SENIOR MANAGEMENT AGREEMENTS
In connection with the Purchase Agreement, AppNet, GTCR, Smart Technology
and substantially all of AppNet's stockholders entered into a Stockholders'
Agreement, dated as of June 29, 1998 (the "Stockholders' Agreement") and a
Registration Agreement, dated as of June 29, 1998 (the "Registration
Agreement"). In addition, each member of AppNet's senior management, including
all of the Named Executive Officers, entered into a Senior Management Agreement
with AppNet upon commencement of their employment with us. The Stockholders'
Agreement provides, among other things, that the Board of Directors will consist
of two representatives designated by GTCR, one representative designated by Mr.
Bajaj and three or more representatives chosen jointly by GTCR and Mr. Bajaj.
The Stockholder's Agreement also includes provisions restricting the
transferability of our common stock, giving AppNet a right of first refusal to
purchase a stockholder's common stock and giving stockholders the right, subject
to certain conditions, to participate if GTCR and Smart Technology transfer
their shares of common stock. The Stockholders' Agreement will terminate upon
the consummation of this offering.
The Registration Agreement provides that the holders of a majority of our
common stock issued to GTCR and Smart Technology pursuant to the Purchase
Agreement (the "GTCR/Smart Common Stock") have the right under certain
circumstances to demand the filing of a registration statement with the
Securities and Exchange Commission with respect to all or any portion of the
GTCR/Smart Common Stock. Substantially all of the other current stockholders of
AppNet have the right to include all or any portion of their AppNet common stock
on registration statements filed by AppNet to register
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shares of GTCR/Smart Common Stock; subject, however, to the ability of the
underwriters of any offering to limit the number of shares included in such
registration. Holders of GTCR/Smart Common Stock may require AppNet to file, and
pay the expenses in connection with, up to four registration statements on Form
S-1 and an unlimited number of registration statements on Forms S-2 and S-3, if
AppNet qualifies to use such forms. If AppNet proposes to register securities
for its own account (other than in this offering), GTCR, Smart Technology and
substantially all of AppNet's other stockholders are entitled to notice of, and
to include their shares in, such registration; subject, however, to the ability
of the underwriters of any offering to limit the number of shares included in
such registration. These registration rights cover substantially all of the
shares of our common stock and will also cover any additional shares obtained by
the parties to the Registration Agreement. The existence and exercise of these
registration rights may make it more difficult for AppNet to arrange future
financing and may have an adverse effect on the market price of our common
stock.
In addition, our acquisition agreement with Arbor Intelligent Systems, Inc.
grants the former Arbor stockholders rights to have their shares of our common
stock included in any registration statement we file, other than in connection
with this offering; subject, however, to the ability of the underwriters of any
offering to limit the number of shares included in such registration.
The Senior Management Agreement with Mr. Bajaj provided for the sale of
3,566,000 shares of our common stock at a per share price of $0.1055. The Senior
Management Agreement restricts the transferability of these shares. AppNet, GTCR
and Smart Technology have certain rights to repurchase these shares upon the
termination of Mr. Bajaj's employment.
Mr. Bajaj pledged the 3,566,000 shares of common stock which he purchased
pursuant to 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. Pursuant to the Senior Management Agreement between
Mr. Bajaj and AppNet, AppNet has 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 $0.1055 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 March 26, 1999,
AppNet had repurchased a total of 2,967,161 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 member of our Board of Directors who
resigned on June 29, 1998, is a member of Fairfax Consulting Company L.L.C. We
entered into a professional services agreement (the "Fairfax Agreement"), dated
as of June 29, 1998, with Fairfax Management Company II, L.L.C. and Fairfax
Consulting Company, L.L.C. (together with Fairfax Management Company II, L.L.C.,
"Fairfax"), pursuant to which Fairfax agreed to provide to AppNet the services
of a financial and management consultant. In return for the consultant's
services, AppNet agreed to pay Fairfax a monthly retainer of $16,667 as well as
any fees for consulting services in excess of the monthly retainer. We
terminated the consulting services portion of the Fairfax Agreement in October
1998. The Fairfax Agreement also provided that if AppNet acquired a company
which was introduced to it by Fairfax, AppNet shall pay a finder's fee to
Fairfax equal to 1% of the purchase price for the acquired company. In 1998,
AppNet paid approximately $336,000 in consulting fees to Fairfax. The Fairfax
Agreement prohibited Fairfax from owning, controlling, rendering services to or
otherwise doing business with one of our competitors while the agreement is in
effect and for a period of 18 months after it is terminated. We terminated the
Fairfax Agreement effective as of November 20, 1998.
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The Fairfax Agreement restricts the transfer by Fairfax of its shares of our
common stock until the earlier of (a) June 29, 2003, (b) 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 and Smart Technology, other than in an
initial public offering or (c) the sale of all or substantially all of our
assets.
AppNet repurchased 3,850,000 shares of its common stock from Fairfax on June
29, 1998 in exchange for a convertible promissory note in the principal amount
of $406,175. The principal balance of this note 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 (the "Davidson Agreement"), pursuant to
which Mr. Davidson received $350,000 in cash and 150,000 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 29, 1999, GTCR and Smart Technologies have paid a total of $48.5 million
in exchange for 32,943,560 shares of our common stock and approximately 45,013
shares of Class A Preferred Stock, and Mr. Davidson has earned a commission of
approximately $685,000.
Pursuant to the Davidson Agreement, Mr. Davidson purchased 246,956 shares of
our common stock at a price of $0.1055 per share. Under that agreement, Mr.
Davidson has a consulting arrangement with AppNet pursuant to which he is
entitled to receive annual payments of $200,000. AppNet may terminate this
consulting arrangement upon thirty days' notice, although upon any termination
prior to June 29, 1999 for reasons other than for cause, we are required to pay
to Mr. Davidson $200,000 less the aggregate amount of all consulting payments
made prior to termination.
OTHER GTCR RELATIONSHIPS
GTCR and AppNet are parties to a professional services agreement, dated as
of June 29, 1998 (the "Professional Services Agreement"), pursuant to which GTCR
is entitled to receive $200,000 per year in exchange for financial and
management consulting services. The Professional Services 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 pursuant
to the Purchase Agreement. GTCR has earned approximately $475,000 in investment
fees. The 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.
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 100,000 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 pursuant to the Purchase Agreement was canceled and AppNet
issued a new promissory note in the principal amount of $903,567 to Smart
Technology. This note bears interest at the rate of 12% per annum. The principal
amount of this note is reduced from time to time by an
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amount equal to the purchase price of any Class A Preferred Stock purchased by
Smart Technology pursuant to the Purchase Agreement. The amount outstanding
under this note has been reduced to $3,300 as of March 29, 1999 and will be
repaid with the proceeds of this offering. Also on June 29, 1998, in accordance
with the Purchase Agreement, the original warrant issued to Smart Technology was
canceled and AppNet issued a new warrant to Smart Technology to purchase 200,000
shares of AppNet common stock for an exercise price of $0.1055 per share.
In 1998, we paid Smart Technology approximately $25,000 in exchange for
consulting services.
PEARLSTEIN AGREEMENT
Foxhall Capital, LLC, an entity controlled by Jack Pearlstein, and AppNet
signed an agreement dated January 18, 1998, pursuant to 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.
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 (a) commission of a felony or
crime involving moral turpitude; (b) fraud, gross negligence or willful
misconduct with respect to AppNet; (c) substantial and repeated failure to
perform duties; or (d) breach of the confidentiality or noncompete provisions of
the Senior Management Agreement.
The Senior Management Agreement contains provisions requiring Mr. Cross to
protect the confidentiality of our proprietary and confidential information. In
addition, Mr. Cross is prohibited, during his employment at AppNet and for two
years after his employment ends if he resigns or is terminated for Cause or for
one year after his employment ends if he is terminated without Cause, from
competing with AppNet, soliciting any of our employees or interfering with any
of our business relationships.
In 1999, John Cross also received options to purchase 962,661 shares of
AppNet common stock at an exercise price of $4.50 per share.
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PRINCIPAL STOCKHOLDERS
The following table sets forth, as of March 29, 1999, information with
respect to the beneficial ownership of our common stock by (a) each person known
to AppNet to beneficially own more than 5% of the outstanding shares of our
common stock, (b) each director of AppNet and each Named Executive Officer and
(c) all directors and executive officers as a group. Unless otherwise indicated,
each stockholder has sole voting and investment power with respect to the shares
beneficially owned by the stockholder and has the same address as AppNet.
<TABLE>
<CAPTION>
NUMBER OF SHARES OF
COMMON STOCK PERCENTAGE OWNERSHIP
BENEFICIALLY OWNED ------------------------------------------
BEFORE THIS OFFERING BEFORE THIS OFFERING AFTER THIS OFFERING
---------------------- --------------------- -------------------
<S> <C> <C> <C>
GTCR (a)........................................... 28,285,131 49.8%
Ken S. Bajaj (b)................................... 7,498,839 13.2
Toby Tobaccowala................................... 500,000 *
Ronald B. Alexander................................ 500,000 *
Robert D. McCalley................................. 474,000 *
Robert G. Harvey................................... 340,000 *
Philip A. Canfield (a)(c).......................... -- *
John Cross......................................... -- *
Thomas M. Davidson................................. 357,261 *
Bruce V. Rauner (a)(c)............................. -- *
Terrence McManus................................... 85,000 *
All executive officers and directors as a group (11
persons)......................................... 9,985,100 17.6
</TABLE>
- ------------------------
* Less than 1%.
(a) The address for GTCR and Messrs. Canfield and Rauner is 6100 Sears
Tower, Chicago, Illinois, 60606.
(b) Excludes 2,000,000 shares owned by certain family trusts and 781,664
shares beneficially owned by Smart Technology, over which Mr. Bajaj does
not exercise any voting or investment control.
(c) Each of Messrs. Canfield and Rauner is a principal of GTCR and therefore
may be deemed to share investment and voting control over the shares of
our common stock held, directly or indirectly, by GTCR. Each of Messrs.
Canfield and Rauner disclaims beneficial ownership of the shares of our
common stock held by GTCR.
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DESCRIPTION OF CAPITAL STOCK
Our authorized capital stock of consists of 75,000,000 shares of common
stock, par value $0.0005 per share, 96,621 shares of Class A Preferred Stock,
par value $0.01 per share, and 20,000 shares of Class B Preferred Stock, par
value $0.01 per share. Upon completion of this offering, there will be issued
and outstanding shares of common stock (including shares that will
be issued upon consummation of this offering upon conversion of convertible
promissory notes), approximately 45,430 shares of Class A Preferred Stock (which
we intend to redeem with the proceeds of this offering) and 11,576 shares of
Class B Preferred Stock (which we intend to redeem with the proceeds of this
offering). As of March 29, 1999, there were 124 holders of our common stock,
five holders of our Class A Preferred Stock and 11 holders of our Class B
Preferred Stock. In addition,
- 4,766,959 shares of common stock have been reserved in connection with the
grant of options to purchase common stock;
- 241,666 shares of common stock have been reserved for issuance in
connection with warrants issued to Silicon Valley Bank and Smart
Technology, L.L.C.;
- 121 shares of Class A Preferred Stock have been reserved for issuance in
connection with a warrant issued to Silicon Valley Bank; and
- AppNet has also reserved shares of common stock for issuance in connection
with convertible promissory notes and contingent payments to the former
stockholders of companies we have acquired.
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. 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.
DIVIDENDS. Holders of our common stock are entitled to receive ratably such
dividends, if any, as are declared by AppNet's Board of Directors out of funds
legally available for the declaration of dividends, subject to the preferential
rights of any holder of preferred stock that may from time to time be
outstanding. The terms of our credit facilities restrict AppNet's ability to pay
dividends on the common stock.
LIQUIDATION. Upon the liquidation, dissolution or winding up of AppNet, the
holders of our common stock are entitled to share pro rata in the distribution
of all of AppNet's assets available for 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.
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, pursuant to which the holders of a majority of the GTCR/Smart Common
Stock have the right to demand registration of all or any portion of the
GTCR/Smart Common Stock under certain circumstances. Substantially all of the
other current stockholders of AppNet have the right to include all or any
portion of their AppNet common stock on
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registration statements filed by AppNet to register GTCR/Smart Common Stock.
Subject to certain 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 the outstanding shares of Class A
Preferred Stock and Class B Preferred Stock. These shares will be canceled and
will not be reissued, sold or transferred. The preferred stock has the dividend,
redemption, liquidation and other rights described below.
VOTING RIGHTS. Neither Class A nor Class B Preferred Stock is entitled to
any voting rights, other than those granted by the Delaware General Corporation
Law, provided that each holder of Class A and Class B Preferred Stock is
entitled to notice of all stockholders meetings at the same time and in the same
manner to which all stockholders entitled to vote at such meetings are entitled.
DIVIDEND RIGHTS. When and as declared by AppNet's Board of Directors and to
the extent permitted under the Delaware General Corporation Law, holders of
Class A and Class B Preferred Stock are entitled to preferential cash dividends.
Dividends on each share of Class A and Class B Preferred Stock accrue on a daily
basis at the rate of 6% per annum on the liquidation value per share of $1,000,
plus all accumulated and unpaid dividends from and including the date of
issuance of such share to and including the first to occur of (a) 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 (b) 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 shall accumulate on such dates. All
accrued and unpaid dividends shall 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 ("Junior Securities").
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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 shall 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 Junior Securities.
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 shall
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 shall it permit any subsidiary, to redeem, purchase or otherwise
acquire directly or indirectly any Junior Securities, nor is AppNet entitled
directly or indirectly to pay or declare any dividend or make any distribution
upon any Junior Securities. 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 pursuant to an arrangement approved by the Board of Directors from
(a) present or former employees of AppNet or its subsidiaries and (b) those
individuals (formerly employees of Arbor Intelligent Systems, Inc.) who are
party to a put agreement with AppNet granting them the right to have their
shares of AppNet common stock repurchased by AppNet during a thirty-day period
commencing on March 11, 1999 for an aggregate amount not to exceed $277,992,
representing a price of $2.00 per share, pursuant to the terms of such
agreement.
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 pursuant to 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
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of more than 50% of AppNet's assets or certain mergers or consolidations
involving AppNet, is proposed to occur, then the holder or holders of a
majority of the shares of Class A Preferred Stock then outstanding may
require AppNet to redeem all or any portion of the Class A Preferred Stock
owned by such holders at a price per share equal to the liquidation value
thereof (plus all accrued and unpaid dividends thereon) by giving written
notice of such election. AppNet must give all holders of Class A Preferred
Stock prompt notice of any proposed Change in Ownership or Fundamental
Change and notice of any election to redeem shares because of such changes.
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. Pursuant
to contractual provisions, upon a sale of AppNet, all outstanding shares of
Class B Preferred Stock shall be redeemable at a price per share equal to
the liquidation value or the holders shall receive the same consideration
per share as the holders of the Class A Preferred Stock.
DELAWARE LAW AND CERTAIN PROVISIONS OF CERTIFICATE OF INCORPORATION AND BYLAWS
AppNet's certificate of incorporation, bylaws and Section 203 of the
Delaware General Corporation Law contain certain 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 shall be subject to Section 203 of the Delaware General
Corporation Law. In general, subject to certain exceptions, Section 203 of the
Delaware General Corporation Law prohibits a publicly held Delaware corporation
from engaging in a "business combination" with an "interested stockholder" for a
period of three years after the date of the transaction in which the person
became an interested stockholder, unless:
- upon consummation of such transaction, the interested stockholder owned
85% of the voting stock of the corporation outstanding at the time the
transaction commenced (excluding for purposes of determining the number of
shares outstanding those shares owned by (1) persons who are directors and
also officers and (2) 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 shall
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
certain stockholder nominations of
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candidates for the Board of Directors and for certain other stockholder business
to be conducted at an annual meeting. These provisions could, under certain
circumstances, operate to delay, defer or prevent a change in control of AppNet.
AUTHORIZED AND UNISSUED PREFERRED STOCK. Upon consummation of this
offering, there will be authorized and unissued shares of preferred stock.
We intend to amend our certificate of incorporation to authorize the Board of
Directors to issue one or more series of preferred stock and to establish the
designations, powers, preferences and rights of each series of preferred stock.
The existence of authorized and unissued preferred stock may enable the Board of
Directors to render more difficult or to discourage an attempt to obtain control
of AppNet by means of a merger, tender offer, proxy contest or otherwise. For
example, if in the due exercise of its fiduciary obligations, the Board of
Directors were to determine that a takeover proposal is not in AppNet's best
interests, the Board of Directors could cause shares of preferred stock to be
issued without stockholder approval in one or more private offerings or other
transactions that might dilute the voting or other rights of the proposed
acquiror or insurgent stockholder or stockholder group or create a substantial
voting block in institutional or other hands that might undertake to support the
position of the incumbent Board of Directors.
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. AppNet's bylaws provide that AppNet shall indemnify each
of its directors, officers, employees and agents to the fullest extent permitted
by law. The certificate of incorporation limits the liability of AppNet's
directors and stockholders to AppNet for monetary damages in certain
circumstances. The certificate of incorporation also provides that AppNet may
purchase insurance on behalf of its directors, officers, employees and agents
against certain 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 .
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SHARES ELIGIBLE FOR FUTURE SALE
Upon consummation of this offering, shares of our common stock will be
outstanding ( shares if the over-allotment option is exercised in full). Of
these shares, the shares of common stock sold in this offering will be
freely tradable without restriction or further registration under the Act,
unless held by an "affiliate" of AppNet (an "AppNet Affiliate") as that term is
defined in Rule 144. All of the shares of our common stock outstanding prior to
the offering are "restricted securities," as such term is defined under Rule
144. These shares are restricted securities because they were issued in private
transactions not involving a public offering and may not be sold in the absence
of registration other than in accordance with Rule 144 or Rule 701 promulgated
under the Securities Act or another exemption from registration. This prospectus
may not be used in connection with any resale of shares of our common stock
acquired in the offering by AppNet Affiliates.
Each of AppNet, our directors, officers and certain of our existing
stockholders have agreed not to offer, sell, contract to sell, announce an
intention to sell, pledge or otherwise dispose of, directly or indirectly, or
file with the Securities and Exchange Commission a registration statement under
the Securities Act relating to, any shares of our common stock or securities
convertible into or exchangeable or exercisable for any shares of our common
stock without the prior written consent of Credit Suisse First Boston
Corporation for a period of days after the date of this prospectus. The
restrictions set forth in the previous sentence do not apply to grants of
employee stock options pursuant to the terms of AppNet's stock incentive plans
in effect on the date of this prospectus, issuances of securities pursuant to
the exercise of such options outstanding on the date of this prospectus and
issuances of securities pursuant to the conversion of any convertible
instruments outstanding on the date of this prospectus.
In general, under Rule 144 as currently in effect, if a minimum of one year
has elapsed since the later of the date of acquisition of the restricted
securities from the issuer or from an affiliate of the issuer, a person (or
persons whose shares of common stock are aggregated), including persons who may
be deemed AppNet Affiliates, would be entitled to sell within any three-month
period a number of shares of AppNet common stock that does not exceed the
greater of
(1) one percent of the then-outstanding shares of AppNet common stock, which
equals approximately 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 certain restrictions as to the
manner of sale, notice requirements and the availability of current public
information about AppNet. In addition, under Rule 144(k), if a period of at
least two years has elapsed since the later of the date restricted securities
were acquired from AppNet or the date they were acquired from an AppNet
Affiliate, a stockholder who is not an AppNet Affiliate at the time of sale and
who has not been an AppNet Affiliate for at least three months prior to the sale
would be entitled to sell shares of our common stock in the public market
immediately without compliance with the foregoing requirements under Rule 144.
