<PAGE>
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON MARCH 3, 1999
REGISTRATION NO. 333-70717
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
------------------------
AMENDMENT NO. 5
TO
FORM S-1
REGISTRATION STATEMENT UNDER
THE SECURITIES ACT OF 1933
---------------------
USINTERNETWORKING, INC.
(Exact name of registrant as specified in its charter)
<TABLE>
<S> <C> <C>
DELAWARE 7379 52-2078325
(STATE OR OTHER JURISDICTION OF (PRIMARY STANDARD INDUSTRIAL (I.R.S. EMPLOYER
INCORPORATION OR ORGANIZATION) CLASSIFICATION CODE NUMBER) IDENTIFICATION NO.)
</TABLE>
------------------------
ONE USI PLAZA
ANNAPOLIS, MARYLAND 21401-7478
(410) 897-4400
(Address, including zip code, and telephone number, including area code, of
registrant's principal executive offices)
------------------------------
WILLIAM T. PRICE, ESQ.
VICE PRESIDENT, SECRETARY AND GENERAL COUNSEL
ONE USI PLAZA
ANNAPOLIS, MARYLAND 21401-7478
(410) 897-4400
(Name, address, including zip code, and telephone number, including area code,
of agent for service)
------------------------------
COPIES TO:
<TABLE>
<S> <C>
JAMES F. ROGERS, ESQ. WILLIAM B. GANNETT, ESQ.
LATHAM & WATKINS CAHILL GORDON & REINDEL
1001 PENNSYLVANIA AVENUE, N.W., SUITE 1300 80 PINE STREET
WASHINGTON, DC 20004 NEW YORK, NY 10005-1702
(202) 637-2200 (212) 701-3000
</TABLE>
------------------------
APPROXIMATE DATE OF COMMENCEMENT OF THE PROPOSED SALE TO THE PUBLIC: As soon
as practicable after the effective date of the Registration Statement.
If any of the securities being registered on this form are to be offered on
a delayed or continuous basis pursuant to Rule 415 under the Securities Act of
1933, check the following box: / /
If this Form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, check the following box and
list the Securities Act registration statement number of the earlier effective
registration statement for the same offering. / /____
If this Form is a post-effective amendment filed pursuant to Rule 462(c)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. / /____
If this Form is a post-effective amendment filed pursuant to Rule 462(d)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. / /____
If delivery of the prospectus is expected to be made pursuant to Rule 434,
please check the following box. / /
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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- --------------------------------------------------------------------------------
<PAGE>
The information in this prospectus is not complete and may be changed. We may
not sell these securities until the registration statement filed with the
Securities and Exchange Commission is effective. This prospectus is not an offer
to sell these securities and it is not soliciting an offer to buy these
securities in any state where the offer or sale is not permitted.
<PAGE>
SUBJECT TO COMPLETION, DATED MARCH 3, 1999
5,000,000 Shares
[LOGO]
USINTERNETWORKING, INC.
Common Stock
-----------
Prior to this offering, there has been no public market for our common
stock. The initial public offering price is expected to be between $ and
$ per share. We have applied to list our common stock on the Nasdaq National
Market under the symbol "USIX."
The underwriters have an option to purchase a maximum of 750,000 additional
shares to cover over-allotments of shares.
Investing in our common stock involves risk. See "Risk Factors" beginning on
page 5.
<TABLE>
<CAPTION>
Underwriting
Price to Discounts and Proceeds
Public Commissions to USI
----------------- ----------------- -----------------
<S> <C> <C> <C>
Per Share............................................. $ $ $
Total................................................. $ $ $
</TABLE>
Delivery of the shares of common stock will be made on or about , 1999
against payment in immediately available funds.
Neither the Securities and Exchange Commission nor any other state
securities commission has approved or disapproved these securities or determined
if this prospectus is truthful or complete. Any representation to the contrary
is a criminal offense.
Credit Suisse First Boston
Bear, Stearns & Co. Inc.
BT Alex. Brown
Legg Mason Wood Walker
Incorporated
Prospectus dated , 1999
<PAGE>
--------------
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
---------
<S> <C>
PROSPECTUS SUMMARY........................... 3
RISK FACTORS................................. 5
USE OF PROCEEDS.............................. 14
DIVIDEND POLICY.............................. 14
CAPITALIZATION............................... 15
DILUTION..................................... 16
SELECTED HISTORICAL CONSOLIDATED FINANCIAL
DATA....................................... 17
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF
OPERATIONS................................. 18
BUSINESS..................................... 23
MANAGEMENT................................... 35
<CAPTION>
PAGE
---------
<S> <C>
CERTAIN RELATIONSHIPS AND RELATED
TRANSACTIONS............................... 45
PRINCIPAL STOCKHOLDERS....................... 48
DESCRIPTION OF CAPITAL STOCK................. 51
SHARES ELIGIBLE FOR FUTURE SALE.............. 53
UNDERWRITING................................. 54
NOTICE TO CANADIAN RESIDENTS................. 56
LEGAL MATTERS................................ 57
EXPERTS...................................... 57
WHERE YOU CAN FIND MORE INFORMATION.......... 57
INDEX TO FINANCIAL STATEMENTS................ F-1
</TABLE>
--------------
YOU SHOULD RELY ONLY ON THE INFORMATION CONTAINED IN THIS DOCUMENT OR TO
WHICH WE HAVE REFERRED YOU. WE HAVE NOT AUTHORIZED ANYONE TO PROVIDE YOU WITH
INFORMATION THAT IS DIFFERENT. THIS DOCUMENT MAY BE USED ONLY WHERE IT IS LEGAL
TO SELL THESE SECURITIES. THE INFORMATION IN THIS DOCUMENT MAY BE ACCURATE ONLY
ON THE DATE OF THIS DOCUMENT.
We have applied for federal registration of the marks "USINTERNETWORKING,"
"USI," "Internet Managed Application Provider," "IMAP" and "USIView." This
prospectus also includes trademarks, service marks and trade names of other
companies.
DEALER PROSPECTUS DELIVERY OBLIGATION
UNTIL , 1999 (25 DAYS AFTER THE COMMENCEMENT OF THIS OFFERING),
ALL DEALERS THAT EFFECT TRANSACTIONS IN THESE SECURITIES, WHETHER OR NOT
PARTICIPATING IN THIS OFFERING, MAY BE REQUIRED TO DELIVER A PROSPECTUS. THIS IS
IN ADDITION TO THE DEALER'S OBLIGATION TO DELIVER A PROSPECTUS WHEN ACTING AS AN
UNDERWRITER AND WITH RESPECT TO UNSOLD ALLOTMENTS OR SUBSCRIPTIONS.
This prospectus contains forward-looking statements and information relating
to us, our industry and the U.S. and international Internet and systems
integration businesses. These forward-looking statements are based on the
beliefs of our management, as well as assumptions made by and information
currently available to our management. When used in this prospectus, the words
"estimate," "project," "believe," "anticipate," "intend," "expect" and similar
expressions are intended to identify forward-looking statements. These
statements reflect our current views with respect to future events and are
subject to risks and uncertainties that could cause our actual results to differ
materially from those contemplated in our forward-looking statements. We caution
you not to place undue reliance on these forward-looking statements, which speak
only as of the date of this prospectus. We do not undertake any obligation to
publicly release any revisions to these forward-looking statements to reflect
events or circumstances after the date of this prospectus or to reflect the
occurrence of unanticipated events.
2
<PAGE>
PROSPECTUS SUMMARY
THIS SUMMARY MAY NOT CONTAIN ALL OF THE INFORMATION THAT MAY BE IMPORTANT TO
YOU. YOU SHOULD READ THE ENTIRE PROSPECTUS, INCLUDING THE FINANCIAL DATA AND
RELATED NOTES, BEFORE MAKING AN INVESTMENT DECISION. UNLESS OTHERWISE INDICATED,
ALL INFORMATION IN THIS PROSPECTUS (1) ASSUMES NO EXERCISE OF THE OVER-ALLOTMENT
OPTION TO PURCHASE ADDITIONAL SHARES OF COMMON STOCK GRANTED TO THE UNDERWRITERS
AND (2) REFLECTS A 1 FOR 8 STOCK SPLIT WHICH WILL BECOME EFFECTIVE PRIOR TO THE
CONSUMMATION OF THIS OFFERING.
ABOUT USINTERNETWORKING
USI, the first Internet Managed Application Provider-SM-, or IMAP-SM-,
implements, operates, and supports packaged software applications that can be
accessed and used over the Internet. USI's services enable our clients to use
leading business software applications without the cost and burden of owning or
managing the underlying technologies, such as computer servers, networking
equipment, and software licenses. Our clients access these applications through
our global network of Enterprise Data Centers. USI has established its IMAP
offerings as a leading single-source solution for middle market companies
implementing distributed business functions. These functions include sales force
automation, customer support, e-commerce, and human resources and financial
systems. USI also allows clients to host their own software applications in our
highly reliable and secure data centers.
USI does not develop application software. We implement and manage
applications for our clients that are developed by others. To execute this
strategy, we have established agreements with leading software vendors in key
application areas, including:
- Siebel in sales force automation, customer service and enterprise
marketing;
- PeopleSoft in human resources and financials;
- Sagent in decision-making support, and;
- BroadVision in e-commerce.
These agreements provide USI with an initial software portfolio that can meet a
broad range of clients' enterprise resource planning, e-commerce and
communication needs. Some of these agreements also provide USI with an
advantageous market position. For example, USI is the exclusive outsource
provider of Siebel application hosting and rental services for direct customers
of Siebel headquartered in North America.
To deliver its services, USI has built a network of four Enterprise Data
Centers located in Annapolis, Silicon Valley, Amsterdam and Tokyo. Our
specialized network architecture incorporates a high level of redundancy,
bypasses Internet congestion points, and enables real time back-up of client
sites across dispersed geographies. As a result, we believe our clients benefit
from superior response time, reliability and security.
USI can implement applications and generate value for clients very quickly.
We can accomplish this because we have developed modular product offerings and
field implementation teams with expertise in our specific IMAP solutions. For
example, our typical implementation of a Siebel application is designed to be
completed in 45 days. We believe that this provides a competitive advantage
versus a more conventional implementation cycle of six months to more than a
year.
USI's client care operation supports our client's needs twenty-four hours a
day, seven days a week. Clients are served by teams with specialized knowledge
of that client's specific IMAP solution. We have developed and implemented
network management tools that allow our client care engineers to rapidly
diagnose and correct clients' problems with any element of the service we
provide.
Because we are selling a service and not the underlying technology, our IMAP
clients sign contracts that provide for fixed monthly payments. Once a contract
is signed, we invest in the hardware, software and implementation needed to
deliver that client's service. This will require a substantial investment in the
early years to build our client base. We expect to benefit from rapidly growing
recurring revenue, which we believe will generate substantial positive cash flow
in later years.
3
<PAGE>
THE OFFERING
The calculation of the shares of common stock outstanding after the offering
in the table below is based on the number of shares outstanding on December 31,
1998. The calculation does not include:
- 4,682,250 shares reserved for issuance under our stock option plan, of
which:
-- 1,682,250 were subject to outstanding options on December 31, 1998
-- approximately 1,875,000 will be subject to options we intend to grant
contingent on this offering
- 1,482,648 shares issuable upon the exercise of warrants outstanding on
December 31, 1998.
<TABLE>
<S> <C>
Common stock offered by USI.................. 5,000,000 shares
Common stock to be outstanding after this
offering.................................... 37,868,276 shares
Over-allotment option........................ 750,000 shares
Use of proceeds.............................. The continued expansion and enhancement of
our network, the addition of services to our
IMAP offerings, payment of preferred stock
dividends, working capital and other general
corporate purposes.
Proposed Nasdaq National Market Symbol....... "USIX"
</TABLE>
SUMMARY UNAUDITED PRO FORMA AND HISTORICAL CONSOLIDATED FINANCIAL DATA
The following table summarizes pro forma consolidated operating statement
data giving effect to the acquisition of Advanced Communications Resources, Inc.
and IIT Holding, Inc. as if they had occurred as of January 1, 1998.
<TABLE>
<CAPTION>
PRO FORMA FOR THE YEAR
ENDED
DECEMBER 31, 1998
---------------------------
(in thousands)
<S> <C>
OPERATING STATEMENT DATA:
Revenues............................................................................. $ 13,938
Operating expenses................................................................... 45,866
Net loss............................................................................. (34,268)
</TABLE>
The following table summarizes consolidated balance sheet data as of
December 31, 1998 and as adjusted to give effect to the conversion of our
preferred stock into common stock and the receipt of $ in net proceeds
from this offering.
<TABLE>
<CAPTION>
AS OF DECEMBER 31, 1998
----------------------------
ACTUAL AS ADJUSTED
---------- ----------------
(in thousands)
<S> <C> <C>
BALANCE SHEET DATA:
Cash and cash equivalents........................................................... $ 43,802 $
Working capital..................................................................... 22,551
Total assets........................................................................ 107,527
Short-term obligations expected to be refinanced.................................... 5,282
Long-term debt and capital lease obligations, excluding current portion............. 8,659
Series B Convertible Redeemable Preferred Stock..................................... 62,242
Common stock subject to repurchase.................................................. 4,145
Stockholders' (deficit) equity...................................................... (1,457)
</TABLE>
USI was incorporated in Delaware in January 1998. In this prospectus, we
will refer to USINTERNETWORKING, Inc. and its subsidiaries, collectively, as
"USI," "we" and "us." Our principal executive offices are located at One USI
Plaza, Annapolis, Maryland 21401-7478. Our telephone number is (410) 897-4400.
Our web site is located at www.usi.net. The information on our web site is not
part of this prospectus.
4
<PAGE>
RISK FACTORS
INVESTING IN OUR COMMON STOCK INVOLVES RISK. YOU SHOULD CAREFULLY CONSIDER
THE RISKS AND UNCERTAINTIES DESCRIBED BELOW BEFORE MAKING AN INVESTMENT
DECISION. THESE RISKS AND UNCERTAINTIES ARE NOT THE ONLY ONES FACING USI OR
WHICH MAY ADVERSELY AFFECT OUR BUSINESS. IF ANY OF THE FOLLOWING RISKS OR
UNCERTAINTIES ACTUALLY OCCUR, OUR BUSINESS, FINANCIAL CONDITION OR RESULTS OF
OPERATIONS COULD BE MATERIALLY ADVERSELY AFFECTED. IN THIS EVENT, THE TRADING
PRICE OF OUR COMMON STOCK COULD DECLINE, AND YOU COULD LOSE ALL OR PART OF YOUR
INVESTMENT. THIS PROSPECTUS ALSO CONTAINS FORWARD-LOOKING STATEMENTS THAT
INVOLVE RISKS AND UNCERTAINTIES. OUR ACTUAL RESULTS MAY DIFFER FROM THOSE
DESCRIBED IN THE FORWARD-LOOKING STATEMENTS. THIS COULD OCCUR BECAUSE OF THE
RISKS DESCRIBED BELOW AND ELSEWHERE IN THIS PROSPECTUS.
OUR BUSINESS IS DIFFICULT TO EVALUATE BECAUSE WE HAVE A LIMITED OPERATING
HISTORY.
We began operating in January 1998. Our limited operating history makes
predicting future results difficult. Since our inception, we have focused on
developing our business and only since September 1998 have we begun to contract
with customers for our IMAP offerings. Revenues to date for our IMAP offerings
have not been material. Because of our limited operating history and the
emerging nature of our markets, our historical financial information is of
limited value in projecting our future results. Therefore, it is difficult to
evaluate our business and prospects.
OUR HISTORICAL REVENUES WERE DERIVED PRIMARILY FROM SERVICES THAT WE DO NOT
EXPECT TO BE THE FOCUS OF
OUR BUSINESS IN THE FUTURE.
Because our IMAP offerings are at an early stage, we currently derive the
overwhelming majority of our revenue primarily from professional services
provided by I.I.T. Holding, Inc. and Advanced Communication Resources, Inc..
These businesses were acquired on September 1998 and October 1998, respectively,
and their services are substantively different than our IMAP offerings. As a
result, historical financial information of IIT and ACR does not reflect the
results we expect from our core business offering in the future.
WE EXPECT TO CONTINUE TO INCUR LOSSES AND EXPERIENCE NEGATIVE CASH FLOW.
We expect to have significant operating losses and to record significant net
cash outflow before financing in the near term. Our business has not generated
sufficient cash flow to fund our operations without resorting to external
sources of capital. Starting up our company and building our network required
substantial capital and other expenditures. As a result, we reported an
operating loss before interest of approximately $29.9 million for the period
from our date of inception through December 31, 1998, and net cash outflow
before financing of approximately $58.3 million for the same period. Further
developing our business and expanding our network will require significant
additional capital and other expenditures.
WE MAY NEED ADDITIONAL CAPITAL TO FUND OUR OPERATIONS AND FINANCE OUR GROWTH,
AND WE MAY NOT BE ABLE TO OBTAIN IT ON TERMS ACCEPTABLE TO US OR AT ALL.
We believe that the estimated net proceeds from this offering, together with
our existing assets, anticipated debt and capital lease financing and expected
revenue growth will be sufficient to fund our operations for at least the next
two years. However, if we expand more rapidly than currently anticipated, if our
working capital needs exceed our current expectations or if we make
acquisitions, we will need to raise additional capital from equity or debt
sources. If we cannot obtain financing on terms acceptable to us or at all, we
may be forced to curtail our planned business expansion and may be unable to
fund our ongoing operations.
5
<PAGE>
OUR SUCCESS DEPENDS ON THE ACCEPTANCE AND INCREASED USE OF INTERNET-BASED
BUSINESS SOFTWARE SOLUTIONS, AND WE CANNOT BE SURE THAT THIS WILL HAPPEN.
Our business model depends on the adoption of Internet-based business
software solutions by commercial users. Our business could suffer dramatically
if Internet-based solutions are not accepted or not perceived to be effective.
The market for Internet services, private network management solutions and
widely distributed Internet-enabled packaged application software has only
recently begun to develop. It is now evolving rapidly.
The growth of Internet-based business software solutions could also be
limited by:
- Concerns over transaction security and user privacy.
- Inadequate network infrastructure for the entire Internet.
- Inconsistent performance of the Internet.
We cannot be certain that this market will become viable or, if it becomes
viable, that it will grow.
THE GROWTH IN DEMAND FOR OUTSOURCED BUSINESS SOFTWARE APPLICATIONS BY MIDDLE
MARKET COMPANIES IS HIGHLY UNCERTAIN.
Growth in demand for and acceptance of outsourced business software
applications, including our IMAP offerings, by middle market companies is highly
uncertain. We believe that many of our potential customers are not fully aware
of the benefits of outsourced solutions. It is possible that these solutions may
never achieve market acceptance. If the market for our products does not grow or
grows more slowly than we currently anticipate, our business, financial
condition and operating results would be materially adversely affected.
OUR BUSINESS STRATEGY MAY NOT EFFECTIVELY ADDRESS OUR MARKET.
We have made substantial investments to pursue our strategy. These
investments include:
- Building a global network of data centers.
- Allying with particular software providers.
- Investing to develop unique product features.
- Developing implementation resources around specific applications.
These investments may not be successful. More cost effective strategies may
be available to compete in this market. We may have chosen to focus on the wrong
application areas or to work with the wrong partners. Potential customers may
not value the specific product features in which we have invested. There is no
assurance that our strategy will prove successful.
WE MAY NOT EFFECTIVELY EXECUTE OUR STRATEGY.
Our business strategy is complex and requires that we successfully and
simultaneously complete many tasks. In order to be successful, we will need to:
- Build and operate a highly-reliable, complex global network.
- Negotiate effective partnerships and develop economically attractive
products.
- Attract and retain IMAP customers.
- Attract and retain highly-skilled employees.
- Integrate acquired companies into our operations.
6
<PAGE>
- Evolve our business to gain advantages in an increasingly competitive
environment.
- Expand our international operations.
In addition, our management team has worked together for less than one year.
There can be no assurance that we will be able to successfully execute all
elements of our strategy.
WE PLAN TO EXPAND VERY RAPIDLY AND MANAGING OUR GROWTH MAY BE DIFFICULT.
We have rapidly expanded our operations since USI was founded in January
1998. We expect our business to continue to grow both geographically and in
terms of the number of products and services we offer. We cannot be sure that we
will successfully manage our growth. In order to successfully manage our growth
we must:
- Enlarge our network and infrastructure.
- Improve our management, financial and information systems and controls.
- Expand, train and manage our employee base effectively.
There will be additional demands on our customer service support and sales,
marketing and administrative resources as we increase our service offerings and
expand our target markets. The strains imposed by these demands are magnified by
the start-up nature of our operations. If we cannot manage our growth
effectively, our business, financial condition or results of operations could be
adversely affected.
OUR GROWTH COULD BE LIMITED IF WE ARE UNABLE TO ATTRACT AND RETAIN QUALIFIED
PERSONNEL.
We believe that our short- and long-term success depends largely on our
ability to attract and retain highly skilled technical, managerial and marketing
personnel. We particularly require additional management personnel in the areas
of application integration and technical support. Individuals with information
technology skills are in short supply and competition for application
integration personnel is particularly intense. We may not be able to hire the
necessary personnel to implement our business strategy, or we may need to pay
higher compensation for employees than we currently expect. We cannot be sure
that we will succeed in attracting and retaining the personnel we need to
continue to grow.
WE DEPEND ON A LIMITED NUMBER OF KEY PERSONNEL WHO WOULD BE DIFFICULT TO
REPLACE.
Our success also depends in significant part on the continued services of
our key technical, sales and senior management personnel. Losing one or more of
our key employees could have a material adverse effect on our business, results
of operations and financial condition. We have employment agreements with
certain key employees, including Christopher R. McCleary, Stephen E. McManus,
Jeffery L. McKnight and Andrew A. Stern, but few other officers or key employees
are party to employment agreements.
WE WILL HAVE BROAD DISCRETION TO ALLOCATE THE PROCEEDS OF THIS OFFERING.
Our management will retain broad discretion to allocate the proceeds of this
offering. Management's failure to apply these funds effectively could have a
material adverse effect on our business, results of operations and financial
condition. We estimate the net proceeds to us from this offering to be
approximately $ million, after deducting estimated offering expenses. We plan
to use these proceeds mainly to continue expanding and enhancing our network, to
add services to our IMAP offerings, and for working capital and other general
corporate purposes. In addition, we will use some of the prceeds to pay accrued
dividends on our shares of convertible preferred stock. Some of the net
7
<PAGE>
proceeds may also be used to repay current or future debts, fund acquisitions or
acquire complementary products or the right to use complementary technologies.
WE DEPEND ON A LIMITED NUMBER OF KEY SUPPLIERS.
We depend on other companies to supply key components of our
telecommunications infrastructure and system and network management solutions.
Any failure to obtain needed products or services in a timely fashion and at an
acceptable cost could have a material adverse effect on our business, results of
operations and financial condition. Although we lease redundant capacity from
multiple suppliers, a disruption in telecommunications capacity could prevent us
from maintaining our standard of service. Some of the key components of our
system and network are available only from sole or limited sources in the
quantities and quality we demand. For example, the hardware we use to support
our real-time mirroring and disaster recovery functions is supplied only by EMC
Corporation. We buy these components from time to time, do not carry significant
inventories of them and have no guaranteed supply arrangements with our vendors.
WE DEPEND ON STRATEGIC RELATIONSHIPS WITH APPLICATION SOFTWARE VENDORS.
Our IMAP offerings are central to our business strategy. We obtain software
products under license agreements with PeopleSoft USA, Inc.; Siebel Systems
Inc.; Sagent Technology, Inc. and BroadVision, Inc. and package them as part of
our IMAP solutions. The agreements are for terms ranging from one to four years.
All the agreements may be terminated upon a breach of the agreement, subject to
cure periods. The agreement with PeopleSoft may be terminated by either party
for convenience upon 90 days notice. If these agreements were to be terminated
or not renewed or we otherwise could not continue to use this software, we might
have to discontinue products or services or delay or reduce their introduction
unless we could find, license and package equivalent technology.
All but one of our agreements with software application providers are
non-exclusive. Our competitors may also license and utilize the same technology
in competition with us. We cannot be sure that the vendors of technology used in
our products will continue to support this technology in its current form. Nor
can we be sure that we will be able to adapt our own products to changes in this
technology. In addition, we cannot be sure that the financial or other
difficulties of our vendors will not have a material adverse effect upon the
technologies incorporated in our products, or that, if these technologies become
unavailable, we will be able to find suitable alternatives.
WE WILL NEED TO OBTAIN ADDITIONAL APPLICATION SOFTWARE.
Our business strategy also depends on obtaining additional application
software. We cannot be sure, however, that we will be able to obtain the new or
enhanced applications we may need to keep our IMAP solutions competitive. If we
cannot obtain these applications and as a result must discontinue, delay or
reduce the availability of our IMAP solutions or other products or services, our
business, results of operations and financial condition may be materially
adversely affected.
DEVELOPING AND EXPANDING OUR OPERATIONS WILL DEPEND, AMONG OTHER THINGS, ON OUR
MANAGEMENT'S ABILITY TO SUCCESSFULLY INTEGRATE THE COMPANIES WE HAVE ACQUIRED.
In September and October of 1998, we acquired I.I.T. Holding, Inc. and
Advanced Communication Resources, Inc. We cannot be sure that we will be able to
continue to successfully integrate the businesses of IIT and ACR into our own,
or that these businesses will perform as expected. In addition, we cannot be
sure that we will be able to successfully integrate any business acquired in the
future into our own. Our failure to successfully integrate an acquired company
or its subsequent underperformance could have a material adverse effect on our
business, results of operations and financial condition.
8
<PAGE>
WE MAY UNDERTAKE ADDITIONAL ACQUISITIONS WHICH POSE RISKS TO OUR BUSINESS.
Our business plan contemplates additional acquisitions which we may or may
not undertake. If we do, our risks may increase because:
- We may pay more than the acquired company is worth.
- We may not fully understand the business we acquire.
- We may be entering markets in which we have little or no direct prior
experience.
- Our ongoing business may be disrupted and resources and management time
diverted.
- Our accounting for acquisitions could require us to amortize substantial
goodwill, adversely affecting our reported results of operations.
In addition, once we have made an acquisition we will face additional risks:
- It may be difficult to assimilate acquired operations and personnel.
- We may not be able to retain the management and other key personnel of the
acquired business.
- We may not be able to maintain uniform standards, controls, procedures and
policies.
- Changing management may impair relationships with an acquired business's
employees or customers.
WE COULD BE REQUIRED TO USE OUR FINANCIAL RESOURCES TO REPURCHASE SHARES OF
COMMON STOCK FROM U S WEST.
We could be required to repurchase shares of our capital stock owned by U S
WEST for cash. This would require us to divert our resources at a time of rapid
growth. U S WEST can force us to repurchase these shares if we engage in
activities which U S WEST would be prohibited from engaging in and we were
considered an affiliate of U S WEST under regulations of the Federal
Communications Commission. See "Certain Relationships and Related
Transactions--Purchases of Series A Preferred Stock." Although we believe the
possibility of this occuring is remote, repurchasing the shares held by U S WEST
could be costly.
TECHNOLOGY MAY CHANGE FASTER THAN WE CAN UPDATE OUR NETWORK AND TECHNOLOGY.
The markets we serve are characterized by rapidly changing technology,
evolving industry standards, emerging competition and the frequent introduction
of new services, software and other products. Our success depends partly on our
ability to enhance existing or develop new products, software and services that
meet changing customer needs in a timely and cost-effective way. We cannot be
sure, however, that we will do some or all of these things. For example, if
software application architecture changes in significant ways, the software for
which we have licenses could become obsolete, we may be forced to update our
hardware and network configurations or we may be forced to replace our mirroring
technology. This may require substantial time and expense, and even then we
cannot be sure that we will succeed in adapting our businesses to these and
other technological developments.
WE COULD BE HARMED IF OUR SYSTEMS ARE NOT COMPATIBLE WITH OTHER PRODUCTS AND
SERVICES.
We believe that our ability to compete successfully also depends on the
continued compatibility of our services with products, services and
architectures offered by various vendors. Our failure to conform to a prevailing
standard, or the failure of a common standard to emerge, could have a material
adverse effect on our business, results of operations and financial condition.
Although we will work with vendors to test new products, we cannot be sure that
their products will be compatible with ours or that they will adequately address
changing customer needs. Although we currently plan to support
9
<PAGE>
emerging standards, we cannot be sure what new industry standards will develop.
We also cannot be sure that we will be able to conform to these new standards
quickly enough to stay competitive. In addition, we cannot be sure that
products, services or technologies developed by others will not make ours
noncompetitive or obsolete.
THE MARKETS WE SERVE ARE HIGHLY COMPETITIVE AND MANY OF OUR COMPETITORS HAVE
MUCH GREATER RESOURCES.
Our current and potential competitors include systems integrators, national
and regional Internet Service Providers, software and hardware vendors, and
global, regional and local telecommunications companies and Regional Bell
Operating Companies. Our competitors, which may operate in one or more of these
areas, include companies such as GTE Corporation; MCI WorldCom, Inc.;
International Business Machines Corporation; Frontier Corporation; PSINet, Inc.;
DIGEX, Inc.; Exodus Communications, Inc.; Andersen Consulting;
PricewaterhouseCoopers; AT&T Corporation; and Sprint Corporation. Our strategic
partners and suppliers could also become competitors.
Many of our competitors have substantially greater financial, technical and
marketing resources, larger customer bases, longer operating histories, greater
name recognition and more established relationships in the industry than we do.
We cannot be sure that we will have the resources or expertise to compete
successfully in the future. Our competitors may be able to:
- More quickly develop and expand their network infrastructures and service
offerings.
- Better adapt to new or emerging technologies and changing customer needs.
- Take advantage of acquisitions and other opportunities more readily.
- Negotiate more favorable licensing agreements with software application
vendors.
- Devote greater resources to the marketing and sale of their products.
- Adopt more aggressive pricing policies.
Some of our competitors may also be able to provide customers with
additional benefits at lower overall costs. We cannot be sure that we will be
able to match cost reductions by our competitors. In addition, we believe that
there is likely to be consolidation in our markets, which could increase price
and other competition in ways that materially adversely affect our business,
results of operations and financial condition. Finally, there are few
substantial barriers to entry, and we have no patented technology that would bar
competitors from our market.
WE COULD BE THE SUBJECT OF INFRINGEMENT CLAIMS.
As the number of software products in our target markets increases and the
functionality of these products further overlap, software industry participants
may become increasingly subject to infringement claims. Someone may even claim
that our technology infringes their proprietary rights. 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 us to enter into costly royalty
or licensing agreements. If successful, a claim of product infringement against
us and our inability to license the infringed or similar technology could
adversely affect our business.
WE FACE RISKS FROM OUR INTERNATIONAL OPERATIONS.
We have established Enterprise Data Centers in Europe and Japan as well as
operations in Venezuela. We intend to expand further into international markets.
We cannot be sure that we will be able
10
<PAGE>
to obtain the necessary telecommunications infrastructure in a cost-effective
manner or compete effectively in international markets. In addition, there are
risks inherent in conducting business internationally. These include:
- Unexpected changes in regulatory requirements.
- Export restrictions.
- Tariffs and other trade barriers.
- Challenges in staffing and managing foreign operations.
- Differing technology standards.
- Employment laws and practices in foreign countries.
- Political instability.
- Fluctuations in currency exchange rates.
- Imposition of currency exchange controls.
- Potentially adverse tax consequences.
Any of these could adversely affect our international operations. We cannot
be sure that one or more of these factors will not have a material adverse
effect on our current or future international operations and, consequently, on
our business, results of operations and financial condition.
GOVERNMENT REGULATION OF OUR BUSINESS IS UNSETTLED.
Laws and regulations directly applicable to communications or commerce over
the Internet are becoming more prevalent. The adoption or modification of laws
or regulations relating to the Internet could adversely affect our business. The
last session of the United States Congress resulted in Internet laws regarding
children's privacy, copyrights, taxation and the transmission of sexually
explicit material. The European Union recently enacted its own privacy
regulations. The law of the Internet, however, remains largely unsettled, even
in areas where there has been some legislative action. It may take years to
determine whether and how existing laws such as those governing intellectual
property, privacy, libel and taxation apply to the Internet. In addition, the
growth and development of the market for online commerce may prompt calls for
more stringent consumer protection laws, both in the United States and abroad,
that may impose additional burdens on companies conducting business online. For
example, Germany, and the European Union have enforced laws and regulations on
content distributed over the Internet that are more strict than those currently
in place in the United States.
WE COULD BE VULNERABLE TO THE YEAR 2000 PROBLEM.
We confront the Year 2000 problem in three contexts.
OUR CUSTOMERS. Many of our customers and potential customers maintain their
Internet operations on UNIX-based servers, which may be impacted by Year 2000
complications. The failure of our customers to ensure that their servers are
Year 2000 compliant could have a material adverse effect on them, which in turn
could have a material adverse effect on our business, results of operations and
financial condition.
OUR SUPPLIERS. Our business could be adversely affected if we cannot obtain
products, services or systems that are Year 2000 compliant when we need them. In
addition, if vendors and service providers cannot deliver their products because
of Year 2000 compliance problems our business, results of operations and
financial condition could be materially adversely affected.
11
<PAGE>
OUR SERVICES. We sell computer-related services, so our risk of lawsuits
relating to Year 2000 issues is likely to be greater than that of companies in
some other industries. Because computer products and services may incorporate
components from different providers, it may be difficult to determine which
component may cause a Year 2000 problem. As a result, we may be subjected to
Year 2000-related lawsuits whether or not our products and services are Year
2000 compliant. Our acquired subsidiaries have several contracts which make Year
2000 warranties. Some of these contracts make broader warranties than those made
by the manufacturers of the software provided. The potential liability arising
from these warranties is not capped. We cannot be certain at this time what the
outcomes or impact of any lawsuits may be.
OUR EXISTING PRINCIPAL STOCKHOLDERS, EXECUTIVE OFFICERS AND DIRECTORS WILL
CONTROL USI AFTER THIS OFFERING.
When this offering is completed, our executive officers, directors, existing
greater-than-5% stockholders and their affiliates will, in the aggregate, own
shares representing approximately 73.53% of our outstanding voting capital
stock. As a result, these persons, acting together, will be able to control all
matters submitted to our stockholders for approval and to control our management
and affairs. For example, these people, acting together, will control the
election and removal of directors and any merger, consolidation or sale of all
or substantially all of our assets.
THE MARKET PRICE OF OUR COMMON STOCK COULD BE AFFECTED BY THE SUBSTANTIAL NUMBER
OF SHARES THAT ARE ELIGIBLE FOR FUTURE SALE.
After this offering is completed, 37,868,276 shares of common stock will be
issued and outstanding, assuming no exercise of the underwriters' over-allotment
option. We cannot be sure what effect, if any, future sales of shares or the
availability of shares for future sale will have on the market price of the
common stock. The market price of our common stock could drop due to sales of a
large number of shares in the market after this offering or the perception that
sales of large numbers of shares could occur. These factors could also make it
more difficult to raise funds through future offerings of common stock. All of
the shares of common stock sold in this offering will be freely tradeable under
the Securities Act unless purchased by our "affiliates," as that term is defined
in the Securities Act. In connection with this offering, our officers and
directors and some of our stockholders will be required not to sell any shares
of common stock for a period of 180 days after the date of this prospectus
without the written consent of Credit Suisse First Boston Corporation.
OUR STOCK PRICE COULD BE VOLATILE.
The trading price of our common stock is likely to be volatile. The stock
market in general, and the market for technology and Internet-related companies
in particular, has experienced extreme volatility. This volatility has often
been unrelated to the operating performance of particular companies. We cannot
be sure that an active public market for our common stock will develop or
continue after this offering. Investors may not be able to sell their common
stock at or above our initial public offering price. Prices for the common stock
will be determined in the marketplace and may be influenced by many factors,
including variations in our financial results, changes in earnings estimates by
industry research analysts, investors' perceptions of us and general economic,
industry and market conditions.
PURCHASERS IN THIS OFFERING WILL EXPERIENCE DILUTION.
Purchasers of common stock in this offering will experience immediate and
substantial dilution in the net tangible book value of their common stock.
12
<PAGE>
WE HAVE ANTI-TAKEOVER DEFENSES THAT COULD DELAY OR PREVENT AN ACQUISITION AND
COULD ADVERSELY AFFECT
THE PRICE OF OUR COMMON STOCK.
Provisions of our certificate of incorporation and bylaws and the provisions
of Delaware law could delay, defer or prevent an acquisition or change of
control of USI or otherwise adversely affect the price of our common stock. For
example, our board of directors is staggered in three classes, so that only
one-third of the directors could be replaced at any annual meeting.
Additionally, our bylaws limit the ability of stockholders to call a special
meeting. Our certificate of incorporation also permits our board to issue shares
of preferred stock without stockholder approval. In addition to delaying or
preventing an acquisition, the issuance of a substantial number of preferred
shares could adversely affect the price of the common stock. Please refer to
"Description of Capital Stock" for a more detailed discussion of these
provisions.
THE RELIABILITY OF MARKET DATA INCLUDED IN THIS PROSPECTUS IS UNCERTAIN.
Since we are a new company and operate in a new and rapidly changing market,
we have included market data from industry publications. The reliability of
these data cannot be assured. Market data used throughout this prospectus were
obtained from internal company surveys and industry publications. Industry
publications generally state that the information contained in these
publications has been obtained from sources believed to be reliable, but that
its accuracy and completeness is not guaranteed. Although we believe market data
used in this prospectus to be reliable, it has not been independently verified.
Similarly, internal company surveys, while believed by us to be reliable, have
not been verified by any independent sources.
13
<PAGE>
USE OF PROCEEDS
We will receive net proceeds from the sale of 5,000,000 shares of common
stock, at an assumed public offering price of $ per share, estimated to be
approximately $ million. This amount will be $ million if the underwriters
exercise their over-allotment option in full, after deducting underwriting
discounts and commissions and estimated offering expenses we will owe. We intend
to use these proceeds mainly:
- To continue expanding and enhancing our network,
- To add additional services to our IMAP offerings,
- For working capital and other general corporate purposes.
In addition, we will use some of the proceeds to pay accrued dividends on
our shares of convertible preferred stock. Some of the net proceeds may also be
used:
- To repay current or future debts,
- To fund acquisitions or acquire complementary products or
- To obtain the right to use complementary technologies.
The amounts and timing of our actual expenditures will depend upon numerous
factors, including the status of our product development efforts, marketing and
sales activities, the amount of cash generated by our operations and
competition. Actual expenditures may vary substantially from these estimates. We
may find it necessary or advisable to use portions of the proceeds for other
purposes. Pending application of the net proceeds as described above, we intend
to invest the net proceeds of this offering in short-term, investment-grade,
interest-bearing securities.
DIVIDEND POLICY
We have never paid cash dividends on our common stock and have no plans to
do so in the foreseeable future. The declaration and payment of any dividends in
the future will be determined by the board of directors and will depend on a
number of factors, including our earnings, capital requirements and overall
financial condition.
14
<PAGE>
CAPITALIZATION
The following table sets forth our capitalization as of December 31, 1998.
We have presented our capitalization:
- On an actual basis,
- On a pro forma basis to give effect to the automatic conversion of all
outstanding shares of preferred stock into common stock upon consummation
of this offering, and
- On a pro forma as adjusted basis to reflect our receipt of the estimated
net proceeds from the sale of 5,000,000 shares of common stock in this
offering, after deducting underwriting discounts and commissions and
estimated offering expenses.
<TABLE>
<CAPTION>
DECEMBER 31, 1998
-----------------------------------
ACTUAL PRO FORMA AS ADJUSTED
--------- ----------- -----------
<S> <C> <C> <C>
(IN THOUSANDS, EXCEPT FOR SHARE
AMOUNTS)
Cash and cash equivalents.................................................... $ 43,802 $ 43,802
--------- ----------- -----------
--------- ----------- -----------
Long-term liabilities:
Short-term obligations expected be refinanced.............................. 5,282 5,282
Long-term debt and capital lease obligations............................... 8,659 8,659
Dividends payable.......................................................... 1,503 1,503
--------- ----------- -----------
Total long-term liabilities................................................ 15,444 15,444
Series B Cumulative Convertible Redeemable Preferred Stock, $.01 par value;
115,000 shares authorized; 59,279 shares issued and outstanding actual, no
shares issued and outstanding pro forma and pro forma as adjusted.......... 62,242 --
Common stock subject to repurchase, 1,343,750 shares......................... 4,145 --
Stockholders' equity (deficit):
Series A Cumulative Convertible Preferred Stock, $.01 par value; 110,000
shares authorized; 55,000 shares issued and outstanding actual, no shares
issued and outstanding pro forma and pro forma as adjusted............... 1 --
Common stock, $.001 par value; 75,000,000 shares authorized; 625,000 shares
issued and outstanding actual, 32,868,276 issued and outstanding pro
forma and 37,868,276 shares issued and outstanding pro forma as
adjusted................................................................. 1 33
Additional paid-in capital................................................... 30,754 97,157
Due from stockholders........................................................ -- (47)
Accumulated deficit.......................................................... (32,212) (32,212)
--------- ----------- -----------
Total stockholder's equity (deficit)....................................... (1,456) 64,931
--------- ----------- -----------
Total capitalization..................................................... $ 80,375 $ 80,375
--------- ----------- -----------
--------- ----------- -----------
</TABLE>
The share numbers in the table exclude:
- 1,682,250 shares of common stock issuable upon exercise of stock options
outstanding as of December 31, 1998 at an exercise price of $2.64 per
share, and
- 1,482,665 shares of common stock reserved for issuance upon exercise of
warrants exercisable as of December 31, 1998 at a weighted average
exercise price of $4.37.
- Approximately 1,875,000 shares of common stock issuable upon exercise of
stock options that we intend to grant contingent on this offering at an
exercise price equal to 50% of the mid-point of the proposed price range.
We will record compensation expense related to these option grants in
accordance with our accounting policy as stated in Note 1 to the
consolidated financial statements.
We have not presented our Series B Preferred Stock as part of our
stockholders' equity because it is mandatorily redeemable on the eighth
anniversary of its issuance. All of these shares will automatically convert into
common stock upon consummation of this offering.
We have not presented 1,343,750 shares of issued and outstanding common
stock as part of our stockholders' equity because we are required to repurchase
these shares, which are held by three of our officers, if these officers die or
become disabled. These provisions will terminate upon the consummation of this
offering.
Please read this capitalization table together with the sections of this
prospectus entitled "Use of Proceeds," "Dividend Policy," "Management's
Discussion and Analysis of Financial Condition and Results of Operations," and
the financial statements of USI, ACR and IIT included in this prospectus.
15
<PAGE>
DILUTION
You will experience immediate and substantial dilution of $ per share in
the net pro forma tangible book value per share of your common stock.
We calculate dilution to new investors by subtracting pro forma net tangible
book value per share of common stock after this offering from the per share
price paid by new investors in this offering. We calculate net pro forma
tangible book value per share by subtracting total liabilities from total
tangible assets and then dividing that number by the number of shares of common
stock outstanding at December 31, 1998, after giving effect to the automatic
conversion of preferred stock upon consummation of this offering.
The following table illustrates the per share dilution to investors in this
offering:
<TABLE>
<CAPTION>
PER SHARE
-----------
<S> <C> <C>
Assumed offering price........................................................... $
Net tangible book value as of December 31, 1998.................................. $ 1.18
Pro forma increase attributable to new investors in this offering................ $
-----------
Pro forma net tangible book value after this offering $
-----------
Pro forma dilution to new investors in this offering............................. $
-----------
-----------
</TABLE>
The following table summarizes on a pro forma basis as of December 31, 1998,
after giving effect to this offering, the number of shares of common stock
purchased from us, the total consideration paid to us and the average
consideration paid per share by existing stockholders and by new investors in
this offering:
<TABLE>
<CAPTION>
SHARES PURCHASED TOTAL CONSIDERATION
------------------------- --------------------------
<S> <C> <C> <C> <C> <C>
AMOUNT
(IN AVERAGE PRICE
NUMBER PERCENT THOUSANDS) PERCENT PER SHARE
------------ ----------- ------------- ----------- -------------
Existing stockholders............................. 32,868,276 86.8% $ 95,258 % $ 2.90
Investors in this offering........................ 5,000,000 13.2%
------------ ----- ------------- ----- ------
Total........................................... 37,868,276 100.0% $ 100.0% $
------------ ----- ------------- ----- ------
------------ ----- ------------- ----- ------
</TABLE>
The calculations on this page are based on shares outstanding as of December
31, 1998. These calculations exclude from the number of outstanding shares of
common stock:
- 1,682,250 shares of common stock issuable upon exercise of stock options
outstanding as of December 31, 1998 at an exercise price of $2.64 per
share, and
- 1,482,648 shares of common stock reserved for issuance upon exercise of
warrants exercisable as of December 31, 1998 at a weighted average
exercise price of $4.37.
- Approximately 1,875,000 shares of common stock issuable upon exercise of
stock options that we intend to grant contingent on this offering at an
exercise price equal to 50% of the mid-point of the proposed price range.
If all of the options and warrants outstanding as of December 31, 1998, had
been exercised at that date, dilution to new investors in this offering would be
$ per share.
16
<PAGE>
SELECTED HISTORICAL CONSOLIDATED FINANCIAL DATA
The following table summarizes our historical consolidated financial data
for the period from our date of inception, January 14, 1998, through December
31, 1998 and as of December 31, 1998. It has been derived from, and is qualified
by reference to, our audited consolidated financial statements included
elsewhere in this prospectus. Your should also read "Management's Discussion and
Analysis of Financial Condition and Results of Operations" and the financial
statements and related notes of USI, ACR and IIT included in this prospectus.
In the table below:
- Series B Preferred Stock is not presented as a part of our stockholders'
equity because it is mandatorily redeemable upon the eighth anniversary of
its issuance.
- We do not present 1,343,750 shares of common stock held by three officers
as part of our stockholders' equity because we could be required to
repurchase these shares at fair value if any of these officers die or
become disabled prior to this offering. See Note 11 of the Notes to USI's
Consolidated Financial Statements. These provisions will terminate upon
the consummation of this offering.
<TABLE>
<CAPTION>
PERIOD FROM
JANUARY 14, 1998
(DATE OF INCEPTION)
TO
DECEMBER 31, 1998
---------------------
<S> <C>
(AMOUNTS IN
THOUSANDS,
EXCEPT PER SHARE
DATA)
OPERATING STATEMENT DATA:
Revenue.................................................................................... $ 4,122
Expenses................................................................................... (34,020)
--------
Operating loss............................................................................. (29,898)
Other income (expense):
Interest income.......................................................................... 367
Interest expense......................................................................... (2,681)
--------
Net loss................................................................................... $ (32,212)
--------
--------
Basic and diluted loss per common share attributable to common stockholders................ $ (53.94)
<CAPTION>
DECEMBER 31, 1998
---------------------
(AMOUNTS IN
THOUSANDS)
<S> <C>
BALANCE SHEET DATA:
Cash and cash equivalents................................................................ $ 43,802
Working capital.......................................................................... 22,551
Total assets............................................................................. 107,527
Short-term obligations expected to be refinanced......................................... 5,282
Long-term debt and capital lease obligations, excluding current portion.................. 8,659
Series B Convertible Redeemable Preferred Stock.......................................... 62,242
Common stock subject to repurchase....................................................... 4,145
Stockholders' equity (deficit)........................................................... (1,457)
</TABLE>
17
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
THE FOLLOWING DISCUSSION AND ANALYSIS SHOULD BE READ TOGETHER WITH THE
FINANCIAL STATEMENTS AND RELATED NOTES OF USI, ACR AND IIT INCLUDED IN THIS
PROSPECTUS. THE DISCUSSION IN THIS PROSPECTUS CONTAINS FORWARD-LOOKING
STATEMENTS THAT INVOLVE RISKS AND UNCERTAINTIES, SUCH AS STATEMENTS OF OUR
PLANS, OBJECTIVES, EXPECTATIONS AND INTENTIONS. THE CAUTIONARY STATEMENTS MADE
IN THIS PROSPECTUS APPLY TO ALL RELATED FORWARD-LOOKING STATEMENTS WHEREVER THEY
APPEAR IN THIS PROSPECTUS. OUR ACTUAL RESULTS COULD DIFFER MATERIALLY FROM THOSE
ANTICIPATED IN SUCH FORWARD-LOOKING STATEMENTS. FACTORS THAT COULD CAUSE OR
CONTRIBUTE TO DIFFERENCES INCLUDE THOSE DISCUSSED IN "RISK FACTORS," AS WELL AS
THOSE DISCUSSED ELSEWHERE IN THIS PROSPECTUS. THE FORWARD-LOOKING STATEMENTS
CONTAINED IN THIS PROSPECTUS ARE MADE AS OF THE DATE OF THIS PROSPECTUS, AND WE
ASSUME NO OBLIGATION TO UPDATE THESE FORWARD-LOOKING STATEMENTS OR TO UPDATE THE
REASONS ACTUAL RESULTS COULD DIFFER MATERIALLY FROM THOSE ANTICIPATED IN THESE
FORWARD-LOOKING STATEMENTS. SEE "RISK FACTORS."
OVERVIEW
We have developed an advanced, integrated service offering that provides our
clients the ability to use leading business software applications through our
state-of-the-art Internet-based network. Since our inception in January 1998, we
have devoted substantially all of our efforts to developing our network
infrastructure, recruiting and training personnel, establishing strategic
business partnerships with application software providers, completing two
strategic acquisitions and raising capital. We have incurred a cumulative net
loss since inception and expect to incur additional losses for at least the next
twelve months, due primarily to additional start-up costs related to
implementation of our services and the continued expansion and enhancement of
our network. As of December 31, 1998, we had accumulated net losses of
approximately $32.2 million.
