<PAGE>
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON MARCH 8, 2000
REGISTRATION NO. 333-31194
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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
------------------------
AMENDMENT NO. 1
TO
FORM S-4
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
------------------------
BREAKAWAY SOLUTIONS, INC.
(Exact name of registrant as specified in its charter)
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<S> <C> <C>
DELAWARE 7389 04-3285165
(State or other jurisdiction of (Primary Standard Industrial (I.R.S. Employer
incorporation or organization) Classification Code Number) Identification Number)
</TABLE>
50 ROWES WHARF
BOSTON, MASSACHUSETTS 02110
(617) 960-3400
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(Address, including zip code, and telephone number, including area code, of
registrant's principal executive offices)
--------------------------
GORDON BROOKS
PRESIDENT AND CHIEF EXECUTIVE OFFICER
BREAKAWAY SOLUTIONS, INC.
50 ROWES WHARF
BOSTON, MASSACHUSETTS 02110
(617) 960-3400
(NAME, ADDRESS, INCLUDING ZIP CODE, AND TELEPHONE NUMBER, INCLUDING AREA CODE,
OF AGENT FOR SERVICE)
--------------------------
COPIES TO:
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DAVID E. REDLICK, ESQ. JEFFREY C. HADDEN, P.C.
THOMAS L. BARRETTE, JR., ESQ. JOSEPH L. JOHNSON III, P.C.
HALE AND DORR LLP GOODWIN, PROCTER & HOAR LLP
60 STATE STREET EXCHANGE PLACE
BOSTON, MASSACHUSETTS 02109 BOSTON, MASSACHUSETTS 02109
TELEPHONE: (617) 526-6000 TELEPHONE: (617) 570-1000
TELECOPY: (617) 526-5000 TELECOPY: (617) 523-1231
</TABLE>
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APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO PUBLIC:
Upon consummation of the business combination described herein.
If the securities being registered on this Form are to be offered in
connection with the formation of a holding company and there is compliance with
General Instruction G, 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, 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. / / ______.
------------------------
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 COMMISSION, ACTING PURSUANT TO SAID SECTION 8(A),
MAY DETERMINE.
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CONSENT SOLICITATION STATEMENT/PROSPECTUS
EGGROCK PARTNERS, INC.
3 CLOCK TOWER PLACE
FOURTH FLOOR
MAYNARD, MA 01754
March 10, 2000
Dear Eggrock Stockholder:
The boards of directors of Eggrock Partners, Inc. and Breakaway
Solutions, Inc. have unanimously approved the merger of Eggrock with a
wholly-owned subsidiary of Breakaway. The accompanying consent solicitation
statement/prospectus contains detailed information concerning the proposed
merger and the reasons for your board's recommendation. A copy of the merger
agreement setting forth the terms of the merger appears as Annex A to the
consent solicitation statement/prospectus.
Under the terms of the merger, each outstanding share of Eggrock capital
stock will be converted into the right to receive approximately 0.51185008 of a
share of Breakaway common stock and outstanding options to purchase Eggrock
common stock will be converted into options to purchase Breakaway common stock
on the same basis. You will receive cash in lieu of any fractional share of
Breakaway common stock which you would otherwise receive in the merger. In order
to secure indemnification obligations under the merger agreement, 10% of the
Breakaway shares that you and the other Eggrock stockholders would otherwise
receive will be placed into escrow for one year. If the merger is completed, the
Eggrock stockholders will own approximately 12% of the total outstanding shares
of Breakaway common stock and will have no further equity interest in Eggrock.
We are asking holders of Eggrock voting common stock and Eggrock preferred
stock to vote on adoption of the merger agreement by executing the enclosed
written consent in lieu of a meeting. Prior to mailing this consent solicitation
statement/prospectus, holders of approximately 69% of Eggrock's outstanding
voting capital stock agreed to consent to adopt the merger agreement. The
adoption of the merger agreement must be approved by holders of a majority of
Eggrock's outstanding voting stock and, therefore, these stockholders have
sufficient voting power to assure adoption of the merger agreement.
Although holders of Eggrock's non-voting common stock are not entitled to
vote on the merger, they do have the right under Delaware law, to require an
appraisal of their shares and to demand the payment of fair value for their
shares. These rights, generally known as "appraisal rights," are described in
detail in this document. In addition, a copy of Section 262 of the Delaware
General Corporation Law, which governs appraisal rights, is attached as Annex D
to this consent solicitation statement/ prospectus. We urge you to read both the
summary and the statutory provision carefully. If you wish to demand an
appraisal of your shares, you must strictly comply with the statutory
requirements.
Under the merger agreement, Breakaway is not obligated to proceed with the
merger if stockholders holding more than 10% of the outstanding shares of
capital stock of Eggrock have demanded appraisal with respect to their shares.
Accordingly, we are requesting that holders of non-voting common stock sign and
return the enclosed waiver in order to inform us that they do not plan to
exercise their appraisal rights. You should be aware, however, that failure to
return a waiver will not, in itself, constitute a demand for appraisal of your
shares.
The boards of directors of Eggrock and Breakaway are furnishing you this
document to provide you with important information about the merger and about
Breakaway. You should read this information carefully prior to making any
decision regarding adoption of the merger agreement or exercise of your
appraisal rights.
Sincerely,
/s/ Maureen Ellenberger
Maureen Ellenberger
IMPORTANT REMINDER: IF YOU CHOOSE TO WAIVE YOUR RIGHT TO DEMAND AN APPRAISAL OF
YOUR SHARES UNDER DELAWARE LAW, PLEASE SIGN THE ENCLOSED WAIVER AND RETURN IN
THE ACCOMPANYING POSTAGE PAID ENVELOPE.
<PAGE>
SUBJECT TO COMPLETION, DATED MARCH 8, 2000.
THE INFORMATION IN THIS CONSENT SOLICITATION STATEMENT/PROSPECTUS IS NOT
COMPLETE AND MAY BE CHANGED. WE MAY NOT ISSUE THESE SECURITIES UNTIL THE
REGISTRATION STATEMENT FILED WITH THE SECURITIES AND EXCHANGE COMMISSION IS
EFFECTIVE. THIS CONSENT SOLICITATION STATEMENT/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>
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BREAKAWAY SOLUTIONS, INC. EGGROCK PARTNERS, INC.
50 Rowes Wharf 3 Clock Tower Place, Fourth Floor
Boston, MA 02110 Maynard, MA 01754
</TABLE>
CONSENT SOLICITATION STATEMENT/PROSPECTUS
Breakaway Solutions, Inc. has entered into a merger agreement with Eggrock
Partners, Inc. The merger agreement provides that a wholly-owned subsidiary of
Breakaway will merge with and into Eggrock, with Eggrock surviving as a
wholly-owned subsidiary of Breakaway, following the merger.
In the merger, Eggrock stockholders will receive approximately 0.51185008 of
a share of Breakaway common stock for each share of Eggrock capital stock they
own and will receive cash in lieu of any fractional share of Breakaway common
stock which they would otherwise receive in the merger.
Breakaway is providing this consent solicitation statement/prospectus to
Eggrock's stockholders with respect to the shares of common stock of Breakaway
to be issued in the merger in exchange for outstanding shares of Eggrock capital
stock.
Eggrock is providing this consent solicitation statement/prospectus to its
stockholders in connection with the solicitation of an action by written consent
adopting the merger agreement and the decision by its stockholders as to whether
to exercise their appraisal rights under Delaware corporate law.
Breakaway common stock is quoted on the Nasdaq National Market under the
symbol "BWAY." On March 7, 2000, its last reported price was $149.50 per share
(without giving effect to the recently declared stock split).
------------------------
THE PROPOSED MERGER IS A COMPLEX TRANSACTION. PLEASE READ AND CONSIDER
CAREFULLY THIS CONSENT SOLICITATION STATEMENT/PROSPECTUS IN ITS ENTIRETY,
INCLUDING THE MATTERS DISCUSSED UNDER "RISK FACTORS" BEGINNING ON PAGE 6.
---------------------
NEITHER THE SECURITIES AND EXCHANGE COMMISSION NOR ANY STATE SECURITIES
REGULATOR HAS APPROVED OR DISAPPROVED THE SECURITIES TO BE ISSUED PURSUANT TO
THIS CONSENT SOLICITATION STATEMENT/PROSPECTUS OR DETERMINED IF THIS CONSENT
SOLICITATION STATEMENT/PROSPECTUS IS TRUTHFUL OR COMPLETE. ANY REPRESENTATION TO
THE CONTRARY IS A CRIMINAL OFFENSE.
This consent solicitation statement/prospectus and action by written consent
are first being mailed to stockholders of Eggrock on or about March 10, 2000.
<PAGE>
TABLE OF CONTENTS
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PAGE
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SUMMARY..................................................... 1
SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS........... 5
TRADEMARKS.................................................. 5
RISK FACTORS................................................ 6
Eggrock stockholders may never receive 10% of the
Breakaway common stock.................................. 6
Breakaway may face challenges in integrating Breakaway and
Eggrock and, as as a result, may not realize the
expected benefits of the anticipated merger............. 6
No adjustment to the merger terms will be made as a result
of changes in the market price of Breakaway's common
stock................................................... 6
Breakaway's stock price is volatile, and the value of the
Breakaway common stock issued in the merger will depend
on its market price at the time of the merger........... 6
Significant merger-related charges against earnings will
increase Breakaway's losses in the quarter in which
Breakaway consummates the merger and during the
post-merger integration period.......................... 7
Clients of Breakaway and Eggrock may delay or cancel
contracts as a result of concerns over the merger....... 7
Breakaway's future success is uncertain because Breakaway
has significantly changed its business.................. 7
Breakaway's business will suffer if growing enterprises do
not adopt and accept application hosting services....... 8
Breakaway's business will suffer if growing enterprises do
not accept e-business solutions......................... 8
Breakaway has a history of operating losses, expects to
incur losses in the future and will not be successful
unless it can reverse this trend........................ 8
Breakaway plans to expand rapidly; if Breakaway cannot
manage its growth successfully, its growth may slow or
stop.................................................... 8
Breakaway relies on a small number of clients for most of
its revenues; Breakaway's revenues will decline
significantly if it cannot keep or replace these
clients................................................. 8
Breakaway's quarterly revenues and operating results are
likely to vary, which may cause the market price of
Breakaway common stock to decline....................... 9
Breakaway's growth could be limited if it is unable to
attract and retain qualified personnel.................. 9
Breakaway may lose money on fixed-fee contracts and
performance-based contracts............................. 9
Breakaway's growth strategy will fail if it is unable to
open new regional offices successfully.................. 10
Breakaway's international expansion plans may be costly
and risky to implement, and may not prove successful.... 10
If Breakaway's efforts to develop brand awareness are not
successful, Breakaway will not increase revenues as
planned................................................. 10
Breakaway generates a significant portion of its revenues
from services related to packaged software applications
of a limited number of vendors; Breakaway would
experience a reduction in revenues if any of those
vendors ceased doing business with Breakaway............ 11
Breakaway's markets are highly competitive and Breakaway's
failure to compete successfully will limit its ability
to retain and increase its market share................. 11
If Breakaway is unable to reuse software code and
methodologies, Breakaway may not be able to deliver its
services rapidly and cost-effectively................... 12
Breakaway depends on a limited number of key personnel who
have recently joined Breakaway and who Breakaway may not
be able to retain....................................... 12
Breakaway may need additional capital, which may not be
available to it, and which, if raised, may dilute your
ownership interest in Breakaway......................... 12
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PAGE
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Breakaway may undertake additional acquisitions which may
limit its ability to manage and maintain its business,
may result in adverse accounting treatment and may be
difficult to integrate into its business................ 12
Breakaway may not be able to deliver its application
hosting services if third parties do not provide
Breakaway with key components of its hosting
infrastructure.......................................... 13
Intellectual property infringement claims against
Breakaway, even without merit, could cost a significant
amount of money to defend and may divert management's
attention............................................... 13
Breakaway may not be able to protect its intellectual
property and proprietary rights......................... 13
Breakaway's business may suffer if growth in the use of
the Internet declines................................... 13
MARKET PRICE INFORMATION.................................... 14
THE MERGER.................................................. 15
Background of the Merger.................................. 15
Joint Reasons for the Merger.............................. 16
Recommendation of the Board of Directors of Breakaway;
Breakaway's Reasons for the Merger...................... 17
Recommendation of the Board of Directors of Eggrock;
Eggrock's Reasons for the Merger........................ 17
Opinion of Financial Advisor to Breakaway................. 18
Arrangements with Key Employees........................... 22
Accounting Treatment of the Merger........................ 22
Governmental and Regulatory Approvals..................... 22
Material United States Federal Income Tax Considerations
of the Eggrock Merger................................... 22
Nasdaq National Market Quotation.......................... 25
Resales of Breakaway Common Stock Issued in Connection
with the Merger; Affiliate Agreements................... 25
CONSENT IN LIEU OF MEETING; WAIVER OF APPRAISAL RIGHTS...... 26
THE MERGER AGREEMENT........................................ 30
General................................................... 30
Conversion of Shares...................................... 30
Creation of Escrow........................................ 30
Treatment of Eggrock Stock Options........................ 30
Exchange of Stock Certificates............................ 31
Representations and Warranties............................ 32
Conduct of Eggrock Before the Completion of the Merger.... 33
Indemnification of Breakaway by Eggrock Stockholders...... 34
Indemnification of Eggrock Stockholders by Breakaway...... 35
Conditions to Obligations to Effect Merger................ 35
Termination of the Merger Agreement....................... 36
Payment of Termination Fee................................ 37
Amendment and Waiver...................................... 37
OTHER AGREEMENTS............................................ 38
Voting Agreement.......................................... 38
Escrow Agreement.......................................... 38
Registration Rights Agreement............................. 38
COMPARISON OF CAPITAL STOCK................................. 39
Description of Breakaway Capital Stock.................... 39
Breakaway Common Stock.................................... 39
Breakaway Preferred Stock................................. 39
Transfer Agent and Registrar.............................. 40
</TABLE>
ii
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Description of Eggrock Capital Stock...................... 40
Eggrock Common Stock...................................... 40
Eggrock Preferred Stock................................... 40
Comparison of Certain Rights.............................. 41
Special Meeting of Stockholders........................... 41
Action by Written Consent of Stockholders................. 41
Amendment of Charter and Bylaws........................... 42
Cumulative Voting......................................... 42
Classification of the Board of Directors.................. 42
Removal of Directors...................................... 42
Limitation of Directors' Liability........................ 42
Indemnification of Directors, Officers and Others......... 42
DESCRIPTION OF BREAKAWAY.................................... 43
Introduction.............................................. 43
Industry Background....................................... 43
The Breakaway Solution.................................... 45
Breakaway Strategy........................................ 46
Breakaway Services........................................ 47
Breakaway Clients......................................... 49
Breakaway Representative Client Engagements............... 49
Breakaway Professional Environment........................ 51
Breakaway Marketing and Sales............................. 51
Breakaway Competition..................................... 52
Breakaway Intellectual Property........................... 53
Breakaway Employees....................................... 53
Breakaway Facilities...................................... 53
Breakaway Legal Proceedings............................... 53
SELECTED CONSOLIDATED FINANCIAL DATA........................ 54
BREAKAWAY SELECTED CONSOLIDATED FINANCIAL DATA.............. 55
EGGROCK PARTNERS, INC. SELECTED FINANCIAL DATA.............. 56
COMPARATIVE PER SHARE DATA.................................. 57
BREAKAWAY MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS....................... 58
Overview.................................................. 58
Acquisitions.............................................. 60
Results of Operations..................................... 61
Liquidity and Capital Resources........................... 63
Market Risk............................................... 64
Year 2000 Readiness Disclosure............................ 64
BREAKAWAY DIRECTORS AND EXECUTIVE OFFICERS.................. 65
Executive Officers........................................ 67
Election of Directors..................................... 67
Compensation of Directors................................. 67
EXECUTIVE OFFICER COMPENSATION.............................. 68
Option Grants in Last Fiscal Year......................... 68
Aggregate Option Exercises in Last Fiscal Year and Fiscal
Year-End Option Values.................................. 69
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iii
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Benefit Plans............................................. 70
Employment Arrangements................................... 72
Compensation Committee Interlocks and Insider
Participation........................................... 74
RELATED PARTY TRANSACTIONS.................................. 75
Internet Capital Group.................................... 75
Acquisitions.............................................. 75
Frank Selldorff........................................... 76
Gordon Brooks............................................. 76
Employment Arrangements................................... 76
Stock Options............................................. 77
Affiliate Transaction Policy.............................. 77
BREAKAWAY SECURITY OWNERSHIP OF PRINCIPAL STOCKHOLDERS AND
MANAGEMENT................................................ 78
EGGROCK BUSINESS............................................ 79
EGGROCK MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS....................... 80
Overview.................................................. 80
Results of Operations..................................... 82
Year Ended December 31, 1999 Compared to Year Ended
December 31, 1998....................................... 82
Provision for Income Taxes................................ 82
Liquidity and Capital Resources........................... 83
Market Risk............................................... 83
Year 2000 Readiness Disclosure............................ 83
LEGAL MATTERS............................................... 84
INTERESTS OF COUNSEL........................................ 84
EXPERTS..................................................... 84
CHANGES IN INDEPENDENT AUDITORS............................. 85
WHERE YOU CAN FIND MORE INFORMATION......................... 85
INDEX TO FINANCIAL STATEMENTS OF BREAKAWAY.................. F-1
FINANCIAL STATEMENTS OF APPLICA CORPORATION................. F-24
FINANCIAL STATEMENTS OF WPL LABORATORIES, INC............... F-32
FINANCIAL STATEMENTS OF WEB YES, INC........................ F-42
FINANCIAL STATEMENTS OF EGGROCK............................. F-52
ANNEX A. AGREEMENT AND PLAN OF MERGER....................... A-1
ANNEX B. ESCROW AGREEMENT................................... B-1
ANNEX C. OPINION OF BREAKAWAY'S FINANCIAL ADVISOR, MORGAN
STANLEY & CO. INCORPORATED................................ C-1
ANNEX D. SECTION 262 OF THE GENERAL CORPORATION LAW OF THE
STATE OF DELAWARE......................................... D-1
</TABLE>
iv
<PAGE>
SUMMARY
THE FOLLOWING IS A SUMMARY OF SOME OF THE INFORMATION CONTAINED IN THIS
CONSENT SOLICITATION STATEMENT/ PROSPECTUS. THIS SUMMARY MAY NOT CONTAIN A
COMPLETE STATEMENT OF ALL THE IMPORTANT ELEMENTS OF THE MERGER, OR OF THOSE
WHICH YOU MAY BELIEVE TO BE IMPORTANT, AND IS QUALIFIED IN ITS ENTIRETY BY THE
MORE DETAILED INFORMATION APPEARING ELSEWHERE IN THIS CONSENT SOLICITATION
STATEMENT/PROSPECTUS AND THE ACCOMPANYING INFORMATION AND DOCUMENTS.
THE COMPANIES (PAGES 43 AND 79)
BREAKAWAY SOLUTIONS, INC.
50 Rowes Wharf
Boston, Massachusetts 02110
(617) 960-3400
Breakaway is a full service provider of e-business solutions that allow
growing enterprises to capitalize on the power of the Internet to reach and
support customers and markets. Breakaway has designed its services specifically
for companies or divisions of larger companies that have sales of up to
$1 billion per year and new and emerging Internet-based businesses.
EGGROCK PARTNERS, INC.
3 Clock Tower Place
Fourth Floor
Maynard, MA 01754
(978) 461-7800
Eggrock is a full service consulting and service integration firm that
focuses on delivering customer-centered business solutions to emerging
enterprises. Eggrock assists growing companies in selecting and implementing
software applications that will allow companies to operate their business more
effectively through use of the Internet.
THE MERGER (PAGE 15 AND ANNEX A)
Through the merger, Eggrock will become a wholly-owned subsidiary of
Breakaway. Eggrock stockholders will receive Breakaway common stock in exchange
for their shares of Eggrock capital stock. The merger agreement is attached to
this consent solicitation statement/prospectus as Annex A. We encourage you to
read the merger agreement carefully and completely as it is the legal document
that governs the merger.
VOTE REQUIRED (PAGE 26)
Adoption of the merger agreement requires the approval of a majority of the
outstanding shares of Eggrock voting common stock and the oustanding shares of
Eggrock preferred stock, voting together as a single class. Eggrock's directors
and their affiliates hold substantially all of the outstanding shares of Eggrock
capital stock which are entitled to vote. Approval of the merger agreement does
not require the vote of Breakaway's stockholders.
The three holders of Eggrock voting common stock, who collectively
beneficially own approximately 69% of the outstanding voting power of Eggrock,
have already agreed to approve the merger agreement. These holders control
sufficient voting power to assure adoption of the merger agreement.
EGGROCK STOCKHOLDERS' RIGHT OF APPRAISAL (PAGE 26 AND ANNEX D)
Under Delaware law, Eggrock stockholders who strictly comply with procedures
of Section 262 of the Delaware General Corporation Law will have the right to
receive the "fair value" of their shares in cash rather than receiving Breakaway
common stock, as specified in the merger agreement. "Fair value" will be
determined by a Delaware court and may be more than, the same as, or less than
the value of the consideration to be paid to other Eggrock stockholders. Holders
of Eggrock common stock who consent in writing to the merger will not be
entitled to demand appraisal of their shares under Delaware law. In addition to
reading the section of this document entitled "Appraisal Rights," you should
carefully read Annex D, which sets forth Section 262 of the Delaware General
Corporation Law.
1
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GOVERNMENTAL AND REGULATORY APPROVALS (PAGE 23)
We are not aware of any governmental or regulatory approvals required for
consummation of the merger.
BOARD APPROVAL (PAGE 17)
BREAKAWAY. Breakaway's board of directors unanimously voted to approve the
merger and the merger agreement and the proposed issuance of Breakaway common
stock in connection with the merger.
EGGROCK. Eggrock's board of directors unanimously declared the transaction
advisable and voted to approve the merger agreement. The Eggrock board of
directors believes that the merger is advisable and in your best interest and
recommends that holders of voting stock consent to the adoption of the merger
agreement.
WHAT HOLDERS OF EGGROCK CAPITAL STOCK WILL RECEIVE (PAGE 30)
Each share of Eggrock capital stock will be exchanged for approximately
0.51185008 of a share of Breakaway common stock. Breakaway will pay cash,
without interest, instead of issuing any fractional shares.
Eggrock stockholders and option holders will receive 7,272,000 shares of
Breakaway common stock in the merger and will hold approximately 12% of the
outstanding capital stock of Breakaway.
STOCK SPLIT
On March 6, 2000, the board of directors of Breakaway approved a two-for-one
stock split, effected through a stock dividend of Breakaway common stock. As a
result, on or about March 23, 2000, each holder of Breakaway common stock as of
March 7, 2000 will receive a dividend of one share of common stock for every
share owned. The merger agreement provides that the conversion ratio will
automatically adjust to take into account any stock splits or stock dividends.
All of the references to shares of Breakaway common stock in this consent
solicitation statement/prospectus, including the number of shares you will
receive in the merger, have been adjusted to reflect the stock split unless
otherwise indicated.
CONDITIONS TO THE MERGER (PAGE 35)
The completion of the merger depends upon satisfying a number of conditions,
including:
- the approval of Eggrock stockholders;
- holders of no more than 10% of the outstanding shares of Eggrock capital
stock may have demanded appraisal with respect to their shares;
- in the period prior to the closing, (a) no more than 10% of Eggrock's
billable personnel may have resigned or been terminated and (b) contracts
providing for fees to Eggrock of no more than $2,500,000 during the year
2000 may have been cancelled;
- the receipt of legal opinions regarding the treatment of the merger as a
reorganization and other matters related to the merger; and
- other customary contractual conditions specified in the merger agreement.
Other than stockholder approval, all of the conditions to the merger may be
waived by the party entitled to assert the condition. If any of these conditions
are not satisfied or waived, then one or both of the parties will not be
obligated to close the merger.
INDEMNIFICATION AND RELATED ESCROW AGREEMENT (PAGES 35 AND 38 AND ANNEX B)
Under the terms of the merger agreement, the Eggrock stockholders will
severally indemnify Breakaway against damages resulting from:
- any misrepresentation, breach of warranty or failure to perform any
covenant or agreement of Eggrock contained in the merger agreement; or
- any failure of an Eggrock stockholder to have good, valid and marketable
title to the shares issued in his, her or its name.
The merger agreement provides that Breakaway may not bring an
indemnification
2
<PAGE>
claim until its damages exceed $575,000, and then only for the amount in excess
of $575,000.
At the closing, Breakaway will deposit 10% of the shares of Breakaway common
stock that the Eggrock stockholders would otherwise receive into escrow for one
year. These shares will be Breakaway's sole remedy for satisfying any
indemnification claims it may have and effectively cap the Eggrock stockholders'
obligation to indemnify Breakaway at the value of the escrow shares. At the
first anniversary of the merger closing, after Breakaway has been indemnified
for any claims it has brought and shares covering any pending claims have been
reserved, the shares remaining in escrow, if any, will be distributed to the
former Eggrock stockholders in proportion to their relative holdings. After that
point, Breakaway will have no further right to be indemnified by the former
Eggrock stockholders.
By consenting to the merger or deciding not to exercise your appraisal
rights, you are effectively agreeing to this indemnification arrangement, the
related escrow arrangement and the appointment of Maureen Ellenberger as your
representative in handling matters related to indemnification and the escrow. We
urge you to carefully read the more detailed summary of these matters that
appears later in this consent solicitation statement/prospectus in the sections
entitled "The Merger Agreement--Indemnification of Breakaway by Eggrock
Stockholders" and "Other Agreements--Escrow Agreement."
The merger agreement also provides that Breakaway will indemnify the Eggrock
stockholders against damages resulting from any misrepresentation, breach of
warranty or failure to perform any covenant or agreement of Breakaway in the
merger agreement, up to an aggregate maximum of $125,000,000. The merger
agreement also provides that the Eggrock stockholders may not bring an
indemnification claim until their damages exceed $575,000, and then only for the
amount in excess of $575,000.
TERMINATION OF THE MERGER AGREEMENT (PAGE 36)
Breakaway or Eggrock may terminate the merger agreement under specified
circumstances, including, among others, the following:
- by mutual consent;
- upon a breach of representations and warranties; or
- if the merger is not completed on or before July 31, 2000.
In addition, under some circumstances, termination of the merger agreement
may lead to payment of a $150,000 termination fee by either Breakaway or
Eggrock.
OPINION OF FINANCIAL ADVISOR (PAGE 18 AND ANNEX C)
In deciding to approve the merger, Breakaway's board of directors considered
many factors, including an opinion of Morgan Stanley & Co. Incorporated as to
the fairness of the consideration to be paid by Breakaway for Eggrock from a
financial point of view to Breakaway.
ARRANGEMENTS WITH KEY EMPLOYEES (PAGE 22)
The three founders of Eggrock, Maureen Ellenberger, Vijay Manwani and
Michael Mordas, and other members of Eggrock's senior management have entered
into restricted stock agreements, pursuant to which 50% of the Breakaway common
stock to be received by these individuals in the merger will be subject to
vesting requirements over a period of four years. As a result, if any of these
individuals' employment is terminated following the merger, that individual may
forfeit his or her unvested shares, depending on the circumstances of the
termination. In addition, Ms. Ellenberger, Mr. Manwani and Mr. Mordas each
entered into at-will employment arrangements with Breakaway, which will be
effective as of the closing of the merger. These employment agreements provide
for a severance payment equal to six months salary if any of these individuals
are terminated without cause or terminate their employment with good reason, as
defined in the agreement.
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ACCOUNTING TREATMENT (PAGE 22)
We will account for the transaction as a purchase of Eggrock by Breakaway
for financial reporting and accounting purposes.
MATERIAL UNITED STATES FEDERAL INCOME TAX CONSIDERATIONS OF THE EGGROCK MERGER
(PAGE 22)
We intend the merger to qualify as a reorganization under the Internal
Revenue Code. If the merger qualifies as a reorganization, no gain or loss
generally will be recognized by Eggrock stockholders for federal income tax
purposes on the exchange of shares of Eggrock capital stock solely for shares of
Breakaway common stock.
Tax matters are very complicated, and the tax consequences of the merger to
you will depend on the facts of your own situation. You should consult your tax
advisor for a full understanding of the tax consequences of the merger to you.
HOW THE RIGHTS OF EGGROCK STOCKHOLDERS WILL DIFFER AS A BREAKAWAY STOCKHOLDER
(PAGE 41)
Your rights as stockholders of Breakaway after the merger will be governed
by Breakaway's charter and bylaws. Those rights differ from your rights as
Eggrock stockholders under Eggrock's charter and bylaws. You can find a detailed
description of these differences in the section entitled "Comparison of Capital
Stock."
FORWARD-LOOKING STATEMENTS MAY PROVE INACCURATE (PAGE 5)
We have made forward-looking statements in this consent solicitation
statement/prospectus that are subject to risks and uncertainties. Forward-
looking statements include the information concerning possible or assumed future
results of operations of Breakaway and/or Eggrock. Also, when we use words such
as "anticipate," "believe," "could," "estimate," "expect," "intend," "may,"
"should," "will," and "would", we are making forward-looking statements.
Stockholders should note that many factors could affect the future financial
results of Breakaway and Eggrock, and could cause these results to differ
materially from those expressed in our forward-looking statements. These factors
include the following:
- the risk that Breakaway encounters greater than expected costs and
difficulties related to combining Eggrock's business with Breakaway's
business;
- changes in laws or regulations, including increased government regulation
of the Internet, and privacy related issues;
- increased competitive pressures from competitors of Breakaway and Eggrock;
- the risk that Breakaway will be unable to retain certain customers of
Eggrock who may terminate their relationship with Eggrock as a result of
the merger or any other reason; and
- the risk that our analyses of these statements could be incorrect or
incomplete and/or that the strategies developed to address them could be
unsuccessful.
BREAKAWAY PRICE INFORMATION (PAGE 14)
Shares of Breakaway common stock are quoted on the Nasdaq National Market.
On January 26, 2000, the last full trading day prior to the public announcement
of the proposed merger, Breakaway common stock closed at $69.375 per share. On
March 7, 2000, Breakaway common stock closed at $149.50 per share (not adjusted
for the stock split). Eggrock's capital stock is not publicly traded.
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SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS
Breakaway and Eggrock make forward-looking statements in this consent
solicitation statement/ prospectus that involve substantial risks and
uncertainties. In some cases you can identify these statements by
forward-looking words such as "anticipate," "believe," "could," "estimate,"
"expect," "intend," "may," "should," "will," and "would" or similar words. You
should read statements that contain these words carefully because they discuss
our future expectations, contain projections of our future results of operations
or of our financial position or state other "forward-looking" information. We
believe that it is important to communicate our future expectations to our
investors. However, there may be events in the future that we are not able to
accurately predict or control. The factors listed in the section captioned "Risk
Factors," as well as any cautionary language elsewhere in this consent
solicitation statement/prospectus, provide examples of risks, uncertainties and
events that may cause our actual results to differ materially from the
expectations we describe in our forward-looking statements. These disclosures
are not intended to be exhaustive. Before you vote to adopt the merger agreement
or decide whether or not to exercise your appraisal rights, you should be aware
that the occurrence of the events described in these risk factors and elsewhere
in this consent solicitation statement/prospectus could have an adverse effect
on our business, results of operations and financial position.
TRADEMARKS
This consent solicitation statement/prospectus contains trademarks of
Breakaway and Eggrock and may contain other trademarks which are the property of
their respective owners.
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RISK FACTORS
YOU SHOULD CAREFULLY CONSIDER THE FOLLOWING RISK FACTORS RELATING TO THE
MERGER BEFORE YOU DECIDE WHETHER TO CONSENT TO THE ADOPTION OF THE MERGER
AGREEMENT AND/OR TO WAIVE YOUR RIGHT TO DEMAND APPRAISAL OF YOUR SHARES. YOU
SHOULD ALSO CONSIDER THE OTHER INFORMATION IN THIS CONSENT SOLICITATION
STATEMENT/PROSPECTUS.
RISKS RELATED TO THE MERGER
EGGROCK STOCKHOLDERS MAY NEVER RECEIVE 10% OF THE BREAKAWAY COMMON STOCK
Ten percent of the Breakaway common stock that would otherwise be received
by Eggrock stockholders in the merger will be placed in escrow to secure the
indemnification obligations of the Eggrock stockholders under the merger
agreement. The escrow will terminate one year after the date of the merger. If
Breakaway makes no claims for indemnification, all of the shares held in escrow
will be released to the Eggrock stockholders. However, Breakaway may recover
damages out of this escrow resulting from breaches by Eggrock of
representations, warranties, and covenants contained in the merger agreement. In
that event, Eggrock stockholders may never receive all or some portion of the
Breakaway common stock placed in escrow.
BREAKAWAY MAY FACE CHALLENGES IN INTEGRATING BREAKAWAY AND EGGROCK AND, AS A
RESULT, MAY NOT REALIZE THE EXPECTED BENEFITS OF THE ANTICIPATED MERGER
Integrating the operations and personnel of Breakaway and Eggrock will be a
complex process, and Breakaway cannot be certain that the integration will be
completed rapidly or will achieve the anticipated benefits of the merger. The
successful integration of our companies will require, among other things,
integration of our service personnel, sales and marketing groups, hosting
infrastructure and offerings and coordination of our development efforts. The
diversion of the attention of our management and any difficulties encountered in
the process of combining our companies could cause the disruption of, or a loss
of momentum in, the activities of the combined company's business. Further, the
process of combining our companies could negatively affect employee morale and
the ability of the combined company to retain some of its key employees after
the merger. In addition, the announcement and completion of the merger could
cause customers to delay or change orders for products as a result of
uncertainty over the integration of our service offerings and software products.
The inability to successfully integrate the operations and personnel of
Breakaway and Eggrock, or any significant delay in achieving integration, could
have a material adverse effect on the business, financial condition and
operating results of the combined company after the merger.
NO ADJUSTMENT TO THE MERGER TERMS WILL BE MADE AS A RESULT OF CHANGES IN THE
MARKET PRICE OF BREAKAWAY'S COMMON STOCK
Under the merger agreement, the number of shares of Breakaway common stock
that Eggrock stockholders will receive is unaffected by the share price of
Breakaway common stock. Increases in the value of Breakaway common stock will
result in a higher price being paid by Breakaway for Eggrock and more value
received by Eggrock stockholders in the merger. Decreases in the value of
Breakaway common stock will result in a lower price being paid by Breakaway for
Eggrock and less value received by Eggrock stockholders in the merger. You will
not know the value of Breakaway common stock to be issued in the merger at the
time you execute the written consent or decide whether to exercise your
appraisal rights. Under the merger agreement, neither Breakaway nor Eggrock will
have the right to terminate the merger agreement as a result of any increase or
decrease in the value of Breakaway common stock.
BREAKAWAY'S STOCK PRICE IS VOLATILE, AND THE VALUE OF THE BREAKAWAY COMMON
STOCK ISSUED IN THE MERGER WILL DEPEND ON ITS MARKET PRICE AT THE TIME OF THE
MERGER
The market price of Breakaway's common stock, like that for the shares of
many other technology and Internet companies, has been and may continue to be
volatile. For example, from December 1, 1999 to March 7, 2000, the Breakaway
common stock closed as high as $149.50 per share (not adjusted
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for the stock split) and as low as $51.125 per share (not adjusted for the stock
split). Recently, the stock market in general and the shares of technology and
Internet companies in particular have experienced significant price
fluctuations. The market price may continue to fluctuate significantly in
response to various factors, including:
- quarterly variations in operating results or growth rates;
- the announcement of technological innovations;
- the introduction of new services or offerings by Breakaway and its
competitors;
- changes in estimates by securities analysts;
- market conditions in the industry;
- announcements and actions by competitors;
- regulatory and judicial actions; and
- general economic conditions.
SIGNIFICANT MERGER-RELATED CHARGES AGAINST EARNINGS WILL INCREASE
BREAKAWAY'S LOSSES IN THE QUARTER IN WHICH BREAKAWAY CONSUMMATES THE MERGER AND
DURING THE POST-MERGER INTEGRATION PERIOD
Breakaway expects to incur charges of approximately $1.2 million in
connection with the merger for legal fees, accounting fees, printing costs and
other costs of the merger and the two companies' integration. In addition,
Eggrock's expenses (estimated to be $500,000) will be paid from assets which
Breakaway would otherwise acquire. These costs may prove higher than Breakaway
anticipates. In addition, Breakaway may incur other additional unanticipated
merger costs. These costs may delay the anticipated benefits of the merger. Some
of these nonrecurring costs will be charged to operations in the fiscal quarter
in which the merger is consummated while others will be expensed as incurred
during the post-merger integration period. The Unaudited Pro Forma Combined
Balance Sheet reflects these estimated transaction costs, but the effects of
these costs are not reflected in the Unaudited Pro Forma Combined Statements of
Operations. In addition, Breakaway's acquisition of Eggrock is being accounted
for as a purchase. As a result, virtually the entire purchase price will be
considered intangible assets and amortized over various periods from three to
five years. These amortization charges will substantially reduce Breakaway's
earnings over the amortization period. They are reflected in the Unaudited Pro
Forma Combined Statement of Operations.
CLIENTS OF BREAKAWAY AND EGGROCK MAY DELAY OR CANCEL CONTRACTS AS A RESULT
OF CONCERNS OVER THE MERGER
The announcement and closing of the merger could cause clients and potential
clients of Breakaway and Eggrock to delay or cancel contracts as a result of
client concerns and uncertainty over the combined company's offerings, personnel
or services. Such a delay or cancellation could have a material adverse effect
on the business, operating results and financial condition of Breakaway.
RISKS RELATED TO BREAKAWAY'S BUSINESS
BREAKAWAY'S FUTURE SUCCESS IS UNCERTAIN BECAUSE BREAKAWAY HAS SIGNIFICANTLY
CHANGED ITS BUSINESS
Prior to 1999, Breakaway primarily provided traditional systems integration
services along with limited strategic planning and Internet systems integration
services. In 1999, Breakaway added application hosting to its service offerings
and substantially increased its capacity to provide strategic planning and
Internet systems integration services through three acquisitions and significant
hiring of professionals. In part, due to these recent significant changes,
Breakaway is subject to the risk that it will fail to successfully implement its
business model and strategy. This risk is heightened because Breakaway is
operating in the new and rapidly evolving e-business solutions market.
Breakaway's historical results of operations do not reflect its new service
offerings. The pro forma financial information included in this consent
solicitation statement/prospectus is based on the separate pre-acquisition
financial reports of the companies Breakaway acquired in 1999. Consequently,
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Breakaway's historical operating results and pro forma financial information may
not give you an accurate indication of how Breakaway will perform in the future.
BREAKAWAY'S BUSINESS WILL SUFFER IF GROWING ENTERPRISES DO NOT ADOPT AND
ACCEPT APPLICATION HOSTING SERVICES
Breakaway's ability to increase revenues and achieve profitability depends
on the adoption and acceptance of third-party application hosting services by
its target market of growing enterprises. Information technology service
providers, including Breakaway, only recently have begun to offer third-party
application hosting services. The market for these services has only recently
begun to develop and is evolving rapidly.
BREAKAWAY'S BUSINESS WILL SUFFER IF GROWING ENTERPRISES DO NOT ACCEPT
E-BUSINESS SOLUTIONS
Breakaway's ability to increase revenues and achieve profitability depends
on the widespread acceptance of e-business solutions by commercial users,
particularly growing enterprises. The market for e-business solutions is
relatively new and is undergoing significant change. The acceptance and growth
of e-business solutions will be limited if the Internet does not prove to be a
viable commercial market.
BREAKAWAY HAS A HISTORY OF OPERATING LOSSES, EXPECTS TO INCUR LOSSES IN THE
FUTURE AND WILL NOT BE SUCCESSFUL UNLESS IT CAN REVERSE THIS TREND
Breakaway expects to continue to incur increasing sales and marketing,
infrastructure development and general and administrative expenses. As a result,
Breakaway will need to generate significant revenues to achieve profitability.
Breakaway cannot be certain whether or when this will occur because of the
significant uncertainties with respect to its business model. Breakaway
experienced a net loss of $575,175 for the fiscal year ended December 31, 1998
and of $10.4 million for the fiscal year ended December 31, 1999. Breakaway
expects to continue to incur significant operating losses in the foreseeable
future. If Breakaway does achieve profitability, it may not be able to sustain
or increase profitability on a quarterly or annual basis in the future.
BREAKAWAY PLANS TO EXPAND RAPIDLY; IF BREAKAWAY CANNOT MANAGE ITS GROWTH
SUCCESSFULLY, ITS GROWTH MAY SLOW OR STOP
Breakaway has recently expanded its operations extensively. Breakaway's
growth has placed, and will continue to place, a significant strain on its
management, operating and financial systems, and sales, marketing and
administrative resources. If Breakaway cannot manage its expanding operations,
Breakaway may not be able to continue to grow or Breakaway may grow at a slower
pace. Furthermore, Breakaway's operating costs may escalate faster than planned.
In order to manage its growth successfully Breakaway must:
- Improve its management, financial and information systems and controls;
- Expand, train and manage its employee base effectively; and
- Enlarge its infrastructure for application hosting services.
BREAKAWAY RELIES ON A SMALL NUMBER OF CLIENTS FOR MOST OF ITS REVENUES;
BREAKAWAY'S REVENUES WILL DECLINE SIGNIFICANTLY IF IT CANNOT KEEP OR REPLACE
THESE CLIENTS
In 1998, revenues from a single client accounted for approximately 27.0% of
Breakaway's total revenues, and revenues from its five largest clients accounted
for 54.0% of total revenues. In 1999, revenues from a single client accounted
for approximately 6.5% of total revenues and revenues from Breakaway's five
largest clients accounted for approximately 26% of total revenues. Revenues from
Internet Capital Group, which is the largest shareholder of Breakaway and elects
two members of its four person board of directors, and related companies
accounted for 18.2% of total revenues for fiscal 1999. If these clients do not
need or want to engage Breakaway to perform additional services for them and
Breakaway is not able to sell its services to new clients at comparable or
greater levels, its revenues will decline.
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BREAKAWAY'S QUARTERLY REVENUES AND OPERATING RESULTS ARE LIKELY TO VARY,
WHICH MAY CAUSE THE MARKET PRICE OF BREAKAWAY COMMON STOCK TO DECLINE
Breakaway's quarterly revenues and operating results are volatile and
difficult to predict. Breakaway's quarterly operating results have varied in the
past and are likely to vary significantly from quarter to quarter in the future.
It is likely that in some future quarter or quarters Breakaway's operating
results will be below the expectations of public market analysts or investors.
If so, the market price of Breakaway common stock may decline significantly.
Factors that may cause Breakaway's results to fluctuate include:
- the amount and timing of demand by Breakaway's clients for application
hosting and e-business solution services;
- the amortization changes attributable to the acquisition of Eggrock;
- Breakaway's ability to obtain new and follow-on client engagements;
- the number, size and scope of Breakaway's projects;
- cancellations or reductions in the scope of major consulting and systems
integration projects;
- Breakaway's ability to enter into multiyear contracts with application
hosting clients;
- cancellations of month-to-month application hosting contracts;
- the length of the sales cycle associated with Breakaway's service
offerings;
- the introduction of new services by Breakaway or its competitors;
- changes in Breakaway's pricing policies or those of Breakaway's
competitors;
- gains recognized, and related compensation expenses incurred, by Breakaway
as a result of its venture capital investments and commitments to
employees based on the performance of those investments;
- Breakaway's ability to attract, train and retain skilled personnel in all
areas of its business;
- Breakaway's ability in a consistent and accurate manner to manage costs,
including personnel costs and support services costs; and
- the timing and cost of anticipated openings or expansions of new regional
offices and new Solution Centers.
Breakaway derives a substantial portion of its revenues from providing
professional services. Breakaway generally recognizes revenues as it provides
services. Personnel and related costs constitute the substantial majority of
Breakaway's operating expenses. Because Breakaway establishes the levels of
these expenses in advance of any particular quarter, underutilization of its
professional services employees may cause significant reductions in Breakaway's
operating results for a particular quarter.
BREAKAWAY'S GROWTH COULD BE LIMITED IF IT IS UNABLE TO ATTRACT AND RETAIN
QUALIFIED PERSONNEL
Breakaway believes that its success depends largely on its ability to
attract and retain highly skilled technical, consulting, managerial, sales and
marketing personnel. Breakaway may not be able to hire or retain the necessary
personnel to implement its business strategy. In addition, Breakaway may need to
pay higher compensation for employees than it currently expects. Individuals
with e-business solutions skills, particularly those with the significant
experience which Breakaway generally requires, are in very short supply.
Competition to hire from this limited pool is intense.
BREAKAWAY MAY LOSE MONEY ON FIXED-FEE CONTRACTS AND PERFORMANCE-BASED
CONTRACTS
Breakaway derives a portion of its revenues from fixed-fee contracts.
Breakaway occasionally makes a portion of its fees contingent on meeting
performance objectives. If Breakaway misjudges the time and resources necessary
to complete a project, or if a client does not achieve the agreed upon
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performance objectives, Breakaway may incur a loss in connection with the
project. This risk is heightened because Breakaway works with complex
technologies in compressed time frames.
BREAKAWAY'S GROWTH STRATEGY WILL FAIL IF IT IS UNABLE TO OPEN NEW REGIONAL
OFFICES SUCCESSFULLY
A key component of Breakaway's growth strategy is to open regional offices
in new U.S. and foreign locations. If Breakaway does not implement this strategy
successfully, Breakaway will not grow. Breakaway devotes substantial financial
and management resources to launch these offices. Breakaway may not select
appropriate locations for these regional offices. Breakaway also may not be able
to open these offices efficiently or manage them profitably.
BREAKAWAY'S INTERNATIONAL EXPANSION PLANS MAY BE COSTLY AND RISKY TO
IMPLEMENT, AND MAY NOT PROVE SUCCESSFUL
One component of Breakaway's strategy is to expand into international
markets. Breakaway recently opened an office in London, U.K. Breakaway believes
that it will face certain risks in doing business abroad that it does not face
domestically. Among the international risks it believes are most likely to
affect Breakaway are:
- costs and difficulties in staffing and managing international operations;
- strains on Breakaway's financial and other systems to manage VAT and other
taxes, and different cost structures;
- unexpected changes in regulatory requirements;
- increased tariffs and other trade barriers;
- costs and delays of localizing products and offerings for local markets
and various languages, and the costs and difficulties in complying with
local business customs;
- difficulties in enforcing contractual and intellectual property rights;
- heightened risks of political and economic instability and the possibility
of nationalization or expropriation of industries or properties;
- difficulties in managing international operations;
- potentially adverse tax consequences including restrictions on
repatriating earnings and the threat of "double taxation;"
- the burden of complying with a wide variety of foreign laws and
regulations some of which may conflict with U.S. laws;
- currency issues, including fluctuations in current exchange rates and the
adoption of the Euro by many countries of the European Union by 2003; and
- restrictions on the import and export of sensitive U.S. technologies, such
as data security and encryption software and systems that Breakaway may
wish to deliver to its customers.
Any of these factors or other factors not listed could damage Breakaway's
business results. There can be no assurance that one or more of these factors
will not have a material adverse effect on Breakaway's foreign operations, and,
consequentially, Breakaway's business, operating results, and financial
condition.
IF BREAKAWAY'S EFFORTS TO DEVELOP BRAND AWARENESS ARE NOT SUCCESSFUL,
BREAKAWAY WILL NOT INCREASE REVENUES AS PLANNED
An important element of Breakaway's business strategy is to develop and
maintain widespread awareness of the Breakaway name. To promote its name and
brand identity, Breakaway has expended considerable amounts and may increase its
marketing expenses. These expenses have caused and may likely cause Breakaway's
operating margins to decline in the future. If these efforts are not successful,
Breakaway will not experience any increase in revenues to offset these expenses.
Breakaway may nonetheless continue to incur these expenses, possibly at higher
levels. Moreover, Breakaway's name
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may be closely associated with the business difficulties of some of its clients,
many of whom are pursuing unproven business models in competitive markets. As a
result, the difficulties or failure of one or more of Breakaway's clients could
damage its name and brand identity.
Breakaway's failure to meet client expectations or deliver error-free
services could result in losses and negative publicity.
Many of Breakaway's engagements involve information technology solutions
that are critical to its clients' businesses. Any defects or errors in these
solutions or failure to meet clients' specifications or expectations could
result in:
- delayed or lost revenues due to adverse client reaction;
- requirements to provide additional services to a client at no charge;
- refunds of monthly application hosting fees for failure to meet service
level obligations;
- negative publicity about Breakaway and its services, which could adversely
affect Breakaway's ability to attract or retain clients; or
- claims for substantial damages against Breakaway, regardless of its
responsibility for such failure, which may not be covered by Breakaway's
insurance policies and which may not be limited by the contractual terms
of Breakaway's engagement.
BREAKAWAY GENERATES A SIGNIFICANT PORTION OF ITS REVENUES FROM SERVICES
RELATED TO PACKAGED SOFTWARE APPLICATIONS OF A LIMITED NUMBER OF VENDORS;
BREAKAWAY WOULD EXPERIENCE A REDUCTION IN REVENUES IF ANY OF THOSE VENDORS
CEASED DOING BUSINESS WITH BREAKAWAY
Breakaway derives a significant portion of its revenues from projects in
which it customizes, implements or hosts packaged software applications
developed by third parties. Breakaway does not have contractual arrangements
with any of these software vendors. As a result, those software vendors with
whom Breakaway does not have contractual arrangements can cease making their
products available to Breakaway at their discretion. Even in the case of
software vendors with whom Breakaway does have contractual arrangements, those
arrangements are either terminable at will by either party or are for short
terms. In addition, these software vendors may choose to compete against
Breakaway in providing strategic consulting, systems integration or application
hosting services. Moreover, Breakaway's success is dependent upon the continued
popularity of the product offerings of these vendors and on its ability to
establish relationships with new vendors in the future. If Breakaway is unable
to obtain packaged applications from these or comparable vendors or, if
Breakaway's vendors choose to compete with it or the popularity of its products
declines, Breakaway's business and operating results may be adversely affected.
BREAKAWAY'S MARKETS ARE HIGHLY COMPETITIVE AND BREAKAWAY'S FAILURE TO
COMPETE SUCCESSFULLY WILL LIMIT ITS ABILITY TO RETAIN AND INCREASE ITS MARKET
SHARE
Breakaway's markets are new, rapidly evolving and highly competitive.
Breakaway expects this competition to persist and intensify in the future.
Breakaway's failure to maintain and enhance its competitive position will limit
its ability to maintain and increase its market share, which would result in
serious harm to its business. Many of Breakaway's competitors are substantially
larger than Breakaway is and have substantially greater financial,
infrastructure and personnel resources than Breakaway has. Furthermore, many of
Breakaway's competitors have well established, large and experienced marketing
and sales capabilities and greater name recognition than Breakaway has. As a
result, Breakaway's competitors may be in a stronger position to respond quickly
to new or emerging technologies and changes in client requirements. They may
also develop and promote their services more effectively than Breakaway does.
Moreover, barriers to entry, particularly in the strategic consulting and
systems integration markets, are low. Breakaway therefore expects additional
competitors to enter these markets.
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IF BREAKAWAY IS UNABLE TO REUSE SOFTWARE CODE AND METHODOLOGIES, BREAKAWAY
MAY NOT BE ABLE TO DELIVER ITS SERVICES RAPIDLY AND COST-EFFECTIVELY
Breakaway's business model depends to a significant extent on its ability to
reuse software code and methodologies that it develops in the course of client
engagements. If Breakaway generally is unable to negotiate contracts to permit
it to reuse code and methodologies, Breakaway may be unable to provide services
to its growing enterprise clients at a cost and within time frames that these
clients find acceptable. Breakaway's clients may prohibit it from such reuse or
may severely limit or condition reuse.
BREAKAWAY DEPENDS ON A LIMITED NUMBER OF KEY PERSONNEL WHO HAVE RECENTLY
JOINED BREAKAWAY AND WHO BREAKAWAY MAY NOT BE ABLE TO RETAIN
All of Breakaway's senior management joined Breakaway in 1998 and 1999. Many
of these individuals have not previously worked together and are becoming
integrated as a management team. As a result, Breakaway's senior managers may
not work together effectively as a team. In addition, due to the competitive
nature of Breakaway's industry, Breakaway may not be able to retain all of its
senior managers.
BREAKAWAY MAY NEED ADDITIONAL CAPITAL, WHICH MAY NOT BE AVAIABLE TO IT, AND
WHICH, IF RAISED, MAY DILUTE YOUR OWNERSHIP INTEREST IN BREAKAWAY
Breakaway may need to raise additional funds through public or private
equity or debt financings in order to:
- support additional capital expenditures;
- take advantage of acquisition or expansion opportunities;
- develop new services; or
- address additional working capital needs.
If Breakaway cannot obtain financing on terms acceptable to it or at all,
Breakaway may be forced to curtail some or all of these activities. As a result,
Breakaway could grow more slowly or stop growing. Any additional capital raised
through the sale of equity will dilute your ownership interest in Breakaway and
may be on terms that are unfavorable to holders of Breakaway common stock.
BREAKAWAY MAY UNDERTAKE ADDITIONAL ACQUISITIONS WHICH MAY LIMIT ITS ABILITY
TO MANAGE AND MAINTAIN ITS BUSINESS, MAY RESULT IN ADVERSE ACCOUNTING TREATMENT
AND MAY BE DIFFICULT TO INTEGRATE INTO ITS BUSINESS
Since March 1999, Breakaway has acquired four companies, not including
Eggrock. Breakaway may undertake additional acquisitions in the future.
Acquisitions involve a number of risks, including:
- diversion of management attention;
- amortization of substantial goodwill, adversely affecting Breakaway's
reported results of operations;
- inability to retain the management, key personnel and other employees of
the acquired business;
- inability to establish uniform standards, controls, procedures and
policies;
- inability to retain the acquired company's customers; and
- exposure to legal claims for activities of the acquired business prior to
acquisition.
Client satisfaction or performance problems with an acquired business also
could affect Breakaway's reputation as a whole. In addition, any acquired
business could significantly underperform relative to Breakaway's expectations.
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BREAKAWAY MAY NOT BE ABLE TO DELIVER ITS APPLICATION HOSTING SERVICES IF
THIRD PARTIES DO NOT PROVIDE BREAKAWAY WITH KEY COMPONENTS OF ITS HOSTING
INFRASTRUCTURE
Breakaway depends on other companies to supply key components of the
computer and telecommunications equipment and the telecommunications services
which Breakaway uses to provide its application hosting services. Some of these
components are available only from sole or limited sources in the quantities and
quality Breakaway demands. Although Breakaway leases redundant capacity from
multiple suppliers, a disruption in its ability to provide hosting services
could prevent Breakaway from maintaining the required standards of service,
which would cause Breakaway to incur contractual penalties.
INTELLECTUAL PROPERTY INFRINGEMENT CLAIMS AGAINST BREAKAWAY, EVEN WITHOUT
MERIT, COULD COST A SIGNIFICANT AMOUNT OF MONEY TO DEFEND AND MAY DIVERT
MANAGEMENT'S ATTENTION
As the number of e-business applications in Breakaway's target market
increases and the functionality of these applications overlaps, Breakaway may
become subject to infringement claims. Breakaway cannot be certain that its
services, the solutions that it delivers or the software used in its solutions
do not or will not infringe valid patents, copyrights or other intellectual
property rights held by third parties. If there is infringement, Breakaway could
be liable for substantial damages. Any infringement claims, even if without
merit, can be time consuming and expensive to defend. They may divert
management's attention and resources and could cause service implementation
delays. They also could require Breakaway to enter into costly royalty or
licensing agreements.
BREAKAWAY MAY NOT BE ABLE TO PROTECT ITS INTELLECTUAL PROPERTY AND
PROPRIETARY RIGHTS
If third parties infringe or misappropriate Breakaway's trade secrets,
copyrights, trademarks or other proprietary information, Breakaway's business
could be seriously harmed. The steps that Breakaway has taken to protect its
proprietary rights may not be adequate to deter misappropriation of its
intellectual property. In addition, Breakaway may not be able to detect
unauthorized use of its intellectual property and take appropriate steps to
enforce its rights. Also, protection of intellectual property in many foreign
countries is weaker and less reliable than in the United States. Accordingly, if
Breakaway's business expands into foreign countries, risks associated with
protecting its intellectual property will increase.
BREAKAWAY'S BUSINESS MAY SUFFER IF GROWTH IN THE USE OF THE INTERNET
DECLINES
Breakaway's business is dependent upon continued growth in the use of the
Internet by its clients, prospective clients and their customers and suppliers.
If the number of users on the Internet does not increase and commerce over the
Internet does not become more accepted and widespread, demand for Breakaway's
services may decrease and, as a result, its revenues would decline. Factors that
may affect Internet usage or electronic commerce adoption include:
- actual or perceived lack of security of information;
- lack of access and ease of use;
- congestion of Internet traffic;
- inconsistent quality of service;
- increases in access costs to the Internet;
- excessive governmental regulation;
- uncertainty regarding intellectual property ownership;
- reluctance to adopt new business methods; and
- costs associated with the obsolescence of existing infrastructure.
13
<PAGE>
MARKET PRICE INFORMATION
Breakaway common stock has traded on the Nasdaq National Market under the
symbol "BWAY" since October 6, 1999. On March 6, 2000, the board of directors of
Breakaway approved a two-for-one stock split, effected through a stock dividend
of Breakaway common stock. The table below sets forth, for the periods
indicated, the high and low sale prices of Breakaway common stock (not adjusted
for the stock split) as reported on the Nasdaq National Market.
<TABLE>
<CAPTION>
BREAKAWAY
COMMON STOCK
-------------------
HIGH LOW
-------- --------
<S> <C> <C>
FISCAL 1999
Quarter ended December 31, 1999............................. $ 77.00 $36.125
FISCAL 2000
Quarter ending March 31, 2000 (through March 7, 2000)....... $171.00 $ 55.00
</TABLE>
Eggrock's capital stock is not listed for trading on any exchange or
automated quotation service. There are 96 holders of record of Eggrock common
stock.
DIVIDEND POLICY
Breakaway has never declared or paid cash dividends on its common stock.
Breakaway currently intends to retain earnings, if any, to support its growth
strategy and does not anticipate paying cash dividends in the foreseeable
future. Payment of future dividends, if any, will be at the discretion of the
Breakaway board of directors after taking into account various factors,
including Breakaway's financial condition, operating results, current and
anticipated cash needs and plans for expansion. Eggrock has never declared or
paid cash dividends on its common stock or preferred stock.
BECAUSE THE MARKET PRICE OF BREAKAWAY COMMON STOCK IS SUBJECT TO
FLUCTUATION, WE URGE EGGROCK STOCKHOLDERS TO OBTAIN A CURRENT MARKET QUOTATION
FOR BREAKAWAY COMMON STOCK.
14
<PAGE>
THE MERGER
BACKGROUND OF THE MERGER
On December 17, 1999, Gordon Brooks, the President of Breakaway met with
Maureen Ellenberger, the President of Eggrock; Michael Mordas, Chief
Relationship Officer of Eggrock; and Vijay Manwani, Chief Technology Officer of
Eggrock, to discuss the possibility of a business combination between Breakaway
and Eggrock. Mr. Brooks and Ms. Ellenberger had worked together at their
previous employer, Cambridge Technology Partners and had spoken about their
businesses prior to this meeting. At this meeting, the participants discussed in
general terms their respective businesses, employee culture and strategic goals.
Following this discussion, the parties agreed to consider further the
possibility of a business combination in more depth. At this point, the parties
did not exchange any specific business or financial information.
On December 21, 1999, Mr. Brooks and Babak Farzami, Vice President,
Corporate Development of Breakaway, provided Ms. Ellenberger with some
information on recent mergers for comparative purposes. In a telephone
conversation on December 22, 1999, Mr. Brooks and Ms. Ellenberger discussed
further the strategic rationale for a possible business combination and the
potential terms of such a transaction.
Following the conversation on December 22, Breakaway's legal counsel
prepared a non-binding letter of intent setting out terms of the proposed
transaction and a confidentiality agreement obligating each party to keep
confidential all non-public due diligence materials provided to it by the other
party.
On December 28, Mr. Brooks, on behalf of Breakaway, delivered to
Ms. Ellenberger the first draft of the letter of intent, which set forth
proposed terms for a strategic business combination, and a first draft of the
confidentiality agreement. After negotiating this proposal with Eggrock,
Breakaway delivered a revised letter of intent on December 31, 1999, which
contemplated a fixed number of shares of Breakaway being issued for stock and
assumed options. Mr. Brooks and Ms. Ellenberger continued to negotiate the terms
of the letter of intent and the confidentiality agreement until January 3, 2000.
On January 3, 2000, Mr. Brooks delivered another version of the term sheet,
which reflected the substance of the parties' negotiations. The parties signed
both the letter of intent, subject to board approval, and the confidentiality
agreement on January 3, 2000.
Between December 31, 1999 and January 3, 2000, Mr. Brooks, Mr. Farzami and
Ms. Ellenberger spoke frequently to discuss the business of their companies and
the terms of a possible strategic merger. During this period, Mr. Brooks and
Mr. Farzami also contacted Breakaway's financial advisor, Morgan Stanley & Co.
Incorporated, to discuss the proposed transaction and the contemplated
consideration to be paid by Breakaway for Eggrock.
Following execution of the non-binding letter of intent and the
confidentiality agreement, the parties and their attorneys and accountants
commenced due diligence and the preparation and negotiation of definitive
documentation for the proposed business combination. At this point a number of
material terms were not resolved; however, the parties believed that
negotiations had proceeded to a point where the remaining differences should be
addressed in the context of negotiations over definitive documentation.
On January 6, 2000, the parties began exchanging a variety of information
relating to both companies' current businesses, organizational structures and
short-term and long-term business objectives. On Monday, January 10, 2000,
Breakaway's counsel provided Eggrock and its representatives with an initial
draft of the definitive merger agreement.
At a previously scheduled board meeting on January 10, 2000, Mr. Brooks
described the terms of the proposed transaction to the Breakaway board and the
board authorized and instructed management
15
<PAGE>
to proceed with due diligence and negotiation of definitive documentation for an
acquisition of Eggrock by Breakaway through a merger.
From January 10, 2000 through January 26, 2000, management representatives
and other employees of both companies met extensively to conduct due diligence
on each other. Morgan Stanley also participated in a number of these sessions in
order to render its opinion that the consideration to be paid by Breakaway was
fair from a financial point of view to Breakaway.
During the same period, representatives of Breakaway and Eggrock and their
legal counsel were in frequent contact to negotiate the terms of the merger
agreement and related definitive documentation. The principal areas of
negotiation included:
- the proposed organizational structure of Breakaway following the merger;
- the representations and warranties to be made by each of Breakaway and
Eggrock;
- the covenants governing the conduct of business by Breakaway and Eggrock
during the period from the date of the merger agreement until the
completion of the merger;
- the conditions required for termination of the merger agreement;
- the parties' indemnification obligations, and the related escrow
agreement;
- the registration rights to be provided to the holders of Eggrock's
preferred stock; and
- the employment arrangements with the three founders of Eggrock and
arrangements by which stock received in the merger by the founders and
other key employees would be subject to special vesting restrictions.
On the afternoon of January 25, 2000, the Breakaway board met to consider
the proposed merger. Mr. Brooks and Mr. Farzami presented information with
respect to the transaction and reviewed the matters set forth in this consent
solicitation statement/prospectus under "--Recommendation of the Board of
Directors of Breakaway; Reasons for the Merger." Mr. Brooks informed the
directors that Morgan Stanley & Co. Incorporated had delivered a written
opinion, dated January 24, 2000, that, as of such date, the consideration to be
paid by Breakaway for Eggrock was fair from a financial point of view to
Breakaway. The directors then reviewed with Mr. Brooks and Mr. Farzami the terms
of the merger agreement. After further discussion and consideration, the
Breakaway board voted unanimously to approve the merger, the merger agreement
and the related documents for the transaction.
On the morning of January 26, 2000, the Eggrock board of directors met
telephonically to consider the proposed merger. Members of Eggrock's senior
management made presentations and reviewed the points described in this consent
solicitation statement/prospectus in "-- Recommendation of the Board of
Directors of Eggrock; Reasons for the Merger." Legal counsel for Eggrock
summarized the status of negotiations and terms of the definitive documentation
for the board. After extensive discussion of the advantages and risks of the
proposed transaction to Eggrock and its stockholders, the Eggrock board
unanimously declared advisable and approved the merger, the merger agreement and
the related documents on the terms discussed at the meeting. The board
authorized management to complete and execute the definitive agreement.
Late in the evening on January 26, 2000, Breakaway and Eggrock executed the
merger agreement. On the morning of January 27, 2000, the two companies issued a
joint press release publicly announcing execution of the merger agreement.
JOINT REASONS FOR THE MERGER
The Breakaway and Eggrock boards of directors each believe that the combined
company will have potential for greater financial strength, market power and
growth potential than either Breakaway or
16
<PAGE>
Eggrock would have on its own. The Breakaway board of directors and the Eggrock
board of directors identified a number of potential benefits to the merger which
they believe could contribute to the success of the combined company and thus
benefit stockholders of both companies, including the following:
- the similarity of the two companies' service offerings, methods for
providing services and client base means that each company will, through
the merger, substantially expand its number of professionals providing
services and geographic coverage much more quickly than through organic
growth;
- the greater financial resources that Breakaway and Eggrock expect to be
available to a larger company;
- the ability of senior management at both companies to benefit from each
other's experience and expertise; and
- the continued strong growth in the development of e-business and the
resulting demand for the services offered by the combined company.
RECOMMENDATION OF THE BOARD OF DIRECTORS OF BREAKAWAY; BREAKAWAY'S REASONS FOR
THE MERGER
The Breakaway board of directors has approved the merger and merger
agreement and the associated transactions and believes that the terms of the
merger are fair to, and in the best interests of, Breakaway and its
stockholders. In reaching its conclusion to approve the merger and the merger
agreement, the Breakaway board of directors considered the factors described
above under "Joint Reasons for the Merger," as well as the opportunity of the
Breakaway stockholders to participate in the potential growth of the combined
company after the merger.
The Breakaway board of directors also considered and reviewed with
management the additional positive factors listed below in reaching its decision
to approve the merger and the merger agreement:
- the high level of familiarity that Breakaway's senior management has with
the senior management, operations, financial condition and prospects of
Eggrock;
- the board's receipt of the opinion of Morgan Stanley that, as of
January 24, 2000, the consideration proposed to be paid by Breakaway under
the terms of the merger was fair to Breakaway from a financial point of
view; and
- the terms of the merger agreement.
Having been approved by the Breakaway board, the merger does not also
require approval by the holders of Breakaway common stock under Delaware law.
RECOMMENDATION OF THE BOARD OF DIRECTORS OF EGGROCK; EGGROCK'S REASONS FOR THE
MERGER
The Eggrock board of directors has approved the merger agreement and the
transactions contemplated thereby and believes that the terms of the merger are
fair to, and in the best interests of, Eggrock and its stockholders. The Eggrock
board of directors recommends that the holders of Eggrock voting stock adopt the
merger agreement. In addition to the anticipated joint benefits described above,
the Eggrock board of directors considered and reviewed with management the
additional positive factors listed below, among various others, in reaching its
decision to approve the merger and the merger agreement:
- the historical financial performance, business operations, financial
condition and prospects of Breakaway, based on the directors' review of
periodic reports filed with the Securities and Exchange Commission and
publicly available information regarding Breakaway, including third-
17
<PAGE>
party analysts' reports, analysts' projections, analysts' comments and
historical stock price, volatility and volume data;
- the financial and other significant terms of the proposed merger,
including the terms and conditions of the merger agreement;
- the opportunity for the Eggrock stockholders to participate as equity
owners in a larger, more diversified company, and thereby to participate
in the value that may be generated through the combination of the two
companies;
- the liquidity that the transaction would provide to the stockholders of
Eggrock without the time, expense and uncertainty involved in conducting
an initial public offering; and
- the fact that the merger was designed to be tax-free to Eggrock and its
stockholders.
The Eggrock board also considered certain potentially negative factors that
could arise in connection with the merger. These included:
- the transaction costs involved in connection with closing the merger;
- the substantial management time and effort required to effectuate the
merger;
- the risk that Breakaway may be unable to integrate the operations and
employee culture of Eggrock successfully; and
- the potentially adverse effect on Eggrock's internal growth and ability to
obtain new clients during the period between signing the merger agreement
and closing the merger.
After extensive discussions, the Eggrock board did not believe that the
negative factors were sufficient, either individually or collectively, to
outweigh the potential advantages of the merger.
The foregoing list of factors is not intended to be an exhaustive list of
all factors considered. In view of the wide variety of factors considered, the
Eggrock board found it impractical to, and did not, quantify or otherwise assign
relative weights to the specific factors considered, and individual directors
may have given differing weights to different factors. The Eggrock board viewed
its position and recommendation as being based on the totality of the
information presented to and considered by it. After taking into consideration
all the factors set forth above, the board determined that the potential
benefits of the proposed merger outweighed the potential detriments associated
with the proposed merger. The board of directors of Eggrock unanimously believes
that the merger is fair to and in the best interest of Eggrock stockholders.
If the merger is not completed, Eggrock will continue to pursue its existing
business strategy. In addition, Eggrock may consider conducting an initial
public offering or investigating other business combination opportunities.
OPINION OF FINANCIAL ADVISOR TO BREAKAWAY
Pursuant to an engagement letter dated as of January 20, 2000, Breakaway
engaged Morgan Stanley to provide Breakaway with a financial fairness opinion in
connection with the merger. Breakaway selected Morgan Stanley to provide a
fairness opinion on the basis of its qualifications, experience and reputation
as well as its knowledge of the business and affairs of Breakaway.
On January 24, 2000, Morgan Stanley delivered its opinion to the Breakaway
board of directors, subsequently confirmed in writing, that the consideration to
be paid by Breakaway pursuant to the merger agreement is fair to Breakaway from
a financial point of view.
The full text of the written opinion of Morgan Stanley, dated January 24,
2000, which sets forth, among other things, assumptions made, procedures
followed, matters considered and limitations on the
18
<PAGE>
scope of the review undertaken by Morgan Stanley in rendering its opinion, is
attached as Annex C to this consent solicitation statement/prospectus. Morgan
Stanley's opinion is directed to the Breakaway board of directors and addresses
only the fairness of the consideration to be paid by Breakaway pursuant to the
merger agreement from a financial point of view to Breakaway as of the date of
the opinion, and does not address any other aspect of the merger and does not
constitute a recommendation to any of the holders of Eggrock voting stock as to
whether to vote to adopt the merger agreement by signing the written consent.
The summary of the opinion of Morgan Stanley set forth in this consent
solicitation statement/prospectus is qualified in its entirety by reference to
the full text of the opinion.
In connection with rendering its opinion, Morgan Stanley, among other
things:
- reviewed certain publicly available financial statements and other
information of Breakaway;
- reviewed certain internal financial statements and other financial and
operating data concerning Breakaway prepared by the management of
Breakaway;
- reviewed certain financial forecasts prepared by the management of
Breakaway;
- discussed the past and current operations and financial condition and the
prospects of Breakaway, including information relating to certain
strategic, financial and operational benefits anticipated from the merger,
with senior executives of Breakaway;
- discussed the past and current operations and financial condition and the
prospects of Eggrock, including information relating to certain strategic,
financial and operational benefits anticipated from the merger, with
senior executives of Eggrock and Breakaway;
- reviewed certain internal financial statements and other financial and
operating data concerning Eggrock prepared by the management of Eggrock;
- reviewed certain financial forecasts prepared by the management of
Eggrock;
- reviewed the reported prices and trading activity for Breakaway common
stock;
- compared the financial performance of Breakaway and the prices and trading
activity of Breakaway common stock with that of certain other comparable
publicly-traded companies and their securities;
- reviewed the pro forma impact of the merger on Breakaway's earnings per
share and other financial ratios;
- reviewed the financial terms, to the extent publicly available, of certain
comparable acquisition transactions;
- reviewed the draft merger agreement and certain related documents; and
- performed such other analyses and considered such other factors as Morgan
Stanley deemed appropriate.
In rendering its opinion, Morgan Stanley assumed and relied upon, without
independent verification, the accuracy and completeness of the information
reviewed by it for the purposes of its opinion. With respect to the financial
forecasts, including the information relating to certain strategic, financial
and operational benefits anticipated from the merger, Morgan Stanley assumed
that they were reasonably prepared on bases reflecting the best currently
available estimates and judgments of the prospects of Breakaway and Eggrock. In
addition, Morgan Stanley assumed that the merger will be consummated in
accordance with the terms set forth in the merger agreement, including, among
other things, that the merger will be treated as a tax-free reorganization
and/or exchange, pursuant to the Internal Revenue Code of 1986. Morgan Stanley
did not make any independent valuation or appraisal
19
<PAGE>
of the assets or liabilities of Breakaway or Eggrock, nor was it furnished with
any such appraisals. Morgan Stanley also relied upon, without any independent
verification, Breakaway management's assessment of the validity of, and the
risks associated with, Eggrock's products, services and technology. Morgan
Stanley's opinion is necessarily based on financial, economic, market and other
conditions as in effect on, and the information made available to it as of
January 24, 2000.
The following is a brief summary of the material analyses performed by
Morgan Stanley in connection with its oral opinion and the preparation of its
written opinion letter dated January 24, 2000. These summaries of financial
analyses include information presented in tabular format. In order to fully
understand the financial analyses used by Morgan Stanley, the tables must be
read together with the text of each summary. The tables alone do not constitute
a complete description of the financial analyses.
COMPARATIVE STOCK PRICE PERFORMANCE
Morgan Stanley reviewed the recent stock price performance of Breakaway and
compared such performance with that of the NASDAQ, the Morgan Stanley High
Technology Index and a stock index comprised of the following Internet Services
companies:
- Agency.com Inc.
- Diamond Technology Partners Inc.
- iXL Enterprises Inc.
- Modem Media-Poppe Tyson Inc.
- Proxicom Inc.
- Razorfish Inc.
- Sapient Corp.
- Scient Corp.
- Viant Corp.
- US Interactive Inc.
COMPARABLE COMPANY ANALYSIS
Morgan Stanley compared certain financial information of Breakaway and
Eggrock with publicly available information for those same comparable Internet
services companies that comprised the comparable stock index. For this analysis,
Morgan Stanley examined a range of publicly available estimates based on
securities research analysts. The following table presents, as of January 19,
2000, the low, high and mean values for the selected comparable Internet
services companies and Breakaway, of each of estimated aggregate value, defined
as market capitalization plus total debt less cash and cash equivalents, to
projected calendar year 2000 and 2001 revenue multiples and aggregate value to
billable
20
<PAGE>
consultants. Additionally, the same information is presented for Eggrock,
assuming a $271 million aggregate value.
<TABLE>
<CAPTION>
AGGREGATE VALUE TO AGGREGATE VALUE
PROJECTED CALENDAR YEAR TO BILLABLE
--------------------------- CONSULTANTS
2000 REVENUE 2001 REVENUE (IN MILLIONS)
------------ ------------ ---------------
<S> <C> <C> <C>
Internet services companies...........
Low................................. 10.5x 11.5x $2.0
Mean................................ 17.8 14.4 7.1
High................................ 27.7 17.5 12.7
Breakaway............................. 36.0 22.8 8.8
Eggrock............................... 13.1 9.3 2.5
</TABLE>
No company utilized in the peer group comparison analysis as a comparison is
identical to Breakaway or Eggrock. In evaluating the peer groups, Morgan Stanley
made judgments and assumptions with regard to industry performance, general
business, economic, market and financial conditions and other matters, many of
which are beyond the control of Breakaway or Eggrock, such as the impact of
competition on the business of Breakaway, Eggrock or the industry generally,
industry growth and the absence of any adverse material change in the financial
condition and prospects of Breakaway, Eggrock or the industry or in the
financial markets in general. Mathematical analysis, such as determining the
average or median, is not in itself a meaningful method of using peer group
data.
RELATIVE CONTRIBUTION ANALYSIS
Morgan Stanley analyzed the pro forma contribution of Breakaway and Eggrock
to the combined company assuming consummation of the merger and based on
publicly available estimates from securities research analysts for Breakaway and
internal management numbers for Eggrock. The analysis showed, among other
things, that based on the projected revenue and gross profit for calendar years
2000-2002 for each company, Eggrock would contribute between 26% and 30% to the
combined company's projected revenue and gross profit over this period. These
figures, adjusted to reflect each company's respective capital structures, were
compared to the pro forma fully-diluted ownership of the combined company by
Eggrock stockholders of 12% implied by the merger with Breakaway on a pro forma
basis.
In connection with the review of the merger by the Breakaway board of
directors, Morgan Stanley performed a variety of financial and comparative
analyses for purposes of its opinion given in connection therewith. The
preparation of a fairness opinion is a complex process and is not necessarily
susceptible to partial analysis or summary description. In arriving at its
opinion, Morgan Stanley considered the results of all of its analyses as a whole
and did not attribute any particular weight to any analysis or factor considered
by it. Furthermore, Morgan Stanley believes that selecting any portion of its
analyses, without considering all analyses, would create an incomplete view of
the process underlying its opinion. In addition, Morgan Stanley may have given
various analyses and factors more or less weight than other analyses and factors
and may have deemed various assumptions more or less probable than other
assumptions, so that the ranges of valuations resulting from any particular
analysis described above should not be taken to be Morgan Stanley's view of the
actual value of Breakaway or Eggrock.
In performing its analyses, Morgan Stanley made numerous assumptions with
respect to industry performance, general business and economic conditions and
other matters, many of which are beyond the control of Breakaway or Eggrock. Any
estimates contained in Morgan Stanley's analysis are not necessarily indicative
of future results or actual values, which may be significantly more or less
favorable than those suggested by such estimates. The analyses performed were
prepared solely as part of Morgan Stanley's analysis of the fairness of the
exchange ratio pursuant to the merger agreement
21
<PAGE>
from a financial point of view to Breakaway and were conducted in connection
with the delivery of the Morgan Stanley opinion to the board of directors of
Breakaway. The analyses do not purport to be appraisals or to reflect the prices
at which Breakaway common stock might actually trade. The consideration to be
paid by Breakaway pursuant to the merger agreement and other terms of the merger
agreement were determined through arm's-length negotiations between Breakaway
and Eggrock and were approved by the boards of directors of both Breakaway and
Eggrock. Morgan Stanley did not participate in any negotiations between
Breakaway and Eggrock. In addition, as described above, Morgan Stanley's opinion
to the Breakaway board of directors was one of many factors taken into
consideration by Breakaway's board of directors in making its decision to
approve the merger. Consequently, the Morgan Stanley analyses as described above
should not be viewed as determinative of the opinion of the Breakaway board of
directors with respect to the value of Eggrock or of whether the Breakaway board
of directors would have been willing to agree to a different consideration.
The Breakaway board of directors retained Morgan Stanley based upon Morgan
Stanley's qualifications, experience and expertise. Morgan Stanley is an
internationally recognized investment banking and advisory firm. Morgan Stanley,
as part of its investment banking and financial advisory business, is
continuously engaged in the valuation of businesses and securities in connection
with mergers and acquisitions, negotiated underwritings, competitive biddings,
secondary distributions of listed and unlisted securities, private placements
and valuations for corporate and other purposes. In the ordinary course of
Morgan Stanley's trading and brokerage activities, Morgan Stanley or its
affiliates may at any time hold long or short positions, trade or otherwise
effect transactions, for its own account or for the account of customers, in the
equity or debt securities or senior loans of Breakaway.
Pursuant to an engagement letter dated January 20, 2000, Morgan Stanley
provided a financial opinion in connection with the merger, and Breakaway agreed
to pay Morgan Stanley $500,000 in connection therewith. Breakaway has also
agreed to reimburse Morgan Stanley for its expenses incurred in performing its
services. In addition, Breakaway has agreed to indemnify Morgan Stanley and its
affiliates, their respective directors, officers, agents and employees and each
person, if any, controlling Morgan Stanley or any of its affiliates against
certain liabilities and expenses, including certain liabilities under the
federal securities laws, related to or arising out of Morgan Stanley's
engagement and any related transactions. In the past, Morgan Stanley and its
affiliates have provided financial advisory services for Breakaway and its
affiliates and have received fees for the rendering of these services.
ARRANGEMENTS WITH KEY EMPLOYEES
The three founders of Eggrock, Maureen Ellenberger, Vijay Manwani and
Michael Mordas, and other members of Eggrock's senior management have entered
into restricted stock agreements, pursuant to which 50% of the Breakaway common
stock to be received by these individuals in the merger will be subject to
vesting requirements over a period of four years. As a result, if any of these
individuals' employment is terminated following the merger, that individual may
forfeit his or her unvested shares, depending on the circumstances of the
termination. In addition, Ms. Ellenberger, Mr. Manwani and Mr. Mordas each
entered into at-will employment arrangements with Breakaway, which will be
effective as of the closing of the merger. These employment agreements provide
for a severance payment equal to six months salary if any of these individuals
are terminated without cause or terminate their employment with good reason, as
defined in the agreement.
ACCOUNTING TREATMENT OF THE MERGER
The merger will be accounted for as a purchase for financial reporting and
accounting purposes. Under this method of accounting, the assets and liabilities
of Eggrock, including intangible assets will be recorded at their fair market
values and included in the financial statements of Breakaway.
22
<PAGE>
GOVERNMENTAL AND REGULATORY APPROVALS
Breakaway and Eggrock are not aware of any governmental or regulatory
approvals required for consummation of the merger, other than compliance with
federal securities laws, applicable securities and "blue sky" laws of the
various states and applicable Delaware law.
MATERIAL UNITED STATES FEDERAL INCOME TAX CONSIDERATIONS OF THE EGGROCK MERGER
GENERALLY. In the opinion of each of Hale and Dorr LLP, counsel to
Breakaway, and Goodwin Procter & Hoar LLP, counsel to Eggrock, the following
sets forth the material United States federal income tax considerations
generally applicable to United States holders of Eggrock common stock and
Eggrock preferred stock who, pursuant to the merger, exchange their Eggrock
stock solely for Breakaway common stock and, if applicable, cash paid in lieu of
a fractional share of Breakaway common stock. The discussion is based on and
subject to the Internal Revenue Code, Treasury Regulations under the Internal
Revenue Code, and existing judicial and administrative rulings and decisions,
each as of the date of this consent solicitation statement/prospectus, all of
which are subject to change (possibly with retroactive effect) and all of which
are subject to differing interpretation.
This discussion and the opinion of each of Hale and Dorr LLP and Goodwin,
Procter & Hoar LLP do not purport to address all aspects of federal income
taxation that may affect particular stockholders in light of their individual
circumstances. In addition, they do not address any tax consequences to
stockholders subject to special rules under the federal income tax law. Examples
of such holders include insurance companies, tax-exempt organizations, financial
institutions, broker-dealers, foreign individuals or entities, stockholders who
hold their stock as part of a hedge, appreciated financial position, straddle or
conversion transaction, stockholders who do not hold their stock as capital
assets and stockholders who have acquired their stock on the exercise of
employee stock options or otherwise as compensation. In addition, this
discussion, and such opinions do not consider the effect of any applicable
state, local, or foreign tax laws. Each Eggrock stockholder is urged to consult
its tax advisor with respect to the specific tax consequences of the merger to
it, including the effect of United States federal, state, and local and foreign
and other tax laws, and the effect of possible changes in the tax laws.