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 pursuant to a written compensatory plan or contract may be
entitled to rely on the resale provisions of Rule 701 of the Securities Act
without having to comply with the public information, holding period, volume
limitation or notice provisions of Rule 144, and AppNet Affiliates may be
entitled to sell their Rule 701 shares without having to comply with the holding
period restrictions of Rule 144, in each case,
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commencing 90 days after the date of this prospectus (although the contractual
limitations will continue through the th day following the date of this
prospectus).
In addition to the restrictions on transfer described above, our executives
with whom we have entered into Senior Management Agreements are subject to
restrictions on the transfer of shares of our common stock owned by them as of
the date they entered into the Senior Management Agreement.
Immediately following the offering, none of the "restricted
securities" will be available for immediate sale in the public market pursuant
to Rule 144. Beginning 90 days after the date of this prospectus, and without
consideration of the contractual restrictions described above,
shares either issued under our stock incentive plans or acquired
upon the exercise of options issued under our stock incentive plans will be
outstanding and eligible for sale in reliance upon Rule 701. Additional shares
may be available if options are exercised in the -day period following the
date of this prospectus. Shares of our common stock issued in reliance on Rule
701 may be resold by holders who are not AppNet Affiliates under Rule 144
without compliance with the holding period, amount and notice limitations and by
holders who are AppNet Affiliates under Rule 144 without compliance with the
holding period limitation.
Following this offering, we intend to file a registration statement on Form
S-8 under the Securities Act to register shares of our common stock
reserved or to be available for issuance pursuant to our stock incentive plans.
Shares of our common stock issued pursuant to our stock incentive plans
generally will be available for sale in the open market by holders who are not
AppNet Affiliates and, subject to the volume and other applicable limitations of
Rule 144, by holders who are AppNet Affiliates, unless such shares are subject
to vesting restrictions or the contractual restrictions described above.
We are a party to a Registration Agreement, dated as of June 29, 1998,
pursuant to which the holders of a majority of the GTCR/Smart Common Stock have
the right to demand registration of all or any portion of the GTCR/Smart Common
Stock under certain circumstances. Substantially all of our other current
stockholders have the right to include all or any portion of their AppNet common
stock on registration statements we file to register GTCR/Smart Common Stock.
Subject to certain conditions, substantially all of our current stockholders
have the right to include all or any portion of their AppNet common stock on
registration statements we file on our own behalf, other than in an initial
public offering. These rights cover substantially all of the shares of our
common stock and will also cover any shares obtained by parties to the
Registration Agreement. Registration of these shares of our common stock would
permit the sale of these shares without regard to the restrictions of Rule 144.
In addition, our acquisition agreement with Arbor gave the former stockholders
of Arbor rights to have their shares of our common stock included in any
registration statement, other than in connection with this offering.
Prior to this offering, there has been no public market for our common
stock. No information is currently available, and we cannot predict the timing
or amount of future sales of shares, or the effect, if any, that future sales of
shares, or the availability of shares for future sale, will have on the market
price of our common stock prevailing from time to time. Sales of substantial
amounts of our common stock (including shares issuable upon the exercise of
stock options) in the public market after the lapse of the restrictions
described above, or the perception that such sales may occur, could materially
and adversely affect the prevailing market price for our common stock and our
ability to raise equity capital in the future.
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U.S. FEDERAL TAX CONSIDERATIONS FOR NON-U.S. HOLDERS
The following is a general discussion of the principal United States federal
income and estate tax consequences of the ownership and disposition of common
stock by a Non-U.S. Holder, as defined below. As used herein, the term "Non-U.S.
Holder" means a holder that for United States federal income tax purposes is an
individual or entity other than (a) a citizen or individual resident of the
United States, (b) 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), (c) an
estate the income of which is subject to U.S. federal income taxation regardless
of its source or (d) a trust if both (1) a U.S. court is able to exercise
primary supervision over the administration of the trust and (2) one or more
U.S. persons have the authority to control all substantial decisions of the
trust.
An individual may, subject to certain 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 certain determinations made at the
partner level), or to certain types of Non-U.S. Holders which may be subject to
special treatment under United States federal income tax laws (for example,
insurance companies, tax-exempt organizations, financial institutions, dealers
in securities and holders of securities held as part of a "straddle," "hedge,"
or "conversion transaction") and 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 (the "Code"), 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 ("U.S. trade or
business income"), are generally subject to U.S. federal income tax on a net
income basis at regular graduated rates, but are not generally subject to the
30% withholding tax if the Non-U.S. Holder files the appropriate U.S. Internal
Revenue Service ("IRS") form with the payor (which form under U.S. Treasury
regulations generally requires the Non-U.S. Holder to provide a
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U.S. taxpayer identification number). Any U.S. trade or business income received
by a Non-U.S. Holder that is a corporation may also, under certain
circumstances, 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, 1999 (the "Final Regulations"), however, a
Non-U.S. Holder of our common stock who wishes to claim the benefit of an
applicable treaty rate generally will be required to satisfy applicable
certification and other requirements. In addition, under the Final Regulations,
in the case of our common stock held by a foreign partnership, (x) the
certification requirement will generally be applied to the partners of the
partnership and (y) the partnership will be required to provide certain
information, including a United States taxpayer identification number. The Final
Regulations also provide look-through rules for tiered partnerships. Further,
the IRS 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 pursuant to an income tax treaty may obtain a refund of any
excess amounts withheld by filing an appropriate claim for a refund with the
IRS.
The Final Regulations also provide special rules for dividend payments made
to foreign intermediaries, U.S. or foreign wholly owned entities that are
disregarded for U.S. federal income tax purposes and entities that are treated
as fiscally transparent in the United States, the applicable income tax treaty
jurisdiction, or both. In addition, recently enacted legislation, effective
August 5, 1997, denies income tax treaty benefits to foreigners receiving income
derived through a partnership (or otherwise fiscally transparent entity) in
certain circumstances. Prospective investors should consult with their own tax
advisers concerning the effect, if any, of these new Treasury regulations and
this recent legislation on an investment in our common stock.
GAIN ON DISPOSITION OF COMMON STOCK
A Non-U.S. Holder generally will not be subject to U.S. federal income tax
in respect of gain recognized on a disposition of our common stock unless: (a)
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), (b) 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 Code, is present in the United States for 183 or
more days in the taxable year of the disposition and meets certain other
requirements, (c) the Non-U.S. Holder is subject to tax pursuant to the
provisions of the U.S. tax law applicable to certain United States expatriates
or (d) 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. 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."
68
<PAGE>
If a Non-U.S. Holder who is an individual is subject to tax under clause (a)
above, such individual generally will be taxed on the net gain derived from a
sale of common stock under regular graduated United States federal income tax
rates. If an individual Non-U.S. Holder is subject to tax under clause (b)
above, such individual generally will be subject to a flat 30% tax on the gain
derived from a sale, which may be offset by certain United States capital losses
(notwithstanding the fact that such individual is not considered a resident
alien of the United States). Thus, individual Non-U.S. Holders who have spent
(or expect to spend) more than a DE MINIMIS period of time in the United States
in the taxable year in which they contemplate a sale of common stock are urged
to consult their tax advisers prior to the sale concerning the U.S. tax
consequences of such sale.
If a Non-U.S. Holder that is a foreign corporation is subject to tax under
clause (a) above, it generally will be taxed on its net gain under regular
graduated United States federal income tax rates and, in addition, will be
subject to the branch profits tax equal to 30% of its "effectively connected
earnings and profits," within the meaning of the Code for the taxable year, as
adjusted for certain items, unless it qualifies for a lower rate under an
applicable tax treaty.
FEDERAL ESTATE TAX
Common stock owned or treated as owned by an individual who is neither a
United States citizen nor a United States resident (as defined for United States
federal estate tax purposes) at the time of death will be included in the
individual's gross estate for United States federal estate tax purposes, unless
an applicable estate tax or other treaty provides otherwise and, therefore, may
be subject to United States federal estate tax.
INFORMATION REPORTING AND BACKUP WITHHOLDING TAX
Under United States Treasury regulations, we must report annually to the IRS
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 certain payments to persons that
fail to furnish certain information under the United States information
reporting requirements) generally will not apply (a) 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 (b) before January 1, 2000, 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 in the manner required certain
identifying information.
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 certain 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.
69
<PAGE>
status or the broker has documentary evidence in its files as to the Non-U.S.
Holder's foreign status and the broker has no actual knowledge to the contrary.
For this purpose, a "U.S. related person" is (a) a "controlled foreign
corporation" for U.S. federal income tax purposes or (b) a foreign person 50% or
more of whose gross income from all sources for the three-year period ending
with the close of its taxable year preceding the payment (or for such part of
the period that the broker has been in existence) is derived from activities
that are effectively connected with the conduct of a U.S. trade or business.
The Final Regulations alter the foregoing rules in certain respects. Among
other things, such regulations provide certain 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 (a) directly by the Non-U.S. Holder; (b) 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 (c) by
certain qualified financial institutions or other qualified entities on behalf
of the Non-U.S. Holder.
Any amounts withheld under the backup withholding rules from a payment to a
Non-U.S. Holder will be refunded (or credited against the holder's U.S. federal
income tax liability, if any) provided that the required information is
furnished to the IRS.
70
<PAGE>
UNDERWRITING
Under the terms and subject to the conditions contained in an underwriting
agreement dated , 1999, we have agreed to sell to the underwriters
named below, for whom Credit Suisse First Boston Corporation, Hambrecht & Quist
LLC, 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..............................................................
The Robinson-Humphrey Company, LLC.................................................
Charles Schwab & Co., Inc..........................................................
---------
Total..........................................................................
---------
---------
</TABLE>
The underwriting agreement provides that the underwriters are obligated to
purchase all of the shares of our common stock offered in this offering if any
are purchased, other than those shares covered by the over-allotment option
described below. The underwriting agreement also provides that if an underwriter
defaults, the purchase commitments of non-defaulting underwriters may be
increased or this offering of our common stock may be terminated.
We have granted to the underwriters a 30-day option to purchase on a pro
rata basis up to additional shares of our common stock at the initial
public offering price less the underwriting discounts and commissions. This
option may be exercised only to cover over-allotments of our common stock.
The underwriters propose to offer our common stock initially at the public
offering price on the cover page of this prospectus and to the selling group
members at that price less a concession of $ per share. The underwriters and
the selling group members may allow a discount of $ per share on sales to other
broker/dealers. After the initial public offering, the public offering price and
concession and discount to dealers may be changed by the representatives.
The following table summarizes the compensation and estimated expenses that
we will pay.
<TABLE>
<CAPTION>
TOTAL
------------------------------------
<S> <C> <C> <C>
WITHOUT WITH OVER-
PER SHARE OVER-ALLOTMENT ALLOTMENT
--------------- ------------------- ---------------
Underwriting discounts and commissions paid by us.......................... $ $ $
Expenses payable by us..................................................... $ $ $
</TABLE>
The underwriters have informed us that they do not expect discretionary
sales to exceed 5% of the shares of our common stock being offered.
We, our officers and directors and certain of our existing stockholders have
agreed not to offer, sell, contract to sell, announce an intention to sell,
pledge or otherwise dispose of, directly or indirectly, or file with the
Securities and Exchange Commission a registration statement under the Securities
Act relating to, any additional shares of our common stock or securities
convertible into or exchangeable or exercisable for any shares of our common
stock without the prior written consent of Credit Suisse First Boston
Corporation for a period of days after the date of this prospectus, except in
our case for grants of employee stock options pursuant to the terms of our stock
incentive plans in effect on the date hereof and issuances of securities
pursuant to the exercise of any options outstanding on the date hereof and
issuances of securities pursuant to the conversion of any convertible
instruments outstanding on the date hereof.
71
<PAGE>
The underwriters have reserved for sale, at the initial public offering
price, up to shares of
our common stock for employees and certain other persons associated with AppNet
who have expressed an interest in purchasing our common stock in this offering.
The number of shares of common stock available for sale to the general public in
this offering will be reduced to the extent these persons purchase the reserved
shares. Any reserved shares not so purchased will be offered by the underwriters
to the general public on the same terms as the other shares.
We have agreed to indemnify the underwriters against liabilities under the
Securities Act, or to contribute to payments which the underwriters may be
required to make in respect thereof.
We will apply to list the shares of our common stock on The Nasdaq Stock
Market's National Market under the symbol "APPN".
Prior to this offering, there has been no public market for our common
stock. The initial public offering price for our common stock will be determined
by negotiation between us and the representatives and does not reflect the
market price for our common stock following this offering. Among the principal
factors considered in determining the initial public offering price will be:
- the information set forth in this prospectus and otherwise available to
the representatives;
- market conditions for initial public offerings;
- the history of and prospects for the industry in which we compete;
- our past and present operations;
- our past and present earnings and current financial position;
- the capability of our management;
- our prospects for future earnings;
- the present state of our development and our current financial condition;
- the recent market prices of, and the demand for, publicly traded common
stock of generally comparable companies;
- the general condition of the securities markets at the time of this
offering; and
- other relevant factors.
We can offer no assurances that the initial public offering price will
correspond to the price at which our common stock will trade in the public
market subsequent to this offering or that an active trading market for our
common stock will develop and continue after this offering.
The representatives may engage in over-allotment, stabilizing transactions,
syndicate covering transactions and penalty bids in accordance with Regulation M
under the Securities Exchange Act of 1934. Over-allotment involves syndicate
sales in excess of the size of this offering, which creates a syndicate short
position. Stabilizing transactions permit bids to purchase the shares of our
common stock so long as the stabilizing bids do not exceed a specified maximum.
Syndicate covering transactions involve purchases of our common stock in the
open market after the distribution has been completed in order to cover
syndicate short positions. Penalty bids permit the representatives to reclaim a
selling concession from a syndicate member when our common stock originally sold
by such syndicate member is purchased in a syndicate covering transaction to
cover syndicate short positions.
Such stabilizing transactions, syndicate covering transactions and penalty
bids may cause the price of our common stock to be higher than it would
otherwise be in the absence of such transactions. These transactions may be
effected on The Nasdaq Stock Market's National Market or otherwise and, if
commenced, may be discontinued at any time.
72
<PAGE>
NOTICE TO CANADIAN RESIDENTS
RESALE RESTRICTIONS
The distribution of our common stock in Canada is being made only on a
private placement basis exempt from the requirement that we prepare and file a
prospectus with the securities regulatory authorities in each province where
trades of our common stock are effected. Accordingly, any resale of our common
stock in Canada must be made in accordance with applicable securities laws which
will vary depending on the relevant jurisdiction and which may require resales
to be made in accordance with available statutory exemptions or pursuant to a
discretionary exemption granted by the applicable Canadian securities regulatory
authority. Purchasers are advised to seek legal advice prior to any resale of
our common stock.
REPRESENTATIONS OF PURCHASERS
Each purchaser of our common stock in Canada who receives a purchase
confirmation will be deemed to represent to us and the dealer from whom such
purchase confirmation is received that (a) 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, (b) where required
by law, that such purchaser is purchasing as principal and not as agent and (c)
such purchaser has reviewed the text above under "Resale Restrictions."
RIGHTS OF ACTION (ONTARIO PURCHASERS)
The securities being offered are those of a foreign issuer and Ontario
purchasers will not receive the contractual right of action prescribed by
Ontario securities law. As a result, Ontario purchasers must rely on other
remedies that may be available, including common law rights of action for
damages or rescission or rights of action under the civil liability provisions
of the U.S. federal securities law.
ENFORCEMENT OF LEGAL RIGHTS
All of the issuer's directors and officers as well as the experts named
herein may be located outside of Canada and, as a result, it may not be possible
for Canadian purchasers to effect service of process within Canada upon the
issuer or such persons. All or a substantial portion of the assets of the issuer
and such persons may be located outside of Canada and, as a result, it may not
be possible to satisfy a judgment against the issuer or such persons in Canada
or to enforce a judgment obtained in Canadian courts against such issuer or
persons outside of Canada.
NOTICE TO BRITISH COLUMBIA RESIDENTS
A purchaser of our common stock to whom the SECURITIES ACT (British
Columbia) applies is advised that such purchaser is required to file with the
British Columbia Securities Commission a report within ten days of the sale of
common stock acquired by such purchaser pursuant to this offering. Such report
must be in the form attached to British Columbia Securities Commission Blanket
Order BOR #95/17, a copy of which may be obtained from us. Only one such report
must be filed in respect of shares of our common stock acquired on the same date
and under the same prospectus exemption.
TAXATION AND ELIGIBILITY FOR INVESTMENT
Canadian purchasers of our common stock should consult their own legal and
tax advisors with respect to the tax consequences of an investment in our common
stock in their particular circumstances and with respect to the eligibility of
our common stock for investment by the purchaser under relevant Canadian
legislation.
73
<PAGE>
LEGAL MATTERS
The validity of the shares of our common stock offered by this prospectus
will be passed upon for AppNet by Fried, Frank, Harris, Shriver & Jacobson (a
partnership including professional corporations), Washington, DC. The
underwriters have been represented by Cravath, Swaine & Moore, New York, NY.
EXPERTS
The audited financial statements and schedules included in this prospectus
and elsewhere in the registration statement have been audited by Arthur Andersen
LLP, independent public accountants, as indicated in their reports with respect
thereto, and are included herein in reliance upon the authority of said firm as
experts in giving said reports.
WHERE YOU CAN FIND ADDITIONAL INFORMATION
AppNet has filed with the Securities and Exchange Commission a registration
statement on Form S-1 under the Securities Act and the rules and regulations
promulgated under the Securities Act with respect to its common stock offered by
this prospectus. This prospectus, which constitutes a part of the registration
statement, does not contain all of the information set forth in the registration
statement and its exhibits and schedules. For further information with respect
to AppNet and its common stock, we refer you to the registration statement,
including its exhibits and the schedules filed as a part of it. You may read and
copy the registration statement at the Securities and Exchange Commission's
following locations:
<TABLE>
<S> <C> <C>
Public Reference Room Office New York Regional Office Chicago Regional Citicorp
450 Fifth Street, N.W. Seven World Trade Center Center
Washington, DC 20549 Suite 1300 500 West Madison Street
New York, NY 10048 Chicago, IL 60661-2511
</TABLE>
You may also obtain copies of the registration statement by mail from the
Public Reference Section of the Securities and Exchange Commission at 450 Fifth
Street, N.W., Judiciary Plaza, Washington, D.C. 20549 or by telephone at
1-800-SEC-0330. The registration statement is available to the public from
commercial document retrieval services and at the Securities and Exchange
Commission's World Wide Website located at http://www.sec.gov. Upon approval of
our common stock for quotation on The Nasdaq Stock Market's National Market, you
can read AppNet's filings with the Securities and Exchange Commission at the
office of Nasdaq Operations, 1734 K Street, N.W. Washington, DC 20006.