REVENUE. We expect that future revenue will be generated primarily from the
delivery of IMAP services. Revenue from IMAP services will consist of monthly
recurring fees from ongoing services and will be recognized ratably as earned
over the contract term. Non-refundable client deposits, if any, will be
recognized as revenue ratably over the contract term. Revenue from the delivery
of professional information technology services will be recognized as services
are performed.
COSTS AND EXPENSES. We will incur operating costs and expenses related to
the delivery of IMAP services. Costs and expenses will include product
development, network and data center support, selling and marketing, and general
and administrative expenses. Since inception, we have incurred expenses
consisting primarily of compensation and benefits, recruiting, occupancy and
consulting. We have expensed all start-up costs as incurred.
We will incur up-front costs related to the delivery of IMAP services.
Product development costs and the cost to operate our network and data centers
will be recognized as period costs. Costs related to the acquisition of hardware
will be capitalized and depreciated over the estimated useful life of the
hardware of five years. Costs related to the acquisition of software licenses
will be capitalized and amortized over either the term of the license agreement,
or the term of the individual client contract, depending on the nature of the
software license agreement. Amortization will be based on current and future
revenue from each product and annual amortization will not be less than that
computed on a straight-line basis over the remaining useful life. Direct costs
related to the integration of software applications for a client on our network
will be capitalized and amortized over the related contract period.
ACQUIRED COMPANIES
The acquisitions of IIT and ACR were made primarily with cash and were
accounted for using the purchase method of accounting. The assets and
liabilities of the acquired companies have been recorded at their fair market
value as of the acquisition closing date. The excess of the purchase price over
the fair market value of the identifiable net assets of IIT and ACR has been
accounted for as goodwill, which is being amortized over its estimated useful
life of 15 years.
18
<PAGE>
HISTORICAL RESULTS OF OPERATIONS
REVENUE. For the period ending December 31, 1998, we generated $4.1 million
in professional information technology services revenue primarily from ACR and
IIT. The remaining revenue during the period was generated through IMAP clients.
GROSS MARGIN, COSTS AND EXPENSES. We incurred expenses of $2.5 million in
the delivery of professional information technology services, resulting in $1.6
million of gross profit or 37.5% of professional information technology service
revenue. We do not anticipate any significant changes in the gross margin
percentage generated from our professional information technology services
business.
The remaining costs of revenues for the period ending December 31, 1998 were
costs associated with the delivery of our IMAP products. These costs which
include the operations of our network, data centers and client care
organization, totaled $4.2 million for the period. We anticipate that the gross
margin for the IMAP services will improve over time as our data centers and
network are more fully utilized.
For the period January 14, 1998, our date of inception, through December 31,
1998, we incurred $25.2 million of selling, general and administrative expenses.
These expenses relate to our development stage activities and consist
principally of compensation, benefits, recruiting, occupancy, consulting
services and network costs prior to the implementation of the first IMAP client.
Included in these expenses is $1 million in non-cash compensation related to
issuance of common stock to two of our executive officers. To the extent that we
grant stock or options to purchase stock at less than the fair market value of
the stock, we may be required to record additional non-cash compensation
expense.
We recorded a deferred tax asset of $11.2 million as of December 31, 1998.
This deferred tax asset consisted principally of start-up costs capitalized for
income tax purposes and employee compensation not currently deductible for
income tax purposes. We have established a valuation allowance for the entire
amount of our deferred tax asset due to uncertainties regarding future taxable
income.
LIQUIDITY AND CAPITAL RESOURCES
At December 31, 1998, we had cash and cash equivalents of $43.8 million
primarily generated through the sale of $32.8 million of Series A Preferred
Stock and $62.0 million of Series B Preferred Stock, after deducting issuance
costs. Through December 31, 1998 we have used $20.6 million through operating
activities and $37.7 million in investing activities. The principal investing
activities were the acquisitions of ACR and IIT for $16.9 million and the
purchase of property and equipment totaling $20.1 million.
USI has used debt and capital leases to partially finance its capital
purchases and plans to continue this practice for the foreseeable future. As of
December 31, 1998, we had obtained commitments for secured financing from
several sources including: Cisco System Capital Corporation ($10.0 million),
Venture Lending & Leasing II, Inc. ($10.0 million), Transamerica Business Credit
Corporation ($5.0 million), Leasing Technologies International, Inc. ($2.0
million) and Hewlett Packard Company ($1.0 million), among others. The total of
the secured financing commitments at December 31, 1998 was $30.1 million, of
which $13.7 had been funded.
We believe that these resources, together with the estimated net proceeds
from this offering and anticipated debt and capital lease financing, will be
sufficient to fund our operations for at least the next two years. If we expand
more rapidly than currently anticipated, if our working capital needs exceed our
current expectations or if we make acquisitions, we will need to raise
additional capital from equity or debt sources. We cannot be sure that we will
be able to obtain the additional financing to satisfy our cash requirements or
to implement our growth strategy on acceptable terms or at all. If we cannot
obtain such financing on terms acceptable to us, we may be forced to curtail our
planned business expansion and may be unable to fund our ongoing operations.
19
<PAGE>
RECENT ACCOUNTING PRONOUNCEMENTS
In March 1998, the American Institute of Certified Public Accountants issued
Statement of Position 98-1, ACCOUNTING FOR THE COSTS OF COMPUTER SOFTWARE
DEVELOPED FOR OR OBTAINED FOR INTERNAL USE (SOP 98-1). This SOP requires the
capitalization of costs to purchase or develop internal-use software, including
external direct costs of materials and services, payroll and payroll related
costs for employees who are directly associated with and devote time to an
internal-use software development project. Allocations of overhead to
capitalized costs are not permitted. Computer software costs related to research
and development are expensed as incurred, as are training and maintenance costs.
SOP 98-1 is effective for years beginning after December 15, 1998 and
application is prospective. Through December 31, 1998, we expensed all costs
related to the implementation of internal use software. We will adopt SOP 98-1
in the first quarter of 1999.
In April 1998, the American Institute of Public Accountants issued Statement
of Position 98-5, REPORTING THE COSTS OF START-UP ACTIVITIES (SOP 98-5). This
SOP requires that start-up costs and organizational costs be expensed as
incurred. Start-up activities include one-time activities related to opening a
new facility, introducing a new product or service, conducting business in a new
territory, conducting business with a new class of customer, initiating new
process in an existing facility, or commencing some new operation. SOP 98-5 is
effective for years beginning after December 15, 1998. We currently expense the
costs of all start-up and organizational activities.
YEAR 2000 COMPLIANCE
YEAR 2000 ISSUE. The Year 2000 issue is a result of computer programs or
systems which store or process date-related information using only two digits to
represent the year. These programs or systems may not be able to properly
distinguish 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 yield erroneous results or even to fail.
STATE OF READINESS. Since its inception in January 1998, USI has been
cognizant of the Year 2000 issue. Hardware and software selections, network
architecture, and client contract terms have all been designed with the Year
2000 issue in mind.
We have established a Year 2000 compliance team to carry out a program of
testing and remediation on our information technology and
non-information-technology systems, for systems used by USI as well as those
provided by USI to its clients. The compliance team includes members from all
levels of management and is led by our engineering and operations organization.
The compliance team meets as a group on a regular basis, and subgroups of the
team will meet as needed to address specific issues.
The compliance team will carry out a program consisting of the following
phases.
- Inventory of all potentially affected software products and
software-related services.
- Analysis of such products and services to identify any areas that require
change or replacement.
- Development of appropriate changes or replacements for the identified
areas.
- Testing.
- Implementation of the changes or replacements.
- Contingency planning.
Because USI is not only a user of software products and software-related
services, but also provides software products and software-related services to
its clients, the compliance program will address both software products and
software-related services used by USI and those provided by USI to its clients.
While different areas of USI face different Year 2000 problems, USI has given
priority to software products and software-related services that it provides to
its clients.
Our compliance team has completed the following tasks under our compliance
program:
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- Conducted in depth discussions with all of its software suppliers. We have
received assurances from all our software suppliers that these programs
provided to us are in compliance, and we do not believe that any of the
software applications provided to clients requires remediation.
- Inventoried existing hardware and software used in our systems. Our
hardware and software purchases were made beginning in March of 1998 and
no systems were in service before then, excluding systems maintained by
the acquired companies. Systems manufactured and released after 1996 are
generally believed to be free of Year 2000 compliance problems.
- Although the companies we recently acquired have been in existence longer
than we have and have older systems in place, we concluded, based on Year
2000 assessments performed for the acquired companies, that there are no
material exposures related to the hardware or software used by the
acquired companies.
- We have performed Year 2000 and subsequent leap year roll-over tests up to
the year 2008 on each of our server platforms. During these tests only one
system was found to be non-compliant. This system was brought into
compliance with an operating system upgrade in October 1998.
- Our network infrastructure units, like routers and switches, were put
through a Year 2000 roll-over test and found to be compliant.
- We have inventoried our internally developed source code and determined
that there is a minimal amount, consisting primarily of custom web scripts
and UNIX shell scripts, which require testing.
The Year 2000 compliance team has the following tasks to complete:
- Determine if additional analysis, remediation, testing or implementation
of new or existing systems, including software developed by the acquired
companies, are required.
- Complete implementation of any necessary changes and replacements to
software products and software-related services used and provided by USI
- Implement procedures to ensure that any future software products and
software-related services, as well as enhancements to existing software
products and software-related services are developed in accordance with
USI's Year 2000 compliance program. We anticipate that inventory and
analysis of our existing systems will be completed by the second quarter
of 1999. We anticipate that implementation of any required changes or
replacements to existing systems as well as contingency planning for
systems identified as having a high risk of non-compliance will be
completed by the third quarter of 1999.
- Design contingency and business continuation plans in the event of the
failure of the systems used by USI due to the Year 2000 millennium change.
COSTS. As of December 31, 1998, USI has not incurred material expenses in
connection with its Year 2000 Program. All expenses relating to Year 2000
compliance to date have been incurred in the normal course of our business, as
we have developed our products, network, and implemented specific client
applications. The cost of completing the Year 2000 Program is expected to be
principally in the form of the opportunity costs of employees' time. USI may
also need to purchase replacement products or hire consultants or other
providers to assist in Year 2000 compliance efforts, though it does not
currently expect that this will prove necessary. Currently, the estimated cost
of the Year 2000 compliance program is approximately $0.7 million, which
includes internal labor costs and reserves for outside consulting and additional
hardware and software. We expect that this estimate will be refined as the
inventory and analysis phase is completed.
RISKS. Should we fail to solve a Year 2000 compliance problem to one of our
systems the result could be a failure or interruption of normal business
operations. We believe that, due to the relative newness of our systems and the
tasks undertaken and completed by our compliance team, the potential for
significant interruptions to normal operations should be minimized. Our primary
risks with regard
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to Year 2000 failures are those which impact our IMAP business. The reasonably
likely worst-case risks inherent in our business are as follows:
- Significant and protracted interruption of electrical power to our data
center operations could materially and negatively impact our ability to
provide data center operations. To mitigate this risk, we have deployed
back-up power systems at our data systems and have the capability to
transfer all of the operations of one data center to another. However,
electrical power interruptions that impact Internet connectivity providers
could adversely impact us because of our reliance upon Internet-based
operations for our day-to-day business.
- Significant and protracted interruption of telecommunications and data
network services in any of our data centers could materially and
negatively impact our ability to provide data center operations. We have
conducted detailed assessments of the components of our telecommunications
infrastructure and are working to identify appropriate system testing
guidelines. In addition, we have plans to seek additional assurances and a
better understanding of the compliance programs of its telecommunications
and data circuit providers.
- The failure of components of our systems used in the data centers could
materially and negatively impact our business. However, based on the time
period in which the data centers were developed we believe the risk of
failure is small. In addition, we have conducted a technical assessment of
the current systems and believe them to be compliant.
- If a product or service provided by USI is found to cause damage or injury
to a client because of year 2000 noncompliance, USI could be liable to the
client for breach of warranty. USI's client contracts generally limit
USI's liability. USI cannot accurately predict what legal claims may be
brought against it. In addition, USI cannot predict the outcome of any
legal claims. USI's acquired subsidiaries have several contracts which
make Year 2000 warranties. Some of these contracts make broader warranties
than those made by the manufacturers of the software provided. The
potential liability arising from some of these warranties is not capped.
- In the course of our business, USI uses software products provided by
other companies, and some of USI's products and services interface to
other companies' systems. USI has received information from various other
third-party providers regarding the Year 2000 readiness of their products
and it continues to review such information. USI is also sending requests
to other third parties for information regarding the Year 2000 readiness
of their products and systems. As USI does not have any control over these
third parties, it cannot guarantee that such third-party products and
systems will not suffer any adverse effects due to the Year 2000 issue
which may result in a material adverse effect on our business.
- USI has not yet completed its Year 2000 contingency plans. If USI does not
complete its contingency plans, its potential year 2000 liabilities may be
increased. The lack of a contingency plan could result in USI responding
late or not at all to problems caused by the date changeover at the end of
1999. In addition, any response USI does make may be poorly conceived or
executed. However, USI's compliance program includes the development of a
contingency plan. The development of the plan is currently underway.
QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
USI is exposed to market risk related to changes in interest rates. USI
invests excess cash balances in cash equivalents. In addition, USI's borrowing
arrangements are on fixed rate terms of varying maturities. USI believes that
the effect, if any, of reasonably possible near-term changes in interest rates
on USI's financial position, results of operations and cash flows is not
material.
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BUSINESS
ABOUT USI
USI provides service offerings to meet the needs of middle market companies
for distributed business functions such as sales force automation, customer
support, e-commerce, and human resources and financial management. We take total
responsibility for providing these services to our clients, freeing them from
the need to own and manage related computer systems, networks and software.
MARKET TRENDS
We believe that there are four key market trends that drive the business
opportunity for USI:
- The rapid growth of Internet-based communications and the outsourcing of
web sites.
- The competitive need of middle market enterprises to automate key business
processes.
- The availability of Internet-enabled packaged software applications.
- The need for an integrated approach to providing these services.
THE RAPID GROWTH OF INTERNET-BASED COMMUNICATIONS AND THE OUTSOURCING OF WEB
SITES.
An increasing number of companies use the Internet to enable fast and
efficient communications between various constituents of their enterprises. For
example:
- E-commerce is becoming a critical element of many businesses' strategies.
Companies increasingly demand that their vendors communicate ordering,
invoicing and payment transactions through Internet-enabled applications.
Forrester Research, Inc. forecasts that Internet commerce revenues will
grow from approximately $10 billion in 1997 to $183 billion by 2001.
- Enterprises are relying on the Internet to communicate with employees who
are increasingly dispersed due to globalization and the development of
alternative workplaces. According to Forrester Research, Inc. there are
between 30 and 40 million telecommuters or home-based workers in the
United States.
- To interact with customers, suppliers and remote employees efficiently, an
increasing number of businesses are implementing mission-critical
applications over intranets and extranets rather than through dedicated
private networks. Forrester Research, Inc. forecasts that the increasing
demand for corporate intranets and extranets will fuel growth rates in
excess of 30% in distributed infrastructure services resulting in a $140
billion market in 2002.
As more companies implement mission-critical business applications on the
Internet, the demand for the outsourced provision of key Internet infrastructure
and services, or web hosting, has significantly increased. The outsourcing of
web sites is occurring because businesses recognize that they do not have an
infrastructure sufficient to ensure reliable and responsive deployment of
mission-critical applications on the Internet. In an April 1998 report,
Forrester Research, Inc. cited scalability, speed and availability as the key
network concerns among Fortune 1000 companies. Web site hosting providers
address these concerns by building substantial redundancy and capacious network
bandwidth into their facilities. Moreover, they provide a physically secure data
center environment, which helps to address businesses' security concerns as they
begin to move proprietary business information over the Internet.
THE COMPETITIVE NEED OF MIDDLE MARKET ENTERPRISES TO AUTOMATE KEY BUSINESS
PROCESSES.
Middle market enterprises increasingly face competitive demands to automate
business processes, but they have frequently not been able to afford the
functionality available to their larger competitors. This has been exacerbated
by the shortage of information technology professionals. We believe that these
enterprises have a significant need for packaged application software to improve
core business processes and reduce costs and enhance their global competitive
position.
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We believe that many of the leading enterprise resource planning software
packages remain too complex and too costly to be effective solutions for middle
market companies. While many enterprise resource planning providers have begun
offering products that are targeted for the middle market, implementation of
these packages generally still requires specialized skill sets and frequently
takes three to twelve months. In addition, the infrastructure required to
support these packages once implemented is also beyond the capabilities of many
middle market businesses. Faced with these costs and time frames, many middle
market companies choose to forgo the capabilities of leading enterprise resource
planning packages in favor of less functional products. We believe that a lower
cost, more easily implemented approach would allow these middle market
businesses to capitalize on the functionality of leading enterprise resource
planning packages and better position these businesses against larger
competitors.
THE AVAILABILITY OF INTERNET-ENABLED PACKAGED SOFTWARE APPLICATIONS.
Until recently, companies wanting to implement Internet applications had to
develop their own software applications or customize existing packages. This
made each implementation unique and costly. It also made implementation time
frames and costs unpredictable. Over the past two years, however, major packaged
application providers, such as Oracle, J.D. Edwards, Siebel, PeopleSoft, Lawson
and others, have released versions of their software which can be accessed and
used over the Internet. Internet-enabled software is becoming an increasingly
common offering of providers of applications for distributed users such as
e-commerce, enterprise resource planning applications, and sales force
automation, where the increasing ubiquity of the Internet makes it a
cost-efficient mechanism for implementing distributed functions.
We believe that the availability of Internet-enabled packaged software makes
it possible, for the first time, to implement these applications on the Internet
in predictable time frames, with predictable costs, and without writing custom
code.
THE NEED FOR AN INTEGRATED APPROACH TO PROVIDING THESE SERVICES.
Forrester Research, Inc. reports that the overall market for outsourcing
packaged software applications will grow from approximately $1 billion in 1997
to over $21 billion by 2001. Furthermore, according to Forrester Research, Inc.,
U.S. firms are now spending approximately a quarter of their overall information
technology budgets on outsourcing services. These services include packaged
application software implementation and support, customer support and network
development and maintenance. Reasons for the growth in outsourcing include:
- The scarcity of information technology professionals.
- The challenges faced by a non-technical company in hiring, motivating and
retaining qualified application engineers and information technology
employees.
- The desire by companies to focus on their core business.
- The difficulties that businesses experience in developing and maintaining
their networks and software applications.
- The fast pace of technical change that shortens time to obsolescence and
forces increases in capital expenditures as companies attempt to keep up
with leading technologies.
Enterprises faced with these problems have traditionally sought solutions from a
variety of information technology providers including system integrators, ISPs,
hardware and software vendors, and telecommunication companies. Thus, these
companies have had to deal with at least three independent suppliers-a software
applications provider, a systems integrator, and a site hosting provider-or have
had to support implementation with in-house resources. There are inherent
conflicts and difficulties with this
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approach, because each supplier is dedicated to providing its own specific
product or service with only limited knowledge of the bundle of products and
services required to provide the complete business solution. USI believes that
these trends create a substantial market opportunity for a single-source
solution that combines software from multiple vendors, hardware, systems
integration and Internet-based communications in an integrated service offering.
THE USI SOLUTION
USI believes that it is well positioned to take advantage of these trends.
We have established our IMAP services as a leading single-source solution for
the Internet-enabled application software needs of middle market enterprises. We
take responsibility for the deployment and maintenance of the IMAP best-of-breed
packaged software applications. This allows our clients to focus on their core
competencies without mediating among disparate vendors. USI's IMAP solutions
enable clients to buy these mission-critical functions as a service from a
single vendor, rather than as a collection of technologies from multiple
vendors.
USI has teamed with major packaged application software providers to
implement its IMAP offerings. USI has built a network of EDCs through which its
clients' business software applications are deployed. The network offers fast,
reliable and secure access to USI-managed client application web sites, which
serve as the "Internet gateways" for enterprises and their employees, customers
and partners to access and use business application software and data. The
servers are generally procured and maintained by USI and dedicated to specific
clients. Clients can define specific groups, such as their sales force,
customers, or investors, to have full or limited access to their web sites.
Because USI's network is deployed globally, access to customer applications can
be equally responsive in North America, Europe, and Asia. Moreover,
geographically dispersed backup is designed to ensure reliability and data
integrity. USI provides packaged application software and support along with its
services on the basis of multi-year contracts paid on a monthly basis. We
believe that the combination of our Internet communications capability along
with Internet-enabled software applications makes our IMAP offerings the first
truly integrated Internet communications and computing solution.
DELIVER INTEGRATED SERVICE OFFERINGS AROUND BUSINESS PROCESSES
We have built and acquired expert product teams that specialize in
implementing IMAP solutions to support specific business processes. USI's
consulting and implementation teams have specific expertise in implementing our
IMAP solutions for sales force automation, supply chain management, human
resource management, e-commerce, decision support, customer service and core
financials. Each team has the capability to integrate a specific application
software package and the required Internet communications services, which
together provide a total solution for a specific business process. These teams
can implement applications and generate value for customers very quickly. For
example, our typical implementation of Siebel technology is designed to be
completed in 45 days. We believe that this provides a competitive advantage over
a more conventional implementation which requires six months to more than a year
for completion. The consulting and implementation teams hand off the implemented
application to USI's Operations group, which runs and maintains the application
as well as provides ongoing support to USI's customer through its client care
organization.
LEVERAGE STRATEGIC RELATIONSHIPS WITH LEADING SOFTWARE APPLICATION PROVIDERS
USI has established relationships with vendors in key application areas,
including Siebel in sales force automation, customer service and enterprise
marketing; PeopleSoft in human resources and financials; Sagent in
decision-making support; and BroadVision in e-commerce. USI is the exclusive
outsource provider of Seibel enterprise relationship management application
hosting and rental services for direct customers of Siebel headquartered in
North America and is one of nine currently certified outsourcing partners for
PeopleSoft. The agreements with software providers generally enable us to
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deploy the applications as a service, without the need to establish a separate
licensing arrangement for each client. The agreements also enable us to provide
our clients with an economically attractive service offering, and afford us
co-marketing and co-branding opportunities. These agreements provide us with an
initial software portfolio that can meet a broad range of our clients'
enterprise resource planning, e-commerce, and communication needs. In addition,
the agreements provide us with an accelerated path to developing our expert
product teams around the software applications and business processes these
applications support.
OPERATE A SPECIALIZED GLOBAL NETWORK
USI has constructed a highly reliable, fully redundant, global network
specifically designed to support its IMAP solutions. The USI network is designed
to provide the fastest possible response time, the highest level of security and
99.9% availability to its clients. USI has EDCs in Annapolis, Silicon Valley,
Amsterdam and Tokyo. These EDCs are monitored and managed from our Global
Enterprise Management Center in Annapolis and a remote back-up GEMC in Silicon
Valley. The network is designed around dual primary backbones connecting our
EDCs and GEMCs. Our dedicated network is linked to the Internet in North America
via six major backbone providers, allowing the Company's customers to bypass
congested public exchange points. Large storage arrays in Annapolis and Silicon
Valley can provide real-time back-up of North American client sites, enabling us
to provide an unusually high level of data integrity. We use our proprietary
network operations platform, USIView, to proactively manage and monitor our
network systems, telecommunications hardware, network connectivity, operating
systems and applications software.
IMPLEMENT SERVICES-BASED BUSINESS MODEL
We sell our IMAP solutions as a service, not as a technology. Accordingly,
our clients sign long-term contracts with fixed monthly payments made as the
service is delivered. We believe that selling our IMap solutions as a service
reduces our clients' initial capital expenditures and makes it easier for
non-technical executives to purchase our products.
THE USI STRATEGY
The focus of our strategy is to deliver timely, reliable and secure IMAP
services to each of our clients. We believe that by doing so we will rapidly
build our client base and secure long-term relationships with those clients. We
will also continue investing to maintain a value advantage over our competitors
and to capitalize on our first mover advantages, as follows:
- INCREASE THE NUMBER OF SOFTWARE RELATIONSHIPS--USI plans to enter into
strategic partnerships with additional application software vendors. This
will enable us to expand our portfolio of IMAP solutions and reduce our
reliance on any one software provider. USI sees opportunities in
additional application areas, such as supply chain management, as well as
in specific vertical market segments.
- ENHANCE THE CAPACITY AND FUNCTIONALITY OF OUR GLOBAL NETWORK OF
EDCS--Today, we provide European and Asian mirror sites to our clients
from co-located EDCs in Amsterdam and Tokyo. As our client base expands,
we intend to build dedicated EDCs in Europe and Asia to increase our
capacity. Once these EDCs are built, we also intend to begin soliciting
European and Asian source business. We also view the Latin American market
as holding substantial potential.
- ACQUIRE ADDITIONAL SYSTEMS INTEGRATORS--As we expand our offerings, we may
acquire additional systems integrators to support the introduction of
these service offerings. We have found that the easiest way to enter new
application areas is to acquire existing businesses that focus on those
applications. This approach not only brings a team with immediately
relevant experience, it
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also brings reference accounts and the potential for cross-selling USI
products to the acquired company's customer base.
IMAP OFFERINGS
Our current IMAP offerings provide integrated solutions to meet the needs of
middle market clients implementing distributed business functions. These
solutions encompass four elements:
- LEADING PACKAGED APPLICATION SOFTWARE. USI'S application packages address
major business process areas including e-commerce, sales force automation,
human resource management, decision support, supply chain management, and
core financials. USI has chosen to focus on mission-critical business
processes that serve distributed users. These processes can gain maximum
value from Internet implementations and from USI's infrastructure.
- USI-MANAGED CLIENT APPLICATION WEB SITES AVAILABLE VIA USI's GLOBAL
NETWORK. USI-managed client application web sites are housed on dedicated
USI-managed servers and available via a reliable, high-performance and
secure global Internet network. Our network architecture is designed to
ensure responsiveness and allows clients to define which groups will have
full or limited access to the web site or the server.
- CONSULTING AND SYSTEMS INTEGRATION SERVICES. IMAP consulting and system
integration services define, develop and deliver the combination of
hardware, network services, and application software that meet a specific
customer's needs. Within the IMAP solutions, USI does not develop software
nor does it implement substantial customization of existing packages.
Rather, modular packages applications are configured to meet a customer's
requirements.
- INTEGRATED CLIENT SERVICE. Once implemented, IMAP solutions are
efficiently managed in USI's network of EDCs. We provide client support
twenty four hours a day, seven days a week, from dedicated teams with
specific knowledge of each client implementation.
In addition to the specific application areas that USI supports, USI allows
clients to host their own software applications in our highly reliable and
secure data center environment. Clients for this complex web site hosting
realize all the reliability, security, and responsiveness benefits of USI's
network; however, USI takes no responsibility for the application itself. We
believe that many of USI's complex web site hosting clients intend to migrate to
a USI-supported application over time.
Most of our IMAP contracts, including our contracts for complex web site
hosting, provide for a modest initial payment and are generally not less than
three years in length. However, client contracts signed under our agreement with
Siebel may have a term as short as six months and we foresee that some web site
hosting contracts may also have shorter terms. Our contracts provide for
prospective payment reductions in the event that agreed service levels, as
measured and quantified by system performance benchmarks, are not met. As an
inducement to attract several of our earliest clients, we agreed to early
termination clauses without substantial penalties. We pursue non-terminable
contacts and do not intend that these inducements to "lighthouse accounts"
become our standard practice.
STRATEGIC SOFTWARE VENDOR RELATIONSHIPS
In developing our IMAP solutions, we have formed relationships with some of
the market-leading software providers whose applications support critical
business processes. These application providers include Siebel, PeopleSoft,
BroadVision, and Sagent. We believe that USI has proven to be an attractive
partner for these software companies because of our strategy to deliver
integrated solutions to middle market enterprises in a cost-effective service
model. Each of our software agreements is unique, but most allow us to deploy
packaged application software as a service without the need to establish a
separate licensing arrangement for each client. The agreements also generally
include co-marketing,
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specialized product training and preferred pricing on the licenses to the
software. USI plans to enter into additional agreements with other software
vendors over time.
Each of USI's key application software relationships is described below.
SIEBEL. Siebel is the recognized leader in providing enterprise
relationship management applications, a range of product offerings that includes
sales force automation, customer service/help desk, and enterprise marketing.
USI and Siebel have entered into an agreement in which USI is the exclusive
outsource provider of Siebel enterprise relationship management application
hosting and rental services for direct customers of Siebel headquartered in
North America.
Our agreement with Siebel establishes a joint program in which the Siebel
sales force will offer outsourcing as a product option. While Siebel will, in
most instances, retain control of the application licensing, USI will implement
the application in its data center, provide on-going management and support, and
may provide its consulting and implementation services. Enterprise relationship
management opportunities identified by USI's sales force will be handled in the
same manner. In return for the exclusivity of this relationship, USI has agreed
not to offer any competing enterprise relationship management applications as
part of its IMAP solutions. The agreement mandates joint marketing programs,
joint oversight of, and agreement on, the program to sell enterprise
relationship management application outsourcing services, and commissioning of
both Siebel and USI sales representatives participating in each sale.
PEOPLESOFT. USI and PeopleSoft have agreed to offer PeopleSoft human
resource and core financial applications as IMAP solutions. PeopleSoft is an
established leader in the enterprise resource planning software industry and the
recognized leader in human resource management solutions. USI is one of nine
currently certified PeopleSoft outsourcing partners.
Our agreement with PeopleSoft provides that outsourcing opportunities
identified by USI's sales force be jointly marketed and quoted. Opportunities
identified by the PeopleSoft sales force will be jointly marketed and quoted
with one of its certified outsourcing partners. Customers who elect outsourcing
through USI will purchase USI's IMAP solutions. USI will pay PeopleSoft a
percentage of the total revenue received, in lieu of a standard licensing fee.
The agreement also provides for the sharing of rapid deployment methodologies,
complete software support, the ability to joint market products and services,
shared visibility at industry events, sharing of sales leads and joint training
efforts.
BROADVISION. USI and BroadVision have agreed to offer BroadVision's
e-commerce application as an IMAP solution. BroadVision's e-commerce application
has been adopted by enterprises across a broad range of industries. The
agreement with BroadVision allows USI to offer a robust set of e-commerce
solutions for business-to-business and business-to-consumer commerce.
Our agreement with BroadVision allows for attractive discounts on licenses.
Our arrangement with BroadVision also provides for flexible use of licenses
worldwide, sharing of development methodology, technical support, joint sales
activity and co-marketing.
SAGENT. USI and Sagent have agreed to offer Sagent Enterprise Decision
Support Systems applications as an IMAP solution. Sagent is currently fully
prepared to service the emerging data warehousing market with its turnkey, fully
Internet-enabled, data warehousing solution. Oracle and Siebel have selected
Sagent as the exclusive data modeling and data movement technology upon which
their data warehouse products are based.
Our agreement with Sagent allows for attractive discounts on licenses and
services and grants us the right to distribute the software as part of our IMAP
solutions without the need to establish a separate licensing arrangement for
each client. The agreement also provides for flexible use of the licenses
worldwide, access to rapid deployment methodology, software support, joint
marketing, visibility as a Sagent Premier Partner at industry events, shared
training resources, and sharing of sales leads.
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OTHER RELATIONSHIPS. In addition to the applications described above, we
implement some e-commerce solutions based on Microsoft Site Server, pursuant to
a licensing agreement with Microsoft Corporation. We also implement many of our
IMAP solutions utilizing Oracle databases, pursuant to a licensing agreement
with Oracle. We have agreed to make Oracle our standard database for most of our
enterprise resource planning implementations. In addition, USI and Oracle are
discussing a potential arrangement allowing USI to offer some Oracle
applications as part of our IMAP solutions.
USI'S NETWORK
We designed our global network specifically to provide superior performance
for the IMAP offerings. The USI global network was engineered around three core
design principles:
- Provide uptime of 99.9% or better to the entire network, which includes
the dedicated customer server.
- Provide fast and predictable response time and access to customer content
globally.
- Provide reliable and customized network security.
NETWORK UPTIME
The USI global network is designed to ensure 99.9% uptime by following four
specific principles:
- Avoiding incompatibility through standardization.
- Utilizing redundant components.
- Offering the ability to mirror client servers in separate EDCs.
- Implementing USIView, USI's global end-to-end network management system.
USI's network is designed around Cisco networking hardware, which minimizes
multi-vendor integration and reduces the risks of hardware incompatibility and
implementation delay. Cisco has designated USI's network as a Cisco Powered
Network, indicating that Cisco has reviewed and approved the network design.
USI's network architecture relies on redundancy of network hardware, facilities
infrastructure like power supplies, and telecommunications circuits, which
maximize the network availability. In addition, we have redundant EDCs, GEMCs,
and wide-area networks connecting our EDCs. The wide-area network connection can
be used to dynamically mirror or provide a duplicate site for each client at an
alternative EDC location. This mirroring feature protects the site from downtime
resulting from catastrophic failure at a specific geographic location. For
clients requiring real time disaster recovery, USI utilizes storage arrays that
enable real time data mirroring and are designed to maintain the integrity of
data to within one second.
The GEMC staff manages and monitors the network systems environment,
telecommunications hardware and data content servers in all of USI's EDCs, both
domestic and international, using USIView, USI's global network operations
technology, an end-to-end network management platform. USIView consists of an
integrated suite of scaleable software tools that allow the GEMC staff to
proactively monitor systems-level events, processes and thresholds. USIView is
the foundation of USI's systems and operations management strategy, providing us
with:
- A unified configuration and change management method.
- An event correlation facility that collects, processes, and responds to
management event information from a variety of sources.
- A central repository for inventory and asset management information.
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FAST RESPONSE TIME
In order to facilitate the faster response time, USI has designed its
network to avoid congestion areas on the Internet and has specifically designed
its primary GEMC to support its integrated network. USI seeks to avoid the known
Internet congestion points at the Metro Area Exchanges and at the network access
points. In order to bypass the MAEs and network access points, USI's network in
North America connects directly with six major Internet service providers'
backbones, which carry about 85% of all the traffic on the Internet today.
Client data is routed directly over an ISP's network to USI's network, bypassing
congested public exchange points. Independent benchmarking has confirmed that
USI's network delivers web-based content to end users from two to seven times
faster than many other major web site hosting providers.
NETWORK SECURITY
Each EDC features multiple levels of security to isolate private information
from public information. Private network infrastructure is physically isolated
with cabling, switches, and routers separately maintained from the hardware for
the public network infrastructure. In addition, access to the EDCs and GEMCs is
restricted to authorized personnel by hand scan readers, which also monitor and
record entrances and departures. The public network and the private network have
minimal electronic or logical interconnection and are connected only through a
redundant firewall. The network also includes firewall products that enforce
data security and policy-based routing for clients who prefer secure access to
server resources. USI believes that these measures ensure complete separation
and security between its public and private networks.
SALES & MARKETING
USI offers its products and services through a direct sales organization
based in the U.S. Each sales representative is responsible for a limited number
of client relationships. USI believes this approach enables its sales
representatives to understand each client's specific business needs thoroughly
and to provide top quality ongoing support. USI currently has 23 sales
representatives located throughout the United States. We intend to expand our
sales organization into all major U.S. markets.
The USI sales teams target medium-sized enterprises based in the U.S. with
annual revenues ranging from $50.0 million to $1.0 billion and selected
divisions of larger multi-national organizations. Our sales strategy emphasizes
that IMAP solutions enable clients to avoid extensive initial capital outlays,
maintain focus on their core businesses, reduce technical and integration risks,
and shorten implementation time for software applications.
USI has developed programs to attract and retain high quality, motivated
sales representatives that have the technical skills and consultative selling
experience necessary to sell USI's IMAP solutions. In addition, USI's
acquisitions have augmented the sales and technical team, and have created
opportunities for more rapid market penetration in their geographic region and
access to established business relationships for cross selling.
USI has established a marketing communications organization that is
responsible for the branding and marketing of all USI's IMAP solutions and for
distinguishing IMAP as a branded product offering. The marketing organization is
responsible for all new service launches to ensure both internal execution and
marketplace acceptance. The marketing organization has developed cooperative
marketing and trade show participation programs in conjunction with USI's
strategic software and hardware partners.
USI has entered into a marketing agreement with U S WEST Communications,
Inc., the incumbent local exchange carrier in fourteen western states. By the
terms of that agreement, U S WEST gains exclusive rights to market USI's IMAP
products in its fourteen-state region. USI makes its products available to U S
WEST at a discount, and provides technical support during the sales process. The
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agreement with respect to any IMAP offering can be canceled in the event that U
S WEST does not achieve an agreed quota of sales for that offering. Moreover,
the exclusive arrangement is not binding on any successor organization to USI.
ACQUISITION STRATEGY
USI's strategy for growth includes both internal development of its
operations and strategic acquisitions. The goal of our acquisition strategy is
to accelerate market penetration, build upon our core competencies and expand
our technical staff and sales force. USI targets acquisition candidates based on
their fit in USI's overall business plan with a particular focus on the
development of expert product teams around specific business processes. Once a
candidate is acquired, USI integrates its IMAP products with the existing
service offerings of the acquired company and leverages the acquired sales force
and customer base to expand market opportunities. In this way, USI accelerates
its market penetration and gains established customer relationships,
complementary skill sets and operational core competencies.
To implement its acquisition strategy, USI has sought acquisition candidates
with experienced technical professionals supported by project managers, training
personnel and a direct sales force. The ideal candidate is a small to mid-sized,
high-growth company with a focus toward service revenues, a business
relationship with one or more of our packaged application software providers and
a management team that shares our vision.
RECENTLY ACQUIRED COMPANIES
USI acquired IIT in September 1998, and ACR in October 1998. These two
companies provide USI with an existing PeopleSoft business partner relationship
and Oracle and Sybase database integration and implementation expertise. The
companies add expert product teams in enterprise resource planning and add core
competencies in network integration, systems integration and Internet services.
The acquired companies also provide a marketing, sales, training and operational
presence in the Florida, California, Chicago and New York/New Jersey regions.
The table below sets forth information regarding the acquired companies as
of December 31, 1998.
<TABLE>
<CAPTION>
TECHNICAL 1998
AND SALES PRIMARY EXPERT CORE NUMBER OF REVENUE
COMPANY PERSONNEL LOCATIONS PRACTICES COMPETENCIES CUSTOMERS ($ MILLION)
- -------------- ------------- -------------- -------------- -------------- ------------- -----------
<S> <C> <C> <C> <C> <C> <C>
IIT 35 Miami PeopleSoft Application 15 $ 6.9
Chicago Integration,
Los Angeles Systems
Integration
ACR 45 New York Oracle Systems 25 $ 7.5
Sybase Integration
</TABLE>
INTERNATIONAL INFORMATION TECHNOLOGY, INC. IIT is a comprehensive provider
of PeopleSoft human resources management and system implementation. The
company's consulting professionals possess expertise in human resources
management as well as accounting and financial systems. IIT specializes in
systems analysis and design, and systems integration solutions. IIT is a
PeopleSoft Global Implementation Partner. IIT's clients represent a wide variety
of industries, including manufacturing, utility, banking, government, food and
services. IIT provides USI with a regional expert practice focused on PeopleSoft
applications and a team of approximately 35 technical consultants dispersed
across the United States. IIT was purchased for $12.8 million and warrants to
purchase 50,000 shares of common stock at an exercise price of $16.00 per share.
In addition, if IIT meets agreed to 1998 revenue,
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EBITDA and employee retention goals, the total cash purchase price can be
increased by up to $3.8 million.
ADVANCED COMMUNICATION RESOURCES, INC. ACR, a New York based systems
integration services company, specializes in Oracle and Sybase database
application integration and business consulting services focused on the
financial services industry. ACR is a Sybase Training Partner and a Microsoft
Authorized Training Center. ACR provides USI with a market presence in the New
York/New Jersey region, as well as approximately 40 technical consultants and 4
sales representatives. ACR was acquired for $2.5 million in cash, a $3.5 million
note which was repaid on January 6, 1999 and warrants to purchase 62,500 shares
of common stock at an exercise price of $16.00 per share. In addition, because
ACR met or exceeded agreed to revenue, EBITDA and employee retention goals, the
total cash purchase price was increased by $5.0 million.
IIT and ACR are the primary providers of the traditional information
technology services we sell. In addition, our other implementation teams
occasionally sell these services on a time and materials basis. Both IIT and ACR
are being successfully integrated into USI, with minimal loss of staff. Sales,
accounting, and administrative functions have been combined. Both companies are
also now supporting the implementation of specific IMAP offerings.
CLIENTS
USI targets North American-based middle market enterprises and selected
divisions of larger multinational organizations. We believe that these
organizations will gain the most competitive advantage from IMAP solutions and
that they provide the greatest opportunity for the outsourcing of information
technology operations. Currently, business software application vendors are
providing software predominantly to larger organizations. Historically, attempts
to market to middle market enterprises have generally been unsuccessful due to
the high up-front costs to obtain the required software, the long lead time to
integrate the software into the specific business process, and the competition
for and shortage of information technology resources in middle market companies.
USI currently has clients for both its IMAP offerings and the traditional
information technology services sold by IIT and ACR. As of January 31, 1999, USI
had twelve IMAP clients representing over $10.0 million in revenues under
contract but not yet earned, also known as a backlog. Of this backlog,
approximately $2.8 million will be earned in the next twelve months. USI and its
acquired entities are currently serving in excess of 35 customers with
traditional information technology services, many of whom are candidates for
cross-selling IMAP offerings. As of January 31, 1999, selected clients of USI
included:
<TABLE>
<CAPTION>
IMAP CLIENTS TRADITIONAL IT SERVICES CLIENTS
- ------------------------------------- -------------------------------------
<S> <C>
Abaccy Group Deutsche Bank
GE Capital Retirement Kaiser Permanente
Hershey Foods Lockheed Martin
Legg Mason Nike
Sunburst Hospitality Prudential Insurance
U S WEST Southern California Edison
</TABLE>
CLIENT CARE
A central element of the IMAP solution is a high level of responsive
personalized service, referred to as client care. Through the USI client care
process, a specific technical account manager is assigned to each client and
support teams are designated to back up the account managers. This structure is
designed to ensure service is available twenty four hours a day, seven days a
week. Assigned support
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teams comprise senior client support specialists, network engineers, and
packaged application engineers. The teams have further support from a group of
product specific application engineers who are trained in the specific software
applications offered by USI.
COMPETITION
The market for Internet-related services is extremely competitive. We
anticipate that competition will continue to intensify as the use of the
Internet grows. The tremendous growth and potential market size of the Internet
market have attracted many start-ups as well as extensions of existing
businesses from different industries. In the market for Internet-enabled
application software and network solutions, we compete on the basis of
performance, price, software functionality and overall network design. While
USI's competition comes from many industry segments, we believe no single
segment provides the integrated, single-source solution provided by USI. Current
and prospective competitors include systems integrators; national, regional and
local ISPs; hardware and software suppliers; and telecommunications companies.
SYSTEMS INTEGRATORS. We compete with national, regional, and local
commercial systems integrators who bundle their services with software and
hardware providers and perform a facilities management outsourcing role for the
customer. These competitors generally have greater name recognition or more
extensive experience than we do. EDS, Andersen Consulting,
PricewaterhouseCoopers and MCI Systemhouse, among others, provide professional
consulting services in the use and integration of software applications in
single-project client engagements. Large systems integrators may establish
strategic relationships with software vendors to offer services similar to our
IMAP offerings. We expect that regional systems integrators are likely to
compete with us based on local customer awareness and relationships with
hardware and software companies. Additionally, regional systems integrators may
align themselves with ISPs to offer complex web site management combined with
professional implementation services.
ISPS. Our current primary competitors include business-focused ISPs with a
significant national presence, such as UUNet Technologies, Inc., GTE
Internetworking Incorporated, PSINet, Inc., Concentric Network Corporation,
DIGEX, Frontier Corporation and Exodus Communications, Inc., among others. While
we believe that our level of service, support and targeted business focus
distinguish us from these competitors, some of these competitors have
significantly greater market presence, brand recognition, and financial,
technical and personnel resources than we do, and have extensive coast-to-coast
Internet networks.
HARDWARE AND SOFTWARE COMPANIES. We compete with hardware and software
companies in providing packaged application solutions as well as network
infrastructure. In order to build market share, both hardware and software
providers may establish strategic relationships in order to enhance their
service offerings. IBM Solutions currently provides applications outsourcing
around its Lotus Notes products and delivers the service via the IBM network
infrastructure. J.D. Edwards & Company, a developer of enterprise resource
planning software, has announced that it will offer its software in an
outsourced model. SAP Aktiengesellschaft has formed an outsourcing organization
to develop key partnerships with leading consulting firms with the intent of
offering SAP software. We believe that additional hardware and software
providers, potentially including our strategic partners, may enter the
outsourcing market in the future.
TELECOMMUNICATIONS COMPANIES. All of the major long distance companies,
including AT&T, MCI WorldCom, and Sprint, offer Internet access services. In
order to address the Internet connectivity requirements of the current business
customers of long distance and local carriers, we believe that there is a move
toward horizontal integration through acquisitions of, joint ventures with, and
purchasing connectivity from, ISPs. Accordingly, USI expects that it will
experience increased competition from the traditional telecommunications
carriers. Many of these telecommunications carriers, in addition to
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<PAGE>
their substantially greater network coverage, market presence, and financial,
technical and personnel resources, also have large existing commercial customer
bases. We believe that our local presence, our strong technical and
data-oriented sales force and our offering of branded software applications are
important features distinguishing us from the telecommunications companies.
OTHER POTENTIAL COMPETITORS. It is possible that new competitors or
alliances may emerge and gain market share. Such competitors could materially
affect our ability to obtain new contracts. Further, competitive pressure could
require us to reduce the price of our products and services thus affecting our
business, financial condition and results from operations.
PROPERTIES
USI is headquartered in Annapolis, Maryland, where it currently leases its
principal executive office. USI's training and conference facilities are located
in a building it owns in Annapolis, Maryland. Due to our rapid expansion, we are
currently examining a number of alternatives for increasing the space available
to us in the Annapolis area.
We lease space in a number of other locations, primarily for EDC and GEMC
installations and to house our consulting and implementation staff. Outside of
Annapolis, we believe that our leased facilities are adequate to meet our
current needs in the markets in which we have begun to deploy our services, and
that additional facilities are available to meet our expansion needs in our
target markets for the foreseeable future.
Our leases are for terms varying from 30 to 60 months and generally contain
renewal options of two to three years as well as rent escalation clauses. During
1998 we incurred approximately $720,000 in rent expense.
EMPLOYEES
As of January 31, 1999, we employed approximately 374 people, including
full-time and part-time employees at our corporate headquarters, our GEMCs and
EDCs and at our subsidiaries. We consider our employee relations to be good.
None of our employees are covered by a collective bargaining agreement.
LEGAL PROCEEDINGS
From time to time we may be involved in litigation that arises in the normal
course of business operations. As of the date of this prospectus, we are not a
party to any litigation that we believe could reasonably be expected to have a
material adverse effect on our business or results of operations.
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<PAGE>
MANAGEMENT
The following sets forth certain information regarding our current directors
and executive officers.
<TABLE>
<CAPTION>
NAME AGE POSITION
- ----------------------------------------------------- --- -----------------------------------------------------
<S> <C> <C>
Christopher R. McCleary(1)........................... 46 Chief Executive Officer and Chairman of the Board
Stephen E. McManus................................... 49 President and Director
Jeffery L. McKnight.................................. 55 Executive Vice President of Operations and Client
Services
Andrew A. Stern...................................... 41 Executive Vice President and Chief Financial Officer
Vincent L. Romano.................................... 52 Senior Vice President World Wide Sales
R. Dean Meiszer(3)................................... 42 Director
Benjamin Diesbach(2)................................. 52 Director
David J. Poulin(3)................................... 40 Director
Ray A. Rothrock(1)(3)................................ 44 Director
Frank A. Adams(1)(2)................................. 53 Director
William F. Earthman(1)(2)............................ 47 Director
John H. Wyant(1)..................................... 52 Director
Joseph R. Zell....................................... 38 Director
Michael C. Brooks (1)(2)(3).......................... 54 Director
</TABLE>
- ------------------------
(1) Member of the executive committee
(2) Member of the compensation committee
(3) Member of the audit committee
CHRISTOPHER R. MCCLEARY is a co-founder of USI and has served as the
Chairman and Chief Executive Officer of USI since January 1998. Prior to
founding USI, he was the Chairman and Chief Executive Officer of DIGEX, Inc.
from January 1996 to December 1997. Prior to serving at DIGEX, Mr. McCleary
served as Vice President and General Manager of Satellite Telephone Service, a
satellite communications company, from October 1990 to January 1996.
STEPHEN E. MCMANUS is a co-founder of USI and has served as its President
and a Director since April 1998. Prior to joining USI, Mr. McManus was Director
of U.S. Sales for the telecommunications unit of Data General Corporation from
January 1998 to March 1998. From June 1995 to December 1998 Mr. McManus served
as a Branch Manager for Silicon Graphics. Prior to joining Silicon Graphics, Mr.
McManus held several positions at Data General Corporation from June 1988 to May
1995, including District Manager for Distributor Sales, VAR District Manager and
Branch Manager.