Breakaway and Eggrock have not requested, and do not plan to request, any
rulings from the Internal Revenue Service concerning the tax treatment of
Breakaway or Eggrock with respect to the merger. The statements in this consent
solicitation statement/prospectus and the opinion of each of Hale and Dorr LLP
and Goodwin, Procter & Hoar LLP are not binding on the Internal Revenue Service
or a court. As a result, neither Breakaway nor Eggrock can assure you that the
tax considerations or opinions contained in this discussion will not be
challenged by the Internal Revenue Service or sustained by a court if challenged
by the Internal Revenue Service.
As a condition of the obligations of each of Breakaway and Eggrock to effect
the merger, each of Hale and Dorr LLP, counsel to Breakaway, and Goodwin,
Procter & Hoar LLP, counsel to Eggrock, will deliver an opinion based on facts,
representations, and assumptions stated in that opinion to the effect that for
federal income tax purposes the merger will constitute a reorganization within
the meaning of Section 368(a) of the Internal Revenue Code.
As a result of the merger being treated as a reorganization, there will be
the following tax consequences:
TAX CONSEQUENCES TO BREAKAWAY, EGGROCK AND BENEDICT. For federal income tax
purposes, no gain or loss will be recognized by each of Breakaway, Eggrock and
Benedict.
TAX CONSEQUENCES TO EGGROCK STOCKHOLDERS. For federal income tax purposes:
23
<PAGE>
(i) no gain or loss will be recognized by the stockholders of Eggrock upon
the conversion of their shares of Eggrock common stock and Eggrock preferred
stock into shares of Breakaway common stock;
(ii) the aggregate tax basis of the shares of Breakaway common stock
received in exchange for the Eggrock common stock and Eggrock preferred stock
pursuant to the merger (including a fractional share of Breakaway common stock
for which cash is received) will be the same as the aggregate tax basis of such
shares of Eggrock common stock and Eggrock preferred stock;
(iii) the holding period for the shares of Breakaway common stock received in
exchange for shares of Eggrock common stock and Eggrock preferred stock will
include the holder's holding period for such shares of Eggrock stock;
(iv) a stockholder of Eggrock who receives cash in lieu of a fractional
share of Breakaway common stock will recognize gain (or loss) equal to the
difference, if any, between the cash payment received and the portion of the tax
basis in the Breakaway shares received in the merger that is allocable to such
fractional share. Such gain (or loss) will be a long-term capital gain (or loss)
if such fractional share of Breakaway common stock is considered to have been
held for more than one year at the effective time; and
(v) a stockholder of Eggrock will be treated as having received the
Breakaway common stock deposited in the escrow fund upon consummation of the
merger. Until such shares are released, the interim basis of the Breakaway
common stock received by an Eggrock stockholder will be determined as if such
stockholder received the maximum number of Breakaway shares. An Eggrock
stockholder will not recognize gain or loss and no amount will be included in
the income of such stockholder by reason of the release of the Breakaway shares
from escrow. However, a stockholder may recognize gain or loss upon the return
of such shares to Breakaway. If gain is recognized, the value of such returned
shares will be added back to the tax basis of the Breakaway common stock
retained by the stockholder.
If the Internal Revenue Service were to successfully challenge the
"reorganization" status of the merger, each Eggrock stockholder would recognize
taxable gain (or loss) with respect to the Eggrock common stock and Eggrock
preferred stock surrendered, measured by the difference between (i) the fair
market value, as of the time of the merger, of the Breakaway common stock
received in the merger, and (ii) the stockholder's tax basis in the Eggrock
stock surrendered therefor in the merger. In such event, a stockholder's
aggregate basis in the Breakaway common stock so received would equal its fair
market value as of the time of the merger and the holding period for such stock
would begin the day after the merger.
Eggrock stockholders will be required to attach a statement to their tax
returns for the year of the merger that contains the information listed in
Treasury Regulation Section 1.368-3(b). Such statement must include the
stockholder's tax basis in the stockholder's Eggrock common stock and Eggrock
preferred stock and a description of the Breakaway common stock received
therefor. Eggrock stockholders are urged to consult their tax advisors with
respect to this statement and any other tax reporting requirements.
The opinions described above do not apply to stockholders who demand an
appraisal of their shares in accordance with Section 262 of the Delaware General
Corporation Law. A holder of Eggrock common stock or Eggrock preferred stock who
exercises appraisal rights with respect to the merger and receives cash for
shares of Eggrock stock will generally recognize capital gain (or loss) measured
by the difference between the amount of cash received and the stockholder's
basis in those shares, provided that the payment is not treated as a dividend
pursuant to Section 302 of the Internal Revenue Code or otherwise. A sale of
shares based on an exercise of appraisal rights generally will not be treated as
a dividend if the stockholder exercising appraisal rights owns no shares of
Eggrock immediately after the merger, after giving effect to the constructive
ownership rules pursuant to the Internal Revenue Code.
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The capital gain or loss will be long-term capital gain or loss if the holder's
holding period for the shares is more than one year.
Certain noncorporate holders of Eggrock common stock and Eggrock preferred
stock may be subject to backup withholding at a rate of 31% on cash payments
received in lieu of a fractional share of Breakaway common stock or upon the
exercise of appraisal rights. Backup withholding will not apply, however, to a
stockholder who (1) furnishes a correct taxpayer identification number and
certifies that it is not subject to backup withholding on the substitute W-9 or
successor form included in the letter of transmittal to be delivered to Eggrock
stockholders following the completion of the merger, (2) provides a
certification of foreign status on Form W-8 or successor form, or (3) is
otherwise exempt from backup withholding.
THE FOREGOING DISCUSSION IS NOT INTENDED TO BE A COMPLETE ANALYSIS OR
DESCRIPTION OF ALL POTENTIAL UNITED STATES FEDERAL INCOME TAX CONSEQUENCES OR
ANY OTHER CONSEQUENCES OF THE MERGER. IN ADDITION, THE DISCUSSION DOES NOT
ADDRESS TAX CONSEQUENCES WHICH MAY VARY WITH, OR ARE CONTINGENT ON, A
STOCKHOLDER'S INDIVIDUAL CIRCUMSTANCES. ACCORDINGLY, WE URGE EGGROCK
STOCKHOLDERS TO CONSULT THEIR OWN TAX ADVISORS AS TO THE SPECIFIC CONSEQUENCES
OF THE MERGER, INCLUDING THE APPLICABLE FEDERAL, STATE, LOCAL, AND FOREIGN TAX
CONSEQUENCES OF THE MERGER.
NASDAQ NATIONAL MARKET QUOTATION
It is a condition to the closing of the merger that the shares of Breakaway
common stock to be issued pursuant to the merger agreement be listed on the
Nasdaq National Market.
RESALES OF BREAKAWAY COMMON STOCK ISSUED IN CONNECTION WITH THE MERGER;
AFFILIATE AGREEMENTS
The shares of Breakaway common stock issued pursuant to the merger will be
freely transferable, except if they are received by persons who are deemed to be
"affiliates" of Eggrock or Breakaway under the Securities Act. Affiliates of
Eggrock at the time of the merger may publicly sell their shares only pursuant
to an effective registration statement or in transactions permitted by the
resale provisions of Rule 145 under the Securities Act with respect to
affiliates. Persons generally considered to be affiliates include individuals or
entities that control, are under common control with, or are controlled by the
applicable corporation and may include officers, directors and principal
stockholders of a corporation.
In general, under Rule 145, an affiliate would be entitled to sell shares of
Breakaway common stock received pursuant to the merger only through unsolicited
"brokers' transactions" or in transactions directly with a "market maker," as
such terms are defined in Rule 145. Additionally, the number of shares to be
sold by an affiliate (together with related persons and other persons acting in
concert) within any three-month period for purposes of Rule 145 may not exceed
the greater of 1% of the outstanding shares of Breakaway stock or the average
weekly trading volume of this stock during the four calendar weeks preceding the
sale. Rule 145 would only remain available, however, to affiliates if Breakaway
remained current with its informational filings under the Exchange Act. One year
after the closing of the merger, an affiliate would be able to sell that
affiliate's shares of Breakaway stock without the Rule 145 manner of sale or
volume limitations, provided that Breakaway was current with its Exchange Act
informational filings and the affiliate was not then an affiliate of Breakaway.
Two years after the closing of the merger, an affiliate would be able to sell
that affiliates' shares of stock without any restrictions so long as the
affiliate had not been an affiliate of Breakaway for at least three months prior
to the sale.
The holders of Eggrock's preferred stock will enter into a registration
rights agreement at closing in which Breakaway has agreed, subject to certain
conditions, and only after November 1, 2000, to register the shares of Breakaway
stock that those entities will receive in the merger pursuant to a shelf
registration statement. A member of the Eggrock board is the nominee of this
group of investors. See "Other Agreements" for a more detailed description of
this agreement.
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CONSENT IN LIEU OF MEETING; WAIVER OF APPRAISAL RIGHTS
The adoption of the merger agreement must be approved by holders of a
majority of Eggrock's voting common stock and Eggrock's preferred stock, voting
together as a single class. Because these classes of common stock are held by a
limited number of holders, Eggrock is requesting that these holders of voting
stock vote to adopt the merger agreement by executing a written consent in lieu
of holding a special meeting of stockholders. The three holders of Eggrock
voting common stock, who collectively beneficially own approximately 69% of the
outstanding voting power of Eggrock, have already agreed to vote to adopt the
merger agreement. These holders control sufficient voting power to assure
adoption of the merger agreement.
Although holders of Eggrock's non-voting common stock are not entitled to
vote on the merger agreement, they do have the right, under Delaware law, to
require an appraisal of their shares and to demand the payment of fair value for
their shares. These rights, generally known as "appraisal rights," are described
in detail in the section entitled "Appraisal Rights" and a copy of Section 262
of the Delaware General Corporation Law, which governs appraisal rights, is
attached as Annex C to this consent solicitation statement/prospectus. You
should read both the summary and the statutory provision carefully when making
your decision because the statutory requirements are complex.
Under the merger agreement, Breakaway is not obligated to proceed with the
merger if stockholders holding more than 10% of the outstanding shares of
capital stock of Eggrock have demanded an appraisal with respect to their
shares. Under Delaware law, stockholders have the right to demand an appraisal
of their shares within 20 days after notice of the merger has been mailed to
them. Eggrock is requesting that holders of non-voting common stock sign and
return a waiver of appraisal rights so that the stockholders may clearly inform
Eggrock that they do not plan to demand appraisal with respect to their shares.
If a sufficient number of stockholders return their waivers to satisfy the
closing condition, then Breakaway and Eggrock may close the merger prior to the
end of the 20 day period.
The failure of a stockholder to return a waiver of appraisal rights will
not, in itself, constitute a demand for appraisal of his or her shares.
Stockholders must strictly comply with the statutory requirements to exercise
their right to demand appraisal of their shares. Failure of a large number of
stockholders to return a waiver of their appraisal rights may prevent Breakaway
and Eggrock from closing the merger prior to the end of the 20 day period.
APPRAISAL RIGHTS
Delaware law does not grant appraisal rights to Breakaway stockholders.
Delaware law grants appraisal rights in the merger to the holders of Eggrock
common stock and Eggrock preferred stock. Under Delaware law, an Eggrock
stockholder may perfect his, her or its appraisal rights by delivering to
Eggrock a demand in writing for the appraisal of its shares and not vote for or
consent in writing to the merger agreement or the merger. Eggrock stockholders
considering seeking appraisal should recognize that the fair value of shares
could be determined to be more than, the same or less than the value of the
Breakaway shares, to which stockholders are entitled if they do not exercise
their appraisal rights. Stockholders who elect to exercise appraisal rights must
comply strictly with all of the procedures set forth in Section 262 of the
Delaware General Corporation Law to preserve those rights. We have attached a
copy of Section 262 of the Delaware General Corporation Law, which sets forth
these appraisal rights, as Annex D to this consent solicitation
statement/prospectus.
Section 262 of the Delaware General Corporation Law sets forth the required
procedure a stockholder seeking appraisal must follow. Making sure that you
actually perfect your appraisal rights can be complicated. The procedural rules
are specific and must be followed completely. Failure to comply with the
procedure may cause you to lose your appraisal rights. The following is only a
summary of your rights and the procedure relating to appraisal rights and is
qualified in its entirety by
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the provisions of Section 262 of the Delaware General Corporation Law. Please
review Section 262 for the complete procedure. Eggrock will not give you any
notice other than as described in this consent solicitation statement/prospectus
and as required by Delaware law.
APPRAISAL RIGHTS PROCEDURES
If you are an Eggrock stockholder and you wish to exercise your appraisal
rights, you must satisfy the following provisions of Section 262 of the Delaware
General Corporation Law.
- YOU MUST MAKE A WRITTEN DEMAND FOR APPRAISAL: You must deliver a written
demand for appraisal to Eggrock within 20 days of the mailing date of this
consent solicitation statement/prospectus. Failing to sign the waiver
alone will not constitute a demand for appraisal.
- YOU MUST NOT VOTE FOR OR CONSENT IN WRITING TO THE MERGER: You must not
consent to or vote for the merger or the adoption of the merger agreement.
If you vote for or consent by written consent to the merger agreement and
merger, you will not be entitled to any right to seek appraisal.
- YOU MUST CONTINUOUSLY HOLD YOUR EGGROCK SHARES: You must continuously hold
your shares of Eggrock capital stock, from the date you make the demand
for appraisal through the completion of the merger. If you are the record
holder of Eggrock capital stock on the date you make a written demand for
appraisal but then transfer your shares before the merger, you will lose
any right to appraisal in respect of those shares.
- You should read the paragraphs below for more details on making a demand
for appraisal.
A written demand for appraisal of Eggrock capital stock must be executed by
or on behalf of a stockholder of record and must reasonably identify the
stockholder and that he or she intends to demand appraisal of his or her shares.
If you own Eggrock capital stock in a fiduciary capacity, such as a trustee,
guardian or custodian, the demand for appraisal must be executed by or for the
record owner.
If you own Eggrock capital stock with one or more persons, such as in a
joint tenancy or tenancy in common, the demand for appraisal must be executed by
or for all joint owners. An authorized agent, which could include one or more of
the joint owners, may sign the demand for appraisal for a stockholder of record;
however, the agent must expressly disclose who the stockholder of record is and
that the agent is signing the demand as that stockholder's agent.
If you are a record owner, such as a broker, who holds Eggrock capital stock
as a nominee for others, you may exercise a right of appraisal with respect to
the shares held for one or more beneficial owners, while not exercising such
right for other beneficial owners. In such a case, you should specify in the
written demand the number of shares as to which you wish to demand appraisal. If
you do not expressly specify the number of shares, we will assume that your
written demand covers all the shares of Eggrock capital stock that are in your
name.
If you are an Eggrock stockholder who elects to exercise appraisal rights,
you should mail or deliver by hand a written demand to:
Eggrock Partners, Inc.
3 Clock Tower Place
Fourth Floor
Maynard, MA 01754
Attention: Maureen Ellenberger
It is important that Eggrock receive all written demands before March 30,
2000. As explained above, this written demand should be signed by, or on behalf
of, the stockholder of record. The written demand for appraisal should specify
the stockholder's name and mailing address, the number of shares of capital
stock owned, and that the stockholder is thereby demanding appraisal of his, her
or its
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shares. The failure to waive your appraisal rights by signing the waiver will
not constitute a written demand for appraisal rights.
If you fail to comply with any of these conditions and the merger becomes
effective, you will only be entitled to receive the merger consideration
provided in the merger agreement.
WRITTEN NOTICE. Within 10 days after the completion of the merger, Eggrock
must give written notice setting forth the date the merger has become effective
to each stockholder who has fully exercised his, her or its appraisal rights in
full compliance with the conditions of Section 262 of the Delaware General
Corporation Law.
PETITION WITH THE CHANCERY COURT. Within 120 days after the completion of
the merger, either Eggrock or any stockholder who has complied with the
conditions of Section 262, may file a petition in the Delaware Court of
Chancery. Any stockholder who files such a petition must provide Eggrock a copy
of the petition demanding that the chancery court determine the value of the
shares of Eggrock stock held by all of the stockholders who are entitled to
appraisal rights. Eggrock has no present intention of filing an appraisal
petition. Accordingly, if you intend to exercise your rights of appraisal, you
should file a petition in the Delaware Court of Chancery. Because Eggrock has no
obligation to file a petition, if you do not file a petition within 120 days
after the completion of the merger, you will lose your rights of appraisal.
WITHDRAWAL OF DEMAND. If you change your mind and decide you no longer want
to assert appraisal rights, you may withdraw your demand for appraisal rights at
any time within 60 days after the closing of the merger. You may also withdraw
your demand for appraisal rights after 60 days after the closing of the merger,
but only with the written consent of Eggrock. If you effectively withdraw your
demand for appraisal rights, you will receive the merger consideration provided
in the merger agreement.
REQUEST FOR APPRAISAL RIGHTS STATEMENT. If you have complied with the
conditions of Section 262, you are entitled to receive a statement from Eggrock
which sets forth the number of shares held by stockholders who have demanded
appraisal rights, and the number of stockholders who own those shares. To
receive this statement, you must send a written request to Eggrock within
120 days after the completion of the merger. Eggrock has 10 days after receiving
a request to mail you the statement.
CHANCERY COURT PROCEDURES. If you properly file a petition for appraisal in
the Delaware Chancery Court and deliver a copy to Eggrock, Eggrock will then
have 20 days to provide the chancery court with a list of the names and
addresses of all stockholders who have demanded appraisal rights and have not
reached an agreement with Eggrock as to the value of their shares. At a hearing
on the petition, the Chancery Court will determine which stockholders, if any,
have fully complied with Section 262 of the Delaware General Corporation Law and
whether they are entitled to appraisal rights under Section 262. The Chancery
Court may also require you to submit your stock certificates to the Registry in
Chancery so that it can note on the certificates that an appraisal proceeding is
pending. If you do not follow the Chancery Court's directions, you may be
dismissed from the proceeding.
APPRAISAL OF SHARES. After the Chancery Court determines which stockholders
are entitled to appraisal rights, it will consider factors relevant to a
determination of the fair value of your shares except for any appreciation or
depreciation due to any expectation or accomplishment of the merger. After the
Chancery Court determines the fair value of their shares, it will direct Eggrock
to pay that value to the stockholders who sought to have their shares appraised.
The Chancery Court can also direct Eggrock to pay interest, simple or compound,
on that value if the Chancery Court determines that interest is appropriate. In
order to receive your payment for your shares, you must then surrender your
stock certificates to Eggrock.
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The chancery court could determine that the fair value of shares of stock is
more than, the same as or less than the merger consideration. In other words, if
you demand appraisal rights, you could receive less consideration than you would
under the merger agreement. You should also be aware that an opinion of an
investment banking firm that the merger is fair is not an opinion that the
merger consideration constitutes fair value under Section 262.
COSTS AND EXPENSES OF APPRAISAL PROCEEDING. The costs and expenses of the
appraisal proceeding may be assessed against Eggrock and/or the stockholders
participating in the appraisal proceeding, as the chancery court deems equitable
under the circumstances. You may also request that the chancery court allocate
the expenses of the appraisal action incurred by any stockholder pro rata
against the value of all of the shares entitled to appraisal.
LOSS OF STOCKHOLDER'S RIGHTS. If you demand appraisal rights, after the
completion of the merger you will not be entitled to:
- vote shares of stock, for any purpose, for which you have demanded
appraisal rights;
- receive payment of dividends or any other distribution with respect to
such shares, except for dividends or distributions, if any, that are
payable to holders of record as of a record date prior to the effective
time of the merger; or
- receive the payment of the consideration provided for in the merger
agreement, unless you properly withdraw your demand for appraisal.
If no petition for an appraisal is filed within 120 days after the
completion of the merger, your right to seek an appraisal will cease and you
will be entitled to receive the consideration that all other holders of Eggrock
capital stock received in the merger. You may withdraw your demand for appraisal
and accept the merger consideration by delivering to Eggrock a written
withdrawal of your demand, except that:
- any attempt to withdraw made more than 60 days after the completion of the
merger will require the written approval of Eggrock; and
- an appraisal proceeding in the chancery court cannot be dismissed unless
the chancery court approves.
If you fail to comply strictly with the procedures described above you will
lose your appraisal rights. Consequently, if you wish to exercise your appraisal
rights, we strongly urge you to consult a legal advisor.
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THE MERGER AGREEMENT
THE FOLLOWING IS A BRIEF SUMMARY OF THE IMPORTANT PROVISIONS OF THE MERGER
AGREEMENT, A COPY OF WHICH IS ATTACHED AS ANNEX A TO THIS CONSENT SOLICITATION
STATEMENT/PROSPECTUS AND IS INCORPORATED BY REFERENCE INTO THIS SUMMARY. THE
SUMMARY IS NOT COMPLETE AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO THE
MERGER AGREEMENT. WE URGE ALL STOCKHOLDERS OF EGGROCK TO CAREFULLY READ THE
MERGER AGREEMENT IN ITS ENTIRETY FOR A MORE COMPLETE DESCRIPTION OF THE TERMS
AND CONDITIONS OF THE MERGER.
GENERAL
Following the adoption of the merger agreement by stockholders of Eggrock
and the satisfaction or waiver of the other conditions to the merger, Benedict
Acquisition Corp., a wholly-owned subsidiary of Breakaway, will be merged into
Eggrock. Eggrock will survive the merger as a wholly-owned subsidiary of
Breakaway. If all the conditions to the merger are satisfied or waived, the
merger will become effective at the time of the filing by Eggrock of a duly
executed certificate of merger with the Secretary of State of the State of
Delaware.
CONVERSION OF SHARES
Upon completion of the merger, each share of Eggrock voting common stock,
each share of Eggrock non-voting common stock, and each share of Eggrock
preferred stock will be converted into a number of shares of Breakaway common
stock determined by multiplying by the conversion ratio. You can determine the
conversion ratio is determined by dividing 7,272,000 by the total number of
shares of Eggrock capital stock outstanding or underlying stock options as of
the closing date. Based on the number of shares currently outstanding, the
conversion ratio should be approximately 0.51185008. If the number of shares of
capital stock or options changes prior to the merger closing, the conversion
ratio may increase or decrease as a result.
CREATION OF ESCROW
By adopting the merger agreement or deciding not to exercise their appraisal
rights, the Eggrock stockholders will effectively authorize the creation of an
escrow on the terms set forth in the escrow agreement and the appointment of
Maureen Ellenberger as their representative with respect to indemnification
matters or the escrow. You should refer to the section entitled "Other
Agreements -- Escrow Agreement" for a summary of the terms of the escrow
agreement.
TREATMENT OF EGGROCK STOCK OPTIONS
At the effective time of the merger, each unexpired and unexercised
outstanding option to purchase shares of Eggrock common stock, whether vested or
unvested, previously granted by Eggrock under its stock option plan will be
assumed by Breakaway and converted into an option to purchase shares of
Breakaway common stock. The number of shares of Breakaway common stock subject
to the assumed Eggrock stock options will be determined pursuant to the
conversion ratio. Any fractional shares of Breakaway common stock resulting from
such adjustment will be rounded down to the nearest share. The exercise price
per share of Breakaway common stock under the Eggrock stock options will equal
the exercise price per share of the Eggrock common stock under the original
stock options divided by the conversion ratio and then rounded up to the nearest
whole cent. All other terms of the options, including those contained in the
Eggrock stock option plan, will remain the same. Pursuant to the merger
agreement, within five days after the merger Breakaway will file a registration
statement on Form S-8 to register shares of Breakaway common stock issuable upon
exercise of the assumed options.
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EXCHANGE OF STOCK CERTIFICATES
FRACTIONAL SHARES. Breakaway will not issue any fractional shares of
Breakaway common stock in the merger. Instead, each holder of shares of Eggrock
common stock or Eggrock preferred stock exchanged pursuant to the merger who
would otherwise have been entitled to receive a fraction of a share of Breakaway
common stock will be entitled to receive a cash payment (without interest)
rounded to the nearest cent equal to the average closing price per share of
Breakaway common stock on the Nasdaq National Market, determined based on the
closing prices on the 20 trading days immediately preceding the second day prior
to the closing of the merger, multiplied by the fraction of a share that such
Eggrock stockholder would otherwise be entitled to receive.
SURRENDER OF SHARES OF EGGROCK COMMON STOCK AND EGGROCK PREFERRED STOCK;
STOCK TRANSFER BOOKS. Prior to the effective time of the merger, Breakaway shall
cause the Exchange Agent to mail a notice and a transmittal form to each record
holder of certificates representing Eggrock common stock and Eggrock preferred
stock advising the holders of the anticipated effectiveness of the merger and
the instructions for surrendering the certificates for Breakaway common stock
and for payment in lieu of fractional shares. Holders of certificates who
properly surrender their certificates in accordance with the instructions in the
notice will receive certificates representing the number of shares of Breakaway
common stock (other than the shares placed in escrow), cash in lieu of any
fractional shares of Breakaway common stock and any dividends or distributions
to which they are entitled. The surrendered certificates will be canceled.
NO FURTHER REGISTRATION OR TRANSFER OF EGGROCK COMMON STOCK AND EGGROCK
PREFERRED STOCK. At the effective time of the merger, the stock transfer books
of Eggrock will be closed and there will be no further transfers of shares of
Eggrock common stock or Eggrock preferred stock on the records of Eggrock. After
the effective time of the merger, the holders of Eggrock stock certificates will
cease to have any rights with respect to such shares of Eggrock common stock and
Eggrock preferred stock except as otherwise provided for in the merger agreement
or applicable law.
DIVIDENDS AND DISTRIBUTIONS. No dividends or other distributions declared
or made on or after the closing date of the merger with respect to shares of
Eggrock common stock or Eggrock preferred stock will be paid to the holder of
any unsurrendered Eggrock certificate with respect to the shares of Breakaway
common stock that the holder thereof is entitled to receive, and no cash payment
in lieu of fractional shares will be paid to any such holder until the holder
surrenders such Eggrock certificate as provided above and provides such
customary representations and certifications as are requested in the transmittal
form sent to each holder. Upon such surrender, Breakaway will pay to the persons
in whose name the Eggrock certificates representing such shares of Breakaway
common stock will be issued, without interest, any dividends or distributions
with respect to the shares of Breakaway common stock which have a record date on
or after the closing date of the merger and have become payable between the
effective time of the merger and the time of such surrender.
LOST CERTIFICATES. If any Eggrock certificates are lost, stolen or
destroyed, an Eggrock stockholder must provide an appropriate affidavit of that
fact. Breakaway may require the owner of such lost, stolen or destroyed Eggrock
certificates to deliver a bond in such sum as it may direct as indemnity against
any claim that may be made against Breakaway with respect to the Eggrock
certificates alleged to have been lost, stolen or destroyed.
HOLDERS OF EGGROCK COMMON STOCK OR EGGROCK PREFERRED STOCK SHOULD NOT SEND
THEIR CERTIFICATES UNTIL THEY RECEIVE A TRANSMITTAL FORM FROM BREAKAWAY.
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REPRESENTATIONS AND WARRANTIES
Each of Breakaway, Eggrock and Benedict made a number of representations and
warranties in the merger agreement regarding aspects of their respective
businesses, financial conditions, structure and other facts pertinent to the
merger.
Breakaway's and Benedict's representations and warranties include:
- their corporate organization and qualification and corporate power to do
business;
- their capitalization;
- their authorization of the merger agreement;
- the absence of conflicts, violations and defaults under their corporate
charters and bylaws and other agreements and documents;
- their financial statements;
- changes in their business since the date of their financial statements;
- litigation;
- interim operations of Benedict;
- broker's fees;
- compliance with Nasdaq requirements; and
- legal compliance.
Eggrock's representations and warranties include:
- Eggrock's corporate organization and qualification and corporate power to
do business;
- Eggrock's capitalization;
- authorization of the merger agreement;
- the absence of conflicts, violations and defaults under Eggrock's
corporate charters and bylaws and other agreements and documents;
- Eggrock's financial statements;
- changes in Eggrock's business since the date of its financial statements;
- the absence of undisclosed liabilities;
- Eggrock's taxes;
- Eggrock's assets;
- Eggrock's real property leases;
- Eggrock's material contracts;
- Eggrock's accounts receivable;
- Eggrock's powers of attorney;
- insurance;
- warranties;
- intellectual property used by Eggrock;
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- litigation involving Eggrock;
- Eggrock's employees;
- Eggrock's employee benefit plans;
- environmental laws that apply to Eggrock;
- Eggrock's legal compliance;
- Eggrock's customers and suppliers;
- permits required to conduct Eggrock's business in compliance with those
permits;
- Eggrock's business relationships with affiliates;
- payments, if any, required to be made by Eggrock to employees and
directors on account of the merger;
- brokers' fees;
- Eggrock's books and records; and
- Section 203 of the Delaware General Corporation Law.
CONDUCT OF EGGROCK BEFORE THE COMPLETION OF THE MERGER
Eggrock has agreed that prior to the completion of the merger, Eggrock will
not, without the written consent of Breakaway:
- issue or sell, or redeem or repurchase, any stock or other securities of
Eggrock or any rights, warrants, or options to acquire any such stock or
other securities;
- split, combine or reclassify any shares of Eggrock capital stock; declare,
set aside or pay any dividend or other distribution in respect of Eggrock
capital stock;
- create, incur or assume any indebtedness; assume, guarantee, endorse or
otherwise become liable or responsible for the obligations of any other
person or entity; or make any loans, advances or capital contributions to,
or investments in, any other person or entity, subject to some exceptions;
- hire any non-billable employee or billable employee to receive
compensation in excess of $8,000 per month;
- enter into, adopt or amend any employee benefit plan or any employment or
severance agreement or arrangement;
- increase the compensation or fringe benefits of, or materially modify the
employment terms of, its directors, officers, or employees, except in the
ordinary course of business;
- pay any bonus or other benefit to its directors, officers or employees;
- acquire, sell, lease, license or dispose of any assets or property, other
than purchases and sales in the ordinary course of business and not in
excess of $50,000 per item;
- mortgage or pledge any of its property or assets or subject any of its
property or assets to any security interest;
- discharge or satisfy any security interest or pay any obligation or
liability other than in the ordinary course of business;
- amend its charter, bylaws or other organizational documents;
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- change in any material respect its accounting methods, principles or
practices;
- enter into, amend, terminate, take or omit to take any action that would
constitute a violation of or default under, or waive any rights under, any
material contract or agreement, or that restricts or affects Eggrock's (or
its successor's) ability to price its services or products, or its ability
to render services for any other person, firm or entity;
- make or commit to make any capital expenditure in excess of $25,000 per
item or $100,000 in the aggregate, subject to some exceptions;
- enter into any agreement which provides for (i) "most favored nation
pricing", (ii) noncompetition, or (iii) restrictions on the ability of
Eggrock or its successors to hire employees or retain contractors;
- institute or settle any legal proceeding;
- take any action or fail to take any action permitted by the merger
agreement with the knowledge that such action or failure would result in
(i) any of the representations and warranties of Eggrock set forth in the
merger agreement becoming untrue; or (ii) any of the conditions to the
merger not being satisfied; and
- agree to or otherwise take any of the above-referenced actions.
INDEMNIFICATION OF BREAKAWAY BY EGGROCK STOCKHOLDERS
The merger agreement provides that the Eggrock stockholders who receive
Breakaway common stock in the merger will indemnify Breakaway for any and all
damages, subject to the limitations described below, Breakaway may suffer as a
result of any of the following:
- any misrepresentation, breach of warranty or failure to perform any
covenant or agreement of Eggrock contained in the merger agreement; or
- any failure of an Eggrock stockholder to have good, valid and marketable
title to the shares issued in his, her or its name.
The representations, warranties and obligations contained in the merger
agreement continue in effect for one year following the closing.
To secure the indemnification obligations of the Eggrock stockholders and
optionholders, 10% of the Breakaway common stock that would otherwise be issued
to the Eggrock stockholders at the closing will be held in escrow. The shares in
escrow will be Breakaway's sole remedy for satisfying its indemnification
claims. Pursuant to the merger agreement, Maureen Ellenberger has been appointed
as the representative of the Eggrock stockholders with respect to
indemnification matters.
The total liability of the Eggrock stockholders for their indemnification
obligations cannot exceed the fair market value of amounts held in escrow, and
the Eggrock stockholders will not be liable until Breakaway's aggregate claims
for damages exceeds $575,000, at which time the Eggrock stockholders will only
be liable for damages in excess of $575,000. The foregoing limitations do not
apply to the breach of representations and warranties by Eggrock regarding
organization and corporate existence, capitalization and authorization of the
merger.
No Eggrock stockholder has a right of contribution against any other Eggrock
stockholder with respect to any breach by Eggrock of any representation,
warranty, covenant or agreement. Therefore, no Eggrock stockholder may be liable
for more than 10% of the shares he, she, or it is entitled to receive in the
merger.
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INDEMNIFICATION OF EGGROCK STOCKHOLDERS BY BREAKAWAY
The merger agreement provides that Breakaway will indemnify Eggrock
stockholders who receive Breakaway common stock in the merger for any
misrepresentation, breach of warranty or failure to perform any covenant of the
merger agreement. The total liability of Breakaway in respect of indemnification
claims shall not exceed in the aggregate $125,000,000.
CONDITIONS TO OBLIGATIONS TO EFFECT THE MERGER
The respective obligations of Breakaway and Eggrock to complete the merger
are subject to the satisfaction or waiver of each of the following conditions
before completion of the merger:
- the stockholders of Eggrock must have adopted the merger agreement;
- Breakaway's registration statement as filed with the Securities and
Exchange Commission, of which this consent solicitation
statement/prospectus is a part, must be effective, no stop order
suspending its effectiveness will be in effect and no proceedings for
suspension of its effectiveness will be pending before or threatened by
the Securities and Exchange Commission;
- there shall have been no law, regulation, injunction or order enacted or
issued which has the effect of making the merger illegal;
- Breakaway and Eggrock must have obtained all necessary governmental
approvals, consents and waivers;
- Breakaway, the escrow agent and the indemnification representative must
have entered into the escrow agreement; and
- Breakaway and Eggrock must each receive from their respective tax counsel
an opinion to the effect that the merger will constitute a reorganization
within the meaning of Section 368(a) of the Internal Revenue Code.
Breakaway and Benedict's obligations to complete the merger are subject to
the satisfaction or waiver of each of the following additional conditions before
completion of the merger:
- holders of no more than 10% of the outstanding Eggrock capital stock have
delivered demands seeking appraisal of their shares;
- Eggrock must have obtained those consents designated by the merger
agreement as required prior to closing except for any which if not
obtained, would not have a material adverse effect;
- Eggrock's representations and warranties qualified as to materiality must
be true and correct as if made at and as of such time and all
representations and warranties not so qualified must be true and correct
in all material respects except to the extent Eggrock's representations
and warranties address matters only as of a particular date, they must be
true and correct as of that date, except to the extent that any failure to
be true and correct has not had and is not reasonably likely to have a
material adverse effect;
- Eggrock must have performed or complied with all of its agreements and
covenants required by the merger agreement except to the extent where the
failure to perform or comply has not had and is not reasonably likely to
have a material adverse effect;
- Breakaway must have entered into (a) employment agreements;
(b) restricted stock agreements; and (c) non-competition/non-solicitation
agreements with each of (i) Maureen Ellenberger; (ii) Michael Mordas; and
(iii) Vijay Manwani;
- Breakaway must have entered into restricted stock agreements with
designated employees of Eggrock;
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- Breakaway must have received an opinion from legal counsel to Eggrock;
- Breakaway must have received copies of the resignations, effective at the
closing of the merger, of each director and officer of Eggrock;
- no more than 10% of Eggrock's billable personnel shall have terminated or
resigned their employment with Eggrock; and
- there cannot have been terminated or cancelled any contract under which
Eggrock was to provide services to clients if, in the aggregate, such
contract anticipated to provide for the payment of fees of $2,500,000 or
more during 2000.
Eggrock's obligations to complete the merger are subject to the satisfaction
or waiver of each of the following additional conditions before competition of
the merger:
- Breakaway must have effected all of the registrations, filings and notices
required by the merger agreement;
- Breakaway's and Benedict's representations and warranties must be true and
correct as if made at and as of such time except (i) to the extent
Breakaway's and Benedict's representations and warranties address matters
only as of a particular date, they must be true and correct as of that
date and (ii) that any qualification based on "materiality" or "material
adverse effect" are to be disregarded;
- each of Breakaway and Benedict must have performed or complied with all of
its agreements and covenants required by the merger agreement;
- Eggrock must have received an opinion from legal counsel to Breakaway and
Benedict;
- the shares of Breakaway common stock to be issued in connection with the
merger must be approved for quotation on the Nasdaq National Market;
- filing with the Nasdaq National Market of a notification form for listing
of additional shares shall have been approved and such shares shall be
approved for listing; and
- Breakaway and certain Eggrock stockholders must have entered into a
registration rights agreement.
TERMINATION OF THE MERGER AGREEMENT
The merger agreement may be terminated at any time prior to completion of
the merger, whether before or after approval and adoption of the merger
agreement by Eggrock stockholders:
- by mutual written consent of Breakaway and Eggrock;
- by Breakaway, upon a breach of any representation, warranty or covenant on
the part of Eggrock set forth in the merger agreement, or if any of
Eggrock's representations or warranties are or become untrue so that the
corresponding condition to completion of the merger would not be met,
provided that, if the breach or inaccuracy is able to be cured by Eggrock
within 10 days following delivery by Breakaway to Eggrock of written
notice of such breach or inaccuracy. Breakaway may not terminate the
merger agreement if the breach or inaccuracy is being cured by Eggrock;
- by Eggrock, upon a breach of any representation, warranty or covenant on
the part of Breakaway or Benedict set forth in the merger agreement, or if
any of Breakaway's or Benedict's representations or warranties are or
become untrue so that the corresponding condition to completion of the
merger would not be met, provided that, if the breach or inaccuracy is
curable by Breakaway or Benedict within 10 days following delivery by
Eggrock to
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Breakaway or Benedict of written notice of such breach or inaccuracy.
Eggrock may not terminate the merger agreement if the breach or inaccuracy
is being cured by Breakaway or Benedict;
- by Breakaway, if Eggrock's stockholders have not approved the merger
agreement; and
- by Breakaway or Eggrock, if the merger is not completed on or before
July 31, 2000.
PAYMENT OF TERMINATION FEE
If Breakaway or Eggrock terminates the merger agreement because of a breach
by the other party, in some instances, the breaching party must pay $150,000 to
the non-breaching party as partial reimbursement of the fees and expenses of the
non-breaching party. See also "--Indemnification of Breakaway by Eggrock
Stockholders."
AMENDMENT AND WAIVER
Generally, the boards of directors of Breakaway and Eggrock may amend the
merger agreement at any time prior to the completion of the merger. Either of
Breakaway or Eggrock may extend the other's time for the performance of any of
the obligations or acts under the merger agreement, waive any inaccuracies in
the other's representations and warranties and waive compliance by the other
with any of the agreements or conditions contained in the merger agreement.
However, after the stockholders of Eggrock consent to the merger, any amendment
will be restricted by Delaware statute. Amendments must be in writing and signed
by all parties.
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OTHER AGREEMENTS
VOTING AGREEMENT
In connection with the execution of the merger agreement, Eggrock entered
into a voting agreement with Maureen Ellenberger, Michael Mordas and Vijay
Manwani. These three stockholders own approximately 69% of the combined voting
power of the outstanding capital stock of Eggrock. Pursuant to the agreement,
each stockholder has agreed to vote all of his or her shares of Eggrock voting
common stock in favor of adoption of the merger agreement and has granted
Breakaway an irrevocable proxy to vote his or her shares in favor of adoption of
the merger agreement. The agreement will terminate upon the earliest to occur of
the effective time of the merger and termination of the merger agreement in
accordance with its terms.
ESCROW AGREEMENT
At the closing, Breakaway will deposit in escrow with the escrow agent a
certificate representing 10% of the shares of Breakaway common stock to which
the Eggrock stockholders would be otherwise entitled for the purpose of securing
and as the sole remedy for satisfying the indemnification obligations of the
Eggrock stockholders pursuant to the merger agreement. The escrow shares will be
issued in the name of the escrow agent or its nominee. The escrow will terminate
one year after the closing. During the term of the escrow agreement, the escrow
shares will be voted by the escrow agent on behalf of the Eggrock stockholders
in accordance with instructions received by the escrow agent from the Eggrock
stockholders. In the absence of these instructions, the escrow agent need not
vote these shares. Promptly following the termination of the escrow, the escrow
agent will deliver to Breakaway's stock transfer agent the number of shares
remaining in escrow. The transfer agent will then deliver the shares to the
Eggrock stockholders in proportion to their relative holdings prior to the
merger. The escrow agent will distribute any cash dividends or property (other
than securities) distributed with respect to the shares to the Eggrock
stockholders. Breakaway and Eggrock are jointly and severally liable for losses,
fees or expenses incurred by the escrow agent without negligence or willful
misconduct and arising out of its duties as escrow agent.
Pursuant to the merger agreement, Maureen Ellenberger has been appointed as
the representative of the Eggrock stockholders to deal with all matters relating
to the indemnification obligations and the escrow arrangement. The escrow
agreement provides that the Eggrock stockholders will indemnify their
representative against losses, liabilities or expenses incurred without gross
negligence or bad faith on the part of the representative and arising out of her
duties.
REGISTRATION RIGHTS AGREEMENT
At closing, Breakaway will enter into a registration rights agreement
providing registration rights with respect to the shares of Breakaway common
stock to be received by the holders of Eggrock preferred stock in the merger.
Under the registration rights agreement, at any time after November 1, 2000,
these entities may demand that Breakaway file with the Securities and Exchange
Commission a "shelf" registration statement on Form S-3 covering the resale to
the public by these entities of the Breakaway common stock then owned by these
entities. Breakaway must file the registration statement within 20 days of the
stockholder's request and must use its best efforts to cause the registration
statement to be declared effective by the Securities and Exchange Commission as
soon as practicable. The agreement also obligates Breakaway to cause the
registration statement to remain continuously effective until the first
anniversary of the effective date of the registration statement or such earlier
time as all of the Breakaway common stock covered by the registration statement
have been sold pursuant to the registration statement. The registration rights
agreement also contains other customary provisions, such as limits on the
ability of the stockholders to use the registration statement in specified cases
and indemnification obligations relating to Securities Act liabilities.
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COMPARISON OF CAPITAL STOCK
THE FOLLOWING IS A SUMMARY OF CERTAIN MATTERS WITH RESPECT TO THE CAPITAL
STOCK OF BREAKAWAY AND EGGROCK. BECAUSE IT IS ONLY A SUMMARY, IT DOES NOT
CONTAIN ALL INFORMATION THAT MAY BE IMPORTANT TO YOU. THEREFORE, YOU SHOULD ALSO
READ THE MORE DETAILED PROVISIONS OF BREAKAWAY'S CHARTER AND BYLAWS AND
EGGROCK'S CHARTER AND BYLAWS.
DESCRIPTION OF BREAKAWAY CAPITAL STOCK
The authorized capital stock of Breakaway consists of 80,000,000 shares of
common stock, $0.000125 par value per share, and 5,000,000 shares of preferred
stock, $0.001 par value per share.
BREAKAWAY COMMON STOCK
CAPITALIZATION
As of February 18, 2000, there were 17,497,742 shares of Breakaway common
stock (not adjusted for the stock split) issued and outstanding which were held
of record by approximately 106 stockholders (which does not include shares held
in street name). Breakaway's charter provides that the number of authorized
shares of Breakaway common stock may be increased or decreased (but not below
the number then outstanding) by the affirmative vote of the holders of the
majority of Breakaway common stock entitled to vote, irrespective of the
provisions of Section 242(b)(2) of the Delaware General Corporation Law.
VOTING RIGHTS, LIQUIDATION, DIVIDENDS AND OTHER RIGHTS
Holders of common stock are entitled to one vote for each share held on all
matters submitted to a vote of Breakaway stockholders and do not have cumulative
voting rights. Accordingly, holders of a majority of the shares of common stock
entitled to vote in any election of directors may elect all of the directors
standing for election. Holders of Breakaway common stock are entitled to receive
proportionately any dividends as may be declared by Breakaway's board of
directors, subject to any preferential dividend rights of outstanding preferred
stock. Upon Breakaway's liquidation, dissolution or winding up, the holders of
common stock are entitled to receive proportionately its net assets available
after the payment of all debts and other liabilities and subject to the prior
rights of any outstanding preferred stock. Holders of Breakaway common stock
have no preemptive, subscription, redemption or conversion rights.
BREAKAWAY PREFERRED STOCK
CAPITALIZATION
As of February 18, 2000, there were no shares of Breakaway preferred stock
outstanding. The Breakaway board of directors has the authority to issue
preferred stock in one or more series and to determine the rights, preferences,
privileges and restrictions, including voting rights, dividend rights,
conversion rights, redemption privileges and liquidation preferences, of each
series of preferred stock.
The purpose of authorizing Breakaway's board of directors to issue preferred
stock and determine its rights and preferences is to eliminate delays associated
with a stockholder vote on specific issuances. The issuance of preferred stock,
while providing desirable flexibility in connection with possible acquisitions
and other corporate purposes, could have the effect of making it more difficult
for a third party to acquire, or could discourage a third party from acquiring,
a majority of Breakaway's outstanding voting stock. Breakaway has no present
plans to issue any additional shares of preferred stock.
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TRANSFER AGENT AND REGISTRAR
The transfer agent and registrar of the Breakaway common stock is
BankBoston, N.A. and its telephone number is (781) 575-2000.
DESCRIPTION OF EGGROCK CAPITAL STOCK
The authorized capital stock of Eggrock consists of 20,000,000 shares of
voting common stock, par value $0.01 per share, 10,000,000 shares of non-voting
common stock, par value $0.01 per share and 5,000,000 shares of preferred stock,
par value $0.01 par value.
EGGROCK COMMON STOCK
As of February 18, 2000, there were 6,750,000 shares of Eggrock voting
common stock outstanding and 2,365,692 shares of Eggrock non-voting common stock
outstanding.
CONVERSION
Upon the consummation of the sale of shares of any class of Eggrock common
stock having net proceeds to Eggrock equal to or in excess of $25 million
(whether such shares are being offered by Eggrock, Eggrock stockholders, or
both) in a firm commitment underwritten public offering pursuant to an effective
registration statement under the Securities Act of 1933, as amended, all
outstanding shares of Eggrock non-voting common stock will automatically be
converted one-for-one into shares of Eggrock voting common stock.
VOTING RIGHTS, LIQUIDATION AND OTHER RIGHTS
Stockholders of Eggrock voting common stock are entitled to one vote for
each share held on matters submitted to a vote of stockholders. Holders of
Eggrock voting common stock may also take action by written consent. Holders of
Eggrock voting common stock do not have cumulative voting rights. The holders of
Eggrock non-voting common stock do not have the right to vote, except as
required under applicable law. Except as required by law, the holders of Eggrock
voting common stock and non-voting common stock vote together as a single class
on all matters as to which holders of Eggrock non-voting common stock are
entitled to vote. Upon the liquidation, dissolution or winding up of Eggrock,
the holders of Eggrock common stock are entitled to receive ratably the net
assets of Eggrock available after the payment of all debts and other liabilities
and subject to the prior rights of any outstanding Eggrock preferred stock.
DIVIDENDS
Holders of Eggrock common stock are entitled to receive their proportionate
share of any dividends declared by the Eggrock board of directors, subject to
any preferential dividend rights of outstanding Eggrock preferred stock.
EGGROCK PREFERRED STOCK
As of February 18, 2000, there were 3,000,000 shares of Eggrock preferred
stock outstanding. Eggrock's charter provides that the number of authorized
shares of a class of Eggrock preferred stock may be increased or decreased (but
not below the number then outstanding) by the affirmative vote of the holders of
a majority of the Eggrock voting common stock.
VOTING RIGHTS, LIQUIDATION AND OTHER RIGHTS
Except as required by law or as set forth in Eggrock's charter, the holders
of Eggrock voting common stock and Eggrock preferred stock vote together as a
single class on all matters submitted to the Eggrock stockholders for a vote.
Eggrock may not, without the vote of a majority in interest of the
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preferred stock, increase the number of directors to more than five. The holders
of the preferred stock also have the right to elect one director of Eggrock.
Upon the liquidation, dissolution or winding up of Eggrock, holders of Eggrock
preferred stock are entitled to receive an amount equal to the original purchase
price per share of approximately $3.33, and are entitled to share ratably with
the holders of common stock on an as if converted basis with respect to any
distributions made to holders of common stock. Holders of preferred stock shall
not be entitled to receive the liquidation preference if the amount they would
receive sharing ratably with holders of common stock on an as if converted basis
exceeds four times the original purchase price per preferred share.
DIVIDENDS
The holders of preferred stock are not entitled to dividends unless declared
by the board of directors but shall be entitled to receive their proportionate
share of any dividends declared with respect to the common stock. Eggrock may
not declare any dividends with respect to the common stock without the consent
of a majority in interest of the preferred stock.
REGISTRATION RIGHTS
Eggrock has granted registration rights to the holders of preferred stock of
Eggrock which provide that if Eggrock consummates an initial public offering, it
must include shares of common stock issuable upon conversion of the preferred
stock. At any time after 180 days after an initial public offering of Eggrock,
holders of a majority in interest of the preferred stock may require Eggrock to
register under the Securities Act of 1933, as amended, certain of shares of
common stock issuable upon conversion of the preferred stock which are subject
to restrictions under the Securities Act of 1933, as amended. Eggrock shall be
obligated to register such shares on only two occasions unless Eggrock is
eligible to register such shares on Form S-3, in which case there is no limit on
the number of occasions Eggrock is required to register shares on Form S-3. At
any time Eggrock registers shares under the Securities Act of 1933, as amended,
it must register a certain portion of the common shares issuable upon conversion
of the preferred stock, subject to certain exceptions.
COMPARISON OF CERTAIN RIGHTS
After consummation of the merger, holders of Eggrock capital stock who
receive Breakaway common stock under the terms of the merger agreement will
become stockholders of Breakaway. The rights of stockholders of Eggrock are
presently governed by Delaware law, the Eggrock charter and the Eggrock bylaws.
The rights of stockholders of Breakaway are governed by Delaware law,
Breakaway's charter and Breakaway's bylaws. The following discussion compares
the rights of holders of Eggrock capital stock and holders of Breakaway capital
stock and various provisions of the charters and bylaws of Eggrock and
Breakaway. This summary is not complete and is qualified in its entirety by
reference to Eggrock's charter and bylaws, Breakaway's charter and bylaws and
the relevant provisions of Delaware law.
SPECIAL MEETING OF STOCKHOLDERS
Under Delaware law, a special meeting of stockholders may be called by the
board of directors or by any other person authorized to do so in the charter or
the bylaws. Breakaway's charter provides that special meetings of the
stockholders may only be called by Breakaway's chairman of the board, president
or board of directors. Eggrock's bylaws provide that special meetings of
stockholders may only be called by Eggrock's chairman of the board or board of
directors.
ACTION BY WRITTEN CONSENT OF STOCKHOLDERS
Under Delaware law, unless the charter provides otherwise, any action to be
taken by stockholders may be taken without a meeting, without prior notice, and
without a vote, if the stockholders having
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the number of votes that would be necessary to take such action at a meeting at
which all stockholders were present and voted consent to the action in writing.
Breakaway's charter does not allow for actions by written consent of the
stockholders. Eggrock's charter and bylaws permit actions by written consent of
stockholders.
AMENDMENT OF CHARTER AND BYLAWS
Delaware law provides generally that the affirmative vote of a majority of
the shares entitled to vote on any matter is required to amend a corporation's
charter or bylaws, unless a corporation's charter or bylaws, as the case may be,
require a greater percentage. Breakaway's charter and bylaws require the
affirmative vote of the holders of at least 75% of the Breakaway capital stock
issued and outstanding and entitled to vote to amend or repeal some provisions
of Breakaway's charter. Eggrock's charter requires the approval of the board of
directors and the affirmative vote of the holders of at least a majority of the
Eggrock capital stock issued and outstanding and entitled to vote to amend or
repeal some provisions of Eggrock's charter. Eggrock's bylaws can generally be
amended by a majority of the board of directors or a majority in interest of the
shareholders entitled to vote.
CUMULATIVE VOTING
Neither the Breakaway charter nor the Eggrock charter provides for
cumulative voting by stockholders in elections of directors.
CLASSIFICATION OF THE BOARD OF DIRECTORS
Breakaway's bylaws provide that the number of directors shall be fixed by
resolution adopted from time to time by Breakaway's board of directors.
Breakaway's charter divides the board of directors into three classes with
staggered three-year terms. Eggrock's bylaws provide that the number of
directors shall be fixed by resolution adopted from time to time by Eggrock's
board of directors. Eggrock's charter does not divide the board of directors
into classes. Eggrock's charter provides that Eggrock may not increase the
number of directors to more than five without the vote of a majority in interest
of the preferred stock.
REMOVAL OF DIRECTORS
Breakaway's charter provides that directors may be removed only for cause by
the affirmative vote of the holders of two-thirds of shares of Breakaway capital
stock entitled to vote. Breakaway's charter provides that any vacancy on
Breakaway's board of directors, including a vacancy resulting from an
enlargement of Breakaway's board of directors, may only be filled by vote of a
majority of the directors then in office. Eggrock's charter provides, subject to
any right of holders of Eggrock preferred stock to elect any director, that
directors may be removed with or without cause only by the affirmative vote of
the majority of the total votes which would be eligible to be cast by Eggrock
stockholders in the election of such director.
LIMITATION OF DIRECTORS' LIABILITY
Each of Breakaway's and Eggrock's charters contains a provision which
eliminates the personal liability of its directors from monetary damages
resulting from a breach of fiduciary duty as a director to the fullest extent
permitted by Delaware law.
INDEMNIFICATION OF DIRECTORS, OFFICERS AND OTHERS
Breakaway's charter contains provisions to indemnify its directors and
officers to the fullest extent permitted by the Delaware law. Eggrock's bylaws
contain provisions to indemnify its directors and officers to the fullest extent
permitted by Delaware law.
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DESCRIPTION OF BREAKAWAY
INTRODUCTION
Breakaway is a full service provider of e-business solutions that allow
growing enterprises to capitalize on the power of the Internet to reach and
support customers and markets. Growing enterprise clients often face significant
obstacles in capitalizing on this opportunity because of technological
complexity, costs of implementation and support and scarcity of qualified
professionals. Breakaway enables its growing enterprise clients to overcome
these obstacles by combining high quality, cost effective Internet professional
services with application hosting to deliver sophisticated e-business solutions
that otherwise might be unavailable to them.
There are five key elements of the Breakaway approach to delivering
e-business solutions:
- Breakaway's proprietary breakthrough methodology enables it to develop
rapid, cost-effective, world-class e-business solutions that Breakaway
designs to maximize the client's return on its technology investments and
provide the client with a sustainable business model and a competitive
advantage;
- Breakaway concentrates on the development of its e-business solutions at
centralized Breakaway Solution Centers where its highly skilled
information technology professionals collaborate to develop solutions more
rapidly and cost effectively than would be possible if such professionals
were geographically dispersed;
- in order to maintain close contact with its clients, Breakaway delivers
the solutions developed at its Breakaway Solution Centers through small
groups of senior personnel at its regional offices located strategically
throughout the United States;
- Breakaway has a dedicated group of professionals--the Breakaway Knowledge
Innovation Team--that captures and disseminates its intellectual capital
throughout its organization and across client engagements; and
- Breakaway offers global application hosting capabilities for both packaged
and customized e-business solutions, allowing it to provide complementary,
high quality hosting and application level support services as part of its
full service offering.
Breakaway employs over 255 professionals who provide strategy solutions,
Internet solutions, and application hosting services. Breakaway offers its
services through seven regional offices located in Boston, Chicago, Dallas, New
York, Orlando, Philadelphia and Redwood Shores (California). Breakaway's four
Breakaway Solution Centers are located in Boston, Philadelphia, Dallas and
Redwood Shores. Breakaway provides e-business application hosting solutions
through facilities in North America, Europe, Asia and Australia. Breakaway
Solutions' clients include Circles, Commonwealth Financial Network, eRisks,
Information Builders, iTurf, Kemper, Partners HealthCare System, Plan Sponsor
Exchange, Portal Software, StarCite.com, Sun Microsystems and VerticalNet.
INDUSTRY BACKGROUND
OVERVIEW
Businesses today are using the Internet to create new revenue opportunities
by enhancing their interactions with new and existing customers. Businesses are
also using the Internet to increase efficiency in their operations through
improved communications, both internally and with suppliers and other business
partners. This emerging business use of the Internet encompasses both
business-to-business and business-to-consumer communications and transactions.
The projected growth of these markets over the next five years is dramatic,
particularly in business-to-business e-commerce. The Gartner Group, an
independent research firm, projects that the market for business-to-business
e-commerce will grow from $43 billion in 1998 to $2.3 trillion in 2004.
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Forrester Research, another independent research firm, predicts that in 2000,
53% of all e-commerce spending will come from companies with $500 million or
less in revenue (the growing enterprise market). In order to capitalize fully on
the new opportunities presented by the Internet, businesses demand
Internet-based applications that process transactions and deliver information
far more effectively than static Web pages.
CHALLENGES FOR GROWING ENTERPRISES
The extensive reach of the Internet can enable growing enterprises to
compete effectively with larger competitors. However, growing enterprises face
significant challenges in their efforts to capitalize on the opportunities that
the Internet offers, including:
- the need to rapidly and successfully develop and implement a successful
and sustainable business before the competition;
- the need to be aware of and implement and stay abreast of new and rapidly
changing technologies, frequently without the benefit of a substantial
internal information technology staff;
- significant integration and interoperability issues caused by the
patchwork of legacy systems that businesses often implemented without a
focused information technology strategy;
- greater budgetary constraints than large enterprises, making purchase
price, total cost of ownership and technological obsolescence key issues;
and
- the need to maintain significant technological infrastructure and to
support e-business applications 24 hours a day, seven days a week.
Breakaway believes that the needs of growing enterprises will make them a
significant factor in the overall market for Internet services. International
Data Corporation, an independent research firm, defines Internet services as the
consulting, design, systems integration, support, management and outsourcing
services associated with the development, deployment and management of Internet
sites. International Data Corporation expects the worldwide market for these
services, which includes both growing and all other enterprises, to grow at a
five year compounded annual growth rate of 59% from $7.8 billion in 1998 to
$78.5 billion in 2003.
Large companies which provide services to assist businesses in using
information technology, including the Internet, have primarily focused their
service offerings on large enterprises, such as Fortune 500 companies, while
largely ignoring growing enterprises and their unique needs. These traditional
service providers generally operate by deploying large numbers of personnel to
the client's site to conduct lengthy studies before proposing a solution.
Breakaway believes that this approach does not yield effective solutions within
the time and budgetary constraints of growing enterprises. According to the
Gartner Group, 75% of companies prefer not to utilize traditional management
consultants because these firms do not understand their Internet needs.
Many boutique information technology service providers that direct their
offerings to growing enterprises do not offer a comprehensive suite of services.
They also frequently lack the financial resources and employees to take on full
service projects or to provide follow-up support and training. Moreover,
resource limitations often prevent small service providers from investing in
internal training and research and development, which Breakaway believes are
critical to the development of innovative solutions and for the cost-effective
provision of services.
Growing enterprises need to get to market very quickly and often lack
internal information technology resources. Accordingly, they increasingly demand
a single source provider of strategy, systems integration, hosting and support
that is focused on their specific needs. Breakaway believes that neither
traditional information technology service providers nor boutique providers
currently meet this demand.
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THE BREAKAWAY SOLUTION
Breakaway has specifically tailored its service offerings for growing
enterprises seeking rapid delivery of cost-effective, high value-added,
comprehensive solutions for their e-business initiatives. Its services consist
of strategy solutions, Internet solutions and application hosting. By offering a
seamless integration of these services, Breakaway is a full service provider of
e-business solutions for growing enterprises. Breakaway delivers its services
using five innovative business processes:
- BREAKAWAY BREAKTHROUGH METHODOLOGY. This methodology divides each client
engagement into discrete phases. In the first phase, Breakaway works
closely with the client to define measurable business objectives and
develop a strategy to achieve these objectives. Breakaway then determines
how the client can use information technology solutions to implement this
strategy. Based on this determination, Breakaway defines the scope of the
solution and helps the client to visualize the proposed solution by
creating a prototype that incorporates the elements of the solution for
the client's customers to see and use. In the next phase, Breakaway
identifies milestones for the project and establishes how the client can
best measure whether the project has met its objectives. After Breakaway
defines the scope of the project and identifies milestones, Breakaway
designs, develops and implements the solution. Breakaway then assists the
client in employee training and in assimilating the changes created by the
solution. Finally, Breakaway maintains its client relationships by
monitoring and reassessing their needs on an ongoing basis.
- BREAKAWAY SOLUTION CENTERS. Breakaway develops its eBusiness solutions at
Breakaway Solution Centers in Boston, Philadelphia, Dallas and Redwood
Shores. Breakaway believes that by concentrating resources at a few sites
where highly skilled and experienced information technology professionals
work together, Breakaway greatly facilitates the sharing of knowledge and
implementation of best practices. Breakaway typically performs development
work at its Solution Centers, which substantially reduces the costs and
inefficiencies associated with travel to client sites. This approach also
reduces the disruption of the client's business that frequently occurs
when a large number of consultants visit the client's site.
- BREAKAWAY REGIONAL DELIVERY. Breakaway delivers the solutions which it
develops at its Breakaway Solution Centers through regional offices
located strategically throughout the United States. Breakaway staffs these
offices with small groups of senior delivery personnel who establish close
working relationships with clients in the region. Using this approach,
Breakaway is able to place senior professionals near its clients while
still providing the client with the efficiencies of centralized solution
development.
- BREAKAWAY KNOWLEDGE INNOVATION TEAM. Breakaway has created a team, staffed
with senior information technology professionals, that develops and
deploys intellectual capital throughout Breakaway Solutions and across
client engagements. The Knowledge Innovation team monitors all of its
client projects on an ongoing basis to identify best practices and
innovative solutions. The team collects and refines this knowledge, then
disseminates it to Breakaway's professionals through Breakaway proprietary
intranet portal, employee training and ongoing communications. Breakaway
believes that its Knowledge Innovation Team allows it to provide its
clients with high quality services quickly and in a cost-effective manner.
- BREAKAWAY INTEGRATED APPLICATION HOSTING. Unlike most providers of
information technology consulting and systems integration services,
Breakaway offers application hosting services for e-business solutions.
Breakaway believes that this capability allows it to help its clients
implement and operate solutions more quickly and cost effectively than
service providers who do not offer application hosting services.
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Breakaway believes its solutions provide its clients with a range of
significant benefits, including:
- BREAKAWAY SPEED. Time to market is a critical factor to the success of an
e-business initiative. Breakaway believes that its approach delivers
solutions to clients significantly more rapidly than traditional
approaches.
- BREAKAWAY QUALITY. The solutions that Breakaway offers are critically
important to its clients' businesses. Breakaway has designed its business
processes to deliver to growing enterprises solutions that it believes are
of equal or superior quality to solutions provided by traditional service
providers.
- BREAKAWAY VALUE. Because growing enterprises often have limited financial
resources, Breakaway seeks to deliver its services in as cost effective a
manner as possible. The core focus of Breakaway's Breakthrough methodology
is the creation of measurable value for its clients. In certain cases
Breakaway links a portion of its fees to its success in providing
measurable value.
BREAKAWAY STRATEGY
Breakaway's objective is to become the leading full service provider of
business-to-business e-business solutions that enable growing enterprises to
increase their revenues and market share. Breakaway's strategy for achieving
this objective is as follows:
FURTHER PENETRATE THE UNDERSERVED GROWING ENTERPRISE MARKET. The growing
enterprise market for e-business solutions is already a large part of the
overall market for these solutions and is expanding rapidly. Breakaway believes
that the companies in the growing enterprise market have different requirements
from more established enterprises, particularly because they often have limited
internal information technology staffs and resources. Breakaway believes this
market is underserved and that growing enterprises require the services of a
full service provider. Breakaway intends to continue to focus on the growing
enterprise market as a full service provider of strategy solutions, eBusiness
solutions and application hosting services.
AGGRESSIVELY PROMOTE THE BREAKAWAY SOLUTIONS BRAND. Growing enterprises
comprise a large, fragmented and geographically diverse market. To leverage its
direct selling efforts and reach this market effectively, Breakaway believes it
is important to build awareness of the Breakaway Solutions brand. To promote its
brand, Breakaway intends to expand its corporate marketing and advertising
efforts, with the specific objective of targeting senior executives of growing
enterprises. Breakaway's goal is to create national recognition of Breakaway
Solutions as the leading full service provider of e-business solutions that
address the specific needs of growing enterprises.
ATTRACT, TRAIN AND RETAIN HIGH QUALITY INFORMATION TECHNOLOGY
PROFESSIONALS. Breakaway believes that attracting and retaining outstanding
professionals is essential to its growth. Breakaway performs the majority of its
development work in its Solution Centers, which greatly limits the travel
required of its professionals. Breakaway believes that extensive travel is one
of the primary causes of employee turnover in its industry. Through its Solution
Centers and regional offices, Breakaway employees participate in a unique
culture that is entrepreneurial and promotes enterprise-wide, collaborative
knowledge sharing. Breakaway believes that the combination of its lower travel
requirement and unique culture helps it to attract and retain highly skilled,
experienced senior information technology professionals.
EXPAND ALLIANCES. Breakaway has established a number of working alliances
with independent software vendors and Internet technology providers. These
relationships provide a range of benefits, including new sales leads,
co-marketing and co-branding opportunities and discounts on software licenses.
In addition, Breakaway's alliances allow it to gain access to training, product
support and technology developed by the companies with which it has alliances.
These relationships also provide an
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accelerated path to developing expertise regarding hardware, software and
applications. Breakaway plans to pursue alliances with both market leading
companies as well as emerging companies. In all cases, Breakaway will seek
alliances which provide it with the opportunity both to use applications in its
solutions and to host these applications.
EXPAND CENTRALIZED DEVELOPMENT/REGIONAL DELIVERY MODEL. Breakaway's
regional office strategy enables it to place senior service delivery personnel
near its clients and to better address the particular demands of local markets
with field sales and field marketing professionals. Senior delivery
professionals in each regional office participate in the sales process for each
client and play a significant role in the design, architecting and program
management of the solution for that client. Breakaway believes that it improves
its responsiveness and client satisfaction by providing a single point of
contact throughout its relationship with the client. Breakaway intends to open
additional regional offices in the Southeast, Midwest and Southwest United
States in 2000. Breakaway also expects to add additional Solution Centers to
support its growth. Breakaway's centralized Solution Center model, complemented
by its regional office network, enables it to operate more effectively and
efficiently than service providers with a less centralized approach.
PROVIDE APPLICATION HOSTING THROUGH STRATEGICALLY LOCATED LEASED
FACILITIES. Breakaway leases space from third party facilities, known as
co-location facilities, for the equipment which it uses for its application
hosting services. Breakaway currently leases space from multiple providers at
eleven co-location facilities worldwide. Breakaway believes that leasing space
and related commodity services, such as uninterrupted power supplies and high
speed telecommunications access, permits it to expand quickly into new markets
while reducing the capital investment required for expansion. Breakaway intends
to continue to pursue this approach because geographic distribution of its
hosting facilities provides its clients with improved, lower cost
telecommunications access as a result of the clients' proximity to the facility,
reduces its network costs and increases reliability through increased diversity
and redundancy.
BREAKAWAY SERVICES
As a full service provider, Breakaway offers the following services:
- strategy solutions;
- e-solutions; and
- application hosting.
Breakaway delivers these services using business processes that it has
designed to provide rapid, high quality and cost-effective solutions. These
business processes include Breakaway's Breakthrough methodology, Breakaway
Solution Centers, Breakaway Knowledge Innovation Team and Breakaway's
sophisticated Breakaway application hosting capabilities. Breakaway believes
that it provides its clients with the greatest value when they use all of its
services on an integrated basis. Clients that engage Breakaway initially only to
provide consulting services frequently request that Breakaway develop and
implement the solution which it has designed in its consulting engagement.
Breakaway believes that it can provide its clients with particularly significant
time and cost savings if it hosts an application that it has designed and
developed for the client because of its knowledge of the client and the
solution.
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The following table is a brief summary of the services which Breakaway
offers in its three service categories.
<TABLE>
<CAPTION>
BREAKAWAY STRATEGY SOLUTIONS BREAKAWAY E-SOLUTIONS BREAKAWAY APPLICATION HOSTING
- ---------------------------- ----------------------------- -----------------------------
<S> <C> <C>
- - e-business strategy - Electronic commerce - Packaged and custom
- - Business and technology transactions systems application hosting
alignment - Community aggregation - Complex Web site management
- - Chief Information Officer applications - High availability hosting
outsourcing - Interactive marketing facilities
- - Application portfolio - Content generation tools - Application performance
management - Site traffic analysis and optimization and reporting
- - Industry and competitive reporting - Security services
reviews - Sales force automation - Application maintenance and
- Marketing automation support services 24 hours per
- Customer service day
- Customer self-service
- Order management
</TABLE>
BREAKAWAY STRATEGY SOLUTIONS
Breakaway advises its customers on the use of e-business solutions to reach
and support customers and markets. The goal of these solutions is typically the
achievement of a quantifiable, sustainable competitive advantage within a short
time frame. Breakaway's strategy services include analyzing the client's market,
business processes and existing technology infrastructure, evaluating both
packaged and custom alternative solutions and formulating recommendations for a
solution or strategy. Breakaway provides a road map that its clients can
implement immediately.
BREAKAWAY E-SOLUTIONS
Breakaway develops and implements e-business applications for high
transaction volume revenue generation activities. Breakaway develops customized
applications to be flexible and easily scalable. Clients require flexibility so
that they can easily integrate Breakaway's solutions with their existing
systems, upgrade solutions for technological changes and respond to developments
in how business is conducted on the Internet. Scalability is critical to
Breakaway's clients because they often experience significant increases in
transaction volume within a short time period. In many cases, Breakaway bases
its development work on strategy and designs that it has developed for the
client in a strategy planning engagement.
BREAKAWAY APPLICATION HOSTING
Breakaway hosts a variety of customized and packaged applications, including
customer relationship management applications, database applications, corporate
Web sites and complex transaction intensive e-business applications. Breakaway's
application hosting service enables clients to rent applications through payment
of a monthly service fee instead of incurring a large one-time, initial
investment. Breakaway's application hosting operations team provides active
monitoring and application level support for Internet-based applications
24 hours a day, 7 days a week. These support capabilities often reduce the
client's need for a large information technology staff.
To provide Breakaway's application hosting services, Breakaway operates a
high availability global service delivery infrastructure with multiple hosting
centers in key geographic locations. Breakaway's
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service delivery infrastructure is designed to provide its clients with a fast
response time, reliability, scalability and security.
BREAKAWAY CLIENTS
Breakaway focuses its marketing and sales activity on growing enterprises.
These businesses generally fit within two broad categories:
- companies or divisions of companies that have annual sales of up to
$500 million; and
- new and emerging Internet-based businesses.
The functionality of many of Breakaway's solutions is applicable across a
variety of industries. Accordingly, Breakaway provides its services to a number
of types of businesses. Breakaway's clients' industries include high technology,
financial services, health care and telecommunications.
A representative list of Breakaway's clients includes:
- Advent Software
- Citizens Financial Group
- Enterprise Risk Solutions
- Fidelity & Guaranty Life Insurance
- Information Builders
- Kemper
- Partners HealthCare System
- Portal Software
- SEI Investments
- Summit Partners
- VerticalNet
- Circles
- Commonwealth Financial Network
- eRisks
- FoodService.com
- iTurf
- Open Systems Solutions
- Plan Sponsor Exchange
- Primavera
- StarCite.com
- Sun Microsystems
- Zymark
Breakaway offers its strategy solutions and Internet solutions services on
either a time and materials basis or a fixed price basis. Breakaway has
initiated a Breakaway Value Assurance program in which a percentage of its fee
is contingent upon the client achieving agreed upon performance objectives.
Breakaway offers this option only in situations in which Breakaway and the
client have agreed on a clear set of measurable values and Breakaway has
provided a sufficiently broad range of services to influence the project's
success. Breakaway believes that its willingness to tie its compensation to
performance objectives is an important sales tool because it demonstrates its
commitment to provide services that have measurable value to its clients.
Breakaway provides its application hosting services for an initial set-up
fee plus a monthly service fee. The monthly service fee is subject to
maintaining stated service levels. Breakaway's hosting fees vary depending upon
the scope of the client's requirements.
BREAKAWAY REPRESENTATIVE CLIENT ENGAGEMENTS
The following examples are representative of Breakaway's client engagements:
PARTNERS HEALTHCARE SYSTEM, INC. Partners HealthCare is an integrated
health care delivery network, which includes two founding members, The
Massachusetts General Hospital and Brigham and Women's Hospital. In 1999,
Partners HealthCare expected to receive a total of approximately $400 million in
sponsored research awards. In addition, Dana Farber/Partners CancerCare, a
collaboration between the Dana Farber Cancer Institute and the institutions
comprising Partners
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HealthCare, needed to integrate research management information to provide
investigators and management comprehensive access to information and to
streamline operations. Partners HealthCare engaged Breakaway to design a
solution to meet these objectives without substantially increasing its
administrative staff. Based on the work of that group, Breakaway developed a
solution at one of its Solution Centers that integrated into a single database
all aspects of all Partners HealthCare's research projects from 17 databases in
multiple locations. The solution deploys the database and its user interface
across an intranet, which permits approximately 2,000 researchers and
administrators easy, rapid and standardized access. This solution achieved the
following client goals:
- it decreased the average time for internal approval of research protocols
from 90 to 14 days;
- it permitted researchers to spend more time performing research and less
time handling administrative issues and responding to information
requests; and
- it made research administration faster and easier.
VERTICALNET, INC. VerticalNet is a leading creator and operator of Web
sites known as vertical trade communities. These tightly focused sites attract
buyers and sellers from around the world by providing editorial content, forums
for the exchange of ideas and the ability to conduct business transactions to
similarly interested professionals. VerticalNet also offers Web site design,
management and hosting services for businesses and trade organizations.
VerticalNet retained Breakaway to assist it in developing a number of different
solutions to realize revenues from business transactions on its Web sites,
increase sales leads, enhance customer services and improve internal work flow.
Breakaway began this assignment by having its Internet solutions group
design a sales lead generation system that enables VerticalNet to monitor
inquiries about businesses requesting information from VerticalNet or its
advertisers. Breakaway then developed and implemented a virtual store at one of
its Solution Centers to enable VerticalNet to convey its ability to engage in
electronic commerce. The store displays saleable items to VerticalNet's more
than 40 trading communities based on the particular affiliation of the customer.
Breakaway designed, developed and implemented this solution within eight weeks
after VerticalNet retained Breakaway.
Breakaway's Internet Solutions group also designed, developed and
implemented other additional significant solutions, including:
- a set of tools which permit both advertisers and VerticalNet's internal
sales force to access and use the data stored in the sales lead generation
system; and
- a comprehensive internal system for the management of customer calls,
advertising inventory, personnel scheduling and administrative oversight
functions.
Breakaway continues to work closely with VerticalNet to expand and refine
these applications.
PLAN SPONSOR EXCHANGE, INC. Plan Sponsor Exchange wanted to create a Web
site, to be called PlanSponsorExchange.com, that would facilitate communications
and transactions between money managers, consultants and their pension fund
clients. Plan Sponsor Exchange engaged Breakaway for assistance in developing a
strategic technical plan to deploy the concept on the Internet.
Breakaway began this project by having its strategy solutions professionals
work with the founder to create an information technology strategy, development
plan and budget. Breakaway then began production of an Internet prototype at one
of its Solution Centers. The engagement proceeded as follows:
- 14 days after Breakaway's initial meeting with the client, Breakaway had
developed a functioning Internet prototype;
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- 90 days after Breakaway's initial meeting, Breakaway delivered a
functioning beta Internet test site on time and on budget; and
- 135 days after Breakaway's initial meeting, the client had fully deployed
its Plan Sponsor Exchange.com site.
Because of its desire to focus on its core business, time to market
considerations and cost considerations, Plan Sponsor Exchange also contracted
with Breakaway to provide application hosting services. Breakaway believes that
its full service provider and rapid deployment capabilities played a key role in
enabling Plan Sponsor Exchange to realize the first-to-market advantage which
was critical to success as institutional investment managers increase their use
of the Internet.
BREAKAWAY PROFESSIONAL ENVIRONMENT
Breakaway's success depends in substantial part upon its ability to recruit
and retain professionals with the high level of information technology skills
and experience needed to provide its sophisticated services. Breakaway believes
that the combination of professional support, intellectual challenge, reduced
travel, corporate culture and compensation it offers will continue to attract
these information technology professionals.
RECRUITING. Breakaway's recruitment department conducts its own direct
recruiting efforts and coordinates informal and search firm referrals. Breakaway
believes that its business model, which results in decreased travel, more
interesting work, greater opportunities for professional development and a
dynamic corporate culture, enhances its ability to attract top professionals.
PROFESSIONAL DEVELOPMENT. Breakaway believes that providing its
professionals with a wide variety of challenging projects and the opportunity to
demonstrate ability and achieve professional advancement are keys to their
retention. Breakaway creates a professional development plan for each of its
information technology professionals that identifies the individual's training
and education objectives. Breakaway encourages all of its strategy and systems
integration professionals to rotate through its strategy services, eSolutions,
and Knowledge Innovation Team groups in order to achieve exposure to the breadth
of its service offerings. This policy creates a high level of intellectual
challenge for Breakaway's professionals and provides them with the opportunity
to display their capabilities across a range of disciplines. In addition,
Breakaway's clients benefit from the resulting broad service experience of its
professionals. Breakaway also believes that the working relationships which
develop in its Solution Centers foster valuable formal and informal mentoring
and knowledge sharing.
CULTURE. Breakaway's culture is critically important to hiring and
retaining information technology professionals. Breakaway's culture reflects the
entrepreneurial spirit that pervades the Internet industry. Breakaway's
compensation plan ties a significant portion of compensation to the achievement
of both individual performance goals, team goals and company financial
performance goals.
BREAKAWAY MARKETING AND SALES
MARKETING. Breakaway's marketing goal is to generate sales opportunities by
increasing the awareness among growing enterprises of the Breakaway Solutions
brand. Breakaway's direct marketing activities include direct mail, targeted
e-mail and seminars for senior executives of growing enterprises and other
persons who make decisions about information technology investments. In
addition, to heighten its public profile, Breakaway seeks opportunities for its
professionals to publish articles and give speeches in their respective areas of
expertise.
SALES. Breakaway's direct sales professionals employ a consultative sales
approach, working with the prospective client's senior executives to identify
the client's service requirements. The service delivery professionals who are
located with Breakaway's sales professionals in its regional offices also
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participate in the sales process. Once the client has engaged Breakaway
Solutions, Breakaway's sales professionals maintain their relationships with the
client by working collaboratively with Breakaway's service professionals who are
assigned to the client.
ALLIANCES. As part of Breakaway's sales and marketing efforts, Breakaway
has established working relationships with a number of companies, including
Broadvision, Cisco Systems, Clarify, Firstwave, Market Touch, Mercury
Interactive, Onyx, Oracle, Rubric, Silknet and Sun Microsystems. These alliances
generally entail sharing sales leads, installation services arrangements, making
joint presentations, negotiating discounts on license fees or other charges and
conducting similar activities. Breakaway's arrangements with many of these
companies are informal and are not the subject of definitive written agreements.
For those companies with whom Breakaway has written agreements, those agreements
are either terminable at will by either party or terminate in one year or less.
Breakaway believes it has been successful in establishing alliances with a
strong group of companies who are either industry leaders or well-regarded new
entrants.
BREAKAWAY COMPETITION
Breakaway's service offerings consist of strategy consulting, eBusiness
implementation and application hosting. Breakaway faces a high level of
competition in all of these service offerings. Breakaway's competitors include
consulting companies, Internet professional services firms, systems integration
firms, application hosting firms and web hosting firms. Barriers to entry in the
strategy consulting and systems integration markets are low. Therefore,
Breakaway expects additional competitors to enter these markets.
STRATEGY CONSULTING. Breakaway believes that the principal competitive
factors in the strategy consulting market are quality of services, technical and
strategic expertise and ability to provide services in a timely and
cost-effective manner. Breakaway believes that it competes successfully as to
all of these competitive factors because of the strong experience and expertise
of Breakaway's professionals and its focus on Internet solutions. Breakaway also
believes that its ability to provide consulting services in combination with
systems integration and hosting provides it with a competitive advantage.
SYSTEMS INTEGRATION. In the systems integration market, Breakaway believes
that the principal competitive factors are the ability to implement high quality
solutions rapidly and in a cost-effective manner in terms of both implementation
and ongoing costs. Through the use of its Breakthrough methodology, Solution
Centers and the Knowledge Innovation Team, Breakaway believes that it is able to
provide high quality systems integration of e-business solutions on a rapid,
cost-effective basis. Breakaway believes its ability to offer application
hosting to systems integration clients also is a distinct competitive advantage.
APPLICATION HOSTING. Breakaway believes that the principal competitive
factors in the application hosting market are quality and reliability of service
and cost. Breakaway believes that it competes effectively as to both of these
factors because of:
- the high level of expertise of its application hosting service
professionals;
- the quality, security and reliability of its application hosting
infrastructure;
- Breakaway's relationships with application vendors which allow its clients
to have access to packaged applications on a cost-effective basis;
- Breakaway's ability to host both complex customized applications and
packaged applications; and
- Breakaway's ability to provide application hosting in combination with its
sophisticated strategy consulting and systems integration services.
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According to Internet Research Group, an independent market analyst,
Breakaway is now the second largest application service provider (determined by
the number of contracts).
BREAKAWAY INTELLECTUAL PROPERTY
Breakaway has developed proprietary methodologies, tools, processes and
software in connection with delivering its services. Breakaway relies on a
combination of trade secret, copyright and trademark laws to protect its
proprietary rights. In particular, Breakaway requires each of its employees to
sign an invention and non-disclosure agreement which provides that they must
maintain the confidentiality of Breakaway's intellectual property and that any
intellectual property which they develop while performing work for Breakaway is
the property of Breakaway.
Breakaway has registered the trademark "Breakaway Solutions" with the United
States Patent and Trademark Office. Breakaway intends to make such other state,
federal and foreign filings it believes appropriate to protect its intellectual
property rights.
BREAKAWAY EMPLOYEES
As of February 18, 2000, Breakaway had approximately 353 employees,
including 255 in consulting, systems integration, regional staff, and
application hosting, 25 in sales and marketing and 73 in finance, administration
and support. Breakaway's continued success depends on its ability to recruit,
train and retain highly qualified technical, sales and managerial professionals.
The competition for these professionals is intense. None of Breakaway's
employees is represented by a labor union, and Breakaway considers its employee
relations to be good.
BREAKAWAY FACILITIES
The Breakaway principal executive offices are located in Boston,
Massachusetts. Breakaway performs professional services at several Boston-area
locations and at six other offices in the United States and an office in London,
UK. Breakaway's facilities comprise approximately 185,000 square feet in the
aggregate. In addition, Breakaway supports and hosts e-business solutions
through facilities at five locations in the United States and five locations
abroad. Breakaway leases all of these facilities either from month to month or
pursuant to lease with remaining terms through November 2002.