Statements in this prospectus as to the contents of any contract or other
document are not necessarily complete, and in each instance we refer you to the
full text of such contract or document filed as an exhibit to the registration
statement, each such statement being qualified in all respects by such
reference.
We intend to furnish our stockholders with annual reports containing
financial statements audited by an independent public accounting firm and make
available to our stockholders quarterly reports for the first three quarters of
each fiscal year containing interim unaudited financial information.
74
<PAGE>
INDEX TO FINANCIAL STATEMENTS
<TABLE>
<S> <C>
APPNET SYSTEMS, INC.
Report of independent public accountants......................................... F--4
Consolidated balance sheet as of December 31, 1998............................... F--5
Consolidated statement of operations for the year ended December 31, 1998........ F--6
Consolidated statement of stockholders' equity for the year ended December 31,
1998........................................................................... F--7
Consolidated statement of cash flows for the year ended December 31, 1998........ F--8
Notes to consolidated financial statements....................................... F--9
SOFTWARE SERVICES CORPORATION, INC.
Report of independent public accountants......................................... F--26
Balance sheets as of December 31, 1996 and 1997, and August 24, 1998............. F--27
Statements of operations for the years ended December 31, 1996 and 1997, and for
the period from January 1, 1998 to August 24, 1998............................. F--28
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--29
Statements of cash flows for the years ended December 31, 1996 and 1997, and for
the period from January 1, 1998 to August 24, 1998............................. F--30
Notes to financial statements.................................................... F--31
ARBOR INTELLIGENT SYSTEMS, INC.
Report of independent public accountants......................................... F--42
Balance sheets as of December 31, 1997 and March 11, 1998........................ F--43
Statements of operations for the year ended December 31, 1997 and for the period
from
January 1, 1998 to March 11, 1998.............................................. F--44
Statements of stockholders' deficit for the year ended December 31, 1997 and for
the period from January 1, 1998 to March 11, 1998.............................. F--45
Statements of cash flows for the year ended December 31, 1997 and for the period
from
January 1, 1998 to March 11, 1998.............................................. F--46
Notes to financial statements.................................................... F--47
</TABLE>
F-1
<PAGE>
<TABLE>
<S> <C>
NEW MEDIA PUBLISHING, INC.
Report of independent public accountants......................................... F--53
Balance sheets as of December 31, 1996 and 1997, and October 1, 1998............. F--54
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--55
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--56
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--57
Notes to financial statements.................................................... F--58
CENTURY COMPUTING, INC.
Report of independent public accountants......................................... F--66
Balance sheets as of December 31, 1996 and 1997 and October 11, 1998............. F--67
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--68
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--69
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--70
Notes to financial statements.................................................... F--71
RESEARCH & PLANNING, INC.
Report of independent public accountants......................................... F--79
Balance sheets as of December 31, 1996 and 1997, and October 19, 1998............ F--80
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--81
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--82
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--83
Notes to financial statements.................................................... F--84
</TABLE>
F-2
<PAGE>
<TABLE>
<S> <C>
THE KODIAK GROUP, INC.
Report of independent public accountants......................................... F--88
Balance sheets as of December 31, 1997 and December 13, 1998..................... F--89
Statements of operations for the year ended December 31, 1997 and for the period
from
January 1, 1998 to December 13, 1998........................................... F--90
Statements of stockholders' equity for the year ended December 31, 1997 and for
the period from January 1, 1998 to December 13, 1998........................... F--91
Statements of cash flows for the year ended December 31, 1997 and for the period
from
January 1, 1998 to December 13, 1998........................................... F--92
Notes to financial statements.................................................... F--93
I33 COMMUNICATIONS CORP.
Report of independent public accountants......................................... F--98
Balance sheets as of December 31, 1996, 1997 and 1998............................ F--99
Statements of operations for the years ended December 31, 1996, 1997 and 1998.... F--100
Statements of stockholders' equity (deficit) for the years ended December 31,
1996, 1997 and 1998............................................................ F--101
Statements of cash flows for the years ended December 31, 1996, 1997 and 1998.... F--102
Notes to financial statements.................................................... F--103
SALZINGER & COMPANY
Report of independent public accountants......................................... F--109
Balance sheet as of December 31, 1998............................................ F--110
Statement of operations for the year ended December 31, 1998..................... F--111
Statement of stockholder's equity for year ended December 31, 1998............... F--112
Statement of cash flows for year ended December 31, 1998......................... F--113
Notes to financial statements.................................................... F--114
INTERNET OUTFITTERS, INC.
Report of independent public accountants......................................... F--117
Balance sheet as of December 31, 1998............................................ F--118
Statement of operations for the year ended December 31, 1998..................... F--119
Statement of stockholders' equity for the year ended December 31, 1998........... F--120
Statement of cash flows for the year ended December 31, 1998..................... F--121
Notes to financial statements.................................................... F--122
</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.
ARTHUR ANDERSEN LLP
Washington, D.C.
March 29, 1999
F-4
<PAGE>
APPNET SYSTEMS, INC.
CONSOLIDATED BALANCE SHEET
AS OF DECEMBER 31, 1998
<TABLE>
<CAPTION>
DECEMBER 31,
1998
--------------
<S> <C>
ASSETS
Current assets:
Cash and cash equivalents....................................................................... $ 2,447,000
Accounts receivable, net of allowance for doubtful accounts of $1,124,000....................... 11,238,000
Other current assets............................................................................ 1,118,000
--------------
Total current assets.......................................................................... 14,803,000
Property and equipment, net....................................................................... 3,012,000
Intangible assets, net............................................................................ 99,380,000
Other assets...................................................................................... 1,175,000
--------------
Total assets.................................................................................. $ 118,370,000
--------------
--------------
LIABILITIES, REDEEMABLE STOCK AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable................................................................................ $ 2,737,000
Accrued liabilities............................................................................. 6,911,000
Current portion of convertible notes and long-term debt......................................... 2,426,000
--------------
Total current liabilities..................................................................... 12,074,000
Credit facilities................................................................................. 37,461,000
Convertible notes, net of current portion......................................................... 2,706,000
Other long-term debt, net of current portion...................................................... 1,199,000
Other long-term liabilities....................................................................... 3,398,000
--------------
Total liabilities............................................................................. 56,838,000
--------------
Commitments and contingencies (Note 16)
Class A Preferred Stock, $.01 par value, 96,621 shares authorized, 38,093 shares issued and
outstanding, liquidation value $1,000........................................................... 37,646,000
Common stock subject to put rights, $.0005 par value; 138,996 shares issued and outstanding....... 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
Common stock, $.0005 par value; 75,000,000 shares authorized, 55,586,894 shares issued and
outstanding................................................................................... 28,000
Additional paid-in capital...................................................................... 27,204,000
Notes receivable from management................................................................ (821,000)
Accumulated deficit............................................................................. (14,379,000)
--------------
Total stockholders' equity.................................................................... 23,608,000
--------------
Total liabilities, redeemable stock and stockholders' equity.................................. $ 118,370,000
--------------
--------------
</TABLE>
The accompanying notes are an integral part of this statement.
F-5
<PAGE>
APPNET SYSTEMS, INC.
CONSOLIDATED STATEMENT OF OPERATIONS
FOR THE YEAR ENDED DECEMBER 31, 1998
<TABLE>
<S> <C>
Revenues....................................................................... $17,674,000
Cost of revenues............................................................... 12,104,000
-----------
Gross profit............................................................... 5,570,000
Operating expenses:
Selling and marketing........................................................ 1,175,000
General and administrative................................................... 5,891,000
Stock-based and other acquisition-related compensation....................... 1,157,000
Depreciation and amortization................................................ 10,151,000
-----------
Total operating expenses................................................... 18,374,000
-----------
Loss from operations........................................................... (12,804,000)
Interest expense............................................................... 1,052,000
Other expense, net............................................................. 723,000
-----------
Loss before income taxes....................................................... (14,579,000)
Income tax benefit............................................................. (200,000)
-----------
Net loss....................................................................... (14,379,000)
Dividends on and accretion of preferred stock.................................. (873,000)
-----------
Net loss attributable to common stockholders................................... $(15,252,000)
-----------
-----------
Basic and diluted net loss per common share.................................... $ (.50)
-----------
-----------
Weighted average common shares outstanding..................................... 30,738,211
-----------
-----------
</TABLE>
The accompanying notes are an integral part of this statement.
F-6
<PAGE>
APPNET SYSTEMS, INC.
CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY
<TABLE>
<CAPTION>
REDEEMABLE EQUITY SECURITIES
--------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
COMMON STOCK
SUBJECT TO CLASS A SERIES A-1
PUT RIGHTS PREFERRED STOCK PREFERRED STOCK
-------------------- ----------------------- ---------------------
SHARES AMOUNT SHARES AMOUNT SHARES AMOUNT
--------- --------- ----------- ---------- --------- ----------
Initial capitalization...................................... -- $ -- -- $ -- -- $ --
Issuance of Series A-1 preferred stock in connection with
acquisition............................................. -- -- -- -- 266,796 1,067,000
GTCR Investment........................................... 138,996 278,000 -- -- (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.............................................. -- -- -- -- -- --
Repurchase and cancellation of shares sold to
management.............................................. -- -- -- -- -- --
Purchase of shares by management.......................... -- -- -- -- -- --
Stock options exercised................................... -- -- -- -- -- --
Net loss.................................................. -- -- -- -- -- --
--------- --------- ----------- ---------- --------- ----------
Total, December 31, 1998.................................... 138,996 $ 278,000 38,093 $37,646,000 -- $ --
--------- --------- ----------- ---------- --------- ----------
--------- --------- ----------- ---------- --------- ----------
<CAPTION>
STOCKHOLDERS' EQUITY
-----------------------------------------------------------
<S> <C> <C> <C>
CLASS B COMMON
PREFERRED STOCK STOCK ADDITIONAL
----------------------- ---------------------- PAID-IN
SHARES AMOUNT SHARES AMOUNT CAPITAL
----------- ---------- --------- ----------- ----------
Initial capitalization...................................... -- $ -- 15,230,000 $ 8,000 $ 127,000
Issuance of Series A-1 preferred stock in connection with
acquisition............................................. -- -- -- -- --
GTCR Investment........................................... -- -- 38,025,112 18,000 4,097,000
Repurchase and cancellation of shares in exchange for note
payable................................................. -- -- (3,850,000) (2,000) (404,000)
Repurchase and cancellation of common stock shares........ -- -- (394,596) -- (789,000)
Issuance of Class A Preferred Stock....................... -- -- -- -- --
Conversion of common stock into Class A Preferred Stock... -- -- (3,953,227) (2,000) (415,000)
Dividends on and accretion of Class A Preferred Stock..... -- -- -- -- (873,000)
Issuance of stock in connection with the 1998 acquired
businesses.............................................. 11,576 11,576,000 9,682,388 5,000 24,808,000
Repurchase and cancellation of shares sold to
management.............................................. -- -- (1,941,000) (1,000) (227,000)
Purchase of shares by management.......................... -- -- 1,576,000 1,000 571,000
Stock options exercised................................... -- -- 1,212,217 1,000 309,000
Net loss.................................................. -- -- -- -- --
----------- ---------- --------- ----------- ----------
Total, December 31, 1998.................................... 11,576 $11,576,000 55,586,894 $ 28,000 $27,204,000
----------- ---------- --------- ----------- ----------
----------- ---------- --------- ----------- ----------
<CAPTION>
NOTES TOTAL
RECEIVABLE FROM ACCUMULATED STOCKHOLDERS'
MANAGEMENT DEFICIT EQUITY
--------------- ------------ ------------
Initial capitalization...................................... $ -- $ -- $ 135,000
Issuance of Series A-1 preferred stock in connection with
acquisition............................................. -- -- --
GTCR Investment........................................... (447,000) -- 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.............................................. 197,000 -- (31,000)
Purchase of shares by management.......................... (571,000) -- 1,000
Stock options exercised................................... -- -- 310,000
Net loss.................................................. -- (14,379,000) (14,379,000)
--------------- ------------ ------------
Total, December 31, 1998.................................... $(821,000) ($14,379,000) $23,608,000
--------------- ------------ ------------
--------------- ------------ ------------
</TABLE>
The accompanying notes are an integral part of this statement.
F-7
<PAGE>
APPNET SYSTEMS, INC.
CONSOLIDATED STATEMENT OF CASH FLOWS
FOR THE YEAR ENDED DECEMBER 31, 1998
<TABLE>
<S> <C>
Cash flows from operating activities:
Net loss..................................................................... $(14,379,000)
Adjustments to reconcile net loss to net cash used in operating activities:
Amortization............................................................... 9,867,000
Depreciation............................................................... 284,000
Stock-based and other acquisition-related compensation..................... 1,157,000
Write-off of deferred financing costs...................................... 291,000
Deferred tax benefit....................................................... (50,000)
Change in assets and liabilities:
Accounts receivable, net................................................. (1,762,000)
Other current assets..................................................... 399,000
Accounts payable......................................................... 1,012,000
Accrued liabilities...................................................... 547,000
-----------
Net cash used in operating activities.................................. (2,634,000)
-----------
Cash flows from investing activities:
Purchase of property and equipment, net...................................... (1,196,000)
Cash paid for 1998 acquired businesses, net of cash acquired................. (69,562,000)
Other assets................................................................. (904,000)
-----------
Net cash used in investing activities.................................. (71,662,000)
-----------
Cash flows from financing activities:
Proceeds from long-term debt................................................. 351,000
Repayments of long-term debt................................................. (268,000)
Borrowings under credit facilities........................................... 47,261,000
Repayments of credit facilities.............................................. (9,800,000)
Debt issue costs............................................................. (351,000)
Proceeds from issuance of common stock....................................... 3,015,000
Repurchase of common stock................................................... (789,000)
Proceeds from issuance of preferred stock.................................... 37,045,000
Repurchase of shares sold to management...................................... (31,000)
Proceeds from exercise of stock options...................................... 310,000
-----------
Net cash provided by financing activities.............................. 76,743,000
-----------
Net increase in cash........................................................... 2,447,000
Cash and cash equivalents, beginning of year................................... --
-----------
Cash and cash equivalents, end of year......................................... $ 2,447,000
-----------
-----------
Supplementary information:
Cash paid for income taxes................................................... $ --
-----------
-----------
Cash paid for interest....................................................... $ 775,000
-----------
-----------
</TABLE>
The accompanying notes are an integral part of this statement.
F-8
<PAGE>
APPNET SYSTEMS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1998
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
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
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
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.
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 1998 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 of up
to $300,000 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.
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 3,953,222 shares of
Company Common Stock at a price of $.1055 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
F-12
<PAGE>
APPNET SYSTEMS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1998
transaction costs, of which $8,820,000 was paid in cash, $9,500,000 was paid in
the form of Company Common Stock (3,166,666 shares valued at $3.00 per share)
and the remainder was paid in options to purchase 414,726 shares of Company
Common Stock valued at $1,150,000. 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, Inc. ("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
$5,568,000 was paid in options to purchase 2,006,761 shares of Company Common
Stock. 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 (2,000,000
shares valued at $3.00 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 (562,500 shares valued
at $4.00 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 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 26, 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, Inc. ("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
F-13
<PAGE>
APPNET SYSTEMS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1998
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 (277,776 shares valued at $4.50 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 (700,000 shares valued at $5.00 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 stockholder'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
(450,000 shares valued at $6.00 per share), and the issuance of 63,555 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 (270,000 shares valued
at $6.00 per share). If certain performance criteria are met during the
twelve-month period ending March 31, 2000, the former stockholders are entitled
to a contingent payment of up to $3,500,000 in cash.
ALLOCATION OF PURCHASE CONSIDERATION
The acquisitions have been accounted for using the purchase method of
accounting and, accordingly, the recognized purchase price has been allocated,
based on preliminary estimates of fair value, to the tangible assets acquired
and liabilities assumed and, with the advice of independent valuation experts,
to the identifiable intangible assets, on the acquisition dates. 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............................................ 4,483,000 12-48 months
Proprietary technology......................................... 4,325,000 12-24 months
</TABLE>
The purchase price in excess of identified tangible and intangible assets
and liabilities assumed in the amount of $93,479,000 was allocated to goodwill.
As a result of the early stage of development of the Internet and electronic
commerce, the dynamics of this rapidly evolving industry and the
F-14
<PAGE>
APPNET SYSTEMS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1998
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>
(UNAUDITED)
-------------
<S> <C>
Revenues....................................................................... $ 54,493,000
Net loss attributable to common stockholders................................... (55,171,000)
Basic and diluted net loss per share........................................... $ (1.05)
</TABLE>
4. ACCOUNTS RECEIVABLE:
Accounts receivable consists of the following:
<TABLE>
<CAPTION>
DECEMBER 31,
1998
-------------
<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:
<TABLE>
<CAPTION>
DECEMBER 31,
1998
-------------
<S> <C>
Income tax receivable.......................................................... $ 808,000
Other current assets........................................................... 310,000
-------------
Other current assets....................................................... $ 1,118,000
-------------
-------------
</TABLE>
F-15
<PAGE>
APPNET SYSTEMS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1998
6. PROPERTY AND EQUIPMENT:
Property and equipment consists of the following:
<TABLE>
<CAPTION>
DECEMBER 31,
1998
-------------
<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:
<TABLE>
<CAPTION>
DECEMBER 31,
1998
--------------
<S> <C>
Customer lists................................................................ $ 4,160,000
Non-competition agreements.................................................... 2,800,000
Assembled workforce........................................................... 4,483,000
Proprietary technology........................................................ 4,325,000
Goodwill...................................................................... 93,479,000
--------------
109,247,000
Accumulated amortization...................................................... (9,867,000)
--------------
Intangible assets, net.................................................... $ 99,380,000
--------------
--------------
</TABLE>
8. ACCRUED LIABILITIES
Accrued liabilities consists of the following:
<TABLE>
<CAPTION>
DECEMBER 31,
1998
------------
<S> <C>
Accrued compensation and benefits............................................... $2,590,000
Accrued dividends on Class A Preferred Stock and Class B
Preferred Stock............................................................... 689,000
Income taxes payable............................................................ 1,500,000
Other accrued liabilities....................................................... 2,132,000
------------
Accrued liabilities......................................................... $6,911,000
------------
------------
</TABLE>
F-16
<PAGE>
APPNET SYSTEMS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1998
9. DEBT:
Debt consists of the following:
<TABLE>
<CAPTION>
DECEMBER 31,
1998
-------------
<S> <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
-------------
37,461,000
-------------
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 $3 per share...................................... 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
Notes payable, principal and interest due December 14, 2001, bear interest at 8%, convertible at
the option of the holder for common stock at $4 per share...................................... 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
-------------
4,706,000
-------------
Other long-term debt:
Notes payable, principal and interest due January 1, 2000, bear interest at 6%................... 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
Other notes payable.............................................................................. 425,000
Note payable to a member of Company management, due at earlier of an initial public offering or
December 31, 1999.............................................................................. 50,000
-------------
1,625,000
-------------
Total debt................................................................................... 43,792,000
Less current portion............................................................................. (2,426,000)
-------------
Long-term debt, net of current portion....................................................... $ 41,366,000
-------------
-------------
</TABLE>
F-17
<PAGE>
APPNET SYSTEMS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1998
The future minimum principal payments of debt outstanding at December 31,
1998, as refinanced by the 1999 Credit Facilities, are as follows:
<TABLE>
<S> <C>
1999........................................................... $2,426,000
2000........................................................... 1,199,000
2001........................................................... 39,461,000
2002........................................................... --
2003........................................................... 706,000
----------
Total...................................................... $43,792,000
----------
----------
</TABLE>
1999 CREDIT FACILITIES
On January 8, 1999, the Company replaced its two existing credit agreements
("the 1998 Credit Facilities") with two credit agreements (together the "1999
Credit Facilities") entered into with a syndicate of lenders providing for
$55,000,000 in borrowings. The 1999 Credit Facilities consist of $40,000,000 in
credit loans (the "Guaranteed Loans") which have been guaranteed by a
significant stockholder and $15,000,000 of additional credit loans (the
"Unguaranteed Loans"). The 1999 Credit Facilities mature on August 24, 2001. On
March 10, 1999, the Company amended the Unguaranteed Loans increasing available
borrowings from $15,000,000 to $26,000,000.