JEFFERY L. MCKNIGHT has been Executive Vice President of Operations and
Client Services since December 1998. He originally joined USI in June of 1998 as
Senior Vice President of Client Care. Previously, he held senior marketing and
operations positions with Aeronautical Radio, Inc., ARINC, the communications
arm of all of the domestic airlines from May 1989 to July 1997. Prior to ARINC,
he held senior operations positions with System One, Inc. from February 1963 to
April 1989.
ANDREW A. STERN has been Executive Vice President and Chief Financial
Officer of USI since July 24, 1998. Prior to joining USI, Mr. Stern held
positions at USF&G Corporation, an insurance company, from May 1993 to July
1998, most recently as Executive Vice President, Strategic Planning and
Reinsurance Operations. In addition, Mr. Stern was a partner of Booz Allen &
Hamilton, an international management and technology consulting firm with whom
he was employed from August 1981 to May 1993.
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VINCENT L. ROMANO, JR. has served as USI's Senior Vice President, Worldwide
Sales since he joined USI in July 1998. Prior to joining USI, Mr. Romano served
in various positions at Motorola, Inc. from March 1989 to July 1998, including
Vice President and Director of Worldwide Sales Operations for its computer
group. Prior to Motorola, he held senior sales positions with Data General, Inc.
from March 1988 to 1989.
R. DEAN MEISZER has been a director of USI since it was founded. He has been
President and Managing Director of The Crisler Company, a Cincinnati-based
investment firm, since May 1989. Prior to Crisler, Mr. Meiszer was Senior Vice
President of Society Bank from March 1978 to May 1989.
BENJAMIN DIESBACH was elected as a director of USI in May 1998 as a designee
of Mr. McCleary in his role as Chief Executive Officer of USI. He has been
President of Midwest Research, Inc., a consulting firm, since he formed it in
January 1995. Prior to forming Midwest Research, Mr. Diesbach was Chief
Executive Officer of Continental Broadcasting, Ltd., a broadcasting company,
from September 1993 to January 1995.
DAVID J. POULIN was elected as a director of USI in May 1998 as a designee
of Mr. McCleary in his role as Chief Executive Officer. He has been the head
hockey coach at the University of Notre Dame since May 1995. Prior to joining
Notre Dame as hockey coach, Mr. Poulin played in the National Hockey League for
13 years.
RAY A. ROTHROCK was elected as a director of USI in June 1998 as a designee
of the Venrock Group. He has been a General Partner of Venrock Associates, the
high technology venture capital investment firm of the Rockefeller Family and
Associates, since June 1988. Mr. Rothrock serves on the boards of directors of
CheckPoint Software Technology and several private companies including Qpass,
Rights Exchange, Appliant, Inc., Sbyn Technology and Simba Technology.
FRANK A. ADAMS was elected as a director of USI in June 1998 as a designee
of the Grotech Group. He is the President and Chief Executive Officer of Grotech
Capital Group, which he co-founded in August 1984. Mr. Adams has served as
President of the Mid-Atlantic Venture Association since July 1985. He has served
on the board of directors of a number of technology companies including
Thunderbird Technologies, Inc. and EPIC Therapeutics, Inc.
WILLIAM F. EARTHMAN was elected as a director of USI in June 1998 as a
designee of the Massey Burch Group. He has been a Partner of Massey Burch
Capital Corporation since January 1994. Prior to becoming a partner at Massey
Burch Capital Corporation, Mr. Earthman served from January 1990 as a Vice
President of Massey Burch Investment Group. Prior to Massey Burch, he worked for
the investment banks J.C. Bradford & Co. from September 1975 to October 1981,
Prudential-Bache Securities from October 1981 to November 1985 and First
Nashville Corp. from December 1985 to December 1989. He currently serves on the
board of directors of Intellivoice Communications, Inc. and Legal Technologies
Network, Inc.
JOHN H. WYANT was elected as a director of USI in June 1998 as a designee of
the Blue Chip Group. He is the Managing Partner and President of Blue Chip
Venture Company, which he founded in 1990. Mr. Wyant is currently a director of
Regent Communications, Inc., Zaring Homes, Inc., Delicious Brands, Inc. and Ciao
Cucina Corporation. He previously served as a director of DIGEX.
JOSEPH R. ZELL was elected as a director of USI in July 1998 as a designee
of U S WEST. Since December 1991, he has held several positions with the
!NTERPRISE Networking division of U S WEST Communications, Inc., including
Director of Product Development for !NTERPRISE, Executive Director of
Applications Innovation, President of US WEST's Wholesale Division and Vice
President of Markets and innovation at !NTERPRISE. He has been President of the
division since March 1997.
MICHAEL C. BROOKS was elected as a director of USI in December 1998 as a
designee of the Whitney Group. He has been a general partner of J. H. Whitney &
Co. since 1984. He is also a director of
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SunGard Data Systems, Inc., Pegasus Communications, Inc., Nitinol Medical
Technology, Inc. and various other private companies.
OTHER KEY EMPLOYEES
In addition, we employ the following other key employees:
L. SEBASTIAN ALEGRETT has served as USI's Vice President and General
Manager, PeopleSoft Implementation Group, since September 1998. From February
1994 to September 1998 he was the President and CEO of IIT, a PeopleSoft Global
Alliance Partner founded by Mr. Alegrett. USI acquired IIT in September 1998.
L. GARRETT BROWN has been Vice President of Product Development for USI
since joining USI in July 1998. Mr. Brown most recently served as Product
Manager of Collocation Services and Managed Hosting for UUNet Technologies
overseeing product introduction from December 1997 to June 1998. Prior to that
he served as the Manager of WWW Major Opportunities, a Server Hosting Division
of UUNet Technologies from February 1997 to December 1997. Mr. Brown originally
joined UUNet Technologies in August 1995 as the Product Manager of Radius Server
Network Resale and Multicast.
LAWRENCE BRUNELLE has been Vice President and General Manager of Siebel
Implementations Group since November 1998. He joined USI in June 1998 as USI's
Vice President of Consulting and Implementation Services. Prior to joining USI,
Mr. Brunelle worked as a Managing Associate with Coopers & Lybrand Consulting
from August 1997 to June 1998. Prior to working at Coopers & Lybrand Consulting,
he was a senior technical manager with Andersen Consulting from June 1996 to
August 1997. In addition, from June 1990 to June 1996, Mr. Brunelle served in
various project management and technical consulting positions with Booz Allen &
Hamilton, Inc.
S. NELSON FRENCH, JR., has been Vice President, Western Sales Region since
joining the Company in August 1998. Mr. French joins USI with over 30 years
experience in the computer hardware and software industry. Previously Mr. French
was with Sun Microsystems, Inc. from July 1988 to August 1998. Since December
1993 he served as the Director, SunSoft Sales & Channels Development. Prior to
that position he held various management positions including; Director of Market
Development, Director of Area Tactical Marketing, Strategic Account Executive
and as a National Account Executive.
MICHAEL HARPER joined USI in April 1998 as Vice President of Product
Marketing. He has been Vice President and General Manager of PeopleSoft Business
Unit since January 1999. Mr. Harper joins USI with over 13 years experience in
systems management, marketing and sales. He recently served as the Mid-Atlantic
Region Systems Manager for Silicon Graphics, Inc. from July 1997 to April 1998
with responsibility for pre-sales and professional services to federal and
commercial customers. Prior to Silicon Graphics, Mr. Harper was with IBM in
various marketing, sales and professional service capacities. Mr. Harper was
with IBM from July 1989 to July 1994.
RICHARD A. HRONICEK has been Vice President and General Manager of Siebel
Business Unit since January 1999. He joined USI in June 1998 as its Vice
President and General Manager of North America West. Previously, he was a
consultant from August 1997 to June 1998 providing telecommunications expertise
in mergers and acquisitions, business strategy, and the acquisition and sale of
Internet service providers. Before that he served as the President and CEO of
Javelin Internet Group from January 1997 to July 1997. Mr. Hronicek was also
President, CEO, and founder of Pacific Bell Internet Services from April 1995 to
December 1996.
MATTHEW D. KANTER has served as the Company's Vice President and General
Manager of Web Hosting/E-Commerce since October 1998. He joined USI after USI's
aquisition of ACR, where he was President, CEO, and Technical Director from
January 1993 to October 1998. ACR delivers applications development and systems
integration services to the financial services community in the Northeastern
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United States. Before joining ACR, Mr. Kanter was Director of Technical Services
at Simpson, Thacher and Bartlett from January 1989 to February 1990.
WILLIAM G. KARPOVICH has been Vice President of Product Development
E-Commerce and Complex Web Hosting since he joined USI in May 1998. Prior to
joining USI, he was Director of Internet Products, a division of the NDC Group,
Inc. from July 1997 to July 1998. Prior to that, Mr. Karpovich was Director of
Product Management at DIGEX from July 1996 to July 1997.
JOHN W. LICCIONE has served as Vice President of Advanced Products
Engineering since December 1998. He joined USI as Vice President of Research and
Development. Prior to joining USI he was Director of System Development in the
Network Services Division of ARINC, Inc. from February 1997 to March 1998. Mr
Liccione served as the Advanced Research and Development Director from April
1994 to February 1997 where he developed and implemented the infrastructure and
strategy for ARINC's Internet infrastructure.
MARK J. MCENEANEY has been Vice President and Controller of USI since
joining USI in April 1998. Prior to joining USI, he was Chief Financial Officer
of Questar Builders, Inc. from November 1997 to March 1998 and of William Ryan
Homes, Inc. from April 1995 to October 1997. Mr. McEneaney is a CPA and was with
Ernst & Young LLP from January 1987 to March 1995, most recently as a Senior
Manager in the accounting and auditing division.
MICHELE PERRY has been Vice President, Marketing for USI since joining USI
in July 1998. Previously, she was Senior Vice President of Marketing and Vice
President of Product Management for Versatility, Inc. from March 1997 to May
1998. Prior to Versatility, Inc., Ms. Perry was with Software AG from May 1994
to December 1996. While at Software AG Ms. Perry served in various management
positions.
CHRISTOPHER M. POELMA is a co-founder of USI and has served as a Senior Vice
President and General Manager since November 1998. He originally joined USI in
April 1998 as its Executive Vice President, Chief Technology Officer. Prior to
joining USI, Mr. Poelma was Vice President of the Enterprise Solutions division
of MICROS Systems, Inc., a technology company, from October 1997 to March 1998.
From January 1996 to October 1997 Mr. Poelma served as an Engagement Manager for
telecommunications and healthcare at Sun Microsystems, Inc. From January 1994 to
December 1995, Mr. Poelma served as Director of the Enterprise Solutions Group
at Unisys, Inc. Prior to his position at Unisys, Inc., Mr. Poelma held various
positions at Electronic Data Systems, Inc. from January 1987 to January 1994
including Systems Engineering Supervisor and Systems Engineering Manager.
WILLIAM T. PRICE has been Vice President, Secretary and General Counsel of
USI since joining USI in April 1998. Prior to joining USI, Mr. Price was the
senior trial associate in the Baltimore-based law firm of Albright, Brown &
Goertemiller from April 1997 to April 1998, where he represented major corporate
clients in antitrust, copyright, intellectual property and other commercial
matters in various state and federal courts. Prior to joining Albright, Brown &
Goertemiller, Mr. Price was a litigator and Managing Attorney for the New York
based law firm of Finklestein and Livine. Mr. Price was with Finklestein and
Livine from April 1993 to October 1996.
L. DEAN RICH has been Vice President, Internetworking Security since joining
USI in June of 1998. Previously Mr. Rich served as a Regional Director for
Internet Security Systems, Inc., from December 1997 until June 1998. In this
capacity Mr. Rich was responsible for managing a team of security professionals
that specialized in vulnerability and threat detection. Prior to Internet
Security Systems, Inc., he was the President of Strategic Security Solutions,
Inc. from June 1997 until November 1997. He has also served as a Management
Consultant for Booz-Allen Hamilton Inc., from July 1995 until November 1996 and
as a Programmer specializing in ISP issues from January 1991 to July 1995.
JAY W. ROBERTSON is our Vice President of Operations. He joined USI in May
1998 as Vice President Support Services. Prior to joining USI, Mr. Robertson was
the Senior Director of Network Services for
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the ARINC Corporation Radio Division from June 1996 to May 1998. Prior to ARINC,
Mr. Robertson was with Sprint Corporation where he held several management and
director positions, including Director of America On-Line Service Center and
Program Office. Mr. Roberston was with Sprint Corporation from June 1985 to June
1996.
LEE TANNER has been Vice President of Siebel Products since February 1999.
He joined the company in May 1998 as its Director of Business Development. Prior
to joining USI, Mr. Tanner served as a Business Development Manager for Sun
Microsystems from June 1996 until May 1998. Prior to that, Mr. Tanner was with
VISIX SOFTWARE Inc. as a Business Development Manager from June 1994 to June
1996 and prior to that Mr. Tanner was an Account Manager for GE Information
Services from November 1991 to May 1994.
RICHARD B. TERHORST has been Vice President, Eastern Sales Region since
joining the Company in October 1998. Mr. Terhorst joins USI with over 30 years
experience in Sales and Executive Management positions. Prior to joining USI,
Mr. Terhorst was President & CEO of Government Systems, Inc. (GSI). Mr. Terhorst
joined GSA, an International Telecommunications Integrator, in March 1994 and
served as President & CEO until joining USI in October 1998. From April 1998
until March 1994 Mr. Terhorst served as an Executive Vice President of Infonet
Services Corporation.
JOHN TOMLJANOVIC has been Vice President, Client Care since November 1998.
He joined the company in June 1998 as its Director of Application Engineering.
Prior to joining USI, Mr. Tomljanovic was with Andersen Consulting from June
1992 to May 1998, most recently as a Manager in the telecommunications group.
JOHN P. STREETEN has been Vice President, Finance of USI since November
1998. He originally joined USI in July 1998 as Vice President, Mergers and
Acquisitions. Prior to joining USI, Mr. Streeten was with IBM as a Finance
Manager of Acquisitions and Alliances from October 1996 to July 1998. Prior to
that, Mr. Streeten was District Sales Manager of Lotus Development Corporation,
an IBM subsidiary from January 1991 to September 1996. Mr. Streeten was also
Regional Sales Manager at CalComp, Inc., a $520 million manufacturer of computer
graphics hardware and peripherals, from July 1983 to December 1990.
BRENDA WOODSMALL has been Vice President Human Resources and Staff Services
for USI since joining USI in May 1998. Prior to joining USI, Ms. Woodsmall was
an independent consultant, from May 1993 to October 1997, based in the Annapolis
and Washington, D.C. areas performing recruiting, customer service training
programs, and other human resources work with startup companies. Her last
corporate role was Senior Vice President of Human Resources at System One
Corporation from September 1983 to October 1991.
COMMITTEES OF THE BOARD OF DIRECTORS
In June 1998, the board of directors established a compensation committee,
an audit committee and an executive committee. The compensation committee makes
recommendations concerning salaries and incentive compensation of our employees
and consultants and administers our stock option plan. The audit committee
reviews, acts on and reports to the board of directors with respect to various
auditing and accounting matters, including reviewing our audit policies,
overseeing the engagement of our independent auditors and developing our
financial strategies. The executive committee is empowered to conduct all
activities that may be conducted by the board of directors, subject only to
limitations imposed by applicable Delaware corporate laws.
COMPENSATION OF DIRECTORS
All non-employee directors are reimbursed for travel and other related
expenses incurred in attending meetings of the board of directors. In addition,
each non-employee director then serving on
39
<PAGE>
the board of directors will receive upon the date of the first board meeting in
the second calendar quarter of each year an option granted pursuant to our
option plan to purchase 3,750 shares of our common stock. The options will vest
immediately and will have an exercise price equal to the fair market value of
the common stock on the date of grant. The shares of common stock purchased
pursuant to these options will be subject to repurchase by us as described in
"--Stock Option Plan".
EMPLOYMENT AGREEMENTS
We have entered into the following employment agreements with our executive
officers.
<TABLE>
<CAPTION>
OFFICER TERM SALARY POSITION
- ---------------------------- ----------------------- ---------- ----------------------------
<S> <C> <C> <C>
Christopher R. McCleary May 1998-May 2001 $ 175,000 Chairman and Chief Executive
Officer
Stephen E. McManus June 1998-June 2001 $ 175,000 President
Andrew A. Stern July 1998-July 2001 $ 175,000 Chief Financial Officer and
Executive Vice President
Jeffery L. McKnight December 1998 $ 175,000 Executive Vice President of
-December 2001 Operations and Client
Services
</TABLE>
Mr. McCleary's agreement also provides for:
- A bonus to be determined based on his meeting established management
objectives with a minimum of $250,000 in the second year of the agreement
and $500,000 in the third year of the agreement.
- The right to terminate him for cause upon a vote of two-thirds of the
board of directors preceded by a finding by the compensation committee or
executive committee that he has breached the agreement.
- The payment of his full salary for the term of the agreement if he is
terminated without cause.
- The payment of his full salary for the term of the agreement if he
terminates the agreement because:
--we breach the agreement
--there is a material adverse change in his job responsibilities, duties,
function or reporting
relationships
--he is required to travel more than 50 miles to a relocated office
- The payment of his bonus after he terminates the agreement for other than
the reasons described above if its amount had already been determined by
the compensation committee.
Mr. McManus, Mr. McKnight and Mr. Stern's agreements all provide for:
- No obligation to pay salary after a termination for cause due to:
--a breach of the agreement by the officer
-- engaging in illegal or immoral practices or activities which can
reasonably be expected to be materially detrimental to our reputation
--being dishonest, disloyal, or fraudulent in performing his duties
--willful misconduct or dereliction of his duties
40
<PAGE>
--using, possessing, selling or delivering illegal drugs
if the action giving rise to the termination is not cured within 60 days
and an arbitrator finds the termination to be valid.
Mr. McManus and Mr. Stern's agreements provide for:
- The right to purchase 625,000 shares of our common stock-each of them has
exercised this right.
- A life insurance policy provided by us in an amount equal to twice his
salary less the amount of any group insurance he selects as part of our
standard group insurance plan.
- Our right to repurchase the 625,000 shares of stock, for $100 in Mr.
McManus case or the total tax liability incurred by Mr. Stern as a result
of his purchase in his case, if the officer is terminated for cause or if
he terminates the agreement, unless, in the case of Mr. Stern, it is a
termination for good reason.
- The obligation to pay the officer's full salary for the remainder of the
term of the agreement or one year, if longer, in the case of Mr. Stern,
and a bonus pro rated for the remaining term of the agreement if we
terminate one of them without cause.
Mr. McKnight's agreement also provides for:
- The grant of an option to purchase 375,000 shares of common stock under
our stock option plan.
- The termination of our right to repurchase his shares under the option
plan 24 hours before any termination of his employment without cause.
All of the agreements provide for the termination of our right to repurchase
shares held by the officers upon a change in control of the company. All of the
agreements also provide for review of the salary and bonus terms by our
compensation committee.
COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION
Prior to June 1998, we had no separate compensation or stock option
committee or other board committee performing equivalent functions, and these
functions were performed by our board of directors. Both Mr. McCleary and Mr.
McManus were members of the board of directors during that period. In June 1998,
we established compensation, audit and executive committees of our board of
directors. The compensation committee is composed of non-employee directors. See
"--Committees of the Board of Directors."
41
<PAGE>
EXECUTIVE COMPENSATION
SUMMARY COMPENSATION. The following table provides summary information
concerning compensation paid or accrued by USI to or on behalf of our "Named
Executive Officers," which are our Chief Executive Officer and each of the other
executive officers of USI who earned more than $100,000, in salary and bonus,
for all services rendered in all capacities during the fiscal year ended
December 31, 1998. The aggregate amount of perquisites and other personal
benefits, securities or property received by each of the Named Executive
Officers was less than either $50,000 or 10% of the total annual salary and
bonus reported for that Named Executive Officer:
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
LONG TERM COMPENSATION
AWARDS
ANNUAL COMPENSATION ------------------------
--------------------- SHARES UNDERLYING
NAME AND PRINCIPAL POSITION SALARY BONUS OPTIONS
- ---------------------------------------------------------------- ---------- --------- ------------------------
<S> <C> <C> <C>
Christopher R. McCleary
Chairman of the Board, Chief Executive Officer................ $ 131,250 $ 0 --
Stephen E. McManus
President..................................................... $ 131,250 $ 0 --
Jeffery L. McKnight,
Executive Vice President of Operations and Client Services.... $ 75,962 $ 50,000 375,000
</TABLE>
STOCK OPTIONS. The following table contains information concerning the
stock option grants made to each of the Named Executive Officers during the
fiscal year ended December 31, 1998:
OPTION GRANTS IN LAST FISCAL YEAR
- The options described in the table below are immediately exercisable and
expire on the tenth anniversary of the date of grant. Shares of common
stock purchased pursuant to these options will be subject to our right to
repurchase them at the option exercise price upon the termination of the
holder's employment or business relationship with us. The repurchase right
will lapse with respect to one-third of the shares purchasable upon
exercise of an option on the first anniversary of the date of grant of the
option. The repurchase right with respect to the remainder of the shares
purchasable upon exercise of an option will lapse in equal quarterly
installments over the subsequent eight calendar quarters.
- The 5% and 10% assumed annual rates of compounded stock price appreciation
are mandated by the rules of the SEC. There can be no assurance that the
actual stock price appreciation over the ten-year option term will be at
the assumed 5% and 10% levels or at any other defined level. Unless the
market price of the common stock appreciates over the option term, no
value will be realized from the option grants. The potential realizable
value is calculated by assuming that the fair market value of the common
stock on the date of grant of the options appreciates at the indicated
rate for the entire term of the option and that the option is exercised at
the exercise price and sold on the last day at the appreciated price.
<TABLE>
<CAPTION>
POTENTIAL REALIZABLE
VALUE AT ASSUMED
INDIVIDUAL GRANTS ANNUAL RATES
-------------------------------------------------------------------- OF STOCK PRICE
NUMBER OF SHARES OF % OF TOTAL APPRECIATION
COMMON STOCK OPTIONS GRANTED EXERCISE FOR OPTION TERM
UNDERLYING OPTIONS TO EMPLOYEES IN PRICE EXPIRATION ------------------------
NAME GRANTED 1998 PER SHARE DATE 5% 10%
- ---------------------- ------------------- ------------------- ------------- ----------- ---------- ------------
<S> <C> <C> <C> <C> <C> <C>
Christopher R.
McCleary............ 0 -- -- -- -- --
Stephen E. McManus.... 0 -- -- -- -- --
Jeffery L. McKnight... 375,000 22.3% $ 2.64 12/2008 $ 622,606 $ 1,577,805
</TABLE>
42
<PAGE>
YEAR-END OPTION VALUES. The following table sets forth information
concerning option holdings through December 31, 1998 by each of the Named
Executive Officers:
- "Exercisable" refers to those options which will be vested and exercisable
immediately upon completion of this offering, while "Unexercisable" refers
to those options which will be unvested at such time.
- Value is determined by subtracting the exercise price from the fair market
value of the common stock based on an assumed initial public offering
price of $ , multiplied by the number of shares underlying the options.
FISCAL YEAR-END OPTION VALUES
<TABLE>
<CAPTION>
NUMBER OF SHARES OF COMMON VALUE OF UNEXERCISED
STOCK UNDERLYING IN-THE-MONEY
OPTIONS AT YEAR END OPTIONS AT YEAR END
-------------------------- ---------------------------
NAME EXERCISABLE UNEXERCISABLE EXERCISABLE UNEXERCISABLE
- --------------------------------------------------------- ----------- ------------- ------------ -------------
<S> <C> <C> <C> <C>
Christopher R. McCleary.................................. -- -- -- --
Stephen E. McManus....................................... -- -- -- --
Jeffery L. McKnight...................................... 375,000 -- --
</TABLE>
STOCK OPTION PLAN
Our 1998 Stock Option Plan, approved by the board of directors in July 1998,
and amended and restated in February 1999, provides for the issuance of up to
4,682,250 shares of common stock pursuant to the grant of stock options, both
nonqualified stock options and incentive stock options, as defined in our option
plan, to independent directors, employees and consultants. As of December 31,
1998, options to purchase 1,652,250 shares of common stock had been awarded,
each with an exercise price of $2.64 per share. Of these, options to purchase
1,652,250 shares of common stock are intended to qualify as Incentive Stock
Options, or ISOs. The remaining options to purchase 30,000 shares of common
stock are nonqualified stock options, or NSOs, granted to our independent
directors. We expect to grant options to purchase 1,875,000 shares of common
stock contingent on the completion of this offering at an exercise price equal
to 50% of the mid-point of the proposed price range. The options will vest
immediately upon the date of grant. Shares of common stock purchased pursuant to
options under our option plan will be subject to our right to repurchase them at
the option exercise price upon the termination of the holder's employment or
business relationship with us. The repurchase right will lapse with respect to
one-third of the shares purchasable upon exercise of an option on the first
anniversary of the date of grant of the option. The repurchase right with
respect to the remainder of the shares purchasable upon exercise of an option
will lapse in equal quarterly installments over the subsequent eight calendar
quarters.
The compensation committee appointed to administer our option plan has
discretion to determine which employees and consultants will be granted stock
options, the number of shares to be optioned, and the terms and conditions of
such options. The full board of directors conducts the administration of the
option plan with respect to options granted to independent directors or to
officers subject to section 16 of the Securities and Exchange Act. During the
term of our option plan, each independent director serving on the date of the
first board meeting during the second calendar quarter of each year will
automatically be granted an option to purchase 3,750 shares of common stock on
such date. The exercise price of such shares will be the fair market value on
the date of grant as determined under the terms of our option plan. The
compensation committee, or the board of directors, as applicable, also has
discretion to make adjustments to options in the event of a change in control or
other corporate event, including without limitation, the discretion to
accelerate the vesting of options or waive our repurchase right.
43
<PAGE>
The federal income tax consequences, in general, of the grant and exercise
of an ISO under our option plan are as follows:
- In general, an employee will not recognize taxable income upon the grant
or exercise of an ISO and we will not be entitled to any business expense
deduction with respect to the grant or exercise of an ISO.
- If the employee holds the shares for at least two years after the date of
grant and for at least one year after the date of exercise, the
difference, if any, between the sales price of the shares and the exercise
price of the option will be treated as long-term capital gain or loss upon
subsequent disposition of the shares.
- If the employee disposes of the shares prior to satisfying the holding
period requirements, the employee will recognize ordinary income at the
time of the disposition, generally in an amount equal to the excess of the
fair market value of the shares at the time the option was exercised over
the exercise price of the option. Generally, we will be allowed a business
expense deduction to the extent an employee recognizes ordinary income.
The balance of the gain realized, if any, will be short-term or long-term
capital gain, depending upon whether the shares have been held for at
least twelve months after the date of exercise.
The federal income tax consequences, in general, of the grant and exercise
of an NSO under our Option Plan are as follows.
- In general, a recipient who receives a NSO will recognize no income at the
time of the grant of the option.
- Upon exercise of an NSO, a recipient will recognize ordinary income in an
amount equal to the excess of the fair market value of the shares on the
date of exercise over the exercise price of the option. Generally, we will
be entitled to a business expense deduction in the amount and at the time
the recipient recognizes ordinary income.
- The basis in shares acquired upon exercise of an NSO will equal the fair
market value of such shares at the time of exercise, and the holding
period of the shares, for capital gain purposes, will begin on the date of
exercise.
401(K) PLAN
In 1998, we adopted a 401(k) plan covering substantially all of our
employees. Under the plan, eligible employees may elect to reduce their current
compensation and have the amount of the reduction contributed to the plan on the
employee's behalf as salary deferral contributions. Beginning in 1999, we will
make matching contributions to the plan on behalf of our employees in the
amounts equal to 50 percent of the first six percent of an employee's salary
contributed to the plan. We will make the contribution in the form of our common
stock and not in cash. The first contribution will not be made until after
completion of this offering. All contributions to the plan by or on behalf of
employees are subject to aggregate annual limits prescribed by the Internal
Revenue Code.
44
<PAGE>
CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
PURCHASES OF SERIES A PREFERRED STOCK
On May 31, 1998, pursuant to an agreement dated May 13, 1998, Blue Chip
Capital Fund II Limited Partnership; Miami Valley Venture Fund L.P.; Grotech
Partners IV L.P.; Grotech Partners V L.P.; Southern Venture Fund SBIC, L.P.;
Southern Venture Fund II, L.P.; Venrock Associates; and Venrock Associates II,
L.P., a group we refer to as the Initial Series A Purchasers, purchased, in the
aggregate, 38,333.33 shares of Series A Preferred Stock for an aggregate
purchase price of $23.0 million.
In connection with the issuance of the shares to the Initial Series A
Purchasers, we issued 1,666.67 shares of Series A Preferred Stock to Christopher
R. McCleary, in exchange for the cancellation of $1 million of debt that we owed
to Mr. McCleary.
In an agreement dated June 18, 1998, we issued an additional 5,000 shares of
Series A Preferred Stock to certain of the Initial Series A Purchasers for an
aggregate purchase price of $3.0 million.
In an agreement dated June 18, 1998, we issued 5,833.33 shares of Series A
Preferred Stock to U S WEST for $3.5 million.
In agreements dated June 19, 1998, we issued 3,000 shares of Series A
Preferred Stock to HAGC Partners, Chris Horgan, who later transferred his
interest to his affiliate, Southeastern Technology Fund, L.P., and a series of
purchasers represented by Account Management Corporation, a group we refer to as
the Account Management Purchasers, for an aggregate purchase price of $1.8
million and 1,166.67 shares of Series A Preferred Stock to USI Partners, Ltd.
for $700,002.
BRIDGE FINANCINGS AND PURCHASES OF SERIES B PREFERRED STOCK
In agreements dated September 8, 1998, all of the existing holders of Series
A Preferred Stock, other than Southern Venture Fund SBIC, L.P., HAGC Partners,
Christopher McCleary and two of the Account Management Purchasers, purchased our
convertible promissory notes in the aggregate principal amount of $9,095,000,
together with warrants to purchase 974,450 shares of common stock for $.08 per
share. Each note was convertible into preferred stock of USI having an aggregate
fair market value equal to the principal amount of the note. All of the notes
were converted into Series B Convertible Preferred Stock on December 31, 1998.
On December 16, 1998, Blue Chip Capital Fund II, L.P. lent us $1.0 million,
which was repaid with interest, in cash, as of December 31, 1998.
In an agreement dated December 16, 1998, Grotech Partners V L.P.; Southern
Venture Fund II, L.P.; Venrock Associates; Venrock Associates II, L.P.; USI
Partners, Ltd.; and Siebel Systems, Inc. purchased our convertible promissory
notes in the aggregate amount of $8.0 million. The principal amount of these
notes was converted into Series B Preferred Stock on December 31, 1998, as
described below.
In an agreement dated December 29, 1998, U S WEST purchased our convertible
promissory note in the amount of $5.0 million. The principal amount of this note
was converted into Series B Preferred Stock on December 31, 1998, as described
below.
On December 31, 1998, the principal amount of all of our outstanding
convertible promissory notes was converted into Series B Preferred Stock. The
accrued interest on these notes was paid in cash. In addition, the warrants we
issued in connection with the issuance of our convertible promissory notes were
exchanged for otherwise identical warrants having an exercise price of $3.44 per
share.
In an agreement dated December 31, 1998, we issued 59,278.56 shares of
Series B Preferred Stock for an aggregate purchase price of $62,242,500,
$22,095,000 of which was paid by conversion of the
45
<PAGE>
convertible promissory notes identified above, to the holders of the convertible
promissory notes described above and J. H. Whitney III, L.P.; Whitney Strategic
Partners III, L.P.; Waller-Sutton Media Partners, L.P.; Arbor Venture Partners,
L.L.C.; Southeastern Technology Fund, L.P.; PNC Bank, N.A., Trustee; PNC Bank,
N.A., Custodian; AEH Profit Sharing Trust; Castellini Management Company; and
all of the holders of Series A Preferred Stock except Southern Venture Fund
SBIC, L.P.; HAGC Partners; and two of the Account Management Purchasers.
The agreement in which we issued the Series B Preferred Stock includes a
repurchase requirement. In the event that we become an "Affiliate" of U S WEST,
as that term is defined in Section 3(1) of the Communications Act of 1934, and
we are also providing services that an Affiliate of U S WEST would be prohibited
from providing, then U S WEST can require us to purchase, and we can require U S
WEST to sell to us, the minimum number of our shares needed to prevent us from
being deemed an Affiliate of U S WEST. The repurchase price, in either instance,
would be the last reported price on the Nasdaq National Market, or as determined
by the board of directors if we are not publicly traded.
AMENDED AND RESTATED STOCKHOLDERS' AGREEMENT
TERMINATION. The provisions of the Amended and Restated Stockholders'
Agreement, other than those relating to registration rights and the right of the
Whitney Group to designate a director will terminate upon consummation of this
offering.
REGISTRATION RIGHTS. According to the terms of the Amended and Restated
Stockholders' Agreement, the holders of the Preferred Stock together referred to
as the investors, have rights to register shares of our capital stock. At any
time 90 days after the effective date of the first registration statement that
we file under the Securities Act, holders of at least 33% of the Registrable
Securities, as defined in the Stockholders' Agreement, may require us to effect
registration under the Securities Act of their registrable securities, subject
to the board of directors' right to defer the registration for a period of up to
180 days. The investors also have the right to cause us to register their
securities on Form S-3 when it becomes available to us if they propose to
register securities having a value of at least $10 million. In addition, if we
propose to register securities under the Securities Act, other than
registrations on Form S-4 or Form S-8, then any of the investors has a right,
subject to quantity limitations we determine, or determined by underwriters if
this offering involves an underwriting, to request that we register such
holder's registrable securities. We will bear all registration expenses incurred
in connection with registrations. We have agreed to indemnify the investors
against liabilities related to the accuracy of the registration statement used
in connection with any registration effected pursuant to the foregoing.
RESTRICTIONS ON TRANSFER. Subject to certain exceptions, we have a right of
first refusal if any stockholder receives and accepts a bona fide offer to
purchase our securities, as defined in the Stockholders' Agreement, then owned
by such shareholder. In addition, each party to the Stockholders' Agreement has
the right to participate on a pro rata basis in any sale of our securities by
any party to the Stockholders' Agreement. Subject to certain exceptions, upon
our proposed issuance of any common stock or any other equity securities, each
party to the Stockholders' Agreement has the preemptive right to purchase that
number of new securities, as defined in the Shareholders' Agreement, proposed to
be issued to maintain the shareholder's relative proportional equity interest in
USI.
GOVERNANCE PROVISIONS. The Stockholders' Agreement requires that the board
of directors consist of eleven members, six of whom are to be designated by each
of the Blue Chip Group, the Grotech Group, the Venrock Group, the Massey Burch
Group, the Whitney Group and U S WEST; and five of whom, including three persons
who are not our employees and are not affiliated with any of the Blue Chip
Group, the Grotech Group, the Venrock Group, the Massey Burch Group, the Whitney
Group and U S WEST, are designated by Christopher R. McCleary as long as he is
the Chief Executive
46
<PAGE>
Officer of USI. The designation of the three independent directors is subject to
the reasonable consent of the holders of two-thirds of each series of preferred
stock. Siebel Systems, Inc. has the right to designate a director if it so
chooses, in which case McCleary designates only four directors, and Waller-
Sutton Media Partners, L.P. has the right to designate an observer to the board
of directors. The Stockholders' Agreement also requires that the board of
directors have an executive committee that has the right to exercise all powers
of the board of directors to the maximum extent permitted by the Delaware
General Corporation Law and which will consist of at least the Chief Executive
Officer and a person designated by each of the Blue Chip Group, the Grotech
Group, the Venrock Group, the Massey Burch Group, the Whitney Group and U S
WEST. The Stockholders' Agreement also requires that the board of directors have
an audit committee and a compensation committee, each of which will have one
member named by the Whitney Group. The Stockholders' Agreement provides that a
director may be removed only by the person entitled to appoint such director.
IMAP AGREEMENT WITH U S WEST
USI and U S WEST entered into an agreement on January 15, 1999 in which USI
grants to U S WEST a limited, nontransferable, non-exclusive license to use the
IMAP solution. The agreement expires in three years unless terminated earlier in
a manner consistent with the agreement or unless extended by mutual written
agreement. U S WEST will pay USI a total of $4,121,250 in thirty-six monthly
installments for use of the IMAP solution. The agreement contains standard
warranty, limitation of liability and indemnity provisions.
PROPERTY SALE BETWEEN CHRISTOPHER R. MCCLEARY AND USI
On July 21, 1998 Christopher R. McCleary sold USI real property located in
Anne Arundel County, Maryland for a purchase price of $220,000. The property is
used by USI for housing, transferring executives, summer interns and corporate
guests.
LOAN FROM CHRISTOPHER R. MCCLEARY TO USI
In April 1998, Christopher R. McCleary loaned USI $1.0 million pursuant to a
short-term non interest bearing loan. We repayed this loan by issuing 1,666.67
shares of Series A Preferred Stock to Mr. McCleary in May 1998.
IMAP AGREEMENT WITH LATTICE PARTNERS, LTD.
USI and Lattice Partners, Ltd. entered into an agreement on December 14,
1998 in which USI grants Lattice Partners, Ltd. a limited, nontransferable,
non-exclusive license to use the IMAP Solution. The agreement expires in three
years unless terminated earlier in a manner consistent with the agreement or
unless extended by mutual written agreement. Lattice Partners, Ltd. will pay USI
a total of $120,000--an initial payment of $30,000 and $90,000 paid in
thirty-six monthly installments. The agreement contains standard warranty,
limitation of liability and indemnity provisions. R. Dean Meiszer, a member of
our board of directors, is also a director of Lattice Partners, Ltd.
47
<PAGE>
PRINCIPAL STOCKHOLDERS
The table below sets forth, as of January 15, 1999, information with respect
to the beneficial ownership of our common stock as adjusted to reflect the
consummation of this offering by (1) each person who we know to be the
beneficial owner of more than 5% of our outstanding common stock; (2) each of
the directors and Named Executive Officers individually; and (3) all directors
and executive officers as a group. Except as otherwise indicated, each of the
stockholders has sole voting and investment power with respect to the shares
beneficially owned. The address of each executive officer and director is c/o
USINTERNETWORKING, Inc. One USI Plaza, Annapolis, MD 21401-7478.
<TABLE>
<CAPTION>
PERCENTAGE OF
OWNERSHIP(1)(2)
NUMBER OF SHARES --------------------------
NAMED EXECUTIVE OFFICERS BENEFICIALLY BEFORE THIS AFTER THIS
AND DIRECTORS OWNED(1)(2) OFFERING OFFERING
- ------------------------------------------------------------------ ---------------------- ------------- -----------
<S> <C> <C> <C>
Christopher R. McCleary(3)........................................ 1,297,618 3.95% 3.43%
Stephen E. McManus................................................ 625,000 1.90 1.65
Andrew A. Stern................................................... 625,000 1.90 1.65
Jeffery L. McKnight(4)............................................ 375,000 1.13 *
DIRECTOR
R. Dean Meiszer(5)................................................ 470,981 1.43 1.24
Ray A. Rothrock(6)................................................ 2,674,224 8.10 7.04
Frank A. Adams(7)................................................. 8,348,985 25.07 21.80
William F. Earthman(8)............................................ 1,412,676 4.30 3.73
John H. Wyant(9).................................................. 3,813,269 11.33 10.01
Benjamin Diesbach(10)............................................. 3,750 * *
David J. Poulin(11)............................................... 3,750 * *
Michael C. Brooks(12)............................................. 5,952,381 18.11 15.72
Joseph Zell(13)................................................... 3,750 * *
All Executive Officers and Directors as a group (14 persons)...... 28,866,502 84.27 73.53
BENEFICIAL OWNERS OF 5% OR MORE OF THE OUTSTANDING COMMON STOCK OF
USI
Blue Chip Group(14)............................................... 3,809,519 11.52 10.00
c/o Blue Chip Venture Company, Ltd.
2000 PNC Center
201 East Fifth Street
Cincinnati, Ohio 45202
Grotech Capital Group(15)......................................... 8,345,235 25.06 21.79
9690 Deereco Road, Suite 800
Timonium, Maryland 21093
Venrock Group(16)................................................. 2,670,474 8.09 7.03
c/o Venrock Associates
Room 5506
30 Rockefeller Plaza
New York, New York 10112
Whitney Group(17)................................................. 5,952,381 18.11 15.72
c/o J.H. Whitney & Co.
177 Broad Street
Stamford, CT 06901
U S WEST Communications, Inc.(18)................................. 3,185,118 9.66 8.39
1801 California Street
Denver, Colorado 80202
</TABLE>
- ------------------------
* less than one percent
(1) Beneficial ownership is determined in accordance with the rules of the
Securities and Exchange Commission. Except where community property laws
apply or as indicated in the footnotes of this
48
<PAGE>
table, to our knowledge, each stockholder identified in the table possesses
sole voting and investment power with respect to all shares of common stock
shown as beneficially owned by the stockholder. The number of shares
beneficially owned by a person includes shares of common stock subject to
options and warrants held by that person that are currently exercisable
within 60 days of January 15, 1999. Shares issuable pursuant to options and
warrants are deemed outstanding for computing the percentage ownership of
the person holding the options and warrants but are not deemed outstanding
for the purposes of computing the percentage ownership of any other person.
(2) For purposes of this table, the number of shares of common stock outstanding
prior to this offering is deemed to be 32,868,276. This number includes
1,968,750 shares of common stock outstanding on January 15, 1999 and an
additional 30,899,526 shares issuable upon conversion of our preferred
stock. For purposes of calculating the percentage beneficially owned by any
person, shares of common stock issuable to such person upon the exercise of
any options exercisable within 60 days of January 15, 1999 are also assumed
to be outstanding. The number of shares of common stock deemed outstanding
after this offering includes the additional underwriters' over-allotment
option.
(3) Includes 297,168 shares of common stock held by the McCleary Children's
Trust of which Christopher McCleary is trustee.
(4) Includes options to purchase 375,000 shares of common stock exercisable
within 60 days of January 15, 1999.
(5) Includes 467,231 shares of common stock owned by USI Partners, Ltd. Mr.
Meiszer is a general partner of USI Partners, Ltd. Mr. Meiszer disclaims
beneficial ownership in the common stock except to the extent of his general
partner interest in USI Partners, Ltd. Also includes options to purchase
3,750 shares of common stock and warrants to purchase 15,000 shares of
common stock each exercisable within 60 days of January 15, 1999.
(6) Includes 1,158,259 shares of common stock owned by Venrock Associates and
162,210 shares of common stock owned by Venrock Associates II, L.P. Mr.
Rothrock is a general partner of Venrock Associates and Venrock Associates
II, L.P. and as such shares voting and investment power with other general
partners. Mr. Rothrock disclaims beneficial ownership in the common stock
except to the extent of his general partner interests in Venrock Associates
and Venrock Associates II, L.P. Also includes options to purchase 3,750
shares of common stock and warrants to purchase 131,785 shares of common
stock each exercisable within 60 days of January 15, 1999.
(7) Includes 2,982,125 shares of common stock owned by Grotech Partners IV, L.P.
and 5,363,063 shares of common stock owned by Grotech Partners V L.P. Mr.
Adams is a member of the general partner of Grotech Partners IV L.P. and
Grotech Partners V, L.P. and as such shares voting and investment power with
other members of the general partner. Mr. Adams disclaims beneficial
ownership of the shares owned by Grotech Partners IV L.P. and Grotech
Partners V L.P. Also includes options to purchase 3,750 shares of common
stock and warrants to purchase 428,570 shares of common stock each
exercisable within 60 days of January 15, 1999.
(8) Includes 750,000 shares of common stock owned by Southern Venture Fund SBIC,
L.P. and 658,924 shares of common stock owned by Southern Venture Fund II,
L.P. Mr. Earthman is a general partner of both Southern Venture Fund SBIC,
L.P. and Southern Venture Fund II, L.P. and as such shares voting and
investment power. Mr. Earthman disclaims beneficial ownership in the shares
owned by Southern Venture Fund SBIC, L.P. and Southern Venture Fund II,
L.P., except to the extent of his interests in the general partnerships of
Southern Venture Fund SBIC, L.P. and Southern Venture Fund II, L.P. Also
includes options to purchase 3,750 shares of common stock and warrants to
purchase 16,071 shares of common stock each exercisable within 60 days of
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<PAGE>
January 15, 1999. Southern Venture Fund SBIC, L.P. and Southern Venture Fund
II, L.P. are part of an affiliated group of investment partnerships and are
collectively referred to as the Massey Burch Group.
(9) Includes 3,238,089 shares of common stock owned by Blue Chip Capital Fund II
Limited Partnership and 571,427 shares of common stock owned by Miami Valley
Venture Fund L.P. Mr. Wyant is the founder and president of Blue Chip
Venture Co., which manages both Blue Chip Capital Fund II Limited
Partnership and Miami Valley Venture Fund L.P. Mr. Wyant disclaims
beneficial ownership of the shares owned by Blue Chip Capital Fund II
Limited Partnership and Miami Valley Venture Fund L.P. Also includes options
to purchase 3,750 shares of common stock or warrants to purchase 214,284
shares of common stock each exercisable within 60 days of January 15, 1999.
(10) Includes options to purchase 3,750 shares of common stock exercisable
within 60 days of January 15, 1999.
(11) Includes options to purchase 3,750 shares of common stock exercisable
within 60 days of January 15, 1999.
(12) Includes 5,812,268 shares of common stock owned by J.H. Whitney III, L.P.
and 140,056 shares of common stock owned by Whitney Strategic Partners III,
L.P. Mr. Brooks is a general partner of J.H. Whitney & Co. and a Managing
Member of J.H. Whitney Equity Partners III, L.L.C. which is the general
partner of J.H. Whitney III, L.P. and Whitney Strategic Partners III, L.P.
Mr. Brooks disclaims beneficial ownership of the shares owned by J.H.
Whitney III, L.P and Whitney Strategic Partners III, L.P.
(13) Includes options to purchase 3,750 shares of common stock exercisable
within 60 days of January 15, 1999. U S West policy prevents Mr. Zell from
exercising these options for his own benefit. Mr. Zell may transfer these
options to U S West under the terms of our option plan. U S West can then
exercise the options for its own benefit.
(14) Includes 3,238,089 shares of common stock owned by Blue Chip Capital Fund
II Limited Partnership and 571,429 shares of common stock owned by Miami
Valley Venture Fund, L.P. Blue Chip Capital Fund II Limited Partnership and
Miami Valley Venture Fund, L.P. are part of an affiliated group of
investment partnerships commonly controlled by Blue Chip Venture Company and
are collectively referred to as the Blue Chip Group. Also includes warrants
to purchase 214,284 shares of common stock exercisable within 60 days of
January 15, 1999.
(15) Includes 2,982,135 shares of common stock owned by Grotech Partners IV,
L.P. and 5,363,063 shares of Common Stock owned by Grotech Partners V, L.P.,
Grotech Partners IV, L.P. and Grotech Partners V, L.P. are part of an
affiliated group of investment partnerships commonly controlled by Grotech
Capital Group and are collectively referred to as the Grotech Capital Group.
Also includes warrants to purchase 428,570 shares of common stock
exercisable within 60 days of January 15, 1999.
(16) Includes 1,158,259 shares of common stock owned by Venrock Associates and
162,210 shares of common stock owned by Venrock Associates II, L.P., Venrock
Associates and Venrock Associates II, L.P. are affiliated entities
collectively referred to as the Venrock Group. Also includes warrants to
purchase 131,785 shares of common stock within 60 days of January 15, 1999.
(17) Includes 5,812,265 shares of common stock owned by J.H. Whitney III, L.P.
and 140,056 shares of common stock owned by Whitney Strategic Partners III,
L.P., J.H. Whitney III, L.P and Whitney Strategic Partners III, L.P. are
affiliated entities collectively referred to as the Whitney Group. Also
includes warrants to purchase 101,785 shares of common stock within 60 days
of January 15, 1999.
(18) Includes warrants to purchase 101,785 shares of common stock exercisable
within 60 days of January 15, 1999.
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DESCRIPTION OF CAPITAL STOCK
The following description of our capital stock is only a summary and is
qualified in its entirety by reference to the actual terms and provisions of the
capital stock contained in our Second Amended and Restated Certificate of
Incorporation which will become effective immediately prior to the consummation
of this offering and our bylaws, as they will be amended at the same time.
Our certificate of incorporation will authorize 75,000,000 shares of common
stock, par value $.001 per share and 1,000,000 shares of preferred stock, par
value $.001 per share, the rights and preferences of which may be designated by
the board of directors. As of the date of this prospectus there will be
37,868,276 shares of common stock issued and outstanding.
COMMON STOCK
Holders of common stock are entitled to one vote for each share held on all
matters submitted to a vote of 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 common stock are entitled to receive ratably
such dividends, if any, as may be declared by the board of directors out of
funds legally available therefor, subject to any preferential dividend rights of
outstanding preferred stock. Upon the liquidation, dissolution or winding up of
USI, the holders of common stock are entitled to receive ratably the net assets
of USI available after the payment of all debts and other liabilities and
subject to the prior rights of any outstanding preferred stock. Holders of the
common stock have no preemptive, subscription, redemption or conversion rights.
The outstanding shares of common stock are, and the shares that we offer in this
offering will be, when issued and paid for, validly issued, fully paid and
nonassessable. The rights, preferences and privileges of holders of common stock
are subject to, and may be adversely affected by, the rights of the holders of
shares of any series of preferred stock which we may designate and issue in the
future. Upon the closing of this offering, there will be no shares of preferred
stock outstanding.