Breakaway signed a lease in October 1999 to occupy 80,070 square feet of
office space at the World Trade Center East in Boston. The building is under
construction, and Breakaway expects to move its permanent offices to this site
in late 2000. The duration of this lease is seven years.
BREAKAWAY LEGAL PROCEEDINGS
From time to time, Breakaway is involved in litigation that arises in the
normal course of business operations. As of the date of this consent
solicitation statement/prospectus, Breakaway believes that the litigation to
which it is a party will not have a material adverse effect on its business or
results of operations.
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SELECTED CONSOLIDATED FINANCIAL DATA
The following selected historical consolidated financial data should be read
in conjunction with "Management's Discussion and Analysis of Financial Condition
and Results of Operations," Breakaway's audited consolidated financial
statements, Eggrock's audited financial statements, and related notes thereto
included elsewhere in this consent solicitation statement/prospectus.
The selected consolidated financial data for Breakaway presented below as of
December 31, 1997, 1998 and 1999 and for the years then ended are derived from
the consolidated financial statements of Breakaway, which consolidated financial
statements have been audited by KPMG LLP, independent certified public
accountants. The selected consolidated financial data as of December 31, 1995
and 1996 and for each of the years then ended are derived from the unaudited
consolidated financial statements of Breakaway. In the opinion of management,
the unaudited consolidated financial statements have been prepared on the same
basis as the audited consolidated financial statements and include all
adjustments (consisting of only normal recurring adjustments) necessary for a
fair presentation of the financial condition and results of operations for such
periods. The selected consolidated financial data for 1999 are not necessarily
indicative of the results that may be expected for the year ended December 31,
2000 or any other future period.
From its inception until December 31, 1998, Breakaway was an S corporation
and, accordingly, was not subject to federal and state income taxes, except for
certain Massachusetts income taxes on S corporations with annual revenues in
excess of $6 million. The pro forma net income (loss) and pro forma net income
(loss) per share--basic and diluted information presented below have been
computed as if Breakaway were subject to all federal and all applicable state
corporate income taxes since 1995, based on the statutory tax rates and the tax
laws then in effect.
The financial statements of Eggrock as of December 31, 1998, September 30,
1999 and December 31, 1999 included in this consent solicitation
statement/prospectus have been audited by Arthur Andersen LLP, independent
public accountants, as indicated in their report with respect thereto, and are
included herein in reliance upon the authority of said firm as experts in giving
said reports. The selected consolidated financial data for Eggrock presented
below as of December 31, 1998 and December 31, 1999 are derived from those
financial statements. The selected consolidated financial data as of
December 31, 1997 and for the period then ended are derived from financial
statements audited by Arthur Andersen LLP but not included in this consent
solicitation statement/prospectus.
In addition, the following selected unaudited pro forma consolidated
statement of operations data for Breakaway for the year ended December 31, 1999
give effect to: (1) the acquisitions of Applica Corporation, WPL
Laboratories, Inc., Web Yes, Inc., and Eggrock and (2) pro forma adjustments to
the historical consolidated financial statements of Breakaway as if these items
had occurred on January 1, 1999. The selected unaudited pro forma consolidated
balance sheet data as of December 31, 1999 gives effect to the acquisition of
Eggrock as if it had occurred on December 31, 1999.
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BREAKAWAY SELECTED CONSOLIDATED FINANCIAL DATA
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
---------------------------------------------------------------
1999 PRO
1995 1996 1997 1998 1999 FORMA
---- ---- ---- ---- ---- --------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C> <C> <C>
CONSOLIDATED STATEMENTS OF OPERATIONS DATA:
Revenue........................................ $1,896 $3,462 $6,118 $10,018 $ 25,390 $ 39,096
Operating expenses:
Project personnel costs...................... 967 1,430 2,543 5,904 11,850 19,289
Selling, general and administrative.......... 740 1,368 2,559 4,814 24,405 94,383
------ ------ ------ ------- -------- --------
Total operating expenses................... 1,707 2,798 5,102 10,718 36,255 113,672
Income (loss) from operations.................. 189 664 1,016 (700) (10,865) (74,576)
Interest income (expense), net................. 8 (25) 60 (32) 475 512
Other income (expense)......................... -- (21) (2) 157 23 23
------ ------ ------ ------- -------- --------
Net income (loss).............................. $ 197 $ 618 $1,074 $ (575) $(10,367) $(74,041)
====== ====== ====== ======= ======== ========
Net income (loss) per share--
Basic and diluted............................ $ 0.01 $ 0.05 $ 0.08 $ (0.05) $ (0.59) $ (2.92)
====== ====== ====== ======= ======== ========
Weighted average shares outstanding............ 15,360 13,282 12,826 12,680 17,440 25,300
====== ====== ====== ======= ======== ========
Pro forma net income (loss).................... $ 118 $ 371 $ 644 $ (380)
Pro forma net income (loss) per share--
Basic and diluted............................ $ 0.01 $ 0.03 $ 0.05 $ (0.03)
</TABLE>
<TABLE>
<CAPTION>
AS OF DECEMBER 31,
---------------------------------------------------------------
1999 PRO
1995 1996 1997 1998 1999 FORMA
---- ---- ---- ---- ---- --------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C>
CONSOLIDATED BALANCE SHEET DATA:
Cash and cash equivalents......................... $ 94 $ 84 $ 879 $ 17 $ 3,920 $ 12,213
Total assets...................................... 740 1,120 2,533 2,743 77,461 362,499
Total long-term liabilities....................... 69 55 84 67 2,001 2,001
Stockholders' equity.............................. 332 948 1,492 913 68,340 350,340
</TABLE>
55
<PAGE>
EGGROCK PARTNERS, INC. SELECTED FINANCIAL DATA
<TABLE>
<CAPTION>
PERIOD FROM INCEPTION YEARS ENDED
(SEPTEMBER 2, 1997) DECEMBER 31,
THROUGH DECEMBER 31, ----------------------
1997 1998 1999
--------------------- -------- --------
(IN THOUSANDS)
<S> <C> <C> <C>
CONSOLIDATED STATEMENT OF OPERATIONS DATA:
Revenue.............................................. $259 $4,608 $11,738
Operating Expenses:
Project personnel costs............................ 94 2,122 6,432
Selling, general and administrative................ 62 1,494 5,700
Compensation related to equity issuances........... 84 281 7,650
---- ------ -------
Total operating expenses......................... 240 3,897 19,782
Income (loss) from operations........................ 19 711 (8,044)
Interest income, net................................. -- 14 114
Income (loss) before income tax...................... 19 725 (7,930)
Income tax provision................................. -- -- 226
Net income (loss).................................... $ 19 $ 725 $(8,156)
==== ====== =======
Pro forma income tax provision....................... -- 578 615
Pro forma net income (loss).......................... $ 19 $ 147 $(8,771)
==== ====== =======
<CAPTION>
AS OF DECEMBER 31,
-------------------------------------------------
PERIOD FROM INCEPTION YEARS ENDED
(SEPTEMBER 2, 1997) DECEMBER 31,
THROUGH DECEMBER 31, ----------------------
1997 1998 1999
--------------------- -------- --------
(IN THOUSANDS)
<S> <C> <C> <C>
CONSOLIDATED BALANCE SHEET DATA:
Cash and cash equivalents............................ $ 9 $ 127 $ 8,293
Total assets......................................... 262 1,848 12,844
Series A redeemable, convertible preferred stock..... -- -- 10,000
Members/stockholders' equity (deficit)............... 253 1,103 (194)
</TABLE>
56
<PAGE>
COMPARATIVE PER SHARE DATA
The following table sets forth certain historical per share data of
Breakaway and Eggrock and combined per share data on an unaudited pro forma
basis after giving effect to the business combination on a purchase basis of
accounting, assuming that 0.51185008 shares of Breakaway common stock are issued
in exchange for one share of Eggrock capital stock in the business combination.
This data should be read in conjunction with the selected historical financial
data, the unaudited pro forma financial data, and the separate historical
financial statements of Breakaway and Eggrock and notes, all of which are
included elsewhere in this consent solicitation statement/prospectus. The pro
forma financial data are not necessarily indicative of the operating results
that would have been achieved had the business combination been consummated as
of the beginning of the periods presented and should not be construed as
representative of results for any future period.
<TABLE>
<CAPTION>
YEAR ENDED
DECEMBER 31,
1999
------------
<S> <C>
HISTORICAL--BREAKAWAY
Earnings/(loss) per share--diluted...................... $(0.59)
Book Value per common share(1).......................... $ 1.96
<CAPTION>
YEAR ENDED
DECEMBER 31,
1999
------------
<S> <C>
HISTORICAL--EGGROCK
Earnings/(loss) per share--diluted...................... $(0.78)
Book Value (deficit) per common share(1)................ $(0.02)
<CAPTION>
YEAR ENDED
DECEMBER 31,
1999
------------
<S> <C>
PRO FORMA COMBINED EARNINGS (LOSS) PER COMMON SHARE--
DILUTED
Per Breakaway share(2).................................. $(2.93)
Equivalent Eggrock share(3)............................. $(1.50)
<CAPTION>
YEAR ENDED
DECEMBER 31,
1999
------------
<S> <C>
PRO FORMA COMBINED BOOK VALUE PER COMMON SHARE
Per Breakaway share(2).................................. $ 8.33
Equivalent Eggrock share(3)............................. $ 4.26
</TABLE>
- ------------------------
(1) The historical book value per common share is computed by dividing
stockholders' equity by the number of shares of common stock outstanding at
the end of each period.
(2) For purposes of pro forma combined data, Breakaway's financial data for the
fiscal year ended December 31, 1999 have been combined with Eggrock's
financial data for the nine-months ended September 30, 1999 and the
three-months ended December 31, 1999, including the effects of pro forma
adjustments described elsewhere in this consent solicitation
statement/prospectus.
(3) The equivalent pro forma combined earnings (loss) per Eggrock common share
and equivalent pro forma combined book value per Eggrock common share, on an
as converted basis, are calculated by multiplying the respective pro forma
combined per common share Breakaway amounts by an exchange ratio of
0.51185008 shares of Breakaway common stock for each share of Eggrock
capital stock.
57
<PAGE>
BREAKAWAY MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
YOU SHOULD READ THE FOLLOWING DISCUSSION TOGETHER WITH THE FINANCIAL
STATEMENTS AND RELATED NOTES APPEARING ELSEWHERE IN THIS CONSENT SOLICITATION
STATEMENT/PROSPECTUS. THIS ITEM CONTAINS FORWARD-LOOKING STATEMENTS WITHIN THE
MEANING OF SECTION 27A OF THE SECURITIES ACT OF 1933 AND SECTION 21E OF THE
SECURITIES AND EXCHANGE ACT OF 1934 THAT INVOLVE RISKS AND UNCERTAINTIES. ACTUAL
RESULTS MAY DIFFER MATERIALLY FROM THOSE INCLUDED IN SUCH FORWARD-LOOKING
STATEMENTS. FACTORS WHICH COULD CAUSE ACTUAL RESULTS TO DIFFER MATERIALLY
INCLUDE THOSE SET FORTH UNDER "RISK FACTORS" COMMENCING ON PAGE 7. SEE "SPECIAL
NOTE REGARDING FORWARD-LOOKING STATEMENTS."
OVERVIEW
Breakaway is a Delaware corporation. Breakaway incorporated in Massachusetts
under the name The Counsell Group, Inc. in 1992, and reincorporated in Delaware
in August 1995. In October 1998, Breakaway changed its name to Breakaway
Solutions, Inc.
Breakway is a full service provider of e-business solutions that allow
growing enterprises to capitalize on the power of the Internet to reach and
support customers and markets. Breakaway's services consist of Breakaway
strategy consulting, Breakaway Internet solutions, Breakaway eCRM services and
Breakaway Application hosting. From Breakaway's inception in 1992 through 1998,
its operating activities primarily consisted of providing Internet solutions and
customer relationship management solutions services. Prior to Breakaway's
acquisition of Applica, Breakaway derived no revenues from application hosting.
Breakaway believes that application hosting will account for a significantly
greater portion of its total revenues in the future. As a result of the
acquisition of Applica, Breakaway began offering application hosting services in
1999.
Historically, Breakaway has offered its services to clients primarily under
time and materials contracts. For these projects, Breakaway recognizes revenues
based on the number of hours worked by consultants at a rate per hour agreed
upon with its clients. Breakaway has also performed some services under
fixed-fee contracts. Breakaway recognizes revenues from fixed-fee contracts on a
percentage of completion method based on the ratio of costs incurred to total
estimated costs. Breakaway's revenues attributable to time and material
contracts and fixed fee contracts in the periods indicated have been as follows
(in thousands):
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
------------------------------
1997 1998 1999
-------- -------- --------
<S> <C> <C> <C>
Time and materials................................ $4,289 $ 5,810 $13,584
Percentage of revenues............................ 70.1% 58.0% 53.5%
Fixed Fee......................................... $1,829 $ 4,208 $11,806
Percentage of revenues............................ 29.9% 42.0% 46.5%
------ ------- -------
Total revenues.................................... $6,118 $10,018 $25,390
====== ======= =======
</TABLE>
Breakaway expects that the portion of its revenues attribute to fixed-fee
contracts will increase for 2000 and in the future.
Due to Breakaway's use of fixed-fee contracts, its operating results may be
affected adversely by inaccurate estimates of costs required to complete
projects. Therefore, Breakaway employs a series of project review processes
designed to help provide accurate project cost and completion estimates,
including a detailed review at the end of each specified reporting period to
determine project percentage of completion to date.
58
<PAGE>
Breakaway generally derives its initial pricing for a contract from its
internal cost and fixed-fee pricing model. This model helps Breakaway's
professionals estimate pricing based on the scope of work and materials
required. The model also takes into account project complexity and technical
risks.
Breakaway seeks to mitigate its risks under fixed-fee contracts by providing
fixed-fee quotes for discrete phases of each project. Using this approach,
Breakaway is able to price more accurately the next phase of the engagement by
virtue of having greater knowledge of the client's needs and the project's
complexity. Breakaway reflects any losses on projects in process in the period
in which they become known.
Breakaway typically receives an advance payment from its strategy consulting
services clients upon contract signing, with additional payments required upon
its attainment of project milestones. Deferred revenue consists principally of
these advance payments. Breakaway recognizes those payments upon performance of
services.
Breakaway prices its application hosting contracts on a fixed-fee basis.
Breakaway recognizes revenues from these contracts as services are provided each
month. In addition, Breakaway charges its application hosting clients a one time
set-up fee, which Breakaway recognizes when set-up is complete. Pricing varies
for each client based on the prospective application to be hosted. Factors which
determine pricing generally include telecommunications bandwidth required,
physical space requirements in Breakaway's leased hosting facilities and the
technological complexity of supporting the hosted application.
In 1998, revenues from a single client accounted for approximately 27.0% of
Breakaway's total revenues, and revenues from Breakaway's five largest clients
accounted for 54.0% of total revenues. During the year ended December 31, 1999,
revenues from Breakaway's five largest clients accounted approximately 25.4% of
its total revenues, however, no single client accounted for more than 10.0% of
Breakaway's total revenues. If these clients do not need or want to engage
Breakaway to perform additional services for them and Breakaway is not able to
sell its services to new clients at comparable or greater levels, Breakaway's
revenues will decline.
In December 1999, Breakaway formed Breakaway Capital I LLC, a wholly-owned
venture capital fund, for the primary purpose of making minority interest
investments in clients. Breakaway intends to make total investments of
approximately $5 million through Breakaway Capital. Breakaway Capital has
committed to invest approximately $3.2 million at this time and is evaluating
other opportunities. In addition, Breakaway intends to distribute approximately
50% of the profits earned by Breakaway Capital to certain employees who are not
executive officers of Breakaway. Those employees eligible to receive these
profits will be selected based upon performance-related criteria determined by
Breakaway. Breakaway has committed to make cash distributions to these employees
if Breakaway Capital liquidates any investment at a profit, provided that the
employee is employed by Breakaway at the time of the distribution. This
commitment by Breakaway means that Breakaway will incur compensation expense
with respect to amounts to be paid to employees.
The determination of the amount of compensation expense, due to gains in
Breakaway Capital, and the timing of when Breakaway must recognize that expense,
are subject to a number of factors, based primarily on the nature and
performance of investments by Breakaway Capital. It is therefore not possible to
predict if and when such compensation expense will occur. For the same reasons,
it is also not possible to predict when Breakaway will recognize any gains from
the investments of Breakaway Capital or whether those gains will occur in the
same fiscal quarter that compensation expense occurs. If Breakaway Capital
realizes large returns on its investments, Breakaway could experience
significant variations in its quarterly results unrelated to its business
operations. These variations could be due to significant gains or to significant
compensation expenses. While gains may offset compensation expenses in a
particular quarter, there can be no assurance that related gains and
compensation expenses will occur in the same quarter.
59
<PAGE>
ACQUISITIONS
Breakaway completed three acquisitions in the first six months of 1999.
These acquisitions enabled Breakaway to become a full service provider by
substantially expanding its capabilities in providing systems integration
services for e-business and by adding the capability to host applications. The
three acquisitions were:
- APPLICA. In March 1999, Breakaway acquired all of the outstanding shares
of Applica Corporation, a New York-based application hosting service
provider. Applica had no revenues for the period beginning on its
inception, September 24, 1998 and ending on December 31, 1998. Breakaway
acquired Applica for 1,447,398 shares of Breakaway common stock.
- WPL. In May 1999, Breakaway acquired WPL Laboratories, Inc., a
Philadelphia, Pennsylvania-based Web development company. WPL focused
primarily on enabling companies to conduct business using the Internet as
a distribution channel. WPL had revenues of $2.6 million for the year
ended December 31, 1998. The total acquisition consideration paid
consisted of approximately $5.0 million in cash to be paid over a
four-year period and 2,728,280 shares of Breakaway common stock. Each WPL
stockholder received 50% of his cash consideration at closing and will
receive the remainder incrementally over a four-year period so long as the
stockholder does not resign and is not terminated for cause. Of the shares
of Breakaway common stock issued to the former WPL stockholders,
approximately 50% are subject to Breakaway's right, which lapses
incrementally over a four-year period, to repurchase the shares of the
stockholder, at their value at the time of the acquisition, upon the
stockholder's resignation or Breakaway's termination of the stockholder
for cause. Also, as a part of the acquisition, Breakaway assumed all
outstanding WPL stock options, which became exercisable for 629,608 shares
of Breakaway common stock at an exercise price of $1.18 per share with a
four-year vesting period.
- WEB YES. In June 1999, Breakaway acquired Web Yes, Inc., a Cambridge,
Massachusetts-based application hosting service provider. This acquisition
strengthens Breakaway's application hosting capabilities, providing
Breakaway with additional domestic and international hosting facilities.
Web Yes had revenues of $288,000 for the year ended December 31, 1998.
Breakaway acquired Web Yes for 984,982 shares of Breakaway common stock.
Of the shares of Breakaway common stock issued to the former Web Yes
stockholders, 685,360 are subject to Breakaway's right, which lapses
incrementally over a four year period, to repurchase the shares of a
particular stockholder upon the termination of his employment with
Breakaway. The repurchase price will be either at the share value at the
time of the acquisition if the stockholder terminates employment or
Breakaway terminates for cause, or at their fair market value if Breakaway
terminates the stockholder's employment without cause.
All acquisitions were accounted for using the purchase method of accounting,
resulting in $14.7 million of intangible assets and deferred costs. Intangible
assets and deferred costs are being amortized over a three to five-year period
from the date of each acquisition.
In addition to the acquisitions in 1999, Breakaway acquired DataCyr
Corporation, a Virginia-based software development company, in February 2000.
This acquisition provides Breakaway with software for use in providing its
services. Breakaway acquired DataCyr for 110,000 shares of Breakaway common
stock. Of those shares, approximately 85% are owned by individuals who are now
employed by Breakaway. These shares subject to Breakaway's right, which lapses
incrementally over a four-year period, to repurchase the shares of the
applicable employee for a nominal amount upon the resignation of the employee
who owns the shares or Breakaway's termination of the employee for cause. The
acquisition was accounted for using the purchase method of accounting.
60
<PAGE>
RESULTS OF OPERATIONS
The following tables set forth certain items included in Breakaway's
consolidated statements of operations as a percentage of revenues for the
periods indicated:
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
-------------------------------
1997 1998 1999
-------- -------- --------
<S> <C> <C> <C>
Revenues............................................. 100.0% 100.0% 100.0%
Project personnel costs.............................. 41.6% 58.9% 46.7%
Selling, general and administrative.................. 41.8% 48.1% 96.1%
----- ----- -----
Operating income (loss).............................. 16.6% (7.0)% (42.8)%
===== ===== =====
</TABLE>
<TABLE>
<CAPTION>
REVENUE FOR THE YEARS
ENDED DECEMBER 31,
----------------------
1998 1999
-------- --------
(IN THOUSANDS)
<S> <C> <C>
SERVICE OFFERING
Strategy and Systems Integration
Solutions............................................ $10,018 $23,298
Percentage of revenues................................. 100.0% 91.8%
Application Hosting Solutions.......................... -- $ 2,092
Percentage of revenues................................. -- 8.2%
------- -------
Total Revenues......................................... $10,018 $25,390
======= =======
</TABLE>
As the preceding tables indicate, Breakaway's revenues in the past were
derived from providing strategy and systems integration solutions services.
Breakaway developed and began implementation of its current strategy to become a
leading full service provider of Internet solutions for businesses in late 1998.
As part of this strategy, Breakaway acquired companies which gave it the ability
to provide application hosting services and expanded its ability to provide
Internet solutions services during the first six months of 1999. Breakaway began
recognizing revenues from these services in the second quarter of 1999. Because
Breakaway is increasing its marketing and sales strategy initiatives and is
adding to its application hosting infrastructure, Breakaway expects its revenue
streams to increase.
YEAR ENDED DECEMBER 31, 1999 COMPARED TO YEAR ENDED DECEMBER 31, 1998
REVENUES. Revenues for the year ended December 31, 1999 increased by
$15.4 million, or 154.0%, to $25.4 million from $10.0 million for the year ended
December 31, 1998. The increase was due primarily to increased market demand for
internet professional services and the addition of Breakaway's hosting line of
business, which was $2.1 million, or 8.3%, of Breakaway's total revenues for the
year ended December 31, 1999. Additionally, Breakaway expanded geographically,
which increased Breakaway's market presence.
PROJECT PERSONNEL COSTS. Project personnel costs for the year ended
December 31, 1999 increased by $5.9 million, or 100.0%, to $11.8 million from
$5.9 million for the year ended December 31, 1998. Project personnel costs
represented 59.0% of revenues for the year ended December 31, 1998, as compared
to 46.5% of revenues for the year ended December 31, 1999. The increase in the
absolute dollars was due primarily to an increase in the number of employees
hired to perform the client services delivered. Project personnel costs
decreased as a percentage of revenues for the year ended December 31, 1999 due
primarily to an increase in the average hourly billable rate of Breakaway's
professionals over the comparable period in 1998 and, to a lesser extent, due to
an increase in average employee utilization rate.
61
<PAGE>
SELLING, GENERAL AND ADMINISTRATIVE. Selling, general and administrative
expenses for the year ended December 31, 1999 increased by $19.6 million, or
408.3%, to $24.4 million from $4.8 million for the year ended December 31, 1998.
As a percentage of revenues, selling, general and administrative expenses
increased from 48.0% for the year ended 1998 to 96.1% for the year ended 1999.
The increase in 1999 was due primarily to increases in personnel-related
expenses to support increased administrative employees, outside professional
fees for recruiting, the recruiting and hiring of a senior executive management
team, the hiring of dedicated sales and marketing employees, a brand name
marketing campaign, the investment in Breakaway's hosting service line
infrastructure, amortization of acquisition intangible assets and deferred costs
and the opening of additional offices. Costs incurred relating to Breakaway's
application hosting service line were $4.0 million in 1999.
INTEREST INCOME. Interest income, net, for the year ended December 31, 1999
increased to $0.7 million from $11,191 for the year ended December 31, 1998. The
increase in 1999 was due primarily to interest income earned on the invested
portion of proceeds from Breakaway's preferred stock financings in January and
July 1999, as well as the initial public offering of Breakaway common stock in
October 1999.
YEAR ENDED DECEMBER 31, 1998 COMPARED TO YEAR ENDED DECEMBER 31, 1997
REVENUES. Revenues for 1998 increased by $3.9 million, or 63.9%, to
$10.0 million from $6.1 million for 1997. The increase in revenues was
attributable primarily to a significant increase in Breakaway's average revenue
per client. This increase occurred because Breakaway's typical client project in
1998 was larger and more complex than the typical client project in 1997.
Breakaway attributes this change primarily to two factors, the increased demand
of businesses for sophisticated e-business solutions and Breakaway's ability to
address that demand by increasing the number of its service professionals.
PROJECT PERSONNEL COSTS. Project personnel costs for 1998 increased by
$3.4 million, or 136.0%, to $5.9 million from $2.5 million for 1997. Project
personnel costs represented 58.9% of revenues for 1998 as compared to 41.6% of
revenues in 1997. The increase, as a percentage of revenues, for 1998 was due
primarily to a decrease in average employee utilization rates from 1997 to 1998.
The utilization rate decreased because Breakaway hired a number of new
professionals in 1998. Typically, utilization rates are lower at the beginning
of a professional's employment.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES. Selling, general and
administrative expenses for 1998 increased by $2.2 million, or 84.6%, to
$4.8 million from $2.6 million for 1997. As a percentage of revenues, general
and administrative expenses increased from 41.8% in 1997 to 48.0% in 1998. The
increase was due primarily to increased payroll to support additional
administrative employees, outside professional fees for recruiting and
management consultants and rent for the establishment of new office locations in
Chicago, Illinois and San Mateo, California. Additionally, Breakaway incurred
moving expenses in 1998 due to the relocation of the Boston office.
INTEREST INCOME (EXPENSE), NET. Interest expense, net, for 1998 was $32,000
as compared to interest income, net, of $60,000 in 1997. Net interest expense in
1998 is a result of increased borrowings under Breakaway's line of credit to
fund growth. Positive cash flow in 1997 allowed Breakaway to make
interest-bearing investments, resulting in net interest income for that year.
OTHER INCOME. Other income in 1998 consists primarily of a payment received
in connection with the early termination of Breakaway's previously leased Boston
office space. Breakaway does not expect other income to be significant in future
periods.
62
<PAGE>
LIQUIDITY AND CAPITAL RESOURCES
From inception through December 31, 1998, Breakaway funded its operations
primarily through cash provided by operations and a line of credit. In 1999,
Breakaway funded its operations through the issuance of preferred and common
stock, and to a lesser extent, through a line of credit and equipment leases.
At December 31, 1999 and 1998, Breakaway's cash balance was $3.9 million and
$17,000, respectively. Breakaway's working capital was $39.9 million at
December 31, 1999 and $0.4 million at December 31, 1998.
Breakaway's operating activities used cash of $14.0 million and
$0.3 million for the years ended December 31, 1999 and 1998, respectively. The
increase in cash used in 1999 primarily resulted from costs Breakaway incurred
in connection with hiring a new management team and implementing new business
acquisitions and increased overhead. In addition, Breakaway experienced an
increase in its accounts receivable resulting from both increased days
outstanding and the extended payment terms of fixed-fee contracts, which
Breakaway entered into.
Cash used in investing activities primarily reflects purchases of
investments funded with the proceeds of the Company's initial public offering in
October 1999. In addition, in 1999, Breakaway used $2.1 million in cash for
acquired businesses.
Breakaway used cash for capital expenditures of $5.9 million and
$0.5 million in the years ended December 31, 1999 and 1998, respectively. These
expenditures were primarily for computer equipment, telecommunications equipment
and furniture and fixtures to support the Company's growth, and to build
Breakaway's application hosting service line.
Breakaway has various equipment lease financing facilities. The terms of
these equipment lease financings average two years. The annual interest rates on
borrowings ranged from 12.7% to 13.3%.
In January 1999, Breakaway issued 5,853,000 shares of Series A Preferred
Stock for $8.3 million. Breakaway used the proceeds to purchase common stock
from an existing stockholder and to fund operations.
In May 1999, Breakaway borrowed $4.0 million from Internet Capital Group and
issued Internet Capital Group a promissory note for $4.0 million bearing
interest at the prime interest rate plus one percent. This promissory note
converted into shares of Breakaway's Series B Preferred Stock in Breakaway's
July 1999 Series B Preferred Stock Financing. Breakaway used the proceeds to
help finance its acquisition of WPL and to fund operations.
In July 1999, Breakaway issued 2,931,849 shares of Series B Preferred Stock
for approximately $19.0 million. Breakway used the proceeds for working capital
and other general corporate purposes.
In October 1999, Breakaway consummated an initial public offering and issued
6,900,000 shares of Breakaway common stock for approximately $42.0 million, net
of underwriter's discounts, commissions and expenses. Breakaway is using the
proceeds for working capital and other general corporate purposes.
In December 1999, Breakaway entered into a Master Lease Agreement with
Silicon Valley Bank to finance up to $4.0 million of equipment and software.
Leases under the Master Lease Agreement will have terms of 36 months. Payments
under the leases will be determined based on an annual interest rate equal to
the annual rate on U.S. Treasury securities of a comparable term plus 2.5%. In
connection with the Master Lease Agreement Breakaway issued Silicon Valley Bank
warrants to purchase 21,818 shares of Breakaway common stock for $5.50 per
share. The warrants are exercisable until December 21, 2002.
63
<PAGE>
Breakaway believes that the proceeds of its initial public offering and
funds that are available under its line of credit will be sufficient to finance
Breakaway's capital requirements for at least the next 12 months. There can be
no assurance, however, that Breakaway's actual needs will not exceed
expectations or that Breakaway will be able to fund its operations in the
absence of other sources. There also can be no assurance that any additional
required financing will be available through additional bank borrowings, debt or
equity offerings or otherwise, or that if such financing is available, that it
will be available on terms acceptable to Breakaway.
MARKET RISK
To date, Breakaway has not utilized derivative financial instruments or
derivative commodity instruments. Breakaway does not expect to employ these or
other strategies to hedge market risk in the foreseeable future. Breakaway
invests its cash in money market funds, which are subject to minimal credit and
market risk. Breakaway believes the market risks associated with these financial
instruments are immaterial.
YEAR 2000 READINESS DISCLOSURE
THE YEAR 2000 ISSUE. The year 2000 issue is a result of computer programs
or systems which store or process date-related information using only the last
two digits to refer to a year. These programs or systems potentially may not be
able to distinguish properly between a year in the 1900's and a year in the
2000's. Failure of these programs or systems to distinguish between the two
centuries could cause the programs or systems to create erroneous results or
even fail.
BREAKAWAY'S STATE OF READINESS. Breakaway established a year 2000 readiness
team to carry out a program for the assessment of its vulnerability to the year
2000 issue and remediation of identified problems. The team consisted of senior
information technology and business professionals whom met on a regular basis.
An outside consultant also worked with the readiness team on a temporary basis
to assist them in carrying out their tasks.
As of February 2000 Breakaway has not experienced any year 2000 related
business interruptions, including its ability to process transactions, send or
receive email messages or invoices, or engage in normal business activities.
COSTS. As of December 31, 1999, Breakaway incurred approximately $90,000 in
expenses related to the year 2000 problem. These amounts include internal labor
costs, legal and outside consulting costs and additional hardware and software
purchases. Breakaway will continue to engage in an ongoing year 2000 assessment,
but has not yet identified any year 2000 issues or developed any contingency
plans. Breakaway anticipates no future costs associated with year 2000.
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BREAKAWAY DIRECTORS AND EXECUTIVE OFFICERS
The executive officers and directors who currently serve or are expected to
serve as executive officers and directors of Breakaway, and their respective
ages and positions as of February 18, 2000, are as follows:
<TABLE>
<CAPTION>
NAME AGE CURRENT POSITION WITH BREAKAWAY
- ---- -------- ------------------------------------------------
<S> <C> <C>
Gordon Brooks................................ 42 President, Chief Executive Officer and Director
Kevin Comerford.............................. 35 Vice President, Administration, Chief Financial
Officer, Treasurer and Secretary
Babak Farzami................................ 32 Vice President, Corporate Development
Christopher Harding.......................... 35 Vice President, Field Operations
Dev Ittycheria............................... 33 Vice President, Application Hosting Services
Joseph S. Johnson............................ 43 Vice President, Chief People Officer
John A. Loftus............................... 38 Vice President, e-Solutions
William Loftus............................... 36 Senior Vice President of Operations
Adam Sholley................................. 40 Vice President, Marketing
Paul K. Stedman.............................. 37 Vice President, North American Field Operations
Maureen Ellenberger.......................... 44 Vice President and Chief Innovation Officer
Janet S. Tremlett............................ 44 Vice President, Strategy Solutions
Christopher H. Greendale..................... 48 Chairman of the Board of Directors
Walter W. Buckley, III....................... 39 Director
Frank Selldorff.............................. 38 Director
</TABLE>
GORDON BROOKS has served as Breakaway's President and Chief Executive Officer
since October 1998 and as a member of Breakaway's board of directors since
January 1999. From June 1991 to September 1998, Mr. Brooks served as Senior Vice
President, Sales, Field Marketing and Operations of Cambridge Technology
Partners (Massachusetts), Inc., an international management consulting and
systems integration company. Also, Mr. Brooks is a member of the board of
directors of Katalyst and MediaBridge Technologies.
KEVIN COMERFORD has served as Breakaway's Vice President, Administration, Chief
Financial Officer, Treasurer and Secretary since June 1998. From April 1998
through May 1998, Mr. Comerford was engaged as an independent management
consultant. In March 1993, Mr. Comerford co-founded Boston Sales
Automation, Inc., an enterprise resource planning systems integrator where he
served in various capacities through March 1998. Mr. Comerford is a Certified
Public Accountant.
BABAK FARZAMI has served as Breakaway's Vice President, Corporate Development
since Breakaway's acquisition of Applica in March 1999. From December 1998
through March 1999, Mr. Farzami served as chairman of the board of directors of
Applica. Mr. Farzami served as Director of Technology, Data Communications of
AT&T Local Services, a telecommunications enterprise, from July 1998 through
November 1998. From 1993 to June 1998, Mr. Farzami served in various capacities
at Teleport Communications Group, a telecommunications services provider, most
recently as Director of Technology, Data Services.
CHRISTOPHER HARDING has served as Breakaway's Vice President, Field Operations
since March 1999. From 1992 to February 1999, Mr. Harding served in various
capacities at Cambridge Technology Partners, most recently as Vice President of
Sales and Field Marketing.
DEV ITTYCHERIA has served as Breakaway's Vice President, Application Hosting
Services since Breakaway's acquisition of Applica in March 1999. From
December 1998 through March 1999, Mr. Ittycheria served
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<PAGE>
as President and Chief Executive Officer of Applica. From July 1998 through
November 1998 and from 1989 through July 1995, Mr. Ittycheria served in various
capacities at AT&T Corp., most recently as Product Director, AT&T Data Services.
From August 1995 through June 1998, Mr. Ittycheria served in various capacities,
most recently as Director, Marketing, TCG CERFnet, at Teleport Communications
Group.
JOSEPH S. JOHNSON has served as Breakaway's Vice President and Chief People
Officer since September 1999. From June 1999 through August 1999, Mr. Johnson
served as a Vice President, Human Capital Management of Darwin Partners, a
workforce solutions provider. From July 1996 through May 1999, he served as the
National Practice Leader, Organizational Effectiveness for Cambridge Technology
Partners. From July 1993 through June 1996, he served as a director in KPMG Peat
Marwick LLP's organizational effectiveness consulting practice.
JOHN A. LOFTUS has served as Breakaway's Vice President, e-Solutions since March
2000 and as a senior manager since May 1999 until March 2000. From 1990 through
Breakaway's acquisition of WPL in April 1999, John Loftus was the Senior Vice
President of WPL. John Loftus is the brother of William Loftus, Breakaway's
Senior Vice President of Operations.
WILLIAM LOFTUS has served as Breakaway's Senior Vice President, Operations since
March 2000. From May 1999 through March 2000, he served as Breakaway's Vice
President, eSolutions and in various other offices. Breakaway acquired WPL in
May 1999. From 1990 through April 1999, William Loftus served as President and
Chief Executive Officer of WPL. William Loftus is also a member of the board of
directors of Plan Sponsor Exchange. William Loftus is the brother of John
Loftus, another Breakaway Vice President.
ADAM SHOLLEY has served as Breakaway's Vice President, Marketing since
September 1999. From 1987 through August 1999, he served in various capacities,
most recently as an Executive Vice President, at Arnold Communications, Inc., an
advertising and communications firm.
PAUL K. STEDMAN has served as Breakaway's Vice President, North American Field
Operations since March 2000 and as a senior manager since May 1999. From January
1992 through December 1996, Mr. Stedman served as a senior manager for Business
Systems Group, a consulting and systems integrator. From January 1997 through
February 1999, Mr. Stedman was a Vice President of Cambridge Technology Partners
with responsibilities for its Southwest Region. From February 1999 through May
1999, Mr. Stedman was associated with PricewaterhouseCoopers in its Dallas
office.
JANET S. TREMLETT has served as Breakaway's Vice President, Strategy Solutions
since January 1999. From July 1997 through December 1998, Ms. Tremlett served as
President at KSJ Technovations, a strategy consulting firm which she founded.
From August 1996 through June 1997, Ms. Tremlett served as Director, Consulting
Services, at The Net Collaborative, Inc., a technology consulting firm, and from
1992 through July 1996, Ms. Tremlett served in various capacities, most recently
as Vice President, Electronic Commerce, at Work/Family Directions, Inc., a
consulting firm specializing in the work-life field.
MAUREEN ELLENBERGER will become Breakaway's Vice President and Chief Innovation
Officer upon approval of Breakaway's board of directors and consummation of the
merger of Eggrock with a wholly-owned subsidiary of Breakaway. From August 1997
to the date the merger is consummated, Ms. Ellenberger has served as president
and chief executive officer of Eggrock. From 1993 to August 1997,
Ms. Ellenberger served in various capacities at Cambridge Technology Partners,
most recently as Southeast Regional Business Manager and Group Manager of the
Innovations Group.
CHRISTOPHER H. GREENDALE has served as Chairman of Breakaway's board of
directors and is a member of the audit committee since January 1999. Also since
January 1999, Mr. Greendale has served as a Managing Director of Internet
Capital Group, Inc., a business-to-business e-commerce company and Breakaway's
affiliate. From January 1998 to December 1998, Mr. Greendale was engaged as an
independent management consultant. In 1991, Mr. Greendale co-founded Cambridge
Technology
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Partners, where he served in various capacities from 1991 through
December 1997, most recently as Executive Vice President, Marketing.
Mr. Greendale serves as a director of Clarify Inc. and Media Bridge
Technologies. Mr. Greendale also serves as a director of Context Integrations
Inc., a potential competitor of Breakaway.
WALTER W. BUCKLEY, III, has served as one of Breakaway's directors and a member
of the audit committee since January 1999. Mr. Buckley is a co-founder, and has
served as President and Chief Executive Officer and a director of Internet
Capital Group since March 1996. From 1991 to February 1996, Mr. Buckley served
as Vice President of Acquisitions of Safeguard Scientifics, Inc., a developer
and operator of emerging growth information technology companies. Mr. Buckley
serves as a director of VerticalNet, Inc. and Who? Vision Systems, Inc.
FRANK SELLDORFF, one of Breakaway's directors, founded The Counsell Group, now
Breakaway, in 1992 and served as chairman of Breakaway's board of directors and
Breakaway's Chief Executive Officer from 1992 through October 1998. From
November 1998 through March 1999, Mr. Selldorff served as Breakaway's Executive
Vice President, Strategic Development, and from November 1998 through June 1999
he served as Breakaway's co-chairman of the board of directors. Mr. Selldorff is
currently co-founder and managing partner of Reach Internet Incubator, LLP, a
venture fund and Internet incubation focused on seed-stage, business-to-business
Internet enterprises.
EXECUTIVE OFFICERS
Each officer serves at the discretion of Breakaway's board of directors and
holds office until his successor is elected and qualified or until his earlier
resignation or removal. There are no family relationships among any of
Breakaway's directors or executive officers.
ELECTION OF DIRECTORS
Breakaway's board of directors is divided into three classes, each of whose
members serve for a staggered three-year term. Messrs. Greendale and Brooks
serve in the class whose term expires in 2000, Mr. Selldorff serves in the class
whose term expires in 2001 and Mr. Buckley serves in the class whose term
expires in 2002. At each annual meeting of stockholders, a class of directors is
elected for a three-year term to succeed the directors of the same class whose
terms are then expiring.
COMPENSATION OF DIRECTORS
Breakaway reimburses its directors for reasonable out-of-pocket expenses
incurred in attending meetings of the board of directors and any meetings of its
committees. Breakaway may, in its discretion, grant stock options and other
equity awards to its non-employee directors from time to time under its stock
incentive plans. Breakaway has granted the following options to Christopher H.
Greendale under its 1998 Stock Plan:
- An option to purchase 168,000 shares of common stock at an exercise price
(as adjusted for subsequent stock splits) of $0.34 on July 1, 1998, all of
which shares have vested in full; and
- An option to purchase 1,108,800 shares of common stock at an exercise
price of $.89 on February 18, 1999, all of which shares have vested in
full.
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<PAGE>
EXECUTIVE OFFICER COMPENSATION
The following table sets forth the total compensation paid or accrued for
the year ended December 31, 1999 to our President and Chief Executive Officer
and our other four most highly compensated executive officers. We refer to all
of these officers collectively as our Named Executive Officers.
<TABLE>
<CAPTION>
LONG TERM AWARDS
---------------------------
NUMBER OF
ANNUAL COMPENSATION(1) SHARES OF
----------------------------------- COMMON STOCK
OTHER ANNUAL UNDERLYING ALL OTHER
NAME AND PRINCIPAL POSITION SALARY BONUS COMPENSATION OPTIONS COMPENSATION
- --------------------------- -------- -------- ------------- ------------ ------------
<S> <C> <C> <C> <C> <C>
Gordon Brooks.......................... $310,125 $60,125 -- 350,000 --
President and Chief Executive Officer
William Loftus......................... 133,333 24,000 -- -- $344,785(2)
Senior Vice President, e-Operations
Christopher Harding.................... 301,884 82,831 -- 1,212,500 --
Vice President, Field Operations
Kevin Comerford........................ 223,325 43,325 -- 80,000 --
Vice President, Administration,
Chief Financial Officer, Treasurer
and Secretary
Janet S. Tremlett...................... 220,720 42,720 -- 224,000 --
Vice President, Strategy Solutions
</TABLE>
- ------------------------
(1) In accordance with the rules of the Securities and Exchange Commission,
other compensation in the form of perquisites and other personal benefits
has been omitted because the aggregate amount of such perquisites and other
personal benefits constituted less than the lessor of $50,000 or 10% of the
total annual salary and bonuses for each of the executive officers for 1999.
(2) This amount represents an amount loaned to William Loftus by Breakaway for
the payment of taxes. William Loftus had a large tax obligation in 1999 due
to his election to include in income in 1999 the fair market value of shares
of stock that he received in connection with the sale of WPL, Inc. to
Breakaway in 1999. The loan bears interest at the rate of 8.75% per annum
and is secured by William Loftus's stock in Breakaway. William Loftus has no
personal liability for the loan beyond the stock he has pledged. All
principal and accrued interest on the loan is due on the first to occur of
(i) the sale by William Loftus of any of the pledged shares and (ii) the
fourth anniversary of the note.
OPTION GRANTS IN LAST FISCAL YEAR
On June 30, 1998, Breakaway adopted its 1998 Stock Plan and began granting
stock options under this plan. See "Benefit Plans--1998 Stock Plan." Breakaway's
1999 Stock Incentive Plan was adopted by its board of directors and approved by
its stockholders in July 1999. See "Benefit Plans--1999 Stock Incentive Plan."
The following table contains information concerning the stock option grants made
to each of the Named Executive Officers in 1999. The per share exercise price of
all options granted to Breakaway's Named Executive Officers represents the fair
market value of Breakaway common stock on the grant date.
Amounts described in the following table under the heading "Potential
Realizable Value at Assumed Rates of Stock Price Appreciation for Option Term"
represent hypothetical gains that could be achieved for the options if exercised
at the end of the option term. These gains are based on assumed rates of stock
appreciation of 5% and 10% compounded annually from the date the options were
granted at their expiration date. Actual gains, if any, on stock option
exercises will depend on the future performance of the Breakaway common stock
and the date on which the options are exercised.
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<PAGE>
No gain to the optionees is possible without an appreciation in stock price,
which will benefit all stockholders commensurately.
<TABLE>
<CAPTION>
INDIVIDUAL GRANTS POTENTIAL REALIZABLE VALUE AT
-------------------------------------------------------------------------- ASSUMED ANNUAL RATES OF
NUMBER OF SHARES % OF TOTAL EXERCISE FAIR MARKET STOCK PRICE APPRECIATION FOR
OF COMMON STOCK OPTIONS GRANTED PRICE/ VALUE ON OPTION TERM(1)
UNDERLYING OPTIONS TO EMPLOYEES IN PER DATE OF EXPIRATION ------------------------------
NAME GRANTED FISCAL YEAR SHARE GRANT DATE 5% 10%
- --------------------- ------------------ --------------- -------- ----------- ---------- ------------- --------------
<S> <C> <C> <C> <C> <C> <C> <C>
Gordon Brooks 350,000 (2) 4.1776% $28.93 $28.93 12/10/99 $6,372,623 $16,144,722
Christopher Harding 1,212,500 (3) 14.4724 .89 .89 2/18/09 675,222 1,711,144
Kevin Comerford 80,000 (4) .9549 5.07 5.07 9/3/09 254,702 645,466
</TABLE>
- ------------------------
(1) As required by the rules of the Securities and Exchange Commission,
potential values stated are based on the prescribed assumption that
Breakaway's common stock will appreciate in value from the date of grant to
the end of the option term at rates (compounded annually) of 5% and 10%,
respectively, and therefore are not intended to forecast possible future
appreciation, if any, in the price of Breakaway's common stock.
(2) 25% of these options will vest on December 10, 2000 with the remaining
shares vesting at a rate of 2.08% per month over 36 months.
(3) 606,250 of these options vested on March 1, 1999 with the remaining shares
vesting in 36 equal monthly installments.
(4) 25% of these options will vest on September 3, 2000 with the remaining
shares vesting at a rate of 2.08% per month after 36 months.
AGGREGATE OPTION EXERCISES IN LAST FISCAL YEAR
AND FISCAL YEAR-END OPTION VALUES
The following table sets forth information concerning option holdings
through December 31, 1999 by each of the Named Executive Officers. Amounts set
forth in the following table under the heading "Value Realized" are based on the
fair market value of the common stock on the date of exercise. Amounts set forth
in the following table under the heading "Value of Unexercised In-the-Money
Options at Year End" are based upon the fair market value of the common stock as
of December 31, 1999, which was $36.50.
<TABLE>
<CAPTION>
NUMBER OF SHARES OF
COMMON STOCK
UNDERLYING UNEXERCISABLE VALUE OF UNEXERCISED IN-THE-
SHARES EXERCISE OPTIONS AT YEAR END MONEY OPTIONS AT YEAR END
ACQUIRED ON PRICE PER VALUE --------------------------- ------------------------------
NAME EXERCISE SHARE REALIZED EXERCISABLE UNEXERCISABLE EXERCISABLE UNEXERCISABLE
- ---- ----------- ----------- ---------- ----------- ------------- -------------- -------------
<S> <C> <C> <C> <C> <C> <C> <C>
Gordon Brooks........ 112,938 $ .89 $ 10,164 4,780,660 350,000 $170,239,303 $2,651,250
Christopher
Harding............ -- -- -- 1,212,500 -- 43,177,125 --
Kevin Comerford...... -- -- -- 54,000 242,000 4,553,190 8,367,810
Janet Tremlett....... -- -- -- 78,000 218,000 3,051,945 8,465,735
William Loftus....... -- -- -- -- -- -- --
</TABLE>
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<PAGE>
BENEFIT PLANS
1998 STOCK PLAN. Breakaway's 1998 stock plan was adopted by its board of
directors and approved by its stockholders in June 1998. As amended, the 1998
plan authorizes the issuance of up to 16,240,536 shares of Breakaway common
stock pursuant to stock options and other awards. No additional grants of stock
options or other awards will be made under the 1998 plan after October 5, 1999.
1999 STOCK INCENTIVE PLAN. Breakaway's 1999 Stock Incentive Plan was
adopted by its board of directors and approved by its stockholders in
July 1999. The 1999 plan is intended to replace Breakaway's 1998 plan. The 1999
Plan authorizes the issuance of up to 9,600,000 shares of Breakaway common stock
(subject to adjustment in the event of stock splits and other similar events).
As of December 31, 1999, options to purchase an aggregate of 16,050,892
shares of Breakaway common stock at a weighted average exercise price of $2.59
per share were outstanding under the 1998 plan and 1999 plan combined.
The 1999 plan provides for the grant of incentive stock options intended to
qualify under Section 422 of the Internal Revenue Code, nonstatutory stock
options, restricted stock awards and other stock-based awards.
Breakaway's officers, employees, directors, consultants and advisors and
those of its subsidiaries are eligible to receive awards under the 1999 plan.
Under present law, however, incentive stock options may only be granted to
employees. No participant may receive any award for more than 1,280,000 shares
in any calendar year.
Optionees receive the right to purchase a specified number of shares of
Breakaway common stock at a specified option price and subject to such other
terms and conditions as are specified in connection with the option grant.
Breakaway may grant options at an exercise price less than, equal to or greater
than the fair market value of Breakaway common stock on the date of grant. Under
present law, incentive stock options and options intended to qualify as
performance-based compensation under Section 162(m) of the Internal Revenue Code
may not be granted at an exercise price less than the fair market value of the
common stock on the date of grant or less than 110% of the fair market value in
the case of incentive stock options granted to optionees holding more than 10%
of the voting power of Breakaway. The 1999 plan permits Breakaway's board of
directors to determine how optionees may pay the exercise price of their
options, including by cash, check or in connection with a "cashless exercise"
through a broker, by surrender to Breakaway of shares of common stock, by
delivery to Breakaway of a promissory note, or by any combination of the
permitted forms of payment.
As of December 31, 1999, approximately 310 persons eligible to receive
awards under the 1999 plan, including nine executive officers and three
non-employee directors. The granting of awards under the 1999 plan is
discretionary.
Breakaway's board of directors administers the 1999 plan and has the
authority to adopt, amend and repeal the administrative rules, guidelines and
practices relating to the plan and to interpret its provisions. It may delegate
authority under the 1999 plan to one or more committees of the board of
directors and, subject to certain limitations, to one or more of Breakaway's
executive officers. Subject to any applicable limitations contained in the 1999
plan, Breakaway's board of directors or a committee of the board of directors or
executive officers to whom Breakaway's board of directors delegates authority,
as the case may be, selects the recipients of awards and determines:
- the number of shares of common stock covered by options and the dates upon
which such options become exercisable;
- the exercise price of options;
- the duration of options; and
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<PAGE>
- the number of shares of common stock subject to any restricted stock or
other stock-based awards and the terms and conditions of such awards,
including the conditions for repurchase, issue price and repurchase price.
In the event of a merger, liquidation or other acquisition event,
Breakaway's board of directors is authorized to provide for:
- the assumption or substitution of all outstanding options by the acquiror;
- the termination of all unexercised options immediately prior to the
closing of the acquisition event;
- appropriate cash payments to option holders, if Breakaway stockholders
would receive cash payments as consideration in the acquisition event; and
- the vesting in full of outstanding options prior to the acquisition event.
No award may be granted under the 1999 plan after July 19, 2009, but the
vesting and effectiveness of awards previously granted may extend beyond that
date. Breakaway's board of directors may at any time amend, suspend or terminate
the 1999 plan, except that no award granted after an amendment of the 1999 plan
and designated as subject to Section 162(m) of the Internal Revenue Code by
Breakaway's board of directors shall become exercisable, realizable or vested,
to the extent the amendment was required to grant the award, unless and until
the amendment is approved by Breakaway's stockholders.
1999 EMPLOYEE STOCK PURCHASE PLAN. Breakaway's 1999 Employee Stock Purchase
Plan was adopted by its board of directors and approved by its stockholders in
July 1999. The purchase plan authorizes the issuance of up to a total of 800,000
shares of Breakaway common stock to participating employees. As of December 31,
1999 no shares of Breakaway common stock has been issued under the purchase
plan.
The following employees, including Breakaway's directors who are employees
and employees of any participating subsidiaries, are eligible to participate in
the purchase plan:
- employees who are customarily employed for more than 20 hours per week and
for more than five months per year; and
- employees employed for at least one month prior to enrolling in the
purchase plan.
Employees who would immediately after the grant own 5% or more of the total
combined voting power or value of Breakaway stock or any subsidiary are not
eligible to participate. As of December 31, 1999, approximately 246 of
Breakaway's employees would have been eligible to participate in the purchase
plan.
On the first day of a designated payroll deduction period (which is referred
to as the offering period), Breakaway grants to each eligible employee who has
elected to participate in the purchase plan an option to purchase shares of
Breakaway common stock as follows: the employee may authorize between 1% to 10%
of his or her base pay to be deducted by Breakaway from his or her base pay
during the offering period. On the last day of the offering period, the employee
is deemed to have exercised the option, at the option exercise price, to the
extent of accumulated payroll deductions. Under the terms of the purchase plan,
the option price is an amount equal to 85% of the per share closing price of
Breakaway common stock on either the first day or the last day of the offering
period, whichever is lower. In no event may an employee purchase under the
purchase plan in any year a number of shares which exceeds the number of shares
determined by dividing $25,000 by the average market price of a share of common
stock on the commencement date of the offering period. The board of directors
has the authority to choose the timing and length of subsequent offering
periods.
An employee who is not a participant on the last day of the offering period
is not entitled to exercise any option, and the employee's accumulated payroll
deductions will be refunded. An
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<PAGE>
employee's rights under the purchase plan terminate upon voluntary withdrawal
from the purchase plan at any time, or when the employee ceases employment for
any reason.
EMPLOYMENT ARRANGEMENTS
Mr. Brooks receives a base salary of $25,000 per month and is eligible to
receive an annual performance bonus of up to $125,000. If Mr. Brooks' employment
is terminated by Breakaway without cause, he will continue to receive his base
salary for a period of twelve months. In December 1999, Breakaway granted
Mr. Brooks additional options to purchase 350,000 shares of Breakaway common
stock at a per share exercise price of $28.93. In December 1999, the Board
authorized an unsecured loan to Mr. Brooks in the amount of $1 million. This
loan is evidenced by a February 2000 Promissory Note which is due, together with
interest at a rate of 6.21% per annum, upon the first to occur of: (i) 30 days
after he ceases to be employed by Breakaway for any reason other than his death
or disability; (ii) February 16, 2003; or (iii) any violation of his employment
agreement. If Mr. Brooks dies or becomes permanently disabled, the loan becomes
due, together with accrued and unpaid interest, six months thereafter.
Mr. Comerford receives a monthly salary of $15,000 and is eligible to
receive a bonus of up to 30% of his base salary. In addition, in 1999 Breakaway
granted to Mr. Comerford options to purchase 80,000 Breakaway common stock at a
per share exercise price of $5.07.
On April 28, 1999, pursuant to the terms of a separation agreement of the
same date, Mr. Selldorff resigned as Executive Vice President, Strategic
Development of Breakaway, in which capacity he coordinated Breakaway's
acquisition strategy and planned corporate development initiatives. Under the
terms of this agreement, Mr. Selldorff agreed to continue to serve as a director
of Breakaway and agreed to waive his right under his December 11, 1998
employment agreement to receive severance payments equal to one year's salary.
In connection with Mr. Selldorff's resignation, his employment agreement
terminated. Prior to his resignation, Breakaway granted Mr. Selldorff stock
options to purchase 2,400,000 shares of Breakaway common stock at a per share
exercise price of $0.34.
On February 11, 1999, Breakaway entered into a one year employment agreement
with Ms. Tremlett. This agreement will automatically renew itself for successive
one year periods unless Ms. Tremlett resigns or Breakaway terminates her
employment. Ms. Tremlett receives a base salary of $14,833 per month and is
eligible to receive a performance bonus of up to 30% of her annual salary,
subject to meeting specified performance targets. If Ms. Tremlett is terminated
by Breakaway without cause, she will continue to receive her salary for an
additional seven and one-half months. Pursuant to her employment agreement
Breakaway granted to Ms. Tremlett stock options to purchase 144,000 shares of
Breakaway common stock at a per share exercise price of $.89. In September 1999
Breakaway granted Ms. Tremlett options to purchase 80,000 shares of Breakaway
common stock at a per share exercise price of $5.07 per share.
On February 17, 1999, Breakaway entered into an employment agreement with
Mr. Harding. Under the terms of this agreement, Mr. Harding's employment shall
continue until March 2001, and the agreement will renew itself for a two year
term expiring March 2003 unless Mr. Harding resigns or Breakaway terminates his
employment. Mr. Harding received a bonus of $50,000 upon commencing his
employment and receives a base salary of $18,333 per month. In addition, he is
eligible to receive a target bonus equal to 30% of his base salary based on
Breakaway's profitability. Pursuant to his employment agreement Breakaway
granted to Mr. Harding stock options to purchase 1,212,500 shares of Breakaway
common stock, at a per share exercise price of $.89, all of which vested upon
the closing of Breakaway's initial public offering in October 1999.
On March 25, 1999, Breakaway entered into an employment agreement with
Mr. Farzami. Mr. Farzami receives a base salary of $15,833 per month and is
eligible to receive a bonus of up to 30% of his annual salary, subject to
meeting specified performance targets. In addition, Breakaway granted to
Mr. Farzami stock options to purchase 676,816 shares of Breakaway common stock
at a per
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<PAGE>
share exercise price of $0.98. If Mr. Farzami's employment is terminated by
Breakaway without cause, he will be entitled to:
- payments equal to six months of his base salary;
- payments equal to his most recent cash bonus; and
- acceleration of vesting with respect to shares of Breakaway common stock
and options to purchase Breakaway common stock held by Mr. Farzami at the
time of his termination which would have vested if his employment with
Breakaway had continued uninterrupted for an additional 12 months.
On March 25, 1999, Breakaway entered into an employment agreement with
Mr. Ittycheria. Mr. Ittycheria receives a base salary of $15,833 per month and
is eligible to receive a bonus of up to 30% of his annual salary, subject to
meeting specified performance targets. In addition, Breakaway granted to
Mr. Ittycheria stock options to purchase 507,612 shares of Breakaway common
stock at a per share exercise price of $.98. If Mr. Ittycheria's employment is
terminated by Breakaway without cause, he will be entitled to:
- payments equal to six months of his base salary;
- a payment equal to his most recent cash bonus; and
- acceleration of vesting with respect to shares of Breakaway common stock
and options to purchase Breakaway common stock held by Mr. Ittycheria at
the time of his termination which would have vested if his employment with
Breakaway had continued uninterrupted for an additional twelve months.
On May 14, 1999, Breakaway entered into an employment agreement with William
Loftus. William Loftus receives a base salary of $16,667 per month and is
eligible to receive a bonus of up to 30% of his annual salary, subject to
meeting specified performance targets. Upon the occurrence of a change of
control of Breakaway, any options granted to William Loftus to purchase
Breakaway common stock will automatically vest in full. If William Loftus'
employment is terminated by Breakaway without cause or if his compensation and
benefits are materially reduced, he will be entitled to:
- payments equal to nine months of his base salary;
- payments equal to the pro rated amount of his quarterly profit sharing
payment; and
- acceleration of vesting of options to purchase Breakaway common stock held
by Mr. Loftus at the time of his termination which would have vested if
his employment with Breakaway had continued uninterrupted for an
additional 12 months.
On September 10, 1999 Breakaway entered into an employment agreement with
Mr. Johnson. The agreement is for one year and automatically renews unless
Mr. Johnson resigns or Breakaway terminates his employment. Mr. Johnson receives
a base salary of $16,667 per month and is eligible to receive a bonus of up to
30% of his annual salary. In connection with his employment, Mr. Johnson has
been granted stock options to purchase 200,000 shares of Breakaway common stock
at a per share exercise price of $5.50. If after one year Breakaway terminates
Mr. Johnson's employment without cause he will be entitled to payments equal to
six months of his base salary. In addition, after one year, Mr. Johnson may
resign and treat his resignation as a termination by the Company without cause,
upon the occurrence of any of the following events:
- his salary or bonus eligibility is materially reduced; or
- a change in control of Breakaway or sale of all or substantially all of
Breakaway's assets.
On September 12, 1999, Breakaway entered into an employment agreement with
Mr. Sholley. The agreement is for one year and automatically renews unless
Mr. Sholley resigns or Breakaway terminates his employment. Mr. Sholley receives
a base salary of $16,667 per month and is eligible to receive a bonus of up to
30% of his annual salary. In connection with his employment, Mr. Sholley has
been
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<PAGE>
granted stock options to purchase 220,000 shares of Breakaway common stock at a
per share exercise price of $5.50. If after one year Breakaway terminates
Mr. Sholley's employment without cause, he will be entitled to payments equal to
six months of his base salary. In addition, after one year Mr. Sholley may
resign and treat his resignation as a termination Breakaway without cause, upon
the occurrence of any of the following events:
- his salary or bonus eligibility is materially reduced; or
- a change in control of Breakaway or sale of all or substantially all of
Breakaway's assets.
On March 6, 2000, Breakaway's board of directors elected John Loftus as its
Vice President, e-Solutions. On May 14, 1999 Breakaway entered into an
employment agreement with John Loftus, providing for a base salary of $16,667
per month and is eligible to receive a bonus of up to 25% of his annual salary,
subject to meeting specified performance targets. In addition, in May 1999
Breakaway granted to John Loftus stock options to purchase 33,812 shares of
Breakaway common stock at a per price share of $1.18. John Loftus is the brother
of William Loftus, Breakaway's Senior Vice President of Operations.
On March 6, 2000, Breakaway's board of directors elected Mr. Stedman as its
Vice President, North American Field Operations. In addition, in May 1999,
Breakaway granted Mr. Stedman stock options to purchase 80,000 shares of
Breakaway common stock at a per price share of $1.09. In December 1999,
Breakaway granted Mr. Stedman stock options to purchase 30,000 shares of
Breakaway common stock at a per price share of $28.80. In March 1999, Breakaway
granted Mr. Stedman stock options to purchase 70,000 shares of Breakaway common
stock at a per price share of $62.78.
401(K) PLAN. In September 1995, Breakaway adopted an employee savings and
retirement plan qualified under Section 401 of the Internal Revenue Code and
covering all of Breakaway employees. Pursuant to the 401(k) plan, employees may
elect to reduce their current compensation by up to the statutorily prescribed
annual limit and have the amount of such reduction contributed to the 401(k)
plan. Breakaway may make matching or additional contributions to the 401(k) plan
in amounts to be determined annually by Breakaway's board of directors. For
1999, the board of directors has determined that Breakaway will contribute up to
25% of Breakaway's employee's initial 6% of eligible contributions. Prior to
1999, Breakaway did not match or contribute to employee's 401(k) plans.
COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION
Decisions concerning compensation of executive officers were made by
Breakaway's board of directors which included Mr. Brooks, the President and
Chief Executive Officer of Breakaway. In October 1999, Breakaway established a
compensation committee consisting of Mr. Greendale and Mr. Buckley. No executive
officer of Breakaway has served as a director or member of the compensation
committee (or other committee serving an equivalent function) of any other
entity, whose executive officers served on Breakaway's board of directors or
compensation committee.
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<PAGE>
RELATED PARTY TRANSACTIONS
INTERNET CAPITAL GROUP
Internet Capital Group beneficially owns 39.9% of Breakaway common stock.
Breakaway's chairman of the board of directors, Christopher H. Greendale, serves
as a Managing Director of Operations of Internet Capital Group and another
Breakaway director, Walter W. Buckley, is a co-founder and serves as President,
Chief Executive Officer and a director of Internet Capital Group. Internet
Capital Group held approximately 13.5% of the outstanding capital stock of
Applica immediately prior to Breakaway's acquisition of Applica and received
193,934 shares of Breakaway common stock in exchange for its Applica stock. See
"Acquisitions Applica Corporation."
On May 13, 1999, Breakaway issued Internet Capital Group a warrant to
purchase up to 147,744 shares of Breakaway common stock at a per share exercise
price of $4.07, as adjusted from time to time. The warrant expires on
September 30, 2006. The shares issuable upon exercise of this warrant are
subject to antidilution protection, including for issuances of Breakaway
securities at a per share price below the warrant exercise price. Shares issued
upon exercise of the warrant have the benefit of the registration rights
agreement between Breakaway, Internet Capital Group and other investors.
Breakaway provides services to Internet Capital Group and some of its
affiliated entities. For the fiscal year 1999, Breakaway total revenues derived
from engagements with Internet Capital Group and its affiliates were
approximately $4,548,000.
All of the above transactions with Internet Capital Group were approved
unanimously by Breakaway's board of directors and were on terms no less
favorable to Breakaway than could be obtained from unaffiliated third parties.
ACQUISITIONS
APPLICA CORPORATION. On March 25, 1999, Breakaway entered into an Agreement
and Plan of Reorganization with Applica Corporation pursuant to which Applica
merged with and into Breakaway. Under the terms of the agreement, Breakaway
issued an aggregate of 1,447,398 shares of Breakaway common stock to the former
stockholders of Applica, including:
- 193,938 shares to Internet Capital Group;
- 331,230 shares to Breakaway Vice President, Corporate Development, Babak
Farzami; and
- 248,424 shares to Breakaway Vice President, Application Hosting Services,
Dev Ittycheria; and
- 72,368 shares of Breakaway common stock are being held in escrow to secure
indemnification obligations to Breakaway under the agreement.
WPL LABORATORIES, INC. On May 17, 1999, Breakaway entered into an Agreement
and Plan of Reorganization with WPL Laboratories, Inc., Celtic Acquisition
Corp., William Loftus, John Loftus, David Perme and Kevin Sheehan pursuant to
which WPL merged with and into Celtic Acquisition. Celtic Acquisition is a
wholly owned subsidiary of Breakaway formed for the purpose of acquiring WPL.
William Loftus is Breakaway Vice President, Internet Solutions. John Loftus is a
member of William Loftus' immediate family. William Loftus is not affiliated
with Breakaway.
Breakaway's purchase price consisted of cash in the aggregate amount of
$4,999,860 and 2,728,280 shares of Breakaway common stock, of which $3,399,905
in cash and 1,855,232 shares were issued to William Loftus and $999,972 in cash
and 545,656 shares were issued to John Loftus. One-half of the aggregate cash
consideration was paid at the closing of the acquisition. Twenty-five percent of
the cash consideration will be paid pro rata to the stockholders on May 17, 2000
and the remaining 75% will be paid pro rata to the stockholders in equal monthly
installments over the next 36 months for as long as
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the recipient does not voluntarily terminate his employment with Breakaway and
is not terminated by Breakaway for cause.
713,548 of the shares of Breakaway common stock issued to William Loftus and
209,866 of the shares of Breakaway common stock issued to John Loftus are
subject to the terms of Restricted Stock Agreements, granting Breakaway a
repurchase right for these shares in the event William Loftus' or John Loftus'
employment at Breakaway is terminated voluntarily by William Loftus or John
Loftus, as appropriate, or for cause by Breakaway. Breakaway's right of
repurchase expires as to 25% of the shares subject to each agreement on May 14,
2000 and as to the remaining 75% of the shares ratably over the ensuing
36 months. Breakaway's repurchase rights under these agreements terminate upon a
change in control of Breakaway or if William Loftus or John Loftus, as
appropriate, is terminated by Breakaway for reasons other than for cause.
Breakaway agreed to loan $346,678 to William Loftus and $104,809 to John
Loftus at the prime interest rate plus one percent in order to fund their tax
liabilities associated with this transaction. Each of William Loftus and John
Loftus issued to Breakaway a promissory note secured by a pledge of 685,008 and
201,472 shares of Breakaway common stock, respectively, as security for these
loans.
Pursuant to Breakaway's acquisition of WPL, Breakaway assumed WPL options
held by Daniel Loftus, John Loftus, Sr. and Veena Loftus, each of whom are
members of William Loftus' immediate family. These options became exercisable
pursuant to their terms in the following amounts:
- Daniel Loftus' option became exercisable for 8,452 shares of Breakaway
common stock at a per share exercise price of $1.18;
- John Loftus, Sr.'s option became exercisable for 8,452 shares of Breakaway
common stock at a per share exercise price of $1.18; and
- Veena Loftus' option became exercisable for 16,904 shares of Breakaway
common stock at a per share exercise price of $1.18.
FRANK SELLDORFF
Frank Selldorff is Breakaway's founder, a former chairman of Breakaway's
board of directors, a former Chief Executive Officer and executive officer of
Breakaway, and presently serves as one of Breakaway's directors. He currently
beneficially owns 17.4% of Breakaway common stock.
On May 26, 1999, Mr. Selldorff exercised a stock option to purchase
1,200,000 shares of Breakaway common stock at a per share purchase price of
$0.34 per share.
On January 4, 1999, Breakaway changed its federal income tax status from an
S corporation to a C corporation. In connection with this change, Breakaway
entered into an agreement with Mr. Selldorff to facilitate Breakaway's change in
tax status. Pursuant to this agreement, Mr. Selldorff agreed to indemnify
Breakaway for all income tax liability prior to January 4, 1999 related to
Breakaway's failure to qualify as an S corporation, up to a maximum of $365,000.
GORDON BROOKS
Gordon Brooks, Breakaway's President and Chief Executive Officer and a
director, presently beneficially owns 14.0% of Breakaway common stock. On
March 5, 1999, Mr. Brooks exercised a stock option to purchase 112,938 shares of
Breakaway common stock at a per share purchase price of $0.89.
EMPLOYMENT ARRANGEMENTS
Breakaway has entered into employment arrangements with all of its executive
officers. See "Executive Compensation--Employment Arrangements."
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<PAGE>
STOCK OPTIONS
As of December 31, 1999, Breakaway has outstanding options under its 1998
Stock Plan and 1999 Stock Incentive Plan to purchase an aggregate of 11,012,982
shares of Breakaway common stock to Breakaway directors and executive officers
at a per share weighted average exercise price of $1.96. In addition, effective
March 19, 1999 Breakaway issued to Thomas Harding, a member of Christopher
Harding's immediate family, an option to purchase 24,000 shares of Breakaway
common stock at a per share exercise price of $0.98.
AFFILIATE TRANSACTION POLICY
Breakaway has adopted a policy providing that all material transactions
between Breakaway and its officers, directors and other affiliates must be:
- approved by a majority of the members of Breakaway's board of directors
and by a majority of the disinterested members of Breakaway's board of
directors; and
- on terms no less favorable to Breakaway than could be obtained from
unaffiliated third parties.
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<PAGE>
BREAKAWAY SECURITY OWNERSHIP OF PRINCIPAL STOCKHOLDERS AND MANAGEMENT
The following table sets forth the security ownership of Breakaway common
stock, as of February 18, 2000, by (a) each person known to Breakaway to be the
beneficial owner of more than 5% of the outstanding shares of Breakaway common
stock, (b) each of the named executive officers and directors of Breakaway and
(c) all directors and executive officers of Breakaway as a group. Unless
otherwise indicated, each person's address is in care of Breakaway, 50 Rowes
Wharf, Boston, Massachusetts 02110. To the knowledge of Breakaway, the persons
named in the table have sole voting and investment power with respect to all
shares of Breakaway stock shown as beneficially owned by them, except as noted
in the footnotes to the table. Beneficial ownership is determined according to
the rules of the SEC. Shares of Breakaway common stock subject to options
currently exercisable or exercisable within sixty days from the date of this
table are deemed outstanding when determining the number of shares and
percentage ownership by the person holding these options.
<TABLE>
<CAPTION>
PRE-MERGER POST-MERGER(9)
------------------------------------- -------------------------------------
NUMBER OF SHARES NUMBER OF SHARES
NAME OF BENEFICIAL OWNER BENEFICIALLY OWNED PERCENT OF TOTAL BENEFICIALLY OWNED PERCENT OF TOTAL
- ------------------------ ------------------ ---------------- ------------------ ----------------
<S> <C> <C> <C> <C>
Christopher H. Greendale(1)...... 15,239,474 42.0 % 15,239,474 36.1 %
Internet Capital Group,
Inc.(2)........................ 13,962,674 39.9 13,962,674 33.0
Walter W. Buckley, III(3)........ 13,962,674 39.9 13,962,674 33.0
William Loftus................... 1,855,232 5.0 1,855,232 4.4
Frank Selldorff(4)............... 7,394,400 20.4 7,394,400 17.0
Gordon Brooks(5)................. 5,347,988 13.3 5,347,988 11.2
Kevin Comerford(6)............... 54,000 * 54,000 *
Janet Tremlett(7)................ 38,000 * 58,000 *
OTHER DIRECTORS AND EXECUTIVE
OFFICERS:
All executive officers and
directors as a group (15
persons, including one former
executive officer)(8).......... 31,604,668 71.2 % 32,758,634(10) 63.4 %
</TABLE>
- ------------------------
* Represents less than 1% of the total.
(1) Consists of 1,276,800 shares subject to outstanding stock options that are
exercisable within the 60-day period following February 18, 2000 and
13,962,674 shares beneficially owned by Internet Capital Group.
Mr. Greendale is a Managing Director of Internet Capital Group.
Mr. Greendale disclaims beneficial ownership of all shares held by Internet
Capital Group.
(2) Includes 147,744 shares issuable upon the exercise of a warrant. The address
of Internet Capital Group, Inc. is 800 The SafeGuard Building, 435 Devon
Park Drive, Wayne, Pennsylvania 19087.
(3) Consists of 13,962,674 shares beneficially owned by Internet Capital Group.
Mr. Buckley is President, Chief Executive Officer and a director of Internet
Capital Group. Mr. Buckley disclaims beneficial ownership of all shares held
by Internet Capital Group.
(4) Includes 1,200,000 shares subject to outstanding options that are
exercisable within the 60-day period following February 18, 2000.
(5) Consists of 4,780,660 shares subject to outstanding stock options that are
exercisable within the 60-day period following February 18, 2000 and 112,940
shares owned by Mr. Brooks.
(6) Consists of 54,000 shares subject to outstanding options that are
exerciseable within the 60-day period following February 18, 2000.
(7) Consists of 38,000 shares subject to outstanding options that are
exercisable within the 60-day period following February 18, 2000.
(8) Includes 147,744 shares issuable upon the exercise of a warrant held by
Internet Capital Group and 13,814,930 shares held by Internet Capital Group,
all of which are attributable to two of Breakaway's directors.
(9) Percentages assume that 7,272,000 shares of Breakaway common stock will be
issued in the merger.
(10) Includes 1,151,662 shares to be issued to Maureen Ellenberger upon closing
of the merger.
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<PAGE>
EGGROCK BUSINESS
Eggrock Partners, Inc. is a full service consulting and systems integration
firm that focuses on delivering customer-centered business solutions to emerging
enterprises. Eggrock assists growing companies in selecting and implementing
software applications that will allow these companies to operate their business
more effectively through use of the Internet. The range of consulting services
offered cover a wide range of client needs, including:
- development of a strategic vision, new business processes and solution
portfolio options during critical planning stages;
- implementation of customized solutions for managing customer relationships
and eCommerce needs; and
- support services from highly experienced information technology support
staff.
Eggrock's consulting clients consist largely of companies with revenues
between $50 million and $500 million a year and small divisions of larger
companies that are growing quickly. These clients recognize the advantages to be
gained from using Internet applications to improve communication internally as
well as externally with their suppliers and customers. As a result of their
size, however, these companies generally lack the personnel and technical
resources to build and maintain the necessary systems without assistance. By
focusing on these types of clients, Eggrock has been able to identify the
specific characteristics of emerging enterprises and the particular dynamics
that affect these companies. Eggrock has capitalized on this expertise to
service companies in fields ranging from financial services, to high technology,
to travel and leisure.
Eggrock also markets the e-Co-Share Application Service Provider. eCo-Share
is aimed at smaller companies, with revenues of less than $50 million.
e-Co-Share is a suite of integrated web-based business applications that
companies can lease with a minimal up-front investment. eCo-Share enables these
smaller companies to gain significant operational efficiencies by using
technology solutions that would otherwise be prohibitively expensive for
companies of their size. The applications provided through eCo-Share focus on
electronic commerce, customer relationship management, financial accounting,
procurement, human resource management, group productivity and enterprise
reporting. eCo-Share was formed through a joint venture with Onyx Software
Corporation, Digex, Incorporated and Microsoft Corporation.
Eggrock was initially formed as a Delaware limited liability company in 1997
by Maureen Ellenberger, Mike Mordas and Vijay Manwani. On October 1, 1999,
Eggrock converted to a Delaware corporation and issued shares of Series A
Redeemable Convertible Preferred Stock to investors in exchange for
$10 million. The proceeds from the financing were allocated to the e-Co-Share
ASP, enhancements to core services marketing and infrastructure and further
North American extension, including the operation and renovation of offices in
Maynard, Massachusetts, Minneapolis, Minnesota, and Washington, D.C. Eggrock
currently has 160 employees in 4 offices, located in Maynard, Massachusetts,
Minneapolis, Minnesota, Boca Raton, Florida and Washington, D.C.
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<PAGE>
EGGROCK MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
YOU SHOULD READ THE FOLLOWING DISCUSSION TOGETHER WITH THE FINANCIAL
STATEMENTS AND RELATED NOTES APPEARING ELSEWHERE IN THIS CONSENT SOLICITATION
STATEMENT/PROSPECTUS. THIS ITEM CONTAINS FORWARD-LOOKING STATEMENTS WITHIN THE
MEANING OF SECTION 27A OF THE SECURITIES ACT OF 1933 AND SECTION 21E OF THE
SECURITIES AND EXCHANGE ACT OF 1934 THAT INVOLVE RISKS AND UNCERTAINTIES. ACTUAL
RESULTS MAY DIFFER MATERIALLY FROM THOSE INCLUDED IN SUCH FORWARD-LOOKING
STATEMENTS. FACTORS WHICH COULD CAUSE ACTUAL RESULTS TO DIFFER MATERIALLY
INCLUDE THOSE SET FORTH UNDER "RISK FACTORS" COMMENCING ON PAGE 7. SEE "SPECIAL
NOTE REGARDING FORWARD-LOOKING STATEMENTS."
OVERVIEW
Eggrock Partners Inc. is a leading full service provider that offers
integrated strategy, e-business implementation, and application hosting for
growing enterprises. Eggrock's services consist of strategic consulting,
e-commerce development and support, systems integration and application hosting.
Eggrock was formed in Delaware on September 2, 1997 as a limited liability
company. Eggrock operated as a limited liability company until September 30,
1999. On October 1, 1999, Eggrock entered into a merger agreement to convert
from a limited liability company to a corporation. Throughout the remainder of
this discussion, the year ended December 31, 1999 refers to the combined results
of operations for the nine months ended September 30, 1999 and the three months
ended December 31, 1999.
On January 26, 2000, Eggrock entered into an agreement to merge with a
wholly-owned subsidiary of Breakaway. The agreement provides for 100% of
Eggrock's outstanding stock and stock options to be exchanged for approximately
3,630,000 shares of Breakaway common stock and shares underlying options to
purchase Breakaway common stock.
Throughout Eggrock's existence as a limited liability company, interests of
members in profits and losses of Eggrock and the rights of members to
distributions and allocations were evidenced by units of interest in Eggrock.
There were two classes of membership interests: Class A Common Units and
Class B Common Units. Class A Units had the right to vote on all matters on
which the members are entitled to vote, as defined in the Agreement. Class B
Units had no voting rights under the Agreement. Class B Units were divided into
vested Class B Units and unvested Class B units. The vesting schedule affected
the allocations and distributions of profits and losses of Eggrock.
Distributions were made to the members of Eggrock in proportion to their vested
units at such times as the Managing Directors determined.
During this period, new and existing employees were granted phantom units.
Phantom units represented a non-equity based right to share in the profits of
Eggrock. Phantom unit holders were evaluated on an annual basis as to whether
they would be allowed to convert their phantom units into Class B Units. The
phantom unit holder was not required to pay any additional cash to effect the
conversion for Class B Units. In connection with the merger agreement entered
into on October 1, 1999, vested phantom units and Class B Units were converted
into nonvoting common stock and unvested Class B Units and Phantom units were
converted into options to purchase nonvoting common stock. Eggrock accounted for
the equity component of this plan as a variable award similar to a junior stock
plan. Accordingly, the equity awards were marked to fair market value each
reporting period until they were converted on October 1, 1999. The related
compensation was recorded as compensation expense related to the issuance of
membership units in the accompanying statements of operations and as an increase
in members' equity. In addition, deferred compensation of $9.8 million has been
recorded in stockholders' equity in the three months ended December 31, 1999
related to stock option grants issued below fair market value. The related stock
compensation expense will be recognized over the vesting period of the related
stock options, generally four years.
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These equity based compensation programs have resulted in noncash
compensation expense of $282,000 and $7.6 million in the years ended
December 31, 1998 and 1999, respectively.
Eggrock's revenue mix has been shifting from time and materials contracts to
fixed-time, fixed-fee agreements. For time and materials projects, Eggrock
recognizes revenues based on the number of days worked by consultants at a daily
rate agreed upon with its clients. Eggrock recognizes revenues from fixed-fee
contracts on a percentage of completion method based on project days worked.
Eggrock's revenues attributable to time and material contracts and fixed fee
contracts in the periods indicated have been as follows:
<TABLE>
<CAPTION>
YEAR ENDED
DECEMBER 31,
-------------------
1998 1999
-------- --------
<S> <C> <C>
Time and materials.......................................... $2,937 $ 4,794
Percentage of revenues...................................... 63.8% 40.8%
Fixed Fee................................................... $1,671 $ 6,944
Percentage of revenues...................................... 36.2% 59.2%
------ -------
Total revenues.......................................... $4,608 $11,738
====== =======
</TABLE>
Due to Eggrock's use of fixed-fee contracts, its operating results may be
affected adversely by inaccurate estimates of costs required to complete
projects. Therefore, Eggrock employs a series of project review processes
designed to help provide accurate project cost and completion estimates,
including a detailed review at the end of each specified reporting period to
determine project percentage of completion to date.
Eggrock generally derives its initial pricing for a contract from its
internal cost and fixed-fee pricing model. This model helps Eggrock's
professionals estimate pricing based on the scope of work and materials
required. The model also takes into account project complexity and technical
risks. Eggrock seeks to mitigate its risks under fixed-fee contracts by
providing fixed-fee quotes for discrete phases of each project. Using this
approach, Eggrock is able to price more accurately the next phase of the
engagement by virtue of having greater knowledge of the client's needs and the
project's complexity. Eggrock reflects any losses on projects in process in the
period in which they become known.
Application hosting services were introduced during 1999 and were not
material for the year ended December 31, 1999. Eggrock anticipates that revenues
from application hosting services will become more significant in future
periods.
For the year ended December 31, 1998, revenues from a single client
accounted for approximately 55.0% of Eggrock's total revenues, and revenues from
Eggrock's five largest clients accounted for 89.5% of total revenues. For the
year ended December 31, 1999, revenues from a single client accounted for
approximately 29.8% of Eggrock's total revenues and revenues from its five
largest clients accounted for approximately 65.0% of its total revenues. If
these clients do not need or want to engage Eggrock to perform additional
services for them and Eggrock is not able to sell its services to new clients at
comparable or greater levels, Eggrock's revenues will decline.