The Guaranteed Loans bear interest, at the Company's option, at various
LIBOR rates plus 2.5 percent or the lenders' base rate plus .5 percent. The
Guaranteed Loans require the Company to pay a quarterly commitment fee of .5
percent on the unused amounts.
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 including
minimum levels of earnings before interest, taxes, depreciation, and
amortization, ratios of cash flow to debt service and 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
F-18
<PAGE>
APPNET SYSTEMS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1998
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. At the date of their issuance, management
determined that none of the conversion features in any of the convertible notes
was beneficial.
10. CAPITAL STOCK:
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.
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 15,230,000 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 3,850,000 shares of Company Common Stock from certain of the Initial
Investors for $.1055 per share or $406,000 and sold an aggregate 32,943,560
shares to GTCR and Smart Technology for $.1055 per share or $3,476,000 before
deduction for expenses and fees. The Company also sold 3,566,000 shares of
Company Common Stock to the Company's President and Chief Executive Officer (the
"Reserved Stock") and 1,515,552 shares to other certain parties affiliated with
the GTCR Investment. These shares were sold for $.1055 per share.
GTCR and Smart Technology committed to provide up to an additional
$96,500,000 in capital to the Company to fund acquisitions as well as other
general corporate purposes. Upon the request of the Board, shares of Class A
Preferred Stock will be issued to GTCR and Smart Technology in the ratio of 98
percent to 2 percent, respectively, in exchange for $1,000 per share. No shares
of Class A Preferred Stock were issued at the time of the GTCR Investment. In
connection with the issuance of Class B Preferred Stock as part of the SSC
transaction, the capital commitment from GTCR and Smart Technology was decreased
to $84,900,000.
In connection with the GTCR Investment, the Company entered into a
management services agreement with GTCR for $200,000 per year.
F-19
<PAGE>
APPNET SYSTEMS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1998
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 533,592
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 394,596
shares of the common stock issued upon the conversion for $2.00 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 138,996 shares of Company Common Stock the
right to require the Company to repurchase their shares for cash at $2.00 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 98 percent of the outstanding Class A
Preferred Stock.
The Company incurred certain fees associated with the issuance of the Class
A Preferred Stock. 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 or conversion rights.
STOCK WARRANTS
The Company has issued warrants to purchase 241,666 shares of Company Common
Stock at $.1055 per share, of which 200,000 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
consolidated financial statements. The Company has also issued warrants to
purchase 121 shares of Class A Preferred Stock at $1,000 per share.
F-20
<PAGE>
APPNET SYSTEMS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1998
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, 3,566,000 shares of Reserved Stock
were purchased at a price of $.1055 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 $.1055 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 1,880,000 shares of Reserved Stock remaining. Additional shares were
repurchased subsequent to year end reducing the total shares outstanding to
598,839 as of March 26, 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 $.1055, 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 1,436,000 shares of
Company Common Stock to management for $.1055 per share. In November 1998, the
Company sold 140,000 shares of Common Stock to a member of management for $3.00
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 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
2,602,170 at December 31, 1998.
F-21
<PAGE>
APPNET SYSTEMS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
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 strike prices ranging from $.02 to $3.05.
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 $0.50 per share for
1998. The weighted average fair value of the options granted by the Company
during 1998 is estimated to be $1.35 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................................................. 1,426,000 $ 2.69
Options converted from 1998 Acquired Businesses................. 2,421,487 .32
Exercised in 1998............................................... (1,212,217) .26
Cancelled in 1998............................................... (33,100) .38
------------- -----
Options outstanding, December 31, 1998, exercise prices range of
$.02 to $4.00................................................. 2,602,170 $ 1.64
------------- -----
------------- -----
Options exercisable, December 31, 1998.......................... 845,699 $ .48
------------- -----
------------- -----
</TABLE>
Subsequent to December 31, 1998, the Company issued options to purchase
2,516,216 shares of Company Common Stock.
13. EARNINGS PER SHARE:
Shares of common stock related to the NMP contingent payments (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 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................................................................... 1,534,041
Warrants........................................................................ 235,292
Convertible notes............................................................... 1,180,073
</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
F-22
<PAGE>
APPNET SYSTEMS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 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 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>
<S> <C>
Deferred tax liabilities:
Intangible assets............................................. $2,241,000
Deferred tax assets:
Allowance for doubtful accounts............................... 434,000
Net operating loss carryforward............................... 1,624,000
Cumulative amortization differences on tax deductible
intangibles................................................. 994,000
Other......................................................... 506,000
Valuation allowance........................................... (1,317,000)
----------
Net deferred tax liability.................................. $ --
----------
----------
</TABLE>
The components of the benefit from income taxes during the year ended
December 31, 1998 are as follows:
<TABLE>
<S> <C>
Current--
Federal....................................................... $ (400,000)
State......................................................... 250,000
----------
Total....................................................... (150,000)
Deferred--
Federal....................................................... (50,000)
State......................................................... --
----------
Income tax benefit.......................................... $ (200,000)
----------
----------
</TABLE>
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,
1998
-------------
<S> <C>
Income tax benefit computed at federal statutory rates......................... $ (4,957,000)
Nondeductible intangible amortization.......................................... 2,402,000
Nondeductible portion of stock-based and other acquisition-related
compensation, net............................................................ 497,000
State income taxes, net of federal income tax benefit.......................... 165,000
Changes in valuation allowance................................................. 1,317,000
Other, net..................................................................... 376,000
-------------
Total...................................................................... $ (200,000)
-------------
-------------
</TABLE>
As of December 31, 1998, the Company had approximately $4.2 million of net
operating loss carryforwards which 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,
F-23
<PAGE>
APPNET SYSTEMS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1998
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
$4,706,000 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.
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, 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.
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 received 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>
F-24
<PAGE>
APPNET SYSTEMS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1998
LITIGATION AND 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, and based on all known facts, all matters are
without merit or 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 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 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 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," 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.
17. SEGMENT INFORMATION:
The Company currently operates in two operating segments: professional
services and electronic commerce processing. For the year ended December 31,
1998, the electronic commerce processing segment was not significant to the
overall financial statements.
F-25
<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-26
<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-27
<PAGE>
SOFTWARE SERVICES CORPORATION
STATEMENTS OF OPERATIONS
FOR THE YEARS ENDED DECEMBER 31, 1996 AND 1997,
AND FOR THE PERIOD FROM JANUARY 1, 1998 TO AUGUST 24, 1998
<TABLE>
<CAPTION>
FOR THE
FOR THE YEARS ENDED PERIOD FROM
DECEMBER 31, JANUARY 1, 1998
---------------------------- TO AUGUST 24,
1996 1997 1998
------------- ------------- -----------------
<S> <C> <C> <C>
Revenues........................................................ $ 11,789,000 $ 13,298,000 $ 10,788,000
Costs of revenues............................................... 7,680,000 8,416,000 6,852,000
------------- ------------- -----------------
Gross profit................................................ 4,109,000 4,882,000 3,936,000
Operating expenses:
Selling and marketing......................................... 1,082,000 997,000 982,000
General and administrative.................................... 2,615,000 3,050,000 1,981,000
Stock-based and acquisition-related compensation.............. -- -- 2,654,000
Depreciation and amortization................................. 300,000 341,000 230,000
------------- ------------- -----------------
Total operating expenses.................................... 3,997,000 4,388,000 5,847,000
------------- ------------- -----------------
Income (loss) from operations................................... 112,000 494,000 (1,911,000)
Gain on sale of investment in affiliate......................... -- 358,000 --
Interest expense, net........................................... (52,000) (35,000) (28,000)
Other expense, net.............................................. -- (9,000) (372,000)
------------- ------------- -----------------
Income (loss) before income taxes............................... 60,000 808,000 (2,311,000)
Provision (benefit) for income taxes............................ 113,000 377,000 (598,000)
------------- ------------- -----------------
Net (loss) income............................................... $ (53,000) $ 431,000 $ (1,713,000)
------------- ------------- -----------------
------------- ------------- -----------------
Basic and diluted net (loss) income per share................... $ (.01) $ .08 $ (.30)
------------- ------------- -----------------
------------- ------------- -----------------
Weighted average common shares outstanding...................... 5,727,000 5,705,000 5,697,000
------------- ------------- -----------------
------------- ------------- -----------------
</TABLE>
The accompanying notes are an integral part of these statements.
F-28
<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-29
<PAGE>
SOFTWARE SERVICES CORPORATION
STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED DECEMBER 31, 1996 AND 1997,
AND FOR THE PERIOD FROM JANUARY 1, 1998 TO AUGUST 24, 1998
<TABLE>
<CAPTION>
FOR THE
PERIOD FROM
FOR THE YEARS ENDED JANUARY 1,
DECEMBER 31, 1998 TO
---------------------- AUGUST 24,
1996 1997 1998
---------- ---------- ---------------
<S> <C> <C> <C>
Cash flows from operating activities:
Net (loss) income..................................................... $ (53,000) $ 431,000 $ (1,713,000)
Adjustments to reconcile net (loss) income to net cash provided by
(used in) operating activities:
Depreciation and amortization..................................... 300,000 341,000 230,000
Deferred compensation agreements.................................. -- 616,000 --
Gain on sale of investment in affiliate........................... -- (358,000) --
Deferred income taxes............................................. (34,000) (216,000) (935,000)
Change in assets and liabilities:
Accounts receivable............................................. 97,000 (570,000) (768,000)
Other current assets............................................ (74,000) 89,000 31,000
Other assets.................................................... -- (2,000) (3,000)
Accounts payable................................................ (109,000) 1,000 668,000
Accrued liabilities............................................. (11,000) 409,000 (297,000)
---------- ---------- ---------------
Net cash provided by (used in) operating activities........... 116,000 741,000 (2,787,000)
---------- ---------- ---------------
Cash flows from investing activities:
Purchase of property and equipment, net............................... (221,000) (121,000) (69,000)
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)
---------- ---------- ---------------
Cash flows from financing activities:
Repayments of long-term debt.......................................... (235,000) (236,000) (263,000)
Net borrowings (repayments) under note payable........................ 400,000 (400,000) --
Repurchase of common stock............................................ (300,000) (63,000) (30,000)
Capital contribution.................................................. -- -- 3,344,000
Payments under deferred compensation agreement........................ -- (154,000) (403,000)
---------- ---------- ---------------
Net cash (used in) provided by financing activities........... (135,000) (853,000) 2,648,000
---------- ---------- ---------------
Net (decrease) increase in cash and cash equivalents.................... (240,000) 182,000 (208,000)
Cash and cash equivalents, beginning of period.......................... 310,000 70,000 252,000
---------- ---------- ---------------
Cash and cash equivalents, end of period................................ $ 70,000 $ 252,000 $ 44,000
---------- ---------- ---------------
---------- ---------- ---------------
Supplementary information:
Cash paid for interest................................................ $ 59,000 $ 56,000 $ 33,000
---------- ---------- ---------------
---------- ---------- ---------------
Cash paid for income taxes............................................ $ 182,000 $ 135,000 $ 653,000
---------- ---------- ---------------
---------- ---------- ---------------
Assets financed under capital lease obligations....................... $ 252,000 $ -- $ --
---------- ---------- ---------------
---------- ---------- ---------------
</TABLE>
The accompanying notes are an integral part of these statements.
F-30
<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-31
<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-32
<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-33
<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-34
<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-35
<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-36
<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-37
<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-38
<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-39
<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-40
<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 1,055,000 880,000
Managed services............................................... (395,000) 56,000 (84,000)
------------- ------------- --------------
Segment operating profit........................................... 136,000 1,111,000 796,000
Reconciliation to Company operating profit due to
costs not allocated to segments:
Deferred compensation.......................................... (24,000) (617,000) --
Costs associated with acquisition.............................. -- -- (3,059,000)
------------- ------------- --------------
Total operating profit......................................... $ 112,000 $ 494,000 $ (2,263,000)
------------- ------------- --------------
------------- ------------- --------------
</TABLE>
F-41
<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-42
<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-43
<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-44
<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-45
<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-46
<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-47
<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-48
<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-49
<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-50
<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-51
<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-52
<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-53
<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-54
<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-55
<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-56
<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-57
<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-58
<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-59
<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-60
<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-61
<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-62
<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-63
<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-64
<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-65
<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-66
<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-67
<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 5,031,000
------------ ------------- --------------------
Gross profit.............................................. 3,842,000 5,541,000 5,009,000
Operating expenses:
General and administrative.................................. 2,992,000 3,890,000 3,912,000
Acquisition-related compensation............................ -- -- 953,000
Depreciation and amortization............................... 153,000 179,000 156,000
------------ ------------- --------------------
Total operating expenses.................................. 3,145,000 4,069,000 5,021,000
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-68
<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-69
<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-70
<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-71
<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-72
<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.
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-73
<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-74
<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-75
<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-76
<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-77
<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
a bonus of approximately $953,000 to certain employees.
F-78
<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-79
<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-80
<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-81
<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-82
<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-83
<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-84
<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-85
<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-86
<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-87
<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-88
<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-89
<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-90
<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-91
<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-92
<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-93
<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-94
<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-95
<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-96
<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-97
<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-98
<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-99
<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-100
<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-101
<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-102
<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-103
<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-104
<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-105
<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-106
<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-107
<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-108
<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-109
<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-110
<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-111
<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-112
<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-113
<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-114
<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-115
<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-116
<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-117
<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-118
<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-119
<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-120
<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-121
<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 26, 1999, the Company entered into a Stock Purchase Agreement with
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.
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-122
<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-123
<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-124
<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-125
<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-126
<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-127
<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-128
<PAGE>
[LOGO]
<PAGE>
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 13. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION.
The following table sets forth expenses and costs payable by AppNet (other
than underwriting discounts and commissions) expected to be incurred in
connection with the issuance and distribution of the securities described in
this registration statement. All amounts are estimated except for the Securities
and Exchange Commission's registration fee and the National Association of
Securities Dealers' filing fee.
<TABLE>
<CAPTION>
AMOUNT
---------
<S> <C>
Registration fee under Securities Act.............................................. $ 47,955
NASD filing fee.................................................................... 17,750
The Nasdaq National Market fees.................................................... *
Legal fees and expenses............................................................ *
Accounting fees and expenses....................................................... *
Printing and engraving expenses.................................................... *
Registrar and transfer agent fees.................................................. *
Miscellaneous expenses............................................................. *
---------
Total.............................................................................. $
---------
---------
</TABLE>
* To be filed by amendment.
ITEM 14. INDEMNIFICATION OF DIRECTORS AND OFFICERS.
AppNet's bylaws provide that AppNet shall indemnify to the fullest extent
authorized by the Delaware General Corporation Law, each person who is involved
in any litigation or other proceeding because such person is or was a director
or officer of AppNet, against all expense, loss or liability reasonably incurred
or suffered in connection therewith. AppNet's bylaws provide that a director or
officer may be paid expenses incurred in defending any proceeding in advance of
its final disposition upon receipt by AppNet of an undertaking, by or on behalf
of the director or officer, to repay all amounts so advanced if it is ultimately
determined that such director or officer is not entitled to indemnification.
Section 145 of the Delaware General Corporation Law permits a corporation to
indemnify any director or officer of the corporation against expenses (including
attorneys' fees), judgments, fines and amounts paid in settlement actually and
reasonably incurred in connection with any action, suit or proceeding brought by
reason of the fact that such person is or was a director or officer of the
corporation, if such person acted in good faith and in a manner that he
reasonably believed to be in or not opposed to the best interests of the
corporation, and, with respect to any criminal action or proceeding, if he had
no reason to believe his conduct was unlawful. In a derivative action, (I.E.,
one brought by or on behalf of the corporation), indemnification may be made
only for expenses, actually and reasonably incurred by any director or officer
in connection with the defense or settlement of such an action or suit, if such
person acted in good faith and in a manner that he reasonably believed to be in
or not opposed to the best interests of the corporation, except that no
indemnification shall be made if such person shall have been adjudged to be
liable to the corporation, unless and only to the extent that the court in which
the action or suit was brought shall determine that the defendant is fairly and
reasonably entitled to indemnity for such expenses despite such adjudication of
liability.
Pursuant to Section 102(b)(7) of the DGCL, 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
II-1
<PAGE>
loyalty to the corporation or its stockholders; (b) from acts or omissions not
in good faith or which involve intentional misconduct or a knowing violation of
law; (c) under Section 174 of the DGCL; or (d) from any transaction from which
the director derived an improper personal benefit.
AppNet intends to obtain primary and excess insurance policies insuring its
directors and officers and those of its subsidiaries against certain liabilities
they may incur in their capacity as directors and officers. Under such policies,
the insurer, on behalf of AppNet, may also pay amounts for which AppNet has
granted indemnification to the directors or officers.
Additionally, reference is made to the Underwriting Agreement filed as
Exhibit 1.1 hereto, which provides for indemnification by the Underwriters of
AppNet, its directors and officers who sign the registration statement and
persons who control AppNet, under certain circumstances.
ITEM 15. RECENT SALES OF UNREGISTERED SECURITIES.
AppNet has issued securities in the following transactions, each of which,
unless otherwise indicated, was intended to be exempt from the registration
requirements of the Securities Act by virtue of Section 4(2) or Regulation D
thereunder.
On March 10, 1998, AppNet issued a warrant to purchase 31,250 shares of
Class B Preferred Stock for an aggregate purchase price of $125,000 to Silicon
Valley Bank as consideration, in part, for a loan from Silicon Valley Bank in
the principal amount of $2,262,500. Pursuant to the terms of an Exchange
Agreement, dated as of June 12, 1998, between AppNet and Silicon Valley Bank,
the warrant to purchase Class B Preferred Stock was exchanged for two new
warrants: (a) a warrant to purchase 41,666 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 15,330,000 shares of its common
stock to its founders in the following amounts and for the following
consideration: (1) 9,000,000 shares to Ken Bajaj for an aggregate purchase price
of $9,000; (2) 5,850,000 shares to Fairfax Management Company for an aggregate
purchase price of $5,850; (3) 160,000 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) 160,000 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) 160,000 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 certain
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 533,592 shares of our common
stock. On June 29, 1998, AppNet redeemed 394,596 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 100,000 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 200,000 shares of AppNet common stock for an
aggregate purchase price of approximately $21,100.