PREFERRED STOCK
The board of directors is authorized, subject to certain limitations
prescribed by law, without further stockholder approval, to issue from time to
time up to an aggregate of 1,000,000 shares of preferred stock in one or more
series and to fix or alter the designations, preferences, rights and any
qualifications, limitations or restrictions of the shares of each such series
thereof, including the dividend rights, dividend rates, conversion rights,
voting rights, terms of redemption, including sinking fund provisions,
redemption price or prices, liquidation preferences and the number of shares
constituting any series or designations of such series. The issuance of
preferred stock may have the effect of delaying, deferring or preventing a
change of control of USI. We have no present plans to issue any shares of
preferred stock.
WARRANTS
At January 15, 1999, there were warrants outstanding to purchase a total of
1,482,648 shares of common stock. Warrants to purchase 974,450 shares at $3.44
per share will expire in September 2008, warrants to purchase 112,500 shares at
$16.00 per share will expire in September and October 2008, warrants to purchase
92,261 shares at $3.36 per share will expire in September 2005, and warrants to
purchase 303,437 shares at $3.36 per share will expire in June 2004.
REGISTRATION RIGHTS
The holders of 30,899,526 shares of common stock issued upon conversion of
the Series A Preferred Stock and Series B Preferred Stock and 974,450 shares of
common stock issuable upon the exercise of warrants to purchase common stock are
entitled to rights with respect to registration of such shares under the
Securities Act described at "Certain Relationship and Related Transactions--
Amended and Restated Stockholder Agreement." The holders of warrants to purchase
433,794 shares of common stock are entitled to rights with respect to
registration of such shares under the Securities
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Act. Under these registration rights, in the event we elect to register any of
our shares of common stock for purposes of effecting any public offering after
the completion of the offering described in this prospectus, the holders of the
warrants or the shares issued upon exercise of the warrants are entitled to
include their shares of common stock in the registration, subject however to the
right of USI or the underwriters of the proposed offering, if any, to reduce the
number of shares proposed to be registered in view of market conditions. All
expenses in connection with any registration other than underwriting discounts
and commissions will be borne by USI.
CERTAIN ANTI-TAKEOVER, LIMITED LIABILITY AND INDEMNIFICATION PROVISIONS
As noted above, our board of directors, without stockholder approval, will
have the authority under our certificate of incorporation to issue preferred
stock with rights superior to the rights of the holders of common stock. As a
result, preferred stock could be issued quickly and easily, could adversely
affect the rights of holders of common stock and could be issued with terms
calculated to delay or prevent a change of control of USI or make removal of
management more difficult.
ELECTION AND REMOVAL OF DIRECTORS. The certificate and bylaws will provide
for the division of our board of directors into three classes, as nearly equal
in number as possible, with the directors in each class serving for a three-year
term, and one class being elected each year by our stockholders. Directors may
be removed only for cause. This system of electing and removing directors may
tend to discourage a third party from making a tender offer or otherwise
attempting to obtain control of USI and may maintain the incumbency of the board
of directors, as it generally makes it more difficult for stockholders to
replace a majority of directors.
STOCKHOLDER MEETINGS. Our bylaws will provide that the stockholders may not
call a special meeting of the stockholders of USI. Rather, only the board of
directors, the chairman of the board or the president will be able to call
special meetings of stockholders.
REQUIREMENTS FOR ADVANCE NOTIFICATION OF STOCKHOLDER NOMINATIONS AND
PROPOSALS. Our bylaws will establish advance notice procedures with respect to
stockholder proposals and the nomination of candidates for election as
directors, other than nominations made by or at the direction of the board of
directors or one of its committees.
DELAWARE ANTI-TAKEOVER LAW. We are a Delaware corporation subject to
Section 203 of the Delaware General Corporation Law. Under Section 203, certain
"business combinations" between a Delaware corporation whose stock generally is
publicly traded or held of record by more than 2,000 stockholders and an
"interested stockholder" are prohibited for a three-year period following the
date that such stockholder became an interested stockholder, unless:
- The corporation has elected in its certificate of incorporation not to be
governed by Section 203. We have not made such an election,
- The business combination or the transaction which resulted in the
stockholder becoming an interested stockholder was approved by the board
of directors of the corporation before such stockholder became an
interested stockholder,
- Upon consummation of the transaction that made such stockholder an
interested stockholder, the interested stockholder owned at least 85% of
the voting stock of the corporation outstanding at the commencement of the
transaction excluding voting stock owned by directors who are also
officers or held in employee benefit plans in which the employees do not
have a confidential right to tender stock held by the plan in a tender or
exchange offer, or
- The business combination is approved by the board of directors of the
corporation and authorized at a meeting by two-thirds of the voting stock
which the interested stockholder did not own.
The three-year prohibition also does not apply to some business combinations
proposed by an interested stockholder following the announcement or notification
of an extraordinary transaction involving the corporation and a person who had
not been an interested stockholder during the previous
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three years or who became an interested stockholder with the approval of a
majority of the corporation's directors. The term "business combination" is
defined generally to include mergers or consolidations between a Delaware
corporation and an interested stockholder, transactions with an interested
stockholder involving the assets or stock of the corporation or its
majority-owned subsidiaries, and transactions which increase an interested
stockholder's percentage ownership of stock. The term "interested stockholder"
is defined generally as those stockholders who become beneficial owners of 15%
or more of a Delaware corporation's voting stock, together with the affiliates
or associates of that stockholder.
LIMITATION OF OFFICER AND DIRECTOR LIABILITY AND INDEMNIFICATION
ARRANGEMENTS. Our certificate limits the liability of our directors to the
maximum extent permitted by Delaware law. Delaware law provides that directors
will not be personally liable for monetary damages for breach of their fiduciary
duties as directors, except liability for:
- any breach of their duty of loyalty to the corporation or its
stockholders,
- acts or omissions not in good faith or which involve intentional
misconduct or a knowing violation of law,
- unlawful payments of dividends or unlawful stock repurchases or
redemptions, or
- any transaction from which the director derived an improper personal
benefit.
This charter provision has no effect on any non-monetary remedies that may be
available to us or our stockholders, nor does it relieve us or our officers or
directors from compliance with federal or state securities laws. The certificate
also generally provides that we shall indemnify, to the fullest extent permitted
by law, any person who was or is a party or is threatened to be made a party to
any threatened, pending or completed action, suit, investigation, administrative
hearing or any other proceeding by reason of the fact that he is or was a
director or officer of ours, or is or was serving at our request as a director,
officer, employee or agent of another entity, against expenses incurred by him
in connection with such proceeding. An officer or director shall not be entitled
to indemnification by us if:
- The officer or director did not act in good faith and in a manner
reasonably believed to be in, or not opposed to, our best interests, or
- With respect to any criminal action or proceeding, the officer or director
had reasonable cause to believe his conduct was unlawful.
These charter and bylaw provisions and provisions of Delaware law may have
the effect of delaying, deterring or preventing a change of control of USI.
TRANSFER AGENT AND REGISTRAR
American Stock Transfer & Trust Company will be the transfer agent and
registrar for the common stock.
SHARES ELIGIBLE FOR FUTURE SALE
Upon the consummation of this offering, USI will have 37,868,276 shares of
common stock outstanding assuming no exercise of the underwriters'
over-allotment option. All of the shares of common stock sold in this offering
will be freely tradeable under the Securities Act, unless purchased by our
"affiliates," as the Securities Act defines that term. Upon the expiration of
lock-up agreements among USI, certain of our stockholders, our executive
officers and directors and the underwriters, which will occur 180 days after the
date of this prospectus and exercise of all options granted under the Stock
Option Plan, 16,025,973 shares of common stock will become eligible for sale,
subject to compliance with Rule 144 or Rule 701 of the Securities Act as
described below.
In general, under Rule 144, a person, or persons whose shares are
aggregated, who has beneficially owned common stock for at least one year will
be entitled to sell in any three-month period a number of shares that does not
exceed the greater of:
- One percent of the number of shares of common stock then outstanding, or
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- The average weekly trading volume of the common stock on the Nasdaq
National Market during the four calendar weeks immediately preceding the
date on which the notice of sale is filed with the Securities and Exchange
Commission.
Sales under Rule 144 are subject to certain requirements relating to manner
of sale, notice and availability of current public information about USI. A
person, or persons whose shares are aggregated, who is not deemed to have been
our affiliate at any time during the three months immediately preceding the sale
and who has beneficially owned "Restricted Shares," as defined in Rule 144, for
at least two years is entitled to sell the shares pursuant to Rule 144(k)
without regard to the limitations and requirements described above.
Rule 701 permits resales of shares in reliance upon Rule 144 but without
compliance with certain restrictions, including the holding period requirement,
of Rule 144. Any employee, officer or director of USI who purchased shares
pursuant to a written compensatory plan or contract may be entitled to rely on
the resale provisions of Rule 701. Rule 701 permits affiliates to sell their
Rule 701 shares under Rule 144 without complying with the holding period
requirements of Rule 144. Rule 701 further provides that non-affiliates may sell
such shares in reliance on Rule 144 without having to comply with the holding
period, public information, volume limitation or notice provisions of Rule 144.
All holders of Rule 701 shares who have not executed lock-up agreements in
connection with this offering will be able to sell such shares beginning 90 days
after the date of this prospectus.
Some of our stockholders and our executive officers and directors will agree
with the underwriters that until 180 days after the date of this prospectus,
they will not offer, sell, contract to sell, announce their intention to sell,
pledge or otherwise dispose of, directly or indirectly, or file with the
Securities and Exchange Commission a registration statement under the Securities
Act relating to, any additional shares of common stock or securities convertible
or exchangeable or exercisable for any shares of our common stock, without the
prior written consent of Credit Suisse First Boston Corporation, subject to
certain exceptions. We will also agree that we will not offer, sell, contract to
sell, announce our intention to sell, pledge or otherwise dispose of, directly
or indirectly, or file with the Securities and Exchange Commission a
registration statement under the Securities Act relating to, any additional
shares of common stock or securities convertible or exchangeable or exercisable
for any shares of our common stock for a period of 180 days after the date of
this prospectus, without the prior written consent of Credit Suisse First Boston
Corporation, subject to certain limited exceptions, including issuance by us
pursuant to the conversion of all the outstanding shares of Series A Preferred
Stock and Series B Preferred Stock or the exercise of employee stock options
outstanding on the date of this prospectus. The lock-up agreements may be
released at any time as to all or any portion of the shares subject to such
agreements at the sole discretion of Credit Suisse First Boston Corporation. See
"Risk Factors--Shares Eligible for Future Sale."
Some of our stockholders have rights to require us to register shares of
common stock that they hold. See "Certain Relationships and Related
Transactions--Amended and Restated Stockholders' Agreement."
UNDERWRITING
Under the terms and subject to the conditions contained in an underwriting
agreement dated , 1999, the underwriters named below, for whom
Credit Suisse First Boston Corporation, Bear, Stearns & Co. Inc., BT Alex. Brown
Incorporated and Legg Mason Wood Walker Incorporated,
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are acting as representatives, have severally but not jointly agreed to purchase
from us the following respective numbers of shares of common stock:
<TABLE>
<CAPTION>
UNDERWRITERS NUMBER OF SHARES
-----------------
<S> <C>
Credit Suisse First Boston Corporation.....................................
Bear, Stearns & Co. Inc....................................................
BT Alex. Brown Incorporated................................................
Legg Mason Wood Walker Incorporated........................................
-----------------
Total.................................................................. 5,000,000
-----------------
-----------------
</TABLE>
The underwriting agreement provides that the obligations of the underwriters
are subject to certain conditions and that they will be obligated to purchase
all the shares of common stock offered hereby if any are purchased (other than
those shares covered by the over-allotment option described below). The
underwriting agreement provides that, in the event of a default, in certain
circumstances, the purchase commitments may be increased or the underwriting
agreement may be terminated.
We have granted to the underwriters a 30-day option to purchase, on a pro
rata basis, up to 750,000 additional shares of common stock at the initial
public offering price, less the underwriting discounts and commissions. This
option may be exercised only to cover over-allotments.
The underwriters will offer the common stock initially at the public
offering price on the cover page of this prospectus and to certain dealers at
such price less a concession of $ per share. The underwriters and such
dealers may allow a discount of $ per share on sales to certain other
dealers. After the initial public offering, the public offering price and
concession and discount may be changed by the representatives.
The following table summarizes the compensation that we will pay the
underwriters and the expenses we will pay:
<TABLE>
<CAPTION>
TOTAL
------------------------------
<S> <C> <C> <C>
WITHOUT WITH
PER SHARE OVER-ALLOTMENT OVER-ALLOTMENT
----------- -------------- --------------
Underwriting discounts and commissions paid by USI.................... $ $ $
Expenses payable by USI............................................... $ $ $
</TABLE>
The representatives have informed us that they do not expect discretionary
sales by the underwriters to exceed 5% of the shares now offered.
USI, our officers and directors and certain other stockholders will agree
that they will not offer, sell, contract to sell, announce their intention to
sell, pledge or otherwise dispose of, directly or indirectly, or file with the
Commission a registration statement under the Securities Act relating to, any
additional shares of common stock or securities convertible into or exchangeable
or exercisable for any shares of our common stock without the prior written
consent of Credit Suisse First Boston Corporation for a period of 180 days after
the date of this prospectus, except in the case of issuances by us pursuant to
the conversion of all the outstanding shares of Series A Preferred Stock and
Series B Preferred Stock, the grant of additional employee stock options or the
exercise of employee stock options outstanding on the date of this prospectus.
We have reserved for purchase from the underwriters up to shares of
common stock which employees and friends of ours may purchase through a directed
share program. Such sales will be at the initial public offering price. The
number of shares of common stock available to the general public will be reduced
to the extent these persons purchase the reserved shares.
We have agreed to indemnify the underwriters against certain liabilities,
including civil liabilities under the Securities Act, or to contribute to
payments which the underwriters may be required to make in connection with civil
liabilities under the Securities Act.
We have applied to list the shares of common stock on The Nasdaq National
Market under the symbol "USIX."
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Before this offering, there has been no public market for the common stock.
The initial public offering price will be determined by negotiation between USI
and the representatives. The principal factors to be considered in determining
the public offering price include:
- the information set forth in this prospectus and otherwise available to
the representatives;
- the history and the prospects for the industry in which we will compete;
the ability of our management;
- our prospects for future earnings;
- the present state of our development and our current financial condition;
- the general condition of the securities markets at the time of this
offering;
- and the recent market prices of, and the demand for, publicly traded
common stock of generally comparable companies.
The representatives, on behalf of the underwriters, may engage in
over-allotment, stabilizing transactions, syndicate covering transactions and
penalty bids in accordance with Regulation M under the Exchange Act.
Over-allotment involves syndicate sales in excess of this offering size, which
creates a syndicate short position. Stabilizing transactions permit bids to
purchase the underlying security so long as the stabilizing bids do not exceed a
specified maximum. Syndicate covering transactions involve purchases of the
securities in the open market after the distribution has been completed in order
to cover syndicate short positions. Penalty bids permit the representatives to
reclaim a selling concession from a syndicate member when the securities
originally sold by such syndicate members are purchased in a syndicate covering
transaction to cover syndicate short positions. Such stabilizing transactions,
syndicate covering transactions and penalty bids may cause the price of the
common stock to be higher than it would otherwise be in the absence of such
transactions. These transactions may be effected on The Nasdaq National Market
or otherwise and, if commenced, may be discontinued at any time.
BT Alex. Brown Incorporated has from time to time provided investment
banking services to us for which it has received customary fees. Legg Mason Wood
Walker Incorporated is an IMAP client of USI.
NOTICE TO CANADIAN RESIDENTS
RESALE RESTRICTIONS
The distribution of the common stock in Canada is being made only on a
private placement basis exempt from the requirement that USI prepare and file a
prospectus with the securities regulatory authorities in each province where
trades of common stock are effected. Accordingly, any resale of the common stock
in Canada must be made in accordance with applicable securities laws which will
vary depending on the relevant jurisdiction, and which may require resales to be
made in accordance with available statutory exemptions or pursuant to a
discretionary exemption granted by the applicable Canadian securities regulatory
authority. Purchasers are advised to seek legal advice prior to any resale of
the Common Stock.
REPRESENTATIONS OF PURCHASERS
Each purchaser of common stock in Canada who receives a purchase
confirmation will be deemed to represent to USI and the dealer from whom such
purchase confirmation is received that (1) such purchaser is entitled under
applicable provincial securities laws to purchase such common stock without the
benefit of a prospectus qualified under such securities laws, (2) where required
by law, that such purchaser is purchasing as principal and not as agent, and (3)
such purchaser has reviewed the text above under "Resale Restrictions".
RIGHTS OF ACTION (ONTARIO PURCHASERS)
The securities being offered are those of a foreign issuer and Ontario
purchasers will not receive the contractual right of action prescribed by
section 32 of the Regulation under the SECURITIES ACT (Ontario). As a result,
Ontario purchasers must rely on other remedies that may be available, including
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common law rights of action for damages or recession or rights of action under
the civil liability provisions of the U.S. federal securities law.
ENFORCEMENT OF LEGAL RIGHTS
All of the issuer's directors and officers as well as the experts named
herein may be located outside of Canada and, as a result, it may not be possible
for Canadian purchasers to effect service of process within Canada upon the
issuer or such persons. All or a substantial portion of the assets of the issuer
and such persons may be located outside of Canada and, as a result, it may not
be possible to satisfy a judgment against the issuer or such persons in Canada
or to enforce a judgment obtained in Canadian courts against such issuer or
persons outside of Canada.
NOTICE TO BRITISH COLUMBIA RESIDENTS
A purchaser of common stock to whom the SECURITIES ACT (British Columbia)
applies is advised that such purchaser is required to file with the British
Columbia Securities Commission a report within ten days of the sale of any
common stock acquired by such purchaser pursuant to this offering. Such report
must be in the form attached to British Columbia Securities Commission Blanket
Order BOR #95/17, a copy of which may be obtained from USI. Only one such report
must be filed in respect of common stock acquired on the same date and under the
same prospectus exemption.
TAXATION AND ELIGIBILITY FOR INVESTMENT
Canadian purchasers of common stock should consult their own legal and tax
advisors with respect to the tax consequences of an investment in the common
stock in their particular circumstances and with respect to the eligibility of
the common stock for investment by the purchaser under relevant Canadian
Legislation.
LEGAL MATTERS
The validity of the issuance of the common stock being offered hereby will
be passed upon for USI by Latham & Watkins, Washington, D.C. and, for the
underwriters, by Cahill Gordon & Reindel, a partnership including a professional
corporation, New York, New York.
EXPERTS
The consolidated financial statements of USINTERNETWORKING, Inc. at December
31, 1998 and for the period from January 14, 1998 (date of inception) through
December 31, 1998, appearing in this prospectus and registration statement have
been audited by Ernst & Young LLP, independent auditors, as set forth in their
report thereon appearing elsewhere in this prospectus and registration
statement, and are included in reliance upon the report given upon the authority
of Ernst & Young LLP as experts in accounting and auditing.
The combined financial statements of International Information Technology,
Inc. and International Information Technology IIT, C.A. at December 31, 1997 and
1996, and for each of the two years in the period ended December 31, 1997,
appearing in this prospectus and registration statement have been audited by
Ernst & Young LLP, independent auditors, as set forth in their report on these
statements appearing elsewhere in this prospectus and registration statement
which, as to the years 1997 and 1996, are based in part on the report of Bassan
& Associates S.C., independent auditors. The combined financial statements
referred to above are included in reliance upon the reports given upon the
authority of the named firms as experts in accounting and auditing.
The combined financial statements of ACR as of December 31, 1997 and 1996
and for the years then ended, included in this prospectus have been audited by
Mahoney Cohen & Company, CPA, P.C., independent auditors, as stated in their
report appearing in this prospectus and registration statement.
WHERE YOU CAN FIND MORE INFORMATION
We have filed with the Securities and Exchange Commission, Washington, D.C.,
20549, a registration statement on Form S-1 under the Securities Act of 1933, as
amended, with respect to the common
57
<PAGE>
stock offered under this prospectus. This prospectus does not contain all of the
information contained in the registration statement and the exhibits and
schedules to the registration statement. Some items are omitted in accordance
with the rules and regulations of the Securities and Exchange Commission. For
further information about USI and the common stock offered under this
prospectus, you should review the registration statement and the exhibits and
schedules filed as a part of the registration statement. Descriptions of
contracts or other documents referred to in this prospectus are not necessarily
complete. If the contract or document is filed as an exhibit to the registration
statement, you should review that contract or document. You should be aware that
when we discuss these contracts or documents in the prospectus we are assuming
that you will read the exhibits to the registration statement for a more
complete understanding of the contract or document. The registration statement
and its exhibits and schedules may be inspected without charge at the public
reference facilities maintained by the Securities and Exchange Commission in
Room 1024, 450 Fifth Street, N.W., Washington, D.C., 20549, and the Securities
and Exchange Commission's regional offices located at 500 West Madison Street,
Suite 1400, Chicago, Illinois, 60661 and Seven World Trade Center, 13th Floor,
New York, New York, 10048. Copies may be obtained from the Securities and
Exchange Commission after payment of fees prescribed by the Securities and
Exchange Commission. The Securities and Exchange Commission also maintains a web
site that contains reports, proxy and information statements and other
information regarding registrants, including us, that file electronically with
the Securities and Exchange Commission. The address of this web site is
http://www.sec.gov. You may also contact the Securities and Exchange Commission
by telephone at (800) 732-0330.
58
<PAGE>
INDEX TO FINANCIAL STATEMENTS
<TABLE>
<S> <C>
CONSOLIDATED FINANCIAL STATEMENTS OF USINTERNETWORKING, INC.
Report of Independent Auditors..................................................... F-2
Consolidated Balance Sheet as of December 31, 1998................................. F-3
Consolidated Statement of Operations for the period January 14, 1998 (date of
inception) through December 31, 1998............................................. F-4
Consolidated Statement of Stockholders' Equity (Deficit) for the period January 14,
1998 (date of inception) through December 31, 1998............................... F-5
Consolidated Statement of Cash Flows for the period January 14, 1998 (date of
inception) through December 31, 1998............................................. F-6
Notes to Consolidated Financial Statements......................................... F-7
FINANCIAL STATEMENTS OF ADVANCED COMMUNICATION RESOURCES, INC.
Independent Auditor's Report....................................................... F-23
Balance Sheets as of December 31, 1997 and 1996 and September 30, 1998
(unaudited)...................................................................... F-24
Statements of Operations for the years ended December 31, 1997 and 1996 and for the
nine months ended September 30, 1998 (unaudited)................................. F-25
Statements of Stockholders' Equity for the years ended December 31, 1997 and 1996
and for the nine months ended September 30, 1998 (unaudited)..................... F-26
Statements of Cash Flows for the years ended December 31, 1997 and 1996 and for the
nine months ended September 30, 1998 (unaudited)................................. F-27
Notes to Financial Statements...................................................... F-28
CONSOLIDATED FINANCIAL STATEMENTS OF I.I.T. HOLDING, INC. AND SUBSIDIARIES
Report of Independent Auditors..................................................... F-34
Consolidated Balance Sheets as of December 31, 1997 and 1996 and as of June 30,
1998 (unaudited)................................................................. F-35
Conslidated Statements of Operations for the years ended December 31, 1997 and 1996
and for the six months ended June 30, 1997 and 1998 (unaudited).................. F-36
Consolidated Statements of Stockholders' Equity for the years ended December 31,
1997 and 1996 and for the six months ended June 30, 1998 (unaudited)............. F-37
Consolidated Statements of Cash Flows for the years ended December 31, 1997 and
1996 and for the six months ended June 30, 1997 and 1998 (unaudited)............. F-38
Notes to Combined Financial Statements............................................. F-39
UNAUDITED PRO FORMA CONSOLIDATED STATEMENT OF OPERATIONS FOR THE TWELVE MONTHS
ENDED DECEMBER 31, 1998.......................................................... P-1
</TABLE>
F-1
<PAGE>
REPORT OF INDEPENDENT AUDITORS
The Board of Directors and Stockholders
USINTERNETWORKING, Inc.
We have audited the accompanying consolidated balance sheet of
USINTERNETWORKING, Inc. ("the Company") as of December 31, 1998, and the related
consolidated statements of operations, stockholders' equity (deficit) and cash
flows for the period January 14, 1998 (date of 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 consolidated financial statements referred to above present
fairly, in all material respects, the consolidated financial position of
USINTERNETWORKING, Inc. as of December 31, 1998, and the consolidated results of
its operations and its cash flows for the period January 14, 1998 (date of
inception) through December 31, 1998, in conformity with generally accepted
accounting principles.
Ernst & Young LLP
Baltimore, Maryland
January 22, 1999, except as to Note 21,
as to which the date is February 26, 1999
The foregoing report is in the form that will be signed upon the completion of
the restatement of capital accounts described in Note 21 to the consolidated
financial statements.
/s/ Ernst & Young LLP
Baltimore, Maryland
February 26, 1999
F-2
<PAGE>
USINTERNETWORKING, INC.
CONSOLIDATED BALANCE SHEET
DECEMBER 31, 1998
<TABLE>
<CAPTION>
ACTUAL PRO FORMA
-------------- --------------
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents...................................................... $ 43,802,465 $ 43,802,465
Restricted cash................................................................ 581,712 581,712
Accounts receivable, less allowance of $142,000................................ 2,882,119 2,882,119
Prepaid expenses and other current assets...................................... 2,436,247 2,436,247
-------------- --------------
Total current assets............................................................. 49,702,543 49,702,543
Software licenses................................................................ 9,596,760 9,596,760
Property and equipment, net of accumulated depreciation of $1,567,885............ 21,640,145 21,640,145
Goodwill, net of accumulated amortization of $601,667............................ 26,147,392 26,147,392
Other assets..................................................................... 439,734 439,734
-------------- --------------
Total assets..................................................................... $ 107,526,574 $ 107,526,574
-------------- --------------
-------------- --------------
LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT)
Current liabilities:
Accounts payable............................................................... $ 6,571,767 $ 6,571,767
Accrued compensation........................................................... 4,870,690 4,870,690
Other accrued expenses......................................................... 1,569,570 1,569,570
Deferred revenue............................................................... 51,247 51,247
Due to former shareholders of acquired businesses.............................. 10,826,735 10,826,735
Current portion of capital lease obligations................................... 1,503,947 1,503,947
Current portion of long-term debt.............................................. 1,757,588 1,757,588
-------------- --------------
Total current liabilities........................................................ 27,151,544 27,151,544
Short-term obligations expected to be refinanced................................. 5,282,450 5,282,450
Capital lease obligations, less current portion.................................. 3,427,254 3,427,254
Long-term debt, less current portion............................................. 5,231,794 5,231,794
Dividends payable................................................................ 1,503,004 1,503,004
-------------- --------------
Total liabilities................................................................ 42,596,046 42,596,046
Series B Convertible Redeemable Preferred Stock, $.01 par value, 115,000 shares
authorized, 59,279 shares issued and outstanding actual, none pro forma;
$62,242,500 aggregate liquidation preference................................... 62,242,500 --
Common stock subject to repurchase, 1,343,750 shares actual, none pro forma...... 4,145,000 --
Commitments and contingent liabilities........................................... -- --
Stockholders' equity (deficit):
Series A Convertible Preferred Stock, $.01 par value, 110,000 shares
authorized, 55,000 shares issued and outstanding; $33,000,000 aggregate
liquidation preference....................................................... 550 --
Common stock, $.001 par value, 75,000,000 shares authorized, 625,000 shares
issued and outstanding actual, 32,868,276 shares issued pro forma............ 625 32,868
Additional paid-in capital..................................................... 30,753,934 97,157,241
Due from stockholders.......................................................... -- (47,500)
Accumulated deficit............................................................ (32,212,081) (32,212,081)
-------------- --------------
Total stockholders' equity (deficit)........................................... (1,456,972) 64,930,528
-------------- --------------
Total liabilities and stockholders' equity (deficit)............................. $ 107,526,574 $ 107,526,574
-------------- --------------
-------------- --------------
</TABLE>
SEE ACCOMPANYING NOTES.
F-3
<PAGE>
USINTERNETWORKING, INC.
CONSOLIDATED STATEMENT OF OPERATIONS
FOR THE PERIOD JANUARY 14, 1998 (DATE OF INCEPTION) THROUGH DECEMBER 31, 1998
<TABLE>
<S> <C>
Revenue........................................................ $ 4,122,449
Costs and expenses:
Direct costs of revenue...................................... 6,658,004
General and administrative................................... 25,193,297
Depreciation and amortization................................ 2,169,552
-----------
Total costs and expenses....................................... 34,020,853
-----------
Operating loss................................................. (29,898,404)
Other income (expense):
Interest income.............................................. 367,411
Interest expense............................................. (2,681,088)
-----------
(2,313,677)
-----------
Net loss....................................................... (32,212,081)
Dividends accrued on Series A Convertible Preferred Stock...... (1,503,004)
-----------
Net loss attributable to common stockholders................... $(33,715,085)
-----------
-----------
Basic and diluted loss per common share attributable to common
stockholders................................................. $ (53.94)
-----------
-----------
</TABLE>
SEE ACCOMPANYING NOTES.
F-4
<PAGE>
USINTERNETWORKING, INC.
CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY (DEFICIT)
FOR THE PERIOD JANUARY 14, 1998 (DATE OF INCEPTION) THROUGH DECEMBER 31, 1998
<TABLE>
<CAPTION>
SERIES A CONVERTIBLE
PREFERRED STOCK COMMON STOCK
------------------------ ----------------------
SHARES PAR VALUE SHARES PAR VALUE
--------- ------------- --------- -----------
<S> <C> <C> <C> <C>
Balance at January 14, 1998..................................................... -- $ -- -- $ --
Issuance of common stock to founder upon inception............................ -- -- 625,000 625
Issuance of Series A Convertible Preferred Stock on May 28, 1998 for cash..... 38,333 383 -- --
Issuance of Series A Convertible Preferred Stock on May 28, 1998 in exchange
for $1,000,000 note......................................................... 1,667 17 -- --
Issuance of Series A Convertible Preferred Stock on June 22, 1998 for cash.... 6,167 62 -- --
Issuance of Series A Convertible Preferred Stock on July 2, 1998 for cash..... 5,833 58 -- --
Issuance of Series A Convertible Preferred Stock on July 30, 1998 for cash.... 3,000 30 -- --
Transaction costs associated with the issuance of Series A Convertible
Preferred Stock............................................................. -- -- -- --
Issuance of warrants to purchase 50,000 shares of common stock associated with
the acquisition of IIT on September 8, 1998................................. -- -- -- --
Issuance of warrants to purchase 974,450 shares of common stock in connection
with $9,095,000 of debt on September 7, 1998................................ -- -- -- --
Issuance of warrants to purchase 74,404 shares of common stock in connection
with a $5,000,000 financing commitment on September 22, 1998................ -- -- -- --
Issuance of warrants to purchase 971 shares of Series B Convertible Redeemable
Preferred Stock in connection with a $10,000,000 financing commitment on
September 30, 1998.......................................................... -- -- -- --
Issuance of warrants to purchase 62,500 shares of common stock associated with
the acquisition of ACR on October 2, 1998................................... -- -- -- --
Issuance of warrants to purchase 17,857 shares of common stock in connection
with a $2,000,000 financing commitment on December 18, 1998................. -- -- -- --
Dividends accrued on Series A Convertible Preferred Stock..................... -- -- -- --
Accretion of common stock subject to repurchase to fair value................. -- -- -- --
Transaction costs associated with the issuance of Series B Convertible
Redeemable Preferred Stock.................................................. -- -- -- --
Net loss for the period January 14, 1998 through December 31, 1998............ -- -- -- --
--------- ----- --------- -----------
Balance at December 31, 1998.................................................... 55,000 $ 550 625,000 $ 625
--------- ----- --------- -----------
--------- ----- --------- -----------
<CAPTION>
TOTAL
ADDITIONAL STOCKHOLDERS'
PAID-IN ACCUMULATED EQUITY
CAPITAL DEFICIT (DEFICIT)
---------- ------------ ------------
<S> <C> <C> <C>
Balance at January 14, 1998..................................................... $ -- $ -- $ --
Issuance of common stock to founder upon inception............................ 4,375 -- 5,000
Issuance of Series A Convertible Preferred Stock on May 28, 1998 for cash..... 22,999,617 -- 23,000,000
Issuance of Series A Convertible Preferred Stock on May 28, 1998 in exchange
for $1,000,000 note......................................................... 999,983 -- 1,000,000
Issuance of Series A Convertible Preferred Stock on June 22, 1998 for cash.... 3,699,938 -- 3,700,000
Issuance of Series A Convertible Preferred Stock on July 2, 1998 for cash..... 3,499,942 -- 3,500,000
Issuance of Series A Convertible Preferred Stock on July 30, 1998 for cash.... 1,799,970 -- 1,800,000
Transaction costs associated with the issuance of Series A Convertible
Preferred Stock............................................................. (205,225) -- (205,225)
Issuance of warrants to purchase 50,000 shares of common stock associated with
the acquisition of IIT on September 8, 1998................................. 40,000 -- 40,000
Issuance of warrants to purchase 974,450 shares of common stock in connection
with $9,095,000 of debt on September 7, 1998................................ 1,948,930 -- 1,948,930
Issuance of warrants to purchase 74,404 shares of common stock in connection
with a $5,000,000 financing commitment on September 22, 1998................ 148,810 -- 148,810
Issuance of warrants to purchase 971 shares of Series B Convertible Redeemable
Preferred Stock in connection with a $10,000,000 financing commitment on
September 30, 1998.......................................................... 606,875 -- 606,875
Issuance of warrants to purchase 62,500 shares of common stock associated with
the acquisition of ACR on October 2, 1998................................... 50,000 -- 50,000
Issuance of warrants to purchase 17,857 shares of common stock in connection
with a $2,000,000 financing commitment on December 18, 1998................. 35,714 -- 35,714
Dividends accrued on Series A Convertible Preferred Stock..................... (1,503,004) (1,503,004)
Accretion of common stock subject to repurchase to fair value................. (3,135,000) (3,135,000)
Transaction costs associated with the issuance of Series B Convertible
Redeemable Preferred Stock.................................................. (236,991) (236,991)
Net loss for the period January 14, 1998 through December 31, 1998............ (32,212,081) (32,212,081)
---------- ------------ ------------
Balance at December 31, 1998.................................................... $30,753,934 ($32,212,081) $(1,456,972)
---------- ------------ ------------
---------- ------------ ------------
</TABLE>
SEE ACCOMPANYING NOTES.
F-5
<PAGE>
USINTERNETWORKING, INC.
CONSOLIDATED STATEMENT OF CASH FLOWS
FOR THE PERIOD JANUARY 14, 1998 (DATE OF INCEPTION) THROUGH DECEMBER 31, 1998
<TABLE>
<S> <C>
OPERATING ACTIVITIES
Net loss....................................................................... $(32,212,081)
Adjustments to reconcile net loss to net cash used in operating activities:
Depreciation................................................................. 1,567,885
Amortization................................................................. 601,667
Non-cash compensation expense related to the issuance of common stock........ 1,000,000
Non-cash interest expense.................................................... 2,011,904
Changes in operating assets and liabilities:
Accounts receivable........................................................ 43,293
Prepaid expenses and other current assets.................................. (2,470,745)
Accounts payable........................................................... 4,333,579
Accrued compensation....................................................... 4,287,023
Accrued expenses and other current liabilities............................. 234,800
-----------
Net cash used in operating activities.......................................... (20,602,675)
INVESTING ACTIVITIES
Purchases of property and equipment............................................ (20,127,849)
Increase in restricted cash.................................................... (581,712)
Acquisition of IIT and ACR, net of cash acquired of $398,581................... (16,899,991)
Increase in other assets....................................................... (59,080)
-----------
Net cash used in investing activities.......................................... (37,668,632)
FINANCING ACTIVITIES
Proceeds from issuance of Series A Convertible Preferred Stock................. 31,794,775
Proceeds from loan from officer, subsequently converted into Series A
Convertible Preferred Stock.................................................. 1,000,000
Proceeds from issuance of Series B Convertible Redeemable Preferred Stock...... 39,910,509
Proceeds from issuance of common stock and common stock subject to
repurchase................................................................... 15,000
Proceeds from issuance of long-term debt....................................... 9,486,969
Proceeds from issuance of notes, subsequently converted into Series B
Convertible Redeemable Preferred Stock....................................... 22,095,000
Payments on long-term debt..................................................... (1,804,876)
Payments on capital lease obligations.......................................... (423,605)
-----------
Net cash provided by financing activities...................................... 102,073,772
-----------
Cash and cash equivalents at end of period..................................... $43,802,465
-----------
-----------
</TABLE>
SEE ACCOMPANYING NOTES.
F-6
<PAGE>
USINTERNETWORKING, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1998
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
DESCRIPTION OF BUSINESS
USINTERNETWORKING, Inc., (the "Company") was incorporated on January 14,
1998 principally to provide clients the ability to use leading business software
applications through the Company's Internet-based network. The Company is an
"Internet Managed Application Provider.-SM-" Our IMAP services integrate
Internet communications, data center management and packaged software
applications implementation and support to meet the technology needs of business
in a number of business process areas including sales force automation, customer
support, e-commerce, and human resource and financial systems. The Company also
makes its infrastructure available to clients who want to run their own
applications in a highly reliable and secure Internet environment and provides
information technology consulting services.
BASIS OF PRESENTATION
The accompanying consolidated financial statements include the accounts of
the Company and its wholly-owned subsidiaries. Intercompany transactions and
balances have been eliminated.
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 amounts reported in the consolidated financial
statements and accompanying notes. Actual results could differ from those
estimates.
CASH AND CASH EQUIVALENTS
The Company considers all money market accounts and all other investments
with a maturity of three months or less when purchased to be cash equivalents.
The carrying value of cash equivalents approximates fair value.
RESTRICTED CASH
At December 31, 1998, $581,712 of cash was pledged as collateral on
outstanding letters of credit related to an operating lease for certain office
space ($400,000), and as security for other obligations ($181,712). These
amounts have been classified as restricted cash in the accompanying consolidated
balance sheet.
SOFTWARE LICENSES
The Company capitalizes the costs associated with the purchase of licenses
for major business process application software used in providing IMAP services.
These licenses specify the number of users permitted to utilize the license in
connection with the Company's service. Transferrable licenses will be amortized
over their estimated useful life. Non-transferrable licenses will be amortized
over the minimum contract period for IMAP clients subject to these licenses.
Amortization will commence in January 1999 and the average amortization period
is expected to be three years.
F-7
<PAGE>
USINTERNETWORKING, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1998
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
PROPERTY AND EQUIPMENT
Property and equipment is stated at cost less accumulated depreciation.
Depreciation is computed for owned assets using the straight-line method over
estimated useful lives of the assets. Assets under capital leases are amortized
using the straight-line method over the lesser of the lease term or the
estimated useful life of the assets.
Estimated useful lives for all depreciable assets other than a building and
leasehold improvements range from three to seven years. The building is
depreciated over 25 years and leasehold improvements are depreciated over the
term of the related lease.
INCOME TAXES
The Company uses the liability method in accounting for income taxes. Under
this method, deferred income tax assets and liabilities are determined based on
differences between financial reporting and tax bases of assets and liabilities
and are measured using the enacted tax rates and laws that will be in effect
when the differences are expected to reverse.
REVENUE RECOGNITION
Substantially all revenues since inception have been earned from information
technology consulting services. Revenues are recognized as services are
provided.
GOODWILL AMORTIZATION
The Company amortizes goodwill arising from certain purchase business
combinations on a straight-line basis over its estimated useful life of 15
years.
ADVERTISING COSTS
The Company expenses advertising as incurred. Advertising expense totaled
approximately $700,000 in 1998.
IMPAIRMENT OF LONG-LIVED ASSETS
Long-lived assets, consisting principally of property and equipment and
goodwill, are evaluated for possible impairment through a review of undiscounted
expected future cash flows. If the sum of the undiscounted expected future cash
flows is less than the carrying amount of the asset, an impairment loss is
recognized.
STOCK OPTIONS
The Company records compensation expense for all stock-based compensation
plans using the intrinsic value method prescribed by Accounting Principles Board
Opinion No. 25, ACCOUNTING FOR STOCK ISSUED TO EMPLOYEES ("APB No. 25"). Under
APB No. 25, if the exercise price of the Company's employee stock options equals
or exceeds the estimated fair value of the underlying stock on the date of
grant, no compensation expense is generally recognized.
F-8
<PAGE>
USINTERNETWORKING, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1998
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
Financial Accounting Standards Board Statement No. 123, ACCOUNTING FOR
STOCK-BASED COMPENSATION ("Statement No. 123") encourages companies to recognize
expense for stock-based awards based on their estimated value on the date of
grant. Statement No. 123 requires the disclosure of pro forma net income or loss
in the notes to the financial statements if the fair value method is not
elected. The Company accounts for its stock-based compensation using the
intrinsic value method, and has determined that the use of the fair value method
to record compensation expense would have no effect on the reported net loss in
1998.
PENDING ACCOUNTING PRONOUNCEMENTS
In March 1998, the AICPA issued Statement of Position 98-1, ACCOUNTING FOR
THE COSTS OF COMPUTER SOFTWARE DEVELOPED FOR OR OBTAINED FOR INTERNAL USE (SOP
98-1). SOP 98-1 requires the capitalization of costs to purchase or develop
internal-use software, including external direct costs of materials and
services, and payroll and payroll related costs for employees who are directly
associated with and devote time to an internal use software development project.
Allocations of overhead and capitalized costs are not permitted. Computer
software costs related to research and development are expensed as incurred, as
are training and maintenance costs. SOP 98-1 is effective for 1999, and
application is prospective. The Company in 1998 expensed all costs related to
the implementation of internal use software. Future costs subject to
capitalization under SOP 98-1 in 1999 and beyond are not expected to materially
affect reported results of operations.
In April 1998, the AICPA issued Statement of Position 98-5, REPORTING THE
COSTS OF START-UP ACTIVITIES (SOP 98-5). SOP 98-5 requires that start-up costs
and organization costs be expensed as incurred. Start-up activities include
one-time activities related to opening a new facility, including a new product
or service, conducting business in a new territory, conducting business with a
new class of customer, initiating a new process in an existing facility, or
commencing some new operation. SOP 98-5 is effective in 1999. All start-up and
organizational costs of the Company are currently expensed; therefore, adoption
of this new standard will have no effect on the consolidated financial
statements.
2. ACQUISITIONS
On September 8, 1998, the Company acquired all of the outstanding common
stock of I.I.T. Holding, Inc. (IIT), a provider of Internet and intranet
consulting, integration and support services principally to commercial companies
located throughout the United States and South America. The initial purchase
price consisted of cash of $12,887,000 and warrants to purchase 50,000 shares of
common stock for $16.00 per share valued at $40,000. Direct acquisition costs of
$394,968 were also incurred. The acquisition was accounted for using the
purchase method of accounting, and the results of operations of IIT are included
in the accompanying consolidated statement of operations for the period from
September 8, 1998 through December 31, 1998. At the acquisition date,
$14,131,788 of goodwill was recorded.
Additional contingent consideration is payable to the former shareholders of
IIT to the extent that defined amounts of revenue, earnings before interest,
income taxes, depreciation and amortization (EBITDA), and employee retention
percentages (as related to the operations of IIT) in 1998 are exceeded. The
maximum amount of contingent consideration payable to the sellers is $3,799,999.
At
F-9
<PAGE>
USINTERNETWORKING, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1998
2. ACQUISITIONS (CONTINUED)
December 31, 1998, the Company has preliminarily determined that the likely
amount of additional consideration due to the sellers is $2,326,735, subject to
final audit results, and therefore has recorded that amount as additional
goodwill.
On October 2, 1998, the Company acquired all of the outstanding common stock
of Advanced Communication Resources, Inc. (ACR), a New York based systems
integrator focused on the financial services industry. The initial purchase
price aggregated $6,050,000, consisting of cash of $2,500,000, a $3,500,000
secured promissory note bearing interest at 8.25%, and warrants to purchase
62,500 shares of common stock for $16.00 per share valued at $50,000. Direct
acquisition costs of $338,916 were also incurred. The acquisition was accounted
for using the purchase method of accounting, and the results of operations of
ACR are included in the accompanying consolidated statement of operations for
the period from October 2, 1998 through December 31, 1998. At the acquisition
date, $5,290,535 of goodwill was recorded.
Additional contingent consideration is payable to the former shareholders of
ACR to the extent that defined amounts of revenue, EBITDA, and employee
retention percentages (as related to the operations of ACR) in 1998 are
exceeded. The maximum amount of contingent consideration payable to the sellers
is $5,000,000. At December 31, 1998, the Company has determined that the amount
of additional consideration due to the sellers is $5,000,000, and therefore has
recorded that amount as additional goodwill.
The following summarizes unaudited pro forma consolidated results of
operations for 1998 assuming the IIT and ACR acquisitions had occurred at the
beginning of the year. The results are not necessarily indicative of what would
have occurred had these transactions been consummated as of the beginning of the
year presented, or of future operations of the Company (in thousands):
<TABLE>
<CAPTION>
PRO FORMA (UNAUDITED)
---------------------
<S> <C>
Revenue................................................................ $ 13,938
Net loss............................................................... $ (34,268)
Basic and diluted loss per common share................................ $ (54.83)
</TABLE>
3. LOSS PER SHARE
The following table sets forth the computation of basic and diluted loss per
common share for the period from January 14, 1998 (date of inception) through
December 31, 1998:
HISTORICAL:
<TABLE>
<S> <C>
Numerator:
Net loss..................................................................... $(32,212,081)
Dividends on Series A Convertible Preferred Stock............................ (1,503,004)
-----------
$(33,715,085)
-----------
-----------
Denominator:
Weighted-average number of shares of common stock outstanding and not subject
to repurchase during the period............................................ 625,000
-----------
Basic and diluted loss per common share........................................ $ (53.94)
-----------
-----------
</TABLE>
F-10
<PAGE>
USINTERNETWORKING, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1998
3. LOSS PER SHARE (CONTINUED)
Basic loss per share is based upon the average number of shares of common
stock outstanding during the period. The computation excludes 1,343,750 shares
of common stock subject to repurchase at December 31, 1998.
Dilutive loss per common share is equal to basic loss per common share
because if potentially dilutive securities were included in the computation, the
result would be anti-dilutive. These potentially dilutive securities consist of
common stock subject to repurchase, convertible preferred stocks, stock options
and warrants.
SUPPLEMENTAL PRO FORMA:
Pro forma basic and diluted loss per common share attributable to common
stockholders is presented to disclose the effect on loss per share of the
assumed conversion of securities which will convert into Common Stock upon the
closing of the proposed initial public offering. For purposes of the pro forma
computation, the convertible securities are assumed to have been converted on
the issuance date.
The following table summarizes the computations of supplemental pro forma
basic and diluted loss per share presented in the accompanying consolidated
statement of operations for the period January 14, 1998 (date of inception)
through December 31, 1998:
<TABLE>
<S> <C>
Numerator:
Net loss..................................................................... $(32,212,081)
Dividends on Series A Convertible Preferred Stock............................ (1,503,004)
-----------
$(33,715,085)
-----------
-----------
Denominator:
Shares used in historical calculation........................................ 625,000
Add:
Pro forma conversion of Series A Convertible Preferred Stock............... 7,366,026
Pro forma conversion of Series B Convertible Redeemable Preferred Stock.... 50,837
-----------
Denominator for pro forma loss per share................................... 8,041,863
-----------
-----------
Supplemental pro forma basic and diluted loss per common share................. $ (4.19)
-----------
-----------
</TABLE>
4. SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION
During the period from January 14, 1998 (date of inception) through December
31, 1998, the Company acquired equipment totaling $5,188,489 under leases
classified as capital leases.
Interest paid during the period was approximately $368,000.
In July 1998, the Company sold 625,000 shares of common stock to an
executive officer for $5,000. The common stock at the date of issuance had an
appraised estimated fair value of $1.60 per share, or $1,000,000. The difference
between the estimated fair value of the common stock of $1,000,000 and the
F-11
<PAGE>
USINTERNETWORKING, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1998
4. SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION (CONTINUED)
amount paid of $5,000 ($995,000) was recorded as non-cash compensation expense.
Other non-cash compensation of $5,000 related to common stock issuances was also
recorded in 1998.
5. PROPERTY AND EQUIPMENT
Property and equipment consists of the following at December 31, 1998:
<TABLE>
<S> <C>
Building and land............................................................. $ 1,007,499
Furniture and fixtures........................................................ 779,332
Equipment and automobiles..................................................... 2,800,742
Computers and software........................................................ 15,321,325
Leasehold improvements........................................................ 3,299,132
-----------
23,208,030
Accumulated depreciation...................................................... (1,567,885)
-----------
Total......................................................................... $21,640,145
-----------
-----------
</TABLE>
Substantially all property and equipment is collateralized under financing
arrangements.
6. CAPITAL LEASE OBLIGATIONS
The Company has entered into capital lease agreements to acquire certain
equipment. Property and equipment in the accompanying consolidated balance sheet
includes this equipment which has a cost of $5,188,489 and accumulated
amortization of $349,716. Amortization of the leased property is included in
depreciation and amortization expense.
Future minimum payments under capital lease obligations consist of the
following at December 31, 1998:
<TABLE>
<S> <C>
1999............................................................................ $1,965,377
2000............................................................................ 1,941,590
2001............................................................................ 1,789,256
2002............................................................................ 91,995
2003............................................................................ 80,420
----------
Total minimum lease payments.................................................... 5,868,638
Amounts representing interest................................................... (937,437)
----------
Present value of capital lease obligations...................................... 4,931,201
Current portion................................................................. (1,503,947)
----------
Capital lease obligations, non-current.......................................... $3,427,254
----------
----------
</TABLE>
7. DUE TO FORMER SHAREHOLDERS OF ACQUIRED BUSINESSES
In connection with the acquistion of ACR in October 1998, the Company issued
to the sellers a $3,500,000 note bearing interest at 8.25% per annum. The note,
including accrued interest, was due and was paid in January 1999.