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<PAGE>
RESULTS OF OPERATIONS
The following table sets forth certain items included in Eggrock's Statement
of Operations as a percentage of revenues for the periods indicated:
<TABLE>
<CAPTION>
YEAR ENDED
DECEMBER 31,
-------------------
1998 1999
-------- --------
<S> <C> <C>
Revenues.................................................... 100.0% 100.0%
Project personnel costs..................................... 46.0% 54.8%
Selling, general and administrative......................... 32.4% 48.6%
Equity based compensation................................... 6.1% 65.1%
----- -----
Operating income (loss)..................................... 15.5% (68.5)%
===== =====
</TABLE>
YEAR ENDED DECEMBER 31, 1999 COMPARED TO YEAR ENDED DECEMBER 31, 1998
REVENUES. Revenues for the year ended December 31, 1999 increased by $7.1
million, or 154.7%, to $11.7 million from $4.6 million for the year ended
December 31, 1998. The increase was due primarily to increased market demand for
Eggrock's Internet professional services. Eggrock increased the number of
clients and scope of the engagements and increased its capacity due to
investments in additional professional services employees. Additionally, Eggrock
expanded geographically, which increased its U.S. market presence.
PROJECT PERSONNEL COSTS. Project personnel costs for the year ended
December 31, 1999 increased by $4.3 million, or 203.2%, to $6.4 million from
$2.1 million for the year ended December 31, 1998. Project personnel costs
represented 54.8% of revenues for the year ended December 31, 1999, as compared
to 46.0% of revenues for the year ended December 31, 1998. The increase in the
absolute dollars was due primarily to an increase in the number of employees
hired to perform the client services delivered. Project personnel costs
increased as a percentage of revenues for the year ended December 31, 1999 due
primarily to investment in more senior personnel with higher compensation
levels, investment in personnel to launch the application hosting business, and
a decrease in average employee utilization rate.
SELLING, GENERAL AND ADMINISTRATIVE. Selling, general and administrative
expenses for the year ended December 31, 1999 increased by $4.2 million, or
281.5%, to $5.7 million from $1.5 million for the year ended December 31, 1998.
As a percentage of revenues, selling, general and administrative expenses
increased to 48.6% for the year ended December 31, 1999 from 32.4% for the year
ended December 31, 1998. The increase in 1999 was due primarily to increases in
personnel-related expenses to support increased administrative employees to
expand Eggrock's infrastructure, expansion in Eggrock's senior management team,
salary expenses for Eggrock's founders beginning with the conversion to a
corporate structure in the fourth quarter of 1999, investment in the application
hosting service line infrastructure, and increased rent and travel expenses
related to the opening of additional offices.
INTEREST INCOME. Interest income, net, for the year ended December 31, 1999
increased to $114,212 from $13,779 for the year ended December 31, 1998. The
increase in 1999 was due primarily to interest income earned on the invested
portion of proceeds from Eggrock's preferred stock financing in October 1999.
PROVISION FOR INCOME TAXES
During the year ended December 31, 1998 Eggrock recorded a pro forma tax
provision of $578,000. During the twelve-month period ended December 31, 1999
Eggrock recorded a combined pro
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forma and actual tax provision of $841,000. The primary difference between
Eggrock's statutory rate and its effective rate relates to non-deductible equity
based compensation. Included in the twelve months ended December 31, 1999 tax
provision is the one-time effect of the Company changing its tax status from a
partnership to a C Corporation which amounted to approximately $464,000.
LIQUIDITY AND CAPITAL RESOURCES
From inception through September 30, 1999, Eggrock funded its operations
primarily through cash provided by operations and a line of credit. In October
of 1999, Eggrock issued $10 million of preferred stock. At December 31, 1999,
Eggrock's cash balance was $8.3 million and its working capital was $8.5
million.
Eggrock used $344,000 in cash from operations for the year ended
December 31, 1999. This was due primarily to the net loss and increased accounts
receivable and prepaid expenses and other current assets, offset by increased
accrued expenses and noncash compensation charges related to membership unit and
other equity issuances. Accounts receivable increased due to higher revenue
levels. Eggrock's operating activities generated cash of $376,000 for the year
ended December 31, 1998. This was due to net income and increases in accrued
expenses and deferred revenue, offset by increased accounts receivable.
Capital expenditures were $644,000 and $284,000 in the years ended
December 31, 1999 and 1998, respectively. These expenditures were primarily for
computer equipment and furniture and fixtures to support Eggrock's growth.
Deposits increased in the year ended December 31, 1999 by $325,000 due to
furniture deposits related to Eggrock's move to new corporate facilities.
In October 1999, Eggrock issued 3,000,000 shares of Series A Preferred Stock
for $10.0 million. In addition, Eggrock currently has a revolving line of credit
with a bank for the lesser of $2 million or 80% of qualifying accounts
receivable, as defined. The revolving line of credit bears interest at the
bank's prime rate and expires in September 2000. Borrowings under the revolving
line of credit are collateralized by substantially all of Eggrock's assets. At
December 31, 1999, Eggrock had $658,000 outstanding and $1.3 million available
for borrowing under this line of credit. Eggrock is also subject to some
financial covenants under this agreement including current ratio and net income
covenants. As of December 31, 1999, Eggrock was not in compliance with the net
income covenant.
Eggrock believes that its current cash balances, cash generated from
operations and funds available under its line of credit will be sufficient to
finance Eggrock's capital requirements for at least the next 12 months. There
can be no assurance, however, that Eggrock's actual needs will not exceed
expectations or that Eggrock will be able to fund its operations in the absence
of other sources. There also can be no assurance that any additional required
financing will be available through additional bank borrowings, debt or equity
offerings or otherwise, or that if such financing is available, that it will be
available on terms acceptable to Eggrock.
MARKET RISK
To date, Eggrock has not utilized derivative financial instruments or
derivative commodity instruments. Eggrock does not expect to employ these or
other strategies to hedge market risk in the foreseeable future. Eggrock invests
its cash in money market funds, which are subject to minimal credit and market
risk. Eggrock believes the market risks associated with these financial
instruments are immaterial.
YEAR 2000 READINESS DISCLOSURE
THE YEAR 2000 ISSUE. The year 2000 issue is a result of computer programs
or systems which store or process date-related information using only the last
two digits to refer to a year. These programs or
83
<PAGE>
systems potentially may not be able to distinguish properly between a year in
the 1900's and a year in the 2000's. Failure of these programs or systems to
distinguish between the two centuries could cause the programs or systems to
create erroneous results or even fail.
EGGROCK'S STATE OF READINESS
Eggrock established a year 2000 readiness team to carry out a program for
the assessment of its vulnerability to the year 2000 issue and remediation of
identified problems. The team consisted of senior information technology and
business professionals who met on a regular basis. An outside consultant also
worked with the readiness team on a temporary basis to assist them in carrying
out their tasks.
As of February 2000 Eggrock has not experienced any year 2000 related
business interruptions, including its ability to process transactions, send or
receive email messages or invoices, or engage in normal business activities.
COSTS. As of December 31, 1999 Eggrock incurred approximately $2,500 in
expenses related to the year 2000 issue and related preparations, and Eggrock
does not anticipate any significant future costs associated with year 2000
monitoring efforts will be incurred. These amounts were incurred for outside
consulting costs. Eggrock will continue to engage in an ongoing year 2000
assessment, but has not yet identified any year 2000 issues or developed any
contingency plans.
LEGAL MATTERS
The validity of the shares of Breakaway common stock to be issued pursuant
to the merger, certain legal matters in connection with the merger and the
federal income tax consequences to the merger will be passed upon for Breakaway
by Hale and Dorr LLP, Boston, Massachusetts. Certain legal matters in connection
with the merger and the federal income tax consequences of the merger will be
passed upon for Eggrock by Goodwin, Procter & Hoar LLP, Boston, Massachusetts.
INTERESTS OF COUNSEL
An investment partnership comprised of partners and senior executives of
Hale and Dorr LLP owns 15,390 shares of Breakaway common stock. Investment
partnerships comprised of partners and senior executives of Goodwin,
Procter & Hoar LLP own 9,000 shares of Eggrock's preferred stock.
EXPERTS
The consolidated financial statements and consolidated financial statement
schedule of Breakaway at December 31, 1998 and 1999 and for each of the years in
the three year period ended December 31, 1999, have been included herein in
reliance upon the reports of KPMG LLP, independent certified public accountants,
appearing elsewhere herein, and upon authority of said firm as experts in
auditing and accounting.
The financial statements of Applica Corporation as of December 31, 1998 and
from September 24, 1998 (inception) through December 31, 1998, have been
included herein in reliance upon the report of KPMG LLP, independent certified
public accountants, appearing elsewhere herein, and upon authority of said firm
as experts in auditing and accounting.
The financial statements of WPL Laboratories, Inc. as of December 31, 1997
and 1998, and for each of the years then ended, have been included herein in
reliance upon the report of KPMG LLP, independent certified public accountants,
appearing elsewhere herein, and upon authority of said firm as experts in
auditing and accounting.
84
<PAGE>
The consolidated financial statements of Web Yes, Inc. and subsidiary as of
December 31, 1997 and 1998 and for each of the years then ended, have been
included herein in reliance upon the report of KPMG LLP, independent certified
public accountants, appearing elsewhere herein, and upon authority of said firm
as experts in auditing and accounting.
The financial statements of Eggrock Partners, Inc. as of December 31, 1998,
September 30, 1999 and December 31, 1999, included in this consent solicitation
statement/prospectus have been audited by Arthur Andersen LLP, independent
public accountants, as indicated in their report with respect thereto, and are
included herein in reliance upon said firm as experts in giving said reports.
CHANGES IN INDEPENDENT AUDITORS
Breakaway retained its current independent auditors, KPMG LLP, and replaced
Brown & Brown, LLP in May 1999. Brown & Brown, LLP had been retained to audit
Breakaway's financial statements as of and for the year ended December 31, 1998.
In January 1999, Breakaway retained Brown & Brown, LLP as its independent
auditors, replacing Arthur Andersen LLP. Arthur Andersen LLP had been retained
to audit Breakaway's financial statements as of and for the year ended
December 31, 1997. Breakaway's board of directors approved each of the changes
in its independent auditors. KPMG LLP has reaudited Breakaway's financial
statements as of and for the years ended December 31, 1998 and December 31,
1997.
During the years in which Breakaway retained Brown & Brown, LLP and Arthur
Andersen LLP and through the periods prior to each of their replacement,
Breakaway had no disagreements with either of Brown & Brown, LLP or Arthur
Andersen LLP on any matter of accounting principles or practices, financial
statement disclosure or auditing scope or procedure, which disagreements, if not
resolved to the satisfaction of Brown & Brown, LLP or Arthur Andersen LLP, as
appropriate, would have caused either of them to make reference thereto in their
report on the financial statements for such years. The reports on Breakaway's
financial statements of Brown & Brown LLP, as of December 31, 1998 and for the
year then ended, and of Arthur Andersen LLP, as of December 31, 1997 and for the
year then ended, did not contain an adverse opinion or a disclaimer of opinion
and were not qualified or modified as to uncertainty, audit scope or accounting
principles.
WHERE YOU CAN FIND MORE INFORMATION
Breakaway files annual, quarterly, and special reports, prospectuses and
other information with the SEC. Breakaway filed with the SEC a registration
statement on Form S-4 under the Securities Act of 1933, as amended to register
with the SEC the Breakaway common stock issuable pursuant to the merger
agreement. This consent solicitation statement/prospectus does not include all
of the information contained in the registration statement. You should refer to
the registration statement and its exhibits for additional information. Whenever
we make reference in this consent solicitation statement/prospectus to any of
Breakaway's contracts, agreements or other documents, the references are not
necessarily complete and you should refer to the exhibits attached to the
registration statement for copies of the actual contract, agreement or other
document.
You can read Breakaway's SEC filings, including the registration statement,
over the Internet at the SEC's web site at HTTP://WWW.SEC.GOV. You may also read
and copy any document Breakaway files with the SEC at its public reference
facilities at 450 Fifth Street, N.W., Washington, D.C. 20549; Seven World Trade
Center, Suite 1300, New York, New York 10048; and Citicorp Center, 500 West
Madison Street, Suite 1400, Chicago, Illinois 60661-2511. You may also obtain
copies of the documents at prescribed rates by writing to the Public Reference
Section of the SEC at 450 Fifth Street, N.W., Washington, D.C. 20549. Please
call the SEC at 1-800-SEC-0330 for further information on the operation of the
public reference facilities.
85
<PAGE>
You should rely only on the information contained in this consent
solicitation statement/prospectus when deciding whether to consent to the merger
or waive your appraisal rights. Neither Breakaway nor Eggrock has authorized
anyone to provide you with information that is different from what is contained
in this consent solicitation statement/prospectus.
This consent solicitation statement/prospectus is dated March 10, 2000. You
should not assume that the information contained in this consent solicitation
statement/prospectus is accurate as of any date other than that date. The
mailing of this consent solicitation statement/prospectus to Eggrock
stockholders and the issuance of the Breakaway common stock in connection with
the merger should not create any implications to the contrary.
86
<PAGE>
INDEX TO FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
PAGE
--------
<S> <C>
CONSOLIDATED FINANCIAL STATEMENTS OF BREAKAWAY SOLUTIONS,
INC.
Independent Auditors' Report................................ F-3
Consolidated Balance Sheets as of December 31, 1998 and
1999...................................................... F-4
Consolidated Statements of Operations for the years ended
December 31, 1997, 1998 and 1999.......................... F-5
Consolidated Statements of Stockholders' Equity for the
years ended December 31, 1997, 1998 and 1999.............. F-6
Consolidated Statements of Cash Flows for the years ended
December 31, 1997, 1998 and 1999.......................... F-7
Notes to Consolidated Financial Statements.................. F-8
FINANCIAL STATEMENTS OF APPLICA CORPORATION
Independent Auditors' Report................................ F-23
Balance Sheet as of December 31, 1998....................... F-24
Statement of Operations from September 24, 1998 (inception)
through December 31, 1998................................. F-25
Statement of Stockholders' Equity from September 24, 1998
(inception) through December 31, 1998..................... F-26
Statement of Cash Flows from September 24, 1998 (inception)
through December 31, 1998................................. F-27
Notes to Financial Statements............................... F-28
FINANCIAL STATEMENTS OF WPL LABORATORIES, INC.
Independent Auditors' Report................................ F-31
Balance Sheets as of December 31, 1997 and 1998 and
March 31, 1999 (unaudited)................................ F-32
Statements of Income for the years ended December 31, 1997
and 1998 and for the three months ended March 31, 1998 and
1999 (unaudited).......................................... F-33
Statements of Stockholders' Equity for the years ended
December 31, 1997 and 1998 and for the three months ended
March 31, 1999 (unaudited)................................ F-34
Statements of Cash Flows for the years ended December 31,
1997 and 1998 and for the three months ended March 31,
1998 and 1999 (unaudited)................................. F-35
Notes to Financial Statements............................... F-36
FINANCIAL STATEMENTS OF WEB YES, INC.
Independent Auditors' Report................................ F-41
Consolidated Balance Sheets as of December 31, 1997 and 1998
and March 31, 1999 (unaudited)............................ F-42
Consolidated Statements of Income for the years ended
December 31, 1997 and 1998 and for the three months ended
March 31, 1998 and 1999 (unaudited)....................... F-43
Consolidated Statements of Stockholders' Equity for the
years ended December 31, 1997 and 1998 and for the three
months ended March 31, 1999 (unaudited)................... F-44
Consolidated Statements of Cash Flows for the years ended
December 31, 1997 and 1998 and for the three months ended
March 31, 1998 and 1999 (unaudited)....................... F-45
Notes to Consolidated Financial Statements.................. F-46
FINANCIAL STATEMENTS OF EGGROCK PARTNERS, INC.
Report of Independent Public Accountants.................... F-51
Balance Sheets as of December 31, 1998, September 30, 1999
and December 31, 1999..................................... F-52
Statements of Operations for the Year Ended December 31,
1998, the Nine Months Ended September 30, 1999 and the
Three Months Ended December 31, 1999...................... F-53
Statements of Redeemable Convertible Preferred Stock and
Members'/Stockholders' Equity (Deficit) for the Year Ended
December 31, 1998, the Nine Months Ended September 30,
1999 and the Three Months Ended December 31, 1999......... F-54
</TABLE>
F-1
<PAGE>
<TABLE>
<CAPTION>
PAGE
--------
<S> <C>
Statements of Cash Flows for the Year Ended December 31,
1998, the Nine Months Ended September 30, 1999 and the
Three Months Ended December 31, 1999...................... F-55
Notes to Financial Statements............................... F-56
UNAUDITED PRO FORMA CONSOLIDATED FINANCIAL STATEMENTS FOR
BREAKAWAY SOLUTIONS, INC.
Basis of Presentation....................................... F-67
Unaudited Pro Forma Consolidated Balance Sheet as of
December 31, 1999......................................... F-68
Unaudited Pro Forma Consolidated Statement of Operations for
the year ended December 31, 1999.......................... F-69
Notes to Unaudited Pro Forma Consolidated Financial
Statements................................................ F-70
</TABLE>
F-2
<PAGE>
INDEPENDENT AUDITORS' REPORT
The Board of Directors
Breakaway Solutions, Inc.:
We have audited the accompanying consolidated balance sheets of Breakaway
Solutions, Inc. as of December 31, 1998 and 1999, and the related consolidated
statements of operations, stockholders' equity and cash flows for each of the
years in the three-year period ended December 31, 1999. These consolidated
financial statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these consolidated 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 consolidated financial statements are
free of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the consolidated 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 consolidated financial statements referred to above
present fairly, in all material respects, the financial position of Breakaway
Solutions, Inc. and subsidiaries as of December 31, 1998 and 1999, and the
results of their operations and their cash flows for each of the years in the
three-year period ended December 31, 1999, in conformity with generally accepted
accounting principles.
/s/ KPMG LLP
Boston, Massachusetts
February 7, 2000, except for paragraph
five of note 6, which is
as of March 7, 2000
F-3
<PAGE>
BREAKAWAY SOLUTIONS, INC.
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT SHARE-RELATED DATA)
<TABLE>
<CAPTION>
DECEMBER 31,
-------------------
1998 1999
-------- --------
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents................................. $ 17 $ 3,920
Short-term investments.................................... -- 28,227
Accounts receivable, net of allowance for doubtful
accounts of $131 in 1998 and $357 in 1999,
respectively............................................ 1,446 7,559
Unbilled revenue on contracts............................. 626 725
Due from related parties.................................. -- 3,991
Prepaid expenses and other current assets................. 59 2,548
------ -------
Total current assets.................................... 2,148 46,970
Investments................................................. -- 9,705
Property and equipment, net................................. 554 7,541
Intangible assets and deferred costs, net of accumulated
amortization.............................................. -- 12,181
Loans to employees.......................................... -- 568
Other assets................................................ 40 496
------ -------
Total assets............................................ $2,742 $77,461
====== =======
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Line of credit............................................ $ 426 $ --
Due to stockholders-current portion....................... -- 625
Capital lease obligations-current portion................. 149 533
Accounts payable.......................................... 813 2,955
Accrued compensation and related benefits................. 178 1,477
Accrued expenses.......................................... -- 1,306
Deferred revenue.......................................... 196 224
------ -------
Total current liabilities............................... 1,762 7,120
------ -------
Due to stockholders--long-term portion...................... -- 1,625
Capital lease obligations-long-term portion................. 67 376
------ -------
Total long-term liabilities............................. 67 2,001
------ -------
Total liabilities..................................... 1,829 9,121
------ -------
Commitments and contingencies
Stockholders' Equity:
Preferred stock........................................... -- --
Common stock, $.000125 par value, 160,000,000 shares
authorized; 15,360,000 shares and 37,889,084 shares
issued in 1998 and 1999, respectively, and 12,249,600
shares and 34,778,684 shares outstanding in 1998 and
1999, respectively...................................... 1 4
Additional paid-in capital................................ -- 78,868
Less: deferred compensation............................... -- (253)
Less: treasury stock, at cost............................. -- --
Retained earnings (accumulated deficit)................... 912 (10,367)
Accumulated other comprehensive income.................... -- 88
------ -------
Total stockholders' equity.............................. 913 68,340
------ -------
Total liabilities and stockholders' equity............ $2,742 $77,461
====== =======
</TABLE>
See accompanying notes to consolidated financial statements.
F-4
<PAGE>
BREAKAWAY SOLUTIONS, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
------------------------------
1997 1998 1999
-------- -------- --------
<S> <C> <C> <C>
Revenue, including revenue from related parties of $4,548 in
1999...................................................... $ 6,118 $10,018 $ 25,390
------- ------- --------
Operating expenses:
Project personnel costs................................... 2,543 5,904 11,850
Selling, general and administrative expenses.............. 2,559 4,814 24,405
------- ------- --------
Total operating expenses................................ 5,102 10,718 36,255
------- ------- --------
Income (loss) from operations........................... 1,016 (700) (10,865)
Other income (expense):
Other income.............................................. -- 160 23
Interest income........................................... 93 11 673
Interest expense, including $128 to related parties in
1999.................................................... (33) (43) (198)
Loss on disposal of equipment............................. (2) (3) --
------- ------- --------
Total other income...................................... 58 125 498
------- ------- --------
Net income (loss)....................................... $ 1,074 $ (575) $(10,367)
======= ======= ========
Net income (loss) per share:
Basic and diluted......................................... $ 0.08 $ (0.05) $ (0.59)
======= ======= ========
Weighted average common shares outstanding:
Basic and diluted......................................... 12,826 12,680 17,440
======= ======= ========
Pro forma information (unaudited) (note 11)
Income (loss) before taxes, as reported................... $ 1,074 $ (575)
Pro forma income taxes (benefit)............................ 430 (195)
------- -------
Pro forma net income (loss)................................. $ 644 $ (380)
======= =======
Pro forma net income (loss) per share:
Basic and diluted......................................... $ 0.05 $ (0.03)
======= =======
Pro forma weighted average common shares outstanding:
Basic and diluted......................................... 12,826 12,680
======= =======
</TABLE>
See accompanying notes to consolidated financial statements.
F-5
<PAGE>
BREAKAWAY SOLUTIONS, INC.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
(IN THOUSANDS)
<TABLE>
<CAPTION>
PREFERRED STOCK COMMON STOCK ADDITIONAL TREASURY STOCK
-------------------- ------------------- PAID-IN DEFERRED --------------------
SHARES AMOUNT SHARES AMOUNT CAPITAL COMPENSATION SHARES AMOUNT
-------- --------- -------- -------- ---------- ------------- -------- ---------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
BALANCE, DECEMBER 31, 1996.... -- $ -- 15,360 $2 $ -- -- (2,534) $ --
Distributions to
stockholders................ -- -- -- -- -- -- -- --
Net income.................... -- -- -- -- -- -- -- --
------ --------- ------- -- ------- ----- ------ ---------
BALANCE, DECEMBER 31, 1997.... -- -- 15,360 2 -- -- (2,534) --
Purchase of treasury stock.... -- -- -- -- -- -- (576) --
Distributions to
stockholders................ -- -- -- -- -- -- -- --
Net loss...................... -- -- -- -- -- -- -- --
------ --------- ------- -- ------- ----- ------ ---------
BALANCE, DECEMBER 31, 1998.... -- -- 15,360 2 -- -- (3,110) --
S Corporation termination..... -- -- -- -- 911 -- -- --
Issuance of preferred stock... 5,853 1 -- -- 8,291 -- -- --
Repurchase and retirement of
common stock................ -- -- (5,048) (1) (4,468) -- -- --
Issuance of common stock for
acquired businesses......... -- -- 5,089 1 9,192 -- -- --
Issuance of stock options..... -- -- -- -- 856 -- -- --
Issuance of common stock for
services.................... -- -- 104 -- 419 (289) -- --
Exercise of stock options..... -- -- 1,376 -- 533 -- -- --
Issuance of Series B preferred
stock....................... 2,932 -- -- -- 19,050 -- -- --
Amortization of deferred
compensation................ -- -- -- -- -- 36 -- --
Conversion of Series A and B
preferred stock to common
stock....................... (8,785) (1) 14,056 1 -- -- -- --
Issuance of common stock in
connection with initial
public offering, net of
$2,980 in offering costs.... -- -- 6,900 1 41,967 -- -- --
Issuance of common stock in
connection with
investment.................. -- -- 52 -- 1,413 -- -- --
Issuance of warrants.......... -- -- -- -- 704 -- -- --
Change in unrealized gains on
investments................. -- -- -- -- -- -- -- --
Net loss...................... -- -- -- -- -- -- -- --
------ --------- ------- -- ------- ----- ------ ---------
Comprehensive income..........
BALANCE, DECEMBER 31, 1999.... -- $ -- 37,889 $4 $78,868 $(253) (3,110) $ --
====== ========= ======= == ======= ===== ====== =========
<CAPTION>
ACCUMULATED
OTHER RETAINED TOTAL
COMPREHENSIVE EARNINGS STOCKHOLDERS' COMPREHENSIVE
INCOME (DEFICIT) EQUITY INCOME (LOSS)
-------------- --------- ------------- --------------
<S> <C> <C> <C> <C>
BALANCE, DECEMBER 31, 1996.... $-- $ 946 $ 948
Distributions to
stockholders................ -- (530) (530)
Net income.................... -- 1,074 1,074 1,074
--- -------- -------- ========
BALANCE, DECEMBER 31, 1997.... -- 1,490 1,492
Purchase of treasury stock.... -- -- --
Distributions to
stockholders................ -- (4) (4)
Net loss...................... -- (575) (575) (575)
--- -------- -------- ========
BALANCE, DECEMBER 31, 1998.... -- 911 913
S Corporation termination..... -- (911) --
Issuance of preferred stock... -- -- 8,292
Repurchase and retirement of
common stock................ -- -- (4,469)
Issuance of common stock for
acquired businesses......... -- -- 9,193
Issuance of stock options..... -- -- 856
Issuance of common stock for
services.................... -- -- 130
Exercise of stock options..... -- -- 533
Issuance of Series B preferred
stock....................... -- -- 19,050
Amortization of deferred
compensation................ -- -- 36
Conversion of Series A and B
preferred stock to common
stock....................... -- -- --
Issuance of common stock in
connection with initial
public offering, net of
$2,980 in offering costs.... -- -- 41,968
Issuance of common stock in
connection with
investment.................. -- -- 1,413
Issuance of warrants.......... -- -- 704
Change in unrealized gains on
investments................. 88 -- 88 88
Net loss...................... -- (10,367) (10,367) (10,367)
--- -------- -------- --------
Comprehensive income.......... $ (9,780)
========
BALANCE, DECEMBER 31, 1999.... $88 $(10,367) $ 68,340
=== ======== ========
</TABLE>
See accompanying notes to consolidated financial statements.
F-6
<PAGE>
BREAKAWAY SOLUTIONS, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
<TABLE>
<CAPTION>
YEARS ENDED
DECEMBER 31,
------------------------------
1997 1998 1999
-------- -------- --------
<S> <C> <C> <C>
Cash flows from operating activities:
Net income (loss)......................................... $1,074 $(575) $(10,367)
Adjustments to reconcile net income (loss) to net cash
provided by (used in) operating activities:
Depreciation and amortization........................... 255 332 3,285
Compensation expense for issuance of common stock
options................................................ -- -- 223
Loss on disposal of fixed assets........................ 2 3 --
Change in operating assets and liabilities, net of
impact of acquisition of businesses:
Accounts receivable................................... (472) (485) (5,182)
Unbilled revenues on contracts........................ -- (393) (99)
Increase in amounts due from related parties............ -- -- (3,991)
Prepaid expenses and other current assets............. 69 (18) (1,546)
Accounts payable...................................... 222 568 1,943
Accrued compensation and other related benefits....... 63 94 604
Accrued expenses and deferred revenue................. -- 196 1,134
------ ----- --------
Net cash provided by (used in) operating
activities.......................................... 1,213 (278) (13,996)
------ ----- --------
Cash flows from investing activities:
Purchase of investments................................. -- -- (37,360)
Purchase of property and equipment...................... (133) (503) (5,886)
Cash paid for acquired businesses net of cash
acquired............................................... -- -- (2,103)
Increase in cash surrender value of life insurance...... -- -- (26)
Proceeds from disposals of fixed assets................. 13 10 --
------ ----- --------
Net cash used in investing activities............... (120) (493) (45,375)
------ ----- --------
Cash flows from financing activities:
Repurchase and retirement of common stock................. -- -- (4,469)
Proceeds from issuances of preferred stock................ -- -- 23,289
Proceeds from note payable to stockholders................ -- -- 4,000
Proceeds from exercise of stock options................... -- -- 533
Proceeds from issuance of common stock, net of offering
costs................................................... -- -- 41,968
Advances to employees..................................... -- (13) (554)
Payments on current portion of long-term debt............. -- (10) (67)
Proceeds from (repayments of) credit line................. -- 426 (426)
Increase in deposits...................................... (18) (5) (767)
Payments on capital lease obligations..................... (184) (50) (233)
Distribution to stockholders.............................. (96) (439) --
------ ----- --------
Net cash provided by (used in) financing
activities.......................................... (298) (91) 63,274
------ ----- --------
Net increase (decrease) in cash and cash
equivalents......................................... 795 (862) 3,903
Cash and cash equivalents, at beginning of year............. 84 879 17
------ ----- --------
Cash and cash equivalents, at end of year................... $ 879 $ 17 $ 3,920
====== ===== ========
Supplemental disclosure of cash flow information:
Cash paid for interest.................................... $ 33 $ 43 $ 105
====== ===== ========
Supplemental disclosures of non-cash investing and financing
activities:
Issuance of common stock in connection with investment in
Internet services company............................... $ -- $ -- $ 1,413
====== ===== ========
Issuance of warrants in connection with capital lease
obligations............................................. $ -- $ -- $ 704
====== ===== ========
Issuance of note payable to stockholders.................. $ -- $ -- $ 2,175
====== ===== ========
Conversion of notes payable and accrued interest to common
stock................................................... $ -- $ -- $ 4,053
====== ===== ========
Capital lease obligations................................. $ 332 $ 14 $ 1,632
====== ===== ========
Distributions payable to stockholders..................... $ 434 $ -- $ --
====== ===== ========
Conversion of preferred stock to common stock............. $ -- $ -- $ 27,289
====== ===== ========
Issuance of common stock in connection with acquisition of
businesses.............................................. $ -- $ -- $ 9,193
====== ===== ========
Acquisition of businesses:
Assets acquired......................................... $ -- $ -- $ 16,358
Liabilities assumed and issued.......................... -- -- (4,299)
Common stock and stock options issued................... -- -- (9,956)
------ ----- --------
Net cash paid for acquisition of businesses......... $ -- $ -- $ (2,103)
====== ===== ========
</TABLE>
See accompanying notes to consolidated financial statements.
F-7
<PAGE>
BREAKAWAY SOLUTIONS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1998 AND 1999
1. NATURE OF BUSINESS
Breakaway Solutions, Inc. (the "Company"), formerly The Counsell Group,
Inc., was established in 1992. The Company is a full service provider of
e-business solutions that allow growing enterprises to capitalize on the power
of the Internet to reach and support customers and markets. The Company has
designed its services specifically for growing enterprises. These are businesses
which generally fit within two broad categories; companies or divisions of
larger companies that have sales of up to $1 billion per year; and new and
emerging Internet-based businesses.
In December 1999, the Company formed Breakaway Capital I LLC, a wholly-owned
venture capital fund, for the primary purpose of making minority interest
investments in clients. Breakaway intends to make total investments of
$5.0 million; however, no investments have been made as of December 31, 1999.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
CONSOLIDATION POLICY
The consolidated financial statements include the accounts of the Company
and its wholly-owned subsidiaries, Breakaway Securities Corporation, Breakaway
Capital LLC, Celtic Acquisition Corporation and WYI Acquisition Corporation. All
intercompany balances and transactions have been eliminated in consolidation.
USE OF ESTIMATES
Management of the Company has made a number of estimates and assumptions
relating to the reporting of assets and liabilities and the disclosure of
contingent assets and liabilities to prepare these financial statements in
conformity with generally accepted accounting principles. Actual results could
differ from those estimates.
CASH AND CASH EQUIVALENTS
For purposes of the consolidated statement of cash flows, the Company
considers all highly liquid debt instruments purchased with an original maturity
of three months or less to be cash equivalents.
MARKETABLE SECURITIES
The Company determines the appropriate classification of marketable
securities at the time of acquisition and re-evaluates such designation at each
balance sheet date. At December 31, 1999, the Company's investments in
marketable securities are classified as available-for-sale and, as such, are
carried at fair value, with unrealized gains and losses, net of deferred taxes
reported as a separate component of stockholders' equity (see Note 3).
FINANCIAL INSTRUMENTS AND CONCENTRATION OF CREDIT RISK
Financial instruments that potentially subject the Company to a
concentration of credit risk consist of cash and cash equivalents, accounts
receivable, and debt instruments.
The Company performs ongoing credit evaluations of its customers and
generally does not require collateral on accounts receivable. The Company
maintains allowances for potential credit losses and
F-8
<PAGE>
BREAKAWAY SOLUTIONS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1998 AND 1999
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
such losses have been within management's expectations. Write-offs of accounts
receivable have not been material for any of the periods presented. The
Company's customers are headquartered primarily in North America. At
December 31, 1998, amounts due from three customers represented $.7 million or
33% of total accounts receivable. At December 31, 1999, no amounts due from
customers exceeded 10% of total accounts receivable.
The fair market values of cash and cash equivalents, accounts receivable and
debt instruments at both December 31, 1998 and 1999 approximate their carrying
amounts.
PROPERTY AND EQUIPMENT
Property and equipment are recorded at cost. Depreciation is recorded on the
straight-line basis over the estimated useful life of the related assets which
range from three to five years. Equipment held under capital leases is stated at
the present value of minimum lease payments at the inception of the lease and
amortized using the straight-line method over the lease term. Maintenance and
repairs are charged to operations when incurred.
LOANS TO EMPLOYEES
Loans have been made to employees of the acquired company WPL Laboratories,
Inc. totaling $0.5 million in the form of promissory notes which bear interest
at 8.0% annually. The principal amount of these promissory notes and interest
accrued thereon shall be payable upon the earlier to occur of: (i) the date on
which the debtor receives any proceeds from the debtor's sale of Breakaway
capital stock pledged to Breakaway under a stock pledge agreement, to the extent
of such proceeds (net of any taxes payable in connection with such sale) and
(ii) the fourth anniversary of the date of the stock pledge agreement to the
full extent of any remaining principal and interest that is outstanding on such
date.
In December 1999, the Company authorized an unsecured loan to its Chief
Executive Officer in the amount of $1.0 million, which loan is due together with
interest at 6.21% annually on the first to occur of the third anniversary of the
loan or thirty days after his ceasing to be employed by the Company. The loan is
evidenced by a February 2000 Promissory Note.
The Company also periodically makes short term loans to employees.
INTANGIBLE ASSETS AND DEFERRED COSTS
Intangible assets and deferred costs primarily relate to the Company's
acquisitions and include customer base, workforce in place and goodwill.
Deferred costs primarily represent deferred compensation costs arising from cash
and stock issued in connection with business acquisitions, for which continuing
employment of individuals is required. In connection with acquisitions accounted
for under the purchase method of accounting (see Note 3), the Company recorded
these intangible assets and deferred costs based on the excess of the purchase
price over the identifiable tangible net assets of the acquiree on the date of
the purchase. Intangible assets and deferred costs are reported at cost, net of
accumulated amortization and are being amortized over their useful lives,
ranging from three to five
F-9
<PAGE>
BREAKAWAY SOLUTIONS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1998 AND 1999
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
years. At December 31, 1999, intangible assets and deferred costs were comprised
of the following (in thousands):
<TABLE>
<S> <C>
Customer base............................................... $ 1,463
Workforce in place.......................................... 852
Goodwill.................................................... 4,875
-------
Intangible assets......................................... 7,190
Deferred costs.............................................. 6,993
-------
14,183
Less accumulated amortization............................... 2,002
-------
Intangible assets and deferred costs, net................. $12,181
=======
</TABLE>
For the year ended December 31, 1999, amortization of deferred costs totaled
$1.0 million and amortization of intangible assets totaled $1.0 million.
Goodwill, which represents the excess of purchase price over fair value of
net assets acquired, is amortized on a straight-line bases over the expected
periods to be benefited of five years. The Company evaluates whether changes
have occurred that would require revision of the remaining estimated useful life
or impact the recoverability of the goodwill. If such changes occur, the Company
would use an estimate of the undiscounted future operating cash flows to
determine the recoverability of the goodwill.
IMPAIRMENT OF LONG-LIVED ASSETS
The Company records impairment losses on long-lived assets used in
operations when indicators of impairment are present and the undiscounted cash
flows estimated to be generated by those assets are less than the assets'
carrying amount.
REVENUE RECOGNITION
Revenues pursuant to fixed-price contracts are recognized as services are
rendered on the percentage-of-completion method of accounting (based on the
ratio of costs incurred to total estimated costs). Revenues pursuant to time and
material contracts are recognized as services are provided. Unbilled revenues on
contracts are comprised of costs plus earnings. Billings in excess of costs plus
earnings are classified as deferred revenues.
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.
PROJECT PERSONNEL COST
Project personnel costs consist of payroll and payroll-related expenses for
personnel dedicated to client assignments.
F-10
<PAGE>
BREAKAWAY SOLUTIONS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1998 AND 1999
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
INCOME TAXES
Prior to 1999, the Company was taxed under the provisions of Subchapter S of
the Internal Revenue Code, whereby the corporate income is taxed to the
individual shareholders based on their proportionate share of the Company's
taxable income. Massachusetts taxes profits on S corporations with receipts
exceeding $6 million.
Effective January 1, 1999, the Company terminated its S Corporation election
and is subject to corporate-level federal and certain additional state income
taxes. Accordingly, the accompanying consolidated statements of operations
include a pro forma income tax adjustment (see Note 11) for the income taxes
that would have been recorded if the Company had been a C Corporation for all
periods presented.
STOCK-BASED COMPENSATION
The Company has adopted Statement of Financial Accounting Standards No. 123
("SFAS 123"), ACCOUNTING FOR STOCK-BASED COMPENSATION. As permitted by SFAS 123,
the Company measures compensation costs in accordance with Accounting Principles
Board Opinion No. 25 ("APB No. 25"), ACCOUNTING FOR STOCK ISSUED TO EMPLOYEES,
and related interpretations. Accordingly, no accounting recognition is given to
stock options issued to employees that are granted at fair market value until
they are exercised. Stock options issued to non-employees are recorded at the
fair value of the stock at the date of grant. Upon exercise, net proceeds,
including income tax benefits realized, are credited to equity. Therefore, the
adoption of SFAS 123 was not material to the Company's financial condition or
results of operations; however, the pro forma impact on income (loss) per share
has been disclosed in the notes to the consolidated financial statements as
required by SFAS 123 (see Note 6).
SEGMENT INFORMATION
At December 31, 1998, the Company adopted Statement of Financial Accounting
Standard No. 131, "Disclosures about Segments of an Enterprise and Related
Information" (SFAS 131) which requires companies to present financial
descriptive segment information (see Note 12).
NET INCOME (LOSS) PER SHARE
In 1997, the Company adopted the provisions of Statement of Financial
Accounting Standards No. 128 ("SFAS 128"), EARNINGS PER SHARE. SFAS 128 requires
the presentation of basic and diluted net income (loss) per share for all
periods presented. There were no common stock equivalents outstanding in 1997.
As the Company has been in a net loss position for the years ended December 31,
1998, and 1999, common stock equivalents of 1,348,948 for the year ended
December 31, 1998 and 15,262,340 for the year ended December 31, 1999 were
excluded from the diluted loss per share calculation as they would be
antidilutive. As a result, diluted loss per share is the same as basic loss per
share, and has not been presented separately.
RECENT ACCOUNTING PRONOUNCEMENTS
The Company does not expect the adoption of recently issued accounting
pronouncements to have a significant impact on its results of operations,
financial position or cash flows.
F-11
<PAGE>
BREAKAWAY SOLUTIONS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1998 AND 1999
3. INVESTMENTS
During 1999, the Company made a 19.9% equity investment in a privately held
Internet services company, including an advance of $0.8 million. The carrying
value of this investment and advance was approximately $3.7 million at
December 31, 1999, which approximates fair value. The advance, which bears
interest at 8% and is payable on December 15, 2000, is classified as a component
of prepaid expenses and other current assets in the accompanying consolidated
balance sheet as of December 31, 1999.
The cost of available-for-sale marketable securities carried at fair value
was $34.9 million at December 31, 1999. There were no investments held as
available-for-sale as of December 31, 1998. Gross unrealized gains and losses
related to securities held as available-for-sale for the year ended
December 31, 1999 are as follows (in thousands):
<TABLE>
<S> <C>
Gross unrealized gains...................................... $94
Gross unrealized losses..................................... (6)
---
Net unrealized gains...................................... $88
===
</TABLE>
At December 31, 1999, $28.2 million in marketable securities were classified
as short-term and $6.8 million were recorded as long-term.
4. ACQUISITIONS
During 1999, the Company acquired the following companies:
<TABLE>
<CAPTION>
DATE COMPANY LOCATION
- ---- ------- --------
<S> <C> <C>
March 25, 1999....................... Applica Corporation New York, NY
May 17, 1999......................... WPL Laboratories, Inc. Haverford, PA
June 10, 1999........................ Web Yes, Inc. Somerville, MA
</TABLE>
The aggregate purchase price paid in connection with the acquisitions made
in 1999 consisted of (i) 5,089,494 shares of common stock of the Company (ii)
$2.2 million in promissory notes, and (iii) $2.5 million of cash.
The total acquisition consideration paid for WPL Laboratories, Inc.
consisted of approximately $5.0 million in cash to be paid over a four-year
period and 2,728,280 shares of Breakaway common stock. Each WPL stockholder
received 50% of his cash consideration at closing and will receive the remainder
incrementally over a four-year period so long as the stockholder does not resign
and is not terminated for cause. Of the shares of Breakaway common stock issued
to the former WPL stockholders, approximately 50% are subject to Breakaway's
right, which lapses incrementally over a four-year period, to repurchase the
shares of the stockholder, at their value at the time of the acquisition, upon
the stockholder's resignation or Breakaway's termination of the stockholder for
cause.
The total consideration paid for Web Yes, Inc. consisted of 984,982 shares
of Breakaway common stock. Of the shares of Breakaway common stock issued to the
former Web Yes stockholders, 685,360 are subject to Breakaway's right, which
lapses incrementally over a four year period, to repurchase the shares of a
particular stockholder upon the termination of his employment with Breakaway.
The
F-12
<PAGE>
BREAKAWAY SOLUTIONS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1998 AND 1999
4. ACQUISITIONS (CONTINUED)
repurchase price will be either at the share value at the time of the
acquisition if the stockholder terminates employment or Breakaway terminates for
cause, or at their fair market value if Breakaway terminates the stockholder's
employment without cause.
The acquisitions have all been accounted for using the purchase method of
accounting. The purchase price was allocated to the assets acquired and
liabilities assumed based on their estimated fair values. Results of operations
for the acquired companies have been included with those of the Company for
periods subsequent to the date of acquisition. The excess of the total purchase
price for each acquired company over the allocation of fair values to the net
assets has been recorded as intangible assets, as follows (in thousands):
<TABLE>
<S> <C>
Working capital............................................. $ 508
Other non-current assets.................................... 706
Non-current liabilities..................................... (134)
-------
1,080
-------
Intangible assets and deferred costs:
Assembled workforce....................................... 852
Customer base............................................. 1,463
Goodwill.................................................. 4,875
Deferred costs............................................ 6,993
-------
Total intangible assets and deferred costs.............. 14,183
-------
Purchase price $15,263
=======
</TABLE>
The following unaudited pro forma results of operations give effect to the
acquisitions accounted for as purchases as if the transactions had occurred at
the beginning of 1998. Such pro forma financial information reflects certain
adjustments, including amortization of goodwill, income tax effects and an
increase in the weighted average shares outstanding. This pro forma information
does not necessarily reflect the results of operations that would have occurred
had the acquisitions taken place at the beginning of 1998 and is not necessarily
indicative of results that may be obtained in the future (in thousands, except
for per share amounts):
<TABLE>
<CAPTION>
1998 1999
-------- --------
<S> <C> <C>
Total revenue............................................. $12,957 $27,358
Net loss.................................................. (2,787) (11,641)
Net loss per share........................................ ($ 0.16) ($ 0.61)
Weighted average common shares outstanding................ 17,770 19,098
</TABLE>
Subsequent to December 31, 1999 the Company entered into agreements to
acquire Eggrock Partners, Inc. and DataCyr Corporation (See Note 13).
F-13
<PAGE>
BREAKAWAY SOLUTIONS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1998 AND 1999
5. PROPERTY AND EQUIPMENT
Property and equipment consisted of the following at December 31 (in
thousands):
<TABLE>
<CAPTION>
1998 1999
-------- --------
<S> <C> <C>
Computer equipment.......................................... $1,117 $8,541
Office equipment............................................ 12 137
Furniture and fixtures...................................... 70 699
Construction-in-progress.................................... -- 214
------ ------
1,199 9,591
Less: Accumulated depreciation and amortization............. (645) (2,050)
------ ------
$ 554 7,541
====== ======
</TABLE>
The cost and related accumulated amortization of property and equipment held
under capital leases is as follows at December 31 (in thousands):
<TABLE>
<CAPTION>
1998 1999
-------- --------
<S> <C> <C>
Cost........................................................ $ 395 $1,787
Less: Accumulated amortization.............................. (332) (450)
----- ------
$ 63 $1,337
===== ======
</TABLE>
6. CAPITAL STOCK
PREFERRED STOCK
In October 1998, the Company's stockholders authorized 5,853,000 shares of
Series A Preferred Stock. In January 1999 the Company issued 5,853,000 shares of
Series A Preferred Stock at $1.42 per share. The Series A Preferred Stock was
converted into common stock upon the completion of the Company's initial public
offering in October 1999.
SERIES B PREFERRED STOCK
In July 1999, the Company issued 2,931,849 shares of Series B Preferred
Stock, $.0001 par value, for $6.50 per share. The Series B Preferred Stock was
converted into common stock upon the completion of the Company's initial public
offering in October 1999.
1999 EMPLOYEE STOCK PURCHASE PLAN
The 1999 Employee Stock Purchase Plan was adopted in July 1999. The purchase
plan authorizes the issuance of up to a total of 800,000 shares of common stock
to participating employees.
STOCK SPLITS
In June and December 1998 and in September 1999, the Board of Directors
approved a 2-for-1, 3-for-1 stock splits effected through stock dividends and a
4-for-5 stock split of the Company's common
F-14
<PAGE>
BREAKAWAY SOLUTIONS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1998 AND 1999
6. CAPITAL STOCK (CONTINUED)
stock, respectively. All prior periods have been restated to reflect these stock
splits effected as a recapitalization.
In March 2000, the Board of Directors approved a 2-for-1 stock split
effected through a stock dividend of the Company's common stock. All prior
periods have been restated to reflect the split effected as a recapitalization.
STOCK PLANS
The Company's 1998 Stock Plan (the "Stock Plan") authorizes the Company to
grant options to purchase common stock, to make awards of restricted common
stock, and to issue certain other equity-related awards to employees and
directors of, and consultants to, the Company. The total number of shares of
common stock which may be issued under the Stock Plan is 16,240,536 shares. The
Stock Plan is administered by the Board of Directors, which selects the persons
to whom stock options and other awards are granted and determines the number of
shares, the exercise or purchase prices, the vesting terms and the expiration
date. Non-qualified stock options may be granted at exercise prices which are
above, equal to, or below the grant date fair market value of the common stock.
The exercise price of options qualifying as incentive stock options may not be
less than the grant date fair market value of the common stock.
Stock options granted under the Stock Plan are nontransferable, generally
become exercisable over a four-year period, and expire ten years after the date
of grant (subject to earlier termination in the event of the termination of the
optionee's employment or other relationship with the Company).
The 1999 Stock Incentive Plan was adopted in July 1999. The 1999 plan is
intended to replace the 1998 plan. Up to 9,600,000 shares of common stock
(subject to adjustment in the event of stock splits and other similar events)
may be issued pursuant to awards granted under the 1999 plan.
The 1999 plan provides for the grant of incentive stock options,
nonstatutory stock options, restricted stock awards and other stock-based
awards.
F-15
<PAGE>
BREAKAWAY SOLUTIONS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1998 AND 1999
6. CAPITAL STOCK (CONTINUED)
The following table presents the combined activity of the two option plans
in which offerings have occurred for the years ended December 31, 1998 and 1999:
<TABLE>
<CAPTION>
1998 1999
------------------------- -------------------------
WEIGHTED WEIGHTED
NUMBER AVERAGE NUMBER AVERAGE
OF EXERCISE OF EXERCISE
OPTIONS PRICE OPTIONS PRICE
-------------- -------- -------------- --------
(IN THOUSANDS) (IN THOUSANDS)
<S> <C> <C> <C> <C>
Outstanding options at beginning of year......... -- $ -- 9,588 $0.63
Granted........................................ 9,792 $0.62 8,378 $4.39
Exercised...................................... -- $ -- (1,398) $0.39
Cancelled...................................... (204) $0.38 (518) $1.30
----- ----- ------ -----
Outstanding options at end of year............... 9,588 $0.63 16,050 $2.59
===== ===== ====== =====
Exercisable options at end of year............... 4,178 $0.50 10,054 $0.78
===== ===== ====== =====
Weighted average fair value of options granted
during the year................................ $ .25 $ 4.18
===== ======
</TABLE>
The following table presents weighted average price and life information
about significant option groups outstanding at December 31, 1999:
<TABLE>
<CAPTION>
OPTIONS OUTSTANDING
----------------------------
WEIGHTED OPTIONS EXERCISABLE
AVERAGE -------------------------
NUMBER REMAINING WEIGHTED
OF CONTRACTUAL AVERAGE
OPTIONS LIFE NUMBER EXERCISE
EXERCISE PRICES OUTSTANDING (YEARS) EXERCISABLE PRICE
- ----------------------------------------------- -------------- ----------- -------------- --------
(IN THOUSANDS) (IN THOUSANDS)
<S> <C> <C> <C> <C>
$0.34........................................ 2,998 8.50 2,244 $0.34
$0.51........................................ 188 8.75 68 $0.51
$0.88........................................ 7,104 9.03 7,102 $0.88
$0.89........................................ 300 9.08 68 $0.89
$0.98........................................ 1,998 9.23 542 $0.98
$1.09........................................ 2,052 9.45 30 $1.09
$5.50........................................ 622 9.72 -- --
$21.33....................................... 94 9.81 -- --
$28.72....................................... 358 9.94 -- --
$28.94....................................... 336 9.94 -- --
------ ----- ------ -----
16,050 9.08 10,054 $ .77
====== ===== ====== =====
</TABLE>
The Company applies APB Opinion No. 25, ACCOUNTING FOR STOCK ISSUED TO
EMPLOYEES, in accounting for its Stock Plan, and, accordingly, compensation cost
is recognized in the financial statements for stock options granted to employees
only when the fair value on the grant date exceeds the exercise price. The
Company granted no stock options during 1996 and 1997. Had the Company
F-16
<PAGE>
BREAKAWAY SOLUTIONS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1998 AND 1999
6. CAPITAL STOCK (CONTINUED)
determined compensation cost based on the fair value at the grant date for its
stock options under SFAS No. 123 for 1998 and 1999 grants, the net loss would
have been increased to the pro forma amounts indicated below:
<TABLE>
<CAPTION>
1998 1999
----------------------- -----------------------
AS REPORTED PRO FORMA AS REPORTED PRO FORMA
----------- --------- ----------- ---------
<S> <C> <C> <C> <C>
Net loss (in thousands)........................... $ (575) $ (687) $(10,367) $(17,713)
Net loss per share................................ $(0.05) $(0.05) $ (0.59) $ (1.02)
</TABLE>
The fair value of options at the date of grant were estimated using the
Black-Scholes model with the following weighted-average assumptions:
<TABLE>
<CAPTION>
OPTION
-------------------
1998 1999
-------- --------
<S> <C> <C>
Volatility.................................................. 70.0% 135.0%
Expected option life (years)................................ 10 9
Interest rate (risk free)................................... 7.0% 6.5%
</TABLE>
The Company has never declared nor paid dividends on any of its capital
stock and does not expect to in the foreseeable future.
F-17
<PAGE>
BREAKAWAY SOLUTIONS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1998 AND 1999
7. COMMITMENTS AND CONTINGENCIES
LINE OF CREDIT
The Company had a $0.7 million bank revolving line of credit (increased to
$1.3 million in February 1999) at prime plus 1/2% (8.25% at December 31, 1998)
which terminated in 1999. At December 31, 1998, the Company borrowed
$0.4 million under this line of credit. At December 31, 1999, there were no
borrowings.
OPERATING LEASES
The Company leases its facilities under various operating leases expiring in
2003. Such leases include provisions that may require the Company to pay its
proportionate share of operating costs, which exceed specific thresholds. Rent
expense for the years ended December 31, 1997, 1998 and 1999 was $0.2 million,
$0.6 million and $1.5 million, respectively.
Other income in 1998 consists primarily of a payment received by the Company
in connection with the early termination of its existing office lease.
CAPITAL LEASES
The Company leases certain of its computer and office equipment under
capital leases. Substantially all of such leases are for two years, with annual
interest rates ranging from 12.7% to 13.3%. The leased equipment secures all
leases.
In September 1999, the Company entered into a Master Lease Agreement with
Silicon Valley Bank to finance up to $4.0 million of equipment and software.
Leases under the Master Lease Agreement have terms of thirty-six months.
Payments are determined based on an annual interest rate equal to the annual
rate on U.S. Treasury securities of a comparable term plus 2.5% (5.5 % at
December 31, 1999). The leased equipment secures all leases. In connection with
the Master Lease Agreement Breakaway issued Silicon Valley Bank warrants to
purchase 21,818 shares of Breakaway common stock for $5.50 per share. The
warrants are exercisable until December 21, 2002.
F-18
<PAGE>
BREAKAWAY SOLUTIONS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1998 AND 1999
7. COMMITMENTS AND CONTINGENCIES (CONTINUED)
The following is a schedule of future minimum rental payments required under
the above leases as of December 31, 1999 (in thousands):
<TABLE>
<CAPTION>
OPERATING CAPITAL
LEASES LEASES
--------- --------
<S> <C> <C>
2000...................................................... $ 3,604 $ 708
2001...................................................... 5,292 588
2002...................................................... 5,956 646
2003...................................................... 6,074 --
2004...................................................... 6,159 --
thereafter................................................ 15,591 --
------- ------
$42,676 1,942
=======
Less: amount representing interest........................ (1,033)
------
Net present value of minimum lease payments............... 909
Less: current portion of capital lease obligations........ (533)
------
Capital lease obligations, net of current portion......... $ 376
======
</TABLE>
8. SIGNIFICANT CUSTOMERS
The following table summarizes revenues from major customers (revenues in
excess of 10% for the year) as a percentage of total revenues:
<TABLE>
<CAPTION>
YEARS ENDED
DECEMBER 31,
------------------------------
1997 1998 1999
-------- -------- --------
<S> <C> <C> <C>
Customer A................................................. 19% 27% --
Customer B................................................. 10% -- --
Customer C................................................. 13% -- --
</TABLE>
9. RELATED PARTIES
In May 1999, Internet Capital Group ("ICG"), holder of the Company's
Series A Preferred Stock, provided $4.0 million in advances which were converted
into equity in July 1999 during the Company's Series B Preferred Stock offering.
In connection with this transaction, the Company issued ICG a warrant to
purchase 147,744 shares of common stock at an exercise price of $4.07 per share.
The Company's acquisition of WPL Laboratories, Inc. in May 1999 included
$5.0 million in cash which was payable to the former stockholders as follows:
(a) one half at closing and (b) the remainder incrementally over a four-year
period so long as the stockholder does not voluntarily terminate his employment
and is not terminated for cause. This amount, which has been discounted at 7%,
is reflected as due to stockholders in the accompanying consolidated balance
sheet.
F-19
<PAGE>
BREAKAWAY SOLUTIONS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1998 AND 1999
9. RELATED PARTIES (CONTINUED)
Interest expense for the above arrangements was approximately $0.1 million
for the year ended December 31, 1999.
In October 1999, ICG's holdings in the Series A Preferred Stock and the
Series B Preferred Stock were converted to common stock upon the completion of
the Company's initial public offering. At December 31, 1999, ICG holds
approximately 40% of the Company's outstanding common stock.
During 1999, the Company provided information technology consulting services
to ICG and to companies in which ICG holds equity interests ("ICG Partner
Companies"). Amounts related to services provided to and amounts due from ICG
and ICG Partner Companies are separately classified in the accompanying
consolidated financial statements.
10. DEFERRED COMPENSATION PLAN
The Company sponsors a qualified 401(k) deferred compensation plan (the
"Plan"), which covers substantially all of its employees. Participants are
permitted, in accordance with the provisions of Section 401(k) of the Internal
Revenue Code, to contribute up to 15% of their earnings into the Plan. The
Company may make matching contributions at its discretion. The Company elected
not to contribute to the Plan for the years ended December 31, 1997 and 1998.
During 1999, the Company made a contribution of $0.1 million to the Plan.
11. INCOME TAXES
As discussed in Note 2, effective January 1, 1999, the Company terminated
its S Corporation election and is subject to corporate-level federal and certain
state income taxes. Upon termination of the S Corporation status, deferred
income taxes are recorded for the tax effect of cumulative temporary differences
between the financial reporting and tax bases of certain assets and liabilities,
primarily deferred revenue that must be recognized currently for tax purposes,
accrued expenses that are not currently deductible, cumulative differences
between tax depreciation and financial reporting allowances, and the impact of
the conversion from the cash method to the accrual method of reporting for tax
purposes.
No provision for federal or state income taxes has been recorded in 1999 as
the Company incurred a net operating loss for the year ended December 31, 1999.
The Company has recorded a valuation allowance against its deferred tax assets
since management believes that, after considering all the available objective
evidence, historical and prospective, with greater weight given to historical
evidence, it is more likely than not that these assets will not be realized. No
income tax benefit has been recorded for the current year presented because of
the valuation allowance.
F-20
<PAGE>
BREAKAWAY SOLUTIONS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1998 AND 1999
11. INCOME TAXES (CONTINUED)
A reconciliation of the statutory Federal income tax rates to the Company's
effective tax rate follows:
<TABLE>
<CAPTION>
1997 1998 1999
-------- -------- --------
<S> <C> <C> <C>
Statutory Federal tax rate (benefit)............. (34.0%) (34.0%) (34.0%)
State income taxes, (net of Federal tax
benefits)...................................... -- -- (7.9%)
Valuation reserve movement....................... -- -- 36.1%
S Corporation effect............................. 34.0% 34.0% --
Amortization..................................... -- -- 5.0%
Other differences................................ -- -- 0.8%
----- ----- -----
Effective income tax rate........................ 0.0% 0.0% 0.0%
===== ===== =====
</TABLE>
The tax effects of temporary differences that give rise to significant
portions of the deferred tax assets and deferred tax liabilities at
December 31, 1999 are as follows (in thousands):
<TABLE>
<S> <C>
Deferred tax assets:
Accounts receivable, principally due to allowance for
doubtful accounts......................................... $ 199
Deferred revenue............................................ 97
Accrued liability relating to compensation-related
expenses.................................................. 120
Other accrued liabilities................................... 4
Fixed assets, principally attributable to differences in
depreciation methods...................................... 5
Operating loss and credit carryforwards..................... 3,294
------
Total gross deferred tax assets............................. 3,719
Less valuation allowance.................................. (2,560)
------
Net deferred tax assets..................................... 1,159
------
Deferred tax liabilities:
Intangible assets / cash to accrual......................... (1,159)
------
Total gross deferred tax liabilities...................... (1,159)
------
Net deferred tax asset.................................... $ --
======
</TABLE>
At December 31, 1999, the Company had a net operating loss carryforward for
income tax reporting purposes of over $7.5 million. This net operating loss
carryover will expire in 2019.
F-21
<PAGE>
BREAKAWAY SOLUTIONS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1998 AND 1999
11. INCOME TAXES (CONTINUED)
Income tax expense (benefit), assuming the Company had been a C Corporation
and applying the tax laws in effect during the periods presented, for each of
the two years in the period ended December 31, 1998 would have been as follows
(in thousands):
<TABLE>
<CAPTION>
YEARS ENDED
DECEMBER 31,
-------------------
1997 1998
-------- --------
(UNAUDITED)
<S> <C> <C>
Federal tax................................................. $ 366 $(195)
State taxes, net of federal................................. 64 --
----- -----
$ 430 $(195)
===== =====
</TABLE>
12. OPERATING SEGMENTS
Historically, the Company has operated in a single segment: strategy and
internet consulting services. With the acquisitions of Applica Corporation and
Web Yes, Inc. during 1999, the Company expanded its operations to include a
second segment: Application and Web Hosting Services.
The following table sets forth certain components of the Application and Web
Hosting Services segment and the Strategy and Internet Consulting Services
segment as of and for the year ended December 31, 1999 (in thousands):
<TABLE>
<CAPTION>
STRATEGY AND
APPLICATION AND INTERNET
WEB HOSTING CONSULTING
SERVICES SERVICE CORPORATE TOTAL
--------------- ------------ --------- --------
<S> <C> <C> <C> <C>
Revenue....................................... $ 2,092 $ 23,298 $ 25,390
Depreciation expense.......................... 823 432 1,255
Net loss...................................... (2,515) (7,852) (10,367)
Total assets.................................. 11,546 20,451 45,464 77,461
Capital additions............................. 4,428 3,603 8,031
</TABLE>
Substantially, all of the Company's assets are located within the United
States. During 1998, one customer accounted for approximately 27% of the
Company's Strategy and Internet Consulting Services revenue. During 1999, no
single customer accounted for 10% or more of either Strategy and Internet
Consulting Services revenue or Application and Web Hosting Services revenue.
13. SUBSEQUENT EVENTS (UNAUDITED)
ACQUISITIONS
Subsequent to December 31, 1999, the Company entered into the following
acquisition, which will be accounted for under the purchase method of
accounting:
- EGGROCK PARTNERS, INC.
On January 26, 2000, the Company entered into an Agreement and Plan Of
Merger to acquire all the outstanding capital stock of Eggrock Partners, Inc.
("Eggrock"), a provider of system integration,
F-22
<PAGE>
BREAKAWAY SOLUTIONS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1998 AND 1999
13. SUBSEQUENT EVENTS (UNAUDITED) (CONTINUED)
website design, and application hosting services. The acquisition is pending
regulatory and Eggrock shareholder approval. The Agreement and Plan of Merger
provides that all of Eggrock's outstanding shares of preferred stock and common
stock be exchanged for shares of Breakaway's common stock based on a conversion
ratio and options to purchase Eggrock common stock to be assumed by Breakaway
and converted into options to purchase Breakaway common stock on the same basis.
The total number of Breakaway shares of common stock to be issued in connection
with the acquisition is 7,272,000. The transaction contemplates that, of the
shares issued to the former Eggrock Partners, Inc. shareholders, 1,916,160
shares issued to the three founders and other members of senior management will
be subject to the Company's right, which lapses incrementally over a four-year
period, to repurchase the shares at the original price paid therefor by the
former shareholder upon the termination of his or her employment with the
Company, subject to conditions described in the agreement.
The following unaudited pro forma consolidated results of operations gives
effect to the acquisition of Eggrock as if it occurred at the beginning of 1999.
Such pro forma consolidated financial information reflects certain adjustments,
including amortization of goodwill and deferred costs, income tax effects and an
increase in the weighted average shares. This pro forma information does not
necessarily reflect the results of operations that would have occurred had the
acquisition taken place at the beginning of 1999 and is not necessarily
indicative of results that may be obtained in the future (in thousands except
per share amounts):
<TABLE>
<S> <C>
Revenue..................................................... $ 39,096
Net loss.................................................... $(74,041)
Net loss per share.......................................... $ (2.92)
Weighted average common shares outstanding.................. 25,300
</TABLE>
- DATACYR CORPORATION
In February 2000, the Company acquired DataCyr Corporation, a software
development company for 110,000 shares of Breakaway common stock.
F-23
<PAGE>
INDEPENDENT AUDITORS' REPORT
The Board of Directors
Applica Corporation:
We have audited the accompanying balance sheet of Applica Corporation (the
"Company"), a development-stage company, as of December 31, 1998, and the
related statements of operations, stockholders' equity, and cash flows from
September 24, 1998 (inception) through December 31, 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 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 Applica Corporation at
December 31, 1998 and the results of its operations and its cash flows from
September 24, 1998 (inception) through December 31, 1998, in conformity with
generally accepted accounting principles.
/s/ KPMG LLP
Boston, Massachusetts
June 30, 1999
F-24
<PAGE>
APPLICA CORPORATION
(A DEVELOPMENT-STAGE COMPANY)
BALANCE SHEET
DECEMBER 31, 1998
<TABLE>
<S> <C>
ASSETS
Current assets:
Cash...................................................... $474,205
Subscriptions receivable.................................. 3,000
--------
Total current assets.................................... 477,205
Property and equipment, net................................. 43,259
Deposits.................................................... 7,332
--------
Total assets............................................ $527,796
========
LIABILITIES AND STOCKHOLDERS' EQUITY
Accounts payable............................................ $ 61,775
--------
Total liabilities....................................... 61,775
Commitments and contingencies
Stockholders' equity:
Preferred stock $0.001 par value, 5,000,000 shares
authorized, 500,000 shares issued and outstanding
(liquidation preference of $500,000).................... 500,000
Common stock $0.001 par value, 10,000,000 shares
authorized, 3,000,000 shares issued and outstanding..... 3,000
Deficit accumulated during development stage.............. (36,979)
--------
Total stockholders' equity.............................. 466,021
--------
Total liabilities and stockholders' equity.............. $527,796
========
</TABLE>
See accompanying notes to financial statements.
F-25
<PAGE>
APPLICA CORPORATION
(A DEVELOPMENT-STAGE COMPANY)
STATEMENT OF OPERATIONS
FROM SEPTEMBER 24, 1998 (INCEPTION) THROUGH DECEMBER 31, 1998
<TABLE>
<S> <C>
Operating expenses:
Organization costs........................................ $ 25,911
Occupancy................................................. 7,331
Depreciation.............................................. 1,483
Other..................................................... 2,254
----------
Total operating expenses................................ 36,979
----------
Net loss................................................ $ (36,979)
==========
Net loss per share--basic and diluted....................... $ (0.01)
Weighted average shares outstanding......................... 3,000,000
</TABLE>
See accompanying notes to financial statements.
F-26
<PAGE>
APPLICA CORPORATION
(A DEVELOPMENT-STAGE COMPANY)
STATEMENT OF STOCKHOLDERS' EQUITY
<TABLE>
<CAPTION>
DEFICIT
ACCUMULATED
PREFERRED STOCK COMMON STOCK DURING TOTAL
------------------- -------------------- DEVELOPMENT STOCKHOLDERS'
SHARES AMOUNT SHARES AMOUNT STAGE EQUITY
-------- -------- --------- -------- ----------- -------------
<S> <C> <C> <C> <C> <C> <C>
Balance, September 24, 1998..... -- $ -- -- $ -- $ -- $ --
Subscription of common
stock....................... -- -- 3,000,000 3,000 -- 3,000
Issuance of preferred stock... 500,000 500,000 -- -- -- 500,000
Net loss...................... -- -- -- -- (36,979) (36,979)
------- -------- --------- ------ -------- --------
Balance, December 31, 1998...... 500,000 $500,000 3,000,000 $3,000 $(36,979) $466,021
======= ======== ========= ====== ======== ========
</TABLE>
See accompanying notes to financial statements.
F-27
<PAGE>
APPLICA CORPORATION
(A DEVELOPMENT-STAGE COMPANY)
STATEMENT OF CASH FLOWS
FROM SEPTEMBER 24, 1998 (INCEPTION) THROUGH DECEMBER 31, 1998
<TABLE>
<S> <C>
Cash flows from operating activities:
Net loss.................................................. $(36,979)
Adjustments to reconcile net loss to net cash provided by
operating activities:
Depreciation............................................ 1,483
Changes in operating assets and liabilities:
Accounts payable...................................... 61,775
Deposits.............................................. (7,332)
--------
Net cash provided by operating activities........... 18,947
--------
Cash flows from investing activities:
Additions to property and equipment....................... (44,742)
--------
Net cash used in investing activities............... (44,742)
--------
Cash flows from financing activities:
Issuance of preferred stock............................... 500,000
--------
Net cash provided by financing activities........... 500,000
--------
Net increase in cash................................ 474,205
Cash at beginning of period................................. --
--------
Cash at end of period....................................... $474,205
========
</TABLE>
See accompanying notes to financial statements.
F-28
<PAGE>
APPLICA CORPORATION
(A DEVELOPMENT-STAGE COMPANY)
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 1998
1. THE COMPANY
Applica Corporation (the "Company") was founded in September 1998 and
provides application hosting services. The Company has experienced losses since
inception and is subject to those risks associated with development-stage
companies. Activities since inception have consisted of development of a
business plan. Since inception and through December 31, 1998, the Company
operated with no salaried employees. Therefore, recurring operating expenses,
such as salaries and fringe benefits, are not reflected in the accompanying
financial statements. Financial statements in subsequent periods will reflect
salaries and fringe benefits.
On March 25, 1999, the Company was acquired by Breakaway Solutions, Inc.
(see Note 7).
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
USE OF ESTIMATES
Management of the Company has made a number of estimates and assumptions
relating to the reporting of assets and liabilities and the disclosure of
contingent assets and liabilities to prepare these financial statements in
conformity with generally accepted accounting principles. Actual results could
differ from those estimates.
IMPAIRMENT OF LONG-LIVED ASSETS
The Company records impairment losses on long-lived assets used in
operations when indicators of impairment are present and the undiscounted cash
flows estimated to be generated by those assets are less than the assets'
carrying amount.
PROPERTY AND EQUIPMENT
Property and equipment are carried at cost and depreciated using the
straight-line method over the estimated useful lives of the related assets,
which range from five to seven years.
Equipment under capital leases is stated at the net present value of minimum
lease payments. Equipment held under capital leases and leasehold improvements
are amortized straight-line over the shorter of the lease term or estimated
useful life of the asset.
INCOME TAXES
Income taxes are accounted for under the asset and liability method.
Deferred tax assets and liabilities are recognized for the future tax
consequences attributable to differences between the financial statement
carrying amounts of existing assets and liabilities and their respective tax
bases and operating loss and tax credit carryforwards. Deferred tax assets and
liabilities are measured using enacted tax rates expected to apply to taxable
income in the years in which those temporary differences are expected to be
recovered or settled. The effect on deferred tax assets and liabilities of a
change in tax rates is recognized in income in the period that includes the
enactment date.
F-29
<PAGE>
APPLICA CORPORATION
(A DEVELOPMENT-STAGE COMPANY)
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1998
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
LOSS PER SHARE
In 1998, the Company adopted the provisions of Statement of Financial
Accounting Standards No. 128 ("SFAS 128"), EARNINGS PER SHARE. SFAS 128 requires
the presentation of basic and diluted net loss per share for all periods
presented. Basic loss per share is based on the weighted average number of
shares outstanding during the period. Diluted net loss per share reflects the
per-share effect of dilutive stock options and other dilutive common stock
equivalents. As the Company is in a net loss position for the period ended
December 31, 1998, common stock equivalents of 500,000 for the period ended
December 31, 1998 were excluded from the diluted loss per share calculation as
they would be antidilutive. As a result, diluted loss per share is the same as
basic loss per share and has not been presented separately.
REPORTING COMPREHENSIVE INCOME
In 1998, the Company adopted Statement of Financial Accounting Standards
No. 130 ("SFAS 130"), REPORTING COMPREHENSIVE INCOME. This statement requires
that all components of comprehensive loss be reported in the financial
statements in the period in which they are recognized. For the period presented,
comprehensive loss under SFAS 130 was equivalent to the Company's net loss
reported in the accompanying statement of operations.
RECENT ACCOUNTING PRONOUNCEMENTS
The Company does not expect the adoption of recently issued accounting
pronouncements to have a significant impact on its results of operations,
financial condition or cash flows.
3. PROPERTY AND EQUIPMENT
At December 31, 1998, property and equipment consists of the following:
<TABLE>
<S> <C>
Office equipment............................................ $41,683
Computer equipment.......................................... 3,059
-------
44,742
Less: accumulated depreciation.............................. (1,483)
-------
Property and equipment, net............................. $43,259
=======
</TABLE>
4. PREFERRED STOCK
The Company's stockholders have authorized 5,000,000 shares of Series A
preferred stock. The Series A preferred stock is entitled to receive dividends
at a rate of $0.05 per share per annum. The Series A preferred stock is voting
and is convertible into shares of common stock on a share-for-share basis,
subject to certain adjustments. In the event of any liquidation, dissolution or
winding up of the Company, the Series A preferred stock has a liquidation
preference of $1.00 per share. The Series A
F-30
<PAGE>
APPLICA CORPORATION
(A DEVELOPMENT-STAGE COMPANY)
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1998
4. PREFERRED STOCK (CONTINUED)
preferred stock is convertible into common stock immediately at the option of
the holder, and automatically converts into common stock upon the completion of
a qualified public offering.
5. INCOME TAXES
The tax effects of temporary differences that give rise to significant
portions of the deferred tax assets at December 31, 1998 are as follows:
<TABLE>
<S> <C>
Deferred tax assets:
Intangible assets, principally due to differences in
amortization............................................ $5,372
Net operating loss carryforward........................... 195
------
Total gross deferred tax assets......................... 5,567
======
Valuation allowance......................................... (5,567)
------
Net deferred tax assets................................. $ --
======
</TABLE>
The Company has recorded a full valuation allowance against its deferred tax
assets since management believes that, after considering all the available
objective evidence, it is more likely than not that these assets will not be
realized.
6. COMMITMENTS AND CONTINGENCIES
The Company has entered into an operating lease for its office space which
expires in August 1999. Future minimum rental commitments under the lease in
1999 are $36,000. The Company is currently exploring alternatives for new space.
7. SUBSEQUENT EVENTS
LOAN AGREEMENT
On March 15, 1999, the Company entered into a Loan and Security Agreement
with a bank for a $150,000 equipment credit line which expires on June 15, 2002.
This agreement terminated upon the purchase of the Company (see Note 7).
AGREEMENT AND PLAN OF REORGANIZATION
On March 25, 1999, the Company entered into an Agreement and Plan of
Reorganization with Breakaway Solutions, Inc. ("Breakaway"), a provider of
information technology consulting services. Under the agreement, Breakaway
acquired all the outstanding stock of the Company in a transaction accounted for
under the purchase method of accounting. The purchase price was comprised of
723,699 shares of Breakaway common stock issued in exchange for all of the
outstanding shares of the Company's common stock.
F-31
<PAGE>
INDEPENDENT AUDITORS' REPORT
The Board of Directors
WPL Laboratories, Inc.:
We have audited the accompanying balance sheets of WPL Laboratories, Inc. as
of December 31, 1997 and 1998, and the related statements of income,
stockholders' equity and cash flows for each of 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 WPL Laboratories, Inc. as of
December 31, 1997 and 1998, and the results of its operations and its cash flows
for each of the years then ended, in conformity with generally accepted
accounting principles.
/s/ KPMG LLP
Boston, Massachusetts
June 30, 1999
F-32
<PAGE>
WPL LABORATORIES, INC.
BALANCE SHEETS
<TABLE>
<CAPTION>
DECEMBER 31,
--------------------- MARCH 31,
1997 1998 1999
-------- ---------- ----------
<S> <C> <C> <C>
(UNAUDITED)
ASSETS
Current assets:
Cash..................................................... $ 81,232 $ 240,310 $ 415,368
Accounts receivable...................................... 371,869 746,982 983,462
Employee advances........................................ -- 103,300 103,300
-------- ---------- ----------
Total current assets................................... 453,101 1,090,592 1,502,130
Property and equipment
Office and computer equipment............................ 103,703 169,668 203,230
Software................................................. 5,000 9,512 10,334
Automobile............................................... 7,500 -- --
-------- ---------- ----------
116,203 179,180 213,564
Less: Accumulated depreciation and amortization.......... (64,556) (83,737) (94,647)
-------- ---------- ----------
Net property and equipment............................. 51,647 95,443 118,917
-------- ---------- ----------
Other assets............................................... 1,915 103,909 244,503
-------- ---------- ----------
$506,663 $1,289,944 $1,865,550
======== ========== ==========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Related-party advance and accrued interest............... $ 23,333 $ 25,000 $ --
Accounts payable......................................... 10,947 8,278 11,862
Accrued compensation and related benefits................ 68,341 206,192 266,689
Other accrued expenses................................... 19,469 23,052 12,500
-------- ---------- ----------
Total current liabilities.............................. 122,090 262,522 291,051
Commitments and contingencies
Stockholders' equity:
Common stock $0.01 par value, 10,000,000 shares
authorized, 1,248,980 shares issued and outstanding in
1997 and 1,800,000 shares issued and outstanding in
1998 and 1999.......................................... 12,490 18,000 18,000
Additional paid-in capital............................... 99 242,589 242,589
Retained earnings........................................ 371,984 766,833 1,313,910
-------- ---------- ----------
Total stockholders' equity............................. 384,573 1,027,422 1,574,499
-------- ---------- ----------
Total liabilities and stockholders' equity............. $506,663 $1,289,944 $1,865,550
======== ========== ==========
</TABLE>
See accompanying notes to financial statements.
F-33
<PAGE>
WPL LABORATORIES, INC.
STATEMENTS OF INCOME
<TABLE>
<CAPTION>
YEARS ENDED THREE MONTHS ENDED
DECEMBER 31, MARCH 31,
----------------------- -----------------------
<S> <C> <C> <C> <C>
1997 1998 1998 1999
---------- ---------- ---------- ----------
<CAPTION>
(UNAUDITED)
<S> <C> <C> <C> <C>
Revenues...................................... $1,611,284 $2,650,415 $ 434,585 $1,087,678
Operating expenses:
Project personnel costs..................... 1,191,193 1,719,664 193,316 446,109
Selling, general and administrative......... 232,040 534,235 64,604 95,418
---------- ---------- ---------- ----------
Total operating expenses.................. 1,423,233 2,253,899 257,920 541,527
---------- ---------- ---------- ----------
Operating income.......................... 188,051 396,516 176,665 546,151
Other income (expense):
Interest expense............................ (2,250) (1,667) -- --
Interest income............................. -- -- -- 926
Other income................................ -- -- -- --
---------- ---------- ---------- ----------
Total other income (expense).............. (2,250) (1,667) -- 926
---------- ---------- ---------- ----------
Net income.................................... $ 185,801 $ 394,849 $ 176,665 $ 547,077
========== ========== ========== ==========
Net income per share--basic................... $ 0.15 $ 0.24 $ 0.14 $ 0.30
Net income per share--diluted................. $ 0.15 $ 0.24 $ 0.14 $ 0.29
Weighted average common shares outstanding.... 1,248,980 1,664,132 1,248,980 1,800,000
Weighted average common stock equivalents..... -- -- -- 66,415
---------- ---------- ---------- ----------
Weighted average common shares outstanding and
common stock equivalents.................... 1,248,980 1,664,132 1,248,980 1,866,415
</TABLE>
See accompanying notes to financial statements.
F-34
<PAGE>
WPL LABORATORIES, INC.
STATEMENTS OF STOCKHOLDERS' EQUITY
<TABLE>
<CAPTION>
COMMON STOCK ADDITIONAL TOTAL
-------------------- PAID-IN RETAINED STOCKHOLDERS'
SHARES AMOUNT CAPITAL EARNINGS EQUITY
--------- -------- ---------- ---------- -------------
<S> <C> <C> <C> <C> <C>
Balance, January 1, 1997................ 1,248,980 $12,490 $ 99 $ 267,993 $ 280,582
Stockholders' distributions........... -- -- -- (81,810) (81,810)
Net income............................ -- -- -- 185,801 185,801
--------- ------- -------- ---------- ----------
Balance, December 31, 1997.............. 1,248,980 12,490 99 371,984 384,573
Common stock issued to employees for
services rendered................... 551,020 5,510 242,490 -- 248,000
Net income............................ -- -- -- 394,849 394,849
--------- ------- -------- ---------- ----------
Balance, December 31, 1998.............. 1,800,000 18,000 242,589 766,833 1,027,422
Net income............................ -- -- -- 547,077 547,077
--------- ------- -------- ---------- ----------
Balance, March 31, 1999 (Unaudited)..... 1,800,000 $18,000 $242,589 $1,313,910 $1,574,499
========= ======= ======== ========== ==========
</TABLE>
See accompanying notes to financial statements.
F-35
<PAGE>
WPL LABORATORIES, INC.
STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
YEARS ENDED THREE MONTHS ENDED
DECEMBER 31, MARCH 31,
-------------------- --------------------
<S> <C> <C> <C> <C>
1997 1998 1998 1999
-------- --------- -------- ---------
<CAPTION>
(UNAUDITED)
<S> <C> <C> <C> <C>
Operating activities:
Net income....................................... $185,801 $ 394,849 $176,665 $ 547,077
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation and amortization.................. 14,300 26,681 6,671 10,910
Common stock issued to employees for services
rendered..................................... -- 248,000 -- --
Changes in operating assets and liabilities:
Accounts receivable.......................... (68,745) (375,113) 30,936 (236,480)
Employee advances............................ -- (103,300) -- --
Accounts payable............................. (2,902) (2,669) 868 3,584
Accrued compensation and related benefits.... 59,033 137,851 (87,810) 60,497
Accrued expenses............................. -- 3,583 -- (10,552)
-------- --------- -------- ---------
Net cash provided by operating
activities............................... 187,487 329,882 127,330 375,036
Cash flows from investing activities:
Purchases of property and equipment.............. (41,106) (70,477) (1,025) (34,384)
Increase in other assets......................... (1,240) (101,994) (1,119) (140,594)
-------- --------- -------- ---------
Net cash used in investing activities...... (42,346) (172,471) (2,144) (174,978)
Cash flows from financing activities:
Proceeds from (repayment of) related party
advance........................................ -- 1,667 -- (25,000)
Stockholders' distribution....................... (81,810) -- -- --
-------- --------- -------- ---------
Net cash provided by (used in) financing
activities............................... (81,810) 1,667 -- (25,000)
-------- --------- -------- ---------
Net increase in cash....................... 63,331 159,078 125,186 175,058
Cash at beginning of period........................ 17,901 81,232 81,232 240,310
-------- --------- -------- ---------
Cash at end of period.............................. $ 81,232 $ 240,310 $206,418 $ 415,368
======== ========= ======== =========
Supplemental disclosure of cash flow information:
Cash paid for interest............................. $ 584 $ -- $ -- $ --
======== ========= ======== =========
</TABLE>
See accompanying notes to financial statements.
F-36
<PAGE>
WPL LABORATORIES, INC.
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 1997 AND 1998
AND MARCH 31, 1999 (UNAUDITED)
1. THE COMPANY
WPL Laboratories, Inc. (the "Company") provides advanced software
development services to businesses. The Company's projects include sales force
automation, distribution, management, personnel management, e-commerce
application development, product analysis and Internet enabling applications.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
USE OF ESTIMATES
Management of the Company has made a number of estimates and assumptions
relating to the reporting of assets and liabilities and the disclosure of
contingent assets and liabilities to prepare these financial statements in
conformity with generally accepted accounting principles. Actual results could
differ from those estimates.