On June 29, 1998, GTCR and Smart Technology purchased 32,279,750 and 663,810
shares of AppNet common stock, respectively, for aggregate purchase prices of
$3,405,514 and $70,032, respectively, from AppNet pursuant to a Purchase
Agreement, dated as of June 29, 1998 (the "Purchase Agreement"). Pursuant to the
Purchase Agreement, GTCR and Smart Technology have also purchased aggregate
amounts of approximately 44,113 and 900 shares of Class A Preferred Stock,
respectively, since June 29, 1998, for aggregate purchase prices of
approximately $44,113,000 and $900,000, respectively.
On June 29, 1998, AppNet issued 3,566,000, 180,000, 314,000 and 180,000
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 100,000 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 certain finder's fees in
connection with investments by GTCR and Smart Technology in AppNet pursuant to
the Purchase Agreement. These shares had an aggregate value of $10,550.
On June 29, 1998, AppNet issued 150,000 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 246,956 shares of its common stock to Mr. Davidson
for an aggregate purchase price of $26,053.
Since June 29, 1998, AppNet issued an aggregate of 1,576,000 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
3,953,227 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 3,953,222 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 3,166,666 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 414,726 shares of its
common stock to the NMP stockholders.
On October 12, 1998, as payment, in part, for all of the issued and
outstanding capital stock of Century, AppNet issued a convertible promissory
note to Riggs & Co., as nominee on behalf of the twenty-nine stockholders of
Century, in the aggregate principal amount of $2,000,000. Each of the
twenty-nine Century stockholders obtained a percentage beneficial interest in
the note. All or any portion of the unpaid balance of the note is convertible at
the holder's option, at any time prior to
II-3
<PAGE>
payment in full, into shares of AppNet common stock, using a per share purchase
price of $3.00. Also in connection with the acquisition of Century, AppNet
assumed options to purchase an aggregate of 2,006,761 shares of its common stock
to the Century stockholders.
On October 20, 1998, AppNet issued an aggregate of 2,000,000 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 562,500 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 $4.00.
On January 6, 1999, AppNet issued 83,334 shares of its common stock to
Antares Leveraged Capital Corporation for an aggregate purchase price of
$375,003.
On January 8, 1999, AppNet issued two convertible promissory notes in an
aggregate principal amount of $3,500,000 to the two 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 three subordinated promissory notes in an
aggregate principal amount of $6,800,000 to its two 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 $4.00. Also in connection with the acquisition of i33, AppNet issued a
convertible promissory note in a principal amount of $1,000,000 to a trust for
the benefit of i33 employees. The principal amount of, and accrued interest on,
this note is convertible into AppNet common stock at the holder's option
commencing upon (a) the consummation of this offering, using a per share
purchase price equal to 80% of the offering price per common share, or (b) a
change in control of AppNet, using a per share purchase price equal to 80% of
the fair market value at the time of the change in control.
On March 4, 1999, AppNet issued an aggregate of 277,776 shares of its common
stock to the four stockholders of Sigma6 as payment, in part, for all of the
issued and outstanding capital stock of Sigma6. The common stock issued to the
Sigma6 stockholders was valued at $1,250,000.
On March 15, 1999, AppNet issued an aggregate of 700,000 shares of its
common stock to Salzinger as payment, in part, for certain assets of Salzinger.
The common stock issued to Salzinger was valued at $3,500,000.
On March 26, 1999, AppNet issued an aggregate of 450,000 shares of its
common stock to the 19 stockholders of Outfitters as payment, in part, for all
of the issued and outstanding capital stock of Outfitters. The common stock
issued to the Outfitters stockholders was valued at $2,700,000. Also in
connection with the acquisition of Outfitters, AppNet assumed options to
purchase an aggregate of 63,555 shares of its common stock to the Outfitters'
stockholders.
On March 29, 1999, AppNet issued an aggregate of 270,000 shares of its
common stock to the three stockholders of Transform IT as payment, in part, for
certain assets of Transform IT. The common stock issued to the Transform IT
stockholders was valued at $1,620,000.
II-4
<PAGE>
From August 1998 through March 29, 1999, AppNet granted options under the
1998 Plan to purchase an aggregate of 4,293,387 shares of its common stock at
exercise prices ranging from $0.01523 to $6.00 to employees and officers and
directors. AppNet issued an aggregate of 13,655 shares of its common stock
pursuant to option exercises under the 1998 Plan at exercise prices ranging from
$0.01523 to $0.05075.
From August 1998 through March 26 1999, AppNet assumed options under the
Century Plan to purchase an aggregate of 2,006,761 shares of its common stock at
exercise prices ranging from $0.2512 to $0.4947. AppNet issued an aggregate of
1,803,357 of its common stock pursuant to option exercises under the Century
Plan at exercise prices ranging from $0.2512 to $0.4947.
From August 1998 through March 26, 1999, AppNet assumed options under the
Internet Outfitters' Plan to purchase an aggregate of 63,555 shares of its
common stock at exercise prices ranging from $0.79 to $1.32, 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 Certificate of Incorporation of AppNet, as amended and restated*
3.2 Bylaws of AppNet, as amended and restated*
4.1 Form of certificate of common stock*
4.2 Registration Agreement dated as of June 29, 1998 by and among AppNet Systems, Inc., GTCR Golder Rauner,
L.L.C., Fairfax Management Company II, L.L.C., Smart Technology, L.L.C. and certain stockholders of
AppNet Systems, Inc.
5.1 Opinion of Fried, Frank, Harris, Shriver & Jacobson*
10.1 Purchase Agreement dated as of June 29, 1998 by and among AppNet Systems, Inc., GTCR Golder Rauner,
L.L.C. and Smart Technology, L.L.C., as amended*
10.2 Agreement of Purchase and Sale of Assets, dated March 12, 1998, by and between AppNet, Arbor Intelligent
Systems, Inc., AppNet of Michigan, Inc. and Ronald Suarez, Robert Simms and Robert Royce for purchase
and sale of all of the assets of Arbor Intelligent Systems, Inc.*
10.3 Merger Agreement, dated June 31, 1998, by and among AppNet, 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, 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, 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, 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.*
</TABLE>
II-5
<PAGE>
<TABLE>
<CAPTION>
EXHIBIT DESCRIPTION
- ----------- --------------------------------------------------------------------------------------------------------
<C> <S>
10.7 Stock Purchase Agreement, dated as of November 25, 1998, by and among AppNet, 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, i33 communications corp., Drew
Rayman and Enno Vandermeer for the purchase of all of the issued and outstanding capital stock of i33
communications corp.*
10.9 Merger Agreement, dated as of February 25, 1999, by and among AppNet, 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, S&C Acquisition Corp.,
Salzinger & Company, Inc. and Steven Salzinger for the purchase of all of the assets of Salzinger &
Company, Inc.*
10.11 Stock Purchase Agreement, dated as of March 26, 1999, by and among AppNet, 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, Transform Acquisition Corp.,
Transform IT, Incorporated and John C. King, Thomas E. Hunt and Roy A. Chandler for the purchase of all
of the assets of Transform IT, Incorporated*
10.13 Revolving Credit Agreement dated as of January 8, 1999 by and among AppNet Systems, Inc., BankBoston,
N.A. and Antares Capital Corporation*
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 First Amendment to Revolving Credit Agreement dated as of March 10, 1999 by and among AppNet,
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,
BankBoston, N.A. and Antares Capital Corporation*
10.17 Form of Lock-Up Agreement*
10.18 Century Computing Incorporated Incentive Stock Plan
10.19 AppNet Systems, Inc. 1998 Stock Option and Incentive Stock (as amended and restated)*
10.20 AppNet Systems, Inc. 1999 Incentive Stock Plan*
10.21 Internet Outfitters, Inc. 1996 Incentive Stock Option Plan, as amended*
10.22 Form of Senior Management Agreement
21.1 Subsidiaries of AppNet*
23.1 Consent of Arthur Andersen LLP
23.2 Consent of Fried, Frank, Harris, Shriver & Jacobson (included in Exhibit 5.1 above)*
24.1 Power of Attorney (included on signature page of this registration statement)
27.1 Financial data schedule
</TABLE>
- ------------------------
* To be filed by amendment.
II-6
<PAGE>
ITEM 17. UNDERTAKINGS.
The undersigned registrant hereby undertakes that, for purposes of
determining any liability under the Securities Act, each filing of the
registrant's annual reports pursuant to section 13(a) or section 15(d) of the
Securities Exchange Act of 1934 (and, where applicable, each filing of an
employee benefit plan's annual report pursuant to section 15(d) of the
Securities Exchange Act of 1934) that is incorporated by reference in the
registration statement shall be deemed to be a new registration statement
relating to the securities offered therein, and the offering of such securities
at that time shall be deemed to be the initial bona fide offering thereof.
Insofar as indemnification for liabilities arising under the Securities Act
may be permitted to directors, officers and controlling persons of the
registrant pursuant to the foregoing provisions, or otherwise, the registrant
has been advised that in the opinion of the Securities and Exchange Commission
such indemnification is against public policy as expressed in the Act and is,
therefore, unenforceable. In the event that a claim for indemnification against
such liabilities (other than payment by the registrant of expenses incurred or
paid by a director, officer or controlling person of the registrant in the
successful defense of any action, suit or proceeding) is asserted by such
director, officer or controlling person in connection with the securities being
registered, the registrant will, unless in the opinion of its counsel the matter
has been settled by controlling precedent, submit to a court of appropriate
jurisdiction the question whether such indemnification by it is against public
policy as expressed in the Act and will be governed by the final adjudication of
such issue.
The undersigned registrant hereby undertakes that:
(1) To provide to the Underwriters at the closing specified in the
underwriting agreement certificates in such denominations and registered in such
names as required by the Underwriters to permit proper delivery to each
purchaser.
(2) For purposes of determining any liability under the Securities Act, the
information omitted from the form of prospectus filed as part of this
registration statement in reliance upon Rule 430A and contained in a form of
prospectus filed by the registrant pursuant to Rule 424b(1) or (4) or 497(h)
under the Securities Act shall be deemed to be part of this registration
statement as of the time it was declared effective.
(3) For purposes of determining any liability under the Securities Act, each
post-effective amendment that contains a form of prospectus shall be deemed to
be a new registration statement relating to the securities offered therein, and
the offering of such securities at that time shall be deemed to be the initial
bona fide offering thereof.
II-7
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, the Registrant
has duly caused this registration statement to be signed on its behalf by the
undersigned, thereunto duly authorized, in the City of Bethesda, State of
Maryland, on March 26, 1999.
APPNET SYSTEMS, INC.
By: /s/ KEN S. BAJAJ
-----------------------------------------
Ken S. Bajaj
CHIEF EXECUTIVE OFFICER
The undersigned directors and officers of Appnet Systems, Inc. hereby
constitute and appoint Ken S. Bajaj and Ronald B. Alexander and each of them
with full power to act without the other and with full power of substitution and
resubstitution, our true and lawful attorneys-in-fact with full power to execute
in our name and behalf in the capacities indicated below this Registration
Statement on Form S-1 and any and all amendments thereto, including
post-effective amendments to this Registration Statement and to sign any and all
additional registration statements relating to the same offering of securities
as this Registration Statement that are filed pursuant to Rule 462(b) of the
Securities Act of 1933, and to file the same, with all exhibits thereto and
other documents in connection therewith, with the Securities and Exchange
Commission and hereby ratify and confirm that all such attorneys-in-fact, or any
of them, or their substitutes shall lawfully do or cause to be done by virtue
hereof.
Pursuant to the requirements of the Securities Act, this registration
statement has been signed by the following persons in the capacities and on the
dates indicated.
SIGNATURE TITLE DATE
- ------------------------------ --------------------------- -------------------
President, Chief Executive
/s/ KEN S. BAJAJ Officer and Director
- ------------------------------ (Principal Executive March 26, 1999
Ken S. Bajaj Officer)
/s/ JOHN CROSS Executive Vice President
- ------------------------------ and Director March 26, 1999
John Cross
/s/ THOMAS M. DAVIDSON Director
- ------------------------------ March 26, 1999
Thomas M. Davidson
/s/ BRUCE RAUNER Director
- ------------------------------ March 26, 1999
Bruce Rauner
/s/ PHILIP A. CANFIELD Director
- ------------------------------ March 26, 1999
Philip A. Canfield
/s/ RONALD B. ALEXANDER Chief Financial Officer
- ------------------------------ (Principal Financial and March 26, 1999
Ronald B. Alexander Accounting Officer)
II-8
<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, and February
5, 1999, respectively. Our audits were made for the purpose of forming an
opinion on the basic financial statements taken as a whole. The accompanying
Schedule II -- Valuation and Qualifying Accounts for AppNet Systems, Inc. and
Software Services Corporation are the responsibility of the Company's management
and are presented for purposes of complying with the Securities and Exchange
Commission's rules and are not part of the basic financial statements. This
schedule has been subjected to the auditing procedures applied in the audit of
the basic financial statements and, in our opinion, fairly states in all
material respects the financial data required to be set forth therein in
relation to the basic financial statements taken as a whole.
ARTHUR ANDERSEN LLP
Washington, D.C.
March 29, 1999
S-1
<PAGE>
SCHEDULE II
APPNET SYSTEMS, INC.
VALUATION AND QUALIFYING ACCOUNTS
<TABLE>
<CAPTION>
ADDITIONS
----------------------
CHARGED
BEGINNING TO ENDING
BALANCE DEDUCTIONS EXPENSE OTHER(1) BALANCE
---------- ----------- ---------- ---------- ------------
<S> <C> <C> <C> <C> <C>
PERIOD ENDING DECEMBER 31, 1998
Allowance for Doubtful Accounts................. $ -- $ 166,000 $ 539,000 $ 751,000 $ 1,124,000
</TABLE>
SOFTWARE SERVICES CORPORATION (PREDECESSOR)
VALUATION AND QUALIFYING ACCOUNTS
<TABLE>
<CAPTION>
ADDITIONS
----------------------
CHARGED
BEGINNING TO ENDING
BALANCE DEDUCTIONS EXPENSE OTHER(1) BALANCE
---------- ----------- ---------- ---------- ------------
<S> <C> <C> <C> <C> <C>
PERIOD ENDING DECEMBER 31, 1996
Allowance for Doubtful Accounts................. $ 49,000 $ 37,000 $ 17,000 -- $ 29,000
PERIOD ENDING DECEMBER 31, 1997
Allowance for Doubtful Accounts................. $ 29,000 $ 10,000 $ 6,000 -- $ 25,000
PERIOD FROM JANUARY 1 TO AUGUST 24, 1998
Allowance for Doubtful Accounts................. $ 25,000 $ (1,000) $ 229,000 -- $ 255,000
</TABLE>
- ------------------------
(1) Amounts reflected in opening balance sheets of acquired companies in
accordance with the purchase method of accounting.
S-2
<PAGE>
EXHIBIT 4.2
REGISTRATION AGREEMENT
THIS REGISTRATION AGREEMENT (this "Agreement") is made as of June
29, 1998, by and among (i) AppNet Systems, Inc., a Delaware corporation (the
"Company"), (ii) GTCR Golder Rauner, L.L.C., a Delaware limited liability
company ("GTCR"), (iii) Fairfax Management Company II, L.L.C., a Delaware
limited liability company ("FMC"), (iv) Smart Technology, L.L.C. ("Smart
Technology"), (v) Ken S. Bajaj, Robert G. Harvey, Robert D. McCalley, Terrence
M. McManus and any other executive employee of the Company who, at any time,
acquires securities of the Company and executes a counterpart of this Agreement
or otherwise agrees to be bound by this Agreement (each, an "Executive" and
collectively, the "Executives"), and (vi) the J. Sunny Bajaj Trust, the Rueben
Bajaj Trust, Silicon Valley Bank, a California-chartered bank, Anchor Financial
Group, Inc., a Delaware corporation, Pascal Luck, Robert M. Stewart, Thomas M.
Davidson and each other person set forth from time to time on the attached
"Schedule of Stockholders" under the heading "Other Stockholders" who, at any
time, acquires securities of the Company and executes a counterpart of this
Agreement or otherwise agrees to be bound by this Agreement (collectively, the
"Other Stockholders"). GTCR, FMC, Smart Technology, the Executives and the Other
Stockholders are collectively referred to herein as the "Stockholders" and
individually as a "Stockholder."
The Company, GTCR and Smart Technology are parties to a Purchase
Agreement of even date herewith (the "Purchase Agreement"). In order to induce
GTCR to enter into the Purchase Agreement, the Company has agreed to provide the
registration rights set forth in this Agreement. The execution and delivery of
this Agreement is a condition to the Closing under the Purchase Agreement.
Unless otherwise provided in this Agreement, capitalized terms used herein shall
have the meanings set forth in Section 8 hereof.
The parties hereto agree as follows:
1. Demand Registrations.
a. Requests for Registration. At any time, the holders of a majority of the
Investor Registrable Securities may request registration under the Securities
Act of all or any portion of their Registrable Securities on Form S-1 or any
similar long-form registration ("Long-Form Registrations"), and the holders of a
majority of the Investor Registrable Securities may request registration under
the Securities Act of all or any portion of their Registrable Securities on Form
S-2 or S-3 or any similar short-form registration ("Short-Form Registrations")
if available. All registrations requested pursuant to this Section 1(a) are
referred to herein as "Demand Registrations." Each request for a Demand
Registration shall specify the approximate number of Registrable Securities
requested to be registered and the anticipated per share price range
<PAGE>
for such offering. Within ten days after receipt of any such request, the
Company shall give written notice of such requested registration to all other
holders of Registrable Securities and shall include in such registration all
Registrable Securities with respect to which the Company has received written
requests for inclusion therein within 15 days after the receipt of the Company's
notice.
b. Long-Form Registrations. The holders of Investor Registrable Securities shall
be entitled to request (i) four Long-Form Registrations in which the Company
shall pay all Registration Expenses ("Company-paid Long-Form Registrations") and
(ii) an unlimited number of Long-Form Registrations in which the holders of
Registrable Securities shall pay their share of the Registration Expenses as set
forth in Section 5 hereof. A registration shall not count as one of the
permitted Long-Form Registrations until it has become effective and no
Company-paid Long-Form Registration shall count as one of the permitted
Long-Form Registrations unless the holders of Investor Registrable Securities
are able to register and sell at least 90% of the Investor Registrable
Securities requested to be included in such registration; provided that in any
event the Company shall pay all Registration Expenses in connection with any
registration initiated as a Company-paid Long-Form Registration whether or not
it has become effective and whether or not such registration has counted as one
of the permitted Company-paid Long-Form Registrations.
c. Short-Form Registrations. In addition to the Long-Form Registrations provided
pursuant to Section 1(b), the holders of Investor Registrable Securities shall
be entitled to request an unlimited number of Short-Form Registrations in which
the Company shall pay all Registration Expenses. Demand Registrations shall be
Short-Form Registrations whenever the Company is permitted to use any applicable
short form. After the Company has become subject to the reporting requirements
of the Securities Exchange Act, the Company shall use its best efforts to make
Short-Form Registrations on Form S-3 available for the sale of Registrable
Securities.
d. Priority on Demand Registrations. The Company shall not include in any Demand
Registration any securities which are not Registrable Securities without the
prior written consent of the holders of a majority of the Registrable Securities
included in such registration. If a Demand Registration is an underwritten
offering and the managing underwriters advise the Company in writing that in
their opinion the number of Registrable Securities and, if permitted hereunder,
other securities requested to be included in such offering exceeds the number of
Registrable Securities and other securities, if any, which can be sold in an
orderly manner in such offering within a price range acceptable to the holders
of a majority of the Investor Registrable Securities to be included in such
registration therein, without adversely affecting the marketability of the
offering, the Company shall include in such registration prior to the inclusion
of any securities which are not Registrable Securities the number of Registrable
Securities requested to be included which in the opinion of such underwriters
can be sold in an orderly manner within the price range of such offering, pro
rata among the respective holders thereof on the basis of the amount of
Registrable Securities owned by each such
<PAGE>
holder. Without the consent of the Company and the holders of a majority of the
Investor Registrable Securities included in such registration, any Persons other
than holders of Registrable Securities who participate in Demand Registrations
which are not at the Company's expense must pay their share of the Registration
Expenses as provided in Section 5 hereof.
e. Restrictions on Long-Form Registrations. The Company shall not be obligated
to effect any Long-Form Registration within 90 days after the effective date of
a previous Long-Form Registration or a previous registration in which the
holders of Registrable Securities were given piggyback rights pursuant to
Section 2 and in which there was no reduction in the number of Registrable
Securities requested to be included. The Company may postpone for up to 180 days
the filing or the effectiveness of a registration statement for a Demand
Registration if the Company and the holders of a majority of the Investor
Registrable Securities agree that such Demand Registration would reasonably be
expected to have a material adverse effect on any proposal or plan by the
Company or any of its Subsidiaries to engage in any offering of the Company's
securities, any acquisition of assets (other than in the ordinary course of
business) or any merger, consolidation, tender offer, reorganization or similar
transaction; provided that in such event, the holders of Registrable Securities
initially requesting such Demand Registration shall be entitled to withdraw such
request and, if such request is withdrawn, such Demand Registration shall not
count as one of the permitted Demand Registrations hereunder and the Company
shall pay all Registration Expenses in connection with such registration. The
Company may delay a Demand Registration hereunder only once in any twelve-month
period.
f. Selection of Underwriters. The holders of a majority of the Investor
Registrable Securities included in any Demand Registration shall have the right
to select the investment banker(s) and manager(s) to administer the offering;
provided, that such investment banker(s) and manager(s) shall be approved by the
Company's board of directors, which approval shall not be unreasonably withheld.
g. Other Registration Rights. Except as provided in this Agreement, the Company
shall not grant to any Persons the right to request the Company to register any
equity securities of the Company, or any securities convertible or exchangeable
into or exercisable for such securities, without the prior written consent of
the holders of a majority of the Investor Registrable Securities.