F-12
<PAGE>
USINTERNETWORKING, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1998
7. DUE TO FORMER SHAREHOLDERS OF ACQUIRED BUSINESSES (CONTINUED)
As more fully disclosed in Note 2, the Company estimates that additional
consideration related to the acquisitions of ACR and IIT in 1998 will be
required to be paid in 1999 in the aggregate amount of $7,326,735.
8. LONG-TERM DEBT
Long-term debt at December 31, 1998 consists of the following:
<TABLE>
<S> <C>
Note payable to a bank due June 30, 2001 and bearing interest at 9.0% per
annum. The note is payable in monthly installments of principal and interest
of $6,644 with all unpaid principal and interest due at maturity. The note is
secured by a mortgage on the real property purchased with the proceeds and
with a $79,929 letter of credit pledged as additional security............... $ 639,517
Note payable to a bank due July 21, 2001 and bearing interest at 9.0% per
annum. The note is payable in monthly installments of principal and interest
of $2,249 with all unpaid principal and interest due at maturity. The note is
secured by a mortgage on the property purchased with the proceeds and with a
$26,984 letter of credit pledged as additional security...................... 217,689
Notes payable due on August 1, 2001 and bearing interest at 13.1% per annum.
The notes are payable in monthly installments of principal and interest of
$77,429 and are collateralized by certain furniture, fixtures, equipment and
software purchased by the Company............................................ 2,081,563
Note payable due on September 1, 2001 and bearing interest at 13.0% per annum.
The note is payable in monthly installments of principal and interest of
$4,868 and is collateralized by certain furniture, fixtures, equipment and
software purchased by the Company............................................ 134,519
Note payable due on October 1, 2001 and bearing interest at 17.1% per annum.
The note is payable in monthly installments of principal and interest of
$158,000 with all unpaid principal and interest due at maturity. This note is
collateralized by certain software licenses purchased by the Company......... 4,501,175
Notes payable due between February 28, 2003 and February 19, 2004 and bearing
interest at rates ranging from 9.25% to 9.99% per annum. The notes are
payable in monthly installments of principal and interest ranging from $542
to $1,274 and are secured by automobiles purchased with the proceeds......... 107,630
----------
Total.......................................................................... 7,682,093
Less: current portion.......................................................... 1,757,588
Less: discounts................................................................ 692,711
----------
$5,231,794
----------
----------
</TABLE>
F-13
<PAGE>
USINTERNETWORKING, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1998
8. LONG-TERM DEBT (CONTINUED)
Aggregate maturities of long-term debt at December 31, 1998 are as follows:
<TABLE>
<S> <C>
1999........................................................................... $2,009,483
2000........................................................................... 2,342,948
2001........................................................................... 3,283,700
2002........................................................................... 25,337
2003 and thereafter............................................................ 20,625
----------
Total.......................................................................... $7,682,093
----------
----------
</TABLE>
At December 31, 1998, the fair value of long-term debt approximates its
carrying value.
9. SHORT-TERM OBLIGATIONS EXPECTED TO BE REFINANCED
At December 31, 1998, the Company had outstanding current liabilities for
the purchase of fixed assets of $7,500,000, for which the Company had
outstanding commitments to finance on a long-term basis. The Company intends to
utilize these commitments in early 1999, and has therefore classified
$5,282,450, or the portion of the $7,500,000 financing that will be due after
1999, of the obligations as long-term. These obligations will bear interest at
rates from 9% to 17% per annum, and will mature in varying installments through
January 2002.
Expected maturities of the short-term debt expected to be refinanced are as
follows:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31:
- ---------------------------------------------------------------------------------------------------
<S> <C>
1999............................................................................................... $ 2,217,550
2000............................................................................................... 2,270,033
2001............................................................................................... 2,420,664
2002............................................................................................... 591,753
-------------
$ 7,500,000
-------------
-------------
</TABLE>
10. PREFERRED STOCK
The Company has authorized the issuance of up to 225,000 shares of preferred
stock, par value $.01 per share, of which 110,000 has been designated Series A
Convertible Preferred Stock ("Series A") and 115,000 has been designated Series
B Convertible Redeemable Preferred Stock ("Series B"). During 1998, the Company
issued 55,000 shares of Series A for a total aggregate purchase price of $33
million, and 59,279 shares of Series B for a total aggregate purchase price of
$62.2 million, including $22.1 million of Series B issued upon conversion of
notes payable. Upon the conversion of notes payable with a face value of
$9,095,000 into Series B, unamortized debt discount of approximately $1,350,000
was recorded as additional interest expense.
F-14
<PAGE>
USINTERNETWORKING, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1998
10. PREFERRED STOCK (CONTINUED)
SERIES A:
CONVERSION RIGHTS
The Series A is convertible into common stock at the option of the holder at
any time. In addition, the Series A will convert automatically into shares of
common stock upon the closing of an underwritten public offering of at least $50
million of net proceeds to the Company with a minimum valuation of fully-diluted
common equity (pre-offering) of $300 million. Each share of Series A is
convertible into 225 shares of common stock. This conversion ratio is subject to
adjustment upon the occurrence of certain specified dilutive events.
DIVIDENDS
The holders of the Series A are entitled to receive cumulative quarterly
dividends at the annual rate of $48 per share with payments commencing on
January 1, 2000. All accrued but unpaid dividends are payable at the closing of
an underwritten public offering of at least $50 million of net proceeds to the
Company with a minimum valuation of fully-diluted common equity (pre-offering)
of $300 million, or upon the conversion of the Series A into common stock.
LIQUIDATION
Each share of Series A has a preference on liquidation equal to $600 per
share plus all accrued and unpaid dividends. The holders of the Series A may
also be entitled to an additional distribution based on the fair market value of
the net assets of the Company as determined by the Board of Directors.
VOTING RIGHTS
Each share of Series A has substantially the same voting rights as the
number of shares of common stock into which it can be converted. In addition,
certain corporate actions require the consent of two-thirds of the outstanding
shares of Series A.
SERIES B:
CONVERSION RIGHTS
The Series B is convertible into common stock at the option of the holder at
any time. In addition, the Series B will convert automatically into shares of
common stock upon the closing of an underwritten public offering of at least $50
million of net proceeds to the Company with a minimum valuation of fully-diluted
common equity (pre-offering) of $300 million. Each share of Series B is
convertible into 312.5 shares of common stock. This conversion ratio is subject
to adjustment upon the occurrence of certain specified dilutive events.
REDEMPTION RIGHTS
Each share of Series B is mandatorily redeemable on December 31, 2006, if
still outstanding, for an amount equal to the liquidation preference.
F-15
<PAGE>
USINTERNETWORKING, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1998
10. PREFERRED STOCK (CONTINUED)
DIVIDENDS
The holders of the Series B are entitled to receive cumulative quarterly
dividends at the annual rate of $84 per share with payments commencing on
January 1, 2000. All accrued but unpaid dividends are payable at the closing of
an underwritten public offering of at least $50 million of net proceeds to the
Company with a minimum valuation of fully-diluted common equity (pre-offering)
of $300 million, or upon the conversion of the Series B into common stock. No
dividends may be paid on the Series A unless dividends due to Series B holders
have been paid.
LIQUIDATION
Each share of Series B has a preference on liquidation equal to the greater
of $1,050 per share plus all accrued and unpaid dividends or the amount that
would be received on an as-converted basis.
VOTING RIGHTS
Each share of Series B has substantially the same voting rights as the
number of shares of common stock into which it can be converted
11. COMMON STOCK SUBJECT TO REPURCHASE
The Company sold 1,343,750 shares of common stock to three officers that at
December 31, 1998 required the Company to repurchase the common stock at fair
value in the event of disability or death. These agreements were amended on
February 25, 1999 to void the repurchase obligation upon the closing of an
initial public offering of the common stock.
The Company initially recorded the common stock subject to repurchase at an
amount equal to the consideration received of $1,010,000, and has accreted the
common stock subject to repurchase to its estimated fair value at December 31,
1998 of $3.12 per share, or an aggregate amount of $4,145,500, through charges
to accumulated deficit. The estimated value per share of $3.12 at December 31,
1998 was determined through an independent appraisal of the Company's common
stock.
12. STOCK WARRANTS
In 1998, in connection with the issuance of debt or capital leases, the
Company issued warrants to purchase 1,066,711 shares of common stock and
warrants to purchase 971 shares of Series B. The common stock warrants expire
from 2003 through 2008, and are exerciseable for $3.36 or $3.44 per share. The
warrants to purchase Series B expire in 2004 and are exerciseable for $1,050 per
share (or $3.36 per common equivalent share).
Upon issuance, the Company estimated the value of the warrants considering
the various terms, including the exercise price of the warrants, the estimated
fair value of the Company's common stock, and the length of time the warrants
are exerciseable. The range of values assigned to the warrants was $.80 to $2.08
per share, and the total value assigned was $2,740,329. This amount was recorded
as additional paid-in capital, and a corresponding debt discount was recorded
that is being recognized as additional interest expense over the term of the
related debt or capital lease.
F-16
<PAGE>
USINTERNETWORKING, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1998
12. STOCK WARRANTS (CONTINUED)
Also, as discussed in Note 2, the Company issued warrants to purchase
112,500 shares of common stock in connection with the acquisition of IIT and
ACR. These warrants expire in 2008 and are exerciseable for $16.00 per share.
The Company estimated the value of these warrants considering the various terms,
including the exercise price of the warrants, the estimated fair value of the
Company's common stock, and the length of time the warrants are exercisable. The
aggregate value assigned to these warrants was $90,000.
During 1998, no warrants issued were exercised. A summary of warrants
outstanding at December 31, 1998 is as follows:
<TABLE>
<CAPTION>
EXERCISE
NUMBER OF SHARES PRICE EXPIRATION DATE
- ---------------------------- ------------- ------------------
<S> <C> <C>
COMMON STOCK:
17,857 $ 3.36 December 2003
74,404 $ 3.36 June 2004
974,450 $ 3.44 September 2008
50,000 $ 16.00 September 2008
62,500 $ 16.00 October 2008
SERIES B PREFERRED STOCK:
971 $ 1,050 June 2004
</TABLE>
13. SHARES RESERVED FOR FUTURE ISSUANCE
As of December 31, 1998, the Company has reserved 12,374,994 shares and
18,524,532 shares of common stock for future issuance upon the conversion of the
Series A and Series B, respectively. In addition, the Company has reserved
1,682,250 shares of common stock for future issuance upon the exercise of stock
options eligible for granting under the 1998 Stock Option Plan (see Note 14),
and 1,482,648 shares of Common Stock attributable to outstanding warrants issued
in 1998.
14. STOCK COMPENSATION PLAN
Effective July 2, 1998, the Company adopted the 1998 Stock Option Plan of
USINTERNETWORKING, Inc. ("the Plan") which is administered by the Compensation
Committee of the Board of Directors. The Plan provides for the granting of
either qualified or non-qualified options to purchase an aggregate of up to
1,682,250 shares of common stock to eligible employees, officers, directors and
consultants of the Company.
F-17
<PAGE>
USINTERNETWORKING, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1998
14. STOCK COMPENSATION PLAN (CONTINUED)
A summary of the Company's stock option activity, and related information
for the year ended December 31, 1998 follows:
<TABLE>
<CAPTION>
NUMBER
OF
OPTIONS EXERCISE PRICE
------------ ---------------
<S> <C> <C>
Granted.............................................................................. 1,709,125 $ 2.64
Forfeited............................................................................ (26,875) 2.64
Outstanding at end of year........................................................... 1,682,250
Exercisable at end of year........................................................... 1,682,250
</TABLE>
The exercise price for all options outstanding as of December 31, 1998 is
$2.64. These options vested immediately upon the date of grant. Shares of common
stock purchased pursuant to these options will be subject to the Company's right
to repurchase them at the option exercise price upon the termination of the
holder's employment or business relationship with the Company. The repurchase
right will lapse with respect to one-third of the shares purchasable upon
exercise of an option on the first anniversary of the date of grant of the
option. The repurchase right with respect to the remainder of the shares
purchasable upon exercise of an option will lapse in equal quarterly
installments over the subsequent eight calendar quarters. The options expire 10
years from the date of issuance. At December 31, 1998, the weighted-average
remaining contractual life of outstanding options is 9.7 years.
For the year ended December 31, 1998, pro forma net loss and loss per share
information required by Statement No. 123 has been determined using the minimum
value method. The minimum value method calculates the fair value of options as
the excess of the estimated fair value of the underlying stock at the date of
grant over the present value of both the exercise price and the expected
dividend payments, each discounted at the risk-free rate, over the expected life
of the option. In determining the estimated fair value of granted stock options
under the minimum value method, the risk-free interest rate was assumed to be
5.50%, the dividend yield was estimated to be 0% and the expected life of
granted options was assumed to be four years.
Because changes in the subjective input assumptions can materially affect
the fair value estimate, in management's opinion, the minimum value method and
other methods prescribed by Statement No. 123 do not necessarily provide a
single measure of the fair value of its employee stock options.
The grant-date fair value of all options granted during 1998 using the
minimum value method was less than $.01, thus no pro forma information has been
presented. The exercise price at the grant-date of all options granted through
December 31, 1998 was greater than the market value of the underlying common
stock on the grant-date, as determined by independent appraisal. As a result,
the Company has not recognized compensation expense related to these options.
15. INCOME TAXES
At December 31, 1998, the Company has a U.S. federal net operating loss
carryforward of $20 million. This carryforward expires in 2013. The amount
available to be used in any given year will be limited by operation of certain
provisions of the Internal Revenue Code. The Company also has U.S.
F-18
<PAGE>
USINTERNETWORKING, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1998
15. INCOME TAXES (CONTINUED)
state net operating loss carryforwards available, the utilization of which will
be similarly limited. The Company has established a valuation allowance with
respect to these federal and state carryforwards.
<TABLE>
<S> <C>
Deferred tax assets:
Net operating loss carryforwards............................................. $ 8,163,105
Start-up and organizational costs capitalized for tax purposes............... 3,632,867
Other........................................................................ 192,230
-----------
Total deferred tax assets...................................................... 11,988,202
Deferred tax liabilities:
Tax over book depreciation................................................... 314,930
Other........................................................................ 467,169
-----------
Total deferred tax liability................................................... 782,099
-----------
Net future income tax benefit.................................................. 11,206,103
Valuation allowance for net deferred tax assets................................ (11,206,103)
-----------
Net deferred tax assets........................................................ $ --
-----------
-----------
</TABLE>
The reconciliation of the reported income tax expense to the amount that
would result by applying the U.S. federal statutory rate to net loss during the
development stage is as follows:
<TABLE>
<S> <C>
Tax benefit at U.S. statutory rate............................................. $(11,274,228)
State income taxes, net of federal benefit..................................... (1,007,505)
Non-deductible goodwill........................................................ 172,803
Non-deductible interest expense................................................ 704,166
Non-deductible transactions costs.............................................. 154,777
Other.......................................................................... 43,884
Valuation allowance............................................................ 11,206,103
-----------
Total.......................................................................... $ --
-----------
-----------
</TABLE>
16. OPERATING LEASES
The Company conducts primarily all of its operations from leased facilities
under operating leases that have terms of up to five years and generally contain
renewal options of two to three years and rent
F-19
<PAGE>
USINTERNETWORKING, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1998
16. OPERATING LEASES (CONTINUED)
escalation clauses. Future minimum payments under noncancelable operating leases
with initial terms of one year or more consist of the following at December 31,
1998:
<TABLE>
<S> <C>
1999............................................................ $1,441,681
2000............................................................ 1,402,328
2001............................................................ 954,563
2002............................................................ 684,799
2003............................................................ 158,549
---------
$4,641,920
---------
---------
</TABLE>
The Company incurred rent expense of $718,416 during the period from January
14, 1998 (date of inception) through December 31, 1998.
17. EMPLOYEE BENEFIT PLAN
The Company established a defined contribution benefit plan effective July
1, 1998. The plan covers substantially all employees who have 30 days of service
with the Company. Participants may contribute from 1% to 15% of their annual
compensation to the plan. In addition, the Company may make discretionary
matching and profit-sharing contributions to the plan. No contributions were
made by the Company in 1998.
18. RELATED PARTY TRANSACTIONS
During 1998, the Company received a non-interest bearing loan from an
officer in the amount of $1,000,000. The loan was subsequently converted into
1,667 shares of Series A Convertible Preferred Stock.
19. BUSINESS AND GEOGRAPHIC SEGMENT INFORMATION
The Company is organized into two business units. The Company's IMAP
division provides an Internet-based network which enables clients to use leading
business software applications without the burden of owning or managing the
underlying technology. These services are delivered to customers through a
network of Enterprise Data Centers located in Maryland, California, Amsterdam
and Tokyo. The Professional IT Services division provides focused software
implementation services on a traditional time and materials basis.
The Company evaluates the performance of its segments based primarily on
operating profit before depreciation, amortization and interest. The accounting
policies used by the reportable segments are the same as those used by the
Company as described in Note 1 to the consolidated financial statements.
F-20
<PAGE>
USINTERNETWORKING, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1998
19. BUSINESS AND GEOGRAPHIC SEGMENT INFORMATION (CONTINUED)
The Company's reportable segments are business units that offer distinct
services. The segments are managed separately as they have different customer
bases and delivery channels. The following table sets forth information on the
Company's reportable segments:
<TABLE>
<CAPTION>
FOR THE PERIOD JANUARY 14, 1998
(INCEPTION) THROUGH
DECEMBER 31, 1998
----------------------------------------------
<S> <C> <C> <C>
PROFESSIONAL
IT
IMAP SERVICES CONSOLIDATED
-------------- -------------- --------------
Revenues.......................................................... $ 69,467 $ 4,052,982 $ 4,122,449
Segment operating (loss) profit................................... (28,071,239) 342,387 (27,728,852)
Total assets...................................................... 101,122,375 6,404,199 107,526,574
Capital expenditures.............................................. 21,358,476 38,752 21,397,228
</TABLE>
A reconciliation of segment operating loss for both segments to net loss
during the development stage is as follows:
<TABLE>
<S> <C>
Segment operating loss for all segments........................ $(27,728,852)
Depreciation and amortization.................................. (2,169,552)
Interest income................................................ 367,411
Interest expense............................................... (2,681,088)
-----------
Net loss during the development stage.......................... $(32,212,081)
-----------
-----------
</TABLE>
Revenues from foreign countries and assets located in foreign countries were
each less than $200,000.
20. PRO FORMA BALANCE SHEET (UNAUDITED)
In January 1999 the Board of Directors approved the filing of a registration
statement for the sale of common stock with the Securities and Exchange
Commission that, upon closing, would meet the criteria for the automatic
conversion of the outstanding Series A Convertible Preferred Stock and Series B
Redeemable Convertible Preferred Stock into common stock. Additionally, in
February 1999, employment contracts of certain officers requiring the repurchase
of 1,343,750 shares of common stock upon death or disability were amended to
void the repurchase obligation upon the closing of an initial public offering.
F-21
<PAGE>
USINTERNETWORKING, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1998
20. PRO FORMA BALANCE SHEET (UNAUDITED) (CONTINUED)
The following table summarizes the components of the pro forma balance
sheet:
<TABLE>
<CAPTION>
ASSUMED
HISTORICAL CONVERSION
DECEMBER 31, OF SECURITIES PRO
1998 UPON IPO FORMA
-------------- ------------- --------------
<S> <C> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents...................................... $ 43,802,465 $ -- $ 43,802,465
Other current assets........................................... 5,900,078 -- 5,900,078
-------------- ------------- --------------
Total current assets............................................. 49,702,543 -- 49,702,543
Property and equipment, net...................................... 21,640,145 -- 21,640,145
Other noncurrent assets.......................................... 36,183,886 -- 36,183,886
-------------- ------------- --------------
Total assets..................................................... $ 107,526,574 $ -- $ 107,526,574
-------------- ------------- --------------
-------------- ------------- --------------
LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT)
Current liabilities:
Accounts payable and accrued expenses.......................... $ 13,012,027 $ -- $ 13,012,027
Other current liabilities...................................... 14,139,517 -- 14,139,517
-------------- ------------- --------------
Total current liabilities........................................ 27,151,544 -- 27,151,544
Other noncurrent liabilities..................................... 15,444,502 -- 15,444,502
Series B Preferred Stock......................................... 62,242,500 (62,242,500) --
Common Stock subject to repurchase............................... 4,145,000 (4,145,000) --
Stockholders' equity (deficit):
Series A Preferred Stock....................................... 550 (550) --
Common Stock................................................... 625 32,243 32,868
Additional paid-in capital..................................... 30,753,934 66,403,307 97,157,241
Due from stockholders.......................................... -- (47,500) (47,500)
Accumulated deficit............................................ (32,212,081) -- (32,212,081)
-------------- ------------- --------------
Total stockholders' equity (deficit)............................. (1,456,972) -- 64,930,528
-------------- ------------- --------------
Total liabilities and stockholders' equity (deficit)............. $ 107,526,574 $ -- $ 107,526,574
-------------- ------------- --------------
-------------- ------------- --------------
</TABLE>
21. SUBSEQUENT EVENT
In February 1999, the Company's Board of Directors approved an 8 for 1
reverse stock split of common stock, options and warrants which becomes
effective on the date the Company's registration statement is declared
effective. Accordingly, all share and per share data including stock option,
warrant and loss per share information have been restated in the consolidated
financial statements to retroactively reflect the stock split.
F-22
<PAGE>
INDEPENDENT AUDITOR'S REPORT
The Board of Directors
Advanced Communication Resources, Inc.
We have audited the accompanying balance sheets of Advanced Communication
Resources, Inc. as of December 31, 1997 and 1996, and the related statements of
operations, stockholders' equity and cash flows for the years then ended. These
financial statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audits to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of Advanced Communication
Resources, Inc. as of December 31, 1997 and 1996, and the results of its
operations and its cash flows for the years then ended, in conformity with
generally accepted accounting principles.
/s/ Mahoney Cohen & Company, CPA, P.C.
New York, New York
July 23, 1998, except for
Note 11, as to which the
date is October 2, 1998
F-23
<PAGE>
ADVANCED COMMUNICATION RESOURCES, INC.
BALANCE SHEETS
ASSETS (NOTE 5)
<TABLE>
<CAPTION>
DECEMBER 31, DECEMBER 31, SEPTEMBER 30,
1996 1997 1998
------------ ------------ -------------
<S> <C> <C> <C>
(UNAUDITED)
Current assets:
Cash............................................................... $ 34,204 $ 179,982 $ 28,317
Accounts receivable, net of allowance for uncollectible accounts of
$81,050 in 1996, $50,000 in 1997 and $100,000 as of September 30,
1998 (Note 3).................................................... 817,803 1,559,330 1,550,942
Other current assets............................................... 26,584 40,447 25,526
Due from stockholders (Note 9)..................................... 70,150 -- 43,570
Due from affiliate (Note 9)........................................ 342,994 -- --
------------ ------------ -------------
Total current assets........................................... 1,291,735 1,779,759 1,648,355
Property and equipment, net (Note 4)................................. 144,190 110,857 180,026
Other assets......................................................... 20,360 6,788 167,278
------------ ------------ -------------
$1,456,285 $1,897,404 $ 1,995,659
------------ ------------ -------------
------------ ------------ -------------
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Notes payable (Note 5)............................................. $ 725,000 $ 525,000 $ 400,000
Accounts payable and accrued expenses.............................. 366,372 435,998 462,914
Deferred income taxes (Note 7)..................................... 50,000 117,000 118,000
Due to stockholders (Note 9)....................................... -- 120,000 --
------------ ------------ -------------
Total current liabilities...................................... 1,141,372 1,197,998 980,914
Commitments and contingencies (Note 10)
Stockholders' equity (Note 6):
Common stock....................................................... 1,500 1,500 1,500
Additional paid-in capital......................................... -- -- --
Retained earnings.................................................. 363,413 747,906 1,063,245
------------ ------------ -------------
364,913 749,406 1,064,745
Less: Treasury stock, at cost...................................... 50,000 50,000 50,000
------------ ------------ -------------
Total stockholders' equity..................................... 314,913 699,406 1,014,745
------------ ------------ -------------
$1,456,285 $1,897,404 $ 1,995,659
------------ ------------ -------------
------------ ------------ -------------
</TABLE>
See accompanying notes.
F-24
<PAGE>
ADVANCED COMMUNICATION RESOURCES, INC.
STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
YEAR ENDED NINE MONTHS ENDED
--------------------------- ----------------------------
DECEMBER 31, DECEMBER 31, SEPTEMBER 30, SEPTEMBER 30,
1996 1997 1997 1998
------------- ------------ ------------- -------------
<S> <C> <C> <C> <C>
(UNAUDITED) (UNAUDITED)
Net revenue (Note 3).................................. $ 4,848,112 $6,646,245 $ 4,714,166 $ 5,416,982
Direct costs (Notes 6 and 9).......................... 3,768,134 4,230,576 2,975,177 3,536,404
------------- ------------ ------------- -------------
Gross margin.......................................... 1,079,978 2,415,669 1,738,989 1,880,578
Operating expenses (Note 9):
Selling............................................. 545,251 377,783 289,959 371,511
General and administrative.......................... 1,395,758 1,574,654 864,833 1,152,228
------------- ------------ ------------- -------------
Total operating expenses.......................... 1,941,009 1,952,437 1,154,792 1,523,739
------------- ------------ ------------- -------------
Income (loss) before provision for (benefit from)
income taxes........................................ (861,031) 463,232 584,197 356,839
Provision for (benefit from) income taxes............. (86,947) 78,739 24,614 41,500
------------- ------------ ------------- -------------
Net income (loss)..................................... $ (774,084) $ 384,493 $ 559,583 $ 315,339
------------- ------------ ------------- -------------
------------- ------------ ------------- -------------
</TABLE>
See accompanying notes.
F-25
<PAGE>
ADVANCED COMMUNICATION RESOURCES, INC.
STATEMENTS OF STOCKHOLDERS' EQUITY
<TABLE>
<CAPTION>
ADDITIONAL
COMMON PAID-IN RETAINED TREASURY
STOCK CAPITAL EARNINGS STOCK TOTAL
----------- ------------- ------------ ---------- ------------
<S> <C> <C> <C> <C> <C>
Balance, January 1, 1996........................... $ 1,500 $ -- $ 1,137,497 $ -- $ 1,138,997
Purchase of treasury stock (Note 6)................ -- -- -- (50,000) (50,000)
Net loss........................................... -- -- (774,084) -- (774,084)
----------- ----- ------------ ---------- ------------
Balance, December 31, 1996......................... 1,500 363,413 (50,000) 314,913
Net income......................................... -- -- 384,493 -- 384,493
----------- ----- ------------ ---------- ------------
Balance, December 31, 1997......................... 1,500 -- 747,906 (50,000) 699,406
Net income (Unaudited)............................. 315,339 -- 315,339
----------- ----- ------------ ---------- ------------
Balance, September 30, 1998 (Unaudited)............ $ 1,500 $ -- $ 1,063,245 $ (50,000) $ 1,014,745
----------- ----- ------------ ---------- ------------
----------- ----- ------------ ---------- ------------
</TABLE>
See accompanying notes.
F-26
<PAGE>
ADVANCED COMMUNICATION RESOURCES, INC.
STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
YEAR ENDED NINE MONTHS ENDED
-------------------------- ----------------------------
DECEMBER 31, DECEMBER 31, SEPTEMBER 30, SEPTEMBER 30,
1996 1997 1997 1998
------------ ------------ ------------- -------------
<S> <C> <C> <C> <C>
(UNAUDITED) (UNAUDITED)
Cash flows from operating activities:
Net income (loss)................................... $ (774,084) $ 384,493 $ 559,583 $ 315,339
Adjustments to reconcile net income (loss) to net
cash provided by (used in) operating activities:
Depreciation and amortization..................... 101,480 80,062 57,204 100,681
Deferred income taxes............................. (90,000) 67,000 (27,000) 1,000
Change in assets and liabilities:
Accounts receivable............................. 903,600 (741,527) (170,219) 8,388
Other current assets............................ (9,509) (13,863) (28,318) 14,921
Accounts payable and accrued expenses........... (88,006) 69,626 223,900 26,916
------------ ------------ ------------- -------------
Net cash provided by (used in) operating
activities.................................. 43,481 (154,209) 615,150 467,245
------------ ------------ ------------- -------------
Cash flows from investing activities:
Purchase of property and equipment.................. (55,995) (33,157) (10,227) (169,670)
Payments for software development................... -- -- (10,000) (160,490)
------------ ------------ ------------- -------------
Cash used in investing activities............. (55,995) (33,157) (20,227) (330,160)
------------ ------------ ------------- -------------
Cash flows from financing activities:
Proceeds from (repayments of) notes payable......... 225,000 (200,000) (575,000) (125,000)
Proceeds from (repayments of) loans from
stockholders...................................... -- 120,000 -- (120,000)
Repayments of (advances to) loans to stockholders... 88,850 70,150 (10,745) (43,750)
Repayments from (advances to) affiliates............ (288,668) 342,994 342,994 --
Purchase of common stock for treasury............... (50,000) -- -- --
------------ ------------ ------------- -------------
Net cash provided by (used in) financing
activities.................................. (24,818) 333,144 (242,751) (288,750)
------------ ------------ ------------- -------------
Net increase (decrease) in cash....................... (37,332) 145,778 352,172 (151,665)
Cash, beginning of year............................... 71,536 34,204 34,204 179,982
------------ ------------ ------------- -------------
Cash, end of year/period.............................. $ 34,204 $ 179,982 $ 386,376 $ 28,317
------------ ------------ ------------- -------------
------------ ------------ ------------- -------------
Supplemental Disclosures of Cash Flow Information
Cash paid during the year/period for:
Interest............................................ $ 60,421 $ 6,132 $ 17,713 $ 23,047
Income taxes........................................ $ 10,093 $ 14,414 $ 14,414 $ 10,715
</TABLE>
See accompanying notes.
F-27
<PAGE>
ADVANCED COMMUNICATION RESOURCES, INC.
NOTES TO FINANCIAL STATEMENTS
(INFORMATION AS OF AND FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1998 AND 1997 IS
UNAUDITED)
NOTE 1--THE COMPANY
Advanced Communication Resources, Inc. (the "Company") provides computer
consulting services, including consultation on Year 2000 compliance matters, to
Fortune 500, financial services and other companies located in the New York
metropolitan area.
NOTE 2--SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
INTERIM FINANCIAL INFORMATION
The September 30, 1998 and 1997 balance sheet, statements of operations,
equity and cash flows for the nine months then ended and certain information and
footnote disclosures related thereto are unaudited. In the opinion of
management, all adjustments, consisting only of normal recurring adjustments,
necessary to fairly present the financial position, results of operations and
cash flows with respect to the interim financial statements, have been included.
The results of operations for the nine months ended September 30, 1998 are not
necessarily indicative of result for the entire fiscal year.
USE OF ESTIMATES
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenue and expenses during the reporting
period. Actual results could differ from those estimates.
PROPERTY AND EQUIPMENT
Property and equipment is recorded at cost. Machinery and equipment and
furniture and fixtures are depreciated by the straight-line method over
estimated useful lives ranging from three to five years. Leasehold improvements
are amortized over the shorter of the term of the lease or their estimated
useful life. Major additions and betterments are capitalized, and repairs and
maintenance are charged to operations in the period incurred.
INCOME TAXES
The Company, with the consent of its stockholders, elected treatment as a
small business corporation under Subchapter S of the Internal Revenue Code and
the corresponding provisions of the New York State Franchise Tax law. Under the
aforementioned provisions, corporate income or loss and any tax credits earned
are included in the stockholders' individual income tax returns. The provision
for income taxes represents New York State Subchapter S and New York City
corporation taxes.
The Company reports on a cash basis for income tax purposes. Deferred state
and local taxes are provided for the differences between the cash basis of
accounting and the accrual basis of accounting utilized in the preparation of
these financial statements. Pursuant to the cash method of accounting, revenue
is recorded when received, rather than when earned, and expenses are recorded
when paid, rather than when incurred.
F-28
<PAGE>
ADVANCED COMMUNICATION RESOURCES, INC.
NOTES TO FINANCIAL STATEMENTS
(INFORMATION AS OF AND FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1998 AND 1997 IS
UNAUDITED)
NOTE 2--SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
REVENUE RECOGNITION
The Company recognizes revenue as professional services are performed. On
fixed fee engagements, which historically have not been material, revenue is
recognized as earned in accordance with the contract.
COMPUTER SOFTWARE COSTS
Computer software costs of $207,997 at September 30, 1998 and $40,719 at
December 31, 1997 and 1996, included in other assets, are recorded at cost and
amortized by the straight-line method over three years. Amortization expense for
the nine months ended September 30, 1998 and the years ended December 31, 1997
and 1996 amounted to $6,788, $6,786 and $6,877, respectively. Accumulated
amortization amounted to $40,719, $33,931 and $26,359 at September 30, 1998,
December 31, 1997 and 1996, respectively.
ADVERTISING EXPENSES
Advertising expenses amounting to approximately $7,600 and $20,500 for the
years ended December 31, 1997 and 1996, respectively, are charged to operations
during the period in which they are incurred.
NOTE 3--CONCENTRATION OF CREDIT RISK AND MAJOR CUSTOMERS
The Company provides consulting services to companies in the financial
services industry, primarily located in the New York metropolitan area. In the
normal course of business, payment for the Company's services is due generally
within thirty days of invoicing. Management's credit evaluation process and the
reasonably short collection terms help mitigate any risks. At September 30,
1998, three customers comprised approximately 8% ($124,000), 10% ($155,000) and
13% ($202,000) of the Company's outstanding accounts receivable. These same
three customers accounted for approximately 16% ($867,000), 12% ($650,000) and
11% ($596,000) of net revenue for the nine months ended September 30, 1998. At
December 31, 1997, two customers comprised approximately 17% ($265,000) and 21%
($327,000) of the Company's outstanding accounts receivable. These same two
customers accounted for approximately 23% ($1,529,000) and 19% ($1,263,000) of
net revenue for the year ended December 31, 1997. Additionally, three customers
accounted for approximately 26% ($1,261,000), 14% ($679,000) and 12% ($582,000)
of net revenue for the year ended December 31, 1996.
The Company places its cash with financial institutions. Accounts are
insured by the Federal Deposit Insurance Corporation up to $100,000.
F-29
<PAGE>
ADVANCED COMMUNICATION RESOURCES, INC.
NOTES TO FINANCIAL STATEMENTS
(INFORMATION AS OF AND FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1998 AND 1997 IS
UNAUDITED)
NOTE 4--PROPERTY AND EQUIPMENT
Property and equipment is comprised of:
<TABLE>
<CAPTION>
DECEMBER 31,
---------------------- SEPTEMBER 30,
1996 1997 1998
---------- ---------- -------------
<S> <C> <C> <C>
Machinery and equipment............................... $ 247,047 $ 280,204 $ 354,037
Furniture and fixtures................................ 45,042 45,042 65,528
Leasehold improvements................................ 57,079 57,079 68,742
---------- ---------- -------------
349,168 382,325 488,307
Less: Accumulated depreciation and amortization....... 204,978 271,468 308,281
---------- ---------- -------------
$ 144,190 $ 110,857 $ 180,026
---------- ---------- -------------
---------- ---------- -------------
</TABLE>
NOTE 5--NOTES PAYABLE
Notes payable consists of:
<TABLE>
<CAPTION>
DECEMBER 31, DECEMBER 31, SEPTEMBER 30,
1996 1997 1998
------------ ------------ -------------
<S> <C> <C> <C>
Bank credit facility providing for a $750,000 line of credit.
Borrowings for advances under the line bear interest at 1% above
the prime rate (9.5% at December 31, 1997). The line is
collateralized by all of the assets of the Company and is
personally guaranteed by the Company's stockholders................ $ -- $ 400,000 $ 400,000
Demand note payable to a commercial bank which bore interest at 1% in
excess of the bank's prime lending rate (9.75% at December 31,
1996); the note was collateralized by all of the assets of the
Company and was personally guaranteed by the Company's
stockholders....................................................... 500,000 -- --
Installment note payable to a former stockholder which bears interest
at 75% of the prime lending rate of a commercial bank (6.37% at
December 31, 1997). The note is collateralized by fifty shares of
the Company's treasury stock held in escrow by the former
stockholder and subordinated to the Company's bank debt. Principal
payments in the amount of $25,000 are to be made quarterly through
March 1, 1999 (A).................................................. 225,000 125,000 --
------------ ------------ -------------
$ 725,000 $ 525,000 $ 400,000
------------ ------------ -------------
------------ ------------ -------------
</TABLE>
- ------------------------
(A) The note contains provisions for minimum working capital, current ratio and
stockholders' equity. The arrangement also limits compensation to the
officers of the Company. At December 31, 1997 and 1996, the Company was in
violation of certain financial covenants. Accordingly, the entire balance
outstanding as of December 31, 1997 and 1996 has been classified as a
current liability.
F-30
<PAGE>
ADVANCED COMMUNICATION RESOURCES, INC.
NOTES TO FINANCIAL STATEMENTS
(INFORMATION AS OF AND FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1998 AND 1997 IS
UNAUDITED)
NOTE 6--STOCKHOLDERS' EQUITY
COMMON STOCK
<TABLE>
<CAPTION>
At September 30, 1998, December 31, 1997 and 1996,
common stock consists of the following:
Advanced Communication Resources, Inc., no par
value:
Authorized--200 shares
<S> <C> <C> <C>
Issued--150 shares
Outstanding--100 shares........................... $ 1,500
------
------
</TABLE>
TREASURY STOCK
On December 13, 1995, the Company entered into a stock purchase agreement to
purchase a stockholder's 33.3% common stock interest in the Company. The
purchase price for the stock was $50,000, paid upon execution of the purchase
agreement. The transaction was consummated during 1996.
In connection with the stock purchase agreement, the Company entered into a
one year $350,000 consulting agreement with the former stockholder with $50,000
payable upon closing and $25,000 per quarter payable over three years. In
addition, the Company entered into a non-compete agreement with the stockholder
covering one year for which the former stockholder was paid $100,000. The
amounts related to the above agreements were charged to operations in 1996 and
are included in the accompanying statement of operations.
F-31
<PAGE>
ADVANCED COMMUNICATION RESOURCES, INC.
NOTES TO FINANCIAL STATEMENTS
(INFORMATION AS OF AND FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1998 AND 1997 IS
UNAUDITED)
NOTE 7--INCOME TAXES
The provision for (benefit from) state and local income taxes for the
periods ended consists of:
<TABLE>
<CAPTION>
DECEMBER 31, DECEMBER 31, SEPTEMBER 30, SEPTEMBER 30,
1996 1997 1998 1997
------------ ------------ ------------- -------------
<S> <C> <C> <C> <C>
Current........................... $ 3,053 $ 11,739 $ 40,500 $ 24,614
Deferred.......................... (90,000) 67,000 1,000 --
------------ ------------ ------------- -------------
$ (86,947) $ 78,739 $ 41,500 $ 24,614
------------ ------------ ------------- -------------
------------ ------------ ------------- -------------
</TABLE>
The Company's provision for local income taxes for the years ended December
31, 1997 and 1996 was determined under the alternative tax method.
The Company's effective state and local tax rate for the nine months ended
September 30, 1998 and the years ended December 31, 1997 and 1996 was 11.6%, 17%
and 13.6%, respectively.
Deferred state and local income taxes arise from the difference in the
amount of revenue and expenses reported on the accrual method of accounting for
financial statement reporting and the cash method of accounting for income tax
purposes.
NOTE 8--RETIREMENT PLAN
The Company formed an IRS approved 401(k) plan during 1996, covering all
eligible full-time employees. Contributions to the plan are based upon a
matching contribution of 50% of employee contributions limited to 3% of salary.
For the nine months ended September 30, 1998 and years ended December 31, 1997
and 1996, 401(k) expense amounted to approximately $35,000, $45,000 and $47,000,
respectively.
NOTE 9--RELATED PARTY TRANSACTIONS
CONSULTING SERVICES
The Company subcontracts the consulting services of two companies affiliated
through common minority ownership interests. For the year ended December 31,
1997, fees incurred and paid to these companies amounted to $125,000. There were
no fees incurred during the year ended December 31, 1996.
DUE FROM AFFILIATE
During 1996, the Company made non-interest bearing advances to an affiliate.
These advances were repaid in full during 1997.
The Company occupies office space leased by an affiliate without a rent
charge. The monthly rent charge of the affiliate was approximately $15,000 per
month for all periods presented.
DUE TO/FROM STOCKHOLDERS
Advances to and from the Company's stockholders are non-interest bearing and
are due (payable) on demand.
F-32
<PAGE>
ADVANCED COMMUNICATION RESOURCES, INC.
NOTES TO FINANCIAL STATEMENTS
(INFORMATION AS OF AND FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1998 AND 1997 IS
UNAUDITED)
NOTE 10--COMMITMENTS AND CONTINGENCIES
LETTER OF CREDIT
At December 31, 1997, the Company is contingently liable pursuant to a
letter of credit in the amount of $10,000 in favor of a trade organization's
legal defense fund. A certificate of deposit in the amount of $10,000
collateralizes the Company's obligation and is included in other current assets
in the accompanying balance sheets.
EMPLOYEE AND CONTRACTOR AGREEMENTS
The Company executes agreements with all technical employees and contractors
which contain certain provisions designed to protect the Company's intellectual
property. The agreements provide for an indefinite term, cancellable by either
party upon ten days written notice.
NOTE 11--SUBSEQUENT EVENTS
CHANGE OF OWNERSHIP
On October 2, 1998, the Company's stockholders sold all outstanding common
stock to USinternetworking, Inc.
ASSIGNMENT OF LEASE
On October 2, 1998, the Company assumed the lease obligation of an
affiliate. Future minimum lease payments, excluding escalation charges, are as
follows:
<TABLE>
<CAPTION>
YEAR ENDING
DECEMBER 31,
- ----------------------------------------------------------------------------------
<S> <C>
1998-Remainder.................................................................... $ 29,000
1999.............................................................................. 120,000
2000.............................................................................. 124,000
2001.............................................................................. 128,000
2002.............................................................................. 131,000
Thereafter........................................................................ 33,000
----------
$ 565,000
----------
----------
</TABLE>
F-33
<PAGE>
REPORT OF INDEPENDENT AUDITORS
The Board of Directors and Stockholders of
I.I.T. Holding, Inc.
We have audited the accompanying consolidated balance sheets of I.I.T.
Holding, Inc. and subsidiaries as of December 31, 1997 and 1996, and the related
consolidated statements of operations, stockholders' equity, and cash flows for
the years then ended. These financial statements are the responsibility of the
Company's management. Our responsibility is to express an opinion on these
financial statements based on our audits. We did not audit the financial
statements of International Information Technology IIT, C.A., a wholly-owned
subsidiary, which statements reflect total assets of $76,361 and $68,247 as of
December 31, 1997 and 1996, respectively, and total revenues of $147,797 and
$3,336, for the year ended December 31, 1997 and for the period from March 6,
1996 (inception) through December 31, 1996. Those statements were audited by
other auditors whose report has been furnished to us, and our opinion, insofar
as it relates to data included for International Information Technology IIT,
C.A., is based solely on the report of the other auditors.
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 and the report of other auditors provide a reasonable
basis for our opinion.
In our opinion, based on our audits and the report of other auditors, the
consolidated financial statements referred to above present fairly, in all
material respects, the consolidated financial position of I.I.T. Holding, Inc.
and subsidiaries as of December 31, 1997 and 1996, and the consolidated results
of their operations and their cash flows for the years then ended in conformity
with generally accepted accounting principles.
/s/ Ernst & Young LLP
Miami, Florida
March 1, 1999
F-34
<PAGE>
I.I.T. HOLDING, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
DECEMBER 31
------------------------
1996 1997 JUNE 30, 1998
---------- ------------ -------------
<S> <C> <C> <C>
(UNAUDITED)
<CAPTION>
ASSETS
<S> <C> <C> <C>
Current assets:
Cash and cash equivalents.............................................. $ 69,563 $ 14,443 $ 219,739
Accounts receivable--trade............................................. 225,500 634,215 883,723
Other current assets................................................... 2,451 13,902 44,046
---------- ------------ -------------
Total current assets..................................................... 297,514 662,560 1,147,508
Equipment and vehicles:
Computer equipment..................................................... 30,407 116,850 160,180
Vehicles............................................................... 45,119 45,119 --
---------- ------------ -------------
75,526 161,969 160,180
Less: accumulated depreciation......................................... (25,831) (56,084) (45,954)
---------- ------------ -------------
49,695 105,885 114,226
Other assets............................................................. 654 618 33,472
---------- ------------ -------------
---------- ------------ -------------
Total assets............................................................. $ 347,863 $ 769,063 $ 1,295,206
---------- ------------ -------------
---------- ------------ -------------
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Bank overdraft......................................................... $ -- $ 157,056 $ --
Accounts payable....................................................... 13,899 7,162 5,370
Accrued expenses....................................................... 60,000 366,685 773,688
Current portion of note payable........................................ 4,443 10,036 --
Current portion of capital lease obligations........................... -- 18,230 11,994
Unsecured demand note payable to stockholder, non-interest bearing..... 99,951 62,160 54,384
Client advances........................................................ 55,824 -- --
Current deferred income taxes.......................................... 49,270 -- --
---------- ------------ -------------
Total current liabilities................................................ 283,387 621,329 845,436
Note payable............................................................. 10,676 -- --
Capital lease obligations, net of current portion........................ -- 15,953 11,031
Deferred income taxes.................................................... 9,103 -- --
Commitments and contingent liabilities
Stockholders' equity:
Common stock........................................................... 2,724 3,197 475
Additional paid-in capital............................................. -- 1,001,843 1,004,565
Accumulated other comprehensive income................................. 835 (20,918) 22,716
Retained earnings (deficit)............................................ 41,138 (852,341) (589,017)
---------- ------------ -------------
44,697 131,781 438,739
---------- ------------ -------------
---------- ------------ -------------
Total liabilities and stockholders' equity............................... $ 347,863 $ 769,063 $ 1,295,206
---------- ------------ -------------
---------- ------------ -------------
</TABLE>
SEE ACCOMPANYING NOTES.
F-35
<PAGE>
I.I.T. HOLDING, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31 SIX MONTHS ENDED
--------------------------- ----------------------------
1996 1997 JUNE 30, 1997 JUNE 30, 1998
------------ ------------- ------------- -------------
<S> <C> <C> <C> <C>
(UNAUDITED) (UNAUDITED)
Consulting revenue..................................... $ 747,023 $ 2,812,011 $ 1,189,342 $ 3,073,248
Cost of revenue........................................ 519,261 1,881,031 913,440 1,677,799
------------ ------------- ------------- -------------
Gross profit........................................... 227,762 930,980 275,902 1,395,449
Operating expenses:
General and administrative........................... 131,037 778,342 93,592 1,092,074
Sales and marketing.................................. 73,305 62,943 16,832 8,449
Stock compensation expense........................... -- 1,002,316 -- --
Depreciation......................................... 13,556 30,253 5,854 17,979
------------ ------------- ------------- -------------
217,898 1,873,854 116,278 1,118,502
------------ ------------- ------------- -------------
Income (loss) from operations.......................... 9,864 (942,874) 159,624 276,947
Interest expense....................................... (2,917) (8,977) -- (13,623)
------------ ------------- ------------- -------------
Income (loss) before provision for income taxes........ 6,947 (951,851) 159,624 263,324
Provision (benefit) for income taxes................... 14,832 (58,372) -- --
------------ ------------- ------------- -------------
Net (loss) income...................................... $ (7,885) $ (893,479) $ 159,624 $ 263,324
------------ ------------- ------------- -------------
------------ ------------- ------------- -------------
</TABLE>
SEE ACCOMPANYING NOTES.
F-36
<PAGE>
I.I.T. HOLDING, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
<TABLE>
<CAPTION>
ADDITIONAL ACCUMULATED
COMMON PAID-IN OTHER COMPREHENSIVE RETAINED
STOCK CAPITAL INCOME EARNINGS TOTAL
----------- ------------ -------------------- ------------- -------------
<S> <C> <C> <C> <C> <C>
Balances at January 1, 1996................. $ 1,000 $ -- $ -- $ 49,023 $ 50,023
Net loss.................................. -- -- -- (7,885) (7,885)
Issuance of common stock.................. 1,724 -- -- -- 1,724
Other comprehensive income-- translation
adjustment.............................. -- -- 835 -- 835
----------- ------------ -------- ------------- -------------
Balances at December 31, 1996............... 2,724 -- 835 41,138 44,697
Stock grant to employees for no
consideration........................... 473 1,001,843 -- -- 1,002,316
Net loss.................................. -- -- -- (893,479) (893,479)
Other comprehensive income-- translation
adjustment.............................. -- -- (21,753) -- (21,753)
----------- ------------ -------- ------------- -------------
Balances at December 31, 1997............... $ 3,197 $ 1,001,843 $ (20,918) $ (852,341) $ 131,781
----------- ------------ -------- ------------- -------------
----------- ------------ -------- ------------- -------------
Corporate reorganization.................. (2,722) 2,722 -- -- --
Net income................................ -- -- -- 263,324 263,324
Other comprehensive income-- translation
adjustment.............................. -- -- 43,634 -- 43,634
----------- ------------ -------- ------------- -------------
Balances at June 30, 1998 (Unaudited)....... $ 475 $ 1,004,565 $ 22,716 $ (589,017) $ 438,739
----------- ------------ -------- ------------- -------------
----------- ------------ -------- ------------- -------------
</TABLE>
- ------------------------
SEE ACCOMPANYING NOTES.