FINANCIAL INSTRUMENTS AND CONCENTRATION OF CREDIT RISK
Financial instruments that potentially subject the Company to a
concentration of credit risk consist of cash and accounts receivable.
The Company performs ongoing credit evaluations of its customers and
generally does not require collateral on accounts receivable. The Company
maintains allowances for potential credit losses and such losses have been
within management's expectations. Write-offs of accounts receivable have not
been material for any of the periods presented. The Company operates in one
industry segment and its customers are headquartered primarily in North America.
The fair market values of cash and accounts receivable at both December 31,
1997 and 1998 approximate their carrying amounts.
PROPERTY AND EQUIPMENT
Property and equipment are stated at cost and depreciated using the
straight-line method over three years for office and computer equipment and
software and five years for the automobile.
IMPAIRMENT OF LONG-LIVED ASSETS
The Company records impairment losses on long-lived assets used in
operations when indicators of impairment are present and the undiscounted cash
flows estimated to be generated by those assets are less than the assets'
carrying amount.
STOCKHOLDERS' EQUITY
On April 1, 1998, the Company amended its articles of incorporation to
change the par value of its common stock from $1.00 to $0.01 and adjust the
number of authorized shares. In addition, the Company approved a stock dividend
of 1,248,880 shares. All related share information for all periods presented has
been restated to reflect this amendment.
F-37
<PAGE>
WPL LABORATORIES, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1997 AND 1998
AND MARCH 31, 1999 (UNAUDITED)
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
REVENUE RECOGNITION
The Company generally recognizes revenue on projects as work is performed
based on hourly billable rates. In addition, a limited number of projects are
performed under fixed-price contracts. Revenue from these contracts is
recognized on the percentage of completion method based on the percentage that
incurred costs to date bear to the most recently estimated total costs. Amounts
billed to clients in excess of revenue recognized are classified as deferred
revenue. Anticipated losses on uncompleted contracts, if any, are recognized in
full when determined.
PROJECT PERSONNEL COSTS
Project personnel costs consist of payroll and payroll-related expenses for
personnel dedicated to client assignments.
INCOME TAXES
The Company has elected to be taxed under the provisions of subchapter S of
the Internal Revenue Code, whereby the corporate income is taxed to the
individual shareholders based on their proportionate share of the Company's
taxable income.
STOCK-BASED COMPENSATION
The Company has adopted Statement of Financial Accounting Standards No. 123
("SFAS 123"), ACCOUNTING FOR STOCK-BASED COMPENSATION. As permitted by
SFAS 123, the Company measures compensation costs in accordance with Accounting
Principles Board Opinion No. 25 ("APB No. 25"), ACCOUNTING FOR STOCK ISSUED TO
EMPLOYEES, and related interpretations. Accordingly, no accounting recognition
is given to stock options issued to employees that are granted at fair market
value until they are exercised. Stock options issued to non-employees are
recorded at the fair value of the stock at the date of grant. Upon exercise, net
proceeds, including income tax benefits realized, are credited to equity.
Therefore, the adoption of SFAS 123 was not material to the Company's financial
condition or results of operations.
NET INCOME PER SHARE
The Company adopted the provisions of Statement of Financial Accounting
Standards No. 128 ("SFAS No. 128"), EARNINGS PER SHARE during 1997. This
statement requires the presentation of basic and diluted net income per share
for all periods presented. Under SFAS 128, the Company presents both basic net
income per share and diluted net income per share. Basic net income per share is
calculated based on weighted average common shares outstanding. Diluted net
income per share reflects the per-share effect of dilutive stock options and
other dilutive common stock equivalents.
REPORTING COMPREHENSIVE INCOME
Effective January 1, 1996, the Company adopted Statement of Financial
Accounting Standards No. 130 ("SFAS 130"), REPORTING COMPREHENSIVE INCOME. This
statement requires that all components of comprehensive income be reported in
the financial statements in the period in which they are
F-38
<PAGE>
WPL LABORATORIES, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1997 AND 1998
AND MARCH 31, 1999 (UNAUDITED)
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
recognized. For each period reported, comprehensive income under SFAS 130 was
equivalent to the Company's net income reported in the accompanying statements
of income.
UNAUDITED INTERIM FINANCIAL INFORMATION
The financial statements as of March 31, 1999 and for the three months ended
March 31, 1998 and 1999 are unaudited; however, in the opinion of management,
all adjustments (consisting of normal recurring adjustments) necessary for a
fair presentation of the financial statements for the interim periods have been
included. Results of operations for the interim periods presented are not
necessarily indicative of the results that may be expected for the full fiscal
year or any future periods.
RECENT ACCOUNTING PRONOUNCEMENTS
The Company does not expect the adoption of recently issued accounting
pronouncements to have a significant impact on its results of operations,
financial condition or cash flows.
3. RELATED-PARTY ADVANCE AND ACCRUED INTEREST
In 1996, the Company received a working capital advance of $20,000, with no
defined terms, from a relative of its major stockholder. The advance has been
accruing interest at 8.3% per year. Interest expense on the advance was $2,250
and $1,667 for the years ended December 31, 1997 and 1998, respectively, and
$417 and $0 for the three months ended March 31, 1998 and 1999, respectively.
4. COMMON STOCK
In April 1998, the Company awarded 551,020 shares of common stock to certain
employees for services rendered. Accordingly, the Company recorded compensation
expense of $248,000, which represented the estimated fair value of the common
stock issued. In connection with the award, the Company advanced $103,300 to the
employees to pay certain personal income taxes. These advances are outstanding
as of December 31, 1998.
5. EMPLOYEE BENEFIT PLAN
The Company maintains a defined contribution plan in accordance with the
provisions of Section 401(k) of the Internal Revenue Code. The plan covers all
full-time employees of the Company. Participants may contribute up to the
greater of 15% of their total compensation or $10,000 to the plan, with the
Company matching on a discretionary basis. For the years ended December 31, 1997
and 1998, the Company did not contribute to the plan.
F-39
<PAGE>
WPL LABORATORIES, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1997 AND 1998
AND MARCH 31, 1999 (UNAUDITED)
6. SIGNIFICANT CUSTOMERS
The following table summarizes revenues from significant customers (revenues
in excess of 10% for the year) as a percentage of total revenues:
<TABLE>
<CAPTION>
THREE MONTHS
YEARS ENDED ENDED
DECEMBER 31, MARCH 31,
---------------------- ----------------------
<S> <C> <C> <C> <C>
1997 1998 1998 1999
-- -- -- --
<CAPTION>
(UNAUDITED)
<S> <C> <C> <C> <C>
Customer A...................................... 52% 38% 53% 32%
Customer B...................................... -- 18 31 --
Customer C...................................... -- 15 -- 22
Customer D...................................... 25 -- -- --
Customer E...................................... -- -- -- 12
Customer F...................................... -- -- -- 12
</TABLE>
7. LEASE COMMITMENTS
The Company has entered into operating leases for its office facility and
equipment that expire through July 2000. Rent expense for the years ended
December 31, 1997 and 1998 was $43,613, and $43,893, respectively. Future
minimum lease payments under the operating leases as of December 31, 1998 are
$119,054 in 1999, $167,064 in 2000, $164,664 in 2001 and $41,166 in 2002.
8. SUBSEQUENT EVENTS
STOCK OPTION PLAN
On January 1, 1999, the Company instituted the WPL Laboratories, Inc. 1999
Stock Option Plan (the "Plan") which authorizes the Company to grant options to
purchase common stock, to make awards of restricted common stock, and to issue
certain other equity-related awards to employees and directors of, and
consultants to, the Company. The total number of shares of common stock which
may be issued under the Plan is 200,000 shares. The Plan is administered by the
Board of Directors, which selects the persons to whom stock options and other
awards are granted and determines the number of shares, the exercise or purchase
prices, the vesting terms and the expiration date. Non-qualified stock options
may be granted at exercise prices which are above, equal to, or below the grant
date fair market value of the common stock. The exercise price of options
qualifying as incentive stock options may not be less than the grant date fair
market value of the common stock. Stock options granted under the Plan are
nontransferable, generally become exercisable over a four-year period, and
expire ten years after the date of grant (subject to earlier termination in the
event of the termination of the optionee's employment or other relationship with
the Company). Subsequent to December 31, 1998 and through May 14, 1999, the
Company granted 186,208 options under the Plan to purchase common stock at $4.00
per share.
F-40
<PAGE>
WPL LABORATORIES, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1997 AND 1998
AND MARCH 31, 1999 (UNAUDITED)
8. SUBSEQUENT EVENTS (CONTINUED)
LINE OF CREDIT
On February 22, 1999, the Company entered into a line of credit agreement
with a commercial bank under which it may borrow up to $750,000 at the bank's
prime rate plus 0.5%. Borrowings under the line are secured by substantially all
assets of the Company and are subject to certain financial and nonfinancial
covenants which include, among other things, maintenance of a ratio of debt to
cash flow, minimum tangible net worth and a ratio of current assets to current
liabilities. The line of credit expires on April 15, 2000. This agreement
terminated upon the purchase of the Company (see Note 8).
CONSULTING AGREEMENT
On March 17, 1999, the Company signed a consulting agreement with
Plansponsor.com, Inc. ("PlanSponsor"). The agreement calls for the Company to
provide 3,000 hours of services, including work previously performed for
PlanSponsor in exchange for shares of common stock in PlanSponsor. As of
December 31, 1998, the Company had performed $100,875 of services based on the
agreement's contractual rates. This amount is included in other assets on the
accompanying balance sheets and will ultimately be settled by issuance of shares
of PlanSponsor common stock. In May 1999, the Company declared a dividend of the
PlanSponsor stock to the stockholders of the Company.
REORGANIZATION AGREEMENT
On May 17, 1999, the Company entered into a Reorganization Agreement with
Breakaway Solutions, Inc. ("Breakaway"), a provider of information technology
consulting services. Under the agreement, Breakaway acquired all the outstanding
stock of the Company in a transaction accounted for under the purchase method of
accounting. The purchase price was comprised of $5 million in cash, 1,364,140
shares of common stock and the assumption of all outstanding WPL stock options,
which became exercisable for 314,804 shares of the Company's common stock at an
exercise price of $2.98 per share with a four-year vesting period. The WPL
stockholders received one half of their cash consideration at closing and will
receive the remainder incrementally over a four-year period so long as the
stockholder does not voluntarily terminate his employment and is not terminated
for cause. Of the shares of common stock issued to the former WPL stockholders,
approximately fifty-percent are subject to our right, which lapses incrementally
over a four-year period, to repurchase the shares of a particular stockholder at
their value at the time of the acquisition upon the stockholder's resignation or
our termination of the stockholder for cause.
F-41
<PAGE>
INDEPENDENT AUDITORS' REPORT
The Board of Directors
Web Yes, Inc.:
We have audited the accompanying consolidated balance sheets of Web
Yes, Inc. and subsidiary as of December 31, 1997 and 1998, and the related
consolidated statements of operations, stockholders' equity and cash flows for
the years then ended. These consolidated financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these consolidated 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 consolidated financial statements are
free of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the consolidated 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 consolidated financial statements referred to above
present fairly, in all material respects, the financial position of Web
Yes, Inc. and subsidiary as of December 31, 1997 and 1998, and the results of
their operations and their cash flows for the years then ended, in conformity
with generally accepted accounting principles.
/s/ KPMG LLP
Boston, Massachusetts
June 30, 1999
F-42
<PAGE>
WEB YES, INC. AND SUBSIDIARY
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
DECEMBER 31,
------------------- MARCH 31,
1997 1998 1999
-------- -------- ---------
<S> <C> <C> <C>
(UNAUDITED)
ASSETS
Current assets:
Cash...................................................... $ 4,729 $ 10,204 $ 1,480
Accounts receivable....................................... 15,415 13,899 31,764
------- -------- --------
Total current assets.................................. 20,144 24,103 33,244
Computer equipment.......................................... 56,509 190,948 221,142
Less: Accumulated depreciation and amortization............. 6,667 26,095 37,601
------- -------- --------
Net computer equipment................................ 49,842 164,853 183,541
------- -------- --------
Deposits.................................................... 100 2,281 2,281
------- -------- --------
Total assets.......................................... $70,086 $191,237 $219,066
======= ======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Current portion of capital lease obligations.............. $ 4,782 $ 18,633 $ 19,951
Loans and advances payable to stockholders................ 45,007 29,251 42,296
Accounts payable.......................................... 12,652 49,414 30,563
Accrued expenses.......................................... 2,010 14,925 28,134
------- -------- --------
Total current liabilities............................. 64,451 112,223 120,944
Capital lease obligations, net of current portion........... 13,652 43,056 37,344
------- -------- --------
Total liabilities..................................... 78,103 155,279 158,288
Commitments and contingencies
Stockholders' equity:
Preferred stock, no par value, 200,000 shares authorized,
none issued and outstanding in 1997 and 70,000 shares
issued and outstanding (liquidation preference of $1 per
share) in 1998 and 1999................................. -- 70,000 70,000
Common stock, no par value, 1,000,000 shares authorized,
13,395 shares issued and outstanding in 1997 and 691,897
shares issued and outstanding in 1998 and 1999.......... 134 6,919 6,919
Additional paid in capital................................ -- 55,985 55,985
Accumulated deficit....................................... (8,151) (90,726) (65,906)
Less: Subscriptions receivable............................ -- (6,220) (6,220)
------- -------- --------
Total stockholders' equity............................ (8,017) 35,958 60,778
------- -------- --------
Total liabilities and stockholders' equity............ $70,086 $191,237 $219,066
======= ======== ========
</TABLE>
See accompanying notes to consolidated financial statements.
F-43
<PAGE>
WEB YES, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
YEARS ENDED THREE MONTHS ENDED
DECEMBER 31, MARCH 31,
------------------- -------------------
<S> <C> <C> <C> <C>
1997 1998 1998 1999
-------- -------- ------- --------
<CAPTION>
(UNAUDITED)
<S> <C> <C> <C> <C>
Revenues............................................. $108,669 $288,512 $54,464 $141,828
Operating expenses:
Direct personnel costs............................. -- 38,750 -- 37,067
Other direct costs................................. 39,163 111,650 9,529 15,051
Selling, general and administrative expenses....... 70,894 214,238 23,375 57,953
-------- -------- ------- --------
Total operating expenses......................... 110,057 364,638 32,904 110,071
-------- -------- ------- --------
Income (loss) from operations.................... (1,388) (76,126) 21,560 31,757
Interest expense................................... (4,182) (6,449) (916) (6,937)
-------- -------- ------- --------
Net income (loss)................................ $ (5,570) $(82,575) $20,644 $ 24,820
======== ======== ======= ========
Net income (loss) per share--basic and diluted....... $ (0.42) $ (0.37) $ 1.52 $ 0.04
Weighted average shares outstanding.................. 13,395 223,452 13,595 691,897
</TABLE>
See accompanying notes to consolidated financial statements.
F-44
<PAGE>
WEB YES, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
<TABLE>
<CAPTION>
COMMON STOCK PREFERRED STOCK ADDITIONAL TOTAL
------------------- ------------------- PAID IN ACCUMULATED SUBSCRIPTIONS STOCKHOLDERS'
SHARES AMOUNT SHARES AMOUNT CAPITAL DEFICIT RECEIVABLE EQUITY
-------- -------- -------- -------- ---------- ------------ ------------- -------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Balance, January 1,
1997.................... 13,395 $ 134 -- $ -- $ -- $ (2,581) $ -- $ (2,447)
Net loss................ -- -- -- -- -- (5,570) -- (5,570)
------- ------ ------ ------- ------- -------- ------- --------
Balance, December 31,
1997.................... 13,395 134 -- -- -- (8,151) -- (8,017)
Issuance of common stock
to founders........... 621,952 6,220 -- -- -- -- (6,220) --
Issuance of common
shares in exchange for
services rendered..... 56,550 565 -- -- 55,985 -- -- 56,550
Issuance of preferred
shares................ -- -- 70,000 70,000 -- -- -- 70,000
Net loss................ -- -- -- -- -- (82,575) -- (82,575)
------- ------ ------ ------- ------- -------- ------- --------
Balance, December 31,
1998.................... 691,897 6,919 70,000 70,000 55,985 (90,726) (6,220) 35,958
Net income
(Unaudited)........... -- -- -- -- -- 24,820 -- 24,820
------- ------ ------ ------- ------- -------- ------- --------
Balance, March 31, 1999
(Unaudited)............. 691,897 $6,919 70,000 $70,000 $55,985 $(65,906) $(6,220) $ 60,778
======= ====== ====== ======= ======= ======== ======= ========
</TABLE>
See accompanying notes to consolidated financial statements.
F-45
<PAGE>
WEB YES, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
YEARS ENDED THREE MONTHS ENDED
DECEMBER 31, MARCH 31,
------------------- -------------------
<S> <C> <C> <C> <C>
1997 1998 1998 1999
------- -------- -------- --------
<CAPTION>
(UNAUDITED)
<S> <C> <C> <C> <C>
Cash flows from operating activities:
Net income (loss)................................... $(5,570) $(82,575) $ 20,644 $ 24,820
Adjustments to reconcile net income (loss) to net
cash provided by (used in) operating activities:
Depreciation and amortization..................... 6,018 20,023 3,000 11,507
Common stock issued to employees for services
rendered........................................ -- 56,550 -- --
Changes in operating assets and liabilities:
Accounts receivable............................. (14,552) 1,516 1,634 (17,865)
Accounts payable................................ 11,346 36,762 (9,426) (18,851)
Accrued expenses................................ 1,716 12,915 500 13,209
------- -------- -------- --------
Net cash provided by (used in) operating
activities.................................. (1,042) 45,191 16,352 12,820
------- -------- -------- --------
Cash flows from investing activity:
Purchase of computer equipment...................... (19,724) (78,286) (6,147) (30,195)
------- -------- -------- --------
Net cash used in investing activity........... (19,724) (78,286) (6,147) (30,195)
------- -------- -------- --------
Cash flows from financing activities:
Proceeds from issuance of preferred stock........... -- 55,000 5,000 --
Increase in deposits................................ (100) (2,181) -- --
Proceeds from loans and advances payable to
stockholders...................................... 37,007 15,033 22,543 8,651
Repayment of capital lease obligations.............. (750) (8,967) -- --
Proceeds (repayment) of loans payable............... (11,008) (20,315) (30,007) --
------- -------- -------- --------
Net cash provided by financing activities..... 25,149 38,570 (2,464) 8,651
------- -------- -------- --------
Increase (decrease) in cash........................... 4,383 5,475 7,741 (8,724)
Cash, beginning of period............................. 346 4,729 4,729 10,204
------- -------- -------- --------
Cash, end of period................................... $ 4,729 $ 10,204 $ 12,470 $ 1,480
======= ======== ======== ========
Supplemental disclosure of cash flow information:
Cash paid for interest.............................. $ 2,466 $ 8,460 $ 916 $ 1,796
======= ======== ======== ========
Supplemental disclosures of non-cash investing and
financing activities:
Issuance of preferred stock in exchange for advances
from stockholders................................. $ -- $ 15,000 $ -- $ --
======= ======== ======== ========
Capital lease obligations........................... $19,150 $ 56,748 $ -- $ --
======= ======== ======== ========
</TABLE>
See accompanying notes to consolidated financial statements.
F-46
<PAGE>
WEB YES, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1997 AND 1998
AND MARCH 31, 1999 (UNAUDITED)
1. THE COMPANY
Web Yes, Inc. (the "Company"), which was incorporated in July 1996, provides
application hosting services. Since inception and through September 1998, the
Company operated with no salaried employees. Therefore, recurring operating
expenses, such as salaries and fringe benefits, are not reflected in the
accompanying financial statements during the applicable periods. Financial
statements for periods subsequent to September 30, 1998 reflect salaries and
fringe benefits.
Web Developers Network, Inc., a wholly owned subsidiary of the Company, has
been inactive since inception.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
PRINCIPLES OF CONSOLIDATION
The accompanying consolidated financial statements include the accounts of
the Company and its wholly owned subsidiary, Web Developers Network, Inc. All
significant intercompany transactions have been eliminated in consolidation.
USE OF ESTIMATES
Management of the Company has made a number of estimates and assumptions
relating to the reporting of assets and liabilities and disclosure of contingent
assets and liabilities to prepare these consolidated financial statements in
conformity with generally accepted accounting principles. Actual results could
differ from those estimates.
COMPUTER EQUIPMENT
Computer equipment is recorded at cost. Depreciation is recorded on the
straight-line basis over the estimated useful life of the related assets (three
to five years). Equipment held under capital leases is stated at the net present
value of minimum lease payments at the inception of the lease and amortized
using the straight-line method over the lease term. Maintenance and repairs are
charged to operations when incurred.
FINANCIAL INSTRUMENTS AND CONCENTRATION OF CREDIT RISK
Financial instruments that potentially subject the Company to a
concentration of credit risk consist of cash, accounts receivable and debt
instruments.
The Company performs ongoing credit evaluations of its customers and
generally does not require collateral on accounts receivable. The Company
maintains allowances for potential credit losses and such losses have been
within management's expectations. Write-offs of accounts receivable have not
been material for any of the periods presented. The Company operates in one
industry segment and its customers are headquartered primarily in North America.
The fair market values of cash, accounts receivable and debt instruments at
both December 31, 1997 and 1998 approximate their carrying amounts.
F-47
<PAGE>
WEB YES, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1997 AND 1998
AND MARCH 31, 1999 (UNAUDITED)
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
IMPAIRMENT OF LONG-LIVED ASSETS
The Company records impairment losses on long-lived assets used in
operations when indicators of impairment are present and the undiscounted cash
flows estimated to be generated by those assets are less than the assets'
carrying amount.
REVENUE RECOGNITION
Revenues pursuant to time and materials contracts are recognized as services
are provided. Revenues from application hosting agreements are recognized
ratably over the terms of the agreements.
DIRECT PERSONNEL COSTS AND OTHER DIRECT COSTS
Direct personnel costs consist of payroll and payroll-related expenses for
personnel dedicated to client assignments. Other direct costs consist of
hardware.
INCOME TAXES
The Company records income taxes using the asset and liability method.
Deferred tax assets and liabilities are recognized for the future tax
consequences attributable to differences between the financial statement
carrying amounts of existing assets and liabilities and their respective income
tax bases, operating loss and tax credit carryforwards. Deferred tax assets and
liabilities are measured using enacted tax rates expected to apply to taxable
income in the years in which those temporary differences are expected to be
recovered or settled. The effect on deferred tax assets and liabilities of a
change in tax rates is recognized in income in the period that includes the
enactment date.
NET INCOME (LOSS) PER SHARE
Basic net income (loss) per share were calculated based on the weighted
average common shares outstanding. There were no common stock equivalents
outstanding for any of the periods presented; accordingly, basic and fully
diluted net income (loss) per share are the same. As the Company has been in a
net loss position for the years ended December 31, 1997 and 1998, common stock
equivalents of zero and 200,000 were excluded from the diluted loss per share
calculation as they would be antidilutive. As a result, diluted loss per share
is the same as basic loss per share, and has not been presented separately.
REPORTING COMPREHENSIVE INCOME
Effective July 1, 1996, the Company adopted SFAS No. 130 ("SFAS 130)",
REPORTING COMPREHENSIVE INCOME. This statement requires that all components of
comprehensive income (loss) be reported in the consolidated financial statements
in the period in which they are recognized. For each period presented,
comprehensive income (loss) under SFAS 130 was equivalent to the Company's net
loss reported in the accompanying consolidated statements of operations.
F-48
<PAGE>
WEB YES, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1997 AND 1998
AND MARCH 31, 1999 (UNAUDITED)
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
UNAUDITED INTERIM FINANCIAL INFORMATION
The consolidated financial statements as of March 31, 1999 and for the three
months ended March 31, 1998 and 1999 are unaudited; however, in the opinion of
management, all adjustments (consisting of normal recurring adjustments)
necessary for a fair presentation of the consolidated financial statements for
the interim periods have been included. Results of operations for the interim
periods presented are not necessarily indicative of the results that may be
expected for the full fiscal year or any other future periods.
RECENT ACCOUNTING PRONOUNCEMENTS
The Company does not expect the adoption of recently issued accounting
pronouncements to have a significant impact on its results of operations,
financial condition or cash flows.
3. LOANS AND ADVANCES PAYABLE TO STOCKHOLDERS
The Company has various loans and advances payable to stockholders for
working capital purposes. The loans, which accrue interest at 8%, have no
definitive repayment terms.
4. STOCKHOLDERS' EQUITY
COMMON STOCK
In September 1998, the Company amended its articles of incorporation to
adjust the number of authorized shares of common stock from 20,000 shares to
1,000,000 shares. The Company then issued 621,952 shares of common stock at $.01
per share to the founders of the Company in order to adjust the equity ownership
to planned percentages. Subsequent to their issuance the founders began to draw
salaries.
During 1998 the Company issued shares of common stock to non-employees in
exchange for services rendered. The Company recorded expense of $56,550 for the
fair value of the stock issued.
PREFERRED STOCK
In September 1998, the Company authorized 200,000 shares of preferred stock
and issued an 70,000 shares of preferred stock at $1.00 per share. The preferred
stock is voting and is convertible into one share of common stock immediately at
the option of the holder, and automatically converts into common stock upon the
completion of a qualifying initial public offering. The preferred stock has a
$1.00 per share liquidation preference.
5. CAPITAL LEASES
The Company leases certain of its computer and office equipment under
capital leases. Substantially all of such leases are for four years, with
interest rates ranging from 12.9% to 21.6%. The leased equipment secures all
leases.
F-49
<PAGE>
WEB YES, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1997 AND 1998
AND MARCH 31, 1999 (UNAUDITED)
5. CAPITAL LEASES (CONTINUED)
The following is a schedule by year of future minimum lease payments due
under the capitalized leases, and the net present value of the minimum lease
payments as of December 31, 1998:
<TABLE>
<S> <C>
1999...................................................... $27,184
2000...................................................... 26,228
2001...................................................... 17,146
2002...................................................... 7,459
-------
Total minimum lease payments............................ 78,017
Less: amount representing interest.......................... 16,328
-------
Net present value of minimum lease payments............. 61,689
Less: current portion of capital lease obligations.......... 18,633
-------
Capital lease obligations, net of current portion....... $43,056
=======
</TABLE>
6. SIGNIFICANT CUSTOMERS
The following table summarizes revenues from major customers (revenues in
excess of 10% for the year) as a percentage of total revenues:
<TABLE>
<CAPTION>
YEARS ENDED THREE MONTHS
DECEMBER 31, ENDED MARCH 31,
------------------------- -------------------------
<S> <C> <C> <C> <C>
1997 1998 1998 1999
-- -- -- --
<CAPTION>
(UNAUDITED)
<S> <C> <C> <C> <C>
Customer A................................. 29% 24% 22% 49%
Customer B................................. -- 35 10 22
</TABLE>
7. INCOME TAXES
The tax effects of temporary differences that give rise to significant
portions of deferred tax assets at December 31, 1997 and 1998 are as follows:
<TABLE>
<CAPTION>
1997 1998
-------- --------
<S> <C> <C>
Deferred tax assets:
Accrued expenses........................................ $ 492 $ 978
Net operating loss carryforwards........................ 714 3,735
------- -------
Total gross deferred tax assets..................... 1,206 4,713
Valuation allowance....................................... (1,206) (4,713)
------- -------
Net deferred tax assets............................. $ -- $ --
======= =======
</TABLE>
The Company has recorded a full valuation allowance against its deferred tax
assets since management believes that, after considering all the available
objective evidence, it is more likely than not that these assets will not be
realized.
F-50
<PAGE>
WEB YES, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1997 AND 1998
AND MARCH 31, 1999 (UNAUDITED)
8. SUBSEQUENT EVENT
On June 10, 1999, the Company entered into an Agreement and Plan of
Reorganization with Breakaway Solutions, Inc. ("Breakaway"), a provider of
information technology consulting services. Under the agreement, Breakaway
acquired all the outstanding capital stock of the Company in a transaction
accounted for under the purchase method of accounting. The total purchase price
was comprised of 571,135 shares of common stock of Breakaway. Of the shares of
common stock issued to the former Web Yes stockholders, 428,351 are subject to
the Company's right, which lapses incrementally over a four-year period, to
repurchase the shares of the particular stockholder upon the termination of his
employment with Breakaway. The repurchase price shall be either at the share
value at the time of the acquisition if the stockholder terminates employment or
is terminated for cause, or at their fair market value if stockholder's
employment is terminated without cause.
F-51
<PAGE>
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To Eggrock Partners, Inc.:
We have audited the accompanying balance sheets of Eggrock Partners, Inc. (a
Delaware corporation formerly known as Eggrock Partners, LLC a Delaware limited
liability company) as of December 31, 1998, September 30, 1999, and
December 31, 1999, and the related statements of operations, redeemable
convertible preferred stock and members'/stockholders' equity (deficit) and cash
flows for the year ended December 31, 1998, the nine months ended September 30,
1999 and the three months ended December 31, 1999. 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 of the United States. 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 Eggrock Partners, Inc. as of
December 31, 1998, September 30, 1999 and December 31, 1999, and the results of
its operations and its cash flows for the year ended December 31, 1998, the nine
months ended September 30, 1999 and the three months ended December 31, 1999, in
conformity with generally accepted accounting principles of the United States.
/s/ Arthur Andersen LLP
Boston, Massachusetts
February 9, 2000
(except with respect to the matter
discussed in footnote 1, as to which
the date is March 7, 2000)
F-52
<PAGE>
EGGROCK PARTNERS, INC.
BALANCE SHEETS
<TABLE>
<CAPTION>
DECEMBER 31, SEPTEMBER 30, DECEMBER 31,
1998 1999 1999
------------ ------------- ------------
<S> <C> <C> <C>
ASSETS
CURRENT ASSETS:
Cash and cash equivalents............................ $ 127,343 $ 271,277 $ 8,292,860
Accounts receivable, net of allowance for doubtful
accounts of $100,000 and $130,000 at September 30,
1999 and December 31, 1999, respectively........... 1,470,838 2,060,529 3,033,633
Prepaid expenses and other current assets............ 44,243 111,171 166,304
---------- ----------- -----------
Total current assets............................... 1,642,424 2,442,977 11,492,797
PROPERTY AND EQUIPMENT, NET (Notes 3 and 10)........... 173,290 388,088 990,257
DEPOSITS............................................... 32,407 35,944 360,944
---------- ----------- -----------
$1,848,121 $ 2,867,009 $12,843,998
========== =========== ===========
LIABILITIES, REDEEMABLE CONVERTIBLE PREFERRED STOCK AND MEMBERS'/STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Revolving line of credit (Note 5).................... $ 100,000 $ 1,050,000 $ 657,528
Accounts payable..................................... -- 152,926 229,849
Accrued expenses (Note 10)........................... 539,870 1,107,167 1,952,641
Deferred revenue..................................... 105,000 -- 10,000
Deferred income taxes................................ -- -- 188,000
---------- ----------- -----------
Total current liabilities.......................... 744,870 2,310,093 3,038,018
COMMITMENTS (Note 9)
SERIES A REDEEMABLE, CONVERTIBLE PREFERRED STOCK, $.01
PAR VALUE:
Authorized--5,000,000 shares
Issued and outstanding--3,000,000 shares at December
31, 1999........................................... -- -- 10,000,000
MEMBERS'/STOCKHOLDERS' EQUITY (DEFICIT):
Members' capital..................................... 359,454 6,635,994 --
Common stock, $.01 par value--
Authorized--30,000,000 shares
Issued and outstanding--9,100,692 shares at
December 31, 1999................................ -- -- 91,007
Additional paid-in capital........................... -- -- 16,467,424
Deferred compensation................................ -- -- (9,303,005)
Retained earnings (accumulated deficit).............. 743,797 (6,079,078) (7,449,446)
---------- ----------- -----------
Total members'/stockholders' equity (deficit)...... 1,103,251 556,916 (194,020)
---------- ----------- -----------
$1,848,121 $ 2,867,009 $12,843,998
========== =========== ===========
</TABLE>
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE FINANCIAL STATEMENTS.
F-53
<PAGE>
EGGROCK PARTNERS, INC.
STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
YEAR ENDED NINE MONTHS ENDED THREE MONTHS
DECEMBER 31, SEPTEMBER 30, ENDED DECEMBER
1998 1999 31, 1999
------------ ----------------- --------------
<S> <C> <C> <C>
REVENUES:
Service........................................ $4,608,388 $ 7,521,888 $ 3,942,257
Royalties...................................... -- 253,000 21,000
---------- ----------- -----------
Total revenues............................... 4,608,388 7,774,888 3,963,257
OPERATING EXPENSES:
Project personnel costs........................ 2,121,559 4,386,236 2,045,862
Selling, general and administrative............ 1,494,289 3,110,179 2,589,864
Compensation related to issuance of membership
units and other equity issuances (Note 2(a)ii
and 7)....................................... 281,554 7,108,255 541,277
---------- ----------- -----------
Total operating expenses..................... 3,897,402 14,604,670 5,177,003
---------- ----------- -----------
Income (loss) from operations................ 710,986 (6,829,782) (1,213,746)
INTEREST INCOME, NET............................. 13,779 6,907 107,305
---------- ----------- -----------
Income (loss) before income tax provision.... 724,765 (6,822,875) (1,106,441)
INCOME TAX PROVISION............................. -- -- 226,000
---------- ----------- -----------
NET INCOME (LOSS)................................ 724,765 (6,822,875) (1,332,441)
PRO FORMA INCOME TAX PROVISION................... 578,000 615,000 --
---------- ----------- -----------
PRO FORMA NET INCOME (LOSS)...................... $ 146,765 $(7,437,875) $(1,332,441)
========== =========== ===========
</TABLE>
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE FINANCIAL STATEMENTS.
F-54
<PAGE>
EGGROCK PARTNERS, INC.
STATEMENTS OF REDEEMABLE CONVERTIBLE PREFERRED STOCK AND MEMBERS'/STOCKHOLDERS'
EQUITY (DEFICIT)
<TABLE>
<CAPTION>
SERIES A REDEEMABLE
CONVERTIBLE
PREFERRED STOCK COMMON STOCK
------------------------ ---------------------------
NUMBER OF REDEMPTION MEMBER NUMBER OF ADDITIONAL
SHARES VALUE CAPITAL SHARES $.01 PAR VALUE PAID- IN CAPITAL
---------- ----------- ---------- ---------- -------------- ----------------
<S> <C> <C> <C> <C> <C> <C>
BALANCE AT DECEMBER 31, 1997..... -- $ -- $ 234,000 -- $ -- $ --
Members' distributions......... -- -- (156,100) -- -- --
Issuance of membership units... -- -- 281,554 -- -- --
Net income..................... -- -- -- -- -- --
--------- ----------- ---------- --------- ------- -----------
BALANCE AT DECEMBER 31, 1998..... -- -- 359,454 -- -- --
Members' distributions......... -- -- (831,715) -- -- --
Issuance of membership units... -- -- 7,108,255 -- -- --
Net loss....................... -- -- -- -- -- --
--------- ----------- ---------- --------- ------- -----------
BALANCE AT SEPTEMBER 30, 1999.... -- -- 6,635,994 -- -- --
Merger and reorganization (Note
2)........................... -- -- (6,635,994) 8,994,387 89,944 6,546,050
Issuance of Series A redeemable
convertible preferred stock
(issuance costs of $37,927).. 3,000,000 10,000,000 -- -- -- --
Exercise of stock options...... -- -- -- 6,305 63 3,092
Deferred compensation related
to the issuance of stock
options...................... -- -- -- -- -- 8,319,282
Issuance of restricted common
stock and related deferred
compensation................. -- -- -- 100,000 1,000 1,599,000
Amortization of deferred
compensation related to
issuance of stock options and
restricted stock............. -- -- -- -- -- --
Net loss....................... -- -- -- -- -- --
--------- ----------- ---------- --------- ------- -----------
BALANCE AT DECEMBER 31, 1999... 3,000,000 $10,000,000 $ -- 9,100,692 $91,007 $16,467,424
========= =========== ========== ========= ======= ===========
<CAPTION>
RETAINED TOTAL
EARNINGS MEMBERS'/
DEFERRED (ACCUMULATED STOCKHOLDERS'
COMPENSATION DEFICIT) EQUITY (DEFICIT)
------------- ------------ ----------------
<S> <C> <C> <C>
BALANCE AT DECEMBER 31, 1997..... $ -- $ 19,032 $ 253,032
Members' distributions......... -- -- (156,100)
Issuance of membership units... -- -- 281,554
Net income..................... -- 724,765 724,765
----------- ----------- ----------
BALANCE AT DECEMBER 31, 1998..... -- 743,797 1,103,251
Members' distributions......... -- -- (831,715)
Issuance of membership units... -- -- 7,108,255
Net loss....................... -- (6,822,875) (6,822,875)
----------- ----------- ----------
BALANCE AT SEPTEMBER 30, 1999.... -- (6,079,078) 556,916
Merger and reorganization (Note
2)........................... -- -- --
Issuance of Series A redeemable
convertible preferred stock
(issuance costs of $37,927).. -- (37,927) (37,927)
Exercise of stock options...... -- -- 3,155
Deferred compensation related
to the issuance of stock
options...................... (8,319,282) -- --
Issuance of restricted common
stock and related deferred
compensation................. (1,525,000) -- 75,000
Amortization of deferred
compensation related to
issuance of stock options and
restricted stock............. 541,277 -- 541,277
Net loss....................... -- (1,332,441) (1,332,441)
----------- ----------- ----------
BALANCE AT DECEMBER 31, 1999... $(9,303,005) $(7,449,446) $ (194,020)
=========== =========== ==========
</TABLE>
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE FINANCIAL STATEMENTS.
F-55
<PAGE>
EGGROCK PARTNERS, INC.
STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
NINE MONTHS THREE MONTHS
YEAR ENDED ENDED ENDED
DECEMBER 31, SEPTEMBER 30, DECEMBER 31,
1998 1999 1999
------------ ------------- ------------
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss).................................... $ 724,765 $(6,822,875) $(1,332,441)
Adjustments to reconcile net income (loss) to net
cash provided by (used in) operating activities--
Noncash compensation expense related to issuance of
membership units and other equity issuances...... 281,554 7,108,255 541,277
Depreciation and amortization...................... 27,559 69,387 41,799
Deferred income taxes.............................. -- -- 188,000
Changes in current assets and liabilities--
Accounts receivable.............................. (1,258,802) (589,691) (973,104)
Prepaid expenses and other current assets........ (34,767) (66,928) (55,133)
Accounts payable................................. -- 152,926 76,923
Accrued expenses................................. 531,157 567,297 845,474
Deferred revenue................................. 105,000 (105,000) 10,000
---------- ----------- -----------
Net cash provided by (used in) operating
activities................................... 376,466 313,371 (657,205)
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of property and equipment.................. (175,746) (284,185) (643,968)
Increase in deposits................................. (26,363) (3,537) (325,000)
---------- ----------- -----------
Net cash used in investing activities.......... (202,109) (287,722) (968,968)
CASH FLOWS FROM FINANCING ACTIVITIES:
Net borrowings on line of credit..................... 100,000 950,000 (392,472)
Exercise of stock options............................ -- -- 3,155
Issuance of Series A redeemable convertible preferred
stock, net of issuance costs....................... -- -- 9,962,073
Issuance of restricted common stock.................. -- -- 75,000
Members' distributions............................... (156,100) (831,715) --
---------- ----------- -----------
Net cash (used in) provided by financing
activities................................... (56,100) 118,285 9,647,756
---------- ----------- -----------
INCREASE IN CASH AND CASH EQUIVALENTS.................. 118,257 143,934 8,021,583
CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD......... 9,086 127,343 271,277
---------- ----------- -----------
CASH AND CASH EQUIVALENTS, END OF PERIOD............... $ 127,343 $ 271,277 $ 8,292,860
========== =========== ===========
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Cash paid for interest............................... $ -- $ 8,092 $ 7,139
========== =========== ===========
</TABLE>
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE FINANCIAL STATEMENTS.
F-56
<PAGE>
EGGROCK PARTNERS, INC.
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 1999
(1) OPERATIONS
Eggrock Partners, Inc. (the Company) is the successor to Eggrock Partners,
LLC, which was formed in Delaware on September 2, 1997 as a limited liability
company. The Company is a leading full-service provider of e-business solutions
for emerging companies in the Internet Economy. The Company provides strategic
consulting, systems integration and application hosting solutions to the
emerging enterprise primarily located in North America. In addition, the Company
has begun to offer application hosting services to its customers. On October 1,
1999, the Company entered into the Agreement and Plan of Reorganization and
Merger (the Merger Agreement) to convert from a limited liability company to a
corporation (see Note 2(b)).
The Company is subject to risks common to rapidly growing, technology-based
companies, including limited operating history, dependence on key personnel,
rapid technological change, competition from substitute services and larger
companies and the need for continued market acceptance of the Company's
services.
On January 26, 2000, the Company entered into an agreement to be acquired by
Breakaway Solutions, Inc. (Breakaway). The agreement provides for all of the
Company's outstanding shares of common stock and preferred stock to be exchanged
for shares of Breakaway common stock based on a conversion ratio and options to
purchase Eggrock common stock to be assumed by Breakaway and converted into
options to purchase Breakaway common stock on the same basis. The conversion
ratio is determined by dividing 7,272,000 (adjusted for the stock split) by the
total number of shares of Eggrock capital stock outstanding and underlying stock
options as of the closing date. Based on the number of shares and stock options
currently outstanding, the conversion ratio should be approximately 0.51185008.
(2) FORMATION AND REORGANIZATION
(A) FORMATION
In September 1997, the Company entered into an operating agreement (the
Agreement). The Agreement included the following terms and conditions.
(I) MANAGEMENT
The members of the Company had designated three members as managing
directors (the Managing Directors) of the Company. The Managing Directors
were responsible for overseeing the operations of the Company and had
certain governance and liquidation rights and privileges as defined in
the partnership agreement. In addition, these Managing Directors did not
receive compensation in the form of payroll for their services.
Compensation for their services was paid in the form of member
distributions as a reduction of members' equity and was $156,100 and
$617,021 for the year ended December 31, 1998 and the nine months ended
September 30, 1999, respectively. Upon the conversion to a corporation on
October 1, 1999 (see Note 2(b)), these individuals began to receive
payroll compensation for their services.
(II) MEMBERSHIP INTERESTS
Interests of members in profits and losses of the Company and the rights
of members to distributions and allocations were evidenced by units of
interest in the Company. There were
F-57
<PAGE>
EGGROCK PARTNERS, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1999
(2) FORMATION AND REORGANIZATION (CONTINUED)
two classes of membership interests: Class A Common Units (Class A Units)
and Class B Common Units (Class B Units). Class A Units had the right to
vote on all matters on which the members are entitled to vote, as defined
by the Agreement. Class B Units had no voting rights under the Agreement.
Class B Units were divided into vested Class B Units and unvested
Class B Units. The vesting schedule affected the allocations and
distributions of profits and losses of the Company. Distributions were
made to the members of the Company in proportion to their vested units at
such times as the Managing Directors determined.
Throughout the Company's existence new and existing employees were
granted Phantom units. Phantom units represented a non-equity based right
to share in the profits of the Company. Phantom unit holders were
evaluated on an annual basis as to whether they would be allowed to
convert their Phantom units into Class B Units. The Phantom unit holder
was not required to pay for Class B Units. In connection with the
reorganization (see Note 2(b)), vested Phantom units and Class B Units
were converted into nonvoting common stock and unvested Class B Units and
Phantom units were converted into options to purchase nonvoting common
stock (see Note 7). The Company accounted for the equity component of
this plan as a variable award plan similar to a junior stock plan.
Accordingly, the equity awards were marked to fair market value each
reporting period until they were converted on October 1, 1999. The
associated compensation was recorded as compensation expense related to
the issuance of membership units in the accompanying statements of
operations and as an increase in members' equity.
As of September 30, 1999, the following membership interests were issued
and vested:
<TABLE>
<CAPTION>
MEMBERSHIP INTERESTS UNITS ISSUED VESTED UNVESTED
- -------------------- ------------ --------- --------
<S> <C> <C> <C>
Class A Units........................ 6,000,000 6,000,000 --
Class B Units........................ 1,772,500 1,201,380 571,120
Phantom Units........................ 2,019,000 1,043,007 975,993
</TABLE>
(B) MERGER AND REORGANIZATION
On September 24, 1999, Eggrock Partners, Inc. was formed. Eggrock
Partners, Inc. has the authority to issue 35,000,000 shares of stock of
which 5,000,000 shares have been designated as Series A redeemable
convertible preferred stock, par value $.01 per share, and 30,000,000
have been designated as common stock, par value $.01 per share of which
20,000,000 shall be designated voting common stock (Voting Common Stock)
and 10,000,000 shall be designated non-voting common stock (Non-Voting
Common Stock).
On October 1, 1999, Eggrock Partners, LLC and Eggrock Partners, Inc.
entered into the Merger Agreement whereby the Class A and Class B Unit
holders as well as Phantom unit owners converted their interests in the
Company into common stock and/or options to purchase common stock of
Eggrock Partners, Inc. As of the effective date of the Merger Agreement,
the identity and separate existence of Eggrock Partners, LLC ceased and
all of the rights, titles, privileges, powers, franchises, properties and
assets of Eggrock Partners, LLC of any kind vested in Eggrock
Partners, Inc., and all debts, liabilities, duties and other obligations
of Eggrock Partners, LLC attach to Eggrock Partners, Inc., and Eggrock
F-58
<PAGE>
EGGROCK PARTNERS, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1999
(2) FORMATION AND REORGANIZATION (CONTINUED)
Partners, Inc. shall continue its existence as a corporation and the
identity, rights, titles, privileges, powers, franchises, properties and
assets of the Company shall continue unaffected and unimpaired by the
merger. This transaction was treated as a merger between entities under
common control.
Membership interests were converted as follows: (i) Class A Units then
outstanding converted into the right to receive 1.125 fully paid shares
of the Company's Voting Common Stock, and (ii) each vested Class B Unit
and vested Phantom unit then outstanding converted into the right to
receive one fully paid share of the Company's Non-Voting Common Stock.
In addition, each unvested Class B Unit or unvested Phantom unit was
granted an option to purchase Non-Voting Common Stock for each unvested
Class B Unit or unvested Phantom unit held. These options were granted
under the Company's 1999 Stock Option and Grant Plan (the 1999 Plan) (see
Note 7) and have a vesting schedule identical to the vesting schedule of
the original Class B Unit or Phantom unit and a per share exercise price
equal to $0.50 per share.
(3) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
The accompanying financial statements reflect the application of the
accounting policies as described below and elsewhere in these notes to financial
statements.
(A) 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 reported amounts of revenues and expenses during
the reporting period. Actual results could differ from those estimates.
(B) REVENUE RECOGNITION
The Company derives substantially all revenues from professional service
agreements. Revenues pursuant to time and materials contracts are
generally recognized as services are performed. Revenues pursuant to
fixed-fee contracts are generally recognized as services are rendered and
are determined based on the percentage-of-completion method of accounting
(based on the ratio of costs incurred to total estimated project costs).
Revenues exclude reimbursable expenses charged to and collected from
clients.
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 become probable and can be reasonably estimated. During the period
from inception to December 31, 1999, the Company has not had a material
revision for estimated losses related to uncompleted contracts.
The Company has entered into a royalty agreement with a customer related
to certain technology that the Company had developed. The agreement
requires the customer to pay $294,000 in royalty payments to the Company
over a 15-month period. Royalties are due from the customer based on a
per unit amount as it sells the technology through to its customers.
F-59
<PAGE>
EGGROCK PARTNERS, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1999
(3) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
The Company is recording revenue on this agreement based on its shipments
to the end user or when the payments become due whichever is later.
(C) PROJECT PERSONNEL COSTS
Project personnel costs consist primarily of compensation and benefits
of the Company's employees engaged in the delivery of professional
services and non-reimbursable expenses related to client projects.
(D) CASH AND CASH EQUIVALENTS
The Company considers all highly liquid investments purchased with an
original maturity of 90 days or less to be cash equivalents.
(E) CONCENTRATION OF CREDIT RISK AND SIGNIFICANT CUSTOMERS
Financial instruments that potentially subject the Company to a
concentration of credit risk consist of cash and cash equivalents and
accounts receivable. Cash and cash equivalents are deposited with
high-credit quality financial institutions. The Company's accounts
receivable are derived from revenue earned from clients located in the
United States. The Company performs ongoing credit evaluations of its
clients' financial condition and maintains reserves for potential credit
losses based on the expected collectibility of total accounts receivable.
To date, the Company has not experienced any material credit losses.
The following table summarizes the number of customers that individually
comprise greater than 10% of total revenues and/or total accounts
receivable and their aggregate percentage of the Company's total revenues
and accounts receivable.
<TABLE>
<CAPTION>
ACCOUNTS RECEIVABLE
REVENUES ----------------------
---------------------- PERCENT OF
PERCENT OF TOTAL
NUMBER OF TOTAL NUMBER OF ACCOUNTS
CUSTOMERS REVENUES CUSTOMERS RECEIVABLE
--------- ---------- --------- ----------
<S> <C> <C> <C> <C>
Year ended December 31, 1998......... 2 69% 5 79%
Nine months ended September 30,
1999............................... 2 46% 4 68%
Three months ended December 31,
1999............................... 4 73% 4 74%
</TABLE>
(F) FAIR VALUE OF FINANCIAL INSTRUMENTS
The Company's financial instruments, including cash and cash
equivalents, accounts receivable, accounts payable and revolving line of
credit are carried at carrying value, which approximates their fair value
because of the short-term nature of these instruments.
(G) PROPERTY AND EQUIPMENT
Property and equipment are stated at cost less accumulated depreciation
and amortization. The Company provides for depreciation and amortization
by charges to operations using the straight-line method, which allocates
the cost of property and equipment over their estimated useful lives of
three years for computer equipment and software, five years for furniture
and fixtures, office equipment and the life of the related lease for
leasehold improvements.
F-60
<PAGE>
EGGROCK PARTNERS, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1999
(3) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
(H) LONG-LIVED ASSETS
The Company reviews its long-lived assets for impairment as events and
circumstances indicate the carrying amounts of an asset may not be
recoverable. The Company evaluates the realizability of its long-lived
assets based on profitability and cash flow expectations for the related
asset. Management believes that as of December 31, 1998 and 1999 and
September 30, 1999, none of the Company's long-lived assets were
impaired.
(I) COMPREHENSIVE INCOME (LOSS)
Comprehensive income (loss) is defined as the change in equity of a
business enterprise during a period from transactions and other events
and circumstances from non-owner sources. The Company's comprehensive
income (loss) is equal to reported net income (loss) for all periods
presented.
(J) RECENT ACCOUNTING PRONOUNCEMENTS
In June 1998, the Financial Accounting Standards Board (FASB) issued
Statement of Financial Accounting Standards (SFAS) No. 133, ACCOUNTING
FOR DERIVATIVES AND HEDGING ACTIVITIES. SFAS No. 133, as amended by SFAS
No. 137, ACCOUNTING FOR DERIVATIVE INSTRUMENTS AND HEDGING
ACTIVITIES--DEFERRAL OF THE EFFECTIVE DATE OF FASB STATEMENT NO. 133, is
effective for all fiscal quarters beginning with the quarter ending
June 30, 2000. SFAS No. 133 establishes accounting and reporting
standards for derivative instruments, including certain derivative
instruments embedded in other contracts, and for hedging activities. The
Company will adopt SFAS No. 133 in its quarter ending June 30, 2000 and
does not expect that such adoption will have a material impact on the
Company's results of operations, financial position or cash flows.
(4) INCOME TAXES
The Company accounts for income taxes, including pro forma computations, in
accordance with SFAS No. 109, ACCOUNTING FOR INCOME TAXES. SFAS No. 109
prescribes an asset and liability approach that requires the recognition of
deferred tax assets and liabilities for the expected future tax consequences of
temporary differences between financial statement carrying amounts and the tax
basis of assets and liabilities.
The Company was taxed from inception to September 30, 1999 as a partnership.
As such, the members were liable for individual federal and state income taxes
related to the Company's taxable income. Payments to the members to fund these
tax liabilities were recorded as distributions in the accompanying statements of
redeemable convertible preferred stock and members'/stockholders' equity
(deficit).
In connection with the merger and reorganization discussed in Note 2(b), the
Company is now subject to federal and state income taxes at prevailing corporate
rates. Accordingly, the accompanying statements of operations for the year ended
December 31, 1998 and the nine months ended September 30, 1999 include a pro
forma tax adjustment for income taxes that would have been recorded if the
Company had been a corporation for those periods.
F-61
<PAGE>
EGGROCK PARTNERS, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1999
(4) INCOME TAXES (CONTINUED)
In accordance with SFAS No. 109, the Company analyzed its deferred tax
position upon this change in tax status. Based on this analysis, the Company has
determined that it had a deferred tax liability of approximately $464,000 as of
October 1, 1999. This deferred tax liability represented the cumulative effect
of all its temporary differences between financial reporting and tax basis of
its assets and liabilities, primarily accounts receivable, accounts payable,
accrued expenses and certain reserves. The Company recorded this deferred tax
liability as a one-time increase in its tax provision during the three months
ended December 31, 1999.
The components of the historical and pro forma income tax provision are as
follows:
<TABLE>
<CAPTION>
NINE MONTHS
YEAR ENDED ENDED THREE MONTHS
DECEMBER 31, SEPTEMBER 30, ENDED
1998 1999 DECEMBER 31,
(PRO FORMA) (PRO FORMA) 1999
------------ ------------- ------------
<S> <C> <C> <C>
Current--
Federal.............................................. $250,000 $438,000 $ 32,000
State................................................ 44,000 78,000 6,000
Deferred--
Federal.............................................. 241,000 84,000 (235,000)
State................................................ 43,000 15,000 (41,000)
Change in tax status................................... -- -- 464,000
-------- -------- --------
$578,000 $615,000 $226,000
======== ======== ========
</TABLE>
A reconciliation of the federal statutory rate to the Company's effective
tax rate is as follows:
<TABLE>
<CAPTION>
NINE MONTHS
YEAR ENDED ENDED THREE MONTHS
DECEMBER 31, SEPTEMBER 30, ENDED
1998 1999 DECEMBER 31,
(PRO FORMA) (PRO FORMA) 1999
------------ ------------- ------------
<S> <C> <C> <C>
Income tax provision (benefit) at federal statutory
rate................................................. 34% (34%) (34%)
Increase (decrease) resulting from--
State tax provision net of federal................... 6 (6) (6)
Nondeductible equity based compensation.............. 40 49 18
Change in tax status................................. -- -- 42
-- --- ---
80% 9% 20%
== === ===
</TABLE>
F-62
<PAGE>
EGGROCK PARTNERS, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1999
(4) INCOME TAXES (CONTINUED)
Deferred income asset (liability) taxes as of September 30, 1999 and
December 31, 1999 related to the following temporary differences:
<TABLE>
<CAPTION>
NINE MONTHS THREE
ENDED MONTHS
SEPTEMBER 30, ENDED
1999 DECEMBER 31,
(PRO FORMA) 1999
------------- ------------
<S> <C> <C>
Nondeductible reserve and accruals.......................... $ 345,000 $ 397,000
Change in accounting method from cash to accrual method of
accounting................................................ (824,000) (618,000)
Other....................................................... 13,000 33,000
--------- ---------
$(464,000) $(188,000)
========= =========
</TABLE>
(5) REVOLVING LINE OF CREDIT
The Company has a credit agreement with a bank. Under this agreement, as
amended during September 1999, the Company may borrow up to the lesser of
$2,000,000 or 80% of qualifying accounts receivable, as defined. The revolving
line of credit bears interest at the bank's prime rate (8.5% at December 31,
1999) and expires on September 30, 2000. Borrowings under the revolving line of
credit are collateralized by substantially all assets of the Company. There was
$1,342,472 available for borrowing under this line at December 31, 1999. The
Company is also subject to certain financial covenants under this agreement
including current ratio and net income covenants. As of September 30, 1999 and
December 31, 1999 the Company was not in compliance with the net income covenant
in this agreement and has not received a waiver of this non-compliance.
(6) PREFERRED STOCK
On October 1, 1999, the Company issued 3,000,000 shares of Series A
Redeemable Convertible Preferred Stock (Series A Preferred Stock) for aggregate
proceeds for $10,000,000.
The rights, preferences, and privileges of the Series A Preferred Stock are
as follows:
DIVIDENDS
No dividends will accrue or be paid to the holders of Series A Preferred
Stock unless declared by the Board of Directors.
LIQUIDATION
In the event of any voluntary, or involuntary, liquidation, dissolution, or
winding up of the Company, as defined, the holders of each share of the
Series A Preferred Stock shall be paid an amount equal to $3.33 per share plus
all accrued and unpaid dividends. After such payments have been made, the
remaining assets of the Company available for distribution shall be distributed
among the holders of the Series A Preferred Stock and common stock in an amount
per share as would have been payable had each share of Series A Preferred Stock
been converted to Voting Common Stock.
F-63
<PAGE>
EGGROCK PARTNERS, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1999
(6) PREFERRED STOCK (CONTINUED)
OPTIONAL REDEMPTION
With the approval of the holders of the majority of the outstanding shares
of Series A Preferred Stock, the Company will be required to redeem, subject to
certain conditions, on October 1, 2004 and October 1, 2005 one-half of the
shares of Series A Preferred Stock held by the holders requesting such
redemption at a price equal to the greater of the fair market value of such
shares on the first redemption date or $3.33 per share, plus any accrued and
unpaid dividends from the original issue date to the redemption date.
CONVERSION
The holder of any share or shares of Series A Preferred Stock shall have the
right, at its option at any time, to convert any such shares of Series A
Preferred Stock (except that upon any liquidation of the Corporation the right
of conversion shall terminate at the close of business on the business day fixed
for payment of the amount distributable on the Series A Preferred Stock) into
such number of shares of Voting Common Stock as is obtained by (i) multiplying
the number of shares of Series A Preferred Stock to be converted by $3.33 and
(ii) dividing the product by the conversion price of $3.33 per share adjusted
for certain dilutive events, as defined.
VOTING
Except as otherwise provided in the Certificate of Incorporation or as
required by law, the holders of Series A Preferred Stock shall vote together
with all other classes of stock of the Company as a single class on all actions.
Each share of Series A Preferred Stock shall entitle the holder to such number
of votes per share into which each shares of Series A Preferred stock is then
convertible.
(7) STOCK OPTION PLAN
On September 27, 1999, the Company adopted the 1999 Plan, which provides for
the granting of incentive stock options (ISOs), nonqualified stock options, and
restricted stock grants to purchase Non-Voting Common stock, to employees,
directors and consultants. ISOs may be granted to employees only, with an
exercise price of not less than 100% of the fair market value on the date of
grant, or in the case of a 10% or greater stockholders, not less than 110% of
the fair market value on the date of grant. All stock options will have a life
as determined by the board of directors but will expire within ten years from
the date of grant, or in the case of 10% or greater stockholders, within five
years. The vesting period of stock options is also determined by the board of
directors. A total of 3,047,113 shares has been reserved for issuance under the
1999 Plan. In some instances, options have been granted at exercise prices below
the fair market value on the date of grant. The difference, if any, between the
fair market value of shares of the Company's Non-Voting Common Stock, as
determined by the Company's Board of Directors, and the exercise price of the
option is recognized as compensation expense over the vesting term. During the
three months ended December 31, 1999, the Company recorded approximately
$9.8 million in deferred compensation.
During 1995, the FASB issued SFAS No. 123, ACCOUNTING FOR STOCK-BASED
COMPENSATION, which defines a fair value based method of accounting for an
employee stock option or similar equity instrument and encourages all entities
to adopt that method of accounting for all of their employee
F-64
<PAGE>
EGGROCK PARTNERS, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1999
(7) STOCK OPTION PLAN (CONTINUED)
stock compensation plans. However, it also allows an entity to continue to
measure compensation cost for those plans using the method of accounting
prescribed by the Accounting Principles Board (APB) Opinion No. 25, ACCOUNTING
FOR STOCK ISSUED TO EMPLOYEES. Entities electing to remain with the accounting
in APB No. 25 must make pro forma disclosures of net income and earnings per
share, as if the fair value based method of accounting defined in SFAS No. 123
had been applied.
The Company has elected to account for its stock-based employee compensation
plans under APB No. 25. However, for pro forma disclosure purposes, the Company
has computed the compensation expense in 1999 for all options granted, using the
Black-Scholes option pricing model as prescribed by SFAS No. 123. The fair value
of the 1999 options granted is estimated on the date of grant using the
following assumptions: a dividend yield of 0%, an expected volatility of 0% and
an expected life of 10 years for each year, and a risk-free interest rate
between 6.11% and 6.28%. The weighted average fair value of options granted
during the year at fair market value was $4.75.
If the Company had accounted for these plans in accordance with SFAS
No. 123, the Company's net income would have been reduced and net loss would
have been increased to the following pro forma amounts:
<TABLE>
<CAPTION>
NINE MONTHS THREE MONTHS
YEAR ENDED ENDED ENDED
DECEMBER 31, SEPTEMBER 30, DECEMBER 31,
1998 1999 1999
------------ ------------- ------------
<S> <C> <C> <C>
Net income (loss)--
As reported.......................................... $724,765 $(6,822,875) $(1,332,441)
Pro forma............................................ 724,765 (6,822,875) (1,376,267)
</TABLE>
Stock option activity from the inception of the 1999 Plan, to December 31,
1999 was as follows:
<TABLE>
<CAPTION>
WEIGHTED
AVERAGE
EXERCISE EXERCISE
NUMBER OF PRICE PER PRICE PER
SHARES SHARE SHARE
--------- --------------- ---------
<S> <C> <C> <C>
Granted..................................................... 1,850,113 $ .50--.75 $.54
Exercised................................................... (6,305) .50 .50
Canceled.................................................... (189,355) .50--.75 .51
--------- --------------- ----
Outstanding at December 31, 1999............................ 1,654,453 $ .50--.75 $.54
========= =============== ====
Exercisable at December 31, 1999............................ 59,237 .50 .50
========= =============== ====
</TABLE>
Options outstanding at December 31, 1999 had a weighted average contractual
life of 9.79 years. Options to purchase 1,197,000 of common stock were available
for future grant as of December 31, 1999.
(8) EGGROCK PARTNERS 401(K) SAVING PLAN
On January 1, 1998 the Company established the Eggrock Partners 401(k)
Savings Plan (the 401(k) Plan). The 401(k) Plan is a defined contribution plan
established under the provisions of Section 401(k)
F-65
<PAGE>
EGGROCK PARTNERS, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1999
(8) EGGROCK PARTNERS 401(K) SAVING PLAN (CONTINUED)
of the Internal Revenue Code. All employees are eligible to participate after
reaching the age of 21 and completing three months of service with the Company.
Under the 401(k) Plan, employees are allowed to defer up to 20% of their annual
compensation. For the year ended December 31, 1998, the nine months ended
September 30, 1999 and the three months ended December 31, 1999, the Company did
not make any contributions to the 401(k) Plan.
(9) COMMITMENTS
The Company leases its facilities and certain equipment under operating
lease agreements through December 2005. Future minimum lease payments under the
Company's operating leases at December 31, 1999 are approximately as follows:
<TABLE>
<CAPTION>
OPERATING
LEASES
----------
<S> <C>
Years ending December 31,
2000........................................................ $ 854,000
2001........................................................ 1,044,000
2002........................................................ 983,000
2003........................................................ 980,000
2004........................................................ 982,000
Thereafter.................................................. 912,000
----------
$5,755,000
==========
</TABLE>
During December 1999, the Company entered into a lease for its new
headquarters. Future minimum lease payments under the new facility lease are
approximately $5,038,000 through December 2005, which are included in the
commitments above. The Company will be released from its obligation under its
current facility lease as of March 31, 2000.
(10) CERTAIN BALANCE SHEET ACCOUNTS
(A) PROPERTY AND EQUIPMENT
Property and equipment consists of the following:
<TABLE>
<CAPTION>
DECEMBER 31, SEPTEMBER 30, DECEMBER 31,
1998 1999 1999
------------ ------------- ------------
<S> <C> <C> <C>
Computer equipment and software......................... $139,097 $336,879 $ 833,566
Furniture and fixtures.................................. 19,271 99,430 191,016
Office equipment........................................ 32,471 35,944 62,346
Leasehold improvements.................................. 10,634 13,403 42,698
-------- -------- ---------
201,473 485,656 1,129,626
Less--Accumulated depreciation and amortization......... (28,183) (97,568) (139,369)
-------- -------- ---------
$173,290 $388,088 $ 990,257
======== ======== =========
</TABLE>
F-66
<PAGE>
EGGROCK PARTNERS, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1999
(10) CERTAIN BALANCE SHEET ACCOUNTS (CONTINUED)
(B) ACCRUALS
Accrued expenses consist of the following:
<TABLE>
<CAPTION>
DECEMBER 31, SEPTEMBER 30, DECEMBER 31,
1998 1999 1999
------------ ------------- ------------
<S> <C> <C> <C>
Payroll and payroll related............................. $322,317 $ 555,471 $1,115,178
Other................................................... 217,553 551,696 837,463
-------- ---------- ----------
Total................................................... $539,870 $1,107,167 $1,952,641
======== ========== ==========
</TABLE>
(C) BAD DEBT RESERVE
Rollforward of the allowance for doubtful accounts:
<TABLE>
<CAPTION>
ADDITIONS
BALANCE AT CHARGED TO
BEGINNING OF COSTS AND BALANCE AT
PERIOD EXPENSES DEDUCTIONS(A) END OF PERIOD
------------ ---------- ------------- -------------
<S> <C> <C> <C> <C>
Year ended December 31, 1998.................. $ -- $ -- $ -- $ --
Nine months ended September 30, 1999.......... $ -- $100,000 $ -- $100,000
Three months ended December 31, 1999.......... $100,000 $ 39,925 $9,925 $130,000
</TABLE>
- ------------------------
(A) UNCOLLECTIBLE ACCOUNTS RECEIVABLE WRITTEN OFF AGAINST THE ALLOWANCE,
NET OF RECOVERIES.
F-67
<PAGE>
BREAKAWAY SOLUTIONS, INC.
UNAUDITED PRO FORMA CONSOLIDATED FINANCIAL STATEMENTS
BASIS OF PRESENTATION
The following unaudited proforma consolidated financial statements give
effect to the acquisition by Breakaway Solutions, Inc. (the "Company") of all of
the stock of Applica Corporation on March 25, 1999, (ii) all of the stock of WPL
Laboratories, Inc. on May 17, 1999 and (iii) all of the stock of Web Yes, Inc.
on June 10, 1999 and (iv) all of the stock of Eggrock Partners, Inc. (together
the Acquired Companies). The unaudited proforma consolidated statement of
operations gives effect to the acquisitions of the Acquired Companies as if they
had occurred on January 1, 1999. The unaudited pro forma consolidated balance
sheet gives effect to the acquisition of Eggrock Partners, Inc. as if it had
occurred on December 31, 1999. These statements are based on the historical
financial statements of the Company and the Acquired Companies, and the
estimates and assumptions set forth below and in the notes to the unaudited pro
forma consolidated financial statements.
The effects of the acquisition of Eggrock Partners, Inc. has been presented
using the purchase method of accounting and accordingly, the purchase price was
allocated to the assets and liabilities assumed based upon management's best
preliminary estimate of fair value with any excess purchase price being
allocated to goodwill, deferred costs or other identifiable intangible assets.
The preliminary allocation of the purchase price will be subject to further
adjustments, which are not anticipated to be material, as the Company finalizes
the allocations of the purchase price in accordance with generally accepted
accounting principles. The pro forma adjustments related to the purchase price
allocation of the acquisition of Eggrock Partners, Inc. represents management's
best estimate of the effects of the acquisition.
The pro forma adjustments are based upon estimates, currently available
information and certain assumptions that management deems appropriate. The
unaudited pro forma consolidated financial data presented herein are not
necessarily indicative of the results the Company would have obtained had such
events occurred on January 1, 1999, as assumed, or the future results of the
Company. The unaudited pro forma consolidated financial statements should be
read in conjunction with the audited financial statements and notes thereto
included elsewhere in this Prospectus.
F-68
<PAGE>
BREAKAWAY SOLUTIONS, INC.
UNAUDITED PRO FORMA CONSOLIDATED BALANCE SHEET
AS OF DECEMBER 31, 1999
(IN THOUSANDS)
<TABLE>
<CAPTION>
BREAKAWAY EGGROCK PRO FORMA PRO FORMA
SOLUTIONS, INC. PARTNERS, INC. ADJUSTMENTS (1) CONSOLIDATED
--------------- -------------- --------------- ------------
<S> <C> <C> <C> <C>
ASSETS
Current Assets:
Cash and cash equivalents....................... $ 3,920 $ 8,293 $ -- $ 12,213
Short-term investments.......................... 28,227 -- -- 28,227
Accounts receivable, net........................ 7,559 3,034 -- 10,593
Unbilled revenues on contracts.................. 725 -- -- 725
Due from related parties........................ 3,991 -- -- 3,991
Prepaid expenses and other current assets....... 2,548 166 -- 2,714
-------- ------- -------- --------
Total current assets.......................... 46,970 11,493 -- 58,463
-------- ------- -------- --------
Investments....................................... 9,705 -- -- 9,705
Property and equipment, net....................... 7,541 990 -- 8,531
Intangible assets and deferred costs, net of
accumulated amortization........................ 12,181 -- 272,194 (b) 284,375
Loans to employees................................ 568 -- -- 568
Other assets...................................... 496 361 -- 857
-------- ------- -------- --------
Total assets.................................. $ 77,461 $12,844 $272,194 $362,499
======== ======= ======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Revolving line of credit........................ -- 657 -- 657
Due to stockholders-current portion............. 625 -- -- 625
Capital lease obligations-current portion....... 533 -- -- 533
Accounts payable................................ 2,955 230 -- 3,185
Accrued compensation and related benefits....... 1,477 -- -- 1,477
Accrued expenses................................ 1,306 1,953 -- 3,259
Deferred revenue................................ 224 10 -- 234
Deferred income taxes........................... -- -- -- 188
-------- ------- -------- --------
Total current liabilities..................... 7,120 3,038 -- 10,158
-------- ------- -------- --------
Due to stockholders............................... 1,625 -- -- 1,625
Capital lease obligations- long-term.............. 376 -- -- 376
-------- ------- -------- --------
Total long-term liabilities................... 2,001 -- -- 2,001
-------- ------- -------- --------
Total liabilities............................. 9,121 3,038 -- 12,159
-------- ------- -------- --------
Stockholders' equity:
Series A preferred stock........................ -- 10,000 (10,000)(a) --
Series B preferred stock........................ -- -- -- --
Common stock.................................... 4 91 (91)(a) 4
Additional paid-in-capital...................... 78,868 16,467 (16,467)(a) 360,868
282,000 (b)
Less: treasury stock, at cost -- -- -- --
Less: deferred compensation....................... (253) (9,303) 9,303 (a) (253)
Retained earnings (accumulated deficit)........... (10,367) (7,449) 7,449 (a) (10,367)
Accumulated other comprehensive income............ 88 -- -- 88
-------- ------- -------- --------
Total stockholders' equity...................... 68,340 9,806 272,194 350,340
-------- ------- -------- --------
Total liabilities and stockholders' equity...... $ 77,461 $12,844 $272,194 $362,499
======== ======= ======== ========
</TABLE>
- ------------------------------
(1) See Note 1 to unaudited pro forma consolidated financial statements.
F-69
<PAGE>
BREAKAWAY SOLUTIONS, INC.
UNAUDITED PRO FORMA CONSOLIDATED STATEMENT OF OPERATIONS
FOR THE YEAR ENDED DECEMBER 31, 1999
(IN THOUSANDS)
<TABLE>
<CAPTION>
BREAKAWAY PRO FORMA EGGROCK
SOLUTIONS, INC. APPLICA WPL WEB YES ADJUSTMENTS SUBTOTAL PARTNERS, INC.
--------------- -------- -------- -------- ----------- -------- --------------
<S> <C> <C> <C> <C> <C> <C> <C>
Revenue............... $ 25,390 -- 1,679 289 -- $27,358 11,738
Operating expenses:
Project personnel
costs............. 11,850 175 721 111 -- 12,857 6,432
Compensation related
to equity
issuances......... -- -- -- -- -- -- 7,650
Selling, general and
admin expenses.... 24,405 152 631 54 1,321 (a) 26,563 5,700
-------- ----- ------ ---- ------ -------- -------
Total operating
expenses........ 36,255 327 1,352 165 1,321 39,420 19,782
-------- ----- ------ ---- ------ -------- -------
Income (loss) from
operations.......... (10,865) (327) 327 124 (1,321) (12,062) (8,044)
Other income
(expense):
Other income.......... 23 -- -- -- -- 23 --
Interest income....... 673 -- 2 -- -- 675 114
Interest expense...... (198) -- -- (14) (65) (277) --
-------- ----- ------ ---- ------ -------- -------
498 -- 2 (14) (65) 421 114
-------- ----- ------ ---- ------ -------- -------
Net loss.............. (10,367) (327) 329 110 (1,386) $(11,641) (7,930)
======== ===== ====== ==== ====== ======== =======
Net loss per
share-basic and
diluted............. $ (0.59)
Weighted average
shares
outstanding......... 17,440
<CAPTION>
PRO FORMA PRO FORMA
ADJUSTMENTS (1) CONSOLIDATED
--------------- ------------
<S> <C> <C>
Revenue............... -- $ 39,096
Operating expenses:
Project personnel
costs............. -- 19,289
Compensation related
to equity
issuances......... (7,650)(d) --
Selling, general and 61,580 (a)
admin expenses.... 540 (c) 94,383
------- --------
Total operating
expenses........ 54,470 113,672
------- --------
Income (loss) from
operations.......... (54,470) (74,576)
Other income
(expense):
Other income.......... -- 23
Interest income....... -- 789
Interest expense...... -- (277)
------- --------
-- 535
------- --------
Net loss.............. (54,470) (74,041)
======= ========
Net loss per
share-basic and
diluted............. $ (2.92)
Weighted average
shares
outstanding......... 25,300
</TABLE>
- ------------------------------
(1) See Note 1 to unaudited pro forma consolidated financial statements.
F-70
<PAGE>
BREAKAWAY SOLUTIONS, INC.
NOTES TO UNAUDITED PRO FORMA CONSOLIDATED FINANCIAL STATEMENTS
(1) PRO FORMA CONSOLIDATED BALANCE SHEET ADJUSTMENTS
During 1999, the Company completed its acquisitions of Applica Corporation,
WPL Laboratories, Inc. and Web Yes, Inc. (the Acquired Companies) for total
consideration valued at approximately $15.3 million. Accordingly, the assets and
liabilities of the Acquired Companies are included in the Company's consolidated
balance sheet as of December 31, 1999 and no pro forma adjustments are necessary
to the pro forma consolidated balance sheet related to the acquisitions of the
Acquired Companies. The following represents the allocation of the purchase
price for the Company's acquisitions of the Acquired Companies over the fair
values of the acquired assets and assumed liabilities of the Acquired Companies
as of the allocation date:
<TABLE>
<S> <C>
(in thousands)
Working capital deficit, including cash acquired............ $ 508
Other non-current assets.................................... 706
Non-current liabilities..................................... (134)
Intangible assets and deferred costs:
Assembled workforce....................................... 852
Customer base............................................. 1,463
Goodwill.................................................... 2,374
Deferred costs.............................................. 9,494
-------
Total intangible assets and deferred costs.................. 14,183
-------
Purchase price.............................................. $15,263
=======
</TABLE>
The pro forma consolidated financial information also reflects the pending
acquisition of Eggrock Partners, Inc. for consideration preliminarily valued at
approximately $282.0 million. For the purpose of the pro forma consolidated
financial information, the number of shares of Breakaway Solutions, Inc. common
stock assumed issued in the acquisition is approximately 7.2 million which
includes conversion of outstanding stock options of Eggrock Partners, Inc. The
estimated acquisition related costs consist primarily of investment banker,
legal and accounting fees to be incurred directly related to the acquisition of
Eggrock Partners, Inc.
The acquisition of Eggrock Partners, Inc. will be accounted for as a
purchase. The purchase price will be allocated to the assets acquired and
liabilities assumed based on their estimated fair values. Intangible assets will
be amortized over a period up to five years. Results of operations for Eggrock
Partners, Inc. will be included with those of the Company for periods subsequent
to the date of acquisition.
F-71
<PAGE>
BREAKAWAY SOLUTIONS, INC.
NOTES TO UNAUDITED PRO FORMA CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(1) PRO FORMA CONSOLIDATED BALANCE SHEET ADJUSTMENTS (CONTINUED)
The pro forma consolidated balance sheet adjustments as of December 31, 1999
consist of the following:
(a) Represents the elimination of historical equity balances of Eggrock
Partners, Inc.
(b) The purchase price for Eggrock Partners, Inc. is expected to be
allocated as follows:
<TABLE>
<S> <C>
(in thousands)
Intangible assets and deferred costs:
Workforce in place........................................ $ 3,815
Goodwill.................................................. 134,351
Deferred costs............................................ 133,752
--------
271,918
Tangible assets............................................. 12,844
Liabilities assumed......................................... (2,762)
--------
$282,000
========
</TABLE>
Intangible assets will be amortized over the useful lives of three years for
assembled workforce and five years for goodwill.
1,916,160 shares of the common stock issued to the former Eggrock
Partners, Inc. shareholders are subject to the Company's right, which lapses
incrementally over a four year period, to repurchase the shares of a particular
shareholder at the original price paid by the former shareholder upon the
termination of his or her employment with the Company subject to conditions
described in the merger agreement. The fair value of these shares will be
recorded as deferred compensation cost and amortized over the four-year vesting
period.
2. PRO FORMA CONSOLIDATED STATEMENT OF OPERATIONS ADJUSTMENTS
The pro forma consolidated statement of operations adjustments for the year
ended December 31, 1999 consist of the following:
(a) General and administrative expense has been adjusted to reflect the
amortization of intangible assets and deferred costs associated with the
acquisitions of the Acquired Companies for the period from January 1,
1999 until the date acquired and Eggrock Partners, Inc for the entire
year ending December 31, 1999.
(b) This represents the adjustment for interest expense relating to the
remaining cash consideration payable to each WPL stockholder for the
period January 1, 1999 to May 17, 1999.
(c) During 1999 certain Eggrock employees did not draw salaries.
Compensation expense has been adjusted to reflect the compensation and
benefits for those employees that are specified in the employment
contracts entered into at the date of acquisition.
(d) This represents the adjustment for compensation expense related to
issuance of stock options by Eggrock Partners, Inc.
F-72
<PAGE>
ANNEX A
AGREEMENT AND PLAN OF MERGER
BY AND AMONG
BREAKAWAY SOLUTIONS, INC.,
BENEDICT ACQUISITION CORP.
AND
EGGROCK PARTNERS, INC.
January 26, 2000
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TABLE OF CONTENTS
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ARTICLE I--THE MERGER......................................................... A-1
1.1 The Merger.................................................. A-1
1.2 The Closing................................................. A-1
1.3 Actions at the Closing...................................... A-1
1.4 Additional Action........................................... A-2
1.5 Conversion of Shares........................................ A-2
1.6 Dissenting Shares........................................... A-3
1.7 Exchange of Shares.......................................... A-3
1.8 Fractional Shares........................................... A-4
1.9 Options..................................................... A-4
1.10 Escrow...................................................... A-5
1.11 Certificate of Incorporation and By-laws.................... A-5
1.12 Directors and Executive Officers............................ A-6
1.13 Tax Consequences............................................ A-6
1.14 Employment Related Matters.................................. A-6
1.15 No Further Rights........................................... A-6
1.16 Closing of Transfer Books................................... A-6
ARTICLE II--REPRESENTATIONS AND WARRANTIES OF THE COMPANY..................... A-6
2.1 Organization, Qualification and Corporate Power............. A-6
2.2 Capitalization.............................................. A-7
2.3 Authorization of Transaction................................ A-7
2.4 Noncontravention............................................ A-8
2.5 Subsidiaries................................................ A-8
2.6 Financial Statements........................................ A-8
2.7 Absence of Certain Changes.................................. A-8
2.8 Undisclosed Liabilities..................................... A-8
2.9 Tax Matters................................................. A-9
2.10 Assets...................................................... A-10
2.11 Owned Real Property......................................... A-10
2.12 Real Property Leases........................................ A-10
2.13 Intellectual Property....................................... A-10
2.14 Intentionally Omitted....................................... A-12
2.15 Contracts................................................... A-12
2.16 Accounts Receivable......................................... A-13
2.17 Powers of Attorney.......................................... A-13
2.18 Insurance................................................... A-13
2.19 Litigation.................................................. A-13
2.20 Warranties.................................................. A-14
2.21 Employees................................................... A-14
2.22 Employee Benefits........................................... A-14
2.23 Environmental Matters....................................... A-16
2.24 Legal Compliance............................................ A-17
2.25 Customers and Suppliers..................................... A-17
2.26 Permits..................................................... A-17
2.27 Certain Business Relationships With Affiliates.............. A-17
2.28 Brokers' Fees............................................... A-17
2.29 Books and Records........................................... A-17
2.30 HSR Act..................................................... A-18
2.31 Section 203 of the Delaware General Corporation Law Not
Applicable.................................................. A-18
</TABLE>
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ARTICLE III--REPRESENTATIONS AND WARRANTIES OF THE BUYER AND THE TRANSITORY
SUBSIDIARY.................................................................... A-18
3.1 Organization, Qualification and Corporate Power............. A-18
3.2 Capitalization.............................................. A-18
3.3 Authorization of Transaction................................ A-19
3.4 Noncontravention............................................ A-19
3.5 Reports and Financial Statements............................ A-19
3.6 Absence of Material Adverse Change.......................... A-20
3.7 Litigation.................................................. A-20
3.8 Interim Operations of the Transitory Subsidiary............. A-20
3.9 Brokers' Fees............................................... A-20
3.10 HSR Act..................................................... A-20
3.11 Nasdaq Requirements......................................... A-20
3.12 Legal Compliance............................................ A-20
3.13 Section 16 Matters.......................................... A-20
ARTICLE IV--COVENANTS......................................................... A-20
4.1 Closing Efforts............................................. A-20
4.2 Governmental and Third-Party Notices and Consents........... A-21
4.3 Special Meeting, Prospectus/Proxy Statement and Registration
Statement................................................... A-21
4.4 Operation of Business....................................... A-22
4.5 Access to Information....................................... A-23
4.6 Notice of Breaches.......................................... A-24
4.7 Exclusivity................................................. A-24
4.8 Expenses.................................................... A-25
4.9 Agreements from Certain Affiliates of the Company........... A-25
4.10 Listing of Merger Shares.................................... A-25
4.11 Tax-Free Treatment.......................................... A-25
4.12 Nonsolicitation............................................. A-25
4.13 Employee Benefit Arrangements............................... A-25
4.14 Blue Sky Laws............................................... A-26
4.15 Rule 144 Information........................................ A-26
4.16 Legal Requirements.......................................... A-26
4.17 Non-Disclosure, Non-Solicitation and Assignment Agreement... A-26
4.18 Operation of Business of Buyer.............................. A-26
ARTICLE V--CONDITIONS TO CONSUMMATION OF MERGER............................... A-26
5.1 Conditions to Each Party's Obligations...................... A-26
5.2 Conditions to Obligations of the Buyer and the Transitory
Subsidiary.................................................. A-27
5.3 Conditions to Obligations of the Company.................... A-28
ARTICLE VI--INDEMNIFICATION................................................... A-29
6.1 Indemnification by the Company Stockholders................. A-29
6.2 Indemnification by the Buyer................................ A-29
6.3 Indemnification Claims...................................... A-29
6.4 Survival of Representations and Warranties.................. A-31
6.5 Limitations................................................. A-32
ARTICLE VII--TERMINATION...................................................... A-32
7.1 Termination of Agreement.................................... A-32
7.2 Effect of Termination....................................... A-33
ARTICLE VIII--DEFINITIONS..................................................... A-34
ARTICLE IX--MISCELLANEOUS..................................................... A-36
9.1 Press Releases and Announcements............................ A-36
9.2 No Third Party Beneficiaries................................ A-37
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9.3 Entire Agreement............................................ A-37
9.4 Succession and Assignment................................... A-37
9.5 Counterparts; Facsimile Signature........................... A-37
9.6 Headings.................................................... A-37
9.7 Notices..................................................... A-37
9.8 Choice of Law............................................... A-38
9.9 Amendments and Waivers...................................... A-38
9.10 Severability................................................ A-38
9.11 Consent to Jurisdiction..................................... A-38
9.12 Construction................................................ A-38
EXHIBITS
Exhibit A Form of Escrow Agreement
Exhibit B Form of Employment Agreement
Exhibit C Form of Restricted Stock Agreement
Form of Non-Disclosure, Non-Solicitation and Assignment
Exhibit D Agreement
Exhibit E Form of Affiliate Agreement
Exhibit F Form of Seller Legal Opinion
Exhibit G Form of Buyer Legal Opinion
Exhibit H Form of Registration Rights Agreement
</TABLE>
<PAGE>
AGREEMENT AND PLAN OF MERGER
AGREEMENT AND PLAN OF MERGER entered into as of January 26, 2000 (the
"Agreement"), by and among Breakaway Solutions, Inc., a Delaware corporation
(the "Buyer"), Benedict Acquisition Corp., a Delaware corporation and a
wholly-owned subsidiary of the Buyer (the "Transitory Subsidiary"), and Eggrock
Partners, Inc., a Delaware corporation (the "Company"). The Buyer, the
Transitory Subsidiary and the Company are referred to collectively herein as the
"Parties."