2. Piggyback Registrations.
a. Right to Piggyback. Whenever the Company proposes to register any of its
securities under the Securities Act (other than (i) in connection with the
Company's initial public offering, (ii) pursuant to a registration on Form S-8
or any successor form or (iii) pursuant to a Demand Registration) and the
registration form to be used may be used for the registration of Registrable
Securities (a "Piggyback Registration"), the Company shall give prompt written
notice (in any event within three business days after its receipt of notice of
any exercise of demand registration rights other
<PAGE>
than under this Agreement) to all holders of Registrable Securities of its
intention to effect such a registration and shall include in such registration
all Registrable Securities with respect to which the Company has received
written requests for inclusion therein within 20 days after the receipt of the
Company's notice.
b. Piggyback Expenses. The Registration Expenses of the holders of Registrable
Securities shall be paid by the Company in all Piggyback Registrations.
c. Priority on Primary Registrations. If a Piggyback Registration is an
underwritten primary registration on behalf of the Company, and the managing
underwriters advise the Company in writing that in their opinion the number of
securities requested to be included in such registration exceeds the number
which can be sold in an orderly manner in such offering within a price range
acceptable to the Company, the Company shall include in such registration (i)
first, the securities the Company proposes to sell, (ii) second, the Registrable
Securities requested to be included in such registration, pro rata among the
holders of such Registrable Securities on the basis of the number of shares
owned by each such holder, and (iii) third, other securities requested to be
included in such registration.
d. Priority on Secondary Registrations. If a Piggyback Registration is an
underwritten secondary registration on behalf of holders of the Company's
securities (other than holders or Registrable Securities), and the managing
underwriters advise the Company in writing that in their opinion the number of
securities requested to be included in such registration exceeds the number
which can be sold in an orderly manner in such offering within a price range
acceptable to the holders of a majority of the Registrable Securities to be
included in such registration, the Company shall include in such registration
(i) first, the securities requested to be included therein by the holders
requesting such registration, (ii) second, the Registrable Securities requested
to be included in such registration, pro rata among the holders of such
Registrable Securities on the basis of the number of shares owned by each such
holder, and (iii) third, other securities requested to be included in such
registration.
e. Selection of Underwriters. If any Piggyback Registration is an underwritten
offering, the selection of investment banker(s) and manager(s) for the offering
must be approved by the holders of a majority of the Investor Registrable
Securities included in such Piggyback Registration. Such approval shall not be
unreasonably withheld.
f. Other Registrations. If the Company has previously filed a registration
statement with respect to Registrable Securities pursuant to Section 1 or
pursuant to this Section 2, and if such previous registration has not been
withdrawn or abandoned, the Company shall not file or cause to be effected any
other registration of any of its equity securities or securities convertible or
exchangeable into or exercisable for its equity securities under the Securities
Act (except on Form S-8 or any successor
<PAGE>
form), whether on its own behalf or at the request of any holder or holders of
such securities, until a period of at least 180 days has elapsed from the
effective date of such previous registration.
3. Holdback Agreements.
a. Each holder of Registrable Securities shall not effect any public sale or
distribution (including sales pursuant to Rule 144) of equity securities of the
Company, or any securities convertible into or exchangeable or exercisable for
such securities, during the seven days prior to and the 180-day period beginning
on the effective date of any underwritten Demand Registration or any
underwritten Piggyback Registration in which Registrable Securities are included
(except as part of such underwritten registration), unless the underwriters
managing the registered public offering otherwise agree.
b. The Company (i) shall not effect any public sale or distribution of its
equity securities, or any securities convertible into or exchangeable or
exercisable for such securities, during the seven days prior to and during the
180-day period beginning on the effective date of any underwritten Demand
Registration or any underwritten Piggyback Registration (except as part of such
underwritten registration or pursuant to registrations on Form S-8 or any
successor form), unless the underwriters managing the registered public offering
otherwise agree, and (ii) shall use reasonable effort to cause each holder of
its Common Stock, or any securities convertible into or exchangeable or
exercisable for Common Stock, purchased from the Company at any time after the
date of this Agreement (other than in a registered public offering) to agree not
to effect any public sale or distribution (including sales pursuant to Rule 144)
of any such securities during such period (except as part of such underwritten
registration, if otherwise permitted), unless the underwriters managing the
registered public offering otherwise agree.
4. Registration Procedures. Whenever the holders of Registrable Securities have
requested that any Registrable Securities be registered pursuant to this
Agreement, the Company shall use its best efforts to effect the registration and
the sale of such Registrable Securities in accordance with the intended method
of disposition thereof, and pursuant thereto the Company shall as expeditiously
as possible:
a. prepare and file with the Securities and Exchange Commission a registration
statement with respect to such Registrable Securities and use its best efforts
to cause such registration statement to become effective (provided that before
filing a registration statement or prospectus or any amendments or supplements
thereto, the Company shall furnish to the counsel selected by the holders of a
majority of the Registrable Securities covered by such registration statement
copies of all such documents proposed to be filed, which documents shall be
subject to the review and comment of such counsel);
<PAGE>
b. notify each holder of Registrable Securities of the effectiveness of each
registration statement filed hereunder and prepare and file with the Securities
and Exchange Commission such amendments and supplements to such registration
statement and the prospectus used in connection therewith as may be necessary to
keep such registration statement effective for a period of not less than 180
days and comply with the provisions of the Securities Act with respect to the
disposition of all securities covered by such registration statement during such
period in accordance with the intended methods of disposition by the sellers
thereof set forth in such registration statement;
c. furnish to each seller of Registrable Securities such number of copies of
such registration statement, each amendment and supplement thereto, the
prospectus included in such registration statement (including each preliminary
prospectus) and such other documents as such seller may reasonably request in
order to facilitate the disposition of the Registrable Securities owned by such
seller;
d. use its best efforts to register or qualify such Registrable Securities under
such other securities or blue sky laws of such jurisdictions as any seller
reasonably requests and do any and all other acts and things which may be
reasonably necessary or advisable to enable such seller to consummate the
disposition in such jurisdictions of the Registrable Securities owned by such
seller (provided that the Company shall not be required to (i) qualify generally
to do business in any jurisdiction where it would not otherwise be required to
qualify but for this subparagraph, (ii) subject itself to taxation in any such
jurisdiction or (iii) consent to general service of process in any such
jurisdiction);
e. notify each seller of such Registrable Securities, at any time when a
prospectus relating thereto is required to be delivered under the Securities
Act, of the happening of any event as a result of which the prospectus included
in such registration statement contains an untrue statement of a material fact
or omits any fact necessary to make the statements therein not misleading, and,
at the request of any such seller, the Company shall prepare a supplement or
amendment to such prospectus so that, as thereafter delivered to the purchasers
of such Registrable Securities, such prospectus shall not contain an untrue
statement of a material fact or omit to state any fact necessary to make the
statements therein not misleading;
f. use its best efforts to cause all such Registrable Securities to be listed on
each securities exchange on which similar securities issued by the Company are
then listed and, if not so listed, to be listed on the NASD automated quotation
system and, if listed on the NASD automated quotation system, use its best
efforts to secure designation of all such Registrable Securities covered by such
registration statement as a NASDAQ "national market system security" within the
meaning of Rule 11Aa2-1 of the Securities and Exchange Commission or, failing
that, to secure NASDAQ authorization for such Registrable Securities and,
without limiting the
<PAGE>
generality of the foregoing, to arrange for at least two market makers to
register as such with respect to such Registrable Securities with the NASD;
g. provide a transfer agent and registrar for all such Registrable Securities
not later than the effective date of such registration statement;
h. enter into such customary agreements (including underwriting agreements in
customary form) and take all such other actions as the holders of a majority of
the Registrable Securities being sold or the underwriters, if any, reasonably
request in order to expedite or facilitate the disposition of such Registrable
Securities (including effecting a stock split or a combination of shares);
i. otherwise use its best efforts to comply with all applicable rules and
regulations of the Securities and Exchange Commission, and make available to its
security holders, as soon as reasonably practicable, an earnings statement
covering the period of at least twelve months beginning with the first day of
the Company's first full calendar quarter after the effective date of the
registration statement, which earnings statement shall satisfy the provisions of
Section 11(a) of the Securities Act and Rule 158 thereunder;
j. in the event of the issuance of any stop order suspending the effectiveness
of a registration statement, or of any order suspending or preventing the use of
any related prospectus or suspending the qualification of any common stock
included in such registration statement for sale in any jurisdiction, the
Company shall use reasonable efforts promptly to obtain the withdrawal of such
order;
k. use reasonable efforts to cause such Registrable Securities covered by such
registration statement to be registered with or approved by such other
governmental agencies or authorities as may be necessary to enable the sellers
thereof to consummate the disposition of such Registrable Securities; and
l. obtain a cold comfort letter from the Company's independent public
accountants in customary form and covering such matters of the type customarily
covered by cold comfort letters as the holders of a majority of the Registrable
Securities being sold reasonably request (provided that such Registrable
Securities constitute at least 10% of the securities covered by such
registration statement).
5. Registration Expenses.
a. All expenses incident to the Company's performance of or compliance with this
Agreement, including without limitation all registration and filing fees, fees
and expenses of compliance with securities or blue sky laws, printing expenses,
messenger and delivery expenses, fees and disbursements of custodians, and fees
and disbursements of counsel for the Company and all independent certified
public accountants, underwriters (excluding discounts and commissions) and other
Persons
<PAGE>
retained by the Company (all such expenses being herein called "Registration
Expenses"), shall be borne as provided in this Agreement, except that the
Company shall, in any event, pay its internal expenses (including, without
limitation, all salaries and expenses of its officers and employees performing
legal or accounting duties), the expense of any annual audit or quarterly
review, the expense of any liability insurance and the expenses and fees for
listing the securities to be registered on each securities exchange on which
similar securities issued by the Company are then listed or on the NASD
automated quotation system.
b. In connection with each Demand Registration and each Piggyback Registration,
the Company shall reimburse the holders of Registrable Securities included in
such registration for the reasonable fees and disbursements of one counsel
chosen by the holders of a majority of the Registrable Securities included in
such registration.
c. To the extent Registration Expenses are not required to be paid by the
Company, each holder of securities included in any registration hereunder shall
pay those Registration Expenses allocable to the registration of such holder's
securities so included, and any Registration Expenses not so allocable shall be
borne by all sellers of securities included in such registration in proportion
to the aggregate selling price of the securities to be so registered.
6. Indemnification.
a. The Company agrees to indemnify, to the extent permitted by law, each holder
of Registrable Securities, its officers and directors and each Person who
controls such holder (within the meaning of the Securities Act) against all
losses, claims, damages, liabilities and expenses caused by any untrue or
alleged untrue statement of material fact contained in any registration
statement, prospectus or preliminary prospectus or any amendment thereof or
supplement thereto or any omission or alleged omission of a material fact
required to be stated therein or necessary to make the statements therein not
misleading, except insofar as the same are caused by or contained in any
information furnished in writing to the Company by such holder expressly for use
therein or by such holder's failure to deliver a copy of the registration
statement or prospectus or any amendments or supplements thereto after the
Company has furnished such holder with a sufficient number of copies of the
same. In connection with an underwritten offering, the Company shall indemnify
such underwriters, their officers and directors and each Person who controls
such underwriters (within the meaning of the Securities Act) to the same extent
as provided above with respect to the indemnification of the holders of
Registrable Securities.
b. In connection with any registration statement in which a holder of
Registrable Securities is participating, each such holder will furnish to the
Company in writing such information and affidavits as the Company reasonably
requests for use in connection with any such registration statement or
prospectus and, to the full
<PAGE>
extent permitted by law, shall indemnify the Company, its directors and officers
and each Person who controls the Company (within the meaning of the Securities
Act) against any losses, claims, damages, liabilities and expenses resulting
from any untrue or alleged untrue statement of material fact contained in the
registration statement, prospectus or preliminary prospectus or any amendment
thereof or supplement thereto or any omission or alleged omission of a material
fact required to be stated therein or necessary to make the statements therein
not misleading, but only to the extent that such untrue statement or omission is
contained in any information or affidavit so furnished in writing by such
holder; provided that the obligation to indemnify will be individual, not joint
and several, for each holder and shall be limited to the net amount of proceeds
received by such holder from the sale of Registrable Securities pursuant to such
registration statement.
c. Any Person entitled to indemnification hereunder will (i) give prompt written
notice to the indemnifying party of any claim with respect to which it seeks
indemnification (provided that the failure to give prompt notice shall not
impair any Person's right to indemnification hereunder to the extent such
failure has not prejudiced the indemnifying party) and (ii) unless in such
indemnified party's reasonable judgment a conflict of interest between such
indemnified and indemnifying parties may exist with respect to such claim,
permit such indemnifying party to assume the defense of such claim with counsel
reasonably satisfactory to the indemnified party. If such defense is assumed,
the indemnifying party will not be subject to any liability for any settlement
made by the indemnified party without its consent (but such consent will not be
unreasonably withheld). An indemnifying party who is not entitled to, or elects
not to, assume the defense of a claim will not be obligated to pay the fees and
expenses of more than one counsel for all parties indemnified by such
indemnifying party with respect to such claim, unless in the reasonable judgment
of any indemnified party a conflict of interest may exist between such
indemnified party and any other of such indemnified parties with respect to such
claim.
d. The indemnification provided for under this Agreement shall remain in full
force and effect regardless of any investigation made by or on behalf of the
indemnified party or any officer, director or controlling Person of such
indemnified party and shall survive the transfer of securities. The Company also
agrees to make such provisions, as are reasonably requested by any indemnified
party, for contribution to such party in the event the Company's indemnification
is unavailable for any reason.
<PAGE>
7. Participation in Underwritten Registrations. No Person may participate in any
registration hereunder which is underwritten unless such Person (i) agrees to
sell such Person's securities on the basis provided in any underwriting
arrangements approved by the Person or Persons entitled hereunder to approve
such arrangements and (ii) completes and executes all questionnaires, powers of
attorney, indemnities, underwriting agreements and other documents reasonably
required under the terms of such underwriting arrangements; provided that no
holder of Registrable Securities included in any underwritten registration shall
be required to make any representations or warranties to the Company or the
underwriters (other than representations and warranties regarding such holder
and such holder's intended method of distribution) or to undertake any
indemnification obligations to the Company or the underwriters with respect
thereto, except as otherwise provided in Section 6 hereof.
8. Definitions.
a. "Executive Registrable Securities" means any shares of Common Stock held as
of the date hereof, or acquired hereafter from the Company, by the Executives.
b. "FMC Registrable Securities" means any shares of Common Stock held as of the
date hereof, or acquired hereafter from the Company, by FMC.
c. "Investor Registrable Securities" means (i) any Common Stock issued pursuant
to the Purchase Agreement (whether issued before or after the date hereof), (ii)
any other Common Stock issued or issuable with respect to the securities
referred to in clause (i) by way of a stock dividend or stock split or in
connection with an exchange or combination of shares, recapitalization, merger,
consolidation or other reorganization, and (iii) any other shares of Common
Stock held by Persons holding securities described in clauses (i) and (ii),
inclusive, above.
d. "Other Stockholder Registrable Securities" means any shares of Common Stock
held as of the date hereof, or acquired hereafter from the Company, by the Other
Stockholders.
e. "Registrable Securities" means FMC Registrable Securities, Investor
Registrable Securities, Executive Registrable Securities and Other Stockholder
Registrable Securities. As to any particular Registrable Securities, such
securities shall cease to be Registrable Securities when they have been
distributed to the public pursuant to an offering registered under the
Securities Act or sold to the public through a broker, dealer or market maker in
compliance with Rule 144 under the Securities Act (or any similar rule then in
force). For purposes of this Agreement, a Person shall be deemed to be a holder
of Registrable Securities when ever such Person has the right to acquire such
Registrable Securities (upon conversion or exercise in connection with a
transfer of
<PAGE>
securities or otherwise, but disregarding any restrictions or limitations upon
the exercise of such right), whether or not such acquisition has actually been
effected.
f. Unless otherwise stated, other capitalized terms contained herein have the
meanings set forth in the Purchase Agreement.