F-37
<PAGE>
I.I.T. HOLDING, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
YEARS ENDED
DECEMBER 31 SIX MONTHS ENDED
------------------------- ----------------------------
1996 1997 JUNE 30, 1997 JUNE 30, 1998
---------- ------------- ------------- -------------
<S> <C> <C> <C> <C>
(UNAUDITED) (UNAUDITED)
OPERATING ACTIVITIES
Net income (loss)........................................ $ (7,885) $ (893,479) $ 159,624 $ 263,324
Adjustments to reconcile net loss to net cash (used in)
provided by operating activities:
Non-cash compensation expense.......................... -- 1,002,316 -- --
Depreciation........................................... 13,556 30,253 5,854 17,789
Deferred taxes......................................... 14,832 (58,372) -- --
Change in assets and liabilities:
Accounts receivable.................................. (72,937) (408,715) (109,619) (249,508)
Other current assets................................. (1,655) (11,415) (9,243) (30,144)
Other assets......................................... -- -- -- (32,854)
Accounts payable..................................... 13,899 (6,737) (11,890) (1,792)
Accrued expenses..................................... 59,200 306,685 247,568 407,003
Client advances...................................... 55,824 (55,824) (55,824) --
---------- ------------- ------------- -------------
Net cash provided by (used in) operating activities...... 74,834 (95,288) 226,470 373,818
INVESTING ACTIVITIES
Acquisition of equipment and vehicle..................... (19,154) (63,532) (15,181) --
Sale of vehicle.......................................... -- -- -- 17,504
---------- ------------- ------------- -------------
Net cash (used in) investing activities.................. (19,154) (63,532) (15,181) 17,504
FINANCING ACTIVITIES
Issuance of common stock................................. 1,724 -- -- --
(Repayments) proceeds from note payable to stockholder... 68,890 (37,791) (56,853) (7,776)
Bank overdraft........................................... (50,733) 157,056 -- (157,056)
Repayments of note payable............................... (5,998) (5,083) (1,098) (10,036)
Repayments of capital leases............................. -- (10,482) -- (11,158)
---------- ------------- ------------- -------------
Net cash provided by financing activities................ 13,883 103,700 (57,951) (186,026)
---------- ------------- ------------- -------------
Net increase (decrease) in cash and cash equivalents..... 69,563 (55,120) 153,338 205,296
Cash and cash equivalents at beginning of year........... -- 69,563 69,563 14,443
---------- ------------- ------------- -------------
Cash and cash equivalents at end of year................. $ 69,563 $ 14,443 $ 222,901 $ 219,739
---------- ------------- ------------- -------------
---------- ------------- ------------- -------------
SUPPLEMENTAL INFORMATION
Interest paid............................................ $ 2,917 $ 8,977 $ -- $ 13,623
---------- ------------- ------------- -------------
---------- ------------- ------------- -------------
SCHEDULE OF NONCASH INVESTING ACTIVITIES
Property and equipment acquired under capital leases..... $ -- $ 44,465 $ -- $ --
---------- ------------- ------------- -------------
---------- ------------- ------------- -------------
</TABLE>
SEE ACCOMPANYING NOTES.
F-38
<PAGE>
I.I.T. HOLDING, INC. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(INFORMATION AS OF AND FOR THE SIX MONTHS ENDED JUNE 30, 1997 AND 1998 IS
UNAUDITED)
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
REORGANIZATION AND BASIS OF PRESENTATION
I.I.T. Holding, Inc. and subsidiaries ("the Company") provides internet
consulting, integration, and support services to commercial companies in the
United States and South America. I.I.T. Holding, Inc. was formed in February
1998 when the shareholders of International Information Technology Inc. and
International Information Technology IIT, C.A., enterprises under common
control, exchanged their stock for 100% of the stock of I.I.T. Holding, Inc. The
accompanying consolidated financial statements for all periods presented include
the combined financial position and results of operations of the companies
previously under common control. All significant intercompany transactions have
been eliminated in preparation of the consolidated financial statements.
INTERIM FINANCIAL INFORMATION
The accompanying June 30, 1998 and 1997 financial statements are unaudited.
In the opinion of management, all adjustments, consisting only of normal
recurring adjustments, necessary to fairly present the financial position,
results of operations and cash flows with respect to the interim financial
statements, have been included. The results of operations for the six months
ended June 30, 1998 are not necessarily indicative of result for the entire
fiscal year.
CONVERSION FOR U.S. DOLLARS
The financial information for a Venezuelan subsidiary includes financial
information converted from Venezuelan Bolivares to U.S. Dollars. A summary of
the conversion method used to convert the financial statements to U.S. Dollars
is as follows:
- monetary assets and liabilities were converted at the rate in effect at
the balance sheet date.
- non-monetary assets and liabilities were converted at their historical
rates.
- the statement of operations was converted at the average rate during the
periods.
USE OF ESTIMATES
The preparation of the combined financial statements in conformity with
generally accepted accounting principles, requires management to make estimates
and assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements, and the reported amount of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
F-39
<PAGE>
I.I.T. HOLDING, INC. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(INFORMATION AS OF AND FOR THE SIX MONTHS ENDED JUNE 30, 1998 AND 1997 IS
UNAUDITED)
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
CASH AND CASH EQUIVALENTS
For purposes of the statement of cash flows, the Company considers all
highly-liquid instruments, including certificates of deposit, purchased with a
maturity of three months or less to be cash equivalents.
EQUIPMENT AND VEHICLES
Equipment and vehicle are stated at cost. Depreciation is calculated on a
straight-line basis over the assets' estimated useful lives which range from
three to five years.
CONCENTRATION OF CREDIT RISK
Financial instruments that subject the Company to concentrations of credit
risk consist primarily of accounts receivable. The Company grants credit in the
normal course of business to their clients. As part of this ongoing procedure,
the Company monitors the creditworthiness of their clients. The Company does not
believe that they are subject to any unusual credit risk beyond the normal
credit risk inherent in their business.
For the six months ended June 30, 1998, two customers accounted for 27%
($829,777), and 11% ($338,057) of total revenue, and two customers accounted for
32% ($282,791), and 19% ($167,907) of accounts receivable at June 30, 1998.
For the year ended December 31, 1997, three clients accounted for 33%
($927,964), 17% ($478,042), and 11% ($309,321) of total revenues, and three
clients accounted for 44% ($279,055), 16% ($101,474), and 11% ($69,764) of
accounts receivable at December 31, 1997. For the year ended December 31, 1996,
three clients accounted for 57% ($425,803), 29% ($216,637), and 11% ($82,173) of
total revenues, and three clients accounted for 42% ($94,710), 24% ($54,120),
and 11% ($24,805) of accounts receivable at December 31, 1996.
REVENUE RECOGNITION
Revenue is recognized in the period the services are performed.
ADVERTISING COSTS
The Company expenses advertising costs as incurred. Advertising expense was
approximately $73,000 and $30,000 in 1997 and 1996, respectively. Advertising
expense was approximately $8,000 for the six months ended June 30, 1998.
NEW ACCOUNTING PRONOUNCEMENTS
In 1997, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 130, "Reporting Comprehensive Income" (SFAS
No. 130). SFAS No. 130 establishes standards for reporting and displaying
comprehensive income. SFAS No. 130 only impacts display as opposed to actual
amounts recorded. Other comprehensive income includes all non-owner changes in
equity that are excluded from net income, such as foreign currency translation
adjustments. SFAS No. 130 was adopted in 1998.
F-40
<PAGE>
I.I.T. HOLDING, INC. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(INFORMATION AS OF AND FOR THE SIX MONTHS ENDED JUNE 30, 1998 AND 1997 IS
UNAUDITED)
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
In June 1997, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 131, "Disclosures about Segments of an
Enterprise and Related Information" (SFAS No. 131). This Statement requires that
public business enterprises report certain information about operating segments
in complete sets of financial statements of the enterprise and in condensed
financial statements of interim periods issued to shareholders. It also requires
that public business enterprises report certain information about their product
and services, the geographic areas in which they operate, and their major
customers. Upon adoption of this pronouncement, additional disclosures will be
required by the Company. This statement is effective for fiscal years beginning
after December 15, 1997. Earlier application is encouraged. The impact of the
adoption of SFAS No. 131 in 1998 has not been determined.
2. LEASES
The Company has entered into various capital leases for computer equipment
during 1997. Computer equipment under capital lease obligations were acquired
for approximately $44,000. Depreciation expense for the six months ended June
30, 1998 was $7,411 and for the year ended December 31, 1997 was $6,000.
Future lease payments under capital and operating leases are summarized as
follows:
<TABLE>
<CAPTION>
CAPITAL
LEASES OPERATING LEASES
------------- ----------------
<S> <C> <C>
1998........................................................ $ 25,118 $ 31,936
1999........................................................ 13,503 3,111
2000........................................................ 5,844 2,592
------------- -------
Total minimum lease payments.............................. 44,465 $ 37,639
-------
-------
Less amounts representing interest.......................... 10,282
-------------
Present value of minimum lease payments (including current
portion of $18,230)....................................... $ 34,183
-------------
-------------
</TABLE>
Rent expense was $17,000, $32,000 and $17,000 for the six months ended June 30,
1998 and for the year ended December 31, 1997 and 1996, respectively.
Capital leases have effective interest rates which range primarily from 6% to
25%.
3. ACCRUED EXPENSES
Accrued expenses are comprised of the following
<TABLE>
<CAPTION>
DECEMBER 31,
---------------------- JUNE 30,
1996 1997 1998
---------- ---------- -------------
<S> <C> <C> <C>
Accrued bonuses, payroll and payroll taxes............. $ 60,000 $ 287,120 $ 586,596
Accrued consulting..................................... -- 67,965 63,744
Accrued expenses....................................... -- 11,600 123,348
---------- ---------- -------------
Total accrued expenses............................... $ 60,000 $ 366,685 $ 773,688
---------- ---------- -------------
---------- ---------- -------------
</TABLE>
F-41
<PAGE>
I.I.T. HOLDING, INC. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(INFORMATION AS OF AND FOR THE SIX MONTHS ENDED JUNE 30, 1998 AND 1997 IS
UNAUDITED)
4. EMPLOYEE BENEFIT PLAN
The Company has established a defined contribution benefit plan effective
January 1, 1998. The plan covers substantially all employees of the Company who
are 21 years of age or older. Participants may contribute up to 15% of their
annual compensation to the plan, and the Company matches up to 3% of annual
compensation.
5. NOTE PAYABLE
The note payable is due to a financing organization, and requires monthly
installments of $552, including interest at 9.90%. The note is secured by a
vehicle and is personally guaranteed by a stockholder.
6. COMMON STOCK
Upon reorganization in February 1998, the Company was authorized to issue
100 shares of common stock with a par value of $5.00 per share. At June 30,
1998, 95 shares were issued and outstanding.
7. STOCK COMPENSATION EXPENSE
In August 1997, the sole stockholder of the Company transferred 473 shares
of the outstanding common stock to management employees for no consideration. An
independent appraisal was obtained which estimated the fair value of the shares
on the date of transfer at $1,002,316. This transfer was treated as a
contribution to additional paid-in capital by the sole stockholder, with an
offsetting charge to compensation expense. In 1997, the Company recorded
compensation expense of $1,002,316 relating to the transfer of these shares.
8. INCOME TAXES
Deferred income tax assets and liabilities are determined based upon
differences between financial reporting and the tax basis of assets and
liabilities and are measured using the enacted tax rate and laws that will be in
effect when the differences are expected to reverse.
The components of the income tax provision are as follows:
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER
31 SIX MONTHS SIX MONTHS
-------------------- ENDED ENDED
1996 1997 JUNE 30, 1997 JUNE 30, 1998
--------- --------- ------------- -------------
<S> <C> <C> <C> <C>
Current.......................... $ -- $ -- $ -- $ --
Deferred......................... 14,832 (58,372) -- --
--------- --------- ------------- -------------
Total.......................... $ 14,832 $ (58,372) $ -- $ --
--------- --------- ------------- -------------
--------- --------- ------------- -------------
</TABLE>
F-42
<PAGE>
I.I.T. HOLDING, INC. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(INFORMATION AS OF AND FOR THE SIX MONTHS ENDED JUNE 30, 1998 AND 1997 IS
UNAUDITED)
8. INCOME TAXES (CONTINUED)
Deferred income taxes reflect the net tax effects of temporary differences
between the carrying amount of assets and liabilities for financial reporting
purposes and the amounts used for income tax purposes. Significant components of
net deferred income taxes are as follows:
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31
-----------------------
<S> <C> <C> <C>
1996 1997
---------- -----------
Deferred tax assets:
Payroll accrual............................... $ 23,964 $ 71,734
Bonus accrual................................. -- 30,934
Other accruals................................ 5,239 40,537
Contributions................................. 40 --
U.S. net operating loss carryforward.......... 11,871 382,242
---------- -----------
Total deferred tax assets..................... 41,114 525,447
Valuation allowance for deferred tax assets... -- (279,506)
---------- -----------
Net deferred tax assets....................... 41,114 245,941
Deferred tax liabilities
Depreciation.................................. (9,103) (9,570)
State tax..................................... (319) (627)
Accounts receivable........................... (90,065) (235,744)
---------- -----------
(99,487) (245,941)
---------- -----------
Total net deferred tax liability............ $ (58,373) $ --
---------- -----------
---------- -----------
</TABLE>
The Company's U.S. subsidiary has net operating loss carry forwards of
approximately $900,000 available to offset future taxable income of the U.S.
operations. These carry forwards will expire in 2012.
The Company's Venezuelan subsidiary has experienced net operating losses in
the amount of $82,000 and $28,000 for the year ended December 31, 1997 and for
the period from March 6, 1996 (inception) through December 31, 1996,
respectively. These net operating losses result in deferred tax assets of
approximately $23,000 at December 31, 1997 and $5,000 at December 31, 1996. Net
operating losses of $28,000 will expire in 1999 and $82,000 will expire in 2000.
Management has determined that it is more likely than not that these net
operating losses will not be utilized, and therefore has determined that a full
valuation allowance of $23,000 and $5,000 is needed at December 31, 1997 and
December 31,1996, respectively.
9. GEOGRAPHIC SEGMENT INFORMATION
The Company is engaged in one business segment. This segment includes
providing internet consulting, integration, and support services principally to
commercial companies located throughout the United States and South America. The
following table presents information regarding geographic segments for 1997 and
1996. There were no service transfers between the United States and South
F-43
<PAGE>
I.I.T. HOLDING, INC. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(INFORMATION AS OF AND FOR THE SIX MONTHS ENDED JUNE 30, 1998 AND 1997 IS
UNAUDITED)
9. GEOGRAPHIC SEGMENT INFORMATION (CONTINUED)
America. Operating profit is total service revenue less cost of service revenue,
general and administrative expenses, sales and marketing and depreciation.
<TABLE>
<CAPTION>
UNITED
STATES SOUTH AMERICA TOTAL
------------ ------------- ------------
<S> <C> <C> <C> <C>
Consulting revenue:
1997 $2,664,214 $ 147,797 $ 2,812,011
1996 743,687 3,336 747,023
Depreciation:
1997 $ 26,919 $ 3,334 $ 30,253
1996 12,720 836 13,556
Operating profit:
1997 $ 158,280 $ (98,838) $ 59,442
1996 39,481 (29,617) 9,864
Other expense:
1997 $ (4,782) (4,195) $ (8,977)
1996 $ (2,345) (572) $ (2,917)
Identifiable assets:
1997 $ 692,702 $ 76,361 $ 769,063
1996 279,616 68,247 347,863
</TABLE>
10. IMPACT OF YEAR 2000 (UNAUDITED)
Some older computer programs were written using two digits rather than four
to define the applicable year. As a result, those computer programs have
time-sensitive software that recognize a date using "00" as the year 1900 rather
than the year 2000. This could cause a system failure or miscalculations causing
disruptions of operations, including, among other things, a temporary inability
to process transactions, send invoices, or engage in similar normal business
activities.
The Company is assessing the modifications or replacement of its software
that may be necessary for its computer systems to function properly with respect
to the dates in the year 2000 and thereafter. The Company does not believe that
the cost of either modifying existing software or converting to new software
will be significant or that the year 2000 issue will pose significant
operational problems for its computer systems.
11. SUBSEQUENT EVENTS
On August 28, 1998, the stockholders of the Company entered into an
agreement to exchange 100% of their outstanding shares for cash and warrants of
the acquiring entity on September 8, 1998.
F-44
<PAGE>
UNAUDITED PRO FORMA CONSOLIDATED STATEMENT OF OPERATIONS
The following Unaudited Pro Forma Consolidated Statement of Operations is
based on the historical consolidated financial statements of USI and the
historical financial statements of ACR and IIT during the periods presented,
adjusted to give effect to those acquisitions.
The Unaudited Pro Forma Consolidated Statement of Operations for the year
ended December 31, 1998 gives effect to the acquisitions as if they had occurred
as of January 1, 1998. The pro forma adjustments are described in the
accompanying notes and are based upon available information and certain
assumptions that management believes are reasonable.
The Unaudited Pro Forma Consolidated Statement of Operations does not
purport to represent what USI's results of operations would actually have been
had the acquisitions in fact occurred on such dates or to project USI's results
of operations for any future date or period. The Unaudited Pro Forma
Consolidated Statement of Operations should be read in conjunction with the
consolidated financial statements of USI, ACR and IIT, and the related notes
thereto, included elsewhere in this Prospectus and "Management's Discussion and
Analysis of Financial Condition and Results of Operations."
IIT was purchased in September 1998 and ACR was purchased in October 1998
and have been accounted for under the purchase method of accounting. The total
purchase price for each of the acquisitions has been allocated to the
identifiable tangible and intangible assets and liabilities of the applicable
acquired business based upon their fair values with the remainder allocated to
goodwill.
P-1
<PAGE>
USINTERNETWORKING, INC.
UNAUDITED PRO FORMA CONSOLIDATED STATEMENT OF OPERATIONS
FOR THE TWELVE MONTHS ENDED DECEMBER 31, 1998
(AMOUNTS IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
HISTORICAL PRO FORMA PRO FORMA
USI(1) ACR IIT TOTAL ADJUSTMENTS(2) CONSOLIDATED
--------- --------- --------- ----------- --------------- ------------
<S> <C> <C> <C> <C> <C> <C>
Revenues.................................. $ 119 $ 7,489 $ 6,900 $14,508 $ (570)(a) $13,938
--------- --------- --------- ----------- --------------- ------------
Expenses:
Cost of sales and services.............. 4,158 4,868 3,781 12,807 -- 12,807
Selling, general and administrative
expenses.............................. 26,466 2,172 2,299 30,937 2,122(b) 33,059
--------- --------- --------- ----------- --------------- ------------
Operating income (loss)................. (30,505) 449 820 (29,236) (2,692) (31,928)
Interest expense........................ 2,675 24 6 2,705 -- 2,705
Interest income......................... (365) -- -- (365) -- (365)
--------- --------- --------- ----------- --------------- ------------
Income (loss) before income taxes......... (32,815) 425 814 (31,576) (2,692) (34,268)
Provision (benefit) for income taxes...... -- 14 -- 14 (14)(c) --
--------- --------- --------- ----------- --------------- ------------
Net (loss) income......................... $ (32,815) $ 411 $ 814 $ (31,590) $ (2,678) $ (34,268)
--------- --------- --------- ----------- --------------- ------------
--------- --------- --------- ----------- --------------- ------------
Basic and diluted loss per common share
attributable to common stockholders..... $ (54.83)
------------
</TABLE>
- ------------------------
(1) For the period from inception, January 14, 1998, to December 31, 1998.
(2) Pro forma adjustments to the unaudited consolidated statement of operations
for the twelve months ended December 31, 1998 are made to reflect the
following:
(a) To record the elimination of intercompany revenue.
(b) To record amortization of goodwill of $2,040 related to the acquisitions
over the estimated useful life of 15 years as well as the elimination of
$82 of intercompany expenses.
(c) USI, after considering the pro forma effects of the acquisitions, has a
pro forma net loss of $34,268. The tax benefits of such loss are offset
by a valuation allowance based on uncertainties surrounding the
realization of the income tax benefit.
P-2
<PAGE>
[LOGO]
<PAGE>
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 13. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION
The following table sets forth the various expenses, all of which will be
borne by the Registrant, in connection with the sale and distribution of the
securities being registered, other than the underwriting discounts and
commissions. All amounts shown are estimates except for the Securities and
Exchange Commission registration fee, the NASD filing fee and the Nasdaq
National Market Listing Fee.
<TABLE>
<S> <C>
SEC Registration Fee.................................................... $ 23,978
NASD Filing Fee......................................................... 9,125
Nasdaq National Market Listing Fee...................................... *
Transfer Agent Fees..................................................... *
Accounting Fees and Expenses............................................ *
Legal Fees and Expenses................................................. *
Printing and Mailing Expenses........................................... *
Miscellaneous........................................................... *
---------
Total............................................................... $ *
---------
---------
</TABLE>
- ------------------------
* To be supplied by amendment.
ITEM 14. INDEMNIFICATION OF DIRECTORS AND OFFICERS
Section 145 of the General Corporation Law of the State of Delaware
("Section 145") permits a Delaware corporation to indemnify any person who was
or is a party or is threatened to be made a party to any threatened, pending, or
completed action, suit, or proceeding, whether civil, criminal, administrative,
or investigative (other than an action by or in the right of the corporation) by
reason of the fact that such person is or was a director, officer, employee, or
agent of the corporation, or is or was serving at the request of the corporation
as a director, officer, employee, or agent of another corporation, partnership,
joint venture, trust, or other enterprise, against expenses (including
attorneys' fees), judgments, fines, and amounts paid in settlement actually and
reasonably incurred by such person in connection with such action, suit, or
proceeding if such person acted in good faith and in a manner such person
reasonably believed to be in or not opposed to the best interests of the
corporation, and, with respect to any criminal action or proceeding, had no
reasonable cause to believe such person's conduct was unlawful.
In the case of an action by or in the right of the corporation, Section 145
permits the corporation to indemnify any person who was or is a party or is
threatened to be made a party to any threatened, pending, or completed action or
suit by or in the right of the corporation to procure a judgment in its favor by
reason of the fact that such person is or was a director, officer, employee or
agent of the corporation, or is or was serving at the request of the corporation
as a director, officer, employee or agent of another corporation, partnership,
joint venture, trust or other enterprise against expenses (including attorneys'
fees) actually and reasonably incurred by such person in connection with the
defense or settlement of such action or suit if he acted in good faith and in a
manner such person reasonably believed to be in or not opposed to the best
interest of the corporation. No indemnification may be made in respect of any
claim, issue, or matter as to which such person shall have been adjudged to be
liable to the corporation unless and only to the extent that the Court of
Chancery or the court in which such action or suit was brought shall determine
upon application that, despite the adjudication of liability but in view of all
the circumstances of the case, such person is fairly and reasonably entitled to
indemnity for such expenses which the Court of Chancery or such other court
shall deem proper.
II-1
<PAGE>
To the extent that a present or former director or officer of a corporation
has been successful on the merits or otherwise in defense of any action, suit or
proceeding referred to in the preceding two paragraphs, Section 145 requires
that such person be indemnified against expenses (including attorneys' fees)
actually and reasonably incurred by such person in connection therewith.
Section 145 provides that expenses (including attorneys' fees) incurred by
an officer or director in defending any civil, criminal, administrative, or
investigative action, suit or proceeding may be paid by the corporation in
advance of the final disposition of such action, suit or proceeding upon receipt
of an undertaking by or on behalf of such director or officer to repay such
amount if it shall ultimately be determined that such person is not entitled to
be indemnified by the corporation as authorized in Section 145.
Our Certificate provides that one of our officers or directors will not be
personally liable to us or our stockholders for monetary damages for any breach
of his fiduciary duty as an officer or director, except in certain cases where
liability is mandated by the DGCL. The provision has no effect on any
non-monetary remedies that may be available to us or our stockholders, nor does
it relieve us or our officers or directors from compliance with federal or state
securities laws. The Certificate also generally provides that we will indemnify,
to the fullest extent permitted by law, any person who was or is a party or is
threatened to be made a party to any threatened, pending or completed action,
suit, investigation, administrative hearing or any other proceeding (each, a
"Proceeding") by reason of the fact that he is or was our director or officer,
or is or was serving at our request as a director, officer, employee or agent of
another entity, against expenses incurred by him in connection with such
Proceeding. An officer or director shall not be entitled to indemnification from
us if (i) the officer or director did not act in good faith and in a manner
reasonably believed to be in, or not opposed to, our best interests, or (ii)
with respect to any criminal action or proceeding, the officer or director had
reasonable cause to believe his conduct was unlawful.
Our Bylaws provide that we will indemnify any person who is made a party to
any threatened, pending or completed action, suit or proceeding by reason of the
fact that he or she is or was our director or officer, and may indemnify any of
our employees or agents in those circumstances, against expenses, including
attorneys' fees, judgments, fines and amounts paid in settlement actually and
reasonably incurred by him or her in connection with such action, suit or
proceeding. No indemnification may be provided for any person who shall have
been finally adjudicated not to have acted honestly or in the reasonable belief
that his or her action was in or not opposed to our best interests or who had
reasonable cause to believe that his or her conduct was unlawful.
Indemnification must be provided to any of our directors, officers, employees or
agents to the extent the person succeeded, on the merits or otherwise, in
defense of any action or claim described above. Any indemnification under this
provision of the Bylaws, unless required under the Bylaws or ordered by a court,
can be made only as authorized in each specific case upon a determination by a
majority of disinterested directors or by independent legal counsel or by the
shareholders that such indemnification is appropriate under the standard set
forth in the preceding sentence.
The underwriting agreement to be filed as Exhibit 1.1 to the Registration
Statement provides for indemnification by the underwriters of USI and its
directors and certain officers, and by USI of the underwriters, for certain
liabilities arising under the Securities Act or otherwise.
ITEM 15. RECENT SALES OF UNREGISTERED SECURITIES
Set forth in chronological order is information regarding all securities
sold and employee stock options granted by the Registrant since January 14,
1998. Further included is the consideration, if any, received by the Registrant
for such securities, and information relating to the section of the Securities
Act of 1933, as amended (the "Securities Act"), and the rules of the Securities
and Exchange Commission under which exemption from registration was claimed. All
awards of options did not involve any
II-2
<PAGE>
sale under the Securities Act. None of these securities were registered under
the Securities Act. Except as described below, no sale of securities involved
the use of an underwriter and no commissions were paid in connection with the
sales of any securities.
1. At various times during the period from January 1998 through January 5,
1999, we have granted to employees and directors options to purchase an
aggregate of 1,682,250 shares of Common Stock with an exercise price of
$2.64. The issuance of these securities were not registered under the
Securities Act in reliance upon Rule 701 of the rules promulgated under the
Securities Act.
2. On January 14, 1998, we issued 625,000 shares of Common Stock to Christopher
R. McCleary for $5,000 in cash.
3. On April 1, 1998, we issued 718,750 shares of Common Stock to Stephen E.
McManus and Christopher Poelma for an aggregate purchase price of $57,500.
The purchase price for the Common Stock was paid with cash and notes payable
to the Company.
4. On May 31, 1998, we issued 38,333.33 shares of Series A Preferred Stock for
an aggregate purchase price of $23 million to the Initial Series A
Investors. The purchase price for such shares was paid in cash at the time
of the issuance. We simultaneously issued 1,666.67 shares of Series A
Preferred Stock for an aggregate purchase price of $1 million to Christopher
R. McCleary. The purchase price for such shares was paid by the forgiveness
by Mr. McCleary of $1 million of debt that we owed him.
5. On June 18, 1998, we issued 5,000 shares of Series A Preferred Stock for an
aggregate purchase price of $3 million to certain of the Initial Series A
Purchasers. We simultaneously issued 5,833.33 shares of Series A Preferred
Stock for $3.5 million to U S WEST. The purchase price for such shares was
paid in cash at the time of issuance.
6. On June 19, 1998, we issued 3,000 shares of Series A Preferred Stock for an
aggregate purchase price of $1.6 million to HAGC Partners, Chris Horgan (who
later transferred his interest to his affiliate, Southeastern Technology
Fund, L.P.) and the Account Management Purchasers. The purchase price for
such shares was paid in cash at the time of issuance. We simultaneously
issued 1,166.67 shares of Series A Preferred Stock for a purchase price of
$700,002 to USI Partners. The purchase price for such shares was paid in
cash at the time of issuance.
7. On July 27, 1998, we issued to Andrew A. Stern 625,000 shares of Common
Stock with a fair market value of $1,000,000. Mr. Stern paid $5,000 in cash
for these shares, and the remainder was recorded as a compensation expense
to the Company.
8. On September 8, 1998, we issued convertible promissory notes in the
aggregate amount of $9,095,000, together with warrants to purchase 974,450
shares of Common Stock for $.01 per share, to certain of the existing
holders of the Series A Preferred Stock. The purchase price for such notes
and warrants was paid in cash at the time of issuance.
9. On December 16, 1998, we issued convertible promissory notes in the
aggregate amount of $8 million to certain of the existing holders of the
Series A Preferred Stock. The purchase price for such notes was paid in cash
at the time of issuance.
10. On December 24, 1998, we issued convertible promissory notes in the amount
of $5 million to U S WEST. The purchase price for such notes was paid in
cash at the time of issuance.
11. On December 31, 1998, we issued 59,278.56 shares of Series B Preferred Stock
for an aggregate purchase price of $62,242,500 to certain holders of the
convertible promissory notes described above, certain holders of Series A
Preferred Stock, and a number of new investors. Of the total
II-3
<PAGE>
purchase price for such shares $40,147,500 was paid in cash and $22,095,000
was paid by conversion of outstanding convertible promissory notes with an
equivalent aggregate principal amount, all at the time of issuance.
All of the shares of preferred stock described in paragraphs 3 through 11
above are being exchanged for shares of Common Stock prior to completion of this
offering. The issuances of the securities above were made in reliance on one or
more exemptions from registration under the Securities Act, including those
provided by Section 4(2) and Rule 701 thereunder. The purchasers of these
securities represented that they had adequate access, through their employment
with us or otherwise, to information about us.
ITEM 16. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES
(a) Exhibits
<TABLE>
<CAPTION>
EXHIBIT
NO. DESCRIPTION
- ----------- ---------------------------------------------------------------------------------------------------------
<C> <S>
1.1* Form of Underwriting Agreement
3.1+ Amended and Restated Certificate of Incorporation of the Registrant
3.2 Form of Second Restated Certificate of Incorporation of the Registrant
3.3+ Bylaws of the Registrant
3.4 Form of Amended and Restated Bylaws of the Registrant
4.1* Specimen Certificate for shares of Common Stock, $.001 par value, of the Registrant
5.1* Opinion of Latham & Watkins with respect to the validity of the securities being offered.
10.1+ Stock Purchase Agreement between USI and the Initial Series A Purchasers dated May 13, 1998
10.2+ Stock Purchase Agreement between USI and certain of the Initial Series A Purchasers dated June 18, 1998
10.3+ Stock Purchase Agreement between USI and U S WEST dated June 18, 1998
10.4+ Stock Purchase Agreement between USI and the Account Management Purchasers dated June 19, 1998
10.5+ Stock Purchase Agreement between USI and HAGC Partners dated June 19, 1998
10.6+ Stock Purchase Agreement between USI and Chris Horgen dated June 19, 1998
10.7+ Stock Purchase Agreement between USI and USI Partners, Ltd. dated June 19, 1998
10.8+ Stock Purchase Agreement among USI, IIT Holding, Inc., Luis Sebastian Alegrett, Michael Mai, Carlos E.
Bravo, and Vicente Perez de Tudela dated August 28, 1998
10.9 Amended and Restated Stock Purchase Agreement among USI, Advanced Communication Resources, Inc., Matthew
D. Kanter, The Benjamin Kanter 1997 QSST Trust, The Ronald Kanter 1997 QSST Trust and David S. Walden
dated October 2, 1998
10.10+ Stock Purchase Agreement between USI and certain other parties dated December 31, 1998
10.11* Amended and Restated Stockholders Agreement between USI and certain other parties dated December 31, 1998
10.12* Employment Agreement between USI and Christopher R. McCleary dated May 29, 1998
10.13* Employment Agreement between USI and Stephen E. McManus dated June 2, 1998
10.14* Employment Agreement between USI and Andrew A. Stern dated July 27, 1998
10.15* Employment Agreement between USI and Jeffrey L. McKnight dated December 15, 1998
10.16+# Outsourcer Alliance Agreement between USI and PeopleSoft USA, Inc. dated September 28, 1998
10.17+# iMAP Agreement between USI and U S WEST, Inc. dated January 15, 1999
10.18+# Software License Agreement between USI and Sagent Technology, Inc. dated June 25, 1998
10.19+# Software License and Service Agreement between USI and Broadvision, Inc. dated July 22, 1998
10.20++ Note Purchase Agreement among USI and the Account Management Purchasers dated September 8, 1998
10.21++ Note Purchase Agreement between USI and Southeastern Technology Fund, L.P. dated September 8, 1998
10.22 Note Purchase Agreement among USI and certain other parties dated September 8, 1998
10.23++ Note Purchase Agreement between USI and U S WEST dated September 8, 1998
10.24 Note Purchase Agreement between USI and certain other parties dated December 16, 1998
10.25 Note Purchase Agreement between USI and U S WEST dated December 29, 1998
10.26+# SiebelNet Agreement between USI and SiebelNet, Inc. dated January 31, 1999
10.27+# Marketing Services Agreement by and between USI, and U S WEST Communications Services, Inc. and U S WEST
Interprise America, Inc. dated January 31, 1999
10.28 Lease Agreement between Consortium One -- Annapolis, LLC and USI dated April 3, 1998
10.29 Amended and Restated Stock Option Plan
21.1+ Subsidiaries of the Registrant
23.1 Consent of Mahoney Cohen & Company, P.C.
</TABLE>
II-4
<PAGE>
<TABLE>
<CAPTION>
EXHIBIT
NO. DESCRIPTION
- ----------- ---------------------------------------------------------------------------------------------------------
23.2 Consent of Bassan & Associates S.C.
<C> <S>
23.3 Consent of Ernst & Young LLP regarding IIT financial statements
23.4 Consent of Ernst & Young LLP regarding USI financial statements
23.5* Consent of Latham & Watkins (included in Exhibit 5.1)
24.1+ Power of Attorney (included on signature page)
27.1 Financial Data Schedule
99.1+ Report of Independent Auditors
</TABLE>
- ------------------------
* To be filed by amendment.
+ Previously filed.
++ Not filed, in accordance with Instruction No. 2 to Item 601 of Regulation
S-K, because the contract is substantially identical to Exhibit 10.22 except as
to the parties thereto and the principal amount of the note.
# Confidential treatment requested as to certain portions.
(b) Schedules
All schedules have been omitted because they are not required or because the
required information is given in the Consolidated Financial Statements or Notes
thereto.
ITEM 17. UNDERTAKINGS
Insofar as indemnification for liabilities arising under the Securities Act
may be permitted to directors, officers and controlling persons of the
Registrant pursuant to the provisions contained in the Articles of
Incorporation, as amended, and By-Laws, as amended, of the Registrant and the
laws of the State of Delaware 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 Securities 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
matters have 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 Securities Act and will be governed by
the final adjudication of such issue.
The undersigned Registrant hereby undertakes to provide to the Underwriters
at the closing specified in the Underwriting Agreement certificates in such
denominations and registered in such names as required by the Underwriters to
permit prompt delivery to each purchaser.
The undersigned Registrant hereby undertakes that:
(1) For purposes of determining any liability under the Securities Act, the
information omitted from the form of prospectus filed as part of this
Registration Statement in reliance upon Rule 430A and contained in a form of
prospectus filed by the Registrant pursuant to Rule 424(b)(1) or (4) or
497(h) under the Securities Act shall be deemed to be part of this
Registration Statement as of the time it was declared effective.
(2) For the purpose of determining any liability under the Securities Act, each
post-effective amendment that contains a form of prospectus shall be deemed
to be a new registration statement relating to the securities offered
therein, and this offering of such securities at that time shall be deemed
to be the initial bona fide offering thereof.
II-5
<PAGE>
SIGNATURES
PURSUANT TO THE REQUIREMENTS OF THE SECURITIES ACT OF 1933, AS AMENDED,
USINTERNETWORKING, INC. HAS DULY CAUSED THIS REGISTRATION STATEMENT TO BE SIGNED
ON ITS BEHALF BY THE UNDERSIGNED, THEREUNTO DULY AUTHORIZED, IN ANNAPOLIS,
MARYLAND ON MARCH 3, 1999.
<TABLE>
<S> <C> <C>
USINTERNETWORKING, INC.
By: /s/ ANDREW A. STERN
-----------------------------------------
Andrew A. Stern
EXECUTIVE VICE PRESIDENT AND
CHIEF FINANCIAL OFFICER
</TABLE>
Pursuant to the requirements of the Securities Act of 1933, as amended, this
Registration Statement has been signed by the following persons in the
capacities and on the dates indicated.
<TABLE>
<CAPTION>
NAME TITLE DATE
- --------------------------------------------- --------------------------------------- --------------------
<S> <C> <C>
* Chairman of the Board and Chief
- ------------------------------------ Executive Officer March 3, 1999
Christopher R. McCleary (Principal Executive Officer)
*
- ------------------------------------ President and Director March 3, 1999
Stephen E. McManus
/s/ ANDREW A. STERN Executive Vice President and Chief
- ------------------------------------ Financial Officer (Principal March 3, 1999
Andrew A. Stern Financial and Accounting Officer)
*
- ------------------------------------ Director March 3, 1999
R. Dean Meiszer
*
- ------------------------------------ Director March 3, 1999
Benjamin Diesbach
*
- ------------------------------------ Director March 3, 1999
Ray A. Rothrock
*
- ------------------------------------ Director March 3, 1999
Frank A. Adams
*
- ------------------------------------ Director March 3, 1999
William F. Earthman
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
NAME TITLE DATE
- --------------------------------------------- --------------------------------------- --------------------
- ------------------------------------
John H. Wyant Director
<S> <C> <C>
- ------------------------------------
Joseph R. Zell Director
*
- ------------------------------------ Director March 3, 1999
Michael C. Brooks
*
- ------------------------------------ Director March 3, 1999
David J. Poulin
</TABLE>
<TABLE>
<S> <C> <C> <C>
*By: /s/ ANDREW A. STERN
-------------------------
Andrew A. Stern
ATTORNEY-IN-FACT
</TABLE>
<PAGE>
EXHIBIT INDEX
<TABLE>
<CAPTION>
EXHIBIT
NO. DESCRIPTION
- ----------- ---------------------------------------------------------------------------------------------------------
<C> <S>
1.1* Form of Underwriting Agreement
3.1+ Amended and Restated Certificate of Incorporation of the Registrant
3.2 Form of Second Restated Certificate of Incorporation of the Registrant
3.3+ Bylaws of the Registrant
3.4 Form of Amended and Restated Bylaws of the Registrant
4.1* Specimen Certificate for shares of Common Stock, $.001 par value, of the Registrant
5.1* Opinion of Latham & Watkins with respect to the validity of the securities being offered.
10.1+ Stock Purchase Agreement between USI and the Initial Series A Purchasers dated May 13, 1998
10.2+ Stock Purchase Agreement between USI and certain of the Initial Series A Purchasers dated June 18, 1998
10.3+ Stock Purchase Agreement between USI and U S WEST dated June 18, 1998
10.4+ Stock Purchase Agreement between USI and the Account Management Purchasers dated June 19, 1998
10.5+ Stock Purchase Agreement between USI and HAGC Partners dated June 19, 1998
10.6+ Stock Purchase Agreement between USI and Chris Horgen dated June 19, 1998
10.7+ Stock Purchase Agreement between USI and USI Partners, Ltd. dated June 19, 1998
10.8+ Stock Purchase Agreement among USI, IIT Holding, Inc., Luis Sebastian Alegrett, Michael Mai, Carlos E.
Bravo, and Vicente Perez de Tudela dated August 28, 1998
10.9 Amended and Restated Stock Purchase Agreement among USI, Advanced Communication Resources, Inc., Matthew
D. Kanter, The Benjamin Kanter 1997 QSST Trust, The Ronald Kanter 1997 QSST Trust and David S. Walden
dated October 2, 1998
10.10+ Stock Purchase Agreement between USI and certain other parties dated December 31, 1998
10.11* Amended and Restated Stockholders Agreement between USI and certain other parties dated December 31, 1998
10.12* Employment Agreement between USI and Christopher R. McCleary dated May 29, 1998
10.13* Employment Agreement between USI and Stephen E. McManus dated June 2, 1998
10.14* Employment Agreement between USI and Andrew A. Stern dated July 27, 1998
10.15* Employment Agreement between USI and Jeffrey L. McKnight dated December 15, 1998
10.16+# Outsourcer Alliance Agreement between USI and PeopleSoft USA, Inc. dated September 28, 1998
10.17+# iMAP Agreement between USI and U S WEST, Inc. dated January 15, 1999
10.18+# Software License Agreement between USI and Sagent Technology, Inc. dated June 25, 1998
10.19+# Software License and Service Agreement between USI and Broadvision, Inc. dated July 22, 1998
10.20++ Note Purchase Agreement among USI and the Account Management Purchasers dated September 8, 1998
10.21++ Note Purchase Agreement between USI and Southeastern Technology Fund, L.P. dated September 8, 1998
10.22 Note Purchase Agreement among USI and certain other parties dated September 8, 1998
10.23++ Note Purchase Agreement between USI and U S WEST dated September 8, 1998
10.24 Note Purchase Agreement between USI and certain other parties dated December 16, 1998
10.25 Note Purchase Agreement between USI and U S WEST dated December 29, 1998
10.26+# SiebelNet Agreement between USI and SiebelNet, Inc. dated January 31, 1999
10.27+# Marketing Services Agreement by and between USI, and U S WEST Communications Services, Inc. and U S WEST
Interprise America, Inc. dated January 31, 1999
10.28 Lease Agreement between Consortium One -- Annapolis, LLC and USI dated April 3, 1998
10.29 Amended and Restated Stock Option Plan
21.1+ Subsidiaries of the Registrant
23.1 Consent of Mahoney Cohen & Company, P.C.
23.2 Consent of Bassan & Associates S.C.
23.3 Consent of Ernst & Young LLP regarding IIT financial statements
23.4 Consent of Ernst & Young LLP regarding USI financial statements
23.5* Consent of Latham & Watkins (included in Exhibit 5.1)
24.1+ Power of Attorney (included on signature page)
27.1 Financial Data Schedule
99.1+ Report of Independent Auditors
</TABLE>
- ------------------------
* To be filed by amendment.
+ Previously filed.
++ Not filed, in accordance with Instruction No. 2 to Item 601 of Regulation
S-K, because the contract is substantially identical to Exhibit 10.22 except as
to the parties thereto and the principal amount of the note.
# Confidential treatment requested as to certain portions.
<PAGE>
Exhibit 3.2
SECOND AMENDED AND RESTATED CERTIFICATE OF INCORPORATION
OF
USINTERWORKING, INC.
(INCORPORATED JANUARY 14, 1998)
***********
I, Andrew A. Stern, Executive Vice President and Chief Financial
Officer of USinterworking, Inc. (the "Corporation"), a corporation organized and
existing under and by virtue of the General Corporation Law of the State of
Delaware, do hereby certify that the First Amended and Restated Certificate of
Incorporation of USinterworking, Inc. originally filed with the Secretary of
State of the State of Delaware on December 31, 1998, and amended on February
______, 1999 and February __ 1999, has been amended and restated in accordance
with provisions of Sections 242 and 245 of the General Corporation Law of the
State of Delaware, and, as amended and restated, is set forth in its entirety as
follows:
FIRST. The name of the Corporation is USinterworking, Inc.
SECOND. The address of the registered office of the Corporation in the
State of Delaware is 1209 Orange Street, Wilmington, Delaware, 19801 in New
Castle County. The name of its registered agent at such address is The
Corporation Trust Company.
THIRD. The nature of the business or purposes to be conducted or
promoted is to engage in any lawful act or activity for which corporations may
be organized under the General Corporation Law of the State of Delaware.
FOURTH. The total number of shares of all classes of capital stock
which the Corporation shall have authority to issue is [_________] shares,
consisting of [________] shares of Common Stock with a par value of $.001 per
share (the "Common Stock") and 1,000.000 shares of Preferred Stock with a par
value or $.001 per share (the "Preferred Stock").
A description of the respective classes of stock and a statement of
the designations, powers, preferences and rights, and the qualifications,
limitations and restrictions of the Preferred Stock and Common Stock are as
follows:
<PAGE>
A. COMMON STOCK
1. GENERAL. All shares of Common Stock will be identical and will
entitle the holders thereof to the same rights, powers and privileges. The
rights, powers and privileges of the holders of the Common Stock are subject to
and qualified by the rights of holders of the Preferred Stock.
2. DIVIDENDS. Dividends may be declared and paid on the Common Stock
from funds lawfully available therefor as and when determined by the Board of
Directors and subject to any preferential dividend rights of any then
outstanding Preferred Stock.
3. DISSOLUTION, LIQUIDATION OR WINDING UP. In the event of any
dissolution, liquidation or winding up of the affairs of the Corporation,
whether voluntary or involuntary, each issued and outstanding share of Common
Stock shall entitle the holder thereof to receive an equal portion of the net
assets of the Corporation available for distribution to the holders of Common
Stock, subject to any preferential rights of any then outstanding Preferred
Stock.
4. VOTING RIGHTS. Except as otherwise required by law or this Second
Amended and Restated Certificate of Incorporation, each holder of Common Stock
shall have one vote in respect of each share of stock held of record by such
holder on the books of the Corporation for the election of directors and on all
matters submitted to a vote of stockholders of the Corporation. Except as
otherwise required by law or provided herein, holders of Common Stock shall vote
together with holders of the Preferred Stock as a single class, subject to any
special or preferential voting rights of any then outstanding Preferred Stock.
There shall be no cumulative voting.
B. PREFERRED STOCK
The Preferred Stock may be issued in one or more series at such time
or times and for such consideration or considerations as the Board of Directors
of the Corporation may determine. Each series shall be so designated as to
distinguish the shares thereof from the shares of all other series and classes.
Except as otherwise provided in this Amended and Restated Certificate of
Incorporation, different series of Preferred Stock shall not be construed to
constitute different classes of shares for the purpose of voting by classes.
The Board of Directors is expressly authorized to provide for the
issuance of all or any shares of the undesignated Preferred Stock in one or more
series, each with such designations, preferences, voting powers (or special,
preferential or no voting powers), relative, participating, optional or other
special right, and privileges and such qualifications, limitations or
restrictions thereof as shall be stated in the resolution or resolutions adopted
by the Board of Directors to create such series, and a certificate of said
resolution or resolutions (a "Certificate of Designation") shall be filed in
accordance with the General Corporation Law of the State of Delaware. The
authority of the Board of Directors with respect to each such series shall
include, without limitation of the foregoing, the right to provide that the
shares of each such series may
2
<PAGE>
be: (i) subject to redemption at such time or times and at such price or prices;
(ii) entitled to receive dividends (which may be cumulative or non-cumulative)
at such rates, on such conditions, and at such times, and payable in preference
to, or in such relation to, the dividends payable on any other class or classes
or any other series; (iii) entitled to such rights upon the dissolution of, or
upon any distribution of the assets of, the Corporation, (iv) convertible into,
or exchangeable for, shares of any other class or classes of stock, or of any
other series of the same or any other class or classes of stock of the
Corporation at such price or prices or at such rates of exchange and with such
adjustments, if any; (v) entitled to the benefit of such limitations, if any, on
the issuance of additional shares of such series or shares of any other series
of Preferred Stock; or (vi) entitled to such other preferences, powers,
qualifications, rights and privileges, all as the Board of Directors may deem
advisable and as are not inconsistent with law and the, provisions of this
Second Amended and Restated Certificate of Incorporation.
FIFTH. The Corporation is to have perpetual existence.
SIXTH. The following provisions are included for the management of the
business and the conduct of the affairs of the Corporation, and for further
definition, limitation and regulation of the powers of the Corporation and of
its Board of Directors and stockholders:
1. The business and affairs of the Corporation shall be managed by or
under the direction of the Board of Directors of the Corporation.
2. The Board of Directors of the Corporation is expressly authorized
to adopt, amend or repeal the By-laws of the Corporation, subject to any
limitation thereof contained in the By-laws. The stockholders shall also have
the power to adopt, amend or repeal the By-laws of the Corporation; PROVIDED,
HOWEVER, in addition to any vote of the holders of any class or series of stock
of the Corporation required by law or by this Second Amended and Restated
Certificate of Incorporation, the affirmative vote of the holders of at least
seventy-five percent (75%) of the voting power of all of the then outstanding
shares of the capital stock of the Corporation entitled to vote generally in the
election of directors, voting together as a single class, shall be required to
adopt, amend or repeal any provision of the By-laws of the Corporation.
3. Stockholders of the Corporation may not take any action by written
consent in lieu of a meeting.
4. Special meetings of stockholders may be called at any time only by
the Chief Executive Officer, the Chairman of the Board of Directors (if any) or
a majority of the Board of Directors. Business transacted at any special meeting
of stockholders shall be limited to matters relating to the purpose or purposes
stated in the notice of meeting.