This Agreement contemplates a merger of the Transitory Subsidiary with and
into the Company. In such merger, the stockholders of the Company will receive
common stock of the Buyer in exchange for their capital stock of the Company.
The Boards of Directors of Buyer, Transitory Subsidiary and the Company
believe it is in the best interests of their respective companies and the
stockholders of their respective companies that the Company and Transitory
Subsidiary combine into a single company through the statutory merger of
Transitory Subsidiary with and into the Company and, in furtherance thereof,
have approved such merger.
The parties intend, by executing this Agreement, to adopt a plan of
reorganization within the meaning of Section 368 of the Internal Revenue Code of
1986, as amended (the "Code") and to cause the Merger to qualify as a
reorganization under the provisions of Section 368(a)(2)(E) of the Code.
Now, therefore, in consideration of the representations, warranties and
covenants herein contained, the Parties agree as follows.
ARTICLE I.
THE MERGER
1.1 THE MERGER. Upon and subject to the terms and conditions of this
Agreement, the Certificate of Merger to be filed with the Secretary of State of
the State of Delaware and the applicable provisions of Delaware General
Corporation Law ("DGCL"), the Transitory Subsidiary shall merge with and into
the Company (with such merger referred to herein as the "Merger") at the
Effective Time (as defined below). From and after the Effective Time, the
separate corporate existence of the Transitory Subsidiary shall cease and the
Company shall continue as the surviving corporation in the Merger (the
"Surviving Corporation"). The "Effective Time" shall be the time at which the
Surviving Corporation files a certificate of merger or other appropriate
documents prepared and executed in accordance with Section 251(c) of the
Delaware General Corporation Law (the "Certificate of Merger") with the
Secretary of State of the State of Delaware, provided that the Effective Time
may be such later time as the parties may agree to and designate in such filing
in accordance with applicable law as the effective time of the Merger. The
Merger shall have the effects set forth in Section 259 of the Delaware General
Corporation Law.
1.2 THE CLOSING. The closing of the transactions contemplated by this
Agreement (the "Closing") shall take place at the offices of Hale and Dorr LLP
in Boston, Massachusetts, commencing at 9:00 a.m. local time on a date specified
by the Buyer and the Company, which date shall not be later than two business
days after (i) all of the conditions to the obligations of the Parties to
consummate the transactions contemplated hereby (excluding the closing
conditions identified in Sections 5.2 (f) and 5.2(g)) have been satisfied or
waived and (ii) the closing conditions identified in Sections 5.2(e),
5.2(f) and 5.2(g) are susceptible of being satisfied (the "Closing Date").
1.3 ACTIONS AT THE CLOSING. At the Closing:
(a) the Company shall deliver to the Buyer and the Transitory Subsidiary
the various certificates, instruments and documents referred to in Section
5.2;
A-1
<PAGE>
(b) the Buyer and the Transitory Subsidiary shall deliver to the Company
the various certificates, instruments and documents referred to in Section
5.3;
(c) the Surviving Corporation shall file with the Secretary of State of
the State of Delaware the Certificate of Merger;
(d) the Buyer shall deliver certificates for the Initial Shares (as
defined below) to a bank trust company or other entity reasonably
satisfactory to the Company appointed by the Buyer to act as the exchange
agent (the "Exchange Agent") in accordance with Section 1.7; and
(e) the Buyer, Maureen Ellenberger (the "Indemnification
Representative") and State Street Bank and Trust Company (the "Escrow
Agent") shall execute and deliver the Escrow Agreement attached hereto as
Exhibit A (the "Escrow Agreement") and the Buyer shall deliver to the Escrow
Agent a certificate for the Escrow Shares (as defined below) being placed in
escrow on the Closing Date pursuant to Section 1.10.
1.4 ADDITIONAL ACTION. The Surviving Corporation may, at any time after
the Effective Time, take any action, including executing and delivering any
document, in the name and on behalf of either the Company or the Transitory
Subsidiary, necessary in order to consummate the transactions contemplated by
this Agreement, so long as such action is not inconsistent with this Agreement.
1.5 CONVERSION OF SHARES. At the Effective Time, by virtue of the Merger
and without any action on the part of any Party or the holder of any of the
following securities:
(a) Each share of voting common stock, $.01 par value per share and each
share of non-voting common stock, $.01 par value per share, of the Company
(together, "Common Shares") issued and outstanding immediately prior to the
Effective Time (other than Common Shares owned beneficially by the Buyer or
the Transitory Subsidiary, Dissenting Shares (as defined below) and Common
Shares held in the Company's treasury) shall be converted into and represent
the right to receive (subject to the provisions of Section 1.10) such number
of shares of common stock, $.000125 par value per share, of the Buyer
("Buyer Common Stock") as is equal to the Common Conversion Ratio (as
defined below).
(b) Each share of Series A Convertible Preferred Stock, $.01 par value
per share, of the Company ("Preferred Shares"; and, together with the Common
Shares, the "Company Shares") issued and outstanding immediately prior to
the Effective Time (other than Preferred Shares owned beneficially by the
Buyer or the Transitory Subsidiary, Dissenting Shares and Preferred Shares
held in the Company's treasury) shall be converted into and represent the
right to receive (subject to the provisions of Section 1.10) such number of
shares of Buyer Common Stock as is equal to the Preferred Conversion Ratio
(as defined below).
(c) The "Common Conversion Ratio" shall be the result obtained by
dividing (i) 3,636,000, as adjusted in the event of any stock split, stock
dividend, reverse stock split or similar event, by (ii) the number of
outstanding Common Shares immediately prior to the Effective Time (after
giving effect to the conversion into Common Shares of all outstanding
Preferred Shares) plus the number of outstanding Common Shares subject to
Options (as defined herein). The "Preferred Conversion Ratio" shall be the
result obtained by multiplying the Common Conversion Ratio by the number of
Common Shares into which each Preferred Share is convertible immediately
prior to the Effective Time. The Parties acknowledge and agree that, as of
the date of this Agreement, the Common Conversion Ratio would be 0.25592504
and the Preferred Conversion Ratio would be 0.25592504. Stockholders of
record of the Company immediately prior to the Effective Time ("Company
Stockholders") shall be entitled to receive immediately 90% of the shares of
Buyer Common Stock into which their Company Shares were converted pursuant
to this Section 1.5 (the "Initial Shares"); the remaining 10% of the shares
of Buyer Common Stock into which the Company Shares were converted pursuant
to this Section 1.5 (the "Escrow Shares"), shall be
A-2
<PAGE>
deposited in escrow pursuant to Section 1.10 and shall be held and disposed
of in accordance with the terms of the Escrow Agreement. The Initial Shares
and the Escrow Shares shall together be referred to herein as the "Merger
Shares."
(d) Each Company Share held in the Company's treasury immediately prior
to the Effective Time and each Company Share owned beneficially by the Buyer
or the Transitory Subsidiary shall be cancelled and retired without payment
of any consideration therefor.
(e) Each share of common stock, $.01 par value per share, of the
Transitory Subsidiary issued and outstanding immediately prior to the
Effective Time shall be converted into and thereafter evidence one share of
common stock, $.01 par value per share, of the Surviving Corporation.
1.6 DISSENTING SHARES.
(a) For purposes of this Agreement, "Dissenting Shares" means Company
Shares held as of the Effective Time by a Company Stockholder who has not
voted such Company Shares in favor of the adoption of this Agreement and the
Merger and with respect to which appraisal shall have been duly demanded and
perfected in accordance with Section 262 of the Delaware General Corporation
Law and not effectively withdrawn or forfeited prior to the Effective Time.
Dissenting Shares shall not be converted into or represent the right to
receive Merger Shares, unless such Company Stockholder shall have forfeited
his, her or its right to appraisal under the Delaware General Corporation
Law or properly withdrawn, his, her or its demand for appraisal. If such
Company Stockholder has so forfeited or withdrawn his, her or its right to
appraisal of Dissenting Shares, then (i) as of the occurrence of such event,
such holder's Dissenting Shares shall cease to be Dissenting Shares and
shall be converted into and represent the right to receive the Merger Shares
issuable in respect of such Company Shares pursuant to Section 1.5, and
(ii) promptly following the occurrence of such event, the Buyer shall
deliver to the Exchange Agent a certificate representing 90% of the Merger
Shares to which such holder is entitled pursuant to Section 1.5 (which
shares shall be considered Initial Shares for all purposes of this
Agreement) and shall deliver to the Escrow Agent a certificate representing
the remaining 10% of the Merger Shares to which such holder is entitled
pursuant to Section 1.5 (which shares shall be considered Escrow Shares for
all purposes of this Agreement).
(b) The Company shall give the Buyer (i) prompt notice of any written
demands for appraisal of any Company Shares, withdrawals of such demands,
and any other instruments that relate to such demands received by the
Company and (ii) the opportunity to direct all negotiations and proceedings
with respect to demands for appraisal under the Delaware General Corporation
Law. The Company shall not, except with the prior written consent of the
Buyer, make any payment with respect to any demands for appraisal of Company
Shares or offer to settle or settle any such demands.
1.7 EXCHANGE OF SHARES
(a) Prior to the Effective Time, the Buyer shall appoint the Exchange
Agent to effect the exchange for the Initial Shares of certificates that,
immediately prior to the Effective Time, represented Company Shares
converted into Merger Shares pursuant to Section 1.5 (including any Company
Shares referred to in the last sentence of Section 1.6(a)) (the
"Certificates"). On the Closing Date, the Buyer shall deliver to the
Exchange Agent, in trust for the benefit of holders of Certificates, a stock
certificate (issued in the name of the Exchange Agent or its nominee)
representing the Initial Shares, as described in Section 1.5. As soon as
practicable after the Effective Time, the Buyer shall cause the Exchange
Agent to send a notice and a transmittal form to each holder of a
Certificate advising such holder of the effectiveness of the Merger and the
procedure for surrendering to the Exchange Agent such Certificate in
exchange for the Initial Shares issuable pursuant to Section 1.5, plus cash
in lieu of any fractional shares, as provided in
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<PAGE>
Section 1.8 below. Each holder of a Certificate, upon proper surrender
thereof to the Exchange Agent in accordance with the instructions in such
notice, shall be entitled to receive in exchange therefor (subject to any
taxes required to be withheld) the Initial Shares issuable pursuant to
Section 1.5. Until properly surrendered, each such Certificate shall be
deemed for all purposes to evidence only the right to receive a certificate
for the Initial Shares issuable pursuant to Section 1.5. Holders of
Certificates shall not be entitled to receive certificates for the Initial
Shares to which they would otherwise be entitled until such Certificates are
properly surrendered.
(b) If any Initial Shares are to be issued in the name of a person other
than the person in whose name the Certificate surrendered in exchange
therefor is registered, it shall be a condition to the issuance of such
Initial Shares that (i) the Certificate so surrendered shall be
transferable, and shall be properly assigned, endorsed or accompanied by
appropriate stock powers, (ii) such transfer shall otherwise be proper and
(iii) the person requesting such transfer shall pay to the Exchange Agent
any transfer or other taxes payable by reason of the foregoing or establish
to the satisfaction of the Exchange Agent that such taxes have been paid or
are not required to be paid. Notwithstanding the foregoing, neither the
Exchange Agent nor any Party shall be liable to a holder of Company Shares
for any Initial Shares issuable to such holder pursuant to Section 1.5 that
are delivered to a public official pursuant to applicable abandoned
property, escheat or similar laws.
(c) In the event any Certificate shall have been lost, stolen or
destroyed, upon the making of an affidavit of that fact by the person
claiming such Certificate to be lost, stolen or destroyed, the Buyer shall
issue in exchange for such lost, stolen or destroyed Certificate the Initial
Shares issuable in exchange therefor pursuant to Section 1.5. The Board of
Directors of the Buyer may, in its discretion and as a condition precedent
to the issuance thereof, require the owner of such lost, stolen or destroyed
Certificate to give the Buyer a bond in such sum as it may direct as
indemnity against any claim that may be made against the Buyer with respect
to the Certificate alleged to have been lost, stolen or destroyed.
(d) No dividends or other distributions that are payable to the holders
of record of Buyer Common Stock as of a date on or after the Closing Date
shall be paid to former Company Stockholders entitled by reason of the
Merger to receive Initial Shares until such holders surrender their
Certificates for certificates representing the Merger Shares. Upon such
surrender, the Buyer shall pay or deliver to the persons in whose name the
certificates representing such Initial Shares are issued any dividends or
other distributions that are payable to the holders of record of Buyer
Common Stock as of a date on or after the Closing Date and which were paid
or delivered between the Effective Time and the time of such surrender;
provided that no such person shall be entitled to receive any interest on
such dividends or other distributions.
1.8 FRACTIONAL SHARES. No certificates or scrip representing fractional
Merger Shares shall be issued to former Company Stockholders upon the surrender
for exchange of Certificates, and such former Company Stockholders shall not be
entitled to any voting rights, rights to receive any dividends or distributions
or other rights as a stockholder of the Buyer with respect to any fractional
Merger Shares that would have otherwise been issued to such former Company
Stockholders. In lieu of any fractional Merger Shares that would have otherwise
been issued, each former Company Stockholder that would have been entitled to
receive a fractional Merger Share shall, upon proper surrender of such person's
Certificates, receive a cash payment rounded to the nearest cent equal to the
average closing price per share of the Buyer Common Stock on the Nasdaq National
Market, as reported by Nasdaq, determined based on the closing prices on the
twenty (20) trading days immediately preceding the second day prior to the
Closing Date, multiplied by the fraction of a share that such Company
Stockholder would otherwise be entitled to receive.
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<PAGE>
1.9 OPTIONS.
(a) As of the Effective Time, by virtue of the Merger, the Company's
1999 Stock Option and Grant Plan (the "Company Stock Plan") shall be assumed
by the Buyer. As of the Effective Time, all options to purchase Common
Shares issued by the Company pursuant to the Company Stock Plan or otherwise
("Options"), whether vested or unvested, and all option plans of the Company
then in effect shall be assumed by the Buyer. Immediately after the
Effective Time, each Option outstanding immediately prior to the Effective
Time shall be deemed to constitute an option to acquire, on the same terms
and conditions as were applicable under such Option at the Effective Time,
such number of shares of Buyer Common Stock as is equal to the number of
Common Shares subject to the unexercised portion of such Option multiplied
by the Common Conversion Ratio (with any fraction resulting from such
multiplication to be rounded down to the nearest whole number). The exercise
price per share of each such assumed Option shall be equal to the aggregate
exercise price of such Option immediately prior to the Effective Time,
divided by the aggregate number of shares of Buyer Common Stock purchasable
pursuant to such Option after the Effective Time (rounded up to the nearest
whole cent). The term, exercisability, vesting schedule, status as an
"incentive stock option" under Section 422 of the Internal Revenue Code of
1986 (as amended, the "Code"), if applicable, and all of the other terms of
the Options shall otherwise remain unchanged.
(b) As soon as practicable after the Effective Time, the Buyer or the
Surviving Corporation shall deliver to the holders of Options appropriate
notices setting forth such holders' rights pursuant to such Options, as
amended by this Section 1.9, and the agreements evidencing such Options
shall continue in effect on the same terms and conditions (subject to the
amendments provided for in this Section 1.9 and such notice).
(c) The Buyer shall take all corporate action necessary to reserve for
issuance a sufficient number of shares of Buyer Common Stock for delivery
upon exercise of the Options assumed in accordance with this Section 1.9.
Within five business days following the Effective Time, the Buyer shall file
a Registration Statement on Form S-8 (or any successor form) under the
Securities Act of 1933 (as amended, the "Securities Act") with respect to
all shares of Buyer Common Stock subject to such Options that may be
registered on a Form S-8, and shall use its best efforts to maintain the
effectiveness of such Registration Statement for so long as such Options
remain outstanding.
1.10 ESCROW.
(a) On the Closing Date, the Buyer shall deliver to the Escrow Agent a
certificate (issued in the name of the Escrow Agent or its nominee)
representing the Escrow Shares, as described in Section 1.5, for the purpose
of securing and as the sole remedy for satisfying the indemnification
obligations of the Indemnifying Stockholders (as defined in Section 6.1) set
forth in this Agreement. The Escrow Shares shall be held by the Escrow Agent
under the Escrow Agreement pursuant to the terms thereof. The Escrow Shares
shall be held as a trust fund and shall not be subject to any lien,
attachment, trustee process or any other judicial process of any creditor of
any party, and shall be held and disbursed solely for the purposes and in
accordance with the terms of the Escrow Agreement.
(b) The adoption of this Agreement and the approval of the Merger by the
Company Stockholders shall constitute approval of the Escrow Agreement and
of all of the arrangements relating thereto, including without limitation
the placement of the Escrow Shares in escrow and the appointment of the
Indemnification Representatives.
1.11 CERTIFICATE OF INCORPORATION AND BY-LAWS.
(a) The Certificate of Incorporation of the Surviving Corporation
immediately following the Effective Time shall be the same as the
Certificate of Incorporation of the Transitory Subsidiary immediately prior
to the Effective Time until duly amended in accordance with applicable law
and such certificate of incorporation, except that (1) the name of the
corporation set forth therein shall be changed to the name of the Company
and (2) the identity of the incorporator shall be deleted.
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(b) The By-laws of the Surviving Corporation immediately following the
Effective Time shall be the same as the By-laws of the Transitory Subsidiary
immediately prior to the Effective Time until duly amended in accordance
with applicable law, the Surviving Corporation's certificate of
incorporation and such By-laws, except that the name of the corporation set
forth therein shall be changed to the name of the Company.
1.12 DIRECTORS AND EXECUTIVE OFFICERS. At the Effective Time, the
directors of Transitory Subsidiary immediately prior to the Effective Time shall
be the directors of the Surviving Corporation, to hold office until such time as
such directors resign, are removed or their respective successors are duly
elected or appointed and qualified. The officers of Transitory Subsidiary
immediately prior to the Effective Time shall be the officers of the Surviving
Corporation, to hold office until such time as such officers resign, are removed
or their respective successors are duly elected or appointed and qualified.
1.13 TAX CONSEQUENCES. It is intended by all of the parties hereto that
the Merger will qualify as a reorganization within the meaning of Section
368(a) of the Code. All of the parties to this Agreement agree to report the
Merger, for all purposes, in a manner which is consistent with the preceding
sentence.
1.14 EMPLOYMENT RELATED MATTERS. Simultaneously with the execution of this
Agreement, Buyer shall enter into (i) employment agreements with each of Maureen
Ellenberger, Michael Mordas and Vijay Manwani in the forms attached hereto as
Exhibit B; (ii) stock restriction agreements with each of Maureen Ellenberger,
Michael Mordas, Vijay Manwani in the forms attached hereto as Exhibit C; and
(iii) non-competition/non-solicitation agreements with each of Maureen
Ellenberger, Michael Mordas and Vijay Manwani in the form attached hereto as
Exhibit D. Each of the agreements specified in this Section 1.14 shall be
effective only upon the Closing and shall terminate without liability to either
party thereto upon the termination of this Agreement in accordance with Section
7.1.
1.15 NO FURTHER RIGHTS. From and after the Effective Time, no Company
Shares shall be deemed to be outstanding, and holders of Certificates shall
cease to have any rights with respect thereto, except as provided herein or by
law.
1.16 CLOSING OF TRANSFER BOOKS. At the Effective Time, the stock transfer
books of the Company shall be closed and no transfer of Company Shares shall
thereafter be made. If, after the Effective Time, Certificates are presented to
the Buyer, the Surviving Corporation or the Exchange Agent, they shall be
cancelled and exchanged for Initial Shares in accordance with Section 1.5,
subject to Section 1.10 and to applicable law in the case of Dissenting Shares.
ARTICLE II.
REPRESENTATIONS AND WARRANTIES OF THE COMPANY
The Company represents and warrants to the Buyer that the statements
contained in this Article II are true and correct, except as set forth in the
disclosure schedule provided by the Company to the Buyer on the date hereof (the
"Disclosure Schedule"). The Disclosure Schedule shall be arranged in sections
and paragraphs corresponding to the numbered and lettered sections and
paragraphs contained in this Article II. The disclosures in any section or
paragraph of the Disclosure Schedule shall qualify as disclosures with respect
to other sections and paragraphs in this Article II only to the extent that it
is reasonably apparent from the reading of such disclosure that it also
qualifies or applies to such other sections or paragraphs. Any reference in this
Article II to an agreement being "enforceable" shall be deemed to be qualified
to the extent such enforceability is subject to (i) laws of general application
relating to bankruptcy, insolvency, moratorium and the relief of debtors,
(ii) the availability of specific performance, injunctive relief and other
equitable remedies and (iii) limitations that may exist with respect to
indemnification provisions contained in any registration rights or similar
agreements. For purposes of this Article II the phrase "to the knowledge of the
Company" or any phrase of similar
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import shall be deemed to refer to the actual knowledge of Maureen Ellenberger,
Michael Mordis and Vijay Manwani.
2.1 ORGANIZATION, QUALIFICATION AND CORPORATE POWER. The Company is a
corporation duly organized, validly existing and in good standing under the laws
of the State of Delaware. The Company is duly qualified to conduct business and
is in good standing under the laws of the Commonwealth of Massachusetts, the
States of Florida and Minnesota, the District of Columbia and each other
jurisdiction in which the nature of its businesses or the ownership or leasing
of its properties requires such qualification, except where the failure to be so
qualified or in good standing, individually or in the aggregate, has not had and
would not reasonably be expected to have a Company Material Adverse Effect (as
defined below). The Company has all requisite corporate power and authority to
carry on the businesses in which it is engaged and to own and use the properties
owned and used by it. The Company has furnished to the Buyer complete and
accurate copies of its Certificate of Incorporation and By-laws each as amended
to date. The Company is not in default under or in violation of any provision of
its Certificate of Incorporation or By-laws. For purposes of this Agreement,
"Company Material Adverse Effect" means a material adverse effect on the assets,
business, financial condition, results of operations of the Company.
2.2 CAPITALIZATION. The authorized capital stock of the Company consists
of (a) 20,000,000 shares of voting common stock, par value $.01 per share, of
which, as of the date of this Agreement, 6,750,000 are issued and outstanding
and no shares are held in the treasury of the Company, (b) 10,000,000 shares of
non-voting common stock, par value $.01 per share, of which, as of the date of
this Agreement, 2,365,692 are issued and outstanding and no shares are held in
the treasury of the Company, and (c) 5,000,000 Preferred Shares, of which, as of
the date of this Agreement, 3,000,000 shares are issued and outstanding. Section
2.2(a) of the Disclosure Schedule sets forth a complete and accurate list of
(i) all stockholders of the Company, indicating the number and class or series
of Company Shares held by each stockholder and (for Company Shares other than
Common Shares) the number of Common Shares (if any) into which such Company
Shares are convertible, (ii) all outstanding Options, indicating (A) the holder
thereof, (B) the number and class or series of Company Shares subject to each
Option, (C) the exercise price, date of grant, vesting schedule and expiration
date for each Option, and (D) any terms regarding the acceleration of vesting,
and (iii) all stock option plans and other stock or equity-related plans of the
Company. All of the issued and outstanding Company Shares are, and all Company
Shares that may be issued upon exercise of Options will be (upon issuance in
accordance with their terms), duly authorized, validly issued, fully paid,
nonassessable and free of all preemptive rights. There are no outstanding or
authorized options, warrants, rights, agreements or commitments to which the
Company is a party or which are binding upon the Company providing for the
issuance or redemption of any of its capital stock. There are no outstanding or
authorized stock appreciation, phantom stock or similar rights with respect to
the Company. There are no agreements to which the Company is a party or by which
it is bound with respect to the voting (including without limitation voting
trusts or proxies), registration under the Securities Act, or sale or transfer
(including without limitation agreements relating to pre-emptive rights, rights
of first refusal, co-sale rights or "drag-along" rights) of any securities of
the Company. To the knowledge of the Company, there are no agreements among
other parties, to which the Company is not a party and by which it is not bound,
with respect to the voting (including without limitation voting trusts or
proxies) or sale or transfer (including without limitation agreements relating
to rights of first refusal, co-sale rights or "drag-along" rights) of any
securities of the Company. All of the issued and outstanding Company Shares were
issued in compliance with applicable federal and state securities laws.
2.3 AUTHORIZATION OF TRANSACTION. The Company has all requisite power and
authority to execute and deliver this Agreement and to perform its obligations
hereunder. The execution and delivery by the Company of this Agreement and,
subject to the adoption of this Agreement and the approval of the Merger by a
majority of the votes represented by the outstanding Company Shares entitled to
vote on
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this Agreement and the Merger (the "Requisite Stockholder Approval"), the
consummation by the Company of the transactions contemplated hereby have been
duly and validly authorized by all necessary corporate action on the part of the
Company. Without limiting the generality of the foregoing, the Board of
Directors of the Company, at a meeting duly called and held, by the unanimous
vote of all directors (i) determined that the Merger is fair to and in the best
interests of the Company and its stockholders, (ii) adopted this Agreement in
accordance with the provisions of the Delaware General Corporation Law, and
(iii) directed that this Agreement and the Merger be submitted to the
stockholders of the Company for their adoption and approval and resolved to
recommend that the stockholders of Company vote in favor of the adoption of this
Agreement and the approval of the Merger. This Agreement has been duly and
validly executed and delivered by the Company and constitutes a valid and
binding obligation of the Company, enforceable against the Company in accordance
with its terms.
2.4 NONCONTRAVENTION. Subject to the filing of the Certificate of Merger
as required by the Delaware General Corporation Law, neither the execution and
delivery by the Company of this Agreement, nor the consummation by the Company
of the transactions contemplated hereby, will (a) conflict with or violate any
provision of the Certificate of Incorporation or By-laws of the Company, (b)
require on the part of the Company any filing with, or any permit,
authorization, consent or approval of, any court, arbitrational tribunal,
administrative agency or commission or other governmental or regulatory
authority or agency (a "Governmental Entity") , (c) conflict with, result in a
breach of, constitute (with or without due notice or lapse of time or both) a
default under, result in the acceleration of obligations under, create in any
party the right to terminate, modify or cancel, or require any notice, consent
or waiver under, any contract or instrument to which the Company is a party or
by which the Company is bound or to which any of its assets is subject, (d)
result in the imposition of any Security Interest (as defined below) upon any
assets of the Company other than non-material discrete items of software or
equipment or (e) violate any order, writ, injunction, decree, statute, rule or
regulation applicable to the Company or any of its properties or assets. For
purposes of this Agreement: "Security Interest" means any mortgage, pledge,
security interest, encumbrance, charge or other lien (whether arising by
contract or by operation of law), other than (i) mechanic's, materialmen's, and
similar liens, (ii) liens arising under worker's compensation, unemployment
insurance, social security, retirement, and similar legislation, and (iii) liens
on goods in transit incurred pursuant to documentary letters of credit, in each
case arising in the Ordinary Course of Business (as defined below) of the
Company and not material to the Company; and "Ordinary Course of Business" means
the ordinary course of the Company's business.
2.5 SUBSIDIARIES.
(a) The Company has no subsidiaries.
(b) The Company does not control or have any equity participation or
similar interest in any corporation, partnership, limited liability company,
joint venture, trust or other business association.
2.6 FINANCIAL STATEMENTS. The Company and its predecessor limited
liability company have provided to the Buyer (a) the audited consolidated
balance sheets and statements of income, changes in stockholders' equity and
cash flows of the Company as of and for each of the last two fiscal years; and
(b) the audited consolidated balance sheet and statements of income, changes in
stockholders' equity and cash flows as of and for the nine months ended as of
September 30, 1999 (the "Most Recent Balance Sheet Date"). Such financial
statements (collectively, the "Financial Statements") have been prepared in
accordance with United States generally accepted accounting principles ("GAAP")
applied on a consistent basis throughout the periods covered thereby and
consistent with each other (except as may be indicated in the notes thereto),
fairly present in all material respects the financial
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condition, results of operations and cash flows of the Company as of the
respective dates thereof and for the periods referred to therein and are
consistent with the books and records of the Company.
2.7 ABSENCE OF CERTAIN CHANGES. Since the Most Recent Balance Sheet Date,
(a) there has occurred no event or development which has had, or could
reasonably be expected to have in the future, a Company Material Adverse Effect
and (b) the Company has not taken any of the actions set forth in paragraph
(i) of Section 4.4.
2.8 UNDISCLOSED LIABILITIES. The Company has no liability (whether known
or unknown, whether absolute or contingent, whether liquidated or unliquidated
and whether due or to become due), except for (a) liabilities shown on the
balance sheet referred to in clause (b) of Section 2.6 (the "Most Recent Balance
Sheet"), (b) liabilities which have arisen since the Most Recent Balance Sheet
Date in the Ordinary Course of Business and (c) contractual and other
liabilities incurred in the Ordinary Course of Business which are not required
by GAAP to be reflected on a balance sheet.
2.9 TAX MATTERS.
(a) For purposes of this Agreement, the following terms shall have the
following meanings:
(i) "Taxes" means all taxes, charges, fees, levies or other similar
assessments or liabilities, including without limitation income, gross
receipts, ad valorem, premium, value-added, excise, real property,
personal property, sales, use, transfer, withholding, employment,
unemployment insurance, social security, business license, business
organization, environmental, workers compensation, payroll, profits,
license, lease, service, service use, severance, stamp, occupation,
windfall profits, customs, duties, franchise and other taxes imposed by
the United States of America or any state, local or foreign government,
or any agency thereof, or other political subdivision of the United
States or any such government, and any interest, fines, penalties,
assessments or additions to tax resulting from, attributable to or
incurred in connection with any tax or any contest or dispute thereof.
(ii) "Tax Returns" means all reports, returns, declarations,
statements or other information required to be supplied to a taxing
authority in connection with Taxes.
(b) The Company has filed on a timely basis all Tax Returns that it was
required to file, and all such Tax Returns were complete and accurate in all
material respects. The Company is not and has not ever been a member of a
group of corporations with which it has filed (or been required to file)
consolidated, combined or unitary Tax Returns. The Company has paid on a
timely basis all Taxes that were due and payable. The unpaid Taxes of the
Company for tax periods through the Most Recent Balance Sheet Date do not
exceed the accruals and reserves for Taxes (excluding accruals and reserves
for deferred Taxes established to reflect timing differences between book
and Tax income) set forth on the Most Recent Balance Sheet. The Company has
no actual or potential liability for any Tax obligation of any taxpayer
(including without limitation any affiliated group of corporations or other
entities that included the Company during a prior period) other than the
Company and the predecessor limited liability company. All Taxes that the
Company is or was required by law to withhold or collect have been duly
withheld or collected and, to the extent required, have been paid to the
proper Governmental Entity.
(c) The Company has delivered to the Buyer complete and accurate copies
of all federal income Tax Returns, examination reports and statements of
deficiencies assessed against or agreed to by the Company or its predecessor
since September 17, 1997. The Company has delivered or made available to the
Buyer complete and accurate copies of all other Tax Returns of the Company
or its predecessor with all related examination reports and statements of
deficiency for all periods from and after September 17, 1997. No examination
or audit of any Tax Return of the Company by any Governmental Entity is
currently in progress or, to the knowledge of the Company, threatened or
contemplated. The Company has not been informed by any jurisdiction
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that the jurisdiction believes that the Company was required to file any Tax
Return that was not filed. The Company has not waived any statute of
limitations with respect to Taxes or agreed to an extension of time with
respect to a Tax assessment or deficiency.
(d) The Company: (i) is not a "consenting corporation" within the
meaning of Section 341(f) of the Code, and none of the assets of the Company
are subject to an election under Section 341(f) of the Code; (ii) has not
been a United States real property holding corporation within the meaning of
Section 897(c)(2) of the Code during the applicable period specified in
Section 897(c)(l)(A)(ii) of the Code; (iii) has not made any payments, is
not obligated to make any payments, and is not a party to any agreement that
could obligate it to make any payment that may be treated as an "excess
parachute payment" under Section 280G of the Code; (iv) has no actual or
potential liability for any Taxes of any person (other than the Company)
under Treasury Regulation Section 1.1502-6 (or any similar provision of
federal, state, local, or foreign law), or as a transferee or successor, by
contract, or otherwise; or (iv) is or has been required to make a basis
reduction pursuant to Treasury Regulation Section 1.1502-20(b) or Treasury
Regulation Section 1.337(d)-2(b).
2.10 ASSETS. The Company owns or leases all material tangible assets
necessary for the conduct of its businesses as presently conducted. Each such
tangible asset is free from material defects, has been maintained in accordance
with normal industry practice, is in good operating condition and repair
(subject to normal wear and tear) and is suitable for the purposes for which it
presently is used. Except as disclosed in Section 2.10 of the Disclosure
Schedule, no material asset of the Company (tangible or intangible) is subject
to any Security Interest.
2.11 OWNED REAL PROPERTY. The Company does not own any real property.
2.12 REAL PROPERTY LEASES. Section 2.12 of the Disclosure Schedule lists
all real property leased or subleased to or by the Company and lists the term of
such lease, any extension and expansion options, and the rent payable
thereunder. The Company has delivered to the Buyer complete and accurate copies
of the leases and subleases (as amended to date) listed in Section 2.12 of the
Disclosure Schedule. With respect to each lease and sublease listed in Section
2.12 of the Disclosure Schedule:
(a) the lease or sublease is legal, valid, binding, enforceable and in
full force and effect;
(b) the lease or sublease will continue to be legal, valid, binding,
enforceable and in full force and effect immediately following the Closing
in accordance with the terms thereof as in effect immediately prior to the
Closing;
(c) neither the Company nor, to the knowledge of the Company, any other
party, is in material breach or violation of, or default under, any such
lease or sublease, and, to the knowledge of the Company, no event has
occurred, is pending or, is threatened, which, after the giving of notice,
with lapse of time, would constitute a material breach or default by the
Company or, to the knowledge of the Company, any other party under such
lease or sublease;
(d) the Company has not assigned, transferred, conveyed, mortgaged,
deeded in trust or encumbered any interest in the leasehold or subleasehold;
and
(e) the Company is not aware of any Security Interest, easement,
covenant or other restriction applicable to the real property subject to
such lease, except for recorded easements, covenants and other restrictions
which do not materially impair the current uses or the occupancy by the
Company of the property subject thereto.
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2.13 INTELLECTUAL PROPERTY.
(a) The Company owns or has the right to use all Intellectual Property
(as defined below) necessary (i) to use, manufacture, market and distribute
the products manufactured, marketed, sold or licensed, and to provide the
services provided, by the Company to other parties (together, the "Company
Customer Deliverables") or (ii) to operate the Company's internal systems
that are material to the business or operations of the Company, including,
without limitation, computer hardware systems, software applications and
embedded systems (the "Company Internal Systems"; the Intellectual Property
owned by or licensed to the Company and incorporated in or underlying the
Customer Deliverables or the Internal Systems is referred to herein as the
"Company Intellectual Property"). Each item of Company Intellectual Property
will be owned or available for use by the Surviving Corporation immediately
following the Closing on substantially identical terms and conditions as it
was immediately prior to the Closing. The Company has taken commercially
reasonable measures to protect the proprietary nature of each item of
Company Intellectual Property. To the knowledge of the Company, (a) no other
person or entity has any rights to any of the Company Intellectual Property
owned by the Company (except pursuant to agreements or licenses specified in
Section 2.13(c) of the Disclosure Schedule), and (b) no other person or
entity is infringing, violating or misappropriating any of the Company
Intellectual Property. For purposes of this Agreement, "Intellectual
Property" means all (i) patents and patent applications, (ii) copyrights and
registrations thereof, (iii) mask works and registrations and applications
for registration thereof, (iv) computer software, data and documentation,
(v) trade secrets and confidential business information, whether patentable
or unpatentable and whether or not reduced to practice, know-how,
manufacturing and production processes and techniques, research and
development information, copyrightable works, and financial, marketing and
business data, pricing and cost information, business and marketing plans
and customer and supplier lists and information treated by the Company as
confidential, (vi) trademarks, service marks, trade names, domain names and
applications and registrations therefor and (vii) other proprietary rights
relating to any of the foregoing. Section 2.13(a) of the Disclosure Schedule
lists each patent, patent application, copyright registration or application
therefor, mask work registration or application therefor, and trademark,
service mark and domain name registration or application therefor owned by
the Company.
(b) To the knowledge of the Company, none of the Company Customer
Deliverables, or the marketing, distribution, provision or use thereof,
infringes or violates, or constitutes a misappropriation of, any
Intellectual Property rights of any person or entity. To the knowledge of
the Company, none of the Internal Systems, or the use thereof, infringes or
violates, or constitutes a misappropriation of, any Intellectual Property
rights of any person or entity. Section 2.13(b) of the Disclosure Schedule
lists any formal complaint, claim or notice, or written threat thereof,
received by the Company alleging any such infringement, violation or
misappropriation; and the Company has provided to the Buyer complete and
accurate copies of all written documentation in the possession of the
Company relating to any such complaint, claim, notice or threat. The Company
has provided to the Buyer complete and accurate copies of all written
documentation in the Company's possession relating to claims or disputes
known to the Company concerning any Company Intellectual Property.
(c) Section 2.13(c) of the Disclosure Schedule identifies each material
license or other agreement (or type of material license or other agreement)
pursuant to which the Company has licensed, distributed or otherwise granted
any rights to any third party with respect to, any Company Intellectual
Property.
(d) Section 2.13(d) of the Disclosure Schedule identifies each material
item of Company Intellectual Property that is owned by a party other than
the Company, and the material license or agreement pursuant to which the
Company uses it (excluding off-the-shelf software programs licensed by the
Company pursuant to "shrink wrap" licenses).
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(e) The Company has not disclosed the source code for any of the
software owned by the Company (the "Company Software") or other confidential
information constituting, embodied in or pertaining to the Software to any
person or entity, except pursuant to the agreements listed in Section
2.13(e) of the Disclosure Schedule, and the Company has taken commercially
reasonable measures to prevent disclosure of such source code.
(f) All of the copyrightable materials (including Software) incorporated
in or bundled with the Customer Deliverables have been created by employees
of the Company within the scope of their employment by the Company or by
independent contractors of the Company who have executed agreements
expressly assigning all right, title and interest in such copyrightable
materials to the Company. No portion of such copyrightable materials was
jointly developed with any third party.
(g) To the knowledge of the Company, the Customer Deliverables and the
Internal Systems are free from significant defects or programming errors and
conform in all material respects to the written documentation and
specifications therefor.
(h) All of the Customer Deliverables currently being marketed,
distributed or licensed by the Company or which were marketed, distributed
or licensed by the Company since September 17, 1997, and all Internal
Systems, are Year 2000 Compliant. The Company is not aware of any failure to
be Year 2000 Compliant of any third-party system that is material to the
business or operations of the Company, including without limitation any
system belonging to any of the Company's suppliers, service providers or
customers.
(i) For purposes of this Agreement, "Year 2000 Compliant" means that the
applicable system or item:
(i) accurately receives, records, stores, provides, recognizes and
processes all date and time data from, during, into and between the
twentieth and twenty-first centuries, the years 1999 and 2000 and all
leap years;
(ii) accurately performs all date-dependent calculations and
operations (including, without limitation, mathematical operations,
sorting, comparing and reporting) from, during, into and between the
twentieth and twenty-first centuries, the years 1999 and 2000 and all
leap years; and
(iii) has not malfunctioned, ceased to function or provided invalid or
incorrect results as a result of (x) the change of years from 1999 to
2000, (y) date data, including date data which represents or references
different centuries, different dates during 1999 and 2000, or more than
one century or (z) the occurrence of any particular date; in each case
without human intervention, other than original data entry; provided, in
each case, that all applications, hardware and other systems used in
conjunction with such system or item which are not owned or licensed by
the Company (or the Buyer, as the case may be) correctly exchange date
data with or provide data to such system or item.
2.14 INTENTIONALLY OMITTED.
2.15 CONTRACTS.
(a) Section 2.15 of the Disclosure Schedule lists the following
agreements to which the Company is a party as of the date of this Agreement:
(i) any agreement (or group of related agreements) for the lease of
personal property from or to third parties involving more than $50,000;
(ii) any agreement (or group of related agreements) for the purchase
of products or for the furnishing or receipt of services, (A) involving
more than $50,000 or (B) in which the
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Company has granted "most favored nation" pricing provisions, granted
marketing or distribution rights relating to any services or territory,
agreed to purchase a minimum quantity of goods or services, or agreed to
purchase goods or services exclusively from a certain party;
(iii) any agreement establishing a partnership or joint venture;
(iv) any agreement (or group of related agreements) under which it
has created, incurred, assumed or guaranteed (or may create, incur,
assume or guarantee) indebtedness (including capitalized lease
obligations) in an amount in excess of $50,000 or under which it has
imposed a Security Interest on any of its assets, tangible or intangible;
(v) any agreement concerning noncompetition or restricting the
Company's or a successor's ability to hire employees or retain contracts;
(vi) any employment or consulting agreement which is not terminable
on notice without cost or other liability to the Company, except accrued
pay, vacation pay and the like;
(vii) any agreement involving any officer or director of the Company
or any affiliate (an "Affiliate"), as defined in Rule 12b-2 under the
Securities Exchange Act of 1934, as amended (the "Exchange Act"),
thereof;
(viii) any agreement under which the consequences of a default or
termination would reasonably be expected to have Company Material Adverse
Effect;
(ix) any agreement which contains any provisions requiring the
Company to indemnify any other party thereto (excluding indemnities
contained in agreements for the purchase, sale or license of products
entered into in the Ordinary Course of Business); and
(x) any other material agreement (or group of related agreements) not
entered into in the Ordinary Course of Business involving more than
$50,000.
(b) The Company has delivered to the Buyer a complete and accurate copy
of each agreement listed in Section 2.15 of the Disclosure Schedule. With
respect to each agreement so listed: (i) the agreement is legal, valid,
binding and enforceable and in full force and effect, provided that the
contracts disclosed pursuant to Section 2.15(a)(v) may not be enforceable in
full in all circumstances; (ii) the agreement will continue to be legal,
valid, binding and enforceable and in full force and effect immediately
following the Closing in accordance with the terms thereof as in effect
immediately prior to the Closing; and (iii) neither the Company nor, to the
knowledge of the Company, any other party, is in breach or violation of, or
default under, any such agreement, and no event has occurred, or, to the
knowledge of the Company, is pending or threatened, which, after the giving
of notice, with lapse of time, or otherwise, would constitute a breach or
default by the Company or, to the knowledge of the Company, any other party
under such contract.
2.16 ACCOUNTS RECEIVABLE. All accounts receivable of the Company reflected
on the Most Recent Balance Sheet are valid receivables subject to no setoffs or
counterclaims and are current and collectible (within 90 days after the date on
which it first became due and payable), net of the applicable reserve for bad
debts on the Most Recent Balance Sheet. All accounts receivable reflected in the
financial or accounting records of the Company that have arisen since the Most
Recent Balance Sheet Date are valid receivables subject to no setoffs or
counterclaims and are collectible (within 90 days after the date on which it
first became due and payable), net of a reserve for bad debts in an amount
proportionate to the reserve shown on the Most Recent Balance Sheet.
2.17 POWERS OF ATTORNEY. There are no outstanding powers of attorney
executed on behalf of the Company.
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2.18 INSURANCE. Section 2.18 of the Disclosure Schedule lists each
insurance policy (including fire, theft, casualty, general liability, workers
compensation, business interruption, environmental, product liability and
automobile insurance policies and bond and surety arrangements) to which the
Company is a party. Such insurance policies are of the type and in amounts
customarily carried by organizations conducting businesses or owning assets
similar to those of the Company. There is no material claim pending under any
such policy as to which coverage has been questioned, denied or disputed by the
underwriter of such policy. All premiums due and payable under all such policies
have been paid, the Company is not liable for retroactive premiums or similar
payments, and the Company is otherwise in compliance in all material respects
with the terms of such policies. The Company has no knowledge of any threatened
termination of, or material premium increase with respect to, any such policy.
Each such policy will continue to be enforceable and in full force and effect
immediately following the Closing in accordance with the terms thereof as in
effect immediately prior to the Closing.
2.19 LITIGATION. There is no action, suit, proceeding, claim, arbitration
or investigation before any Governmental Entity or before any arbitrator (a
"Legal Proceeding") which is pending or, to the Company's knowledge, has been
threatened in writing against the Company.
2.20 WARRANTIES. No service sold, licensed or delivered by the Company is
subject to any guaranty, warranty, right of credit or other indemnity other than
the applicable standard terms and conditions used by the Company, which are set
forth in Section 2.20 of the Disclosure Schedule. Section 2.20 of the Disclosure
Schedule sets forth the aggregate expenses incurred by the Company in fulfilling
its obligations under its guaranty, warranty, right of return and indemnity
provisions since September 17, 1997.
2.21 EMPLOYEES.
(a) Section 2.21 of the Disclosure Schedule contains a list of all
employees of the Company, along with the position and the annual rate of
compensation of each such person. Section 2.21 of the Disclosure Schedule
contains a list of all employees of the Company who are a party to a non-
competition agreement with the Company; copies of such agreements have
previously been delivered to the Buyer.
(b) The Company is not a party to or bound by any collective bargaining
agreement, nor has it experienced any strikes, formal grievances, claims of
unfair labor practices or other collective bargaining disputes. The Company
has no knowledge of any organizational effort made or threatened, either
currently or within the past two years, by or on behalf of any labor union
with respect to employees of the Company.
2.22 EMPLOYEE BENEFITS.
(a) For purposes of this Agreement, the following terms shall have the
following meanings:
(i) "Employee Benefit Plan" means any "employee pension benefit plan"
(as defined in Section 3(2) of ERISA), any "employee welfare benefit
plan" (as defined in Section 3(1) of ERISA), and any other written or
oral plan, agreement or arrangement involving direct or indirect
compensation, including without limitation insurance coverage, severance
benefits, disability benefits, deferred compensation, bonuses, stock
options, stock purchase, phantom stock, stock appreciation or other forms
of incentive compensation or post-retirement compensation.
(ii) "ERISA" means the Employee Retirement Income Security Act of
1974, as amended.
(iii) "Company ERISA Affiliate" means any entity which is, or at any
applicable time was, a member of (1) a controlled group of corporations
(as defined in Section 414(b) of the Code), (2) a group of trades or
businesses under common control (as defined in Section
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414(c) of the Code), or (3) an affiliated service group (as defined under
Section 414(m) of the Code or the regulations under Section 414(o) of the
Code), any of which includes or included the Company.
(b) Section 2.22(b) of the Disclosure Schedule contains a complete and
accurate list of all Employee Benefit Plans maintained, or contributed to,
by the Company or any Company ERISA Affiliate ("Company Employee Benefit
Plans"). Complete and accurate copies of (i) all Company Employee Benefit
Plans which have been reduced to writing, (ii) written summaries of all
unwritten Company Employee Benefit Plans, (iii) all related trust
agreements, insurance contracts and summary plan descriptions, and (iv) all
annual reports filed on IRS Form 5500, 5500C or 5500R and (for all funded
plans) all plan financial statements for the last five plan years for each
Company Employee Benefit Plan, have been delivered to the Buyer. Each
Company Employee Benefit Plan has been administered in all material respects
in accordance with its terms and each of the Company, and the Company ERISA
Affiliates has in all material respects met its obligations with respect to
such Company Employee Benefit Plan and has made all required contributions
thereto. The Company, each ERISA Affiliate and each Company Employee Benefit
Plan are in compliance in all material respects with the currently
applicable provisions of ERISA and the Code and the regulations thereunder
(including without limitation Section 4980 B of the Code, Subtitle K,
Chapter 100 of the Code and Sections 601 through 608 and Section 701 et seq.
of ERISA). All filings and reports as to each Company Employee Benefit Plan
required to have been submitted to the Internal Revenue Service or to the
United States Department of Labor have been duly submitted.
(c) There are no Legal Proceedings (except claims for benefits payable
in the normal operation of the Company Employee Benefit Plans and
proceedings with respect to qualified domestic relations orders) against or
involving any Company Employee Benefit Plan or asserting any rights or
claims to benefits under any Company Employee Benefit Plan that could give
rise to any material liability.
(d) The Eggrock Partners 401(k) Savings Plan (the "401(k) Plan") is the
only Company Employee Benefit Plan that is intended to be qualified under
Section 401(a) of the Code. The prototype plan pursuant to which the 401(k)
Plan is established and maintained has received an opinion letter from the
National Office of the Internal Revenue Service, upon which the Company may
rely, to the effect that the form of prototype plan and trust are exempt
from federal income taxes under Sections 401(a) and 501(a), respectively, of
the Code. The 401(k) Plan has not been amended or operated since its
adoption in any respect, and no act or omission has occurred, that would
adversely affect its qualification or materially increase its cost. Each
Company Employee Benefit Plan which is required to satisfy Section
401(k)(3) or Section 401(m)(2) of the Code has been tested for compliance
with, and satisfies the requirements of, Section 401(k)(3) and Section
401(m)(2) of the Code for each plan year ending prior to the Closing Date.
(e) Neither the Company nor any Company ERISA Affiliate has ever
maintained an Employee Benefit Plan subject to Section 412 of the Code or
Title IV of ERISA.
(f) At no time has the Company or any Company ERISA Affiliate been
obligated to contribute to any "multiemployer plan" (as defined in Section
4001(a)(3) of ERISA).
(g) There are no unfunded obligations under any Company Employee Benefit
Plan providing benefits after termination of employment to any employee of
the Company (or to any beneficiary of any such employee), including but not
limited to retiree health coverage and deferred compensation, but excluding
continuation of health coverage required to be continued under Section 4980B
of the Code or other applicable law and insurance conversion privileges
under state law. The assets of each Company Employee Benefit Plan which is
funded are reported at their fair market value on the books and records of
such Employee Benefit Plan.
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(h) No act or omission has occurred and no condition exists with respect
to any Employee Benefit Plan maintained by the Company, or any Company ERISA
Affiliate that would subject the Company or any Company ERISA Affiliate to
(i) any material fine, penalty, tax or liability of any kind imposed under
ERISA or the Code or (ii) any contractual indemnification or contribution
obligation protecting any fiduciary, insurer or service provider with
respect to any Company Employee Benefit Plan.
(i) No Company Employee Benefit Plan is funded by, associated with or
related to a "voluntary employee's beneficiary association" within the
meaning of Section 501(c)(9) of the Code.
(j) Each Company Employee Benefit Plan is amendable and terminable
unilaterally by the Company at any time without liability to the Company as
a result thereof and no Company Employee Benefit Plan, plan documentation or
agreement, summary plan description or other written communication
distributed generally to employees by its terms prohibits the Company from
amending or terminating any such Company Employee Benefit Plan.
(k) Section 2.22(k) of the Disclosure Schedule discloses each:
(i) agreement with any stockholder, director, executive officer or other key
employee of the Company (A) the benefits of which are contingent, or the
terms of which are materially altered, upon the occurrence of a transaction
involving the Company of the nature of any of the transactions contemplated
by this Agreement, (B) providing any term of employment or compensation
guarantee or (C) providing severance benefits or other benefits after the
termination of employment of such director, executive officer or key
employee; (ii) agreement, plan or arrangement under which any person may
receive payments from the Company that may be subject to the tax imposed by
Section 4999 of the Code or included in the determination of such person's
"parachute payment" under Section 280G of the Code; and (iii) agreement or
plan binding the Company, including without limitation any stock option
plan, stock appreciation right plan, restricted stock plan, stock purchase
plan, severance benefit plan or Employee Benefit Plan, any of the benefits
of which will be increased, or the vesting of the benefits of which will be
accelerated, by the occurrence of any of the transactions contemplated by
this Agreement or the value of any of the benefits of which will be
calculated on the basis of any of the transactions contemplated by this
Agreement.
(l) Section 2.22(l) of the Disclosure Schedule sets forth the policy of
the Company with respect to accrued vacation, accrued sick time and earned
time-off and the amount of such liabilities as of the date hereof.
2.23 ENVIRONMENTAL MATTERS.
(a) The Company has complied with all material applicable Environmental
Laws (as defined below). There is no pending or, to the knowledge of the
Company, threatened civil or criminal litigation, written notice of
violation, formal administrative proceeding, or investigation, inquiry or
information request by any Governmental Entity, relating to any
Environmental Law involving the Company. For purposes of this Agreement,
"Environmental Law" means any federal, state or local law, statute, rule or
regulation or the common law relating to the environment or occupational
health and safety, including without limitation any statute, regulation,
administrative decision or order pertaining to (i) treatment, storage,
disposal, generation and transportation of industrial, toxic or hazardous
materials or substances or solid or hazardous waste; (ii) air, water and
noise pollution; (iii) groundwater and soil contamination; (iv) the release
or threatened release into the environment of industrial, toxic or hazardous
materials or substances, or solid or hazardous waste, including without
limitation emissions, discharges, injections, spills, escapes or dumping of
pollutants, contaminants or chemicals; (v) the protection of wild life,
marine life and wetlands, including without limitation all endangered and
threatened species; (vi) storage tanks, vessels, containers, abandoned or
discarded barrels, and other closed receptacles; (vii) health and safety of
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employees and other persons; and (viii) manufacturing, processing, using,
distributing, treating, storing, disposing, transporting or handling of
materials regulated under any law as pollutants, contaminants, toxic or
hazardous materials or substances or oil or petroleum products or solid or
hazardous waste. As used above, the terms "release" and "environment" shall
have the meaning set forth in the Comprehensive Environmental Response,
Compensation and Liability Act of 1980, as amended ("CERCLA").
(b) To the best knowledge of the Company, there have been no releases of
any Materials of Environmental Concern (as defined below) into the
environment at any parcel of real property or any facility formerly or
currently owned, operated or controlled by the Company. The Company is not
aware of any releases of Materials of Environmental Concern at parcels of
real property or facilities other than those owned, operated or controlled
by the Company that could reasonably be expected to have an impact on the
real property or facilities owned, operated or controlled by the Company.
For purposes of this Agreement, "Materials of Environmental Concern" means
any chemicals, pollutants or contaminants, hazardous substances (as such
term is defined under CERCLA), solid wastes and hazardous wastes (as such
terms are defined under the Resource Conservation and Recovery Act), toxic
materials, oil or petroleum and petroleum products or any other material
subject to regulation under any Environmental Law.
(c) Set forth in Section 2.23(c) of the Disclosure Schedule is a list of
all documents (whether in hard copy or electronic form) that contain any
environmental reports, investigations and audits relating to premises
currently or previously owned or operated by the Company (whether conducted
by or on behalf of the Company or a third party, and whether done at the
initiative of the Company or directed by a Governmental Entity or other
third party) which the Company has possession of or access to. A complete
and accurate copy of each such document has been provided to the Buyer.
(d) The Company is not aware of any material environmental liability of
any solid or hazardous waste transporter or treatment, storage or disposal
facility that has been used by the Company.
2.24 LEGAL COMPLIANCE. The Company, and the conduct and operations of its
business, are in compliance with each applicable law (including rules and
regulations thereunder) of any federal, state, local or foreign government, or
any Governmental Entity, except for any violations or defaults that,
individually or in the aggregate, have not had and would not reasonably be
expected to have a Company Material Adverse Effect.
2.25 CUSTOMERS AND SUPPLIERS. Section 2.25 of the Disclosure Schedule sets
forth a list of (a) each customer that accounted for more than 5% of the
consolidated revenues of the Company during the last full fiscal year and the
amount of revenues accounted for by such customer during each such period and
(b) each supplier that is the sole supplier of any significant product to the
Company. No such customer or supplier has indicated within the past year that it
will stop, or decrease the rate of, buying products or supplying products, as
applicable, to the Company. No unfilled customer order or commitment obligating
the Company to process, manufacture or deliver products or perform services will
result in a loss to the Company upon completion of performance. No purchase
order or commitment of the Company is in excess of normal requirements, nor are
prices provided therein in excess of current market prices for the products or
services to be provided thereunder.
2.26 PERMITS. Section 2.26 of the Disclosure Schedule sets forth a list of
all permits, licenses, registrations, certificates, orders or approvals from any
Governmental Entity (including without limitation those issued or required under
Environmental Laws and those relating to the occupancy or use of owned or leased
real property) ("Permits") issued to or held by the Company. Such listed Permits
are the only Permits that are required for the Company and the Subsidiaries to
conduct their respective businesses as presently conducted or as proposed to be
conducted, except for those the
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absence of which, individually or in the aggregate, have not had and would not
reasonably be expected to have a Company Material Adverse Effect. Each such
Permit is in full force and effect and, to the knowledge of the Company, no
suspension or cancellation of such Permit is threatened and there is no basis
for believing that such Permit will not be renewable upon expiration. Each such
Permit will continue in full force and effect immediately following the Closing.
2.27 CERTAIN BUSINESS RELATIONSHIPS WITH AFFILIATES. No Affiliate of the
Company (a) owns any property or right, tangible or intangible, which is used in
the business of the Company, (b) has any claim or cause of action against the
Company, or (c) owes any money to, or is owed any money by, the Company in an
amount in excess of $50,000. Section 2.27 of the Disclosure Schedule describes
any transactions or relationships between the Company and any Affiliate thereof
which have occurred or existed since January 1, 1998.
2.28 BROKERS' FEES. The Company has no liability or obligation to pay any
fees or commissions to any broker, finder or agent with respect to the
transactions contemplated by this Agreement.
2.29 BOOKS AND RECORDS. The minute books and other similar records of the
Company contain complete and accurate records of all actions taken at any
meetings of the Company's stockholders, Board of Directors or any committee
thereof and of all written consents executed in lieu of the holding of any such
meeting. The books and records of the Company accurately reflect in all material
respects the assets, liabilities, business, financial condition and results of
operations of the Company.
2.30 HSR ACT. Assuming the accuracy of the representation by the Buyer in
Section 3.10, the Company is not required to file a Notification and Report Form
under the Hart-Scott-Rodino Act of 1976, as amended ("HSR Act"), in connection
with the transactions contemplated by this Agreement.
2.31 SECTION 203 OF THE DELAWARE GENERAL CORPORATION LAW NOT
APPLICABLE. The Board of Directors of the Company has taken all actions so that
the restrictions contained in Section 203 of the Delaware General Corporation
Law applicable to "business combination" (as defined in Section 203) will not
apply to the execution, delivery or performance of this Agreement, the
Shareholders Voting Agreement described in Section 1.17 or the consummation of
the Merger or other transactions contemplated by this Agreement.
ARTICLE III.
REPRESENTATIONS AND WARRANTIES OF THE BUYER
AND THE TRANSITORY SUBSIDIARY
Each of the Buyer and the Transitory Subsidiary represents and warrants to
the Company as follows:
3.1 ORGANIZATION, QUALIFICATION AND CORPORATE POWER. Each of the Buyer and
the Transitory Subsidiary is a corporation duly organized, validly existing and
in good standing under the laws of the state of its incorporation. The Buyer is
duly qualified to conduct business and is in corporate and tax good standing
under the laws of each jurisdiction in which the nature of its businesses or the
ownership or leasing of its properties requires such qualification, except where
the failure to be so qualified or in good standing would not have a Buyer
Material Adverse Effect (as defined below). The Buyer has all requisite
corporate power and authority to carry on the businesses in which it is engaged
and to own and use the properties owned and used by it. The Buyer has furnished
or made available to the Company complete and accurate copies of its Certificate
of Incorporation and By-laws, each as amended to date. For purposes of this
Agreement, "Buyer Material Adverse Effect" means a material adverse effect on
the assets, business, financial condition, or results of operations of the Buyer
and its subsidiaries, taken as a whole.
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3.2 CAPITALIZATION. The authorized capital stock of the Buyer consists of
(a) 80,000,000 shares of Buyer Common Stock, of which 17,441,352 shares were
issued and outstanding as of January 24, 2000, and (b) 5,000,000 shares of
Preferred Stock, $.01 par value per share, of which no shares are issued or
outstanding. All of the issued and outstanding shares of Buyer Common Stock are
duly authorized, validly issued, fully paid, nonassessable and free of all
preemptive rights. All of the Merger Shares will be, when issued in accordance
with this Agreement, duly authorized, validly issued, fully paid, nonassessable
and free of all preemptive rights. Section 3.2 of the Buyer's Disclosure
Schedule attached hereto sets forth a complete and accurate list of (i) all
outstanding options, warrants and other securities convertible into or
exchangeable for shares of capital stock of the Buyer, indicating the number and
class or series of capital stock of the Buyer subject to each such security; and
(ii) all stock option plans and other stock or equity-related plans of the
Buyer. Other than the securities listed in Section 3.2 of the Disclosure
Schedule, there are no outstanding or authorized options, warrants, rights,
agreements or commitments to which the Buyer is a party or which are binding
upon the Buyer providing for the issuance or redemption of any of its capital
stock. There are no outstanding or authorized stock appreciation, phantom stock
or similar rights with respect to the Buyer. There are no agreements to which
the Buyer is a party or by which it is bound with respect to voting (including
without limitation voting trusts or proxies), registration under the Securities
Act, or sale or transfer (including without limitation agreements relating to
pre-emptive rights, rights of first refusal, co-sale rights or "drag-along"
rights) of any securities of the Buyer. All of the issued and outstanding shares
of Buyer Common Stock were issued in compliance with applicable federal and
state securities laws.
3.3 AUTHORIZATION OF TRANSACTION. Each of the Buyer and the Transitory
Subsidiary has all requisite power and authority to execute and deliver this
Agreement and (in the case of the Buyer) the Escrow Agreement and the
Registration Rights Agreement (together, the "Transaction Documents") and to
perform its obligations hereunder and thereunder. The execution and delivery by
the Buyer and the Transitory Subsidiary of this Agreement and (in the case of
the Buyer) the Transaction Documents and the consummation by the Buyer and the
Transitory Subsidiary of the transactions contemplated hereby and thereby have
been duly and validly authorized by all necessary corporate action on the part
of the Buyer and Transitory Subsidiary, respectively, including without
limitation having obtained all necessary approvals from Buyer's stockholders.
This Agreement has been duly and validly executed and delivered by the Buyer and
the Transitory Subsidiary and constitutes a valid and binding obligation of the
Buyer and the Transitory Subsidiary, enforceable against them in accordance with
its terms, except to the extent such enforceability is subject to: (i) laws of
general application relating to bankruptcy, insolvency, moratorium and the
relief of debtors, (ii) the availability of specific performance, injunctive
relief and other equitable remedies, and (iii) limitations that may exist with
respect to indemnification provisions contained in any registration right or
similar agreements.
3.4 NONCONTRAVENTION. Subject to compliance with the applicable
requirements of the Securities Act, any applicable state securities laws, the
Exchange Act and the NASDAQ National Market, and the filing of the Certificate
of Merger as required by the Delaware General Corporation Law, neither the
execution and delivery by the Buyer or the Transitory Subsidiary of this
Agreement or (in the case of the Buyer) the Transaction Documents, nor the
consummation by the Buyer or the Transitory Subsidiary of the transactions
contemplated hereby or thereby, will (a) conflict with or violate any provision
of the Certificate of Incorporation or By-laws of the Buyer or the Transitory
Subsidiary, (b) require on the part of the Buyer or the Transitory Subsidiary
any filing with, or permit, authorization, consent or approval of, any
Governmental Entity, (c) conflict with, result in breach of, constitute (with or
without due notice or lapse of time or both) a default under, result in the
acceleration of obligations under, create in any party any right to terminate,
modify or cancel, or require any notice, consent or waiver under, any contract
or instrument to which the Buyer or the Transitory Subsidiary is a party or by
which either is bound or to which any of their assets are subject, except for
(i) any conflict, breach, default, acceleration, termination, modification or
cancellation which would not adversely affect the consummation of the
transactions contemplated hereby or (ii) any
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notice, consent or waiver the absence of which would not adversely affect the
consummation of the transactions contemplated hereby, or (d) violate any order,
writ, injunction, decree, statute, rule or regulation applicable to the Buyer or
the Transitory Subsidiary or any of their properties or assets.
3.5 REPORTS AND FINANCIAL STATEMENTS. Buyer has filed with the Securities
and Exchange Commission (the "SEC") each statement, report, registration
statement (including, without limitation, the Form S-1 and all amendments and
prospectuses related thereto filed in connection with the Buyer's initial public
offering) and definitive proxy statement required to be filed with the SEC by
Buyer since June 30, 1999 (collectively, the "Buyer SEC Documents"). The Buyer
SEC Documents constitute all of the documents required to be filed by the Buyer
under Section 13 or subsections (a) or (c) of Section 14 of the Exchange Act
with the SEC through the date of this Agreement. All documents required to be
filed as exhibits to the Buyer SEC Documents have been so filed, and all
material contracts so filed as exhibits are in full force and effect, except
those which have expired in accordance with their terms, and neither Buyer nor
any subsidiary of Buyer is in default thereunder where such a default would
reasonably be expected to have a Buyer Material Adverse Effect. As of their
respective filing dates, (i) the Buyer SEC Documents complied in all material
respects with the requirements of the Exchange Act and the Securities Act and
the rules and regulations thereunder and (ii) none of the Buyer SEC Documents
contained any untrue statement of a material fact or omitted to state a material
fact required to be stated therein or necessary to make the statements made
therein, in light of the circumstances in which they were made, not misleading,
except to the extent corrected by a subsequently filed Buyer SEC Document which
was filed prior to the date hereof. The financial statements of Buyer, including
the notes thereto, included in the Buyer SEC Documents (the "Buyer Financial
Statements") were complete and correct in all material respects as of their
respective dates, complied as to form in all material respects with applicable
accounting requirements and with the published rules and regulations of the SEC
with respect thereto as of their respective dates, and have been prepared in
accordance with GAAP applied on a basis consistent throughout the periods
indicated and consistent with each other (except as may be indicated in the
notes thereto or, in the case of unaudited statements included in Quarterly
Reports on Form 10-Qs, as permitted by Form 10-Q of the SEC). The Buyer
Financial Statements fairly present the consolidated financial condition,
results of operations and cash flows of the Buyer and the Buyer Subsidiaries at
the dates and during the periods indicated therein (subject, in the case of
unaudited statements, to normal, recurring year-end adjustments) and are
consistent with the books and records of the Buyer and the Buyer Subsidiaries.
3.6 ABSENCE OF MATERIAL ADVERSE CHANGE. Since September 30, 1999, there
has occurred no event or development which has had, or could reasonably be
expected to have in the future, a Buyer Material Adverse Effect.
3.7 LITIGATION. Except as disclosed in the Buyer SEC Documents, as of the
date of this Agreement, there is no Legal Proceeding which is pending or, to the
Buyer's knowledge, threatened against the Buyer or any subsidiary of the Buyer
which, if determined adversely to the Buyer or such subsidiary, could have,
individually or in the aggregate, a Buyer Material Adverse Effect.
3.8 INTERIM OPERATIONS OF THE TRANSITORY SUBSIDIARY. The Transitory
Subsidiary was formed solely for the purpose of engaging in the transactions
contemplated by this Agreement and has engaged in no business activities other
than as contemplated by this Agreement.
3.9 BROKERS' FEES. Neither the Buyer nor the Transitory Subsidiary has any
liability or obligation to pay any fees or commissions to any broker, finder or
agent with respect to the transactions contemplated by this Agreement.
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3.10 HSR ACT. Assuming the accuracy of the Company's representation in
Section 2.30, Buyer is not required to file a Notification and Report Form under
the HSR Act, in connection with the transactions contemplated by this Agreement.
3.11 NASDAQ REQUIREMENTS. Buyer is not required to obtain stockholder
approval of this Agreement or the transactions contemplated hereby pursuant to
the rules of the Nasdaq National Market applicable to listed companies.
3.12 LEGAL COMPLIANCE. Each of the Buyer and the Buyer Subsidiaries, and
the conduct and operations of their respective businesses, are in compliance
with each applicable law (including rules and regulations thereunder) of any
federal, state, local or foreign government, or any Governmental Entity, except
for any violations or defaults that, individually or in the aggregate, have not
had and would not reasonably be expected to have a Buyer Material Adverse
Effect.
3.13 SECTION 16 MATTERS. In connection with adopting resolutions approving
the Transactions, the Board of Directors of Buyer has taken such actions and
votes as are necessary to approve the acquisition of Common Stock of the Buyer
by Maureen Ellenberger for all purposes, including for purposes of exempting
such acquisition under Rule 16b-3 promulgated under the Exchange Act.
ARTICLE IV.
COVENANTS
4.1 CLOSING EFFORTS. Each of the Parties shall use its reasonable best
efforts, ("Reasonable Best Efforts"), to take all actions and to do all things
necessary, proper or advisable to consummate the transactions contemplated by
this Agreement, including without limitation using its Reasonable Best Efforts
to ensure that the conditions to the obligations of the other Parties to
consummate the Merger are satisfied.
4.2 GOVERNMENTAL AND THIRD-PARTY NOTICES AND CONSENTS.
(a) Each Party shall use its Reasonable Best Efforts to obtain, at its
expense, all waivers, permits, consents, approvals or other authorizations
from Governmental Entities, including if applicable those required under the
HSR Act and to effect all registrations, filings and notices with or to
Governmental Entities, as may be required for such Party to consummate the
transactions contemplated by this Agreement and to otherwise comply with all
applicable laws and regulations in connection with the consummation of the
transactions contemplated by this Agreement.
(b) The Company shall use its Reasonable Best Efforts to obtain, at its
expense, all such waivers, consents or approvals from third parties, and to
give all such notices to third parties, as are required to be listed in
Section 2.4 of the Disclosure Schedule.
4.3 SPECIAL MEETING, PROSPECTUS/PROXY STATEMENT AND REGISTRATION STATEMENT.
(a) The Company shall use its Reasonable Best Efforts to obtain, as
promptly as practicable, the Requisite Stockholder Approval, either at a
special meeting of stockholders or pursuant to a written stockholder
consent, all in accordance with the applicable requirements of the Delaware
General Corporation Law. In connection with such special meeting of
stockholders or written stockholder consent, the Buyer shall prepare, with
the assistance and cooperation of the Company, a Registration Statement on
Form S-4 (the "Registration Statement"). The Registration Statement shall
include a prospectus/proxy statement to be used for the purpose of offering
the Merger Shares to stockholders of the Company and soliciting proxies or
written consents from stockholders of the Company for the purpose of
obtaining the Requisite Stockholder Approval (such prospectus/proxy
statement, together with any accompanying letter to stockholders, notice of
meeting and form of proxy or written consent, shall be referred to herein as
the "Prospectus/Proxy Statement"). The summary of the Merger in the
Prospectus/Proxy Statement shall include a
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summary of the terms relating to the indemnification obligations of the
Company Stockholders, the escrow arrangements and the authority of the
Indemnification Representative, and a statement that the adoption of this
Agreement by the stockholders of the Company shall constitute approval of
such terms. The Buyer shall file the Registration Statement with the SEC and
shall, with the assistance of the Company, promptly respond to any SEC
comments on the Registration Statement and shall otherwise use its
Reasonable Best Efforts to have the Registration Statement declared
effective under the Securities Act as promptly as practicable. Promptly
following such time as the Registration Statement is declared effective, the
Company shall distribute the Prospectus/Proxy Statement to its stockholders
and, pursuant thereto, shall use its Reasonable Best Efforts to obtain the
Requisite Stockholder Approval. If the Requisite Stockholder Approval is
obtained by means of a written consent, the Company shall send, pursuant to
Sections 228 and 262(d) of the Delaware General Corporation Law, a written
notice to all stockholders of the Company that did not execute such written
consent informing them that this Agreement and the Merger were adopted and
approved by the stockholders of the Company and that appraisal rights are
available for their Company Shares pursuant to Section 262 of the Delaware
General Corporation Law (which notice shall include a copy of such Section
262), and shall promptly inform the Buyer of the date on which such notice
was sent.
(b) The Company, acting through its Board of Directors, shall include in
the Prospectus/Proxy Statement the unanimous recommendation of its Board of
Directors that the stockholders of the Company vote in favor of the adoption
of this Agreement and the approval of the Merger.
(c) The Company shall ensure that the Prospectus/Proxy Statement does
not contain any untrue statement of a material fact or omit to state a
material fact necessary in order to make the statements made, in light of
the circumstances under which they were made, not misleading (provided that
the Company shall not be responsible for the accuracy or completeness of any
information relating to the Buyer or furnished by the Buyer in writing for
inclusion in the Prospectus/Proxy Statement).
(d) The Buyer shall ensure that the Registration Statement does not
contain an untrue statement of a material fact or omit to state a material
fact required to be stated therein or necessary to make the statements
therein not misleading (provided that the Buyer shall not be responsible for
the accuracy or completeness of any information relating to the Company or
furnished by the Company in writing for inclusion in the Registration
Statement).
(e) Each of Buyer and the Company, agrees promptly to correct any
information provided by it for use in the Registration Statement if and to
the extent that such information shall have become false or misleading in
any material respect, and each of the parties hereto further agrees to take
all steps necessary to amend or supplement the Registration Statement and to
cause the Registration Statement as so amended or supplemented to be filed
with the SEC and to be disseminated to the Company Stockholders, in each
case as and to the extent required by applicable federal and state
securities laws and the DGCL.
4.4 OPERATION OF BUSINESS. Except as contemplated by this Agreement,
during the period from the date of this Agreement to the earlier of the
termination of this Agreement and the Effective Time, the Company shall (except
to the extent expressly contemplated by this Agreement or as consented to in
writing by the other party) conduct its operations in the Ordinary Course of
Business and in compliance with all applicable laws and regulations and, to the
extent consistent therewith, use its Reasonable Best Efforts to preserve intact
its current business organization, keep its physical assets in good working
condition, keep available the services of its current officers and employees and
preserve its relationships with customers, suppliers and others having business
dealings with it to the end that its goodwill and ongoing business shall not be
impaired in any material respect. Without limiting the generality of the
foregoing, (except to the extent expressly contemplated by this Agreement, or as
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consented to in writing by the other party) prior to the Effective Time, the
Company shall not, without the written consent of the Buyer:
(a) issue or sell, or redeem or repurchase, any stock or other
securities of the Company or any rights, warrants or options to acquire any
such stock or other securities (except pursuant to the conversion or
exercise of convertible securities or Options outstanding on the date
hereof), or amend any of the terms of (including without limitation the
vesting of) any such convertible securities or Options, provided that the
Company may grant those Options set forth in Section 2.2(b) of the
Disclosure Schedule under the heading " Authorized January Stock Options."
(b) split, combine or reclassify any shares of its capital stock;
declare, set aside or pay any dividend or other distribution (whether in
cash, stock or property or any combination thereof) in respect of its
capital stock;
(c) create, incur or assume any indebtedness (including obligations in
respect of capital leases); assume, guarantee, endorse or otherwise become
liable or responsible (whether directly, contingently or otherwise) for the
obligations of any other person or entity; or make any loans, advances or
capital contributions to, or investments in, any other person or entity,
provided that the Company may borrow pursuant to its line of credit with
Fleet National Bank described in Section 2.4(c) of the Disclosure Schedule
as in effect on the date of this Agreement to fund such expenditures as are
permitted pursuant to this Agreement;
(d) (i) hire any employee or consultant at a level of compensation in
excess of $8,000 per month, (ii) enter into, adopt or amend any Employee
Benefit Plan or any employment or severance agreement or arrangement of the
type described in Section 2.22(k), (iii) (except for normal increases in the
Ordinary Course of Business for employees who are not Affiliates) increase
in any manner the compensation or fringe benefits of, or materially modify
the employment terms of, its directors, officers or employees, generally or
individually, (iv) pay any bonus or other benefit to its directors, officers
or employees (except for existing payment obligations listed in Section 2.21
of the Disclosure Schedule);
(e) acquire, sell, lease, license or dispose of any assets or property
(including without limitation any shares or other equity interests in or
securities of any subsidiary or any corporation, partnership, association or
other business organization or division thereof), other than purchases and
sales of assets in the Ordinary Course of Business and not in excess of
$50,000 per item;
(f) mortgage or pledge any of its property or assets or subject any such
property or assets to any Security Interest;
(g) discharge or satisfy any Security Interest or pay any obligation or
liability other than in the Ordinary Course of Business;
(h) amend its charter, by-laws or other organizational documents;
(i) change in any material respect its accounting methods, principles or
practices, except insofar as may be required by a generally applicable
change in GAAP;
(j) enter into, amend, terminate, take or omit to take any action that
would constitute a violation of or default under, or waive any rights under,
any material contract or agreement, or that restricts or affects the
Company's (or its successor's) ability to price its services or products, or
its ability to render services for any other person, firm or entity;
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(k) make or commit to make any capital expenditure in excess of $25,000
per item or $100,000 in the aggregate, provided that the Company may make
expenditures not in excess of the following limits to complete the build out
and equipping of its offices in the following locations:
<TABLE>
<CAPTION>
C
----------
<S> <C>
Maynard, Massachusetts...................................... $1,300,000
Minneapolis, Minnesota...................................... $ 250,000
Fort Lauderdale, Florida.................................... $ 250,000
Washington, D.C............................................. $ 50,000
</TABLE>
(l) enter into any agreement which provides for (i) "most favored
nation" pricing, (ii) noncompetition or (iii) restrictions on the ability of
the Company or its successors to hire employees or retain contractors;
(m) institute or settle any Legal Proceeding;
(n) take any action or fail to take any action permitted by this
Agreement with the knowledge that such action or failure to take action
would result in (i) any of the representations and warranties of the Company
set forth in this Agreement becoming untrue or (ii) any of the conditions to
the Merger set forth in Article V not being satisfied; or
(o) agree to or otherwise take any of the foregoing actions.
4.5 ACCESS TO INFORMATION.
(a) Upon reasonable notice and subject to the restrictions contained in
confidentiality agreements by which the Company and Buyer are bound, the
Company shall permit representatives of the Buyer to have reasonable access
(at reasonable times during normal business hours, and in a manner so as not
to interfere with the normal business operations of such entity) to all
premises, properties, financial and accounting records, contracts, other
records and documents, of or pertaining to the Company, as applicable;
provided that if the Company is withholding information because it is
obligated to do so pursuant to a confidentiality agreement by which it is
bound, the Company shall give the Buyer notice of such withholding.
(b) Buyer agrees that, unless and until the Closing has been
consummated, Buyer and its officers, directors, agents and representatives
will hold in strict confidence, and will not use, any confidential or
proprietary data or information obtained from the Company with respect to
its business or financial condition except for the purpose of evaluating,
negotiating and completing the transaction contemplated hereby. Information
that (i) is or becomes generally available to the public as a result of
public disclosure by the Company or its representatives, (ii) was available
to Buyer on a non-confidential basis prior to its disclosure to Buyer by the
Company, (iii) becomes available to Buyer on a non-confidential basis from a
source other than the Company or its representatives provided that such
source is not bound by a confidentiality agreement with the Company or its
representatives or (iv) was developed by Buyer independently and without any
use of information provided by or obtained from the Company shall not be
deemed confidential or proprietary information for purposes of this
agreement. If the transaction contemplated by this Agreement is not
consummated, Buyer will promptly return to the Company (or certify that it
has destroyed) all copies of such data and information, including but not
limited to financial information, customer lists, business and corporate
records, worksheets, test reports, Tax Returns, lists, memoranda, and other
documents prepared by or made available to Buyer in connection with the
transaction.
(c) Within 20 days after the end of each month ending prior to the
Closing, beginning with January, 2000, the Company shall furnish to the
Buyer an unaudited income statement for such month and a balance sheet as of
the end of such month, prepared on a basis consistent with the
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Financial Statements (except that the unaudited financial statements do not
have notes thereto). Such financial statements shall present fairly in all
material respects the financial condition and results of operations of the
Company on a consolidated basis as of the dates thereof and for the periods
covered thereby, and shall be consistent with the books and records of the
Company (subject to normal recurring year end adjustments).
4.6 NOTICE OF BREACHES.
(a) From the date of this Agreement until the Effective Time, the
Company shall promptly deliver to the Buyer supplemental information
concerning events or circumstances occurring subsequent to the date hereof
which would render any representation, warranty or statement in this
Agreement or the Disclosure Schedule inaccurate or incomplete in any
material respect at any time after the date of this Agreement until the
Closing Date. No such supplemental information shall be deemed to cure any
misrepresentation or breach of warranty or constitute an amendment of any
representation, warranty or statement in this Agreement or the Disclosure
Schedule.
(b) From the date of this Agreement until the Effective Time, the Buyer
shall promptly deliver to the Company supplemental information concerning
events or circumstances occurring subsequent to the date hereof which would
render any representation or warranty in this Agreement inaccurate or
incomplete in any material respect at any time after the date of this
Agreement until the Closing Date. No such supplemental information shall be
deemed to cure any misrepresentation or breach of warranty or constitute an
amendment of any representation or warranty in this Agreement.
4.7 EXCLUSIVITY.
(a) From and after the date of this Agreement until the earlier of the
Closing Date or the termination of this Agreement, the Company shall not,
and the Company shall use its best efforts to cause each of its officers,
directors, employees, representatives and agents not to, directly or
indirectly, (i) initiate, solicit, encourage or otherwise facilitate any
inquiry, proposal, offer or discussion with any party (other than the Buyer)
concerning any merger, reorganization, consolidation, recapitalization,
business combination, liquidation, dissolution, share exchange, sale of
stock (excluding issuances upon outstanding convertible securities and
options or to employees), sale of material assets or similar business
transaction involving the Company, (an "Acquisition Proposal"),
(ii) furnish any non-public information concerning the business, properties
or assets of the Company, to any party (other than the Buyer) in connection
with any potential Acquisition Proposal, or (iii) engage in discussions or
negotiations with any party (other than the Buyer) concerning any potential
Acquisition Proposal.