9. Miscellaneous.
a. No Inconsistent Agreements. The Company shall not hereafter enter into any
agreement with respect to its securities which is inconsistent with or violates
the rights granted to the holders of Registrable Securities in this Agreement.
b. Adjustments Affecting Registrable Securities. The Company shall not take any
action, or permit any change to occur, with respect to its securities which
would adversely affect the ability of the holders of Registrable Securities to
include such Registrable Securities in a registration undertaken pursuant to
this Agreement or which would adversely affect the marketability of such
Registrable Securities in any such registration (including, without limitation,
effecting a stock split or a combination of shares).
c. Remedies. Any Person having rights under any provision of this Agreement
shall be entitled to enforce such rights specifically to recover damages caused
by reason of any breach of any provision of this Agreement and to exercise all
other rights granted by law. The parties hereto agree and acknowledge that money
damages may not be an adequate remedy for any breach of the provisions of this
Agreement and that any party may in its sole discretion apply to any court of
law or equity of competent jurisdiction (without posting any bond or other
security) for specific performance and for other injunctive relief in order to
enforce or prevent violation of the provisions of this Agreement.
d. Additional Stockholders. In connection with the issuance of any additional
equity securities of the Company, the Company, with the prior written consent of
GTCR may permit such person to become a party to this Agreement and succeed to
all of the rights and obligations of a "Stockholder" under this Agreement by
obtaining an executed counterpart signature page to this Agreement, and, upon
such execution, such person shall for all purposes be a "Stockholder" party to
this Agreement.
e. Amendments and Waivers. Except as otherwise provided herein, the provisions
of this Agreement may be amended or waived only upon the prior written consent
of the Company and holders of at least a majority of the Registrable Securities;
provided that in the event that such amendment or waiver would adversely affect
a holder or group of holders of Registrable Securities in a manner different
than any other holder of Registrable Securities, then such amendment or waiver
will require the consent of such holder of Registrable Securities or a majority
of the Registrable Securities held by such group of holders adversely affected.
<PAGE>
f. Successors and Assigns. All covenants and agreements 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, whether or not any express assignment has been made, the
provisions of this Agreement which are for the benefit of purchasers or holders
of Registrable Securities are also for the benefit of, and enforceable by, any
subsequent holder of Registrable Securities. The rights and obligations of GTCR
under this Agreement may be assigned at any time, in whole or in part, to any
investment fund managed by GTCR, or any successor thereto; provided that such
assignment occurs in the manner provided in the Purchase Agreement.
g. 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.
h. 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.
i. Descriptive Headings. The descriptive headings of this Agreement are inserted
for convenience only and do not constitute a part of this Agreement.
j. Governing Law. The corporate law of the State of Delaware shall govern all
issues and questions concerning the relative rights of the Company and its
stockholders. All other issues and questions concerning the construction,
validity, interpretation and enforcement of this Agreement and the exhibits and
schedules hereto shall be governed by, and construed in accordance with, the
laws of the State of Illinois, without giving effect to any choice of law or
conflict of law rules or provisions (whether of the State of Illinois or any
other jurisdiction) that would cause the application of the laws of any
jurisdiction other than the State of Illinois.
k. Notices. All notices, demands or other communications to be given or
delivered under or by reason of the provisions of this Agreement shall be in
writing and shall be deemed to have been given when delivered personally to the
recipient, sent to the recipient by reputable overnight courier service (charges
prepaid) or mailed to the recipient by certified or registered mail, return
receipt requested and postage prepaid. Such notices, demands and other
communications shall be sent to the Investor and to each Executive at the
addresses indicated on the Schedule of Stockholders and to the Company at the
address of its corporate headquarters or to such other address or to the
<PAGE>
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 Registration
Agreement on the day and year first above written.
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
FAIRFAX MANAGEMENT COMPANY II, L.L.C.
By: /s/ Bruce K. Gouldey
-------------------------------------
Name: Bruce K. Gouldey
Its: Member
/s/ Ken S. Bajaj
----------------------------------------
KEN S. BAJAJ
/s/ Robert G. Harvey
----------------------------------------
ROBERT G. HARVEY
<PAGE>
[Continuation of Registration Agreement Signature Page]
/s/ Robert D. McCalley
----------------------------------------
ROBERT D. MCCALLEY
/s/ Terrence M. McManus
----------------------------------------
TERRENCE M. MCMANUS
SMART TECHNOLOGY, L.L.C.
By: /s/ Kavelle R. Bajaj
-------------------------------------
Name: Kavelle R. Bajaj
-----------------------------------
Its: Managing Partner
------------------------------------
/s/ Thomas M. Davidson
----------------------------------------
THOMAS M. DAVIDSON
<PAGE>
[Continuation of Registration Agreement Signature Page]
J. SUNNY BAJAJ TRUST
By: /s/ Jaideep Bajaj
-------------------------------------
Jaideep Bajaj, Co-Trustee
By: /s/ Bhavneet Bajaj
-------------------------------------
Bhavneet Bajaj, Co-Trustee
By: /s/ Daniel A. Masur
-------------------------------------
Daniel A. Masur, Co-Trustee
RUEBEN BAJAJ TRUST
By: /s/ Jaideep Bajaj
-------------------------------------
Jaideep Bajaj, Co-Trustee
By: /s/ Bhavneet Bajaj
-------------------------------------
Bhavneet Bajaj, Co-Trustee
By: /s/ Daniel A. Masur
-------------------------------------
Daniel A. Masur, Co-Trustee
<PAGE>
[Continuation of Registration Agreement Signature Page]
SILICON VALLEY BANK
By: /s/ Peter McDonald
-----------------------------------
Name: Peter McDonald
-----------------------------------
Its: Vice President
-----------------------------------
ANCHOR FINANCIAL GROUP, INC.
By: /s/ Stuart J. Yarbrough
-----------------------------------
Name: Stuart J. Yarbrough
-----------------------------------
Its: President
-----------------------------------
/s/ Pascal Luck
----------------------------------------
PASCAL LUCK
/s/ Robert M. Stewart
----------------------------------------
ROBERT M. STEWART
<PAGE>
EXHIBIT 10.18
Amended November 29, 1994
Amended October 29, 1996
CENTURY COMPUTING, INCORPORATED
INCENTIVE STOCK OPTION PLAN
1 GENERAL
1.1 Purpose
This 1993 Incentive Stock Option Plan (the "Plan") is established to
create additional incentive for employees of Century Computing, Incorporated
(the "Company") to promote the financial success and progress of the Company.
1.2 Administration
(a) The Plan shall be administered by the Company's Board of Directors (the
"Board") and/or by a duly appointed Stock Option Committee (the "Committee") of
the Board having such powers as shall be specified by the Board. Any subsequent
references to the Board shall also mean the Committee if it has been appointed.
(b) Subject to the limitations of the Plan, the Board shall have the sole and
complete authority:
(i) to select from the regular full-time employees of the Company those
who shall participate in the Plan ("Participants"),
(ii) to make awards in such forms and amounts as it shall determine,
(iii) to impose such limitations, restrictions and conditions upon such
awards as it shall deem appropriate, and
(iv) to interpret the Plan and to adopt, amend and rescind administrative
guidelines and other rules and regulations relating to the actions
necessary or advisable for the implementation and administration of the
Plan. The Board's determinations on matters within its authority shall be
conclusive and binding upon the Company and all other persons.
(c) The Board shall act on behalf of the Company as sponsor of the Plan. Except
as otherwise provided in Section 2.4 hereof, all expenses associated with the
administration of the Plan shall be borne by the Company.
(d) Without the express approval of the Board, the Committee shall not have the
authority to award Options for more than 5,000 shares to any single Participant.
Page 1
<PAGE>
Century Computing, Inc. Incentive Stock Option Plan
1.3 Eligibility
Participants shall be selected by the Board from employees of the Company
who have the capacity to contribute to the success of the Company. In making
these selections and in determining the form and amount of awards, the Board may
give consideration to the functions and responsibilities of the individual, his
or her past, present and potential contributions to the Company's profitability
and sound growth, the value of his or her services to the Company, and other
factors deemed relevant by the Board.
1.4 Type of Awards under the Plan
Awards under the Plan shall be in the form of Incentive Stock Options
(hereinafter referred to as "Options"). A Participant may, if otherwise
eligible, be granted Options in any combination from time to time.
1.5 Shares Subject to the Plan
Shares of stock issued under the Plan may be in whole or in part
authorized and unissued or treasury shares of the Company's common stock, with
par value $.01 per share (the "Common Stock") which may be voting or nonvoting,
in the discretion of the Board or the Committee. The maximum number of shares of
Common Stock which may be issued for all purposes under the Plan shall be
130,000, subject to adjustment in accordance with the provisions of Section 3.2
hereof. Any shares of Common Stock subject to an Option which for any reason is
canceled or terminated without having been exercised shall again be available
for awards under the Plan. No fractional shares shall be issued, and the Board
shall determine the manner in which fractional share values shall be treated.
2 TERMS OF THE OPTIONS
2.1 Award of Options
Subject to the provisions of the Plan, the Board shall determine for each
Option (which need not be identical) the number of shares for which the Option
shall be granted, the option price of the Option, the exercisability of the
Option, and all other terms and conditions of the Option. Options granted
pursuant to the Plan shall be evidenced by written agreements specifying the
number of shares covered thereby, in such form as the Board shall from time to
time establish, which agreements may incorporate all or any of the terms of the
Plan by reference ("Stock Option Agreements").
2.2 Option Price
The purchase price of Common Stock purchasable under Options shall be not
less than the fair market value, as determined by the Board, of the shares of
Common Stock of the Company on the date of the grant of the Option, except that,
as to an employee who at the time the Option is granted owns stock possessing
more than 10% of the total combined voting power of all classes of stock of the
Company within the meaning of section 422(b)(6) of the Internal Revenue Code of
1986, as amended (the "Code") (a "Ten Percent Owner Employee"), the option price
shall not be less than 110% of the fair market value of the shares on the date
the Option is granted.
Page 2
<PAGE>
Century Computing, Inc. Incentive Stock Option Plan
2.3 Term of Options
(a) The Plan shall become effective on the date of its adoption by the Board
subject to the approval of the Plan by the holders of the majority of the shares
of stock of the Company entitled to vote at a meeting of the stockholders held
within 12 months of the effective date. No Option shall be awarded pursuant to
the Plan after the expiration of the ten year period beginning on the date the
Plan is adopted by the Board.
(b) The Board shall have the power to set the time or times within which each
Option shall be exercisable or the event or events upon the occurrence of which
all or a portion of each Option shall be exercisable and the term of each
Option.
(c) No option shall be exercisable after the expiration of ten years from the
date such Option is granted, and provided further, that no Option granted to a
Ten Percent Owner Employee shall be exercisable after the expiration of five
years from the date such Option is granted.
2.4 Exercise of Options
(a) Options may be exercised only by written notice to the Company, stating the
number of shares of Common Stock being purchased and accompanied by payment of
the option price for the number of such shares being purchased (i) in cash, or
(ii) by tender to the Company of shares of the Company's Common Stock owned by
the Participant and having a fair market value (or appraised value pursuant to
an independent valuation of the Company's Common Stock) not less than the
aggregate option price, or by such other consideration as the Board may approve
at the time the Option is granted. As soon as practicable after receipt of such
notice and full payment for the shares of Common Stock being purchased, the
Company shall deliver to the Participant a certificate or certificates
representing the acquired shares of Common Stock. At the time an Option is
exercised, in whole or in part, or at any time thereafter as requested by the
Company, the Participant shall pay, or make adequate provision for payment of,
federal and state income and employment tax withholding obligations of the
Company, if any, which arise upon exercise, in whole or in part, of the Option
or upon disposition of the shares acquired by exercise of the Option. 'The
applicability of such withholding taxes shall be determined by the Company in
its sole discretion.
(b) Unless otherwise agreed in writing by the Board, Options may be exercised by
an Optionee only twice in any calendar year.
2.5 Limitations on Options
(a) Under the terms of the Plan, the aggregate fair market value (determined at
the time an Option is granted) of the shares of Common Stock with respect to
which Options are exercisable for the first time by a Participant during any
calendar year (under all such option plans of the Company) shall not exceed
$100,000.
(b) A Participant shall have the following rights upon death, disability or
other termination of his or her employment:
(i) If the Participant's employment is terminated by death, his or her
estate or the person who acquired the right to exercise such Option by
bequest or inheritance from the Participant shall be entitled, for a
period of one year following the date of his of her death, to exercise the
Option with respect to all or any part of the shares of Common Stock
subject thereto, to the extent the Option had become exercisable at the
time of death.
Page 3
<PAGE>
Century Computing, Inc. Incentive Stock Option Plan
(ii) If the Participant's employment terminates because of disability
within the meaning of section 22(e)(3) of the Code, the Participant or his
or her legal representative shall have the right, for a period of one year
following the date of such termination, to exercise the Option with
respect to all or any part of the shares of Common Stock subject thereto,
to the extent the Option had become exercisable at the time of such
termination.
(iii) If the Company terminates a Participant's employment, or if a
Participant voluntarily terminates his or her employment with the Company,
all of the then outstanding Options granted to such Participant shall
terminate immediately.
2.6 Repurchase of Option Shares
(a) Upon termination of a Participant's employment, the Company shall have the
right to purchase any or all shares of its Common Stock issued to a Participant
in connection with the exercise of an Option, provided, however, that such
rights shall expire on the latest of the following:
(i) one year after the Participant is no longer an employee; or,
(ii) two years and six months after the date of grant of the Option; or,
(iii) 18 months after the date of last exercise of all or any part of the
Option granted hereunder.
(b) If the Company exercises its rights hereunder it shall pay a purchase price
equal to the greater of:
(i) the purchase price paid for the Common Stock issued to the Option
holder; or
(ii) the then fair market value of such Common Stock.
The date of purchase shall be no sooner than the earlier of two years
after the date of the grant of the Option or one year after the date of exercise
of the last Option exercised. The purchase price shall be payable at the
election of the Company in either all cash or one half in cash and one half
through a promissory note of the Company payable within one year of the date of
issuance with interest at the prime rate as published by The Wall Street Journal
plus one percent.
3 MISCELLANEOUS PROVISIONS
3.1 Non-Transferability
No Option award under the Plan shall be transferable by any Participant
otherwise than by will or, if the Participant dies intestate, by the laws of
descent and distribution. All awards shall be exercisable or received during the
Participant's lifetime only by such Participant or his or her legal
representative. Any transfer contrary to this Section 3.1 will nullify the
Option involved.
3.2 Adjustments of and Changes in Stock
In the event that the shares of Common Stock of the Company, as presently
constituted, shall be changed into or exchanged for a different number or kind
of shares of stock of the Company or of another corporation (whether by reason
of corporate merger, consolidation, acquisition of property or stock separation,
reorganization or liquidation) or if the number of such shares of Common Stock
shall be increased through the payment of a stock dividend, then there shall be
substituted for or added to each share of stock which may become subject to an
Option under this Plan, the number and kind of such shares of stock into which
each outstanding share of Common Stock of the Company shall be so changed,
Page 4
<PAGE>
Century Computing, Inc. Incentive Stock Option Plan
or for which each such share shall be exchanged, or to which each such share
shall be entitled, as the case may be. Outstanding Options shall also be
appropriately amended as to price and other terms as may be necessary to reflect
the foregoing events. Upon dissolution or liquidation of the Company, or upon a
reorganization, merger or consolidation in which the Company is not the
surviving corporation, or upon the sale of substantially all of the assets of
the Company to another corporation, the Options issued hereunder shall survive
and appropriate provision shall be made for the continuation of outstanding
Options by, for example, the substitution on an equitable basis, of appropriate
securities, or options on such securities, of the reorganized, merged,
purchasing, or consolidated corporation.
3.3 Stock Transfer Restrictions
Shares of Common Stock purchased under the Plan and held by or through any
person who is an officer, director or affiliate of the Company may not be sold
or otherwise disposed of within two years of the date of grant of the Option for
such shares nor within one year after receipt by the Participant of such shares.
Any such transfers shall be:
(i) pursuant to an effective registration statement under the Securities
Act of 1933, as amended, (the "Act"), or a transaction which, in the
opinion of counsel for the Company, is exempt from registration under the
Act and,
(ii) in compliance with state securities laws.
The Board may waive the foregoing restrictions, in whole or in part, in
any particular case or cases or may terminate such restrictions whenever the
Board determines that such restrictions afford no substantial benefit to the
Company.
3.4 Amendment, Modification and Termination of the Plan
The Board of Directors may terminate, amend or modify the Plan, at any
time; provided, however, that no such action of the Board of Directors, without
approval of the stockholders, may
(i) increase the total number of shares of Common Stock for which Options
may be granted under the Plan, except as contemplated in Section 3.2
above,
(ii) decrease the minimum Option price or
(iii) increase the maximum Option term or extend the period after which
Options may not be awarded under the Plan.
No amendment, modification or termination of the Plan shall in any manner
affect any Option theretofore granted to a Participant under the Plan without
the consent of the Participant or the transferee of such Option.
3.5 Non-Uniform Determinations
The Board's determinations under the Plan, including without limitation,
(i) the determination of the Participants to receive awards, (ii) the form,
amount and timing of such awards, (iii) the terms and provisions of such awards
and (iv) the agreements evidencing the same, need not be uniform and may be made
by it selectively among Participants who receive, or who are eligible to
receive, awards under the Plan, whether or not such Participants are similarly
situated.
Page 5
<PAGE>
Century Computing, Inc. Incentive Stock Option Plan
3.6 Leaves of Absence; Transfers
The Board shall be entitled to make such rules, regulations and
determinations as it deems appropriate under the Plan in respect of any leave of
absence from the Company granted to a Participant. Without limiting the
generality of the foregoing, the Board shall be entitled to determine
(i) whether or not any such leave of absence shall be treated as if a
Participant ceased to be an employee and
(ii) the impact, if any, of any such leave of absence on awards under the
Plan. In the event Participant transfers within the Company, such
Participant shall not be deemed to have ceased to be an employee for
purposes of the Plan.
3.7 Rights as a Stockholder or Employee
No person shall have any rights as a stockholder with respect to any
shares of Common Stock covered by an Option until such time as stock
certificates for the shares of Common Stock for which the Option has been
exercised are issued. No adjustment shall be made for dividends or distributions
or other rights for which the record date is prior to the date such stock
certificate(s) are issued, except as provided in Section 3.2 above. Nothing in
this Plan or in any Stock Option Agreement shall confer upon any Participant any
right to continue in the employ of the Company or interfere in any way with any
right of the Company to terminate the Participant's employment at any time.
3.8 Termination of the Plan
Termination of the Plan shall not affect the right of Participants under
Options previously granted to them, and all unexpired Options shall continue in
force and operation after termination of the Plan except as they may lapse or be
terminated by their own terms and conditions.
Page 6
<PAGE>
EXHIBIT 10.22
FORM OF
SENIOR MANAGEMENT AGREEMENT
THIS SENIOR MANAGEMENT AGREEMENT (this "Agreement") is made as of
_____________, 1999, between _____________________, a _____________ corporation
(the "Company"), and ______________ ("Executive").
WHEREAS, concurrently with the execution of this Agreement,
________________, a ______________ corporation (the "Predecessor") merged with
and into the Company, which is a wholly-owned subsidiary of AppNet Systems,
Inc., a Delaware corporation ("AppNet"), pursuant to that certain Agreement and
Plan of Reorganization dated _____________, 1999 (the "Acquisition");
WHEREAS, prior to the Acquisition Executive had been a key employee of
Predecessor, and, as a result of the Acquisition, Executive currently is a key
employee of the Company;
WHEREAS, as a material inducement to AppNet to complete the Acquisition,
Executive has agreed to execute this Agreement and to be bound by the terms and
conditions hereof;
WHEREAS, the Company desires to continue to employ Executive and to have
the benefit of his skills and services, and Executive desires to continue his
employment with the Company, on the terms and conditions set forth herein; and
WHEREAS, the parties hereto desire to set forth herein the terms and
conditions of their agreements and understandings with respect to the foregoing.