5. The books of the Corporation may be kept at such place within or
without the State of Delaware as the By-laws of the Corporation may provide or
as may be designated from time to time by the Board of Directors of the
Corporation.
SEVENTH.
3
<PAGE>
1. NUMBER OF DIRECTORS. The number of directors which shall constitute
the whole Board of Directors shall be determined by resolution of a majority of
the Board of Directors, but in no event shall the number of directors be less
than three. The number of directors may be decreased at any time and from time
to time by a majority of the directors then in office, but only to eliminate
vacancies existing by reason of the death, resignation, removal or expiration of
the term of one or more directors. The directors shall be elected at the annual
meeting of stockholders by such stockholders as have the right to vote on such
election. Directors need not be stockholders of the Corporation.
2. CLASS OF DIRECTOR. The Board of Directors shall be and is divided
into three classes, Class I, Class II and Class III. No one class shall have
more than one director more than any other class.
3. ELECTION OF DIRECTORS. Elections of directors need not be by
written ballot except as and to the extent provided in the By-laws of the
Corporation.
4. TERMS OF OFFICE. Each director shall serve for a term ending on the
date of the third annual meeting following the annual meeting at which such
director was elected; provided, however, that each initial director in Class I
shall serve for a term ending on the date of the annual meeting next following
the end of the Corporation's fiscal year ending December 31, 1999; each initial
director in Class II shall serve for a term ending on the date of the annual
meeting next following the end of the corporation's fiscal year ending december
31, 2000; and each initial director in Class III shall serve for a term ending
on the date of the annual meeting next following the end of the corporation's
fiscal year ending December 31, 2001.
5. ALLOCATION OF DIRECTORS AMONG CLASSES IN THE EVENT OF
INCREASES OR DECREASES IN THE NUMBER OF DIRECTORS. In the event of any increase
or decrease in the authorized number of directors, (i) each director then
serving as such shall nevertheless continue as director of the class of which he
or she is a member until the expiration of such director's current term or his
or her prior death, retirement or resignation and (ii) the newly created or
eliminated directorships resulting from such increase or decrease shall be
apportioned by the Board of Directors among the three classes of directors so as
to ensure that no one class has more than one director more than any other
class. To the extent possible, consistent with the foregoing rule, any newly
created directorships shall be added to those classes whose terms of office are
to expire at the earliest dates following such allocation. No decrease in the
number of director constituting the whole Board of Directors shall shorten the
term of an incumbent Director.
6. TENURE. Notwithstanding any provisions to the contrary contained
herein, each director shall hold office until his or her successor is elected
and qualified, or until his or her earlier death, resignation or removal.
7. VACANCIES. Unless and until filled by the stockholders, any vacancy
in the Board of Directors, however occurring, including a vacancy resulting from
an enlargement of the Board of Directors, may be filled only by vote of a
majority of the directors then in office, even if less than a quorum, or by a
sole remaining director. A director elected to fill a vacancy shall
4
<PAGE>
be elected for the unexpired term of his or her predecessor in office, if
applicable, and a director chosen to fill a position resulting from an increase
in the number of directors shall hold office until the next election of the
class for which such director shall have been chosen and until his or her
successor is elected and qualified, or until his or her earlier death,
resignation or removal.
8. QUORUM. A majority of the total number of the whole Board
of Directors shall constitute a quorum at all meetings of the Board of
Directors. In the event one or more of the directors shall be disqualified to
vote at any meeting, then the required quorum shall be reduced by one for each
such director so disqualified; provided, however, that in no case shall less
than one-third (1/3) of the number so fixed constitute a quorum. In the absence
of a quorum at any such meeting, a majority of the directors present may adjourn
the meeting from time to time without further notice other than announcement at
THE MEETING, UNTIL A QUORUM SHALL BE PRESENT.
9. ACTION AT MEETING. At any meeting of the board of directors at
which a quorum is present, the vote of a majority of those present shall be
sufficient to take any action, unless a different vote is specified by law or
the Corporation's By-laws.
10. REMOVAL. Directors may be removed only for cause. any one or more
or all of the directors may be removed with cause only by the holders of at
least a majority of the shares then entitled to vote at an election of
directors.
11. STOCKHOLDER NOMINATIONS AND INTRODUCTION OF BUSINESS, ETC. Advance
notice of stockholder nominations for election of directors and other business
to be brought by stockholders before a meeting of stockholders shall be given in
the manner provided in the Corporation's By-laws.
12. RIGHTS OF PREFERRED STOCK. The provisions of this article are
subject to the rights of the holders of any series of Preferred Stock from time
to time outstanding.
EIGHTH. No director (including any advisory director) of the
Corporation shall be personally liable to the Corporation or its stockholders
for monetary damages for breach of fiduciary duty as a director notwithstanding
any provision of law imposing such liability; provided, however, that to the
extent provided by applicable law, this provision shall not eliminate the
liability of a director (i) for any breach of the director's duty of loyalty to
the Corporation or its stockholders, (ii) for acts or omissions not in good
faith or which involve intentional misconduct or a knowing violation of law,
(iii) under Section 174 of the General Corporation Law of the State of Delaware,
or (iv) for any transaction from which the director derived an improper personal
benefit. No amendment to or repeal of this provision shall apply to or have any
effect on the liability or alleged liability of any director for or with respect
to any acts or omissions of such director occurring prior to such amendment or
repeal.
NINTH. The Board of Directors of the Corporation, when evaluating any
offer of another party (a) to make a tender or exchange offer for any equity
security of the Corporation or (b) to effect a business combination, shall, in
connection with the exercise of its judgment in determining what is in the best
interests of the Corporation as whole, be authorized to give due
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consideration to any such factors as the Board of Directors determines to be
relevant, including, without Limitation:
(i) the interests of the Corporation's stockholders, including
the possibility that these interests might be best served by the
continued independence of the Corporation;
(ii) whether the proposed transaction might violate federal or
state laws;
(iii) not only the consideration being offered in the proposed
transaction, in relation to the then current market price for the
outstanding capital stock of the Corporation, but also to the market
price for the capital stock of the Corporation over a period of years,
the estimated price that might be achieved in a negotiated sale of the
Corporation as a whole or in part or through orderly liquidation, the
premiums over market price for the securities of other corporations in
similar transactions, current political, economic and other factors
bearing on securities prices and the Corporation's financial condition
and future prospects; and
(iv) the social, legal and economic effects upon employees,
suppliers, customers, creditors and others having similar
relationships with the Corporation, upon the communities in which the
Corporation conducts its business and upon the economy of the state,
region and nation.
In connection with any such evaluation, the Board of Directors is authorized to
conduct such investigations and engage in such legal proceedings as the Board of
Directors may determine.
TENTH.
1. ACTIONS, SUITS AND PROCEEDINGS OTHER THAN BY OR IN THE RIGHT OF THE
CORPORATION. The Corporation shall indemnify each person who was or is a party
or is threatened to be made a party to any threatened, pending or completed
action, suit or proceeding, whether civil, criminal, administrative or
investigative (other than an action by or in the right of the Corporation), by
reason of the fact that he is or was, or has agreed to become, a director or
officer of the Corporation, or is or was serving, or has agreed to serve, at the
request of the Corporation, as a director, officer or trustee of, or in a
similar capacity with, another corporation partnership, joint venture, trust or
other enterprise (including any employee benefit plan) (all such persons being
referred to hereafter as "Indemnitee"), or by reason of any action alleged to
have been taken or omitted in such capacity, against all expenses (including
attorneys' fees), judgments, fines and amounts paid in settlement actually and
reasonably incurred by him or on his behalf in connection with such action, suit
or proceeding and any appeal therefrom, 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 Corporation, and with respect to any criminal action or proceeding, had no
reasonable cause to believe his conduct was unlawful. The termination of any
action, suit or proceeding by judgment, order, settlement, conviction or upon a
plea of NOLO CONTENDERE or its
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equivalent, shall not, of itself, create a presumption that the person did not
act in good faith and in a manner which he reasonably believed to be in, or not
opposed to, the best interests of the Corporation, and, with respect to any
criminal action or proceeding, had reasonable cause to believe that his conduct
was unlawful. Notwithstanding anything to the contrary in this Article, except
as set forth in Section 6 below, the Corporation shall not indemnify an
Indemnitee seeking indemnification in connection with a proceeding (or part
thereof) initiated by the Indemnitee unless the initiation thereof was approved
by the Board of Directors of the Corporation.
2. ACTIONS OR SUITES OR IN THE RIGHT OF THE CORPORATION. The
Corporation shall indemnify any Indemnitee who was or is a party or is
threatened to be made a party to any threatened pending or completed action or
suit by or in the right of the Corporation to procure a judgment in its favor by
reason of the fact that he is or was, or has agreed to become, a director or
officer of the Corporation, or is or was serving, or has agreed to serve, at the
request of the Corporation, as a director, officer or trustee of, or in a
similar capacity with, another corporation, partnership, joint venture, trust or
other enterprise (including any employee benefit plan), or by reason of any
action alleged to have been taken or omitted in such capacity, against all
expenses (including attorneys' fees) and amounts paid in settlement actually and
reasonably incurred by him or on his behalf in connection with such action, suit
or proceeding and any appeal therefrom, 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 Corporation, except that no indemnification shall be made in respect of any
claim, issue or matter as to which such person shall have been adjudged to be
liable to the Corporation unless and only to the extent that the Court of
Chancery of Delaware or the court in which such action or suit was brought shall
determine upon application that, despite the adjudication of such liability but
in view of all the circumstances of the case, such person is fairly and
reasonably entitled to indemnity for such expenses (including attorneys' fees)
which the Court of Chancery of Delaware or such other court shall deem proper.
3. INDEMNIFICATION FOR EXPENSES OF SUCCESSFUL PARTY. Notwithstanding
the other provisions of this Article, to the extent that an Indemnitee has been
successful, on the merits or otherwise, in defense of any action, suit or
proceeding referred to in Sections 1 and 2 of this Article, or in defense of any
claim, issue or matter therein, or on appeal from any such action, suit or
proceeding, he shall be indemnified against all expenses (including attorneys'
fees) actually and reasonably incurred by him or on his behalf in connection
therewith. Without limiting the foregoing, if any action, suit or proceeding is
disposed of, on the merits or otherwise (including a disposition without
prejudice), without (i) the disposition being adverse to the Indemnitee, (ii) an
adjudication that the Indemnitee was liable to the Corporation, (iii) a plea of
guilty or NOLO CONTENDERE by the Indemnitee, (iv) an adjudication that the
Indemnitee did not act in good faith and in a manner he reasonably believed to
be in or not opposed to the best interests of the Corporation, and (v) with
respect to any criminal proceeding, an adjudication that the Indemnitee had
reasonable cause to believe his conduct was unlawful, the Indemnitee shall be
considered for the purpose hereof to have been wholly successful with respect
thereto.
4. NOTIFICATION AND DEFENSE OF CLAIM. As a condition precedent to his
right to be indemnified, the Indemnitee must notify the Corporation in writing
as soon as practicable
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of any action, suit, proceeding or investigation involving him for which
indemnity will or could be sought. With respect to any action, suit, proceeding
or investigation of which the Corporation is so notified, the Corporation will
be entitled to participate therein at its own expense and/or to assume the
defense thereof at its own expense, with legal counsel reasonably acceptable to
the Indemnitee. After notice from the Corporation to the Indemnitee of its
election so to assume such defense, the Corporation shall not be liable to the
Indemnitee for any legal or other expenses subsequently incurred by the
Indemnitee in correction with such claim, other than as provided below in this
Section 4. The Indemnitee shall have the right to employ his own counsel in
connection with such claim, but the fees and expenses of such counsel incurred
after notice from the Corporation of its assumption of the defense thereof shall
be at the expense of the Indemnitee unless (i) the employment of counsel by the
Indemnitee has been authorized by the Corporation, (ii) counsel to the
Indemnitee shall have reasonably concluded that there may be a conflict of
interest or position on any significant issue between the Corporation and the
Indemnitee in the conduct of the defense of such action, or (iii) the
Corporation shall not in fact have employed counsel to assume the defense of
such action, in each of which cases the fees and expenses of counsel for the
Indemnitee shall be at the expense of the Corporation, except as otherwise
expressly provided by this Article. The Corporation shall not be entitled,
without the consent of the Indemnitee, to assume the defense of any claim
brought by or in the right of the Corporation or as to which counsel for the
Indemnitee shall have reasonably made the conclusion provided for in clause (ii)
above.
5. ADVANCE OF EXPENSES. Subject to the provisions of Section 6 below,
in the event that the Corporation does not assume the defense pursuant to
Section 4 of this Article of any action, suit, proceeding or investigation of
which the Corporation receives notice under this Article, any expenses
(including attorneys' fees) incurred by an Indemnitee in defending a civil or
criminal action, suit, proceeding or investigation or any appeal therefrom shall
be paid by the Corporation in advance of the final disposition of such matter,
PROVIDED, HOWEVER, that the payment of such expenses incurred by an Indemnitee
in advance of the final disposition of such matter shall be made only upon
receipt of an undertaking by or on behalf of the Indemnitee to repay all amounts
so advanced in the event that it shall ultimately be determined that the
Indemnitee is not entitled to be indemnified by the Corporation as authorized in
this Article. Such undertaking may be accepted without reference to the
financial ability of such person to make such repayment.
6. PROCEDURE FOR INDEMNIFICATION. In order to obtain
indemnification or advancement of expenses pursuant to Section 1, 2, 3 or 5 of
this Article, the Indemnitee shall submit to the Corporation a written request,
including in such request such documentation and information as is reasonably
available to the Indemnitee and is reasonably necessary to determine whether and
to what extent the Indemnitee is entitled to indemnification or advancement of
expenses. Any such indemnification or advancement of expenses shall be made
promptly, and in any event within 60 days after receipt by the Corporation of
the written request of the Indemnitee, unless with respect to requests under
Section 1, 2 or 5 the Corporation determines, by clear and convincing evidence,
within such 60-day period that the Indemnitee did not meet the applicable
standard of conduct set forth in Section 1 or 2, as the case may be. Such
determination shall be made in each instance by (a) a majority vote of the
directors of the
8
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Corporation who are not at that time parties to the action, suit or proceeding
in question ("disinterested directors"), even though less than a quorum, (b) if
there are no such disinterested directors, or if such disinterested directors so
direct, by independent legal counsel (who may be regular legal counsel to the
corporation) in a written opinion, (c) a majority vote of a quorum of the
outstanding shares of stock of all classes entitled to vote for directors,
voting as a single class, which quorum of the outstanding shares of stock of all
classes entitled to vote for directors, voting as a single class, which quorum
shall consist of stockholders who are not at the time parties to the action,
suit or proceeding in question, or (d) a court of competent jurisdiction.
7. REMEDIES.
The right to indemnification or advances as granted by this Article
shall be enforceable by the Indemnitee in any court of competent jurisdiction if
the corporation denies such request, in whole or in part, or if no disposition
thereof is made within the 60-day period referred to above in Section 6. Unless
otherwise provided by law, the burden of proving that the Indemnitee is not
entitled to indemnification or advancement of expenses under this Article shall
be on the Corporation. Neither the failure of the Corporation to have made a
determination prior to the commencement of such action that indemnification is
proper in the circumstances because the Indemnitee has met the applicable
standard of conduct, nor an actual determination by the Corporation pursuant to
Section 6 that the Indemnitee has not met such applicable standard of conduct,
shall be a defense to the action or create a presumption that the Indemnitee has
not met the applicable standard of conduct. The Indemnitee's expenses (including
attorney's fees) incurred in connection with successfully establishing his right
to indemnification, in whole or in part, in any such proceeding shall also be
indemnified by the Corporation.
8. SUBSEQUENT AMENDMENT.
No amendment, termination or repeal of this Article or of the relevant
provisions of the General Corporation Law of the State of Delaware or any other
applicable laws shall affect or diminish in any way the rights of any Indemnitee
to indemnification under the provisions hereof with respect to any action, suit,
proceeding or investigation arising out of or relating to any action,
transactions or facts occurring prior to the final adoption of such amendment,
termination or repeal.
9. OTHER RIGHTS.
The indemnification and advancement of expenses provided by this
Article shall not be deemed exclusive of any other rights to which an Indemnitee
seeking indemnification or advancement of expenses may be entitled under any law
(common or statutory), agreement or vote of stockholders or disinterested
directors or otherwise, both as to action in his official capacity and as to
action in any other disinterested directors or otherwise both as to action in
his official capacity and as to action in any other capacity while holding
office for the Corporation, and shall continue as to an Indemnitee who has
ceased to be a director or officer, and shall inure to the benefit of the
estate, heirs, executors and administrators of the Indemnitee. Nothing contained
in this Article shall be deemed to prohibit, and the Corporation is specifically
authorized to enter into, agreements with officers and directors providing
indemnification rights
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and procedures different from those set forth in this Article. In addition, the
Corporation may, to the extent authorized from time to time by the Board of
Directors, grant indemnification rights to other employees or agents of the
Corporation or other persons serving the Corporation and such rights may be
equivalent to, greater or less than, those set forth in this Article.
10. PARTIAL INDEMNIFICATION. If an Indemnitee is entitled under any
provision of this Article to indemnification by the Corporation for some or a
portion of the expenses (including attorneys' fees), judgments, fines or amounts
paid in settlement actually and reasonably incurred by him or on his behalf in
connection with any action, suit, proceeding or investigation and any appeal
therefrom but not, however, for the total amount thereof, the Corporation shall
nevertheless indemnify the Indemnitee for the portion of such expenses
(including attorneys, fees), judgments, fines or amounts paid in settlement to
which the Indemnitee is entitled.
11. INSURANCE. The Corporation may purchase and maintain Insurance at
its expense, to protect itself and any director, officer, employee or agent of
the Corporation or another corporation, partnership, joint venture, trust or
other enterprise (including any employee benefit plan) against any expenses,
liability or loss incurred by him in any such capacity, or arising out of his
status as such, whether or not the Corporation would have the power to indemnify
such person against such expense, liability or loss under the General
Corporation Law of the State of Delaware.
12. MERGER OR CONSOLIDATION. If the Corporation is merged into or
consolidated with another corporation and the Corporation is not the surviving
corporation, the surviving corporation shall assume the obligations of the
Corporation under this Article with respect to any action, suit, proceeding or
investigation arising out of or relating to any actions, transactions or facts
occurring prior to the date of such merger or consolidation.
13. SAVINGS CLAUSE. If this Article or any portion hereof shall be
invalidated on any ground by any court of competent jurisdiction, then the
Corporation shall nevertheless indemnity each Indemnitee as to any expenses
(including attorneys' fees), judgments, fines and amounts paid in settlement in
connection with any action, suit, proceeding or investigation, whether civil,
criminal or administrative, including an action by or in the right of the
Corporation, to the fullest extent permitted by an applicable portion of this
Article that shall not have been invalidated and to the fullest extent permitted
by applicable law.
14. DEFINITIONS. Terms used herein and defined in Section 145(h) and
Section 145(i) of the General Corporation Law of the State of Delaware shall
have the respective meanings assigned to such terms in such Section 145(h) and
Section 145(i).
15. SUBSEQUENT LEGISLATION. If the General Corporation Law of the
State of Delaware is amended after adoption of this Article to expand further
the indemnification permitted to Indemnitees, then the Corporation shall
indemnify such persons to the fullest extent permitted by the General
Corporation Law of the State of Delaware, as so amended.
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ELEVENTH. The Corporation reserves the right to amend or repeal any
provision contained in this Second Amended and Restated Certificate of
Incorporation in the manner prescribed by the laws of the State of Delaware and
all rights conferred upon stockholders are granted subject to this reservation,
PROVIDED, HOWEVER, that in addition to the vote of the holders of any class or
series of stock of the Corporation required by law or by this Second Amended and
Restated Certificate of Incorporation but in addition to any vote of the holders
of any class or series of stock of the Corporation required by law, this Second
Amended and Restated Certificate of Incorporation or a Certificate of
Designation with respect to a series of Preferred Stock, the affirmative vote of
the holders of shares of voting Stock of the Corporation representing at least
seventy-five percent (75%) of the voting power of all of the then outstanding
shares of the capital stock of the Corporation entitled to vote generally in the
election of directors voting together as a single class, shall be required to
(i) reduce or eliminate the number of authorized shares of Common Stock or the
number of authorized shares of Preferred Stock set forth in Article FOURTH or
(ii) amend or repeal, or adopt any provision inconsistent with, Parts A and B of
Article FOURTH and Articles FIFTH, SIXTH, SEVENTH, EIGHTH, NINTH, TENTH and this
Article ELEVENTH of this Second Amended and Restated Certificate of
Incorporation.
IN WITNESS WHEREOF, the undersigned has hereunto signed his name and
affirms that the statements made in this Second Amended and Restated Certificate
of Incorporation are true under the penalties of perjury this__ day of_____1999.
-----------------------------------------------
Andrew A. Stern
Executive Vice President and Chief Financial
Officer
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Exhibit 3.4
AMENDED AND RESTATED
BY-LAWS
OF
USINTERNETWORKING, INC.
<PAGE>
BY-LAWS
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE NUMBER
<S> <C> <C>
ARTICLE 1. STOCKHOLDERS....................................................................................3
1.1. PLACE OF MEETING...........................................................................3
1.2. ANNUAL MEETING ............................................................................3
1.3. SPECIAL MEETING............................................................................3
1.4. NOTICE OF MEETINGS.........................................................................3
1.5. VOTING LIST................................................................................4
1.6. QUORUM.....................................................................................4
1.7. ADJOURNMENTS...............................................................................4
1.8. VOTING AND PROXIES.........................................................................5
1.9. ACTION AT MEETING..........................................................................5
1.10. INTRODUCTION OF BUSINESS AT MEETINGS......................................................6
1.11. ACTION WITHOUT MEETING....................................................................8
ARTICLE 2. DIRECTORS.......................................................................................8
2.1. GENERAL POWERS.............................................................................9
2.2. NUMBER: ELECTION AND QUALIFICATION.........................................................9
2.3. CLASSES OF DIRECTORS.......................................................................9
2.4. TERMS IN OFFICE............................................................................9
2.5. ALLOCATION OF DIRECTORS AMONG CLASSES IN THE EVENT OF INCREASES OR
DECREASES IN THE NUMBER OF DIRECTORS..................................................9
2.6. TENURE.....................................................................................9
2.7. VACANCIES.................................................................................10
2.8. RESIGNATION...............................................................................10
2.9. REGULAR MEETINGS..........................................................................10
2.10. SPECIAL MEETINGS.........................................................................10
2.11. NOTICE OF SPECIAL MEETING................................................................10
2.12. MEETINGS BY TELEPHONE CONFERENCE CALLS...................................................11
2.13. QUORUM...................................................................................11
2.14. ACTION AT MEETING........................................................................11
2.15. ACTION BY WRITTEN CONSENT................................................................11
2.16. REMOVAL..................................................................................11
2.17. COMMITTEES...............................................................................11
2.18. COMPENSATION OF DIRECTORS................................................................12
2.19. AMENDMENTS TO ARTICLE....................................................................12
ARTICLE 3. OFFICERS.......................................................................................12
3.1. ENUMERATION...............................................................................12
3.2. ELECTION..................................................................................13
3.3. QUALIFICATION.............................................................................13
</TABLE>
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<TABLE>
<S> <C> <C>
3.4. TENURE....................................................................................13
3.5. RESIGNATION AND REMOVAL...................................................................13
3.6. VACANCIES.................................................................................13
3.7. CHAIRMAN OF THE BOARD AND VICE-CHAIRMAN OF THE BOARD......................................14
3.8. CHIEF EXECUTIVE OFFICER...................................................................14
3.9. PRESIDENT.................................................................................14
3.10. VICE PRESIDENTS..........................................................................14
3.11. SECRETARY AND ASSISTANT SECRETARIES......................................................15
3.12. TREASURER AND ASSISTANT TREASURERS.......................................................15
3.13. SALARIES.................................................................................15
3.14. ACTION WITH RESPECT TO SECURITIES OF OTHER CORPORATIONS..................................15
ARTICLE 4. CAPITAL STOCK..................................................................................16
4.1. ISSUANCE OF STOCK.........................................................................16
4.2. CERTIFICATES OF STOCK.....................................................................16
4.3. TRANSFERS.................................................................................16
4.4. LOST, STOLEN OR DESTROYED CERTIFICATES....................................................17
4.5. RECORD DATE...............................................................................17
ARTICLE 5. GENERAL PROVISIONS.............................................................................17
5.1. FISCAL YEAR..............................................................................17
5.2. CORPORATE SEAL...........................................................................17
5.3. NOTICES..................................................................................18
5.4. WAIVER OF NOTICE.........................................................................18
5.5. EVIDENCE OF AUTHORITY....................................................................18
5.6. FACSIMILE SIGNATURES.....................................................................18
5.7. RELIANCE UPON BOOKS, REPORTS AND RECORDS.................................................18
5.8. TIME PERIODS.............................................................................19
5.9. CERTIFICATE OF INCORPORATION.............................................................19
5.10. TRANSACTIONS WITH INTERESTED PARTIES....................................................19
5.11. SEVERABILITY............................................................................19
5.12. PRONOUNS................................................................................20
ARTICLE 6. AMENDMENTS.....................................................................................20
6.1. BY THE BOARD OF DIRECTORS................................................................20
6.2. BY THE STOCKHOLDERS......................................................................20
</TABLE>
ii
<PAGE>
AMENDED AND RESTATED
BY-LAWS
OF
USINTERNETWORKING, INC. (the "Corporation")
ARTICLE 1.
STOCKHOLDERS
1.1. PLACE OF MEETING. All meetings of stockholders shall be held at
such place within or without the State of Delaware as may be designated from
time to time by the Chairman of the Board (if any), the board of directors of
the Corporation (the "Board of Directors") or the Chief Executive Officer or, if
not so designated, at the registered office of the Corporation.
1.2. ANNUAL MEETING. The annual meeting of stockholders for the
election of directors and for the transaction of such other business as may
properly be brought before the meeting shall be held on a date to be fixed by
the Chairman of the Board (if any), Board of Directors or the Chief Executive
Officer (which date shall not be a legal holiday in the place where the meeting
is to be held) at the time and place to be fixed by the Chairman of the Board,
the Board of Directors or the Chief Executive Officer and stated in the notice
of the meeting.
1.3. SPECIAL MEETING. Special meetings of stockholders may be called at
any time by the Chairman of the Board (if any), a majority of the Board of
Directors or the Chief Executive Officer and shall be held at such place, on
such date and at such time as shall be fixed by the Board of Directors or the
person calling the meeting. Business transacted at any special meeting of
stockholders shall be limited to matters relating to the purpose or purposes
stated in the notice of meeting.
1.4. NOTICE OF MEETINGS. Except as otherwise provided by law, written
notice of each meeting of stockholders, whether annual or special, shall be
given not less than 10 nor more than 60 days before the date of the meeting to
each stockholder entitled to vote at such meeting. The notices of all meetings
shall state the place, date and hour of the meeting. The notice of a special
meeting shall state, in addition, the purpose or purposes for which the meeting
is called. If mailed, notice is given when deposited in the United States mail,
postage prepaid, directed to the stockholder at his or her address as it appears
on the records of the Corporation.
1.5. VOTING LIST. The officer who has charge of the stock ledger of the
Corporation shall prepare, at least 10 days before every meeting of
stockholders, a complete list of the stockholders entitled to vote at the
meeting, arranged in alphabetical order, and showing the address of each
stockholder and the number of shares registered in the name of each stockholder.
Such list shall be open to the examination of any stockholder, for any purpose
germane to the meeting, during ordinary business hours, for a period of at least
10 days prior to the meeting, either at a place within the city where the
meeting is to be held, which place shall be specified in
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the notice of the meeting, or if not so specified, at the place where the
meeting is to be held. The list shall also be produced and kept at the time and
place of the meeting during the whole time of the meeting, and may be inspected
by any stockholder who is present. This list shall presumptively determine the
identity of the stockholders entitled to vote at the meeting and the number of
shares held by each of them.
1.6. QUORUM. Except as otherwise provided by law, the Certificate of
Incorporation or these By-Laws, the holders of a majority of the shares of the
capital stock of the Corporation issued and outstanding and entitled to vote at
the meeting, present in person or represented by proxy, shall constitute a
quorum for the transaction of business. Shares held by brokers which such
brokers are prohibited from voting (pursuant to their discretionary authority on
behalf of beneficial owners of such shares who have not submitted a proxy with
respect to such shares) on some or all of the matters before the stockholders,
but which shares would otherwise be entitled to vote at the meeting ("Broker
Non-Votes") shall be counted, for the purpose of determining the presence or
absence of a quorum, toward the total voting power of the shares of capital
stock of the Corporation. If a quorum has been established for the purpose of
conducting the meeting, a quorum shall be deemed to be present for the purpose
of all votes to be conducted at such meeting, provided that where a separate
vote by a class or classes, or series thereof, is required, a majority of the
voting power of the shares of such class or classes, or series, present in
person or represented by proxy shall constitute a quorum entitled to take action
with respect to that vote on that matter. If a quorum shall fail to attend any
meeting, the chairman of the meeting or the holders of a majority of the voting
power of the shares of stock entitled to vote who are present, in person or by
proxy, may adjourn the meeting to another place, date, or time.
1.7. ADJOURNMENTS. Any meeting of stockholders may be adjourned to
any other time and to any other place at which a meeting of stockholders may be
held under these By-Laws by the stockholders present or represented at the
meeting and entitled to vote, although less than a quorum, or, if no stockholder
is present, by any officer entitled to preside at or to act as Secretary of such
meeting. It shall not be necessary to notify any stockholder of any adjournment
of less than 30 days if the time and place of the adjourned meeting are
announced at the meeting at which adjournment is taken, unless after the
adjournment a new record date is fixed for the adjourned meeting. At the
adjourned meeting, the Corporation may transact any business which might have
been transacted at the original meeting.
1.8. VOTING AND PROXIES. At any meeting of the stockholders, each
stockholder shall have one vote for each share of stock entitled to vote at such
meeting held of record by such stockholder and a proportionate vote for each
fractional share so held, unless otherwise provided in the Certificate of
Incorporation. Each stockholder of record entitled to vote at a meeting of
stockholders, or to express consent or dissent to corporate action in writing
without a meeting, may vote or express such consent or dissent in person or may
authorize another person or persons to vote or act for such stockholder by
written proxy executed by such stockholder or his or her authorized agent or by
a transmission permitted by law and delivered to the Secretary of the
Corporation. No such proxy shall be voted or acted upon after three years from
the date of its execution, unless the proxy expressly provides for a longer
period. Any copy, facsimile telecommunication or other reliable reproduction of
the writing or transmission created pursuant
4
<PAGE>
to this Section 1.8 may be substituted or used in lieu of the original writing
or transmission for any and all purposes for which the original writing or
transmission could be used, provided that such copy, facsimile telecommunication
or reproduction shall be a complete reproduction of the entire original writing
or transmission.
All voting, including on the election of directors but excepting where
otherwise required by law or the Certificate of Incorporation, may take place
via a voice vote. Any vote not taken by voice shall be taken by ballots, each of
which shall state the name of the stockholder or proxy voting and such other
information as may be required under the procedure established for the meeting.
The Corporation may, and to the extent required by law or the
Certificate of Incorporation, shall, in advance of any meeting of stockholders,
appoint one or more inspectors to act at such meeting and make a written report
thereof. The Corporation may designate one or more persons as alternate
inspectors to replace any inspector who fails to act. If no inspector or
alternate is able to act at a meeting of stockholders, the person presiding at
such meeting may, and to the extent required by law or the Certificate of
Incorporation, shall, appoint one or more inspectors to act at such meeting.
Each inspector, before entering upon the discharge of his duties, shall take and
sign an oath faithfully to execute the duties of inspector with strict
impartiality and according to the best of his or her ability.
1.9. ACTION AT MEETING. When a quorum is present at any meeting of
stockholders, the holders of a majority of the stock present or represented and
voting on a matter (or if there are two or more classes of stock entitled to
vote as separate classes, then in the case of each such class, the holders of a
majority of the stock of that class present or represented and voting on such
matter) shall decide any matter to be voted upon by the stockholders at such
meeting, except when a different vote is required by express provision of law,
the Certificate of Incorporation or these By-Laws. Any election by stockholders
shall be determined by a plurality of the votes cast by the stockholders
entitled to vote at the election. Except as otherwise provided by the
Certificate of Incorporation, all elections of directors shall be determined by
a plurality of the votes cast, and except as otherwise required by law or the
Certificate of Incorporation, all other matters shall be determined by a
majority of the votes cast affirmatively or negatively. For the purposes of this
paragraph, Broker Non-Votes represented at the meeting but not permitted to vote
on a particular matter shall not be counted, with respect to the vote on such
matter, in the number of (a) votes cast, (b) votes cast affirmatively, or (c)
votes cast negatively.
1.10. INTRODUCTION OF BUSINESS AT MEETINGS.
A. ANNUAL MEETINGS OF STOCKHOLDERS.
(1) Nominations of persons for election to the Board of
Directors and the proposal of business to be considered by the
stockholders may be made at an annual meeting of stockholders (a)
pursuant to the Corporation's notice of meeting, (b) by or at the
direction of the Board of Directors or (c) by any stockholder of the
Corporation who was a stockholder of record at the time of giving of
notice provided for in this Section 1.
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10, who is entitled to vote at the meeting and who complies with the
notice procedures set forth in this Section 1.10.
(2) For nominations or other business to be properly brought
before an annual meeting by a stockholder pursuant to clause (c) of
paragraph (A)(1) of this Section 1.10, the stockholder must have given
timely notice thereof in writing to the Secretary of the Corporation
and such other business must otherwise be a proper matter for
stockholder action. To be timely, a stockholders notice shall be
delivered to the Secretary at the principal executive offices of the
Corporation not later than the close of business on the one hundred
twentieth (120th) day nor earlier than the close of business on the one
hundred fiftieth (150th) day prior to the first anniversary of the date
of the proxy statement delivered to stockholders in connection with the
preceding year's annual meeting provided, however, that if either (i)
the date of the annual meeting is more than thirty (30) days before or
more than sixty (60) days after such an anniversary date or (ii) no
proxy statement was delivered to stockholders in connection with the
preceding year's annual meeting, notice by the stockholder to be timely
must be so delivered not earlier than the close of business on the
ninetieth (90th) day prior to such annual meeting and not later than
the close of business on the later of the sixtieth (60th) day prior to
such annual meeting or the close of business on the tenth (10th) day
following the day on which public announcement of the date of such
meeting is first made by the Corporation. Such stockholder's notice
shall set forth (a) as to each person whom the stockholder proposes to
nominate for election or reelection as a director, all information
relating to such person that is required to be disclosed in
solicitations of proxies for election of directors, or is otherwise
required, in each case pursuant to Regulation 14A under the Securities
Exchange Act of 1934, as amended (the "Exchange Act") (including such
person's written consent to being named in the proxy statement as a
nominee and to serving as a director if elected); (b) as to any other
business that the stockholder proposes to bring before the meeting, a
brief description of the business desired to be brought before the
meeting, the reasons for conducting such business at the meeting and
any material interest in such business of such stockholder and the
beneficial. owner, if any, on whose behalf the proposal is made; and
(c) as to the stockholder giving the notice and the beneficial owner,
if any, on whose behalf the nomination or proposal is made (i) the name
and address of such stockholder, as they appear on the Corporation's
books, and of such beneficial owner and (ii) the class and number of
shares of capital stock of the Corporation that are owned beneficially
and held of record by such stockholder and such beneficial owner.
(3) Notwithstanding anything in the second sentence of
paragraph (A)(2) of this Section 1.10 to the contrary, in the event
that the number of directors to be elected to the Board of Directors of
the Corporation is increased and there is no public announcement by the
Corporation naming all of the nominees for director or specifying the
size of the increased Board of Directors at least seventy (70) days
prior to the first anniversary of the preceding year's annual meeting
(or, if the annual meeting is held more than thirty (30) days before or
sixty (60) days after such anniversary date, at least seventy (70) days
prior to such annual meeting), a stockholder's notice required by this
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Section 1.10 shall also be considered timely, but only with respect to
nominees for any new positions created by such increase, if it shall be
delivered to the Secretary at the principal executive office of the
Corporation not later than the close of business on the tenth (10th)
day following the day on which such public announcement is first made
by the Corporation.
B. SPECIAL MEETINGS OF STOCKHOLDERS. Only such business shall be
conducted at a special meeting of stockholders as shall have been brought before
the meeting pursuant to the Corporation's notice of meeting. Nominations of
persons for election to the Board of Directors may be made at a special meeting
of stockholders at which directors are to be elected pursuant to the
Corporation's notice of meeting (a) by or at the direction of the Board of
Directors or (b) provided that the Board of Directors has determined that
directors shall be elected at such meeting, by any stockholder of the
Corporation who is a stockholder of record at the time of giving of notice of
the special meeting, who shall be entitled to vote at the meeting and who
complies with the notice procedures set forth in this Section 1.10. If the
Corporation calls a special meeting of stockholders for the purpose of electing
one or more directors to the Board of Directors, any such stockholder may
nominate a person or persons (as the case may be), for election to such
position(s) as specified in the Corporation's notice of meeting, if the
stockholder's notice required by paragraph (A)(2) of this Section 1.10 shall be
delivered to the Secretary at the principal executive offices of the Corporation
not earlier than the ninetieth (90th) day prior to such special meeting nor
later than the later of (x) the close of business of the sixtieth (60th) day
prior to such special meeting or (y) the close of business of the tenth (10th)
day following the day on which public announcement is first made of the date of
such special meeting and of the nominees proposed by the Board of Directors to
be elected at such meeting.
C. GENERAL.
(1) Only such persons who are nominated in accordance with
the procedures set forth in this Section 1.10 shall be eligible to
serve as directors and only such business shall be conducted at a
meeting of stockholders as shall have been brought before the meeting
in accordance with the procedures set forth in this Section 1.10 Except
as otherwise provided by law, the Certificate of Incorporation or these
By-Laws, the chairman of the meeting shall have the power and duty to
determine whether a nomination or any business proposed to be brought
before the meeting was made or proposed, as the case may be, in
accordance with the procedures set forth in this Section 1.10 and, if
any proposed nomination or business is not in compliance herewith, to
declare that such defective proposal or nomination shall be
disregarded.
(2) For purposes of this Section 1.10, "public announcement"
shall mean disclosure in a press release reported by the Dow Jones News
Service, Associated Press or comparable national news service or in a
document publicly filed by the Corporation with the Securities and
Exchange Commission pursuant to Section 13, 14 or 15(d) of the Exchange
Act.
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(3) Notwithstanding the foregoing provisions of this Section
1.10, a stockholder shall also comply with all applicable requirements
of the Exchange Act and the rules and regulations thereunder with
respect to the matters set forth herein. Nothing in this Section 1.10
shall be deemed to affect any rights (i) of stockholders to request
inclusion of proposals in the Corporation's proxy statement pursuant to
Rule 14a-8 under the Exchange Act or (ii) of the holders of any series
of Preferred Stock to elect directors under specified circumstances.
1.11. ACTION WITHOUT MEETING. Stockholders of the Corporation may not
take any action by written consent in lieu of a meeting. Notwithstanding any
other provision of law, the Certificate of Incorporation or these By-Laws, and
notwithstanding the fact that a lesser percentage may be specified by law, the
affirmative vote of the holders of at least seventy-five percent (75%) of the
votes which all the stockholders would be entitled to cast at any annual
election of directors or class of directors shall be required to amend or
repeal, or to adopt any provision inconsistent with, this Section 1.11.
ARTICLE 2.
DIRECTORS
2.1. GENERAL POWERS. The business and affairs of the Corporation shall
be managed by or under the direction of a Board of Directors, who may exercise
all of the powers of the Corporation except as otherwise provided by law or the
Certificate of Incorporation. In the event of a vacancy in the Board of
Directors, the remaining directors, except as otherwise provided by law or the
Certificate of Incorporation, may exercise the powers of the full Board of
Directors until the vacancy is filled.
2.2. NUMBER: ELECTION AND QUALIFICATION. The number of directors which
shall constitute the whole Board of Directors shall be determined by resolution
of the Board of Directors, but in no event shall be less than three. The number
of directors may be decreased at any time and from time to time by a majority of
the directors then in office, but only to eliminate vacancies existing by reason
of the death, resignation, removal or expiration of the ten-n of one or more
directors. The directors shall be elected at the annual meeting of stockholders
by such stockholders as have the right to vote on such election. Directors need
not be stockholders of the Corporation.
2.3. CLASSES OF DIRECTORS. The Board of Directors shall be and is
divided into three classes: Class I, Class II and Class III. No one class shall
have more than one director more than any other class.
2.4. TERMS IN OFFICE. Each director shall serve for a term ending on
the date of the third annual meeting following the annual meeting at which such
director was elected; provided, however, that each initial director in Class I
shall serve for a term ending on the date of the annual meeting following the
end of the Corporation's fiscal year ending December 31, 1999; each initial
director in Class II shall serve for a term ending on the date of the annual
meeting following the end of the Corporation's fiscal year ending December 31,
2000; and each initial
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director in Class III shall serve for a term ending on the date of the annual
meeting following the end of the Corporation's fiscal year ending December 31,
2001.
2.5. ALLOCATION OF DIRECTORS AMONG CLASSES IN THE EVENT OF INCREASES OR
DECREASES IN THE NUMBER OF DIRECTORS. In the event of any increase or decrease
in the authorized number of directors, (i) each director then serving as such
shall nevertheless continue as director of the class of which he or she is a
member until the expiration of such director's current term or his or her prior
death, retirement or resignation and (ii) the newly created or eliminated
directorships resulting from such increase or decrease shall be apportioned by
the Board of Directors among the three classes of directors, subject to Section
2.3. To the extent possible, consistent with the foregoing rule, any newly
created directorships shall be added to those classes whose terms of office are
to expire at the earliest dates following such allocation, unless otherwise
provided for from time to time by resolution adopted by a majority of the
directors then in office, although less than a quorum. No decrease in the number
of directors constituting the whole Board of Directors shall shorten the term of
an incumbent Director.
2.6. TENURE. Notwithstanding any provisions to the contrary contained
herein, each director shall hold office until his or her successor is elected
and qualified, or until his or her earlier death, resignation or removal.
2.7. VACANCIES. Unless and until filled by the stockholders, any
vacancy in the Board of Directors, however occurring, including a vacancy
resulting from an enlargement thereof, may be filled by vote of a majority of
the directors then in office, although less than a quorum, or by a sole
remaining director. A director elected to fill a vacancy shall be elected for
the unexpired term of his or her predecessor in office, and a director chosen to
fill a position resulting from an increase in the number of directors shall hold
office until the next annual meeting of stockholders at which directors of the
class to which such position belongs are to be elected and until his or her
successor is elected and qualified, or until his or her earlier death,
resignation or removal.
2.8. RESIGNATION. Any director may resign by delivering his or her
written resignation to the Corporation at its principal office or to the Chief
Executive Officer or Secretary. Such resignation shall be effective upon receipt
unless it is specified to be effective at some other time or upon the happening
of some other event.
2.9. REGULAR MEETINGS. Regular meetings of the Board of Directors may
be held without notice at such time and place, either within or without the
State of Delaware, as shall be determined from time to time by the Board of
Directors; provided that any director who is absent when such a determination is
made shall be given notice of the determination. Directors may be held without
notice immediately after and at the same place as the annual meeting of Regular
meetings of the Board of Directors shall be held at such place or places, on
such date or dates, and at such time or times as shall have been established by
the Board of Directors and publicized among all directors. A notice of each
regular meeting shall not be required.
2.10. SPECIAL MEETINGS Special meetings of the Board of Directors may
be held at any time and place, within or without the State of Delaware,
designated in a call by the Chairman of
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the Board (if any), the Chief Executive Officer, two or more directors, or by
one director in the event that there is only a single director in office.
2.11. NOTICE OF SPECIAL MEETING. Notice of any special meeting of
directors shall be given to each director by the Secretary or by the officer or
one of the directors calling the meeting. Notice shall be duly given to each
director (i) by giving notice to such director in person or by telephone at
least 48 hours in advance of the meeting, (ii) by sending a telegram or
delivering written notice by facsimile transmission or by hand, to his or her
last known business or home address at least 48 hours in advance of the meeting,
or (iii) by mailing written notice to his or her last known business or home
address at least 72 hours in advance of the meeting. A notice or waiver of
notice of a meeting of the Board of Directors need not specify the purposes of
the meeting.
2.12. MEETINGS BY TELEPHONE CONFERENCE CALLS. Directors or any members
of any committee designated by the Board of Directors may participate in a
meeting of the Board of Directors or such committee by means of conference
telephone or similar communications equipment by means of which all persons
participating in the meeting can hear each other, and participation by such
means shall be deemed to constitute presence in person at such meeting.
2.13. QUORUM. A majority of the total number of the whole Board of
Directors shall constitute a quorum at all meetings of the Board of Directors.
In the event one or more of the directors shall be disqualified to vote at any
meeting, then the required quorum shall be reduced by one for each such director
so disqualified; provided, however, that in no case shall less than one-third
(1/3) of the total number of the whole Board of Directors constitute a quorum.
In the absence of a quorum at any such meeting, a majority of the directors
present may adjourn the meeting from time to time without further notice other
than announcement at the meeting, until a quorum shall be present.
2.14. ACTION AT MEETING. At any meeting of the Board of Directors at
which a quorum is present, the vote of a majority of those present shall be
sufficient to take any action, unless a different vote is specified by law, the
Certificate of Incorporation or these By-Laws.
2.15. ACTION BY WRITTEN CONSENT. Any action required or permitted to be
taken at any meeting of the Board of Directors or of any committee of the Board
of Directors may be taken without a meeting, if all members of the Board of
Directors or committee, as the case may be, consent to such action in writing,
and the written consents are filed with the minutes of proceedings of the Board
of Directors or committee.
2.16. REMOVAL. Any one or more or all of the directors may be removed
with cause only by the holders of at least a majority of the shares then
entitled to vote at an election of directors.
2.17.COMMITTEES. The Board of Directors may, by resolution passed by a
majority of the whole Board, designate one or more committees, each committee to
consist of one or more of the directors of the Corporation. The Board of
Directors may designate one or more directors as alternate members of any
committee, who may replace any absent or disqualified member at any
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meeting of such committee. In the absence or disqualification of a member of a
committee, the member or members of such committee present at any meeting and
not disqualified from voting, whether or not such member or members constitute a
quorum, may unanimously appoint another member of the Board of Directors to act
at such meeting in the place of any such absent or disqualified member. Any such
committee, to the extent provided in the resolution of the Board of Directors
and subject to the provisions of the General Corporation Law of the State of
Delaware, shall have and may exercise all the powers and authority of the Board
of Directors in the management of the business and affairs of the Corporation
and may authorize the seal of the Corporation to be affixed to all papers which
may require it. Each such committee shall keep minutes and make such reports as
the Board of Directors may from time to time request. Except as the Board of
Directors may otherwise determine or as provided herein, any committee may make
rules for the conduct of its business, but unless otherwise provided by the
directors or in such rules, its business shall be conducted as nearly as
possible in the same manner as is provided in these By-Laws for the Board of
Directors. Adequate provisions shall be made for notice to members of all
meeting of committees. One-third (1/3) of the members of any committee shall
constitute a quorum unless the committee shall consist of one (1) or two (2)
members, in which event one (1) member shall constitute a quorum; and all
matters shall be determined by a majority vote of the members present. Action
may be taken by any committee without a meeting if all members thereof consent
thereto in writing, and the writing or writings are filed with the minutes of
the proceedings of such committee.
2.18. COMPENSATION OF DIRECTORS. Directors may be paid such
compensation for their services and such reimbursement for expenses of
attendance at meetings as the Board of Directors may from time to time
determine. No such payment shall preclude any director from serving the
Corporation or any of its parent or subsidiary corporations in any other
capacity and receiving compensation for such service.
2.19. AMENDMENTS TO ARTICLE. Notwithstanding any other provisions of
law, the Certificate of Incorporation or these By-Laws, and notwithstanding the
fact that a lesser percentage may be specified by law, the affirmative vote of
the holders of a least seventy-five percent (75%) of the votes which all the
stockholders would be entitled to cast at any annual election of directors or
class of directors shall be required to amend or repeal, or to adopt any
provision inconsistent with, this Article 2.
ARTICLE 3.
OFFICERS
3.1. ENUMERATION. The officers of the Corporation shall consist of a
Chief Executive Officer, a President, a Secretary, a Treasurer and such other
officers with such other titles as the Board of Directors shall determine,
including, but not limited to, a Chairman of the Board, a Vice-Chairman of the
Board, and one or more Vice Presidents, Assistant Treasurers and Assistant
Secretaries. The Board of Directors may appoint such other officers as it may
deem appropriate.
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3.2. ELECTION. The Chief Executive Officer, President, Treasurer and
Secretary shall be elected annually by the Board of Directors at its first
meeting following the annual meeting of stockholders. Other officers may be
appointed by the Board of Directors at such meeting or at any other meeting.
3.3. QUALIFICATION. No officer need be a stockholder. Any two or more
offices may be held by the same person.
3.4. TENURE. Except as otherwise provided by law, by the Certificate of
Incorporation or by these By-Laws, each officer shall hold office until his or
her successor is elected and qualified, unless a different term is specified in
the vote choosing or appointing such officer, or until his or her earlier death,
resignation or removal.