(b) The Company shall immediately notify any party with which
discussions or negotiations of the nature described in paragraph (a) above
were pending that the Company is terminating such discussions or
negotiations. If the Company receives any inquiry, proposal or offer of the
nature described in paragraph (a) above, the Company shall, within one
business day after such receipt, notify the Buyer of such inquiry, proposal
or offer, including the identity of the other party and the terms of such
inquiry, proposal or offer.
4.8 EXPENSES. Except as set forth in Article VI and the Escrow Agreement,
each of the Parties shall bear its own costs and expenses (including legal fees
and expenses) incurred in connection with this Agreement and the transactions
contemplated hereby.
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4.9 AGREEMENTS FROM CERTAIN AFFILIATES OF THE COMPANY. At or prior to the
Effective Time, the Company shall provide to the Buyer a list of those persons
who are, in the Buyer's or the Company's respective reasonable judgment,
affiliates of the Company within the meaning of Rule 145 of the Securities Act.
The Company shall provide such information and documents as the Buyer shall
reasonably request for purposes of reviewing such list and shall notify the
Buyer in writing regarding any change in the identity of such affiliates prior
to the Closing Date. In order to help ensure that the issuance of and any resale
of the Merger Shares will comply with the Securities Act, the Company shall use
its Reasonable Best Efforts to deliver or cause to be delivered an Affiliate
Agreement, in the form attached hereto as Exhibit E executed by each of such
affiliates. The Buyer shall be entitled to place appropriate legends on the
certificates evidencing any Merger Shares to be issued to such affiliates of the
Company, and to issue appropriate stop transfer instructions to the transfer
agent for the Buyer Common Stock, setting forth restrictions on transfer
consistent with the terms of the Affiliate Agreement.
4.10 LISTING OF MERGER SHARES. The Buyer shall use its best efforts to
list the Merger Shares on the Nasdaq National Market. Each of Buyer and the
Company will advise and deliver copies (if any) to the other parties, promptly
after it receives notice thereof, of any request by the Nasdaq National Market
for amendment of any submitted materials or comments thereon and responses
thereto or requests by the Nasdaq National Market for additional information.
4.11 TAX-FREE TREATMENT. None of Buyer, Transitory Subsidiary or the
Company shall take or fail to take or cause to be taken or fail to be taken any
action, whether before or after Closing, which would cause the Merger to fail to
constitute a "reorganization" within the meaning of Section 368(a) of the Code.
No party to this Agreement shall take a position on any return, report or filing
inconsistent with this treatment.
4.12 NONSOLICITATION. Prior to the Effective Time and, in the event that
this Agreement is terminated for any reason, for a period of one (1) year
following the Effective Time, neither Buyer nor the Company nor any of their
respective affiliates shall directly, or indirectly, solicit for employment or
hire any employee of the other party, or any of their respective subsidiaries,
with whom such party has had contact or who became known to such party in
connection with the Merger; provided, however, that the foregoing provision
shall not prohibit (i) the employment of an employee who contacts the hiring
party of his or her own initiative and without any direct or indirect
solicitation by such hiring party or (ii) general advertisement in newspapers or
other periodicals in the ordinary course of business.
4.13 EMPLOYEE BENEFIT ARRANGEMENTS. Each employee of the Company who was
an employee of the Company immediately prior to the Closing shall, as of the
Effective Time, (i) be entitled to participate in the employee programs
maintained by the Buyer to the same extent as similarly situated employees of
Buyer, (ii) receive credit for such employee's past service with the Company
prior to the Effective Time and prior to the time that such employee becomes a
participant for all purposes under such plans and programs, (iii) to the extent
permitted under the terms of such plans and programs, not to be subject to any
waiting periods or limitations on benefits for pre-existing conditions and shall
be given credit for amounts paid under corresponding plans during the
appropriate period prior to the Closing and (iv) shall be given credit for all
accrued but unused vacation time credited to such employee as of the Closing. In
addition, if any employees of the Company employed as of the Closing Date become
covered by a medical plan of Buyer or any of its Affiliates, such medical plan
shall not impose any exclusion on coverage for pre-existing medical conditions
with respect to these employees. Notwithstanding the foregoing, nothing
contained in this Section 4.13 shall confer any rights, remedies, obligations or
liabilities upon any party other than the parties hereto.
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<PAGE>
4.14 BLUE SKY LAWS. Buyer shall take such steps as may be necessary to
comply with the securities and blue sky laws of all jurisdictions which are
applicable to the issuance of the Buyer Common Stock in connection with the
Merger.
4.15 RULE 144 INFORMATION. Buyer shall make and keep public information
available, as those terms are understood and defined in Rule 144 under the
Securities Act, for a period of two (2) years after the Closing Date.
4.16 LEGAL REQUIREMENTS. Each of Buyer and the Company will use Reasonable
Best Efforts to comply promptly with all legal requirements which may be imposed
on them with respect to the consummation of the transactions contemplated by
this Agreement and will promptly cooperate with and furnish information to any
party hereto necessary in connection with any such requirements imposed upon
such other party in connection with the consummation of the transactions
contemplated by this Agreement and will use Reasonable Best Efforts to obtain
(and will cooperate with the other parties hereto in obtaining) any consent,
approval, order or authorization of, or any registration, declaration or filing
with, any Governmental Entity or other person, required to be obtained or made
in connection with the taking of any action contemplated by this Agreement.
4.17 NON-DISCLOSURE, NON-SOLICITATION AND ASSIGNMENT AGREEMENT. The
Company acknowledges that it is the policy of the Buyer for each of its
employees to enter into a Non-Disclosure, Non-Solicitation and Assignment
Agreement and that it shall be a condition of the continued employment of each
of the Company's employees after the Closing that he or she enter into such
Agreement with the Buyer.
4.18 OPERATION OF BUSINESS OF BUYER. Prior to the Effective Time, without
the prior written consent of the Company, which consent shall not be
unreasonably withheld or delayed, Buyer shall not: (x) engage in any transaction
(other than transactions contemplated by this Agreement) that would (i) require
the approval of the stockholders of Buyer, (ii) require Buyer to include the
information relating to such transaction in the pro forma financial statements
that are required to be contained in the Registration Statement (the APro
Formas@) or (iii) require Buyer to amend or restate the Pro Formas in any
material manner; (y) engage in any material securities offering, or acquisition
of the business, assets or capital stock of any entity by Buyer that would
reasonably be anticipated to cause a material delay in the consummation of the
transactions contemplated by this Agreement; or (z) enter into any binding
contract to do any of the foregoing, provided that the provisions of this
Section 4.18 shall not apply with respect to the Buyer=s proposed acquisition of
the corporation set forth in Section 4.18 of the Buyer's Disclosure Schedule.
ARTICLE V.
CONDITIONS TO CONSUMMATION OF MERGER
5.1 CONDITIONS TO EACH PARTY'S OBLIGATIONS. The respective obligations of
each Party to consummate the Merger are subject to the satisfaction at or prior
to the Effective Time of each of the following conditions, each of which may be
waived, in writing, by agreement of all of the parties hereto:
(a) this Agreement and the Merger shall have received the Requisite
Stockholder Approval;
(b) the Registration Statement shall have become effective in accordance
with the provisions of the Securities Act, and there shall not be in effect
any stop order suspending the effectiveness of the Registration Statement or
any proceedings seeking such a stop order;
(c) No Injunctions or Restraints; Illegality. No temporary restraining
order, preliminary or permanent injunction or other order issued by any
court of competent jurisdiction or other legal or regulatory restraint or
prohibition preventing the consummation of the Merger shall be in effect,
nor shall any administrative agency or commission or other governmental
authority or
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<PAGE>
instrumentality of competent jurisdiction have enacted, issued or
promulgated any statute, rule, regulation or order which makes the
consummation of the Merger illegal. In the event an injunction or other
order shall have been issued, each party agrees to use its reasonable best
efforts to have such injunction or other order lifted.
(d) Governmental Approval. Buyer and the Company shall have timely
obtained from each Governmental Entity all approvals, waivers and consents
necessary, if any, for consummation of or in connection with the Merger and
the several transactions contemplated hereby, including such approvals,
waivers and consents as may be required under the Securities Act, under
state Blue Sky laws, and, if applicable, under the HSR Act (or, in the case
of the HSR Act, all applicable time limitations under the HSR Act shall have
expired), unless the failure to obtain a particular approval, waiver or
consent is not reasonably likely to have a Buyer Material Adverse Effect or
a Seller Material Adverse Effect.
(e) Escrow Agreement. Buyer, Escrow Agent and the Indemnification
Representative shall have entered into an Escrow Agreement in the form
attached hereto as Exhibit A.
(f) Tax Opinion. Each of Buyer and the Company shall have received a
written opinion from their respective counsel to the effect that the Merger
will constitute a reorganization within the meaning of Section 368 of the
Code, which opinions shall be substantially identical in substance;
provided, however, that if the counsel to either Buyer or the Company does
not render such opinion, this condition shall nonetheless be deemed
satisfied with respect to such party if counsel to the other party renders
such opinion to such party. In preparing the Buyer and the Company tax
opinions, counsel may rely on reasonable assumptions and may also rely on
(and to the extent reasonably required, the parties and the Company's
stockholders shall make) reasonable representations related thereto.
5.2 CONDITIONS TO OBLIGATIONS OF THE BUYER AND THE TRANSITORY
SUBSIDIARY. The obligation of each of the Buyer and the Transitory Subsidiary
to consummate the Merger is subject to the satisfaction (or waiver by the Buyer)
of the following additional conditions:
(a) the number of Dissenting Shares shall not exceed 10% of the number
of outstanding Common Shares as of the Effective Time (calculated after
giving effect to the conversion into Common Shares of all outstanding
Preferred Shares);
(b) the Company shall have obtained (and shall have provided copies
thereof to the Buyer) all of the waivers, permits, consents, approvals or
other authorizations, and effected all of the registrations, filings and
notices, referred to in Schedule 5.2(b) which are required on the part of
the Company except for any which if not obtained or effected would not have
a Company Material Adverse Effect or a material adverse effect on the
ability of the Parties to consummate the transactions contemplated by this
Agreement;
(c) the representations and warranties of the Company set forth in the
first sentence of Section 2.1 and in Section 2.2 and 2.3 and any
representations and warranties of the Company set forth in this Agreement
that are qualified as to materiality shall be true and correct in all
respects, and all other representations and warranties of the Company set
forth in this Agreement shall be true and correct in all material respects,
in each case as of the date of this Agreement and as of the Effective Time
as though made as of the Effective Time, except to the extent such
representations and warranties are specifically made as of a particular date
or as of the date of this Agreement (in which case such representations and
warranties shall be true and correct as of such date) and except where the
failures to be true and correct, individually or in the aggregate and
without regard to any qualifications as to materiality or Company Material
Adverse Effect contained in such representations and warranties, have not
had and are not reasonably likely to have a Company Material Adverse Effect;
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<PAGE>
(d) the Company shall have performed or complied with its agreements and
covenants required to be performed or complied with under this Agreement as
of or prior to the Effective Time, except to the extent where the failures
to perform or comply, individually or in the aggregate and without regard to
any qualifications as to materiality or Company Material Adverse Effect
contained in such agreements and covenants, have not had and are not
reasonably likely to have a Company Material Adverse Effect; provided that
the Company shall have complied with the provisions of Section 4.7 in all
respects;
(e) the agreements provided for in Section 1.14 shall be in full force
and effect;
(f) the Buyer shall have entered into stock restriction agreements with
all of the Level 3 Directors of the Company in the form attached hereto as
Exhibit C;
(g) the Company shall have delivered to the Buyer and the Transitory
Subsidiary a certificate (the "Company Certificate") to the effect that each
of the conditions specified in clause (a) of Section 5.1 and clauses
(a) through (e) of this Section 5.2 is satisfied in all respects;
(h) the Buyer shall have received from counsel to the Company an opinion
in the form as set forth in Exhibit F attached hereto, addressed to the
Buyer and dated as of the Closing Date;
(i) the Buyer shall have received copies of the resignations, effective
as of the Effective Time, of each director and officer of the Company and
the Subsidiaries (other than any such resignations which the Buyer
designates, by written notice to the Company, as unnecessary); and
(j) none of the following shall have occurred after the date of this
Agreement:
(i) the termination or resignation of employment for any reason of
more than 10% of the billable personnel employed by the Company as of the
date of this Agreement; or
(ii) the termination or cancellation of contracts in effect as of the
date of this Agreement under which the Company was to provide services to
clients if, in the aggregate, such contracts provided for the payment of
fees of $2,500,000 or more during 2000.
5.3 CONDITIONS TO OBLIGATIONS OF THE COMPANY. The obligation of the
Company to consummate the Merger is subject to the satisfaction of the following
additional conditions:
(a) the Buyer shall have effected all of the registrations, filings and
notices referred to in Section 4.2 which are required on the part of the
Buyer, except for any which if not obtained or effected would not have a
Buyer Material Adverse Effect or a material adverse effect on the ability of
the Parties to consummate the transactions contemplated by this Agreement;
(b) the representations and warranties of the Buyer and the Transitory
Subsidiary set forth in the first sentence of Section 3.1 and Sections 3.2
and 3.3 and any representations and warranties of the Buyer and the
Transitory Subsidiary set forth in this Agreement that are qualified as to
materiality shall be true and correct, and the representations and
warranties of the Buyer and the Transitory Subsidiary set forth in this
Agreement that are not so qualified (other than those set forth in Section
3.1 and Section 3.3) shall be true and correct in all material respects, in
each case as of the date of this Agreement and as of the Effective Time as
though made as of the Effective Time, except to the extent such
representations and warranties are specifically made as of a particular date
or as of the date of this Agreement (in which case such representations and
warranties shall be true and correct as of such date) and except to the
extent that such failure to be true and correct in all respects or true and
correct in all material respects, as applicable, would not have a Buyer
Material Adverse Effect;
(c) each of the Buyer and the Transitory Subsidiary shall have performed
or complied with in all material respects its agreements and covenants
required to be performed or complied with
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<PAGE>
under this Agreement as of or prior to the Effective Time except to the
extent that such failure to perform or comply would not have a Buyer
Material Adverse Effect;
(d) the Buyer shall have delivered to the Company a certificate (the
"Buyer Certificate") to the effect that each of the conditions specified in
clause (a) of Section 5.1 and clauses (a) through (c) of this Section 5.3 is
satisfied in all respects;
(e) the Company shall have received from counsel to the Buyer and the
Transitory Subsidiary an opinion in the form as set forth in Exhibit G
attached hereto, addressed to the Company and dated as of the Closing Date;
(f) Listing of Additional Shares. The filing with the Nasdaq National
Market of a Notification Form for Listing of Additional Shares with respect
to the shares of Buyer Common Stock issuable to the Company Stockholders in
the Merger and upon exercise of the Options under the Company's Stock Option
Plan assumed by Buyer shall have been made and such shares shall be approved
for listing, subject to official notice of issuance; and
(g) Registration Rights Agreement. Buyer and the Company Stockholders
shall have entered into a Registration Rights Agreement in the form attached
hereto as Exhibit H.
ARTICLE VI.
INDEMNIFICATION
6.1 INDEMNIFICATION BY THE COMPANY STOCKHOLDERS. The Company Stockholders
receiving the Merger Shares pursuant to Section 1.5 (the "Indemnifying
Stockholders") shall severally, but not jointly indemnify the Buyer in respect
of, and hold it harmless against, any and all debts, obligations and other
liabilities (whether absolute, accrued, contingent, fixed or otherwise, or
whether known or unknown, or due or to become due or otherwise), monetary
damages, fines, fees, penalties, interest obligations, deficiencies, losses and
expenses (including without limitation amounts paid in settlement, interest,
court costs, costs of investigators, reasonable fees and expenses of attorneys,
accountants, financial advisors and other experts, and other expenses of
litigation) ("Damages") incurred or suffered by the Surviving Corporation or the
Buyer or any Affiliate thereof resulting from, relating to or constituting:
(a) any misrepresentation, breach of warranty or failure to perform any
covenant or agreement of the Company contained in this Agreement or the
Company Certificate; or
(b) any failure of any Company Stockholder to have good, valid and
marketable title to the issued and outstanding Company Shares issued in the
name of such Company Stockholder, free and clear of all Security Interests.
6.2 INDEMNIFICATION BY THE BUYER. The Buyer shall indemnify the
Indemnifying Stockholders in respect of, and hold them harmless against, any and
all Damages incurred or suffered by the Indemnifying Stockholders resulting
from, relating to or constituting any misrepresentation, breach of warranty or
failure to perform any covenant or agreement of the Buyer or the Transitory
Subsidiary contained in this Agreement or the Buyer Certificate.
6.3 INDEMNIFICATION CLAIMS.
(a) A party entitled, or seeking to assert rights, to indemnification
under this Article VI (an "Indemnified Party") shall give written
notification to the party from whom indemnification is sought (an
"Indemnifying Party") of the commencement of any suit or proceeding relating
to a third party claim for which indemnification pursuant to this
Article VI may be sought. Such notification shall be given within 20
business days after receipt by the Indemnified Party of notice of such suit
or proceeding, and shall describe in reasonable detail (to the extent known
by the Indemnified Party) the facts constituting the basis for such suit or
proceeding and the amount of
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the claimed damages; provided, however, that no delay on the part of the
Indemnified Party in notifying the Indemnifying Party shall relieve the
Indemnifying Party of any liability or obligation hereunder except to the
extent of any damage or liability caused by or arising out of such failure.
Within 20 business days after delivery of such notification, the
Indemnifying Party may, upon written notice thereof to the Indemnified
Party, assume control of the defense of such suit or proceeding with counsel
reasonably satisfactory to the Indemnified Party. The party not controlling
such defense (the "Non-controlling Party") may participate therein at its
own expense. The party controlling such defense (the "Controlling Party")
shall keep the Non-controlling Party advised of the status of such suit or
proceeding and the defense thereof and shall consider in good faith
recommendations made by the Non-controlling Party with respect thereto. The
Non-controlling Party shall furnish the Controlling Party with such
information as it may have with respect to such suit or proceeding
(including copies of any summons, complaint or other pleading which may have
been served on such party and any written claim, demand, invoice, billing or
other document evidencing or asserting the same) and shall otherwise
cooperate with and assist the Controlling Party in the defense of such suit
or proceeding. The Indemnifying Party shall not agree to any settlement of,
or the entry of any judgment arising from, any such suit or proceeding
without the prior written consent of the Indemnified Party, which shall not
be unreasonably withheld or delayed; provided, that, if the amount of such
settlement will be fully indemnified against by the Indemnifying Party then
the Indemnifying Party may agree to any settlement of, or the entry of any
judgment arising from, any such suit or proceeding without the prior written
consent of the Indemnified Party, provided that such settlement includes a
complete release of the Indemnified Party from all claims relating to the
subject matter of the suit or proceeding. The Indemnified Party shall not
agree to any settlement of, or the entry of any judgment arising from, any
such suit or proceeding without the prior written consent of the
Indemnifying Party, which, may not be unreasonably withheld or delayed.
(b) In order to seek indemnification under this Article VI other than as
specified in Section 6.2(a) above, an Indemnified Party shall give written
notification (a "Claim Notice") to the Indemnifying Party which contains
(i) a description and the amount (the "Claimed Amount") of any Damages
incurred or reasonably expected to be incurred by the Indemnified Party,
(ii) a statement that the Indemnified Party is entitled to indemnification
under this Article VI for such Damages and a reasonable explanation of the
basis therefor, (iii) a demand for payment (in the manner provided in
paragraph (c) below) in the amount of such Damages, and (iv) a copy of the
Claim Notice to the Escrow Agent.
(c) Within 20 business days after delivery of a Claim Notice, the
Indemnifying Party shall deliver to the Indemnified Party a written response
(the "Response") in which the Indemnifying Party shall: (i) agree that the
Indemnified Party is entitled to receive all of the Claimed Amount (in which
case, the Indemnifying Party and the Indemnified Party shall deliver to the
Escrow Agent, within three days following the delivery of the Response, a
written notice executed by both parties instructing the Escrow Agent to
distribute to the Buyer such number of Escrow Shares as have an aggregate
Value (as defined below) equal to the Claimed Amount), (ii) agree that the
Indemnified Party is entitled to receive part, but not all, of the Claimed
Amount (the "Agreed Amount") (in which case, the Indemnifying Party and the
Indemnified Party shall deliver to the Escrow Agent, within three days
following the delivery of the Response, a written notice executed by both
parties instructing the Escrow Agent to distribute to the Buyer such number
of Escrow Shares as have an aggregate Value equal to the Agreed Amount) or
(iii) dispute that the Indemnified Party is entitled to receive any of the
Claimed Amount. If the Indemnifying Party in the Response disputes its
liability for all or part of the Claimed Amount, the Indemnifying Party and
the Indemnified Party shall follow the procedures set forth in Section
6.2(d) for the resolution of such dispute (a "Dispute"). For purposes of
this Article VI, the "Value" of any Escrow Shares delivered in satisfaction
of an indemnity claim shall be the average of the last reported sale prices
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per share of the Buyer Common Stock on the Nasdaq National Market over the
ten consecutive trading days immediately preceding and ending on the last
trading day before the date of such determination (subject to equitable
adjustment in the event of any stock split, stock dividend, reverse stock
split or similar event affecting the Buyer Common Stock since the beginning
of such ten-day period), multiplied by the number of such Escrow Shares.
(d) During the 15-day period following the delivery of a Response that
reflects a Dispute, the Indemnifying Party and the Indemnified Party shall
use good faith efforts to resolve the Dispute. If the Indemnified Party and
the Indemnifying Party should so agree, a memorandum setting forth such
agreement shall be prepared and signed by both parties and furnished to the
Escrow Agent. The Escrow Agent shall be entitled to rely on any such
memorandum and shall distribute the Buyer Common Stock from the Escrow Fund
in accordance with the terms thereof.
(e) If the Indemnifying Party is comprised of the Indemnifying
Stockholders, references to the Indemnifying Party (except provisions
relating to an obligation to make or a right to receive any payments
provided for in Section 6.4 or Section 6.5) shall be deemed to refer to the
Indemnification Representative. The Indemnification Representative shall
have full power and authority on behalf of each Indemnifying Stockholder to
take any and all actions on behalf of, execute any and all instruments on
behalf of, and execute or waive any and all rights of, the Indemnifying
Stockholders under this Article VI. The Indemnification Representative may
be changed by the holders of a majority in interest of the Escrow Shares
from time to time upon not less than 10 days' prior written notice to Buyer.
The Indemnification Representative may resign upon thirty (30) days' notice
to the parties to this Agreement and the Indemnifying Stockholders. No bond
shall be required of the Indemnification Representative, and the
Indemnification Representative shall receive no compensation for his or her
services. Notices or communications to or from the Indemnification
Representative shall constitute notice to or from each of the Indemnifying
Stockholders. The Indemnification Representative shall have reasonable
access to information about the Buyer and the reasonable assistance of the
Company's former officers and employees for purposes of performing his or
her duties and exercising his or her rights hereunder, provided that the
Indemnification Representative shall treat confidentially and not disclose
any nonpublic information from or about the Company to anyone (except on a
need to know basis to individuals who agree to treat such information
confidentially or in connection with any arbitration proceeding).
6.4 SURVIVAL OF REPRESENTATIONS AND WARRANTIES. All representations and
warranties contained in this Agreement, the Company Certificate or the Buyer
Certificate shall (a) survive the Closing and any investigation at any time made
by or on behalf of an Indemnified Party and (b) shall expire on the date one
year following the Closing Date. If an Indemnified Party delivers to an
Indemnifying Party, before expiration of a representation or warranty, either a
Claim Notice based upon a breach of such representation or warranty, or a notice
that, as a result a legal proceeding instituted by or written claim made by a
third party, the Indemnified Party reasonably expects to incur Damages as a
result of a breach of such representation or warranty (an "Expected Claim
Notice"), then such representation or warranty shall survive until, but only for
purposes of, the resolution of the matter covered by such notice. If the legal
proceeding or written claim with respect to which an Expected Claim Notice has
been given is definitively withdrawn or resolved in favor of the Indemnified
Party, the Indemnified Party shall promptly so notify the Indemnifying Party;
and if the Indemnified Party has delivered a copy of the Expected Claim Notice
to the Escrow Agent and Escrow Shares have been retained in escrow after the
Termination Date (as defined in the Escrow Agreement) with respect to such
Expected Claim Notice, the Indemnifying Party and the Indemnified Party shall
promptly deliver to the Escrow Agent a written notice executed by both parties
instructing the Escrow Agent to distribute such retained Escrow Shares to the
Indemnifying Stockholders in accordance with the terms of the Escrow Agreement.
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<PAGE>
6.5 LIMITATIONS.
(a) Except with respect to claims based on fraud, notwithstanding
anything to the contrary herein, (i) the aggregate liability of the
Indemnifying Stockholders for Damages under this Article VI shall not exceed
the Value of the Escrow Shares, and (ii) the aggregate liability of the
Buyer for Damages under this Article VI shall not exceed $125,000,000.
(b) Except with respect to claims based on fraud, the rights of the
Indemnified Parties under this Article VI and, in the case of the
Indemnifying Stockholders, the Escrow Agreement shall be the sole and
exclusive remedy of the Indemnified Parties with respect to any matters
relating to this Agreement, the Merger and any other transaction
contemplated by this Agreement, including without limitation claims
resulting from or relating to any misrepresentation, breach of warranty or
failure to perform any covenant or agreement contained in this Agreement.
(c) No Indemnifying Stockholder shall have any right of contribution
against the Company or the Surviving Corporation with respect to any breach
by the Company of any of its representations, warranties, covenants or
agreements. There shall be no right of contribution between and among the
Indemnifying Stockholders with respect to their indemnification obligations
under this Article VI.
(d) The Company Stockholders shall not be required to indemnify the
Buyer with respect to any claim for indemnification due to inaccuracies in
the representations and warranties of the Company, except for the
representations and warranties set forth in Sections 2.1, 2.2 and 2.3,
unless and until the aggregate amount of all such claims against the Company
Stockholders exceeds $575,000, at which time the Company Stockholders shall
only be required to indemnify the Buyer with respect to the amount in excess
of $575,000.
(e) The Buyer shall not be required to indemnify the Company
Stockholders with respect to any claim for indemnification due to
inaccuracies in the representations and warranties of the Buyer, except for
the representations and warranties set forth in Section 3.1, 3.2 and 3.3,
unless and until the aggregate amount of all such claims against the Buyer
exceeds $575,000, at which time the Buyer shall only be required to
indemnify the Company Stockholders with respect to the amount in excess of
$575,000.
(f) Notwithstanding anything in this Agreement to the contrary, no
Company Stockholder shall be obligated to indemnify the Buyer pursuant to
this Article VI for an amount in excess of the Value (as defined in Section
6.2(a) hereof) of the number of Escrow Shares to which such Company
Stockholder would be otherwise entitled to receive pursuant to Section 1.5
hereof and such Escrow Shares shall serve as the sole and exclusive remedy
for satisfaction of such Company Stockholder's obligations pursuant to this
Article VI. There shall be no right of contribution between and among the
Company Stockholders with respect to their indemnification obligations under
this Article VI.
ARTICLE VII.
TERMINATION
7.1 TERMINATION OF AGREEMENT. The Parties may terminate this Agreement
prior to the Effective Time (whether before or after Requisite Stockholder
Approval), as provided below:
(a) the Parties may terminate this Agreement by mutual written consent;
(b) the Buyer may terminate this Agreement by giving written notice to
the Company in the event the Company is in breach of any representation,
warranty or covenant contained in this Agreement, and such breach,
individually or in combination with any other such breach, (i) would cause
the conditions set forth in clauses (c) or (d) of Section 5.2 not to be
satisfied and (ii) is not
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<PAGE>
cured within 10 days following delivery by the Buyer to the Company of
written notice of such breach;
(c) the Company may terminate this Agreement by giving written notice to
the Buyer in the event the Buyer or the Transitory Subsidiary is in breach
of any representation, warranty or covenant contained in this Agreement, and
such breach, individually or in combination with any other such breach,
(i) would cause the conditions set forth in clauses (c) or (d) of Section
5.3 not to be satisfied and (ii) is not cured within 10 days following
delivery by the Company to the Buyer of written notice of such breach;
(d) the Buyer may terminate this Agreement by giving written notice to
the other Parties at any time after the Company Stockholders have voted on
whether to approve this Agreement and the Merger in the event this Agreement
and the Merger failed to receive the Requisite Stockholder Approval;
(e) the Buyer may terminate this Agreement by giving written notice to
the Company if the Closing shall not have occurred on or before July 31,
2000 by reason of the failure of any condition precedent under Section 5.1
or 5.2 hereof (unless the failure results primarily from a breach by the
Buyer or the Transitory Subsidiary of any representation, warranty or
covenant contained in this Agreement); or
(f) the Company may terminate this Agreement by giving written notice to
the Buyer and the Transitory Subsidiary if the Closing shall not have
occurred on or before July 31, 2000 by reason of the failure of any
condition precedent under Section 5.1 or 5.3 hereof (unless the failure
results primarily from a breach by the Company of any representation,
warranty or covenant contained in this Agreement).
7.2 EFFECT OF TERMINATION. If any Party terminates this Agreement pursuant
to Section 7.1 all obligations of the Parties hereunder shall terminate without
any liability of any Party to any other Party, except (i) as set forth in
Sections 4.5(b), 4.8, 4.12 and Article IX, (ii) for any liability for any
breaches of this Agreement by such Party prior to the time of termination and
(iii) if the termination was by a Party pursuant to Sections 7.1(b), (c), (d),
(e) or (f) as a result of a material breach by the other Party hereto, the
breaching Party shall promptly pay $150,000 to the non-breaching Party as
partial reimbursement of the fees and expenses of the non-breaching Party.
Payment of the $150,000 amount specified in the prior sentence shall in no way
alter, limit, waive or otherwise affect any of the rights or obligations of the
parties pursuant to this Agreement (including claims for damages arising out of
a breach of this Agreement).
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<PAGE>
ARTICLE VIII.
DEFINITIONS
For purposes of this Agreement, each of the following defined terms is
defined in the Section of this Agreement indicated below.
<TABLE>
<CAPTION>
DEFINED TERM SECTION
- ------------ -------
<S> <C>
401(k) Plan 2.22(d)
Acquisition Proposal 4.7(e)
Affiliate 2.15(a)(vii)
Affiliate Agreement 4.9
Agreed Amount 6.3(c)
Agreement Introduction
Buyer Introduction
Buyer Certificate 5.3(d)
Buyer Common Stock 1.5(a)
Buyer Financial Statements 3.5
Buyer Material Adverse Effect 3.1
Buyer SEC Documents 3.5
CERCLA 2.23(a)
Certificates 1.7(a)
Certificate of Merger 1.1
Claim Notice 6.3(b)
Claimed Amount 6.3(b)
Closing 1.2
Closing Date 1.2
Code 1.9(a)
Common Conversion Ratio 1.5(c)
Common Shares 1.5(a)
Company Introduction
Company Certificate 5.2(g)
Company Employee Benefits Plan 2.22(b)
Company Intellectual Property 2.13(a)
Company Material Adverse Effect 2.1
Company Shares 1.5(b)
Company Stockholder 1.5(c)
</TABLE>
A-35
<PAGE>
<TABLE>
<CAPTION>
DEFINED TERM SECTION
- ------------ -------
<S> <C>
Company Stock Plan 1.9(a)
Company Customer Deliverables 2.13(a)
Controlling Party 6.3(a)
Damages 6.1
Delaware Courts 9.11
DGCL 1.1
Disclosure Schedule Article II
Dispute 6.3(c)
Dissenting Shares 1.6(a)
Effective Time 1.1
Employee Benefit Plan 2.22(a)(i)
Environmental Law 2.23(a)
ERISA 2.22(a)(ii)
Company ERISA Affiliate 2.22(a)(iii)
Escrow Agreement 1.3(e)
Escrow Agent 1.3(e)
Escrow Shares 1.5(c)
Expected Claim Notice 6.4
Exchange Act 2.15(a)(vii)
Exchange Agent 1.3(d)
Financial Statements 2.6
GAAP 2.6
Governmental Entity 2.4
HSR Act 2.3
Indemnification Representatives 1.3(e)
Indemnified Party 6.3(a)
Indemnifying Party 6.3(a)
Indemnifying Stockholders 6.1
Initial Shares 1.5(c)
Intellectual Property 2.13(a)
Company Internal Systems 2.13(a)
Legal Proceeding 2.19
Materials of Environmental Concern 2.23(b)
</TABLE>
A-36
<PAGE>
<TABLE>
<CAPTION>
DEFINED TERM SECTION
- ------------ -------
<S> <C>
Merger 1.1
Merger Shares 1.5(c)
Most Recent Balance Sheet 2.8
Most Recent Balance Sheet Date 2.6
Non-controlling Party 6.3(a)
Options 1.9(a)
Ordinary Course of Business 2.4
Parties Introduction
Permits 2.26
Preferred Conversion Ratio 1.5(c)
Preferred Shares 1.5(b)
Prospectus/Proxy Statement 4.3(a)
Reasonable Best Efforts 4.1
Registration Statement 4.3(a)
Response 6.3(c)
Requisite Stockholder Approval 2.3
SEC 3.5
Securities Act 1.9(c)
Security Interest 2.4
Company Software 2.13(e)
Surviving Corporation 1.1
Taxes 2.9(a)(I)
Tax Returns 2.9(a)(ii)
Transaction Documents 3.3
Transitory Subsidiary Introduction
Value 6.3(c)
Year 2000 Compliant 2.13(i)
</TABLE>
ARTICLE IX.
MISCELLANEOUS
9.1 PRESS RELEASES AND ANNOUNCEMENTS. No Party shall issue any press
release or public announcement or otherwise make any public statements relating
to the subject matter of this Agreement without the prior written approval of
the other Parties, which consent shall not be unreasonably withheld; provided,
however, that any Party may make any public disclosure, without the prior
written approval of the other Party, it believes in good faith is required by
applicable law, regulation or stock market rule (in which case the disclosing
Party shall use reasonable best efforts to
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<PAGE>
advise the other Parties and provide them with a copy of the proposed disclosure
prior to making the disclosure). Notwithstanding the foregoing, the parties may
have oral communications with representatives of the financial community which
are consistent with their historic practice so long as information contained in
such communications has been substantially disclosed previously in a press
release or public announcement made in compliance with the provisions of this
Section 9.1.
9.2 NO THIRD PARTY BENEFICIARIES. This Agreement shall not confer any
rights or remedies upon any person other than the Parties and their respective
successors and permitted assigns; provided, however, that the provisions in
Article I concerning issuance of the Merger Shares and Article VI concerning
indemnification are intended for the benefit of the Company Stockholders.
9.3 ENTIRE AGREEMENT. This Agreement (including the documents referred to
herein) constitutes the entire agreement among the Parties and supersedes any
prior understandings, agreements or representations by or among the Parties,
written or oral, with respect to the subject matter hereof; provided that the
Confidentiality Agreement, dated January 3, 2000 between the Buyer and the
Company shall remain in effect in accordance with its terms.
9.4 SUCCESSION AND ASSIGNMENT. This Agreement shall be binding upon and
inure to the benefit of the Parties named herein and their respective successors
and permitted assigns. No Party may assign either this Agreement or any of its
rights, interests or obligations hereunder without the prior written approval of
the other Parties; provided that the Transitory Subsidiary may assign its
rights, interests and obligations hereunder to an Affiliate of the Buyer who
becomes a party to this Agreement and agrees to perform and assume the
obligations of Transitory Subsidiary hereunder, but no such assignment shall
relieve either Buyer or Transitory Subsidiary of their respective obligations
hereunder if such assignee does not perform such obligations.
9.5 COUNTERPARTS; FACSIMILE SIGNATURE. This Agreement may be executed in
two or more counterparts, each of which shall be deemed an original but all of
which together shall constitute one and the same instrument. This Agreement may
be executed by facsimile signature.
9.6 HEADINGS. The section headings contained in this Agreement are
inserted for convenience only and shall not affect in any way the meaning or
interpretation of this Agreement.
9.7 NOTICES. All notices, requests, demands, claims, and other
communications hereunder shall be in writing. Any notice, request, demand, claim
or other communication hereunder shall be deemed duly delivered four business
days after it is sent by registered or certified mail, return receipt requested,
postage prepaid, or one business day after it is sent for next-day delivery via
a reputable nationwide overnight courier service, in each case to the intended
recipient as set forth below:
<TABLE>
<S> <C>
IF TO THE COMPANY: COPY TO:
Eggrock Partners, Inc. Goodwin, Procter & Hoar LLP
30 Monument Square, Suite 155 Exchange Place, 53 State St.
Boston, MA 02109 Concord, MA 01742
Attention: Maureen Ellenberger Attention: Jeffrey C. Hadden, P.C. and Joseph
Telecopier: (978) 287-4680 L. Johnson III, P.C.
Telecopier: 617-523-1231
IF TO THE BUYER OR THE TRANSITORY SUBSIDIARY: COPY TO:
Breakaway Solutions, Inc. Hale and Dorr LLP
50 Rowes Wharf 60 State Street
Boston, MA 02110 Boston, MA 02110
Attention: Gordon Brooks Attention: Thomas L. Barrette, Jr., Esq.
Telecopier: (617) 960-3434 Telecopier: (617) 526-5000
</TABLE>
A-38
<PAGE>
Any Party may give any notice, request, demand, claim or other communication
hereunder using any other means (including personal delivery, expedited courier,
messenger service, telecopy, telex, ordinary mail or electronic mail), but no
such notice, request, demand, claim or other communication shall be deemed to
have been duly given unless and until it actually is received by the party for
whom it is intended. Any Party may change the address to which notices,
requests, demands, claims, and other communications hereunder are to be
delivered by giving the other Parties notice in the manner herein set forth.
9.8 CHOICE OF LAW. All disputes, claims or controversies arising out of or
relating to this Agreement, or the negotiation, validity or performance of this
Agreement, or the transactions contemplated hereby shall be governed by and
construed in accordance with the laws of the State of Delaware without regard to
its rules of conflict of laws.
9.9 AMENDMENTS AND WAIVERS. The Parties may mutually amend any provision
of this Agreement at any time prior to the Effective Time; provided, however,
that any amendment effected subsequent to the Requisite Stockholder Approval
shall be subject to any restrictions contained in the Delaware General
Corporation Law. No amendment of any provision of this Agreement shall be valid
unless the same shall be in writing and signed by all of the Parties. No waiver
of any right or remedy hereunder shall be valid unless the same shall be in
writing and signed by the Party giving such waiver. No waiver by any Party with
respect to any default, misrepresentation or breach of warranty or covenant
hereunder shall be deemed to extend to any prior or subsequent default,
misrepresentation or breach of warranty or covenant hereunder or affect in any
way any rights arising by virtue of any prior or subsequent such occurrence.
9.10 SEVERABILITY. Any term or provision of this Agreement that is invalid
or unenforceable in any situation in any jurisdiction shall not affect the
validity or enforceability of the remaining terms and provisions hereof or the
validity or enforceability of the offending term or provision in any other
situation or in any other jurisdiction. If the final judgment of a court of
competent jurisdiction declares that any term or provision hereof is invalid or
unenforceable, the Parties agree that the court making the determination of
invalidity or unenforceability shall have the power to limit the term or
provision, to delete specific words or phrases, or to replace any invalid or
unenforceable term or provision with a term or provision that is valid and
enforceable and that comes closest to expressing the intention of the invalid or
unenforceable term or provision, and this Agreement shall be enforceable as so
modified.
9.11 CONSENT TO JURISDICTION. Each of the Company, Buyer and Transitory
Subsidiary hereby irrevocably and unconditionally consents to submit to the sole
and exclusive jurisdiction of the courts of the State of Delaware and of the
United States District Court for the District of Delaware (the "DELAWARE
COURTS") for any litigation arising out of or relating to this Agreement, or the
negotiation, validity or performance of this Agreement, or the transactions
contemplated hereby (and agrees not to commence any litigation relating thereto
except in such courts), waives an objection to the laying of venue of any such
litigation in the Delaware Courts and agrees not to plead or claim in any
Delaware Court that such litigation brought therein has been brought in an
inconvenient forum. Each of the parties hereto agrees, (a) to the extent such
party is not otherwise subject to service of process in the State of Delaware,
to appoint and maintain an agent in the State of Delaware as such party's agent
for acceptance of legal process, and (b) that service of process may also be
made on such party by prepaid certified mail with a proof of mailing receipt
validated by the United States Postal Service constituting evidence of valid
service. Service made pursuant to (a) or (b) above shall have the same legal
force and effect as if served upon such party personally within the State of
Delaware.
9.12 CONSTRUCTION.
(a) The language used in this Agreement shall be deemed to be the
language chosen by the Parties to express their mutual intent, and no
rule of strict construction shall be applied against any Party.
(b) Any reference to any federal, state, local or foreign statute or law
shall be deemed also to refer to all rules and regulations promulgated
thereunder, unless the context requires otherwise.
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<PAGE>
IN WITNESS WHEREOF, the Parties have executed this Agreement and Plan of
Merger as of the date first above written.
<TABLE>
<S> <C> <C>
BREAKAWAY SOLUTIONS, INC.
By: /s/ GORDON BROOKS
-----------------------------------------
Name: Gordon Brooks
Title: PRESIDENT AND CHIEF EXECUTIVE
OFFICER
BENEDICT ACQUISITION CORP.
By: /s/ KEVIN COMERFORD
-----------------------------------------
Name: Kevin Comerford
Title: PRESIDENT
EGGROCK PARTNERS, INC.
By: /s/ MAUREEN ELLENBERGER
-----------------------------------------
Name: Maureen Ellenberger
Title: PRESIDENT AND CHIEF EXECUTIVE
OFFICER
</TABLE>
A-40
<PAGE>
ANNEX B
ESCROW AGREEMENT
THIS ESCROW AGREEMENT is entered into as of [ ], 2000 (this
"Agreement"), by and among Breakaway Solutions, Inc., a Delaware corporation
(the "Buyer"), Eggrock Partners, Inc., a Delaware corporation (the "Company"),
Maureen Ellenberger (the "Indemnification Representative") and State Street Bank
and Trust Company (the "Escrow Agent").
WHEREAS, the Buyer and the Company have entered into an Agreement and Plan
of Merger, dated as of January 26, 2000 (the "Merger Agreement"), by and among
the Company, the Buyer and Benedict Acquisition Corp., a Delaware corporation
and wholly owned subsidiary of the Buyer ("Merger Sub"), pursuant to which
Merger Sub will merge with and into the Company (the "Merger") which, as the
surviving corporation (the "Surviving Corporation"), will become a wholly-owned
subsidiary of the Buyer;
WHEREAS, the Merger Agreement provides that an escrow account will be
established for the purpose of securing and as the sole remedy for satisfying
the indemnification obligations of the stockholders of the Company pursuant to
the Merger Agreement (collectively, the "Indemnifying Stockholders") to the
Buyer; and
WHEREAS, the parties hereto desire to establish the terms and conditions
pursuant to which such escrow account will be established and maintained;
NOW, THEREFORE, the parties hereto hereby agree as follows:
1. CONSENT OF COMPANY STOCKHOLDERS. The Indemnifying Stockholders have,
either by virtue of their approval of the Merger Agreement or through the
execution of an instrument to such effect, consented to: (a) the establishment
of this escrow for the purpose of securing and as the sole remedy for satisfying
the Indemnifying Stockholders' indemnification obligations under Article VI of
the Merger Agreement in the manner set forth herein, (b) the appointment of
Maureen Ellenberger as the Indemnification Representative as their
representative for purposes of this Agreement and as attorney-in-fact and agent
for and on behalf of each Indemnifying Stockholder, and the taking by the
Indemnification Representative of any and all actions and the making of any
decisions required or permitted to be taken or made by her under this Agreement
and (c) all of the other terms, conditions and limitations in this Agreement.
2. ESCROW AND INDEMNIFICATION.
(a) ESCROW OF SHARES. Simultaneously with the execution of this
Agreement, the Buyer shall deposit with the Escrow Agent a certificate for
[ ] shares of common stock of the Buyer, as determined pursuant to
Section 1.5 of the Merger Agreement, issued in the name of the Escrow Agent
or its nominee. The certificate shall be accompanied by a statement of the
Buyer confirming that the certificate delivered to the Escrow Agent
represents all of the Escrow Shares to be deposited with the Escrow Agent
pursuant to the terms of Section 1.10 of the Merger Agreement. Upon its
receipt thereof, the Escrow Agent shall acknowledge in writing receipt of
such stock certificate to the Buyer and the Company. The Buyer may from time
to time deposit with the Escrow Agent additional shares of common stock of
the Buyer pursuant to the final sentence of Section 1.6(a) of the Merger
Agreement. Any such delivery of additional shares shall be accompanied by
(i) a written notice from the Buyer to the Escrow Agent identifying such
shares as additional shares being deposited under this Agreement and (ii) a
revised SCHEDULE A to reflect such deposit, as contemplated by Section 3(c)
below (or shall state that no such revision is necessary). The shares
deposited with the Escrow Agent pursuant to the first sentence of this
Section 2(a), together with any further shares deposited by the Buyer
pursuant to the immediately preceding sentence, are referred to herein as
the "Escrow Shares." The Escrow Shares shall be
B-1
<PAGE>
held as an escrow fund and shall not be subject to any lien, attachment,
trustee process or any other judicial process of any creditor of any party
hereto. The Escrow Agent agrees to hold the Escrow Shares in an escrow
account (the "Escrow Account"), subject to the terms and conditions of this
Agreement.
(b) INDEMNIFICATION. The Indemnifying Stockholders have agreed in
Article VI of the Merger Agreement that they shall severally but not jointly
indemnify and hold harmless the Buyer from and against specified Damages (as
defined in Section 6.1 of the Merger Agreement). The Escrow Shares shall be
security for and the sole remedy for satisfying such indemnity obligation of
the Indemnifying Stockholders, subject to the limitations, and in the manner
provided, in this Agreement.
(c) DIVIDENDS, ETC. Any securities distributed in respect of or in
exchange for any of the Escrow Shares, whether by way of stock dividends,
stock splits or otherwise, shall be issued in the name of the Escrow Agent
or its nominee, and shall be delivered to the Escrow Agent, who shall hold
such securities in the Escrow Account. Such securities shall be considered
Escrow Shares for purposes hereof.
(d) VOTING OF SHARES. The Indemnifying Stockholders shall have the
right, to direct the Escrow Agent in writing as to the exercise of any
voting rights pertaining to the Escrow Shares, and the Escrow Agent shall
comply with any such written instructions. The Buyer shall send the
Indemnifying Stockholders any notice, solicitation or other document or
information it issues to its stockholders generally with respect to the
Escrow Shares, including but not limited to proxy materials. Absent its
receipt of such written instruction on a timely basis, the Escrow Agent
shall be under no obligation to protect, preserve, exercise or enforce any
rights or privileges in the Escrow Shares.
(e) TRANSFERABILITY. The respective interests of the Indemnifying
Stockholders in the Escrow Shares shall not be assignable or transferable,
other than by operation of law to the heir or administrative personal
representative or devisee of a deceased Indemnifying Stockholder. Notice of
any such assignment or transfer by operation of law shall be given to the
Escrow Agent and the Buyer in writing, and no such assignment or transfer
shall be valid until such notice is given.
(f) REPORTING. For federal income tax purposes and, to the extent
permitted by applicable law, state and local tax purposes, the parties shall
submit any required reports or returns prepared on the basis that the
Indemnifying Stockholders are the owners of the Escrow Shares in the
relative percentages set forth on SCHEDULE A annexed hereto and made a part
hereof, as such SCHEDULE A may be revised from time to time as provided
herein (as so revised, from time to time, "SCHEDULE A"), and the
Indemnifying Stockholders shall furnish any required tax forms consistent
with the foregoing.
3. DISTRIBUTION OF ESCROW SHARES.
(a) The Escrow Agent shall distribute the Escrow Shares only in
accordance with (i) a written instrument delivered to the Escrow Agent that
is executed by both the chief executive officer or chief financial officer
of Buyer and the Indemnification Representative and that instructs the
Escrow Agent as to the distribution of some or all of the Escrow Shares,
(ii) an order of a court of competent jurisdiction, a copy of which is
delivered to the Escrow Agent by either the Buyer or the Indemnification
Representative, that instructs the Escrow Agent as to the distribution of
some or all of the Escrow Shares, (iii) the provisions of Section
3(b) hereof; provided, however, that in any such circumstance, prior to
distribution of Escrow Shares to any Indemnifying Stockholder, the Escrow
Agent (A) may demand payment of any Claimed Amount pursuant to Section
6(a) and transfer the related amount of Escrow Shares to the Buyer pursuant
to the terms of said Section, and (B) shall deliver to the Indemnification
Representative any Escrow Shares that may be
B-2
<PAGE>
necessary to pay any Indemnification Representative Expenses pursuant to
Section 8(b) (to the extent the Escrow Agent has received written notice
thereof).
(b) On the date that is the first anniversary of the date hereof (the
"Termination Date"), the Escrow Agent shall determine (i) the aggregate
Value (as defined in Section 4 hereof) of Escrow Shares then held hereunder,
(ii) the aggregate amount of claims set forth in any Buyer Claims (as
defined below) received by the Escrow Agent prior to the Termination Date
and not resolved pursuant to clauses (i) or (ii) of Section 3(a) (and as to
which the Escrow Agent has not otherwise received written notice of the
resolution from the Buyer), and (iii) the aggregate Claimed Amount of any
pending claims for reimbursement of the Escrow Agent pursuant to Section
6(a) below, and the aggregate amount of any pending Indemnification
Representative Expenses, as that term is defined in Section 8(b) below as to
which the Escrow Agent has received written notice from the Indemnification
Representative prior to the Termination Date (and which have not been paid,
to the knowledge of the Escrow Agent). If and to the extent such aggregate
Value of the Escrow Shares (as described in clause (i) of this paragraph) is
determined by the Escrow Agent to exceed (such excess, if any, the "Escrow
Share Excess Value") the sum of the aggregate amount of such pending Buyer
Claims, pending Claimed Amounts and pending Indemnification Representative
Expense claims (as described in clauses (ii) and (iii) of this paragraph),
the Escrow Agent shall distribute that portion of the Escrow Shares then
held hereunder equal to such Escrow Share Excess Value (as nearly as
practicable, after rounding as provided in Section 3(c) below) to the
Indemnifying Stockholders as provided in Section 3(c). As used herein, a
"Buyer Notice" shall mean any written notice received by the Escrow Agent
from the Buyer prior to the Termination Date which states that it is a
"Claim Notice" as defined in Section 6.2(b) of the Merger Agreement and sets
forth a brief description of the claim to which it relates and the amount of
such claim. The Escrow Agent shall retain in escrow after the Termination
Date such Escrow Shares, if any, not released pursuant to the first two
sentences of this Section 3(b) (such released Escrow Shares representing the
Escrow Share Excess Value, if any), and any such Escrow Shares so retained
in escrow shall be distributed only in accordance with the terms of clauses
(i), (ii) or (iii) of Section 3(a) hereof.
(c) Any distribution of all or a portion of the Escrow Shares to the
Indemnifying Stockholders shall be made by delivery of the stock certificate
held by the Escrow Agent representing the Escrow Shares then held by it to
the Company with appropriate written instruction (and any necessary and
appropriate endorsement) requesting transfer of the applicable number of
Escrow Shares to the Indemnifying Stockholders, divided among them pro rata
(as nearly as practicable, after rounding as provided below) in accordance
with the percentages set forth opposite such holders' respective names on
SCHEDULE A attached hereto, and requesting issuance and delivery of stock
certificates representing such transferred Escrow Shares to such
Indemnifying Stockholders (in each case by mailing such certificate to his
or her address set forth on Schedule A, or as such Indemnifying Stockholder
may otherwise instruct the Escrow Agent in writing); and, if less than all
the then remaining Escrow Shares are to be so transferred, also instructing
the Company to issue and return to the Escrow Agent (or its nominee, if the
Escrow Agent shall so instruct) a stock certificate representing the
remaining Escrow Shares. The Escrow Agent shall have no liability for the
actions or omissions of, or any delay on the part of, the Company in
connection therewith; provided, however, that notwithstanding any term
hereof (or in Sections 3(a) or 3(b)) to the contrary, in connection with any
distribution of Escrow Shares to Indemnifying Stockholders, the Escrow Agent
shall withhold the distribution of the portion of the Escrow Shares
otherwise distributable to an Indemnifying Stockholder who has not,
according to a written notice provided by the Buyer to the Escrow Agent,
prior to such distribution, surrendered pursuant to the terms of the Merger
Agreement his, her or its stock certificates formerly representing shares of
stock of the Company; and PROVIDED FURTHER that such SCHEDULE A shall be
appropriately revised by the Buyer (and provided to the Escrow Agent) in the
event the Buyer
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deposits additional Escrow Shares with the Escrow Agent pursuant to the
final sentence of Section 1.6(a) of the Merger Agreement following the date
of this Agreement. Any shares withheld because an Indemnifying Stockholder
has not yet surrendered their Company stock certificate shall be delivered
to the Buyer promptly after the Termination Date, and shall be delivered by
the Buyer to the Indemnifying Stockholders to whom such shares would have
otherwise been distributed upon surrender of their Company stock
certificates. Distributions to the Indemnifying Stockholders shall be made
by mailing stock certificates to such holders at their respective addresses
shown on SCHEDULE A (or such other address as may be provided in writing to
the Escrow Agent by any such holder). No fractional Escrow Shares shall be
distributed to Indemnifying Stockholders pursuant to this Agreement.
Instead, the number of shares that each Indemnifying Stockholder shall
receive shall be rounded up or down to the nearest whole number (provided
that the Indemnification Representative shall have the authority to effect
such rounding in such a manner that the total number of whole Escrow Shares
to be distributed equals the number of Escrow Shares then held in the Escrow
Account).
4. VALUATION OF ESCROW SHARES. For purposes of this Agreement, the "Value"
of any Escrow Shares shall be the average of the last reported sale prices per
share of the Buyer's common stock on the Nasdaq National Market over the ten
consecutive trading days immediately preceding and ending on the last trading
day before the date of such determination (subject to equitable adjustment in
the event of any stock split, stock dividend, reverse stock split or similar
event affecting the Buyer's common stock since the beginning of such ten-day
period), as certified by the Buyer and the Indemnification Representative to the
Escrow Agent in writing, multiplied by the number of such Escrow Shares. In any
circumstance in which the Escrow Agent is required to make a distribution of
Escrow Shares based upon such Value or otherwise requires a determination of
Value in order to perform its duties under this Agreement, the Escrow Agent
shall be entitled to request the Buyer and the Indemnification Representative to
determine and certify to the Escrow Agent the per share Value of the Escrow
Shares as of a date of determination specified therein (which may be a date
selected by the Escrow Agent which is as near as reasonably practicable to the
date on which the related distribution or action is to be taken), and the Buyer
shall promptly provide such certification to the Escrow Agent. The Escrow Agent
shall be entitled to rely conclusively upon any such certification of Value
without any duty to verify or recalculate the same, and the Escrow Agent shall
not be liable for any action or omission of, or delay on the part of, the Buyer
in such connection. Notwithstanding any term hereof to the contrary, in any such
instance, the Escrow Agent shall be entitled to refrain from taking any action
otherwise required hereunder (and which requires a determination of Value),
without liability on its part, until it receives such certification from the
Buyer and the Indemnification Representative.
5. FEES AND EXPENSES OF ESCROW AGENT. The Buyer hereby agrees (i) to pay
or reimburse the Escrow Agent for its attorney's fees and expenses incurred in
connection with the preparation of this Agreement and (ii) to pay the Escrow
Agent's compensation for its normal services hereunder in accordance with the
attached fee schedule, attached as Schedule B and made a part hereof, and
(iii) to pay or reimburse any other costs and expenses (including without
limitation reasonable attorneys' fees) incurred by the Escrow Agent in
connection with the administration of this Agreement or the escrow created
hereby or the performance or observance of its duties hereunder which are in
excess of its compensation for normal services hereunder.
6. LIMITATION OF ESCROW AGENT'S LIABILITY.
(a) The Escrow Agent shall incur no liability with respect to any action
taken or suffered by it in reliance upon any notice, direction, instruction
(including without limitation any wire transfer instruction), consent,
statement or other documents believed by it to be genuine and duly
authorized, nor for other action or inaction except its own willful
misconduct or gross negligence. The Escrow Agent shall not be responsible
for the validity or sufficiency of this Agreement. In all
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questions arising under this Agreement, the Escrow Agent may rely on the
written advice of counsel (including in-house counsel), and the Escrow Agent
shall not be liable to anyone for anything done, omitted or suffered in good
faith by the Escrow Agent based on such advice. The Escrow Agent shall not
be required to take any action hereunder involving any expense, or
subjecting it to any liability unless the payment of such expense and
indemnification from such liability, is made or provided for in a manner
reasonably satisfactory to it.
(b) The Buyer and the Indemnifying Stockholders hereby, jointly and
severally, agree to indemnify the Escrow Agent for, and hold it harmless
against, any loss, liability or expense (including without limitation
reasonable attorneys fees) incurred without gross negligence or willful
misconduct on the part of Escrow Agent, arising out of or in connection with
its appointment hereunder or its carrying out of its duties hereunder. As
between themselves, the Buyer and Indemnifying Stockholders agree that the
Buyer, on the one hand, and the Indemnifying Stockholders, on the other
hand, shall each be responsible for one-half of such amounts; provided that
the Escrow Shares shall constitute the sole and exclusive source for
satisfaction of the Indemnifying Stockholders' obligations hereunder and the
Indemnifying Stockholders shall in no event be responsible for amounts in
excess of the Value of the Escrow Shares at the time such indemnification is
to be paid. The foregoing indemnification shall survive the termination of
this Agreement.
(c) The Escrow Agent (i) shall not be responsible for the performance of
any agreements referred to or described herein (including without limitation
the Merger Agreement) except to the extent the Escrow Agent is a party
thereto, or for determining or compelling compliance therewith, and shall
not otherwise be bound thereby, and (ii) shall be obligated only for the
performance of such duties as are expressly and specifically set forth in
this Escrow Agreement on its part to be performed, and no implied duties or
obligations of any kind shall be read into this Agreement against or on the
part of the Escrow Agent. The Escrow Agent shall not be liable to anyone for
any action taken or omitted to be taken by it hereunder except in the case
of the Escrow Agent's own gross negligence or willful misconduct in breach
of the terms of this Agreement. In no event shall the Escrow Agent be liable
for indirect, punitive, special or consequential damage or loss (including
but not limited to lost profits) whatsoever, even if the Escrow Agent has
been informed of the likelihood of such loss or damage and regardless of the
form of action. The Escrow Agent shall not be under any duty to invest (or
otherwise pay interest on) any cash it may receive at any time or times
under or pursuant to this Agreement.
7. LIABILITY AND AUTHORITY OF INDEMNIFICATION REPRESENTATIVE; SUCCESSORS
AND ASSIGNEES.
(a) The Indemnification Representative shall not be liable for any act
done or omitted hereunder as the Indemnification Representative. The
Indemnification Representative may, in all questions arising under the
Escrow Agreement, rely on the advice of counsel and the Indemnification
Representative shall not be liable to the Indemnifying Stockholders for
anything done, omitted or suffered in good faith by the Indemnification
Representative based on such advice.
(b) The Indemnifying Stockholders hereby severally, but not jointly,
agree to indemnify the Indemnification Representative for, and hold her
harmless against, any loss, liability or expense incurred without gross
negligence or bad faith on the part of Indemnification Representative and
arising out of or in connection with the acceptance or administration of her
duties hereunder.
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(c) In the event of the death or permanent disability of the
Indemnification Representative, or her resignation as the Indemnification
Representative pursuant to Section 6.3(e) of the Merger Agreement, a
successor Indemnification Representative shall be elected by a majority vote
of the Indemnifying Stockholders, with each such Indemnifying Stockholder
(or his, her or its successors or assigns) to be given a vote equal to the
number of votes represented by the shares of stock of the Company held by
such Indemnifying Stockholder immediately prior to the effective time of the
Merger. Each successor Indemnification Representative shall have all of the
power, authority, rights and privileges conferred by this Agreement upon the
original Indemnification Representatives, and the term "Indemnification
Representatives" as used herein shall be deemed to include successor
Indemnification Representatives.
(d) The Indemnification Representative shall have full power and
authority on behalf of each Indemnifying Stockholders, and their successors,
with respect to all matters arising under this Agreement and Article VI of
the Merger Agreement and all actions taken by the Indemnification
Representative hereunder shall be binding upon the Indemnifying
Stockholders, and their successors, as if expressly confirmed and ratified
in writing by each of them. Without limiting the generality of the
foregoing, the Indemnification Representative shall have full power and
authority to interpret all of the terms and provisions of this Agreement, to
compromise any claims asserted hereunder and to authorize any release of the
Escrow Shares to be made with respect thereto, on behalf of the Indemnifying
Stockholders and their successors.
(e) The Escrow Agent may rely on the Indemnification Representative as
the exclusive agent of the Indemnifying Stockholders under this Agreement
and shall incur no liability to any party with respect to any action taken
or suffered by it in reliance thereon.
8. AMOUNTS PAYABLE BY INDEMNIFYING STOCKHOLDERS.
(a) Following receipt of (i) a written instrument executed by the
appropriate officer of the Company and the Indemnification Representative as
set forth in Section 3(a) or (ii) an order of a court of competent
jurisdiction as set forth in Section 3(a), the amounts payable by the
Indemnifying Stockholders under this Agreement (including the
indemnification obligations to the Escrow Agent pursuant to Section 6(b) or
to the Indemnification Representative pursuant to Section 7) shall be
payable solely as follows: the Escrow Agent shall notify the Indemnification
Representative in writing of any such amount payable (the "Claimed Amount")
by the Indemnifying Stockholders as soon as it becomes aware that any such
amount is payable, with a copy of such notice to the Buyer. On the sixth
business day after the delivery of such notice, the Escrow Agent shall
distribute to the Buyer, the Escrow Agent or the Indemnification
Representative, as applicable, such number of Escrow Shares (up to the
number of Escrow Shares then available in the Escrow Account) as have a
Value (as defined in Section 4 hereof) equal to the Claimed Amount in
satisfaction of such indemnification obligations of the Indemnifying
Stockholders.
(b) If the Indemnification Representative incurs any expenses in
performing her duties under this Agreement (such as expenses relating to
consultations with attorneys or accountants), she shall send a written
notice to the Escrow Agent setting forth the amount and nature of any such
expenses. Such expenses of the Indemnification Representative, in the amount
set forth in the notice from the Indemnification Representative, shall be
considered "Indemnification Representative Expenses." Notwithstanding the
provisions of Section 3, before any distributions are made by the Escrow
Agent to the Indemnifying Stockholders pursuant to Section 3, the Escrow
Agent shall first distribute to the Indemnification Representative, such
number of Escrow Shares (up to the number of Escrow Shares then available in
the Escrow Account) as have a Value (as defined in Section 4 hereof) equal
to the Indemnification Representative Expenses.
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9. TERMINATION. This Agreement shall terminate upon the distribution by
the Escrow Agent of all of the Escrow Shares in accordance with this Agreement;
provided that the provisions of Sections 5, 6 and 7 shall survive such
termination.
10. NOTICES. All notices, requests, demands, claims, and other
communications hereunder shall be in writing. Any notice, request, demand, claim
or other communication hereunder shall be deemed duly delivered four business
days after it is sent by registered or certified mail, return receipt requested,
postage prepaid, or one business day after it is sent for next-day delivery via
a reputable nationwide overnight courier service, in each case to the intended
recipient as set forth below; provided, however, that notwithstanding the
foregoing, in no event shall any request, demand, claim or other communication
to the Escrow Agreement deemed to have been received by it unless and until
actually received by it.
<TABLE>
<S> <C>
IF TO THE BUYER: COPY TO:
Breakaway Solutions, Inc. Hale and Dorr LLP
50 Rowes Wharf 60 State Street
Boston, MA 02110 Boston, MA 02110
Attention: Gordon Brooks Attention: Thomas L. Barrette, Jr., Esq.
Telecopier: (617) 960-3434 Telecopier: (617) 526-5000
IF TO THE INDEMNIFICATION REPRESENTATIVES: COPY TO:
c/o Eggrock Partners, Inc. Goodwin, Procter & Hoar LLP
30 Monument Square, Suite 155 Exchange Place, 53 State St.
Concord, MA 01742 Boston, MA 02109
Attention: Maureen Ellenberger Attention: Jeffrey C. Hadden, P.C. and
Telecopier: (978) 287-4680 Joseph L. Johnson III, P.C.
Telecopier: 617-523-1621
IF TO THE ESCROW AGENT:
By delivery or overnight courier: By Mail:
State Street Bank and Trust Company State Street Bank and Trust Company
2 Avenue de Lafayette, 6(th) Floor Corporate Department
Boston, MA 02111-1724 P. O. Box 778
Attention: Deborah Ibrahim Boston, MA 02102-0778
Telecopier: (617) 662-1466 Attention: Deborah Ibrahim
</TABLE>
Any party may give any notice, instruction or communication in connection with
this Agreement using any other means (including personal delivery, telecopy or
ordinary mail), but no such notice, instruction or communication shall be deemed
to have been delivered unless and until it is actually received by the party to
whom it was sent. Any party may change the address to which notices,
instructions or communications are to be delivered by giving the other parties
to this Agreement notice thereof in the manner set forth in this Section 10.
11. SUCCESSOR ESCROW AGENT. In the event the Escrow Agent becomes
unavailable or unwilling to continue in its capacity herewith, the Escrow Agent
may resign and be discharged from its duties or obligations hereunder by
delivering a resignation to the parties to this Escrow Agreement, not less than
60 days prior to the date when such resignation shall take effect. The Buyer may
appoint a successor Escrow Agent without the consent of the Indemnification
Representative so long as such successor is a bank with assets of at least $500
million, and may appoint any other successor Escrow Agent with the consent of
the Indemnification Representative, which shall not be unreasonably withheld.
If, within such notice period, the Buyer provides to the Escrow Agent written
instructions with respect to the
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appointment of a successor Escrow Agent and directions for the transfer of any
Escrow Shares then held by the Escrow Agent to such successor, the Escrow Agent
shall act in accordance with such instructions and promptly transfer such Escrow
Shares to such designated successor. If no successor Escrow Agent is named as
provided in this Section 11 prior to the date on which the resignation of the
Escrow Agent is to properly take effect, the Escrow Agent may apply to a court
of competent jurisdiction for appointment of a successor Escrow Agent.
12. GENERAL.
(a) GOVERNING LAW; ASSIGNS. All disputes, claims or controversies
arising out of or relating to this Agreement, or the negotiation, validity
or performance of this Agreement, or the transactions contemplated hereby
shall be governed by and construed in accordance with the laws of the
Commonwealth of Massachusetts without regard to its rules of conflict of
laws. This Agreement shall be binding upon and inure to the benefit of the
parties named herein and their respective successors and permitted assigns.
No party may assign either this Agreement or any of its rights, interests or
obligation hereunder without the prior written approval of the other
parties.
(b) COUNTERPARTS. This Agreement may be executed in two or more
counterparts, each of which shall be deemed an original, but all of which
together shall constitute one and the same instrument.
(c) ENTIRE AGREEMENT. Except for those provisions of the Merger
Agreement referenced herein, this Agreement and the Merger Agreement
constitutes the entire understanding and agreement of the parties with
respect to the subject matter of this Agreement and supersedes all prior
agreements or understandings, written or oral, between the parties with
respect to the subject matter hereof.
(d) WAIVERS. No waiver by any party hereto of any condition or of any
breach of any provision of this Escrow Agreement shall be effective unless
in writing. No waiver by any party of any such condition or breach, in any
one instance, shall be deemed to be a further or continuing waiver of any
such condition or breach or a waiver of any other condition or breach of any
other provision contained herein.
(e) AMENDMENT. This Agreement may be amended only with the written
consent of the Buyer, the Escrow Agent and the Indemnification
Representative.
(f) CONSENT TO JURISDICTION AND SERVICE. Each of the parties to this
Agreement hereby irrevocably and unconditionally consents to submit to the
sole and exclusive jurisdiction of the courts of the Commonwealth of
Massachusetts and of the United States District Court for the District of
Massachusetts (the "MASSACHUSETTS COURTS") for any litigation arising out of
or relating to this Agreement, or the negotiation, validity or performance
of this Agreement, or the transactions contemplated hereby (and agrees not
to commence any litigation relating thereto except in such courts), waives
an objection to the laying of venue of any such litigation in the
Massachusetts Courts and agrees not to plead or claim in any Massachusetts
Court that such litigation brought therein has been brought in an
inconvenient forum. Each of the parties hereto agrees, (a) to the extent
such party is not otherwise subject to service of process in the
Commonwealth of Massachusetts, to appoint and maintain an agent in the
Commonwealth of Massachusetts as such party's agent for acceptance of legal
process, and (b) that service of process may also be made on such party be
prepaid certified mail with a proof of mailing receipt validated by the
United States Postal Service constituting evidence of valid service. Service
made pursuant to (a) or (b) above shall have the same legal force and effect
as if served upon such party personally within the Commonwealth of
Massachusetts.
(g) DISPUTE RESOLUTION. It is understood and agreed that should any
dispute arise with respect to the delivery, ownership, right of possession,
and/or disposition of the Escrow Shares, or
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should any claim be made upon the Escrow Agent or the Escrow Shares by a
third party, the Escrow Agent upon receipt of notice of such dispute or
claim is authorized and shall be entitled (at its sole option and election)
to retain in its possession without liability to anyone, all or any of said
Shares until such dispute shall have been settled either by the mutual
written agreement of the parties involved or by a final order, decree or
judgment of a court in the United States of America, the time for perfection
of an appeal of such order, decree or judgment having expired. The Escrow
Agent may, but shall be under no duty whatsoever to, institute or defend any
legal proceedings which relate to the Escrow Shares.
(h) FORCE MAJEURE. The Escrow Agent shall not be responsible for delays
or failures in performance resulting from acts beyond its control. Such acts
shall include but not be limited to acts of God, strikes, lockouts, riots,
acts of war, epidemics, governmental regulations superimposed after the
fact, fire, communication line failures, computer viruses, power failures,
earthquakes or other disasters.
(i) REPRODUCTION OF DOCUMENTS. This Agreement and all documents
relating thereto, including, without limitation, (a) consents, waivers and
modifications which may hereafter be executed, and (b) certificates and
other information previously or hereafter furnished, may be reproduced by
any photographic, photostatic, microfilm, optical disk, micro-card,
miniature photographic or other similar process. The parties agree that any
such reproduction shall be admissible in evidence as the original itself in
any judicial or administrative proceeding, whether or not the original is in
existence and whether or not such reproduction was made by a party in the
regular course of business, and that any enlargement, facsimile or further
reproduction of such reproduction shall likewise be admissible in evidence.
[Remainder of Page Intentionally Left Blank]
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IN WITNESS WHEREOF, the parties have duly executed this Escrow Agreement as
of the day and year first above written.
<TABLE>
<S> <C> <C>
BUYER
BREAKAWAY SOLUTIONS, INC.
By:
-----------------------------------------
Name: Gordon Brooks
Title: PRESIDENT AND CHIEF EXECUTIVE
OFFICER
INDEMNIFICATION REPRESENTATIVE
-----------------------------------------
Maureen Ellenberger
ESCROW AGENT
STATE STREET BANK AND TRUST COMPANY
By:
-----------------------------------------
Name:
Title:
</TABLE>
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SCHEDULE A
<TABLE>
<CAPTION>
INDEMNIFYING STOCKHOLDER PERCENTAGE
- ------------------------ ----------
<S> <C>
</TABLE>
<PAGE>
SCHEDULE B
ESCROW AGENT'S FEE SCHEDULE
ACCEPTANCE FEE
An acceptance fee in the amount of $1,000 shall be payable to the Escrow
Agent upon acceptance of its appointment under the Agreement.
ANNUAL ESCROW FEE
An annual fee for ordinary services shall be payable in the amount of $3,500
per year or any part of a year (the "Annual Fee"). The Annual Fee shall be due
and payable in advance, upon signing of the Escrow Agreement; thereafter upon
each anniversary date. The Annual Fee shall be subject to adjustment by the
Escrow Agent annually, upon notice.
WIRE TRANSFER FEES
A wire transfer fee of $20 per wire shall be charged for each outgoing wire
transfer.
EXTRAORDINARY ADMINISTRATIVE EXPENSES
In addition to the Annual Fee, fees for extraordinary services will be
determined and charged by appraisal. Such services may include, but are not
limited to, additional responsibilities and services incurred in case of
default, or dispute or third party claim upon the escrow fund.
OUT OF POCKET EXPENSES
Out-of-pocket expenses, such as but not limited to counsel fees and
expenses, telephone, postage, insurance, shipping charges, outside investment
charges and supplies, will be charged at cost.
<PAGE>
[MORGAN STANLEY & CO. INCORPORATED LETTERHEAD]
ANNEX C
January 24, 2000
Board of Directors
Breakaway Solutions, Inc.
50 Rowes Wharf, 6th Floor
Boston, MA 02110
Members of the Board:
We understand that Breakaway Solutions, Inc. ("Breakaway" or the "Company"),
Alpha Acquisition Corp., a wholly owned subsidiary of Breakaway ("Merger Sub"),
and Eggrock Partners Corp. ("Eggrock"), propose to enter into an Agreement and
Plan of Merger, substantially in the form of the draft dated January 19, 2000
(the "Merger Agreement"), which provides, among other things, for the merger
(the "Merger") of Merger Sub with and into EGGROCK. Pursuant to the Merger,
Eggrock will become a wholly-owned subsidiary of the Company and each issued and
outstanding share of Eggrock voting common stock, par value $.01 per share, of
non-voting common stock, par value $.01 per share, and of Series A Convertible
Preferred Stock, par value $.01 per share, other than shares held in treasury or
held by the Buyer or Merger Sub or as to which dissenters' rights have been
perfected, will be converted into the right to receive a certain number of
shares of common stock, par value $0.01 per share, of Breakaway (the "Breakaway
Common Stock"), determined pursuant to a formula set forth in the Merger
Agreement and subject to adjustment in certain circumstances (such shares in the
aggregate, the "Consideration"). The terms and conditions of the Merger are more
fully set forth in the Merger Agreement.
You have asked for our opinion as to whether the Consideration to be paid by
Breakaway pursuant to the Merger Agreement is fair from a financial point of
view to Breakaway.
For purposes of the opinion set forth herein, we have:
(i) reviewed certain publicly available financial statements and other
information of Breakaway;
(ii) reviewed certain internal financial statements and other financial and
operating data concerning Breakaway prepared by the management of
Breakaway;
(iii) reviewed certain financial forecasts prepared by the management of
Breakaway;
(iv) discussed the past and current operations and financial condition and
the prospects of Breakaway, including information relating to certain
strategic, financial and operational benefits anticipated from the
Merger, with senior executives of Breakaway;
(v) discussed the past and current operations and financial condition and
the prospects of Eggrock, including information relating to certain
strategic, financial and operational benefits anticipated from the
Merger, with senior executives of Eggrock and Breakaway;
(vi) reviewed certain internal financial statements and other financial and
operating data concerning Eggrock prepared by the management of
Eggrock;
(vii) reviewed certain financial forecasts prepared by the management of
Eggrock;
(viii) reviewed the reported prices and trading activity for Breakaway Common
Stock;
(ix) compared the financial performance of Breakaway and the prices and
trading activity of Breakaway Common Stock with that of certain other
comparable publicly-traded companies and their securities;
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(x) reviewed the pro forma impact of the Merger on Breakaway's earnings per
share and other financial ratios;
(xi) reviewed the financial terms, to the extent publicly available, of
certain comparable acquisition transactions;
(xii) reviewed the draft Merger Agreement and certain related documents; and
(xiii) performed such other analyses and considered such other factors as we
have deemed appropriate.
We have assumed and relied upon without independent verification the accuracy
and completeness of the information reviewed by us for the purposes of this
opinion. With respect to the financial forecasts, including the information
relating to certain strategic, financial and operational benefits anticipated
from the Merger, we have assumed that they have been reasonably prepared on
bases reflecting the best currently available estimates and judgments of the
prospects of Breakaway and Eggrock. In addition, we have assumed that the Merger
will be consummated in accordance with the terms set forth in the Merger
Agreement, including, among other things, that the Merger will be treated as a
tax-free reorganization and/or exchange, each pursuant to the Internal Revenue
Code of 1986. We have not made any independent valuation or appraisal of the
assets or liabilities of the Company or Eggrock, nor have we been furnished with
any such appraisals. We have also relied upon, without any independent
verification, Breakaway management's assessment of the validity of, and the
risks associated with, Eggrock's products, services and technology. Our opinion
is necessarily based on financial, economic, market and other conditions as in
effect on, and the information made available to us as of, the date hereof.
We have been retained to provide a fairness opinion to the Board of Directors in
connection with the Merger and have not participated in any negotiations between
Breakaway and Eggrock. In the past, Morgan Stanley & Co. Incorporated and its
affiliates have provided financial advisory and financing services for the
Company, their affiliates, and their shareholders and have received fees for the
rendering of these services.
It is understood that this letter is for the information of the Board of
Directors of Breakaway only and may not be used for any other purpose without
our prior written consent. In addition, this opinion does not in any manner
address the prices at which the Breakaway Common Stock will trade following
consummation of the Merger.
Based upon and subject to the foregoing, we are of the opinion on the date
hereof that the Consideration to be paid by Breakaway pursuant to the Merger
Agreement is fair from a financial point of view to Breakaway.
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Very truly yours,
MORGAN STANLEY & CO. INCORPORATED
By: /s/ COLE R. BADER
-----------------------------------------
Cole R. Bader
VICE PRESIDENT
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ANNEX D
SECTION 262
OF
GENERAL CORPORATION LAW
OF THE
STATE OF DELAWARE
262. APPRAISAL RIGHTS.
(a) Any stockholder of a corporation of this State who holds shares of
stock on the date of the making of a demand pursuant to subsection (d) of
this section with respect to such shares, who continuously holds such shares
through the effective date of the merger or consolidation, who has otherwise
complied with subsection (d) of this section and who has neither voted in
favor of the merger or consolidation nor commented thereto in writing
pursuant to Section 228 of this title shall be entitled to an appraisal by
the Court of Chancery of the fair value of the stockholder's shares of stock
under the circumstances described in subsections (b) and (c) of this
section. As used in this section, the word "stockholder" means a holder of
record of stock in a stock corporation and also a member of record of a
nonstock corporation; the words "stock" and "share" mean and include what is
ordinarily meant by those words and also membership or membership interest
of a member of a nonstock corporation; and the words "depository receipt"
mean a receipt or other instrument issued by a depository representing an
interest in one or more shares, or fractions thereof, solely of stock of a
corporation, which stock is deposited with the depository.
(b) Appraisal rights shall be available for the shares of any class or
series of stock of a constituent corporation in a merger or consolidation to
be effected pursuant to Section 251 (other than a merger effected pursuant
to Section 251(g) if this title), Section 252, Section 254, Section 257,
Section 258, Section 263 or Section 264 of this title:
(1) Provided, however, that no appraisal rights under this section
shall be available for the shares of any class or series of stock, which
stock, or depository receipts in respect thereof, at the record date
fixed to determine the stockholders entitled to receive notice of and to
vote at the meeting of stockholders to act upon the agreement of merger
or consolidation, were either (i) listed on a national securities
exchange or designated as a national market system security on an
interdealer quotation system by the National Association of Securities
Dealers, Inc. or (ii) held of record by more than 2,000 holders; and
further provided that no appraisal rights shall be available for any
shares of stock of the constituent corporation surviving a merger if the
merger did not require for its approval the vote of the stockholders of
the surviving corporation as provided in subsection (f) of Section 251 of
this title.
(2) Notwithstanding paragraph (1) of this subsection, appraisal
rights under this section shall be available for the shares of any class
or series of stock of a constituent corporation if the holders thereof
are required by the terms of an agreement of merger or consolidation
pursuant to Sections 251, 252, 254, 257, 258, 263 and 264 of this title
to accept for such stock anything except:
a. Shares of stock of the corporation surviving or resulting
from such merger or consolidation, or depository receipts in respect
thereof;
b. Shares of stock of any other corporation, or depository
receipts in respect thereof, which shares of stock (or depository
receipts in respect thereof) or depository receipts at the effective
date of the merger or consolidation will be either listed on a
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national securities exchange or designated as a national market
system security on an interdealer quotation system by the National
Association of Securities Dealers, Inc. or held of record by more
than 2,000 holders;
c. Cash in lieu of fractional shares or fractions depository
receipts described in the foregoing subparagraphs a. and b. of this
paragraph; or
d. Any combination of the shares of stock, depository receipts
and cash in lieu of fractional shares or fractional depository
receipts described in the foregoing subparagraphs a., b. and c. of
this paragraph.
(3) In the event all of the stock of a subsidiary Delaware
corporation party to a merger effected under Section 253 of this title is
not owned by the parent corporation immediately prior to the merger,
appraisal rights shall be available for the shares of the subsidiary
Delaware corporation.
(c) Any corporation may provide in its certificate of incorporation that
appraisal rights under this section shall be available for the shares of any
class or series of its stock as a result of an amendment to its certificate
of incorporation, any merger or consolidation in which the corporation is a
constituent corporation or the sale of all or substantially all of the
assets of the corporation. If the certificate of incorporation contains such
a provision, the procedures of this section, including those set forth in
subsections (d) and (e) of this section, shall apply as nearly as is
practicable.