NOW, THEREFORE, the parties hereto agree as follows:
1. Employment. The Company agrees to employ Executive and Executive
accepts such employment for the period beginning as of the date hereof and
ending on the third anniversary of the date hereof (the "Base Period") or upon
Executive's earlier separation pursuant to Section 1(c) hereof (the Base Period
or such shorter period being referred to as the "Employment Period"); provided,
however, that the Employment Period shall automatically be renewed for
additional one year periods commencing on the third anniversary of the date
hereof unless the Company gives Executive written notice of its desire to
terminate Executive's employment by the Company at least 60 days prior to the
end of the then-current Employment Period.
(a) Position and Duties. During the Employment Period, Executive
shall serve as ______________________________ of the Company and shall have the
normal duties, responsibilities and authority of the
____________________________, subject to the power of the Company's Chairman,
the Company's Board of Directors (the "Board") or an executive of AppNet
designated by the Chairman of the Company (the "Manager") to expand or limit
such duties, responsibilities and authority and to override actions of the
____________________.
<PAGE>
Executive shall report to the Manager and Executive shall devote his best
efforts and his full business time and attention to the business and affairs of
the Company and its Affiliates.
(b) Salary, Bonus and Benefits. During the Employment Period, the
Company will pay Executive a base salary of $_________ per annum, subject to any
increase as determined by the Manager based upon the Company's achievements of
budgetary and other objectives set by the Manager (the "Annual Base Salary"). In
addition, Executive shall be eligible to receive a bonus of up to _____ percent
(___%) of the Annual Base Salary based upon the Company's achievement of
budgetary and other objectives set by the Manager. Executive's Annual Base
Salary for any partial year will be prorated based upon the number of days
elapsed in such year. In addition, during the Employment Period, Executive will
be entitled to such other benefits approved by the Manager. Executive will be
eligible for grants of options during the Employment Period approved by the
Company's Board of Directors based on Executive's and the Company's performance.
(c) Separation. Executive's employment by the Company during the
Employment Period will continue until Executive's resignation, Disability or
death or until the Board terminates Executive's employment for any reason or
without any reason (a "Separation"); provided, however, that in the event of
Executive's resignation, Executive agrees to provide the Company no less than 90
days prior written notice of such resignation in order to allow for an orderly
transition to Executive's replacement. If the Employment Period is terminated by
the Company without Cause, subject to the provisions of this Agreement,
Executive shall have no further rights or claims against the Company or its
Affiliates except that he shall be entitled to receive his Annual Base Salary
and his life insurance, medical insurance and disability insurance benefits (but
no other fringe benefits) through the end of the Noncompete Period (as defined
below in Section 3, including any extensions pursuant to Section 3(a)) (such
payment is hereinafter referred to as the "Severance Payment") payable in
accordance with the Company's normal payroll practices. If the Employment Period
is terminated due to death, then the Annual Base Salary and medical insurance
will be continued through the next full calendar month following the month in
which the Executive died. If the Employment Period is terminated due to
Disability, then the Annual Base Salary, medical insurance and disability
insurance will be continued until the last day of the six-month period following
Disability; provided, however, that such Annual Base Salary shall be reduced by
the amount of any disability income payments made to the Executive during such
six-month period from any insurance or other policies provided by the Company.
Except as provided herein, upon termination of Executive's employment for any
other reason (including termination for Cause), neither Executive nor his
beneficiary or estate will have any further rights or claims against the Company
or its Affiliates except for the unpaid portion of the Annual Base Salary
through the date of termination and reimbursement of all business expenses
incurred by Executive prior to such date. Notwithstanding the foregoing,
Executive understands and agrees that Executive's employment with the Company
was a key inducement to AppNet to acquire the Company from Executive and the
other former shareholders of the Company and Executive agrees that if he resigns
from employment with the Company during the Employment Term, then Executive
shall be liable for liquidated damages to the Company in an amount equal to (i)
two (2) times the Annual Base Salary in the event that Executive resigns from
employment with the Company on or prior to the
-2-
<PAGE>
second anniversary of the date hereof; and (ii) the Annual Base Salary in the
event that Executive resigns from employment with the Company after the second
anniversary of the date hereof but prior to the end of the Base Period.
(d) Return of Company Property. Executive agrees that, upon the
termination of the Employment Period, Executive will immediately surrender to
the Company all of the Company's property, including without limitation all
equipment, funds, lists, manuals, books, records or other Confidential
Information (as defined herein) (including all copies of any of the foregoing)
in the possession of, or provided to, Executive.
2. Confidential Information.
(a) Executive acknowledges that the Company and its Affiliates are
engaged in the business of _______________________________________ (the
"Business"). Executive further acknowledges that the Business and its continued
success depend upon the use and protection of a large body of confidential and
proprietary information, and that he holds a position of trust and confidence by
virtue of which he necessarily possesses, has access to and, as a consequence of
his signing this Agreement, will continue to possess and have access to, highly
valuable, confidential and proprietary information of the Company and its
Affiliates not known to the public in general, and that it would be improper for
him to make use of this information for the benefit of himself and others. All
of such confidential and proprietary information now existing or to be developed
in the future will be referred to in this Agreement as "Confidential
Information." This includes, without specific limitation, information relating
to the nature and operation of the Business or any other business conducted by
the Company or the Company's Affiliates that Executive actively assisted or was
involved with (the "Affiliate Business"), the persons, firms and corporations
which are customers or active prospects of the Company or the Affiliate Business
during Executive's employment by the Company, the Company's and the Affiliate
Business' development transition and transformation plans, methodology and
methods of doing business, strategic, acquisition, marketing and expansion
plans, including plans regarding planned and potential acquisitions and sales,
financial and business plans, employee lists, numbers and location of sales
representatives, new and existing programs and services (and those under
development), prices and terms, customer service, integration processes
requirements, costs of providing service, support and equipment and equipment
maintenance costs. Confidential Information shall not include any information
that has become generally known to and available for use by the public other
than as a result of Executive's acts or omissions.
(b) Disclosure of any Confidential Information of the Company shall
not be prohibited if such disclosure is directly pursuant to a valid and
existing order of a court or other governmental body or agency within the United
States; provided, however, that (i) Executive shall first have given prompt
notice to the Company of any such possible or prospective disclosure (or
proceeding pursuant to which any such disclosure may result) and (ii) Executive
shall afford the Company a reasonable opportunity to prevent or limit any such
disclosure.
-3-
<PAGE>
(c) During the Employment Period and for a period of three (3) years
thereafter, Executive will preserve and protect as confidential all of the
Confidential Information known to Executive or at any time in Executive's
possession. In addition, during the Employment Period and at all times
thereafter, Executive will not disclose to any unauthorized person or use for
his own account any of such Confidential Information without the Manager's
written consent. Executive agrees to deliver to the Company at Executive's
Separation, or at any other time the Company may request in writing, all
memoranda, notes, plans, records, reports and other documents (and copies
thereof) containing or otherwise relating to any of the Confidential Information
(including, without limitation, all acquisition prospects, lists and contact
information) which he may then possess or have under his control. Executive
acknowledges that all such memoranda, notes, plans, records, reports and other
documents are and at all times will be and remain the property of the Company.
(d) Executive will fully comply with any agreement reasonably
required by any of the Company's Affiliates, business partners, suppliers or
contractors with respect to the protection of the confidential and proprietary
information of such entities.
3. Noncompetition and Nonsolicitation. Executive acknowledges that
in the course of his employment with the Company he has or will become familiar
with the Confidential Information concerning the Company and such Affiliates and
that his services will be of special, unique and extraordinary value to the
Company. Executive agrees that the Company has a protectable interest in the
Confidential Information acquired by Executive during the course of his
employment with the Company. Therefore, Executive agrees that:
(a) Noncompetition. For a period equal to the greater of (i) three
years from the date of this Agreement and (ii) so long as Executive is employed
or affiliated with the Company or any Affiliate and for an additional twelve
(12) months thereafter (the "Noncompete Period"), he shall not, directly or
indirectly own, manage, control, participate in, consult with, render services
for, or in any manner engage in the Business or any other business conducted by
the Company's Affiliates that Executive actively assisted or was involved with
at the time of Separation; provided that in the event of a termination of
employment by the Manager without Cause, the Manager may extend the Noncompete
Period for an additional six month term by giving notice to Executive within 120
days after the effective date of Separation.
(b) Nonsolicitation. So long as Executive is employed or affiliated
with the Company or any Affiliate and for an additional twenty-four (24) months
thereafter (the "Nonsolicitation Period"), Executive shall not directly or
indirectly through another Person (i) induce or attempt to induce any employee
of the Company or any of its Affiliates to leave the employ of the Company or
such Affiliate, or in any way interfere with the relationship between the
Company or any of its Affiliates and any employee thereof, (ii) hire any person
who was an employee of the Company or any of its Affiliates within one year
prior to the time of such hiring, (iii) service, solicit or accept any business
from any customer or licensee of the Company or its Affiliates for the purpose
of competing with the Company or its Affiliates in the Business, (iv) induce or
attempt to induce any owner of a site location, customer, supplier, licensee or
other
-4-
<PAGE>
business relation of the Company or any of its Affiliates to cease doing
business with the Company or such Affiliate or in any way interfere with the
relationship between any such customer, supplier, licensee or business relation
and the Company or any of its Affiliates, (v) directly or indirectly disclose to
any other person the name or address of any customer of the Company for the
purpose of competing with the Company or its Affiliates, or (vi) directly or
indirectly acquire or attempt to acquire an interest in any business relating to
the business of the Company or any of its Affiliates and with which, to
Executive's knowledge, the Company or any of its Affiliates has entertained
discussions or has requested and received information relating to the
acquisition of such business by the Company or any of its Affiliates in the
one-year period immediately preceding a Separation.
(c) Enforcement. If, at the time of enforcement of Section 2 or 3 of
this Agreement, a court holds that the restrictions stated herein are
unreasonable under circumstances then existing, the parties hereto agree that
the maximum duration, scope or geographical area reasonable under such
circumstances shall be substituted for the stated period, scope or area and that
the court shall be allowed to revise the restrictions contained herein to cover
the maximum duration, scope and area permitted by law. Because Executive's
services are unique and because Executive has access to Confidential
Information, the parties hereto agree that money damages would be an inadequate
remedy for any breach of this Agreement.
(d) Additional Acknowledgments. Executive acknowledges that the
provisions of this Section 3 are in consideration of: (i) employment with the
Company and (ii) additional good and valuable consideration as set forth in this
Agreement. Executive expressly agrees and acknowledges that the restrictions
contained in Sections 2 and 3 do not preclude Executive from earning a
livelihood, nor do they unreasonably impose limitations on Executive's ability
to earn a living. In addition, Executive agrees and acknowledges that the
potential harm to the Company of its non-enforcement outweighs any harm to the
Executive of its enforcement by injunction or otherwise. Executive acknowledges
that he has carefully read this Agreement and has given careful consideration to
the restraints imposed upon the Executive by this Agreement, and is in full
accord as to their necessity for the reasonable and proper protection of the
Confidential Information. Executive expressly acknowledges and agrees that each
and every restraint imposed by this Agreement is reasonable with respect to
subject matter, time period and geographical area.
GENERAL PROVISIONS
4. Definitions.
"Affiliate" or "Affiliates" of the Company means AppNet and all
Subsidiaries of AppNet.
"Cause" means (i) the commission by Executive of a felony or a crime
involving moral turpitude or the intentional commission of any other act or
omission involving dishonesty or fraud with respect to the Company or any of its
Affiliates or any of their customers or
-5-
<PAGE>
suppliers, (ii) conduct by Executive tending to bring the Company or any of its
Affiliates into substantial public disgrace or disrepute, (iii) substantial and
repeated failure by Executive to perform duties of the office held by Executive
as reasonably directed by the Manager not cured within ten (10) business days
after written notice thereof, (iv) gross negligence or willful misconduct by
Executive with respect to the Company or any of its Affiliates, (v) any material
breach of Section 2 or 3 of this Agreement by Executive not cured within ten
(10) business days after written notice thereof from the Company, or (vi) any
election by the Company not to renew the Employment Period on the third
anniversary of the date hereof or any renewal thereof. The failure of the
Company or the Executive to achieve budgetary objectives established by the
Board shall not in and of itself constitute Cause.
"Disability" means a physical or mental condition which, for a
continuous period of at least six (6) months has or will prevent the Executive
from performing his duties on a full time basis and in a professional and
consistent manner. Any dispute as to the Executive's Disability shall be
referred to and resolved by a licensed physician selected and approved by the
Company and the Executive.
"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.
"Subsidiary" means any corporation of which fifty percent (50%) or
more of the securities having ordinary voting power in electing the board of
directors are, at the time as of which any determination is being made, owned by
the Company either directly or through one or more Subsidiaries. The term
Subsidiary shall also include any joint venture arrangement between the Company
and any other entity.
5. Notices. Any notice or other communication which is required or
permitted hereunder shall be in writing and shall be deemed given if delivered
personally, sent by facsimile transmission with confirmation of transmission,
sent by registered or certified mail (postage prepaid, return receipt
requested), or by nationally recognized overnight courier service, as follows:
If to the Company:
________________________
c/o AppNet Systems, Inc.
6707 Democracy Blvd., Suite 1000
Bethesda, Maryland 20817
Attention: Ken S. Bajaj, President
Facsimile: (301) 581-2488
-6-
<PAGE>
with a copy to:
Tucker, Flyer & Lewis
1615 L Street, N.W., Suite 400
Washington, D.C. 20036
Attention: Arthur E. Cirulnick, Esq.
Facsimile: (202) 429-3231
If to the Executive:
________________________
________________________
________________________
Facsimile:______________
or to such other address as the person to whom notice is to be given may have
specified in a notice duly given to the sender as provided herein. Such notice
or other communication shall be deemed to have been given as of the date so
delivered, telefaxed, mailed or dispatched and, if given by any other means,
shall be deemed given only when actually received by the addressees.
6. Executive's Representations and Warranties. Executive represents
and warrants that he has full right and authority to enter into this Agreement
and fully perform his obligations hereunder, that he is not subject to any
non-competition agreement other than with the Company, and that his past,
present and reasonably anticipated future activities have not and will not
infringe on the proprietary rights of others. Executive further represents and
warrants that he is not obligated under any contract (including licenses,
covenants or commitments of any nature) or other agreement, or subject to any
judgment, decree or order or any court or administrative agency, which would
conflict with his obligation to use his best efforts to promote the interests of
the Company and its Affiliates or which would conflict with the business of the
Company or its Affiliates as conducted or proposed to be conducted. Neither the
execution nor delivery of this Agreement, nor the carrying on by Executive of
the Company's business as an officer or employee of the Company will conflict
with or result in a breach of the terms, conditions or provisions of, or
constitute a default under, any contract, covenant or instrument under which
Executive is now obligated.
7. General Provisions.
(a) Severability. Whenever possible, each provision of this
Agreement will be interpreted in such manner as to be effective and valid under
applicable law, but if any provision of this Agreement is held to be invalid,
illegal or unenforceable in any respect under any applicable law or rule in any
jurisdiction, such invalidity, illegality or unenforceability will not affect
any other provision or any other jurisdiction, but this Agreement will be
reformed, construed and enforced in such jurisdiction as if such invalid,
illegal or unenforceable provision had never been contained herein.
-7-
<PAGE>
(b) 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.
(c) Counterparts; Facsimile Transmission. This Agreement may be
executed in separate counterparts, each of which is deemed to be an original and
all of which taken together constitute one and the same agreement. This
Agreement may be executed and delivered by facsimile transmission.
(d) Successors and Assigns. Except as otherwise provided herein,
this Agreement shall bind and inure to the benefit of and be enforceable by
Executive and the Company and their respective successors and assigns.
(e) Choice of Law. All questions concerning the construction,
validity and interpretation of this Agreement and the exhibits hereto will be
governed by and construed in accordance with the internal laws of the State of
__________, without giving effect to any choice of law or conflict of law
provision or rule (whether of the State of __________ or any other jurisdiction)
that would cause the application of the laws of any jurisdiction other than the
State of __________.
(f) Remedies. Each of the parties to this Agreement will be entitled
to enforce its rights under this Agreement specifically, to recover damages and
costs (including attorney's fees) caused by any breach of any provision of this
Agreement and to exercise all other rights existing in its favor. The parties
hereto agree and acknowledge that money damages may not be an adequate remedy
for any breach of the provisions of this Agreement and that any party may in its
sole discretion apply to any court of law or equity of competent jurisdiction
(without posting any bond or deposit) for specific performance and/or other
injunctive relief in order to enforce or prevent any violations of the
provisions of this Agreement.
(g) Amendment and Waiver. The provisions of this Agreement may be
amended and waived only with the prior written consent of the Company (given by
the Manager) and the Executive.
(h) Business Days. If any time period for giving notice or taking
action hereunder expires on a day which is a Saturday, Sunday or holiday in the
state in which the Company's principal place of business is located, the time
period shall be automatically extended to the business day immediately following
such Saturday, Sunday or holiday.
(i) Termination. This Agreement (except for the provisions of
Sections 1(a) and 1(b)) shall survive a Separation and shall remain in full
force and effect after such Separation.
-8-
<PAGE>
IMPORTANT: THIS AGREEMENT CONTAINS VERY IMPORTANT TERMS GOVERNING YOUR
EMPLOYMENT WITH THE COMPANY. SECTION 3 CONTAINS PROVISIONS WHICH AFFECT YOUR
ABILITY TO TAKE CERTAIN ACTIONS FOLLOWING THE TERMINATION OF YOUR EMPLOYMENT.
YOU SHOULD FEEL FREE TO SEEK ADVICE FROM YOUR ATTORNEY REGARDING ANY MATTER
RELATING TO THIS AGREEMENT. BY EXECUTING THIS AGREEMENT, YOU ARE AFFIRMING THAT
YOU HAVE HAD THE OPPORTUNITY TO REVIEW THIS AGREEMENT AND TO CONSULT WITH YOUR
ATTORNEY IF YOU SO DESIRED, THAT YOU UNDERSTAND THE MEANING AND SIGNIFICANCE OF
ALL OF ITS PROVISIONS, THAT NO REPRESENTATIONS OR PROMISES HAVE BEEN MADE TO YOU
REGARDING YOUR EMPLOYMENT WHICH ARE NOT SET FORTH IN THIS AGREEMENT, AND THAT
YOU ARE FREELY SIGNING THIS AGREEMENT TO OBTAIN EMPLOYMENT WITH THE COMPANY.
[Execution Page Follows]
-9-
<PAGE>
IN WITNESS WHEREOF, the parties hereto have executed this Senior
Management Agreement on the date first written above.
--------------------------------------------
By:
----------------------------------------
Name:
---------------------------------------
Title:
--------------------------------------
EXECUTIVE:
--------------------------------------------
[Name]
-10-
<PAGE>
EXHIBIT 23.1
Consent of Arthur Andersen LLP
As independent public accountants, we hereby consent to the use of our
reports (and to all references to our Firm) included in or made a part of
this prospectus.
/s/ ARTHUR ANDERSEN LLP
-----------------------
March 26, 1999 ARTHUR ANDERSEN LLP
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