(d) Appraisal rights shall be perfected as follows:
(1) If a proposed merger or consolidation for which appraisal rights
are provided under this section is to be submitted for approval at a
meeting of stockholders, the corporation, not less than 20 days prior to
the meeting, shall notify each of its stockholders who was such on the
record date for such meeting with respect to shares for which appraisal
rights are available pursuant to subsections (b) or (c) hereof that
appraisal rights are available for any or all of the shares of the
constituent corporations, and shall include in such notice a copy of this
section. Each stockholder electing to demand the appraisal of SUCH
STOCKHOLDER'S shares shall deliver to the corporation, before the taking
of the vote on the merger or consolidation, a written demand for
appraisal of SUCH STOCKHOLDER'S shares. Such demand will be sufficient if
it reasonably informs the corporation of the identity of the stockholder
and that the stockholder intends thereby to demand the appraisal of SUCH
STOCKHOLDER'S shares. A proxy or vote against the merger or consolidation
shall not constitute such a demand. A stockholder electing to take such
action must do so by a separate written demand as herein provided. Within
10 days after the effective date of such merger or consolidation, the
surviving or resulting corporation shall notify each stockholder of each
constituent corporation who has complied with this subsection and has not
voted in favor of or consented to the merger or consolidation of the date
that the merger or consolidation has become effective; or
(2) If the merger or consolidation was approved pursuant to Section
228 or Section 253 of this title, each constituent corporation, either
before the effective date of the merger or consolidation or within ten
days thereafter, shall notify each of the holders of any class or series
of stock of such constituent corporation who are entitled to appraisal
rights of the approval of the merger or consolidation and that appraisal
rights are available for any or all shares of such class or series of
stock of such constituent corporation, and shall include in such notice a
copy of this section; provided that, if the notice is given on or after
the effective date of the merger or consolidation, such notice shall be
given by the surviving or resulting corporation to all such holders of
any class or series of stock of a constituent corporation that
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are entitled to appraisal rights. Such notice may, and, if given on or
after the effective date of the merger or consolidation, shall, also
notify such stockholders of the effective date of the merger or
consolidation. Any stockholder entitled to appraisal rights may, within
20 days after the date of mailing of such notice, demand in writing from
the surviving or resulting corporation the appraisal of such holders
shares. Such demand will be sufficient if it reasonably informs the
corporation of the identity of the stockholder and that the stockholder
intends thereby to demand the appraisal of such holder's shares. If such
notice did not notify stockholders of the effective date of the merger or
consolidation, either (i) each such constituent corporation shall send a
second notice before the effective date of the merger or consolidation
notifying each of the holders of any class or series of stock of such
constituent corporation that are entitled to appraisal rights of the
effective date of the merger or consolidation or (ii) the surviving or
resulting corporation shall send such a second notice to all such holders
on or within 10 days after such effective date; provided, however, that
if such second notice is sent more than 20 days following the sending of
the first notice, such second notice need only be sent to each
stockholder who is entitled to appraisal rights and who has demanded
appraisal of such holder's shares in accordance with this subsection. An
affidavit of the secretary or assistant secretary or of the transfer
agent of the corporation that is required to give either notice that such
notice has been given shall, in the absence of fraud, be prima facie
evidence of the facts stated therein. For purposes of determining the
stockholders entitled to receive either notice, each constituent
corporation may fix, in advance, a record date that shall be not more
than 10 days prior to the date the notice is given, provided, that if the
notice is given on or after the effective date of the merger or
consolidation, the record date shall be such effective date. If no record
date is fixed and the notice is given prior to the effective date, the
record date shall be the close of business on the day next preceding the
day on which the notice is given.
(e) Within 120 days after the effective date of the merger or
consolidation, the surviving or resulting corporation or any stockholder who
has complied with subsections (a) and (d) hereof and who is otherwise
entitled to appraisal rights, may file a petition in the Court of Chancery
demanding a determination of the value of the stock of all such
stockholders. Notwithstanding the foregoing, at any time within 60 days
after the effective date of the merger or consolidation, any stockholder
shall have the right to withdraw SUCH STOCKHOLDER'S demand for appraisal and
to accept the terms offered upon the merger or consolidation. Within 120
days after the effective date of the merger or consolidation, any
stockholder who has complied with the requirements of subsections (a) and
9d) hereof, upon written request, shall be entitled to receive from the
corporation surviving the merger or resulting from the consolidation a
statement setting forth the aggregate number of shares not voted in favor of
the merger or consolidation and with respect to which demands for appraisal
have been received and the aggregate number of holders of such shares. Such
written statement shall be mailed to the stockholder within 10 days after
SUCH STOCKHOLDER'S written request for such a statement is received by the
surviving or resulting corporation or within 10 days after expiration of the
period for delivery of demands for appraisal under subsection (d) hereof,
whichever is later.
(f) Upon the filing of any such petition by a stockholder, service of a
copy thereof shall be made upon the surviving or resulting corporation,
which shall within 20 days after such service file in the office of the
Register in Chancery in which the petition was filed a duly verified list
containing the names and addresses of all stockholders who have demanded
payment for their shares and with whom agreements as to the value of their
shares have not been reached by the surviving or resulting corporation. If
the petition shall be filed by the surviving or resulting corporation, the
petition shall be accompanied by such a duly verified list. The Register in
Chancery, if so ordered by the Court, shall give notice of the time and
place fixed for the hearing of such petition by registered or certified mail
to the surviving or resulting corporation and to the
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stockholders shown on the list at the addresses therein stated. Such notice
shall also be given by 1 or more publications at least 1 week before the day
of the hearing, in a newspaper of general circulation published in the City
of Wilmington, Delaware or such publication as the Court deems advisable.
The forms of the notices by mail and by publication shall be approved by the
Court, and the costs thereof shall be borne by the surviving or resulting
corporation.
(g) At the hearing on such petition, the Court shall determine the
stockholders who have complied with this section and who have become
entitled to appraisal rights. The Court may require the stockholders who
have demanded an appraisal for their shares and who hold stock represented
by certificates to submit their certificates of stock to the Register in
Chancery for notation thereon of the pendency of the appraisal proceedings;
and if any stockholder fails to comply with such direction, the Court may
dismiss the proceedings as to such stockholder.
(h) After determining the stockholders entitled to appraisal, the Court
shall apraise the shares, determining their fair value exclusive of any
element of value arising from the accomplishment or expectation of the
merger of consolidation, together with a fair rate of interest, in any, to
be paid upon the amount determined to be the fair value. In determining such
fair value, the Court shall take into account all relevant factors. In
determining the fair rate of interest, the may consider all relevant
factors, including the rate of interest which the surviving or resulting
corporation would have had to pay to borrow money during the pendency of the
proceeding. Upon application by the surviving or resulting corporation or by
any stockholder entitled to participate in the appraisal proceeding, the
Court may, in its discretion, permit discovery or other pretrial proceedings
and may proceed to trial upon the appraisal prior to the final determination
of the stockholder entitled to an appraisal. Any stockholder whose name
appears on the list filed by the surviving or resulting corporation pursuant
to subsection (f) of this section and who has submitted SUCH STOCKHOLDER'S
certificates of stock to the Register in Chancery, if such is required, may
participate fully in all proceedings until it is finally determined that
SUCH STOCKHOLDER is not entitled to appraisal rights under this section.
(i) The Court shall direct the payment of the fair value of the shares,
together with interest, if any, by the surviving or resulting corporation to
the stockholders entitled thereto. Interest may be simple or compound, as
the Court may direct. Payment shall be so made to each such stockholder, in
the case of holders of uncertificated stock forthwith, and the case of
holders of shares represented by certificates upon the surrender to the
corporation of the certificates representing such stock. The Court's decree
may be enforced as other decrees in the Court of Chancery may be enforced,
whether such surviving or resulting corporation be a corporation of this
State or of any state.
(j) The costs of the proceeding may be determined by the Court and taxed
upon the parties as the Court deems equitable in the circumstances. Upon
application of a stockholder, the Court may order all or a portion of the
expenses incurred by any stockholder in connection with the appraisal
proceeding, including, without limitation, reasonable attorney's fees and
the fees and expenses of experts, to be charged pro rata against the value
of all the shares entitled to an appraisal.
(k) From and after the effective date of the merger or consolidation, no
stockholder who has demanded appraisal rights as provided in subsection
(d) of this section shall be entitled to vote such stock for any purpose or
to receive payment of dividends or other distributions on the stock (except
dividends or other distributions payable to stockholders of record at a date
which is prior to the effective date of the merger or consolidation);
provided, however, that if no petition for an appraisal shall be filed
within the time provided in subsection (e) of this section, or if such
stockholder shall deliver to the surviving or resulting corporation a
written withdrawal of such stockholder's demand for an appraisal and an
acceptance of the merger or consolidation, either
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within 60 days after the effective date of the merger or consolidation as
provided in subsection (e) of this section or thereafter with the written
approval of the corporation, then the right of such stockholder to an
appraisal shall cease. Notwithstanding the foregoing, no appraisal
proceeding in the Court of Chancery shall be dismissed as to any stockholder
without the approval of the Court, and such approval may be conditioned upon
such terms as the Court deems just.
(l) The shares of the surviving or resulting corporation to which the
shares of such objecting stockholders would have been converted had they
assented to the merger or consolidation shall have the status of authorized
and unissued shares of the surviving or resulting corporation.
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<PAGE>
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 20. INDEMNIFICATION OF DIRECTORS AND OFFICERS
Article SEVENTH of the Registrant's Certificate of Incorporation provides
that no director of the Registrant shall be personally liable for any monetary
damages for any breach of fiduciary duty as a director, except to the extent
that the Delaware General Corporation Law prohibits the elimination or
limitation of liability of directors for breach of fiduciary duty.
Article EIGHTH of the Registrant's Certificate of Incorporation provides
that a director or officer of the Registrant:
(a) shall be indemnified by the Registrant against all expenses (including
attorneys' fees), judgments, fines and amounts paid in settlement incurred
in connection with any litigation or other legal proceeding (other than an
action by or in the right of the Registrant) brought against him by virtue
of his position as a director or officer of the Registrant if he acted in
good faith and in a manner he reasonably believed to be in, or not opposed
to, the best interests of the Registrant, and, with respect to any criminal
action or proceeding, had no reasonable cause to believe his conduct was
unlawful and
(b) shall be indemnified by the Registrant against all expenses (including
attorneys' fees) and amounts paid in settlement incurred in connection with
any action by or in the right of the Registrant brought against him by
virtue of his position as a director or officer of the Registrant if he
acted in good faith and in a manner he reasonably believed to be in, or not
opposed to, the best interests of the Registrant, except that no
indemnification shall be made with respect to any matter as to which such
person shall have been adjudged to be liable to the Registrant, unless a
court determines that, despite such adjudication but in view of all of the
circumstances, he is entitled to indemnification of such expenses.
Notwithstanding the foregoing, to the extent that a director or officer has been
successful, on the merits or otherwise, including, without limitation, the
dismissal of an action without prejudice, he is required to be indemnified by
the Registrant against all expenses (including attorneys' fees) incurred in
connection therewith. Expenses shall be advanced to a director or officer at his
request, provided that he undertakes to repay the amount advanced if it is
ultimately determined that he is not entitled to indemnification for such
expenses.
Indemnification is required to be made unless the Registrant determines that
the applicable standard of conduct required for indemnification has not been
met. In the event of a determination by the Registrant that the director or
officer did not meet the applicable standard of conduct required for
indemnification, or if the Registrant fails to make an indemnification payment
within 60 days after such payment is claimed by such person, such person is
permitted to petition the court to make an independent determination as to
whether such person is entitled to indemnification. As a condition precedent to
the right of indemnification, the director or officer must give the Registrant
notice of the action for which indemnity is sought and the Registrant has the
right to participate in such action or assume the defense thereof.
Article EIGHTH of the Registrant's Certificate of Incorporation further
provides that the indemnification provided therein is not exclusive, and
provides that in the event that the Delaware General Corporation Law is amended
to expand the indemnification permitted to directors or officers the Registrant
must indemnify those persons to the fullest extent permitted by such law as so
amended.
Section 145 of the Delaware General Corporation Law provides that a
corporation has the power to indemnify a director, officer, employee or agent of
the corporation and certain other persons serving
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at the request of the corporation in related capacities against amounts paid and
expenses incurred in connection with an action or proceeding to which he is or
is threatened to be made a party by reason of such position, if such person
shall have acted in good faith and in a manner he reasonably believed to be in
or not opposed to the best interests of the corporation, and, in any criminal
proceeding, if such person had no reasonable cause to believe his conduct was
unlawful; provided that, in the case of actions brought by or in the right of
the corporation, no indemnification shall be made with respect to any matter as
to which such person shall have been adjudged to be liable to the corporation
unless and only to the extent that the adjudicating court determines that such
indemnification is proper under the circumstances.
ITEM 21. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES
(A) EXHIBITS
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2.1* Agreement and Plan of Merger, dated as of January 26, 2000,
by and among the Registrant, Benedict Acquisition Corp. and
Eggrock Partners, Inc. ("Eggrock").
3.1 Reserved.
3.2 Reserved.
3.3** Third Amended and Restated Certificate of Incorporation of
the Registrant.
3.4** Amended and Restated Bylaws of the Registrant.
4.1** Specimen certificate for shares of the Registrant's common
stock.
5.1**** Opinion of Hale and Dorr LLP.
8.1 Opinion of Hale and Dorr LLP as to tax matters.
8.2 Opinion of Goodwin, Procter & Hoar LLP as to tax matters.
10.1** 1998 Stock Incentive Plan.
10.2** 1999 Stock Incentive Plan.
10.3** 1999 Employee Stock Purchase Plan.
10.4 Reserved.
10.5** Employment Agreement, dated November 13, 1998, by and
between the Registrant and Gordon Brooks.
10.6** Employment Agreement, dated December 11, 1998, by and
between the Registrant and Frank Selldorff.
10.7** Employment Agreement, dated February 11, 1999, by and
between the Registrant and Janet Tremlett.
10.8** Employment Agreement, dated March 25, 1999, by and between
the Registrant and Babak Farzami.
10.9** Employment Agreement, dated March 25, 1999, by and between
the Registrant and Dev Ittycheria.
10.10** Employment Agreement, February 17, 1999, by and between the
Registrant and Christopher Harding.
10.11 Reserved.
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10.12** Employment Agreement, dated May 29, 1998, by and between the
Registrant and Kevin Comerford.
10.13*** Form of Escrow Agreement to be entered into at closing of
the Merger, by and among the Registrant, Eggrock, Maureen
Ellenberger, as Indemnification Representative, and State
Street Bank and Trust Company, as Escrow Agent.
10.14** Separation Agreement, dated as of April 28, 1999, by and
between the Registrant and Frank Selldorff.
10.15** Employment Agreement, dated May 14, 1999, by and between the
Registrant and William Loftus.
10.16** Option Agreement, by and between the Registrant and Frank
Selldorff, effective July 1, 1998.
10.17** Option Agreement, by and between the Registrant and Kevin
Comerford, effective July 1, 1998.
10.18** Option Agreement, by and between the Registrant and
Christopher Greendale, effective July 1, 1998.
10.19** Option Agreement, by and between the Registrant and Janet
Tremlett, effective July 1, 1998.
10.20** Amendment No. 1 to the Option Agreement, by and between
Janet Tremlett and the Registrant, dated January 22, 1999.
10.21** Option Agreement, by and between the Registrant and Kevin
Comerford, effective October 1, 1998.
10.22** Option Agreement, by and between the Registrant and Gordon
Brooks, effective December 23, 1998.
10.23** Option Agreement, by and between the Registrant and Gordon
Brooks, effective December 23, 1998.
10.24** Option Agreement, by and between the Registrant and Gordon
Brooks, effective December 23, 1998.
10.25** Option Agreement, by and between the Registrant and Gordon
Brooks, effective December 23, 1998.
10.26** Option Agreement, by and between the Registrant and Gordon
Brooks, effective December 23, 1998.
10.27** Option Agreement, by and between the Registrant and Janet
Tremlett, effective January 22, 1999.
10.28** Option Agreement, by and between the Registrant and
Christopher Greendale, effective February 18, 1999.
10.29** Option Agreement, by and between the Registrant and
Christopher Harding, effective February 18, 1999.
10.30** Option Agreement, by and between the Registrant and
Christopher Harding, effective February 18, 1999.
10.31** Option Agreement, by and between the Registrant and Babak
Farzami, effective March 25, 1999.
</TABLE>
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10.32** Option Agreement, by and between the Registrant and Dev
Ittycheria, effective March 25, 1999.
10.33 Reserved.
10.34 Reserved.
10.35** Lease Agreement dated as of July 22, 1998, by and between
the Registrant and Equity Office Properties Trust.
10.36 Reserved.
10.37** Warrant to purchase the Registrant's common stock, dated May
13, 1999, issued by the Registrant to Internet Capital
Group.
10.38** Stock Pledge Agreement, dated as of May 14, 1999, by and
between the Registrant and William Loftus.
10.39** Stock Restriction Agreement, dated as of May 14, 1999, by
and between the Registrant and William Loftus.
10.40** Amended and Restated Investors' Rights Agreement, dated as
of July 2, 1999, by and between the Registrant and the
investors named therein.
10.41** Employment Agreement, dated September 10, 1999, by and
between the Registrant and Joe Johnson.
10.42** Employment Agreement, dated September 12, 1999, by and
between the Registrant and Adam Sholley.
10.43** Master Lease Agreement, dated as of September 29, 1999, by
and between the Registrant and Silicon Valley Bank.
10.44** Warrant to purchase the Registrant's common stock, dated
September 29, 1999, issued by the Registrant to Silicon
Valley Bank.
10.45**** Form of Registration Rights Agreement to be entered into at
closing of the Merger, by and among the Company and the
stockholders of Eggrock named therein.
10.46**** Stockholder Agreement, dated as of January 26, 2000, by and
between the Registrant, Benedict Acquisition Corp. and
certain stockholders of Eggrock named therein.
10.47 Promissory Note in favor of the Registrant, made by John
Loftus payable to the Registrant, dated June 23, 1999.
10.48 Offer letter to John Loftus from the Registrant, dated
May 14, 1999.
10.49 Stock Restriction Agreement, dated as of May 14, 1999, by
and between the Registrant and John Loftus.
21.1**** Schedule of subsidiaries of the Registrant.
23.1 Consent of Hale and Dorr LLP (contained in exhibit 5.1 and
exhibit 8.1).
23.2 Consent of KPMG LLP regarding Breakaway Solutions, Inc.
23.3 Consent of KPMG LLP regarding Applica Corporation.
23.4 Consent of KPMG LLP regarding WPL Laboratories, Inc.
23.5 Consent of KPMG LLP regarding Web Yes, Inc.
23.6 Consent of Arthur Andersen LLP.
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23.7 Consent of Morgan Stanley & Co. Incorporated.
23.8 Consent of Goodwin, Procter & Hoar LLP (included in exhibit
8.2).
24.1**** Power of Attorney with respect to the Registrant.
27.1**** Financial Data Schedule for the year ended December 31,
1999.
99.1** Letter of Arthur Andersen LLP.
99.2** Letter of Brown & Brown LLP.
99.3 Form of Written Consent of Eggrock Voting Stockholders.
99.4 Form of Waiver of Appraisal Rights.
</TABLE>
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* Filed as Annex A to this written consent solicitation statement/prospectus
constituting part of this registration statement.
** Incorporated by reference to the registration statement on Form S-1 (File
No. 333-83343) as declared effective by the Securities and Exchange
Commission on October 5, 1999.
*** Filed as Annex B to this written consent solicitation statement/prospectus
constituting part of this registration statement.
**** Previously filed.
(B) FINANCIAL STATEMENT SCHEDULES
SCHEDULE II. VALUATION AND QUALIFYING ACCOUNTS.
All other schedules have been omitted because they are not required or
because the required information is given in the Registrant's consolidated
financial statements or notes to those statements.
ITEM 22. UNDERTAKINGS
The undersiged hereby undertakes:
(1) To file, during any period in which offers or sales are being made, a
post-effective amendment to this registration statement:
(i) To include any prospectus required by section 10(a)(3) of the
Securites Act of 1933;
(ii) To reflect in the prospectus any facts or events arising after the
effective date of the registration statement (or the most recent
post-effective amendment thereof) which, individually or in the aggregate,
represent a fundamental change in the information set forth in the
registration statement; and
(iii) To include any material information with respect to the plan of
distribution not previously disclosed in the registration statement or any
material change to such information in the registration statement.
(2) That, for the purpose of determining any liability under the Securities
Act of 1933, each such post-effective amendment 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.
(3) To remove from registration by means of a post-effective amendment any
of the securities being registered which remain unsold at the termination of the
offering.
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(4) That prior to any public reoffering of the securities registered
hereunder through use of a prospectus which is a part of this registration
statement, by any person or party who is deemed to be an underwriter within the
meaning of Rule 145(c), the issuer undertakes that such reoffering prospectus
will contain the information called for by the applicable registration form with
respect to reofferings by persons who may be deemed underwriters, in addition to
the information called for by the other items of the applicable form.
(5) That every prospectus (i) that is filed pursuant to paragraph (4)
immediately preceding, or (ii) that purports to meet the requirements of
section 10(a)(3) of the Act and is used in connection with an offering of
securities subject to Rule 415, will be filed as part of an amendment to the
registration statement and will not be used until such amendment is effective,
and that, for purposed of determining any liability under the Securities Act of
1933, each such post-effective amendment 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.
(6) To supply by means of a post-effective amendment all required
information concerning a transaction, and the company being acquired involved
therein, that was not the subject of and included in the registration statement
when it became effective.
(7) Insofar as indemnification for liabilities arising under the Securities
Act of 1933 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 the 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.
II-6
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, the Registrant
has duly caused this Amendment No. 1 to the Registration Statement to be signed
on its behalf by the undersigned, thereunto duly authorized, in the city of
Boston, Commonwealth of Massachusetts, on March 8, 2000.
<TABLE>
<S> <C> <C>
BREAKAWAY SOULTIONS, INC.
By: /S/ KEVIN COMERFORD
-----------------------------------------
VICE PRESIDENT, ADMINISTRATION, CHIEF
FINANCIAL OFFICER, TREASURER AND SECRETARY
</TABLE>
Pursuant to the requirements of the Securities Act of 1933, this Amendment
No. 1 to the Registration Statement has been signed by the following persons in
the capacities and on the dates indicated.
<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
--------- ----- ----
<C> <S> <C>
* President and Chief Executive Officer
------------------------------------ (Principal Executive Officer) and
Gordon Brooks Director March 8, 2000
Vice President, Administration, Chief
/S/ KEVIN COMERFORD Financial Officer, Treasurer and
------------------------------------ Secretary (Principal Financial
Kevin Comerford Officer and Principal Accounting
Officer) March 8, 2000
*
------------------------------------ Chairman of the Board of Directors
Christopher H. Greendale March 8, 2000
*
------------------------------------ Director
Frank Selldorff March 8, 2000
------------------------------------ Director
Walter W. Buckley, III
</TABLE>
<TABLE>
<S> <C>
/s/ KEVIN COMERFORD
-------------------------------
Kevin Comerford
*By: AS ATTORNEY-IN-FACT
</TABLE>
II-7
<PAGE>
SCHEDULE II
BREAKAWAY SOLUTIONS, INC. AND SUBSIDIARIES
VALUATION AND QUALIFYING ACCOUNTS
Three Years Ended December 31, 1999
<TABLE>
<CAPTION>
ADDITIONS
BALANCE AT CHARGED TO
BEGINNING COSTS AND BALANCE AT
DESCRIPTION OF PERIOD EXPENSES DEDUCTIONS (C) END OF PERIOD
- ----------- ---------- ---------- -------------- -------------
<S> <C> <C> <C> <C>
Allowance for doubtful accounts:
Year ended December 31, 1997.................. $ 10 $ 55 $ -- $ 65
Year ended December 31, 1998.................. 65 189 123 131
Year ended December 31, 1999.................. 131 369 143 357
</TABLE>
<PAGE>
INDEX TO EXHIBITS
<TABLE>
<C> <S>
2.1* Agreement and Plan of Merger, dated as of January 26, 2000,
by and among the Registrant, Benedict Acquisition Corp. and
Eggrock.
3.1 Reserved.
3.2 Reserved.
3.3** Third Amended and Restated Certificate of Incorporation of
the Registrant.
3.4** Amended and Restated Bylaws of the Registrant.
4.1** Specimen certificate for shares of the Registrant's common
stock.
5.1**** Opinion of Hale and Dorr LLP.
8.1 Opinion of Hale and Dorr LLP as to tax matters.
8.2 Opinion of Goodwin, Procter & Hoar LLP as to tax matters.
10.1** 1998 Stock Incentive Plan.
10.2** 1999 Stock Incentive Plan.
10.3** 1999 Employee Stock Purchase Plan.
10.4 Reserved.
10.5** Employment Agreement, dated November 13, 1998, by and
between the Registrant and Gordon Brooks.
10.6** Employment Agreement, dated December 11, 1998, by and
between the Registrant and Frank Selldorff.
10.7** Employment Agreement, dated February 11, 1999, by and
between the Registrant and Janet Tremlett.
10.8** Employment Agreement, dated March 25, 1999, by and between
the Registrant and Babak Farzami.
10.9** Employment Agreement, dated March 25, 1999, by and between
the Registrant and Dev Ittycheria.
10.10** Employment Agreement, February 17, 1999, by and between the
Registrant and Christopher Harding.
10.11 Reserved.
10.12** Employment Agreement, dated May 29, 1998, by and between the
Registrant and Kevin Comerford.
10.13*** Form of Escrow Agreement to be entered into at closing of
the Merger, by and among the Registrant, Eggrock, Maureen
Ellenberger, as Indemnification Representation, and State
Street Bank and Trust Company, as Escrow Agent.
10.14** Separation Agreement, dated as of April 28, 1999, by and
between the Registrant and Frank Selldorff.
10.15** Employment Agreement, dated May 14, 1999, by and between the
Registrant and William Loftus.
10.16** Option Agreement, by and between the Registrant and Frank
Selldorff, effective July 1, 1998.
10.17** Option Agreement, by and between the Registrant and Kevin
Comerford, effective July 1, 1998.
10.18** Option Agreement, by and between the Registrant and
Christopher Greendale, effective July 1, 1998.
</TABLE>
<PAGE>
<TABLE>
<C> <S>
10.19** Option Agreement, by and between the Registrant and Janet
Tremlett, effective July 1, 1998.
10.20** Amendment No. 1 to the Option Agreement, by and between
Janet Tremlett and the Registrant, dated January 22, 1999.
10.21** Option Agreement, by and between the Registrant and Kevin
Comerford, effective October 1, 1998.
10.22** Option Agreement, by and between the Registrant and Gordon
Brooks, effective December 23, 1998.
10.23** Option Agreement, by and between the Registrant and Gordon
Brooks, effective December 23, 1998.
10.24** Option Agreement, by and between the Registrant and Gordon
Brooks, effective December 23, 1998.
10.25** Option Agreement, by and between the Registrant and Gordon
Brooks, effective December 23, 1998.
10.26** Option Agreement, by and between the Registrant and Gordon
Brooks, effective December 23, 1998.
10.27** Option Agreement, by and between the Registrant and Janet
Tremlett, effective January 22, 1999.
10.28** Option Agreement, by and between the Registrant and
Christopher Greendale, effective February 18, 1999.
10.29** Option Agreement, by and between the Registrant and
Christopher Harding, effective February 18, 1999.
10.30** Option Agreement, by and between the Registrant and
Christopher Harding, effective February 18, 1999.
10.31** Option Agreement, by and between the Registrant and Babak
Farzami, effective March 25, 1999.
10.32** Option Agreement, by and between the Registrant and Dev
Ittycheria, effective March 25, 1999.
10.33 Reserved.
10.34 Reserved.
10.35** Lease Agreement dated as of July 22, 1998, by and between
the Registrant and Equity Office Properties Trust.
10.36 Reserved.
10.37** Warrant to purchase the Registrant's common stock, dated May
13, 1999, issued by the Registrant to Internet Capital
Group.
10.38** Stock Pledge Agreement, dated as of May 14, 1999, by and
between the Registrant and William Loftus.
10.39** Stock Restriction Agreement, dated as of May 14, 1999, by
and between the Registrant and William Loftus.
10.40** Amended and Restated Investors' Rights Agreement, dated as
of July 2, 1999, by and between the Registrant and the
investors named therein.
10.41** Employment Agreement, dated September 10, 1999, by and
between the Registrant and Joe Johnson.
10.42** Employment Agreement, dated September 12, 1999, by and
between the Registrant and Adam Sholley.
</TABLE>
<PAGE>
<TABLE>
<C> <S>
10.43** Master Lease Agreement, dated as of September 29, 1999, by
and between the Registrant and Silicon Valley Bank.
10.44** Warrant to purchase the Registrant's common stock, dated
September 29, 1999, issued by the Registrant to Silicon
Valley Bank.
10.45**** Registration Rights Agreement to be entered into at the
closing of the Merger, by and among the Company and the
stockholders of Eggrock named therein.
10.46**** Stockholder Agreement, dated January 26, 2000, by and
between the Registrant, Benedict Acquisition Corp. and
certain stockholders of Eggrock named therein.
10.47 Promissory Note in favor of the Registrant, made by John
Loftus payable to the Registrant, dated June 23, 1999.
10.48 Offer letter to John Loftus from the Registrant, dated
May 14, 1999.
10.49 Stock Restriction Agreement, dated as of May 14, 1999, by
and between the Registrant and John Loftus.
21.1**** Schedule of subsidiaries of the Registrant.
23.1 Consent of Hale and Dorr LLP (contained in exhibit 5.1 and
exhibit 8.1).
23.2 Consent of KPMG LLP regarding Breakaway Solutions, Inc.
23.3 Consent of KPMG LLP regarding Applica Corporation.
23.4 Consent of KPMG LLP regarding WPL Laboratories, Inc.
23.5 Consent of KPMG LLP regarding Web Yes, Inc.
23.6 Consent of Arthur Andersen LLP regarding Eggrock Partners,
Inc.
23.7 Consent Morgan Stanley Inc. & Co. Incorporated.
23.8 Consent of Goodwin, Procter & Hoar LLP (included in exhibit
8.2).
24.1**** Power of Attorney with respect to the Registrant.
27.1**** Financial Data Schedule for the year ended December 31,
1999.
99.1** Letter of Arthur Andersen LLP.
99.2** Letter of Brown & Brown LLP.
99.3 Form of Written Consent of Eggrock Voting Stockholders.
99.4 Form of Waiver of Appraisal Rights.
</TABLE>
- ------------------------
* Filed as Annex A to this written consent solicitation statement/prospectus
constituting part of this registration statement.
** Incorporated by reference to the registration statement on Form S-1 (File
No. 333-83343) as declared effective by the Securities and Exchange
Commission on October 5, 1999.
*** Filed as Annex B to this written consent solicitation statement/prospectus
constituting part of this registration statement.
**** Previously filed.
<PAGE>
Exhibit 8.1
HALE AND DORR LLP
WWW.HALEDORR.COM
60 STATE STREET - BOSTON, MASSACHUSETTS 02109
617-526-6000 - FAX 617-526-5000
March 8, 2000
Breakaway Solutions, Inc.
50 Rowes Wharf
Boston, MA 02110
Re: Merger pursuant to Agreement and Plan of Merger among Breakaway
Solutions, Inc., Benedict Acquisition Corp., and Eggrock
Partners, Inc.
---------------------------------------------------------------
Ladies and Gentlemen:
This opinion is being delivered to you in connection with the filing
of a registration statement (the "Registration Statement") on Form S-4, which
includes the Consent Solicitation Statement and Prospectus relating to the
Agreement and Plan of Merger dated as of January 26, 2000 (the "Merger
Agreement"), by and among Breakaway Solutions, Inc., a Delaware corporation
("Parent"), Benedict Acquisition Corp., a Delaware corporation and wholly
owned subsidiary of Parent ("Sub"), and Eggrock Partners, Inc., a Delaware
corporation ("Target"). Pursuant to the Merger Agreement, Sub will merge with
and into Target (the "Merger"). Except as otherwise provided, capitalized
terms not defined herein have the meanings set forth in the Merger Agreement
and the exhibits thereto or in the letters delivered to Hale and Dorr LLP by
Parent and Target containing certain representations of Parent and Target
relevant to this opinion (the "Representation Letters"). All section
references, unless otherwise indicated, are to the United States Internal
Revenue Code of 1986, as amended (the "Code").
In our capacity as counsel to Parent in the Merger, and for purposes of
rendering this opinion, we have examined and relied upon the Registration
Statement, the Merger Agreement and the exhibits thereto, including the Escrow
Agreement, the Representation Letters, and such other documents as we considered
relevant to our analysis. In our examination of documents, we have assumed the
authenticity of original documents, the accuracy of copies, the genuineness of
signatures, and the legal capacity of signatories.
We have assumed that all parties to the Merger Agreement and to any
other documents examined by us have acted, and will act, in accordance with the
terms of such Merger Agreement and documents and that the Merger will be
consummated at the Effective Time pursuant to the terms and conditions set forth
in the Merger Agreement
<PAGE>
Breakaway Solutions, Inc.
March 8, 2000
Page 2
without the waiver or modification of any such terms and conditions.
Furthermore, we have assumed that all representations contained in the Merger
Agreement, as well as those representations contained in the Representation
Letters, are, and at the Effective Time will be, true and complete in all
material respects, and that any representation made in any of the documents
referred to herein "to the best of the knowledge and belief" (or similar
qualification) of any person or party is, and at the Effective Time will be,
correct without such qualification. We have also assumed that as to all matters
for which a person or entity has represented that such person or entity is not a
party to, does not have, or is not aware of, any plan, intention, understanding,
or agreement, there is no such plan, intention, understanding, or agreement. We
have not attempted to verify independently such representations, but in the
course of our representation, nothing has come to our attention that would cause
us to question the accuracy thereof.
The conclusions expressed herein represent our judgment as to the
proper treatment of certain aspects of the Merger under the income tax laws of
the United States based upon the Code, Treasury Regulations, case law, and
rulings and other pronouncements of the Internal Revenue Service (the "IRS") as
in effect on the date of this opinion. No assurances can be given that such laws
will not be amended or otherwise changed prior to the Effective Time, or at any
other time, or that such changes will not affect the conclusions expressed
herein. Nevertheless, we undertake no responsibility to advise you of any
developments after the Effective Time in the application or interpretation of
the income tax laws of the United States.
Our opinion represents our best judgment of how a court would decide if
presented with the issues addressed herein and is not binding upon either the
IRS or any court. Thus, no assurances can be given that a position taken in
reliance on our opinion will not be challenged by the IRS or rejected by a
court.
This opinion addresses only the specific United States federal income
tax consequences of the Merger set forth below, and does not address any other
federal, state, local, or foreign income, estate, gift, transfer, sales, use, or
other tax consequences that may result from the Merger or any other transaction
(including any transaction undertaken in connection with the Merger). We express
no opinion regarding the tax consequences of the Merger to stockholders of
Target that are subject to special tax rules, and we express no opinion
regarding the tax consequences of the Merger arising in connection with the
ownership of options or warrants for Target stock.
On the basis of, and subject to, the foregoing, and in reliance upon
the representations and assumptions described above, we are of the opinion that
the discussion under the section "Material United States Federal Income Tax
Considerations of the Eggrock Merger" in the Registration Statement, subject to
the limitations and qualifications described therein, accurately describes the
material federal income tax considerations relevant to Target stockholders
receiving Buyer Common Stock in the Merger.
<PAGE>
Breakaway Solutions, Inc.
March 8, 2000
Page 3
In rendering this opinion, we have assumed that Goodwin, Procter & Hoar
LLP has delivered, and has not withdrawn, an opinion that is substantially
similar to this one. No opinion is expressed as to any federal income tax
consequence of the Merger except as specifically set forth herein, and this
opinion may not be relied upon except with respect to the consequences
specifically discussed herein.
This opinion is intended solely for the purpose of inclusion as an
exhibit to the Registration Statement. It may not be relied upon for any other
purpose or by any other person or entity, and may not be made available to any
other person or entity without our prior written consent. We hereby consent to
the filing of this opinion as an exhibit to the Registration Statement and
further consent to the use of our name in the Registration Statement in
connection with references to this opinion and the tax consequences of the
Merger. In giving this consent, however, we do not hereby admit that we are in
the category of persons whose consent is required under Section 7 of the
Securities Act of 1933, as amended.
Very truly yours,
/s/ Hale and Dorr LLP
HALE AND DORR LLP
<PAGE>
EXHIBIT 8.2
[GP&H Letterhead]
March 8, 2000
Eggrock Partners, Inc.
3 Clock Tower Place, 4th Floor
Maynard, MA 01754
Re: Merger pursuant to Agreement and Plan of Reorganization among
Breakaway Solutions, Inc., Benedict Acquisition Corp., and Eggrock
Partners, Inc.
Ladies and Gentlemen:
This opinion is being delivered to you in connection with the filing of
a registration statement (the "Registration Statement") on Form S-4, which
includes the Consent Solicitation Statement and Prospectus relating to the
Agreement and Plan of Reorganization dated as of January 26, 2000 (the "Merger
Agreement"), by and among Breakaway Solutions, Inc., a Delaware corporation
("Parent"), Benedict Acquisition Corp., a Delaware corporation and wholly owned
subsidiary of Parent ("Sub"), and Eggrock Partners, Inc., a Delaware corporation
("Target"). Pursuant to the Merger Agreement, Sub will merge with and into
Target (the "Merger"). Except as otherwise provided, capitalized terms not
defined herein have the meanings set forth in the Merger Agreement and the
exhibits thereto or in the letters delivered to Goodwin, Procter & Hoar, LLP by
Parent and Target containing certain representations of Parent and Target
relevant to this opinion (the "Representation Letters"). All section references,
unless otherwise indicated, are to the United States Internal Revenue Code of
1986, as amended (the "Code").
In our capacity as counsel to Target in the Merger, and for purposes of
rendering this opinion, we have examined and relied upon the Registration
Statement, the Merger Agreement and the exhibits thereto, including the Escrow
Agreement, the Representation Letters, and such other documents as we considered
relevant to our analysis. In our examination of documents, we have assumed the
authenticity of original documents, the accuracy of copies, the genuineness of
signatures, and the legal capacity of signatories.
We have assumed that all parties to the Merger Agreement and to any
other documents examined by us have acted, and will act, in accordance with the
terms of such Merger Agreement and documents and that the Merger will be
consummated at the Effective Time pursuant to the
<PAGE>
Eggrock Partners, Inc.
March 8, 2000
Page 2
terms and conditions set forth in the Merger Agreement without the waiver or
modification of any such terms and conditions. Furthermore, we have assumed that
all representations contained in the Merger Agreement, as well as those
representations contained in the Representation Letters, are, and at the
Effective Time will be, true and complete in all material respects, and that any
representation made in any of the documents referred to herein "to the best of
the knowledge and belief" (or similar qualification) of any person or party is,
and at the Effective Time will be, correct without such qualification. We have
also assumed that as to all matters for which a person or entity has represented
that such person or entity is not a party to, does not have, or is not aware of,
any plan, intention, understanding, or agreement, there is no such plan,
intention, understanding, or agreement. We have not attempted to verify
independently such representations, but in the course of our representation,
nothing has come to our attention that would cause us to question the accuracy
thereof.
The conclusions expressed herein represent our judgment as to the
proper treatment of certain aspects of the Merger under the income tax laws of
the United States based upon the Code, Treasury Regulations, case law, and
rulings and other pronouncements of the Internal Revenue Service (the "IRS") as
in effect on the date of this opinion. No assurances can be given that such laws
will not be amended or otherwise changed prior to the Effective Time, or at any
other time, or that such changes will not affect the conclusions expressed
herein. Nevertheless, we undertake no responsibility to advise you of any
developments after the Effective Time in the application or interpretation of
the income tax laws of the United States.
Our opinion represents our best judgment of how a court would decide if
presented with the issues addressed herein and is not binding upon either the
IRS or any court. Thus, no assurances can be given that a position taken in
reliance on our opinion will not be challenged by the IRS or rejected by a
court.
This opinion addresses only the specific United States federal income
tax consequences of the Merger set forth below, and does not address any other
federal, state, local, or foreign income, estate, gift, transfer, sales, use, or
other tax consequences that may result from the Merger or any other transaction
(including any transaction undertaken in connection with the Merger). We express
no opinion regarding the tax consequences of the Merger to stockholders of
Target that are subject to special tax rules, and we express no opinion
regarding the tax consequences of the Merger arising in connection with the
ownership of options or warrants for Target stock.
<PAGE>
Eggrock Partners, Inc.
March 8, 2000
Page 3
On the basis of, and subject to, the foregoing, and in reliance upon
the representations and assumptions described above, we are of the opinion that
the discussion under the section "Material United States Federal Income Tax
Considerations of the Eggrock Merger" in the Registration Statement, subject to
the limitations and qualifications described therein, accurately describes the
material federal income tax considerations relevant to Target stockholders
receiving Buyer Common Stock in the Merger.
In rendering this opinion, we have assumed that Hale and Dorr LLP has
delivered, and has not withdrawn, an opinion that is substantially similar to
this one. No opinion is expressed as to any federal income tax consequence of
the Merger except as specifically set forth herein, and this opinion may not be
relied upon except with respect to the consequences specifically discussed
herein.
This opinion is intended solely for the purpose of inclusion as an
exhibit to the Registration Statement. It may not be relied upon for any other
purpose or by any other person or entity, and may not be made available to any
other person or entity without our prior written consent. We hereby consent to
the filing of this opinion as an exhibit to the Registration Statement and
further consent to the use of our name in the Registration Statement in
connection with references to this opinion and the tax consequences of the
Merger. In giving this consent, however, we do not hereby admit that we are in
the category of persons whose consent is required under Section 7 of the
Securities Act of 1933, as amended.
Very truly yours,
/s/ Goodwin, Procter & Hoar LLP
<PAGE>
Exhibit 10.47
PROMISSORY NOTE
$104,809.00 King of Prussia, Pennsylvania
June 23, 1999
John A. Loftus ("DEBTOR") hereby promises to pay to the order of
BREAKAWAY SOLUTIONS, INC. ("LENDER"), its successors and assigns, in lawful
money of the United States of America, the lesser of One hundred four thousand
eight hundred nine dollars ($104,809.00) or the principal balance outstanding
under this Promissory Note, together with accrued and unpaid interest thereon,
at the rate or rates set forth below, and on the dates and in the amounts set
forth below.
The unpaid principal amount of this Promissory Note shall bear interest
at a rate per annum equal to eight and three-quarters percent (8.75%) calculated
on the basis of a 365 day year and the actual number of days elapsed. If any
interest is determined to be in excess of the then legal maximum rate, then that
portion of each interest payment representing an amount in excess of the then
legal maximum rate shall be deemed a payment of principal and applied against
the principal of the obligations evidenced by this Note.
The principal amount of this Promissory Note and interest accrued
thereon shall be payable upon the earlier to occur of: (i) the date on which
Debtor receives any proceeds from his sale of Lender capital stock pledged to
Lender under the Stock Pledge Agreement (described below), to the extent of such
proceeds (net of any taxes payable in connection with such sale) and (ii) the
fourth anniversary of the date of the Stock Pledge Agreement (as defined below)
to the full extent of any remaining principal and interest that is outstanding
on such date.
In the event that Debtor shall fail to pay when due (whether at
maturity, by reason of acceleration or otherwise) any principal of or interest
on this Promissory Note, then (i) if such payment of principal or interest is
not made within 5 days of the due date, Lender may declare all obligations
(including without limitation, outstanding principal and accrued and unpaid
interest thereon) under this Promissory Note to be immediately due and payable
without presentment, demand, protest or any other notice of any kind, all of
which are hereby expressly waived and (ii) such overdue amounts shall bear
interest at a rate per annum equal to the otherwise applicable rate pursuant to
paragraph 2 above PLUS five percent (5%) per annum.
This Promissory Note is secured pursuant to that certain Stock Pledge
Agreement, dated as of May 14, 1999, by and between Debtor and Lender.
Notwithstanding anything to the contrary contained hereon or in the Stock Pledge
Agreement, but without in any manner impairing the validity of this Promissory
Note, the Stock Pledge Agreement or any security interest created thereby, in
the event of any default under the terms of this Promissory Note, Lender will
not hold Debtor personally liable for payment of the obligations evidenced by
this Promissory Note or for any other sums due as a result of any defaults under
this Promissory Note, and the sole recourse of Lender for any and all such
defaults shall be by exercise of the remedies provided in the Stock Pledge
Agreement.
<PAGE>
Debtor hereby waives presentment, demand, notice of dishonor, protest,
notice of protest and all other demands, protests and notices in connection with
the execution, delivery, performance, collection and enforcement of this
Promissory Note. Debtor shall pay all costs of collection when incurred,
including reasonable attorneys' fees, costs and expenses.
This Promissory Note is being delivered in, is intended to be performed
in, shall be construed and interpreted in accordance with, and be governed by
the internal laws of, the State of Delaware, without regard to principles of
conflict of laws.
This Promissory Note shall not be transferred without the express
written consent of Lender, provided that if Lender consents to any such transfer
or if notwithstanding the foregoing such a transfer occurs, then the provisions
of this Promissory Note shall inure to the benefit of and be binding upon any
successor to Debtor and shall be extended to any holder thereof.
JOHN A. LOFTUS
/s/ John A. Loftus
------------------
<PAGE>
Exhibit 10.48
BREAKAWAY SOLUTIONS, INC.
May 14, 1999
John Loftus
216 Wynne Lane
Haverford, PA 19041
Dear John:
Breakaway Solutions, Inc. (the "Company") is pleased to offer you the
position of Managing Director of the Company's Internet Solutions Service Line
(the "Position") subject to the terms and conditions set forth in this letter
agreement ("Agreement"). In consideration of the mutual agreements set forth
below, you and the Company agree to the following:
1. EFFECTIVE DATE; TERM; EFFECT OF TERMINATION OF THIS AGREEMENT.
(a) EFFECTIVE DATE. This Agreement shall be effective on the date set forth
above (such date being referred to as the "Effective Date") and shall continue
until your employment with the Company is terminated. In connection with your
execution of this Agreement you agree that upon request of the Company you shall
provide proof of your legal right to work in the United States as required by
the U.S. Immigration and Naturalization Service.
(b) EFFECT OF TERMINATION OF THIS AGREEMENT. Termination of your employment
with the Company shall terminate this Agreement. Following termination of this
Agreement, this Agreement shall become null and void and no party hereto (or any
of their respective directors, officers or employees) shall have any liability
or further obligation to any other party hereto under this Agreement, except as
provided in Sections 3, 4, 5, 6 and 7 of this Agreement, each of which
provisions shall survive termination of this Agreement. Nothing contained in
this Section 1 shall relieve any party from liability for any breach of this
Agreement occurring prior to any termination.
2. POSITION, DUTIES AND DURATION OF ASSIGNMENT. You will serve in the Position
with such duties and responsibilities as may be reasonably assigned by the Chief
Executive Officer, and as are commensurate with the duties and responsibilities
of managing directors of companies that are of comparable size and in comparable
industries to the Company. You will report to the Chief Executive Officer. You
will devote all of your business time, skill, attention and best efforts to the
Company's business and to discharge and fulfill the responsibilities assigned to
you by the Company during your employment. You shall not render services to any
other person or entity without the prior written consent of the Company, and you
shall not engage in any activity which conflicts or interferes with the
performance of the duties and responsibilities of the Position. You acknowledge
that your employment with the Company is "at will" and is subject to termination
by either the Company or you at any time, with or without cause. You will
perform the duties and responsibilities of the Position principally from
Haverford, Pennsylvania,
<PAGE>
or the vicinity thereof, except for reasonable periodic travel that may be
necessary in connection with the performance of the duties and responsibilities
of the Position.
3. COMPENSATION AND BENEFITS.
(a) SALARY. During your employment you will receive a base salary of
$165,000 per annum paid in accordance with the Company's normal payroll
practice. The Company will make such deductions, withholdings and other payments
from sums payable pursuant to this Agreement which are required by law for taxes
and other charges, or which you request pursuant to payroll deductions chosen by
you. In the event of your death, the Company will make all salary payments,
profit sharing payments and expense reimbursements which are accrued and not yet
paid as of the date of your death to your legal representative. All dollar
amounts stated in this and all other Sections of this Agreement refer to United
States currency.
(b) PROFIT SHARING. For each fiscal year, you will be eligible to receive
profit sharing distributions of up to an aggregate of 25% of annual salary for
such fiscal year contingent on the Company achieving specified profit targets as
specified by the Company's Board of Directors, such distributions to be made at
times and in the percentage amounts as set forth in the Company's profit sharing
plan.
(c) BENEFITS. You will be entitled to participate in or receive such
benefits under the Company's employee benefit plans and policies and such other
benefits which may be made available as in effect from time to time and as are
provided to officers of the Company. The Company may change, amend, modify or
completely eliminate any benefit plan from time to time.
(d) BUSINESS EXPENSES. You will be entitled to reimbursement for necessary
and reasonable business expenses incurred by you in your employment with the
Company in accordance with accounting procedures as the Company shall adopt from
time to time.
(e) VACATION/HOLIDAYS. During your employment under this Agreement you will
be entitled to four weeks paid vacation, accrued in accordance with Company
policies, and Company holidays in accordance with the Company's holiday
policies, as they may be amended from time to time.
(f) RECEIPT OF DOCUMENTATION. You acknowledge that you have received from
the Company copies of the Company's benefits plans. You understand and agree
that the Company has reserved the right and option, in its sole discretion, to
change, interpret or modify these and all other plans or policies at any time in
accordance with the terms of the respective plans or policies.
4. RESTRICTIONS AND CONDITIONS.
As an express condition of this Agreement and your continued employment
with the Company, you agree to comply with the agreements and other conditions
in this Section.
(a) AGREEMENT NOT TO DISCLOSE CONFIDENTIAL INFORMATION. While employed by
the Company and thereafter, you shall not, directly or indirectly, use any
Confidential Information
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(as hereinafter defined) other than pursuant to your employment by, and for the
benefit of, the Company, or disclose to anyone outside of the Company any such
Confidential Information. The term "Confidential Information" as used throughout
this Agreement shall mean all trade secrets, proprietary information, inventions
and developments, including customer lists, business plans, and all other data
or information (and any tangible evidence, record or representation thereof),
whether prepared, conceived or developed by an employee of the Company
(including you) or received by the Company from an outside source, which is in
the possession of the Company and which is maintained in confidence by the
Company or which might permit the Company or its clients or customers
(hereinafter collectively referred to as "Clients") to obtain a competitive
advantage over competitors who do not have access to such trade secrets,
proprietary information, or other data or information. This provision does not
apply to any Confidential Information that the Company has voluntarily disclosed
to the public that you are required by law, court order or otherwise to
disclose, or that has otherwise entered the public domain through no fault of
yours. You understand that the Company from time to time has in its possession
information which is claimed by others to be proprietary and which the Company
has agreed to keep confidential. You agree that all such information shall be
Confidential Information for purposes of this Agreement.
(b) ASSIGNMENT OF DEVELOPMENTS. You agree that all Confidential Information
and all other discoveries, inventions, ideas, designs, concepts, processes,
methods and improvements or parts thereof, conceived or otherwise made by you
during the period of your employment by the Company, alone or jointly with
others and in any way relating to the Company's present or proposed products or
services or to tasks assigned to you during the course of your employment,
whether or not made during your regular working hours or on the Company's
premises (hereinafter collectively referred to as "Developments"), together with
all products or services which embody such Developments, shall be the sole
property of the Company. You agree to, and hereby do, assign to the Company all
your right, title and interest throughout the world in and to all Developments
and to anything tangible which evidences or constitutes any such Development.
You agree that all such Developments shall constitute works made for hire under
the copyright laws of the United States and hereby assign and, to the extent any
such assignment cannot be made at present, you hereby agree to assign to the
Company all copyrights, patents, reproductions and other proprietary rights you
may have in any such Development, together with the right to file for and/or own
wholly without restriction United States and foreign patents, trademarks, and
copyrights with respect thereto.
(c) EXCEPTIONS TO THIS AGREEMENT. You hereby certify that you have informed
the Company in writing of any and all continuing obligations which you have to
any previous employer and all Confidential Information or Developments which you
claim as your own or otherwise intend to exclude from this Agreement.
(d) EMPLOYEE'S OBLIGATION TO COOPERATE. You will, at any time during your
employment, on request of the Company, execute all documents and perform all
lawful acts which the Company considers necessary or advisable to secure its
rights hereunder and to carry out the intent of this Agreement.
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<PAGE>
(e) RETURN OF PROPERTY. At any time on request of the Company, you shall
return promptly all documents and other property belonging to the Company or its
Clients or business partners.
(f) RESTRICTIONS ON CERTAIN POST-EMPLOYMENT ACTIVITIES.
(i) As long as you are employed by the Company and for a period of nine
months after the termination of your employment for any reason (except in
conjunction with a general solicitation for employees), you shall not solicit,
or induce to resign any employee of the Company (or anyone who was an employee
of the Company during the period beginning six months prior to your termination
of employment with the Company), or assist in such hiring by any other person or
business entity or encourage any such employee to terminate his or her
employment with the Company.
(ii) As long as you are employed by the Company, and for a period of
nine months following termination of your employment, you shall not either
directly or indirectly (a) solicit, divert or attempt to divert from the Company
to yourself or to any other person or business entity the business or patronage
of any of the Clients or business partners of the Company; or (b) provide
services, whether on your own behalf or as an owner, manager, consultant,
director, officer, partner or employee of any other person or business entity,
to any of the Clients of the Company; provided, however, that clause (b) shall
not prohibit you from accepting employment as a direct employee of Clients or
business partners. In the event that you breach any of the terms of this
Section, the prohibitions set forth in this Section will remain in effect for
nine months from the discovery of such breach by an officer of the Company.
(g) NO OTHER AGREEMENT. You warrant that you are not subject to any
agreement or obligation with any other party which would or could in any way
conflict with your obligations under this Agreement. You agree to indemnify and
hold harmless the Company from any claims, actions or damages arising from or
relating to a breach or alleged breach of this subsection.
(h) EQUITABLE REMEDIES; SURVIVAL. You and the Company agree that upon a
breach or violation of any provision of this Section 4, the Company, in addition
to all other remedies which might be available to it, shall be entitled as a
matter of right to equitable relief in any court of competent jurisdiction,
including the right to obtain injunctive relief or specific performance. You and
the Company agree that the remedies at law for any such breach or violation are
not fully adequate and that the injuries to the Company as a result of the
continuation of any breach or violation are incapable of full calculation in
monetary terms and, therefore, constitute irreparable harm. The provisions of
this Section 4 shall survive termination of this Agreement.
5. COMPENSATION AND BENEFITS UPON TERMINATION OF EMPLOYMENT.
Upon termination of your employment (such date of termination being
referred to as the "Termination Date"), regardless of when such termination
occurs, the Company will pay you the compensation and benefits as described in
this Section 5.
(a) The Company will pay you on or about the Termination Date all salary,
profit sharing and vacation pay, if any, that has been earned (or, in the case
of profit
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<PAGE>
sharing payments, that would have been earned) or accrued through the date of
your termination from the Company and has not yet been paid (in the case of
profit sharing payments, such amounts to be pro-rated based on the Termination
Date).
(b) You may be entitled to continuation of applicable life insurance,
accidental death and disability or other benefits for one (1) year, provided
that you make an appropriate conversion and comply with the requirements of the
applicable benefit plans.
(c) You will not be entitled to receive any other compensation or benefits
provided by, through or on behalf of the Company, under this Agreement other
than benefits that are vested as of the date of termination and that are payable
in accordance with the terms of any applicable benefit plan.
(d) You acknowledge and agree that the compensation and benefits provided
above have been negotiated with the Company and shall be deemed to fully satisfy
any notice requirements which may be required by any jurisdiction. This Section
5 constitutes your only rights to compensation, benefits, damages, or other
remedies arising out of the termination of your employment.
(e) The provisions of this Section 5 shall survive termination of this
Agreement.
6. CHANGE OF CONTROL PROVISIONS.
Upon the occurrence of a Change of Control, the vesting of any options granted
to you to purchase shares of Company Common Stock, if any, shall automatically
vest in full. For purpose of this Section 6, "Change of Control" shall mean the
occurrence of any of the following events:
(i) the approval by shareholders of the Company of a merger or
consolidation of the Company with any other corporation, other than a merger or
consolidation which would result in the voting securities of the Company
outstanding immediately prior thereto continuing to represent (either by
remaining outstanding or by being converted into voting securities of the
surviving entity) more than fifty percent (50%) of the total voting power
represented by the voting securities of the Company or such surviving entity
outstanding immediately after such merger or consolidation;
(ii) any approval by the shareholders of the Company of a plan or
proposal for the liquidation or dissolution of the Company or an agreement or
agreements for the sale, lease, exchange, disposition or other transfer (in one
transaction or a series of transactions) by the Company of all or substantially
all of the assets of the Company; or
(iii) any "person" (as such term is used in Sections 13(d) and 14(d) of
the Securities Exchange Act of 1934, as amended) becoming the "beneficial owner"
(as defined in Rule l3d-3 under said Act), directly or indirectly, of securities
of the Company representing 50% or more of the total voting
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<PAGE>
power represented by the Company's then outstanding voting securities; PROVIDED
HOWEVER, that this section shall not apply to any person or persons who, either
individually or jointly, on the date of this Agreement beneficially owned
securities of the Company representing 50% or more of the total voting power
represented by the Company's then outstanding voting securities.
7. SEVERANCE BENEFITS.
(a) In the event that the Company terminates your employment other than
for cause (as defined below) or materially reduces your compensation and
benefits, you shall be entitled to the following severance benefits: (i) a
payment, within thirty (30) days of such termination, in the amount of nine (9)
months salary then in effect, less standard deductions and withholdings, (ii) a
payment, within thirty (30) days after the close of the quarter in which your
employment was terminated, for the pro rated amount of the quarterly profit
sharing payment paid by the Company to which you would have been entitled had
you been employed by the Company at the close of such quarter, less standard
deductions and withholdings, (iii) the acceleration of vesting with respect to
options to purchase Common Stock of the Company held by you at the time of such
termination as if your employment with the Company had continued uninterrupted
for an additional twelve (12) months, and (iv) the continuation for a period of
one (1) year following such termination of your right to participate in or enjoy
benefits under any benefit plan of the Company in which you are participating at
the time of such termination, so long as such benefit plan remains generally
available to similarly situated employees of the Company. You agree that nothing
in this Agreement obligates the Company to maintain any such benefit plans or
prevents the Company from modifying or eliminating the rights of all
participants under such benefit plans from time to time, in the sole discretion
of the Board.
(b) The Company's termination of your employment with the Company shall
be without "cause" if the Company terminates your employment with the Company
for any reason other than: (i) the substantial and continuing failure, after
thirty (30) days notice thereof, to render services to the Company or any
subsidiary of the Company in accordance with the terms or requirements of your
position and duties; (ii) gross negligence or willful misconduct in the
performance of your duties or a breach of fiduciary duty to the Company or any
subsidiary of the Company; (iii) the commission of an act of embezzlement or
fraud; (iv) deliberate disregard of the written rules or policies of the Company
or any subsidiary of the Company which results in direct or indirect loss,
damage or injury to the Company or any subsidiary of the Company; (v) the
intentional unauthorized disclosure of any trade secret or confidential
information of the Company or any subsidiary of the Company; or (vi) the
conviction of a felony.
8. GENERAL.
(a) EMPLOYMENT ELIGIBILITY. From time to time after your first day of
employment, you may be asked to provide proof of your identity as well as your
legal right to work in the United States. If for any reason you are unable to
provide proof of your identity as well as your legal right to work in the United
States, the Company may not be able to employ you in the Position and may
terminate your employment. If you are a citizen of a restricted country (as
identified by the U.S. Department of Commerce) you must receive a validated
license from the
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Office of Export Licensing. This license must be obtained within a time limit
established by the Company.
(b) GOVERNING LAW. The validity, interpretation, effect, and enforcement of
this Agreement shall be governed by the internal laws of the Commonwealth of
Massachusetts, without regard to choice of law rules.
(c) ENTIRE AGREEMENT. In making your decision whether or not to accept this
offer, you agree that you have not relied upon any promises or representations
made by the Company, other than those made in this letter. This Agreement sets
forth the entire agreement and understanding between you and the Company with
respect to your employment by the Company, and supersede any other negotiations,
agreements, understandings, oral agreements, representations or past or future
practices, whether written or oral, with, by or of the Company.
Each Company plan or policy referred to herein directly or by implication
is incorporated herein only insofar as it does not contradict this Agreement. If
any inconsistencies between this Agreement and any such plan or policy or future
plan or policy exist, the most recent applicable plan document or official
policy shall control.
(d) MODIFICATION. This Agreement may not be amended, modified, changed or
discharged in any respect except as agreed in writing and signed by you and the
Chief Executive Officer of the Company.
(e) SEVERABILITY AND INTERPRETATION. In the event that any provision or any
portion of this Agreement is held invalid or unenforceable by a court of
competent jurisdiction, such provision or portion thereof shall be considered
separate and apart from the remainder of this Agreement and the other provisions
shall remain fully valid and enforceable. In the event that any provision is
held to be overly broad as written, such provision shall be deemed amended to
narrow its application to the extent necessary to make the provision enforceable
according to applicable law and enforced as amended.
(f) NOTICES. All notices required by this Agreement shall be given in
writing either by personal delivery or by first class mail, return receipt
requested. Notices given to the Company shall be addressed to the Company at its
address set forth on the first page of this Agreement, or at such later address
where the Company's principal offices are located. Notice to you shall be to the
last known address as set forth in your personnel file. Notice given by personal
delivery shall be deemed given when delivered. Notice given by mail shall be
deemed given five (5) days following the date of mailing.
(g) MISCELLANEOUS. The rights of the Company under this Agreement shall
inure to the benefit of and shall be binding upon the present and future
subsidiaries of the Company, any and all subsidiaries of a subsidiary, and
successors and assigns of the Company. No assignment of this Agreement by the
Company will relieve the Company of its obligations hereunder. You shall not
assign any of your rights and/or obligations under this Agreement and any such
attempted assignment will be void. This Agreement shall be binding upon your
heirs, executors, administrators or other legal representatives and their legal
assigns.
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<PAGE>
(h) WAIVER. A waiver by either party of any of the terms or conditions of
this Agreement in any instance shall not be deemed or construed to be a waiver
of such term or condition for the future, or of any subsequent breach thereof.
All remedies, rights, undertakings, obligations and agreements contained in this
Agreement shall be cumulative and none of them shall be in limitation of any
other remedy, right, undertaking, obligation or agreement of either party.
(i) SURVIVAL. The provisions of this Section 8 shall survive termination of
this Agreement.
If you agree with the foregoing, please sign below and return the original
to me. You may keep the enclosed copy for your records.
Sincerely,
Breakaway Solutions, Inc.
By: /s/ Gordon Brooks
------------------------
Gordon Brooks, President
Agreed to this 16 day of May, 1999
Employee: /s/ John A. Loftus
------------------
*EMPLOYMENT AGREEMENT*
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Exhibit 10.49
BREAKAWAY SOLUTIONS, INC.
STOCK RESTRICTION AGREEMENT
This Stock Restriction Agreement (this "Agreement") is made as of May 14,
1999, by and between Breakaway Solutions, Inc., a Delaware corporation (the
"Company"), and John A. Loftus (the "Stockholder").
WHEREAS, the Company, WPL Laboratories, Inc., a Pennsylvania corporation
("WPL") and Celtic Acquisition Corp., a Pennsylvania corporation ("Merger Sub")
and the Stockholder, among others, have entered into an Agreement and Plan of
Reorganization (the "Merger Agreement") whereby WPL will merge with and into
Merger Sub (the "Merger");
WHEREAS, the Stockholder will acquire an aggregate of 341,035 shares of the
Company's common stock at a price of $2.78 per share (the "Original Purchase
Price") pursuant to the Merger;
WHEREAS, the Merger Agreement requires, as a condition to closing the
Merger, that the parties hereto enter into this Agreement;
WHEREAS, the Stockholder desires to induce the Company to close the Merger
and is willing to subject an aggregate of 131,167 shares, representing the total
number of shares of the Company's common stock to be acquired by the Stockholder
in the Merger less the Stockholder's pro rata proportion (based exclusively on
the Outstanding Share Amount) of 50% of the Aggregate Share Number (as defined
in the Merger Agreement) (the "Shares"), of the Company's common stock to the
repurchase option described herein;
NOW, THEREFORE, the parties hereto agree as follows:
SECTION 1
REPURCHASE OPTION
1.1 In the event the Stockholder's employment ("Continuous Status") with
the Company is terminated by the Stockholder voluntarily or by the Company for
"CAUSE" (as defined below) before all of the Shares are released from the
Company's repurchase option (see Section 2), the Company shall, upon the date of
such termination, have an irrevocable, exclusive option for a period of sixty
(60) days from such date to repurchase up to that number of shares which
constitute the "Unreleased Shares" (as defined in Section 2) at the Original
Purchase Price per share (the "Repurchase Price"). Such option shall be
exercised by the Company by delivering written notice to the Stockholder and, at
the Company's option, (i) by delivering to the Stockholder a check in the amount
of the aggregate Repurchase Price, or (ii) by the Company canceling an amount of
the Stockholder's indebtedness for borrowed money to the Company, if any, equal
to the aggregate Repurchase Price, or (iii) by a combination of (i) and (ii) so
that the combined payment and cancellation of indebtedness equals such aggregate
Repurchase Price. Upon delivery of such notice and the payment of the aggregate
Repurchase Price in any of the ways described above, the Company shall become
the legal and beneficial owner of the Unreleased Shares being repurchased and
all rights and interests therein or relating thereto, and
<PAGE>
the Company shall have the right to retain and transfer to its own name the
number of Unreleased Shares being repurchased by the Company. For the purpose of
this Section 1, "CAUSE" shall mean: (i) the substantial and continuing failure,
after thirty (30) days' notice thereof, to render services to the Company or any
subsidiary of the Company in accordance with the terms or requirements of the
Stockholder's position and duties; (ii) gross negligence or willful misconduct
in the performance of Stockholder's duties or a breach of fiduciary duty to the
Company or any subsidiary of the Company; (iii) the commission of an act of
embezzlement or fraud; (iv) deliberate disregard of the written rules or
policies of the Company or any subsidiary of the Company which results in direct
or indirect loss, damage or injury to the Company or any subsidiary of the
Company; (v) the intentional unauthorized disclosure of any trade secret or
confidential information of the Company or any subsidiary of the Company; or
(vi) the conviction of a felony.
1.2 Whenever the Company shall have the right to repurchase the Unreleased
Shares hereunder, the Company may designate and assign one or more employees,
officers, directors or stockholders of the Company or other persons or
organizations to exercise all or a part of the Company's repurchase rights under
this Agreement and purchase all or a part of such Unreleased Shares.
SECTION 2
RELEASE OF SHARES FROM REPURCHASE OPTION
2.1 Twenty-five percent (25%) of the Shares shall be released from the
Company's repurchase option on the first anniversary of the date hereof and the
remaining Shares shall be released from the Company's repurchase option ratably
every month over an aggregate period of thirty-six (36) months, provided in each
case that the Stockholder's Continuous Status with the Company has not
terminated prior to the date of any such release, subject to Section 2.2 below.
2.2 Upon the occurrence of a Change of Control, all Unreleased Shares (as
defined below) shall be released from the Company's repurchase option in full.
For purpose of this Section 2.2, "Change of Control" shall mean the occurrence
of any of the following events:
(i) the approval by shareholders of the Company of a merger or
consolidation of the Company with any other corporation, other
than a merger or consolidation which would result in the
voting securities of the Company outstanding immediately prior
thereto continuing to represent (either by remaining
outstanding or by being converted into voting securities of
the surviving entity) more than fifty percent (50%) of the
total voting power represented by the voting securities of the
Company or such surviving entity outstanding immediately after
such merger or consolidation;
(ii) any approval by the shareholders of the Company of a plan or
proposal for the liquidation or dissolution of the Company or
an agreement or agreements for the sale, lease, exchange,
disposition or other transfer (in one transaction or a series
of transactions) by the Company of all or substantially all of
the assets of the Company; or
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(iii) any "person" (as such term is used in Sections 13(d) and 14(d)
of the Securities Exchange Act of 1934, as amended) becoming
the "beneficial owner" (as defined in Rule l3d-3 under said
Act), directly or indirectly, of securities of the Company
representing 50% or more of the total voting power represented
by the Company's then outstanding voting securities; PROVIDED
HOWEVER, that this section shall not apply to any person or
persons who, either individually or jointly, on the date of
this Agreement beneficially owned securities of the Company
representing 50% or more of the total voting power represented
by the Company's then outstanding voting securities.
2.3 In the event that the Company terminates Stockholder's employment other
than for Cause or materially reduces Stockholder's compensation and benefits,
then all of the Unreleased Shares (as defined below) shall immediately be
released from the Company's repurchase option.
2.4 Any of the Shares which have not yet been released from the Company's
repurchase option are referred to herein as "UNRELEASED SHARES".
SECTION 3
RESTRICTION ON TRANSFER
3.1 Except for the escrow described in Section 4 or the transfer of the
Shares to the Company or its assignees contemplated by this Agreement, none of
the Shares or any beneficial interest therein shall be transferred, encumbered
or otherwise disposed of in any way until the release of such Shares from the
Company's repurchase option in accordance with the provisions of this Agreement.
3.2 The Stockholder further agrees that, during the period of duration (up
to, but not exceeding, one hundred eighty (180) days) specified by the Company
and an underwriter of Common Stock or other securities of the Company, following
the date of the final prospectus which forms a part of a registration statement
of the Company filed under the Securities Act of 1933, as amended, relating to
the Company's initial public offering, the Stockholder shall not, to the extent
requested by the Company and such underwriter, directly or indirectly sell,
offer to sell, pledge, contract to sell (including, without limitation, any
short sale), grant any option, right or warrant, to purchase or otherwise
transfer or dispose of (other than to donees who agree to be similarly bound)
(each a "Disposition") any of the Shares at any time during such period except
Common Stock included in such registration; provided that other officers of the
Company are prohibited from engaging in a Disposition to the same extent as
provided herein.
SECTION 4
ESCROW OF SHARES
4.1 To ensure the availability for delivery of the Stockholder's Unreleased
Shares upon repurchase by the Company pursuant to the Company's repurchase
option under Section 1 above, the Stockholder shall, upon execution of this
Agreement, deliver and deposit with the
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Company the share certificates representing the Unreleased Shares, together with
the stock assignment duly endorsed in blank, attached hereto as EXHIBIT A. The
Unreleased Shares and stock assignment shall be held by the Company pursuant to
the terms of this Agreement.
4.2 The Company shall not be liable for any act it may do or omit to do
with respect to holding the Unreleased Shares in escrow and while acting in good
faith and in the exercise of its good faith judgment.
4.3 If the Company or any assignee exercises its repurchase option
hereunder, the Company, upon receipt of written notice of such option exercise
from the proposed transferee, shall take all steps necessary to accomplish such
transfer.
4.4 When the repurchase option has been exercised or expires unexercised or
a portion of the Shares has been released from such repurchase option, upon
Stockholder's request the Company shall promptly cause a new certificate to be
issued for such released Shares and shall deliver such certificate to the
Company or the Stockholder, as the case may be.
4.5 Subject to the terms hereof, the Stockholder shall have all the rights
of a stockholder with respect to such Unreleased Shares while they are held in
escrow, including without limitation, the right to vote the Unreleased Shares
and receive any cash dividends declared thereon. If, from time to time during
the term of the Company's repurchase option, there is (i) any stock dividend,
stock split or other change in the Unreleased Shares, or (ii) any acquisition,
merger or sale of assets of the Company which does not release all of the
Unreleased Shares from the Company's repurchase option, any and all new,
substituted or additional securities to which the Stockholder is entitled by
reason of the Stockholder's ownership of the Unreleased Shares shall be
immediately subject to this Agreement, deposited with the Company and included
thereafter as "Unreleased Shares" for purposes of this Agreement and the
Company's repurchase option.
4.6 THE STOCKHOLDER ACKNOWLEDGES AND AGREES THAT THE RELEASE OF SHARES FROM
THE REPURCHASE OPTION OF THE COMPANY PURSUANT TO SECTION 2 HEREOF IS EARNED ONLY
BY CONTINUING SERVICE AS AN EMPLOYEE OF THE COMPANY (EXCEPT AS PROVIDED IN
SECTION 2.2). THE STOCKHOLDER FURTHER ACKNOWLEDGES AND AGREES THAT THIS
AGREEMENT, THE TRANSACTIONS CONTEMPLATED HEREUNDER AND THE VESTING SCHEDULE SET
FORTH HEREIN DO NOT CONSTITUTE AN EXPRESS OR IMPLIED PROMISE OF CONTINUED
ENGAGEMENT AS AN EMPLOYEE FOR THE VESTING PERIOD, FOR ANY PERIOD, OR AT ALL, AND
SHALL NOT INTERFERE WITH THE STOCKHOLDER'S RIGHT OR THE COMPANY'S RIGHT TO
TERMINATE THE STOCKHOLDER'S EMPLOYMENT RELATIONSHIP AT ANY TIME, WITH OR WITHOUT
CAUSE.
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SECTION 5
MISCELLANEOUS
5.1 ENFORCEABILITY/SEVERABILITY. The parties hereto agree that each
provision of this Agreement shall be interpreted in such a manner as to be
effective and valid under applicable law. If any provision of this Agreement
shall nonetheless be held to be prohibited by or invalid under applicable law,
such provision shall be effective only to the extent of such prohibition or
invalidity, without invalidating the remainder of such provision or the
remaining provisions of this Agreement.
5.2 STOCKHOLDER REPRESENTATIONS. In connection with this Agreement, the
Stockholder understands that he (and not the Company) shall be responsible for
his own federal, state, local or foreign tax liability and any of his other tax
consequences that may arise as a result of the transactions contemplated by this
Agreement. Stockholder shall rely solely on the determinations of his tax
advisors or his own determinations, and not on any statements or representations
by the Company or any of its agents, with regard to all such tax matters.
STOCKHOLDER HAS REVIEWED SECTION 83 OF THE INTERNAL REVENUE CODE OF 1986, AS
AMENDED, WITH HIS TAX ADVISOR.
5.3 ENTIRE AGREEMENT; SUCCESSORS AND ASSIGNS. This Agreement constitutes
the entire agreement between the parties relative to the subject matter hereof
and supersedes any previous agreement among the parties. Subject to the
exceptions specifically set forth in this Agreement, the terms and conditions of
this Agreement shall inure to the benefit of and be binding upon the respective
executors, administrators, heirs, successors and assigns of the parties.
5.4 GOVERNING LAW. This Agreement shall be governed by and construed in
accordance with the laws of the State of Delaware applicable to contracts
entered into and wholly to be performed within the State of Delaware by Delaware
residents.
5.5 COUNTERPARTS. This Agreement may be executed in counterparts, each of
which shall be an original, but all of which together shall constitute one and
the same instrument.
5.6 HEADINGS. The section headings of this Agreement are for convenience
and shall not by themselves determine the interpretation of this Agreement.
5.7 NOTICES. Any notice required or permitted hereunder shall be given in
writing and shall be conclusively deemed effectively given upon personal
delivery, or delivery by overnight courier, or five (5) days after deposit in
the United States mail, by registered or certified mail, postage prepaid,
addressed (i) if to the Company, as set forth below the Company's name on the
signature page of this Agreement and (ii) if to the Stockholder, to such address
as the Stockholder last provided the Company, or at such other address as the
parties may designate by ten (10) days' advance written notice to the other
parties.
5.8 AMENDMENT OF AGREEMENT. Any provision of this Agreement may be amended
by a written instrument signed by the Company and by the Stockholder.
[REMAINDER OF PAGE INTENTIONALLY LEFT BLANK]
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<PAGE>
IN WITNESS WHEREOF, the parties hereto have executed this Agreement as of
the date above set forth.
BREAKAWAY SOLUTIONS, INC.
50 Rowes Wharf
Boston, MA 02110
By: /s/ Gordon Brooks
-----------------
Name: Gordon Brooks
Title: CEO
"STOCKHOLDER"
/s/ John A. Loftus
--------------------
Name: John A. Loftus
*STOCK RESTRICTION AGREEMENT*
<PAGE>
EXHIBIT A
ASSIGNMENT SEPARATE FROM CERTIFICATE
FOR VALUE RECEIVED I, ____________________, hereby sell, assign and
transfer unto ________________________________________ shares of the Common
Stock of Breakaway Systems, Inc. standing in my name on the books of said
corporation represented by Certificate No. _____ herewith and do hereby
irrevocably constitute and appoint the Secretary of Breakaway Systems, Inc. or
his or her designee, to transfer the said stock on the books of the within named
corporation with full power of substitution in the premises.
This assignment may be used only in accordance with the Repurchase
Agreement between the corporation and the undersigned dated May __, 1999.
Date:_________________________ , _____ ______________________________________
Name:_________________________________
<PAGE>
EXHIBIT 23.2
INDEPENDENT ACCOUNTANTS CONSENT AND REPORT ON SCHEDULE
The Board of Directors
Breakaway Solutions, Inc.:
The audits referred to in our report dated February 4, 2000, except for
paragraph five of note 6, which is as of March 7, 2000, included the related
consolidated financial statement schedule as of December 31, 1999, and for each
of the years in the three-year period ended December 31, 1999, included in the
registration statement. The consolidated financial statement schedule is the
responsibility of the Company's management. Our responsibility is to express an
opinion on the consolidated financial statement schedule based on our audits. In
our opinion such consolidated financial statement schedule, when considered in
relation to the basic consolidated financial statements taken as a whole,
presents fairly in all material respects the information set forth therein.
We consent to the use of our reports included herein and to the reference to
our firm under the headings "Selected Consolidated Financial Data" and "Experts"
in the prospectus.
/s/ KPMG LLP
Boston, Massachusetts
March 8, 2000
<PAGE>
EXHIBIT 23.3
CONSENT OF INDEPENDENT ACCOUNTANTS
The Board of Directors
Applica Corporation:
We consent to the use of our report on the financial statements of Applica
Corporation as of December 31, 1998 and from September 24, 1998 (inception)
through December 31, 1998 dated June 30, 1999 included herein and to the
reference to our firm under the headings "Selected Consolidated Financial Data"
and "Experts" in the prospectus.
/s/ KPMG LLP
Boston, Massachusetts
March 8, 2000
<PAGE>
EXHIBIT 23.4
CONSENT OF INDEPENDENT ACCOUNTANTS
The Board of Directors
WPL Laboratories, Inc.:
We consent to the use of our report on the financial statements of WPL
Laboratories, Inc. as of December 31, 1997 and 1998 and for each of the years
then ended dated June 30, 1999 included herein and to the reference to our firm
under the headings "Selected Consolidated Financial Data" and "Experts" in the
prospectus.
/s/ KPMG LLP
Boston, Massachusetts
March 8, 2000
<PAGE>
EXHIBIT 23.5
CONSENT OF INDEPENDENT ACCOUNTANTS
The Board of Directors
Web Yes, Inc.:
We consent to the use of our report on the consolidated financial statements of
Web Yes, Inc. and subsidiary as of December 31, 1997 and 1998 and for each of
the years then ended dated June 30, 1999 included herein and to the reference to
our firm under the headings "Selected Consolidated Financial Data" and "Experts"
in the prospectus.
/s/ KPMG LLP
Boston, Massachusetts
March 8, 2000
<PAGE>
EXHIBIT 23.6
CONSENT OF INDEPENDENT ACCOUNTANTS
As independent public accountants, we hereby consent to the use of our report
(and to all references to our Firm) included in or made a part of this
registration statement.
/s/ Arthur Andersen LLP
Boston, Massachusetts
March 8, 2000
<PAGE>
EXHIBIT 23.7
CONSENT OF MORGAN STANLEY & CO. INCORPORATED
The Board of Directors of Breakaway
Solutions, Inc.:
We hereby consent to the inclusion in the consent solicitation
statement/prospectus of Breakaway Solutions, Inc. forming part of this
Registration Statement on Form S-4 of our opinion dated January 24, 2000 to the
Board of Directors of Breakaway Solutions, Inc. attached as Annex C to the
consent solicitation statement/prospectus.
/s/ Cole R. Bader
Vice President
MORGAN STANLEY & CO. INCORPORATED
New York, New York
February 28, 2000
<PAGE>
Exhibit 99.3
EGGROCK PARTNERS, INC.
CONSENT OF ALL VOTING STOCKHOLDERS
The undersigned, being all of the holders of capital stock of Eggrock
Partners, Inc., a Delaware corporation (the "Company"), entitled to vote on the
matters set forth below (such holders, the "Voting Stockholders"), do each
hereby consent pursuant to Section 228 of the Delaware General Corporation Laws
to the adoption of the following resolutions in connection with the merger (the
"Merger") of Benedict Acquisition Corp. ("Benedict") with and into the Company,
pursuant to the Agreement and Plan of Merger by and between the Company,
Breakaway Solutions, Inc. ("Breakaway") and Benedict dated as of January 26,
2000 (the "Merger Agreement"). Pursuant to the Merger Agreement, Benedict will
merge with and into the Company with the Company as the surviving corporation,
and the Company will thereafter be a wholly-owned subsidiary of Breakaway.
WHEREAS, the Board of Directors of the Company has recommended,
adopted, approved and declared advisable the Merger and the Merger Agreement;
WHEREAS, the Voting Stockholders are in receipt of a copy of the
consent solicitation statement/prospectus relating to the Merger, dated as
of March 10, 2000 and have had a reasonable opportunity to ask questions
about the Merger of representatives of the Company and Breakaway;
NOW, THEREFORE BE IT RESOLVED, that the Merger Agreement by and between
the Company, Breakaway and Benedict in the form attached hereto as EXHIBIT A is
hereby adopted and approved in order to effect the Merger.
[Signature Page Follows Next]
<PAGE>
IN WITNESS WHEREOF, the undersigned Voting Stockholders have executed
this Consent on the date set forth opposite its name below.
HOLDERS OF VOTING COMMON STOCK:
Dated: _____________________________
Maureen Ellenberger
Dated: _____________________________
Vijay Manwani
Dated: _____________________________
Michael Mordas
HOLDERS OF SERIES A PREFERRED STOCK:
Battery Ventures V, L.P.
Dated: ______________________________
Name:
Title:
Battery Investment Partners V, LLC
Dated: ______________________________
Name:
Title:
Battery Ventures Convergence Fund,
L.P.
Dated: ______________________________
Name:
Title:
1998 GPH Fund LLC
Dated: ______________________________
Name:
Title:
GPH ER Partners
Dated: ______________________________
Name:
Title:
<PAGE>
Exhibit 99.4
WAIVER OF APPRAISAL RIGHTS
BY STOCKHOLDERS OF
EGGROCK PARTNERS, INC.
WHEREAS, the undersigned ("Stockholder") is a holder of non-voting
common stock, par value $.01 per share, of Eggrock Partners, Inc., a Delaware
corporation ("Eggrock").
WHEREAS, Eggrock has entered into the Agreement and Plan of Merger by
and among Breakaway Solutions, Inc. ("Breakaway"), Benedict Acquisition Corp.
("Benedict") and Eggrock, dated as of January 26, 2000 (the "Merger Agreement")
pursuant to which Benedict will merge with and into Eggrock (the "Merger").
WHEREAS, Section 262 of the Delaware General Corporation Law ("Section
262") grants appraisal rights to Stockholders of Eggrock and provides that
Stockholder may demand in writing that Eggrock pay the fair value for his or her
shares.
WHEREAS, Stockholder is in receipt of a copy the consent
solicitation statement/prospectus relating to the Merger, dated as of March
10, 2000 and has had an reasonable opportunity to ask questions about the
Merger of representatives of the Company and Breakaway.
WHEREAS, in order to induce Breakaway and Benedict to consummate the
Merger sooner than they would otherwise be required to do under the Merger
Agreement, the undersigned Stockholder desires to waive his or her appraisal
rights pursuant to Section 262.
NOW, THEREBY, the undersigned Stockholder hereby waives his or her
rights to demand an appraisal of his or her shares of capital stock pursuant
to Section 262 in connection with the Merger and agrees not to demand the
appraisal of such shares. The undersigned stockholder acknowledges (i)
receipt of the consent solicitation statement/prospectus dated as of March
10, 2000 relating to, among other things, the Merger, Eggrock, Eggrock's
prospects, Breakaway and the consideration Stockholder will receive as a
result of the Merger, and which constitutes notice that appraisal rights
under Section 262 are available for his or her shares of capital stock and
includes a copy of Section 262 and (ii) that Breakaway and Benedict will rely
on this waiver in deciding whether to consummate the Merger sooner than they
would otherwise be required to do under the Merger Agreement.
[Remainder of page intentionally left blank]
<PAGE>
IN WITNESS WHEREOF, the undersigned has duly executed this Waiver as of
the date set forth below.
- -------------------------- ---------------------------
Date: Name:
Number of Share of
Common Stock of
Eggrock Partners,
Inc.:
--------------------