3.5. RESIGNATION AND REMOVAL. Any officer may resign by delivering his
or her written resignation to the Chairman of the Board (if any), to the Board
of Directors at a meeting thereof, to the Corporation at its principal office or
to the Chief Executive Officer or Secretary. Such resignation shall be effective
upon receipt unless it is specified to be effective at some other time or upon
the happening of some other event.
Any officer may be removed at any time, with or without cause, by
vote of a majority of the entire number of directors then in office.
Except as the Board of Directors may otherwise determine, no
officer who resigns or is removed shall have any right to any compensation as an
officer for any period following his or her resignation or removal, or any right
to damages on account of such removal, whether his or her compensation be by the
month or by the year or otherwise, unless such compensation is expressly
provided in a duly authorized written agreement with the Corporation.
3.6. VACANCIES. The Board of Directors may fill any vacancy occurring
in any office for any reason and may, in its discretion, leave unfilled for such
period as it may determine any offices other than those of President, Treasurer
and Secretary. Each such successor shall hold office for the unexpired term of
his predecessor and until his or her successor is elected and qualified, or
until his or her earlier death, resignation or removal.
3.7. CHAIRMAN OF THE BOARD AND VICE-CHAIRMAN OF THE BOARD. The Chairman
of the Board, if any, shall preside at all meetings of the Board of Directors
and stockholders at which he or she is present and shall perform such duties and
possess such powers as are designated by the Board of Directors. If the Board of
Directors appoints a Vice-Chairman of the Board, he or she shall, in the absence
or disability of the Chairman of the Board, perform the duties and exercise the
powers of the Chairman of the Board and shall perform such other duties and
possess such other powers as may from time to time be designated by the Board of
Directors.
3.8. CHIEF EXECUTIVE OFFICER. The Chief Executive Officer shall,
subject to the direction of the Board of Directors, have general charge and
supervision of the business of the Corporation. Unless otherwise provided by the
Board of Directors, the Chief Executive Officer shall preside at all meetings of
the stockholders, and, if a director, at all meetings of the Board of
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Directors. Unless the Board of Directors has designated another officer as the
Chief Executive Officer, the Chief Executive Officer shall be the Chief
Executive Officer of the Corporation. The Chief Executive Officer shall perform
such other duties and shall have such other powers as the Board of Directors may
from time to time prescribe. The Chief Executive Officer shall have the power to
enter into contracts and otherwise bind the Corporation in matters arising in
the ordinary course of the Corporation's business.
3.9. PRESIDENT. The President shall perform such duties and possess
such powers as the Board of Directors or the Chief Executive Officer may from
time to time prescribe. In the event of the absence, inability or refusal to act
of the Chief Executive Officer, the President shall perform the duties of the
Chief Executive Officer and, when so performing, shall have all the powers of
and be subject to all the restrictions upon the Chief Executive Officer. Unless
otherwise determined by the Board of Directors, the President shall have the
power to enter into contracts and otherwise bind the Corporation in matters
arising in the ordinary course of the Corporation's business.
3.10. VICE PRESIDENTS. Any Vice President shall perform such duties and
possess such powers as the Board of Directors or the Chief Executive Officer may
from time to time prescribe. In the event of the absence, inability or refusal
to act of the President, the Vice President (or if there shall be more than one,
the Vice Presidents in the order determined by the Board of Directors) shall
perform the duties of the President and, when so performing, shall have all the
powers of and be subject to all the restrictions upon the President. The Board
of Directors may assign to any Vice President the title of Executive Vice
President, Senior Vice President or any other title selected by the Board of
Directors. Unless otherwise determined by the Board of Directors, any Vice
President shall have the power to enter into contracts and otherwise bind the
Corporation in matters arising in the ordinary course of the Corporation's
business.
3.11. SECRETARY AND ASSISTANT SECRETARIES. The Secretary shall perform
such duties and shall have such powers as the Board of Directors or the Chief
Executive Officer may from time to time prescribe. In addition, the Secretary
shall perform such duties and have such powers as are incident to the office of
secretary, including without limitation the duty and power to give notices of
all meetings of stockholders and special meetings of the Board of Directors, to
attend all meetings of stockholders and the Board of Directors and keep a record
of the proceedings, to maintain a stock ledger and prepare lists of stockholders
and their addresses as required, to be custodian of corporate records and the
corporate seal and to affix and attest to the same on documents.
Any Assistant Secretary shall perform such duties and possess
such powers as the Board of Directors, the Chief Executive Officer or the
Secretary may from time to time prescribe. In the event of the absence,
inability or refusal to act of the Secretary, the Assistant Secretary (or if
there shall be more than one, the Assistant Secretaries in the order determined
by the Board of Directors) shall perform the duties and exercise the powers of
the Secretary.
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In the absence of the Secretary or any Assistant Secretary at any
meeting of stockholders or directors, the person presiding at the meeting shall
designate a temporary secretary to keep a record of the meeting.
3.12. TREASURER AND ASSISTANT TREASURERS.. The Treasurer shall perform
such duties and shall have such powers as the Board of Directors or the Chief
Executive Officer may from time to time prescribe. In addition, the Treasurer
shall perform such duties and have such powers as are incident to the office of
treasurer, including without limitation the duty and power to keep and be
responsible for all funds and securities of the Corporation, to deposit funds of
the Corporation in depositories selected in accordance with these By-Laws, to
disburse such funds as ordered by the Board of Directors, to make proper
accounts for such funds, and to render as required by the Board of Directors
statements of all such transactions and of the financial condition of the
Corporation.
The Assistant Treasurers shall perform such duties and possess
such powers as the Board of Directors, the Chief Executive Officer or the
Treasurer may from time to time prescribe. In the event of the absence,
inability or refusal to act of the Treasurer, the Assistant Treasurer (or if
there shall be more than one, the Assistant Treasurers in the order determined
by the Board of Directors) shall perform the duties and exercise the powers of
the Treasurer.
3.13. SALARIES. Officers of the Corporation shall be entitled to such
salaries, compensation or reimbursement as shall be fixed or allowed from time
to time by the Board of Directors.
3.14. ACTION WITH RESPECT TO SECURITIES OF OTHER CORPORATIONS. Unless
otherwise directed by the Board of Directors, the Chief Executive Officer or any
officer of the Corporation authorized by the Chief Executive Officer shall have
power to vote and otherwise act on behalf of the Corporation, in person or by
proxy, at any meeting of stockholders of or with respect to any action of
stockholders of any other corporation in which the Corporation may hold
securities and otherwise to exercise any and all rights and powers which this
Corporation may possess by reason of its ownership of securities in such other
corporation.
ARTICLE 4.
CAPITAL STOCK
4.1. ISSUANCE OF STOCK. Unless otherwise voted by the stockholders and
subject to the provisions of the Certificate of Incorporation, the whole or any
part of any unissued balance of the authorized capital stock of the Corporation
or the whole or any part of any issued, authorized capital stock of the
Corporation held in its treasury may be issued, sold, transferred or otherwise
disposed of by vote of the Board of Directors in such manner, for such
consideration and on such terms as the Board of Directors may determine.
4.2. CERTIFICATES OF STOCK. Every holder of stock of the Corporation
shall be entitled to have a certificate, in such form as may be prescribed by
law and by the Board of Directors, certifying the . number and class of shares
owned by such stockholder in the Corporation. Each such certificate shall be
signed by, or in the name of the Corporation by, the Chairman or Vice-
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Chairman, if any, of the Board of Directors, or the President or a Vice
President, and the Treasurer or an Assistant Treasurer, or the Secretary or an
Assistant Secretary of the Corporation. Any or all of the signatures on such
certificate may be a facsimile.
Each certificate for shares of stock which are subject to any
restriction on transfer pursuant to the Certificate of Incorporation, the
By-Laws, applicable securities laws or any agreement among any number of
shareholders or among such holders and the Corporation shall have conspicuously
noted on the face or back of such certificate either the full text of such
restriction or a statement of the existence of such restriction.
4.3. TRANSFERS. Except as otherwise established by rules and
regulations adopted by the Board of Directors, and subject to applicable law,
shares of stock may be transferred on the books of the Corporation by the
surrender to the Corporation or its transfer agent of the certificate
representing such shares, properly endorsed or accompanied by a written
assignment or power of attorney properly executed, and with such proof of
authority or the authenticity of signature as the Corporation or its transfer
agent may reasonably require. Except as may be otherwise required by law, by the
Certificate of Incorporation or by these By-Laws, the Corporation shall be
entitled to treat the record holder of stock as shown on its books as the owner
of such stock for all purposes, including the payment of dividends and the right
to vote with respect to such stock, regardless of any transfer, pledge or other
disposition of such stock, until the shares have been transferred on the books
of the Corporation in accordance with the requirements of these By-Laws.
4.4. LOST, STOLEN OR DESTROYED CERTIFICATES. The Corporation may issue
a new certificate of stock in place of any previously issued certificate alleged
to have been lost, stolen, or destroyed, upon such terms and conditions as the
Chief Executive Officer may prescribe, including the presentation of reasonable
evidence of such loss, theft or destruction and the giving of such indemnity as
the Chief Executive Officer may require for the protection of the Corporation or
any transfer agent or registrar.
4.5. RECORD DATE. The Board of Directors may fix in advance a date as a
record date for the determination of the stockholders entitled to notice of or
to vote at any meeting of stockholders or to express consent (or dissent) to
corporate action in writing without a meeting, or entitled to receive payment of
any dividend or other distribution or allotment of any rights in respect of any
change, conversion or exchange of stock, or for the purpose of any other lawful
action. Such record date shall not be more than 60 nor less than 10 days before
the date of such meeting, nor more than 60 days prior to any other action to
which such record date relates.
If no record date is fixed, the record date for determining
stockholders entitled to notice of or to vote at a meeting of stockholders shall
be at the close of business on the day before the day on which notice is given,
or, if notice is waived, at the close of business on the day before the day on
which the meeting is held. The record date for determining stockholders entitled
to express consent to corporate action in writing without a meeting, when no
prior action by the Board of Directors is necessary, shall be the day on which
the first written consent is expressed. The record date for determining
stockholders for any other purpose shall be at the
15
<PAGE>
close of business on the day on which the Board of Directors adopts the
resolution relating to such purpose.
A determination of stockholders of record entitled to notice
of or to vote at a meeting of stockholders shall apply to any adjournment of the
meeting; provided, however, that the Board of Directors may fix a new record
date for the adjourned meeting.
ARTICLE 5.
GENERAL PROVISIONS
5.1. FISCAL YEAR. The fiscal year of the Corporation shall be fixed by
resolution of the Board of Directors.
5.2. CORPORATE SEAL. The corporate seal shall be in such form as shall
be approved by the Board of Directors.
5.3. NOTICES. Except as otherwise specifically provided herein or
required by law or the Certificate of Incorporation, all notices required to be
given to any stockholder, director, officer, employee or agent of the
Corporation shall be in writing and may in every instance be effectively given
by hand delivery to the recipient thereof, by depositing such notice in the
mails, postage paid, or by sending such notice by prepaid telegram, facsimile
transmission or by e-mail. Any such notice shall be addressed to such
stockholder, director, officer, employee or agent at his or her last known
address as the same appears on the books of the Corporation. The time when such
notice is received shall be deemed to be the time of the giving of the notice.
5.4. WAIVER OF NOTICE. Whenever any notice whatsoever is required to be
given by law, by the Certificate of Incorporation or by these By-Laws, a waiver
of such notice either in writing signed by the person entitled to such notice or
such person's duly authorized attorney, or by telegraph, facsimile transmission
or any other available method, whether before, at or after the time stated in
such waiver, or the appearance of such person or persons at such meeting in
person or by proxy, shall be deemed equivalent to such notice.
5.5. EVIDENCE OF AUTHORITY. A certificate by the Secretary, or an
Assistant Secretary, or a temporary Secretary, as to any action taken by the
stockholders, directors, a committee or any officer or representative of the
Corporation shall, as to all persons who rely on the certificate in good faith,
be conclusive evidence of such action.
5.6. FACSIMILE SIGNATURES. In addition to the provisions for use of
facsimile signatures elsewhere specifically authorized in these By-Laws,
facsimile signatures of any officer or officers of the Corporation may be used
whenever and as authorized by the Board of Directors or a committee thereof.
5.7. RELIANCE UPON BOOKS, REPORTS AND RECORDS. Each director, each
member of any committee designated by the Board of Directors, and each officer
of the Corporation shall, in the performance of his or her duties, be fully
protected in relying in good faith upon the books of account or other records of
the Corporation and upon such information, opinions, reports or
16
<PAGE>
statements presented to the Corporation by any of its officers or employees or
committees of the Board of Directors so designated, or by any other person as to
matters which such director or committee member reasonably believes are within
such other person's professional or expert competence and who has been selected
with reasonable care by or on behalf of the Corporation.
5.8. TIME PERIODS. In applying any provision of these By-Laws that
requires that an act be done or not be done a specified number of days prior to
an event or that an act be done during a period of a specified number of days
prior to an event, calendar days shall be used, the day of the doing of the act
shall be excluded, and the day of the event shall be included.
5.9. CERTIFICATE OF INCORPORATION. All references in these By-Laws to
the Certificate of Incorporation shall be deemed to refer to the Certificate of
Incorporation of the Corporation, as amended and in effect from time to time.
5.10. TRANSACTIONS WITH INTERESTED PARTIES No contract or transaction
between the Corporation and one or more of the directors or officers, or between
the Corporation and any other corporation, partnership, association, or other
organization in which one or more of the directors or officers are directors or
officers, or have a financial interest, shall be void or voidable solely for
this reason, or solely because such director or officer is present at or
participates in the meeting of the Board of Directors or a committee of the
Board of Directors which authorizes the contract or transaction or solely
because his, her or their votes are counted for such purpose, if-
(1) The material facts as to his or her relationship or
interest and as to the contract or transaction are disclosed or are
known to the Board of Directors or the committee, and the Board or
committee in good faith authorizes the contract or transaction by the
affirmative vote of a majority, of the disinterested directors, even
though the disinterested directors be less than a quorum;
(2) The material facts as to his or her relationship or
interest and as to the contract or transaction are disclosed or are
known to the stockholders entitled to vote thereon, and the contract or
transaction is specifically approved in good faith by vote of the
stockholders; or
(3) The contract or transaction is fair as to the Corporation
as of the time it is authorized, approved or ratified, by the Board of
Directors, a committee of the Board of Directors, or the stockholders.
Common or interested directors may be counted in determining
the presence of a quorum at a meeting of the Board of Directors or of a
committee which authorizes the contract or transaction.
5.11. SEVERABILITY. Any determination that any provision of these
By-Laws is for any reason inapplicable, illegal or ineffective shall not affect
or invalidate any other provision of these By-Laws.
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5.12. PRONOUNS. All pronouns used in these By-Laws shall be deemed to
refer to the masculine, feminine or neuter, singular or plural, as the identity
of the persons or persons so designated may require.
ARTICLE 6.
AMENDMENTS
6.1. BY THE BOARD OF DIRECTORS. Except as is otherwise set forth in
these By-Laws, these By-Laws may be altered, amended or repealed, or new by-laws
may be adopted, by the affirmative vote of a majority of the directors present
at any regular or special meeting of the Board of Directors at which a quorum is
present.
6.2. BY THE STOCKHOLDERS. Except as otherwise set forth in these
By-Laws, these By-Laws may be altered, amended or repealed or new by-laws may be
adopted by the affirmative vote of the holders of a majority of the shares of
the capital stock of the Corporation issued and outstanding and entitled to vote
at any regular meeting of stockholders, or at any special meeting of
stockholders, provided notice of such alteration, amendment, repeal or adoption
of new by-laws shall have been stated in the notice of such special meeting.
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Exhibit 10.9
---------------------------
---------------------------
AMENDED AND RESTATED
STOCK PURCHASE AGREEMENT
dated as of
October 2, 1998
by and among
USINTERNETWORKING, Inc.,
Advanced Communication Resources, Inc.,
Matthew D. Kanter,
The Benjamin Kanter 1997 QSST Trust,
The Ronald Kanter 1997 QSST Trust,
and
S. David Walden
---------------------------
---------------------------
<PAGE>
TABLE OF CONTENTS
<TABLE>
<CAPTION>
Page
<S> <C>
ARTICLE I. DEFINITIONS............................................................................................1
1.1. Defined Terms............................................................................1
1.2. Certain Usage............................................................................8
ARTICLE II. PURCHASE AND SALE OF SHARES...........................................................................9
2.1. Purchase and Sale of Shares..............................................................9
2.2. Total Consideration and Terms............................................................9
2.3. Contingent Payments......................................................................9
2.4. Noncompete..............................................................................11
ARTICLE III. CLOSING.............................................................................................11
3.1. Closing.................................................................................11
3.2. Sellers' Closing Deliveries.............................................................11
3.3. Purchaser's Closing Deliveries..........................................................11
ARTICLE IV. REPRESENTATIONS AND WARRANTIES OF THE COMPANY AND SELLERS........................................... 11
4.1. Organization............................................................................12
4.2. Subsidiaries............................................................................12
4.3. Capitalization..........................................................................12
4.4. Authorization...........................................................................13
4.5. No Conflict or Violation................................................................13
4.6. Financial Statements....................................................................13
4.7. Books and Records.......................................................................14
4.8. Undisclosed Liabilities.................................................................14
4.9. Absence of Certain Changes or Events....................................................14
4.10. Contracts; No Defaults.................................................................15
4.11. Government Contracts; Backlog..........................................................17
4.12. Tangible Assets........................................................................17
4.13. Intellectual Property..................................................................18
4.14. Real Property..........................................................................20
4.15. Litigation and Proceedings.............................................................21
4.16. Employee Benefit Plans.................................................................21
4.17. Labor Relations........................................................................25
4.18. Legal Compliance.......................................................................26
4.19. Environmental Protection...............................................................26
4.20. Taxes..................................................................................27
4.21. Governmental Authorities: Consents....................................................29
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4.22. Licenses, Permits and Authorizations...................................................29
4.23. Insurance..............................................................................30
4.24. Brokers' Fees..........................................................................30
4.25. No Other Agreements to Sell the Shares.................................................30
4.26. Transactions with Certain Persons......................................................30
4.27. Customers, Distributors and Suppliers..................................................31
4.28. Banking Relationships..................................................................31
4.29. Accounts Receivable....................................................................31
4.30. Year 2000..............................................................................32
4.31. Investment.............................................................................32
ARTICLE V. REPRESENTATIONS AND WARRANTIES OF PURCHASER...........................................................32
5.1. Organization of Purchaser...............................................................32
5.2. Authorization...........................................................................33
5.3. Warrant Shares..........................................................................33
5.4. No Conflict or Violation................................................................33
5.5. Governmental Authorities; Consents......................................................33
5.6. Brokers' Fees...........................................................................34
ARTICLE VI. COVENANTS OF SELLERS AND THE COMPANY.................................................................34
6.1. Conduct of Business.....................................................................35
6.2. HSR Act.................................................................................35
6.3. No Solicitations........................................................................35
6.4. Notice to Purchaser.....................................................................36
6.5. Consents................................................................................36
6.6. Inspections.............................................................................36
6.7. Employee Benefit Plans..................................................................36
ARTICLE VII. COVENANTS OF PURCHASER..............................................................................36
7.1. HSR Act.................................................................................37
7.2. Consents................................................................................37
ARTICLE VIII. COVENANTS OF SELLERS, THE COMPANY AND PURCHASER....................................................37
8.1. Confidentiality.........................................................................37
8.2. Cooperation and Records Retention.......................................................37
ARTICLE IX. CONDITIONS TO OBLIGATIONS............................................................................38
9.1. Conditions to Obligations of Purchaser, Sellers and the Company.........................38
9.2. Conditions to Obligations of Purchaser..................................................38
9.3. Conditions to the Obligations of Sellers and the Company................................40
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ARTICLE X. TERMINATION...........................................................................................40
10.1. Termination............................................................................40
10.2. Effect of Termination..................................................................41
ARTICLE XI. DEFAULT AND REMEDIES.................................................................................41
11.1. Breach and Opportunity to Cure.........................................................41
11.2. Sellers' Remedies......................................................................41
11.3. Purchaser's Remedies...................................................................42
11.4. Escrow Deposit.........................................................................42
ARTICLE XII. POST CLOSING OBLIGATIONS; SURVIVAL OF REPRESENTATION................................................42
12.1. Indemnification........................................................................42
12.1.1. Purchaser's Right to Indemnification...................................................42
12.1.2. Seller's Right to Indemnification......................................................43
12.1.3. Conduct of Proceedings.................................................................43
12.1.4. Limitations on Indemnification.........................................................44
12.1.5. Indemnification Sole Remedy............................................................44
12.2. Right of Offset........................................................................44
12.3. Survival of Representations............................................................44
12.4. Rights of Set-Off......................................................................45
ARTICLE XIII. TAX MATTERS........................................................................................45
13.1. Allocation of Responsibility...........................................................45
13.2. Payment of Taxes.......................................................................45
13.3. Tax Returns............................................................................45
13.4. Refunds................................................................................46
13.5. Contests...............................................................................46
13.6. Allocation of Taxes....................................................................47
13.7. Treatment of Indemnity Payments........................................................47
13.8. Indemnification........................................................................47
13.9. Successors.............................................................................47
ARTICLE XIV. SELLER REPRESENTATIVE...............................................................................47
14.1. Designation of Seller Representative...................................................47
14.2. Authority and Rights of Seller Representative; Limitations on Liability................47
ARTICLE XV. MISCELLANEOUS........................................................................................48
15.1. Waiver.................................................................................48
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15.2. Notices................................................................................48
15.3. Assignment.............................................................................49
15.4. Rights of Third Parties................................................................50
15.5. Reliance...............................................................................50
15.6. Transfer Taxes; Title Costs; Expenses..................................................50
15.7. Construction...........................................................................50
15.8. Captions; Counterparts.................................................................50
15.9. Entire Agreement.......................................................................50
15.10. Amendments............................................................................51
15.11. Severability..........................................................................51
15.12. Publicity.............................................................................51
15.13. Further Assurances....................................................................51
15.14. Attorney's Fees.......................................................................51
</TABLE>
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EXHIBITS
<TABLE>
<CAPTION>
<S> <C> <C>
Exhibit A Transaction Expenses
Exhibit B Employees
Exhibit C Pro Rata Share
Exhibit D Form of Warrant Agreement
Exhibit E Allocation of Cash Consideration
Exhibit F Secured Promissory Note
Exhibit G Form of Noncompetition Agreement
Exhibit H Form of Opinion of Company and Sellers' Counsel
Exhibit I Form of Employment Agreement
Exhibit J Warrantholder's Agreement
Exhibit K Form of Opinion of Purchaser's Counsel
</TABLE>
v
<PAGE>
SCHEDULES
<TABLE>
<CAPTION>
<S> <C> <C>
Schedule 4.1 Foreign Qualifications
Schedule 4.3 Capitalization
Schedule 4.5 Noncontravention
Schedule 4.6 Financial Statements
Schedule 4.8 Undisclosed Liabilities
Schedule 4.9 Absence of Certain Changes
Schedule 4.10 Contracts
Schedule 4.13(c) Company Intellectual Property
Schedule 4.14 Real Property
Schedule 4.16 Employee Benefit Plans
Schedule 4.20 Taxes
Schedule 4.22 Licenses, Permits and Authorizations
Schedule 4.23 Insurance
Schedule 4.26 Transactions with Certain Persons
Schedule 4.27 Customers, Distributors & Suppliers
Schedule 4.28 Banking Relationships
</TABLE>
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AMENDED AND RESTATED
STOCK PURCHASE AGREEMENT
This AMENDED AND RESTATED STOCK PURCHASE AGREEMENT (the
"AGREEMENT" or "PURCHASE AGREEMENT") is entered into by and among Matthew D.
Kanter, The Benjamin Kanter 1997 QSST Trust, The Ronald Kanter 1997 QSST Trust,
and S. David Walden (the "SELLERS" and each a "SELLER"), Advanced Communication
Resources, Inc., a New York corporation (the "Company") and USinternetworking,
Inc., a Delaware corporation (the "Purchaser"), as of this 2d day of October,
1998, and amends and restates the Stock Purchase Agreement between the Sellers
and Purchaser dated as of September 1, 1998 (the "Original Purchase Agreement").
RECITALS:
A. Sellers own of record and beneficially all of the issued
and outstanding shares of common stock, no par value per share (the "COMPANY
COMMON STOCK"), of the Company (the "Shares").
B. Seller and Purchaser desire to amend and restate the
Original Purchase Agreement upon the terms and subject to the conditions set
forth herein.
C. Upon the terms and subject to the conditions set forth
herein, Sellers desire to sell to Purchaser or its designees, and Purchaser
desires to purchase from Sellers the Shares, free and clear of any and all
Encumbrances.
AGREEMENT:
NOW, THEREFORE, in consideration of the premises and the
mutual covenants and agreements contained herein, the parties hereto agree as
follows:
ARTICLE I.
DEFINITIONS
1.1. DEFINED TERMS. As used herein, the following terms shall have
the following meanings:
"AFFILIATE" shall mean with respect to any specified Person,
any other Person that, directly or indirectly, controls, is controlled by, or is
under common control with, such Person, through one or more intermediaries or
otherwise.
"AGREEMENT" shall have the meaning set forth in the Preamble.
"ANCILLARY AGREEMENTS" shall mean all exhibits and schedules
to the Agreement.
"ANTITRUST AUTHORITY" shall mean the Antitrust Division of the
United States Department of Justice or the United States Federal Trade
Commission.
<PAGE>
"BALANCE SHEET" shall mean the balance sheet of the Company as
of the date indicated thereon, together with the notes thereto.
"BENEFIT ARRANGEMENT" shall have the meaning set forth in
SECTION 4.16.
"BOOKS AND RECORDS" shall mean all of the following as made
and kept by the Company (a) all records and lists pertaining to customers,
suppliers or personnel of the Company, (b) all product, business and marketing
plans of the Company and (c) all books, ledgers, files, reports, plans, drawings
and operating records of every kind maintained by the Company including, without
limitation, all stock books, stock ledgers and corporate minutes and Real Estate
Records of the Company.
"BUSINESS" shall mean the Company's business of providing
computer consulting services.
"BUSINESS DAY" shall mean any day that is not a Saturday,
Sunday or any other day on which banks are required or authorized by law to be
closed in New York, New York.
"CASH CONSIDERATION" shall have the meaning specified in
SECTION 2.2.
"CLAIMS" shall have the meaning set forth in SECTION 12.1.1.
"CLOSING" shall have the meaning set forth in SECTION 3.1.
"CLOSING DATE" shall have the meaning set forth in SECTION
3.1.
"CODE" shall mean the Internal Revenue Code of 1986, as
amended, and the regulations promulgated thereunder.
"COMPANY" shall have the meaning set forth in the Preamble.
"COMPANY COMMON STOCK" shall have the meaning set forth in the
Recitals.
"CONTINGENT PAYMENTS" shall have the meaning set forth in
SECTION 2.3.
"CONTRACTS" shall mean, collectively, all agreements,
contracts, leases, purchase orders, memoranda of understanding and other binding
contractual commitments to which the Company is a party, including those
contracts listed on SCHEDULE 4.10.
"DISCLOSURE SCHEDULE" shall mean the schedules attached
hereto.
"EBITDA" shall mean, with respect to any Person for any
period, the Net Income of such Person for such period plus (i) an amount equal
to any extraordinary loss plus any net loss realized in connection with the sale
or disposition of any asset, to the extent such losses were deducted in
computing such Net Income, plus (ii) provision for taxes based on income or
profits of such Person and its Subsidiaries for such period, to the extent that
such provision for taxes was deducted in computing such Net Income, plus (iii)
interest expense of such Person and its
2
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Subsidiaries for such period, whether paid or accrued and whether or not
capitalized (including, without limitation, amortization of debt issuance costs
and original issue discount, non-cash interest payments, the interest component
of any deferred payment obligations, the interest component of all payments
associated with capital lease obligations, commissions, discounts and other fees
and charges incurred in respect of letter of credit or bankers' acceptance
financings, and net payments (if any) pursuant to hedging obligations), to the
extent that any such expense was deducted in computing such Net Income, plus
(iv) depreciation, amortization (including amortization of goodwill and other
intangibles but excluding amortization of prepaid cash expenses that were paid
in a prior period) and other non-cash expenses (excluding any such non-cash
expense to the extent that it represents an accrual of or reserve for cash
expenses in any future period or amortization of a prepaid cash expense that was
paid in a prior period) of such Person and its Subsidiaries for such period to
the extent that such depreciation, amortization and other non-cash expenses were
deducted in computing such Net Income, plus (v) cash expenses actually incurred
by the Company in connection with the Transactions as described on EXHIBIT A
hereto, minus (vi) non-cash items increasing such Net Income for such period
(other than items that were accrued in the ordinary course of business), in each
case, on a consolidated basis and determined in accordance with GAAP.
"EMPLOYEE LAWS" shall have the meaning set forth in SECTION
4.17.
"EMPLOYEE PLANS" shall have the meaning set forth in SECTION
4.16(a).
"EMPLOYEE RETENTION PERCENTAGE" shall mean, the percentage
obtained by dividing (i) the aggregate number of the employees of the Company
listed on EXHIBIT B who are employed by the Company as of December 31, 1998
(plus (A) any employees of the Company listed on EXHIBIT B who are employees of
the Purchaser or any Affiliate of the Purchaser other than the Company as of
December 31, 1998, (B) any employees listed on EXHIBIT B who are not employed by
the Company as of December 31, 1998 because of such person's death or disability
or termination by the Company and (C) any employees who are hired after the date
of this Agreement, and are employed by the Company at December 31, 1998, in
replacement or substitution of any of the employees listed on EXHIBIT B) by (ii)
36.
"ENCUMBRANCE" shall mean any mortgage, claim, charge, lien,
easement, right-of-way, covenant, condition, option, pledge, call, commitment,
security interest, conditional sales agreement, title retention agreement,
lease, and any other imperfection of title or restriction of any kind and
nature, choate or inchoate.
"ENVIRONMENTAL CLAIMS" shall mean all accusations,
allegations, notice of violations, liens, claims, demands, suits, or causes of
action for any damage, including without limitation, personal injury, property
damage (including any depreciation of property values), lost use of property, or
consequential damages, arising directly or indirectly out of Environmental
Conditions or Environmental Laws.
"ENVIRONMENTAL CONDITIONS" shall mean the state of the
environment, including natural resources (e.g., flora and fauna), soil, surface
water, wet lands, ground water, any present or potential drinking water supply,
subsurface strata, or ambient air, regulated under
3
<PAGE>
Environmental Laws relating to or arising out of the use, handling, storage,
treatment, recycling, generation, transportation, release, spilling, leaking,
pumping, pouring, emptying, discharging, injecting, escaping, leaching,
disposal, dumping, or threatened release of Hazardous Materials by the Company
or their predecessors or successors in interest, or by their agents,
representatives, employees, or independent contractors when acting in such
capacity on behalf of the Company. With respect to Environmental Claims by third
parties, Environmental Conditions also include the exposure of persons to
Hazardous Materials at the work place or the exposure of persons or property to
Hazardous Materials migrating from or otherwise emanating from or located on
property owned or occupied by the Company.
"ENVIRONMENTAL EXPENSES" shall mean any liability, loss, cost,
or expense related to an Environmental Claim, incurred in compliance with any
Environmental Laws, or incurred in response to Environmental Conditions,
including without limitation the costs of any investigation, remedial or
response actions, the costs associated with posting financial assurances for the
completion of any such actions, the preparation of any closure or other plans or
analyses, the costs of health assessments or other medical studies, the costs of
retention of expert consultants or legal counsel, capital improvements,
operation and maintenance costs, testing and monitoring costs, power and utility
costs and administrative costs incurred by governmental agencies.
"ENVIRONMENTAL LAWS" shall mean any and all foreign, Federal,
state, local or municipal laws, rules, orders, regulations, statutes,
ordinances, codes, legally binding decrees or other requirement of any
Governmental Authority (including, without limitation, common law) regulating,
relating to or imposing liability or standards of conduct concerning protection
of the environment or of human health relating to exposure of any kind of
Hazardous Materials, as has been, is now, or may at any time hereafter be, in
effect.
"ENVIRONMENTAL NONCOMPLIANCE" shall mean: (i) the release of
any Hazardous Materials into the environment, any storm drain, sewer, septic
system or publicly owned treatment works, in violation of any effluent or
emission limitations, standards or other criteria or guidelines established by
any federal, state or local law, regulation, rule, ordinance, plan or order;
(ii) any noncompliance with Environmental Laws including the failure to have
obtained permits, variances or other authorizations required under Environmental
Laws; (iii) any facility operations, procedures and/or designs which do not
conform to the statutory or regulatory requirements of Environmental Laws; and
(iv) the operation of any facility or equipment in violation of any permit
condition, schedule of compliance, administrative or court order and the like.
"ERISA" shall have the meaning set forth in SECTION 4.16(a).
"ERISA AFFILIATE" shall have the meaning set forth in SECTION
4.16(a).
"FINANCIAL STATEMENTS" shall have the meaning set forth in
SECTION 4.6.
"FIXTURES" shall mean any fixtures, machinery, installations
and building equipment located at or on any Real Property.
4
<PAGE>
"GAAP" shall mean United States generally accepted accounting
principles consistently applied.
"GOLDEN PARACHUTE PAYMENT" shall have the meaning set forth in
SECTION 4.16(c).
"GOVERNMENTAL AUTHORITY" shall mean any Federal, state,
municipal or local government, governmental authority, regulatory or
administrative agency, governmental commission, department, board, bureau,
court, tribunal, arbitrator or arbitral body.
"GOVERNMENT CONTRACT" shall have the meaning set forth in
SECTION 4.11.
"GOVERNMENT ORDER" shall mean any order, writ, rule, judgment,
injunction, decree, stipulation, determination or award entered by or with any
Governmental Authority.
"HAZARDOUS MATERIALS" shall mean any hazardous substance,
gasoline or petroleum (including crude oil or any fraction thereof) or petroleum
products, polychlorinated biphenyls, ureaformaldehyde insulation, asbestos or
asbestos-containing materials, pollutants, contaminants, radioactivity, and any
other materials or substances of any kind, whether solid, liquid or gas, and
whether or not any such substance is defined as hazardous under any
Environmental Law, that is regulated pursuant to any Environmental Law or that
could give rise to liability under any Environmental law.
"HSR ACT" shall mean the Hart-Scott-Rodino Antitrust
Improvement Act of 1976, as amended.
"IMPROVEMENTS" shall mean any right, title or interest in any
buildings, facilities, other structures and improvements, building systems and
fixtures.
"INDEMNIFIED PARTY" shall have the meaning set forth in
SECTION 12.1.3.
"INDEMNITOR" shall have the meaning set forth in SECTION
12.1.3.
"INDEPENDENT ACCOUNTING FIRM" shall have the meaning set forth
in SECTION 2.3(d).
"INSURANCE POLICY" shall have the meaning set forth in SECTION
4.23.
"INTELLECTUAL PROPERTY" shall mean (a) all inventions (whether
patentable or unpatentable and whether or not reduced to practice), all
improvements thereto, and all patents, patent applications, and patent
disclosures, together with all reissuances, continuations,
continuations-in-part, revisions, extensions, and reexaminations thereof, (b)
all trademarks, service marks, trade dress, logos, trade names, and corporate
names, together with all translations, adaptations, derivations, and
combinations thereof and including all goodwill associated therewith, and all
applications, registrations, and renewals in connection therewith, (c) all
copyrightable works, all copyrights, and all applications, registrations, and
renewals in connection therewith, (d) all mask works and all applications,
registrations, and renewals in connection therewith, (e) all trade secrets and
confidential business information (including ideas,
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research and development, know-how, formulas, compositions, manufacturing and
production processes and techniques, technical data, designs, drawings,
specifications, customer and supplier lists, pricing and cost information, and
business and marketing plans and proposals), (f) all computer software
(including data and related documentation), (g) all other proprietary rights,
and (h) all copies and tangible embodiments thereof (in whatever form or
medium).
"INTERIM BALANCE SHEET" shall mean the Balance Sheet dated the
Interim Balance Sheet Date.
"INTERIM BALANCE SHEET DATE" shall mean June 30, 1998.
"INTERIM FINANCIAL STATEMENTS" shall mean the Interim Balance
Sheet and the statements of operations, changes in shareholders' equity and cash
flow for the period ended on the Interim Balance Sheet.
"IRS" means the United States Internal Revenue Service.
"LIABILITIES" shall mean any direct or indirect liability,
indebtedness, obligation, commitment, expense, claim, deficiency, guaranty or
endorsement of or by any person of any type, whether accrued, absolute,
contingent, matured, unmatured or other.
"MATERIAL ADVERSE EFFECT" shall mean a material adverse effect
on the business, assets, liabilities, condition (financial or otherwise),
results of operations or prospects of the Company, taken as a whole.
"MULTIEMPLOYER PLAN" shall have the meaning set forth in
SECTION 4.16(a).
"NET INCOME" shall mean with respect to any Person for any
period, the aggregate of the Net Income of such Person and its Subsidiaries for
such period, on a consolidated basis, determined in accordance with GAAP.
"NONCOMPETITION AGREEMENT" shall have the meaning set forth in
SECTION 2.4.
"PBGC" shall have the meaning specified in SECTION 4.16(a).
"PENSION PLAN" shall have the meaning specified in SECTION
4.16(a).
"PERMITS" shall mean any licenses, permits, certificates of
occupancy, approvals, authorizations, variances and waivers issued by any
Governmental Authority.
"PERMITTED ENCUMBRANCE" shall mean any (i) mechanics lien,
materialmen's lien and similar Encumbrance with respect to any amounts not yet
due and payable or which are being contested in good faith through appropriate
proceedings and for which adequate reserves are maintained in accordance with
GAAP, (ii) Encumbrance for Taxes not yet due and payable or which are being
contested in good faith through appropriate proceedings, for which adequate
reserves are maintained in accordance with GAAP, and which are disclosed on the
Disclosure Schedule, (iii) routine utility easements or other non-detrimental
agreements of record affecting
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the Real Property which do not materially interfere with the use, occupancy or
marketability of the Real Property subject thereto and (iv) other Encumbrances
disclosed in the Schedules to this Agreement.
"PERSON" shall mean any individual, corporation, partnership,
limited liability company, joint venture, association, joint-stock company,
trust, unincorporated organization, labor union or Governmental Authority.
"PERSONNEL" shall have the meaning set forth in SECTION
4.9(b).
"PRE-CLOSING ENVIRONMENTAL MATTER" shall mean any
Environmental Claim, Environmental Condition or any noncompliance with any
Environmental Law on the part of Seller, its Affiliates or any of their
predecessors in interest occurring or in existence on, or arising from actions
occurring prior to, the Closing Date.
"PRE-CLOSING PARTIAL PERIOD" shall have the meaning set forth
in SECTION 13.1.
"PRIME RATE" shall have the meaning set forth in SECTION
12.1.1.
"PRO RATA SHARE" shall mean with respect to each Seller, such
Seller's percentage interest in the equity of the Company as set forth on
EXHIBIT C hereto.
"PURCHASER" shall have the meaning set forth in the Preamble.
"PURCHASER COMMON STOCK" shall have the meaning set forth in
SECTION 5.3.
"PURCHASER INDEMNITEES" shall have the meaning set forth in
SECTION 12.1.1.
"REAL ESTATE RECORDS" shall mean, to the extent in the
possession or control of Sellers or the Company, the real estate records, files,
books, blueprints, plans (as-built and otherwise), surveys, specifications,
designs, drawings, and other data associated with the Real Property.
"REAL PROPERTY" shall have the meaning set forth in SECTION
4.14.
"REAL PROPERTY LEASE" shall have the meaning set forth in
SECTION 4.14.
"RECIPIENTS" shall have the meaning set forth in SECTION
4.16(c).
"REVENUE" shall mean the revenue of the Company determined in
accordance with GAAP.
"SELLER REPRESENTATIVE" shall have the meaning set forth in
SECTION 14.1.
"SELLERS" shall have the meaning set forth in the Preamble.
"SELLER INDEMNITEES" shall have the meaning set forth in
SECTION 12.1.2.
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"SHARES" shall have the meaning set forth in the Recitals.
"SUBSIDIARY" shall mean any corporation, partnership, limited
liability company, joint venture or other entity in which the Company, directly
or indirectly, holds fifty percent (50%) or more of the voting power of all
equity securities or other ownership interests of such entity, or over which the
Company either directly or indirectly exercises actual control.
"TARGET EBITDA" shall mean $679,250.
"TARGET REVENUE" shall mean $7,559,150.
"TAX" or "TAXES" shall mean any federal, state, local or
foreign net or gross income, gross receipts, license, payroll, employment,
excise, severance, stamp, occupation, premium, (including taxes under Code Sec.
59A), customs duties, capital stock, franchise, profits, withholding, social
security (or similar), unemployment, disability, real property, personal
property, sales, use, transfer, registration, value added, alternative or add-on
minimum, estimated, or other tax, governmental fee or like assessment or charge
of any kind whatsoever, including any interest, penalty or additions thereto and
any amount imposed by any governmental authority or arising under any Tax law or
agreement, including, without limitation, any joint venture or partnership
agreement.
"TAX RETURNS" shall mean all reports, returns, declarations,
claims for refund or statements of any kind or nature relating to Taxes, and any
schedule or attachment thereto and any amendment thereof.
"TOTAL CONSIDERATION" shall have the meaning set forth in
SECTION 2.2(a).
"TRANSACTIONS" shall mean the transactions contemplated by
this Agreement and the Ancillary Agreements.
"WARRANTS" shall mean the warrants entitling the holders
thereof to purchase up to 500,000 shares of common stock of Purchaser at a price
of $2.00 per share, subject to the terms and conditions of the Warrant Agreement
attached hereto as EXHIBIT D.
"WELFARE PLAN" shall have the meaning set forth in SECTION
4.16(a).
1.2. CERTAIN USAGE. As used herein the following additional terms
shall have the following meaning:
The term "including" as used herein shall be read to mean
"including, without limitation."
The term "knowledge" as used herein, shall mean with respect
to any person, those facts or circumstances actually known by such person as
well as any facts or circumstances that would be known after due inquiry by a
person holding a comparable office or job or with comparable experience or
responsibilities. For purposes of this Agreement, the knowledge of Matthew D.
Kanter and S. David Walden shall be imputed to the Sellers and the Company, and
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the knowledge of Christopher McCleary, Stephen McManus, Lawrence Brunell, and
Andrew Stern shall be imputed to Purchaser.
ARTICLE II.
PURCHASE AND SALE OF SHARES
2.1. PURCHASE AND SALE OF SHARES. Upon the terms and subject to the
conditions contained herein, on the Closing Date, Sellers shall sell, convey and
transfer to Purchaser or Purchaser's designees, and Purchaser or its designee
shall purchase and acquire from Sellers, the Shares, free and clear of all
Encumbrances.
2.2. TOTAL CONSIDERATION AND TERMS.
(a) The aggregate consideration for the Shares to be purchased
by Purchaser hereunder and for the Noncompetition Agreement (the "TOTAL
CONSIDERATION") shall, subject to adjustment as provided in SECTIONS 2.3, and
12.1 hereof, consist of (i) Two Million Five Hundred Thousand Dollars
($2,500,000) in cash (the "CASH CONSIDERATION"); (ii) a $3,500,000 secured
promissory note payable to the Seller Representative, for the benefit of the
Sellers, in the form attached as EXHIBIT F (the "Note"); (iii) Five Million
Dollars ($5,000,000) in Contingent Payments (as defined below), subject to the
rights of set-off as provided in SECTION 12.4 hereof and subject to satisfaction
of the terms and conditions set forth below in SECTION 2.3; and (iv) the
Warrants.
(b) At the Closing, Purchaser will (i) pay to each Seller by
wire transfer of immediately available funds to an account designated in writing
by such Seller the amount set forth opposite each Seller's name on EXHIBIT E;
(ii) execute and deliver to the Sellers the Note; and (iii) issue the Warrants
to each of Matthew D. Kanter and S. David Walden.
(c) Purchaser has previously delivered to an escrow account,
pursuant to the Escrow Agreement dated September 1, 1998, the amount of $500,000
as a deposit towards the Cash Consideration (the balance of such account, the
"ESCROW DEPOSIT"). At Closing, the balance of the Escrow Deposit and interest
accrued thereon shall be applied towards the payment of the Cash Consideration.
In the event that this Agreement is terminated pursuant to Article X, the
balance of the Escrow Deposit shall be delivered to the Company or Purchaser in
accordance with the provisions of SECTION 11.4.
2.3. CONTINGENT PAYMENTS.
(a) As further consideration of the agreements set forth
herein and the sale by Sellers of the Shares, if the targets set forth below are
all achieved, Purchaser shall pay to each Seller such Seller's Pro Rata Share of
the applicable amount set forth below: (the "CONTINGENT PAYMENT"):
(i) In the event that (A) the Revenue of the Company
for the twelve months ended December 31, 1998 (the "1998 REVENUE")
exceeds 80% of the Target Revenue but is equal to or less than 100% of
the Target Revenue, (B)
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the EBITDA of the Company for the twelve months ended December 31,
1998 (the "1998 EBITDA") exceeds 80% of the Target EBITDA but is equal
to or less than 100% of the Target EBITDA, and (C) the Employee
Retention Percentage as of December 31, 1998 exceeds 80%, Purchaser
shall pay to each Seller such Seller's Pro Rata Share of $4,000,000,
or as otherwise directed in writing by the Seller Representative at
least two (2) Business Days prior to receipt of the Contingent
Payment; or
(ii) In the event that (A) the 1998 Revenue is
greater than the Target Revenue, (B) the 1998 EBITDA is greater than
the Target EBITDA, and (C) the Employee Retention Percentage as of
December 31, 1998 exceeds 80%, Purchaser shall pay to each Seller such
Seller's Pro Rata Share of $5,000,000, or as otherwise directed in
writing by the Seller Representative at least two (2) Business Days
prior to receipt of the Contingent Payment.
(b) Within fifteen (15) calendar days following the date on
which Purchaser receives the Company's audited financial statements for the
twelve months ended December 31, 1998 and in no event later than March 31, 1999,
Purchaser shall prepare and deliver to the Seller Representative a calculation
of the 1998 Revenue and 1998 EBITDA and the Employee Retention Percentage as of
December 31, 1998.
(c) The Seller Representative may dispute Purchaser's
calculation of the 1998 Revenue and the 1998 EBITDA but only on the basis that
the amounts reflected in such calculation were not determined in accordance with
GAAP or adjusted in accordance with this Agreement. The Seller Representative
shall notify Purchaser in writing of each disputed item, specifying the amount
of each item in dispute and setting forth, in detail, the basis for each item in
dispute, within fifteen (15) calendar days of the Seller Representative's
receipt of Purchaser's calculation of the Revenue. If the Seller Representative
has not notified Purchaser of any such dispute within such fifteen (15) day
period, then Purchaser's calculation shall be deemed to be final and conclusive
on the parties hereto, and any amount payable under SECTION 2.3(a) shall be paid
by Purchaser within five (5) Business Days thereafter.
(d) In the event of such a dispute, Purchaser and the Seller
Representative shall negotiate in good faith to reconcile their differences. If
such dispute has not been resolved within ten (10) Business Days after
Purchaser's receipt of notice of such dispute, the Seller Representative and
Purchaser shall submit the item(s) remaining in dispute to a mutually acceptable
independent "Big Five" accounting firm (the "INDEPENDENT ACCOUNTING FIRM"),
which shall, as promptly as practical but in no event later than thirty (30)
calendar days after such submission, determine and report upon such remaining
disputed item(s). Such determination and report shall be final, binding and
conclusive on the parties hereto and any amount payable under SECTION 2.3(a)
shall be paid by Purchaser within five (5) Business Days thereafter. The fees
and disbursements of the Independent Accounting Firm shall be allocated between
Purchaser and Sellers in the same proportion that the aggregate amount of such
remaining disputed item(s) so submitted to the Independent Accounting Firm,
which is unsuccessfully disputed by each such
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party (as determined by the Independent Accounting Firm), bears to the total
amount of such remaining disputed item(s) so submitted.
(e) In order not to interfere with the ability of the Company
to meet the Revenue, EBITDA and Employee Retention Percentage targets set forth
in Section 2.3(a), prior to January 1, 1999, Purchaser shall not (i) transfer
any of the employees, assets, or customers of the Company to Purchaser or any
Affiliate of Purchaser unless Purchaser first makes arrangements for the Company
to receive an allocation of Revenue and EBITDA attributable to such employees,
assets or customers for the period prior to January 1, 1999 or (ii) materially
modify any Company employee's compensation or benefits without the prior written
consent of the Seller Representative.
2.4. NONCOMPETE. As further consideration of the agreements set
forth herein and sale by Sellers of the Shares, at the Closing, each Seller
shall enter into a noncompetition agreement with Purchaser in the form of
EXHIBIT G hereto (the "NONCOMPETITION AGREEMENT"). The Noncompetition Agreement
shall become effective as of the Closing Date and shall continue in effect for a
period of two years after the Closing Date. Purchaser and Sellers agree that the
amount of the Total Consideration allocable to the Noncompetition Agreement
shall be $700,000.
ARTICLE III.
CLOSING
3.1. CLOSING. The consummation of the purchase and sale of the
Shares (the "CLOSING") shall take place at 10:00 a.m., local time, on or before
October 2, 1998 at the offices of Morse Zelnick Rose & Lander LLP, 450 Park
Avenue, New York, New York, or at such other time or place as the Seller
Representative and Purchaser may agree in writing (the day on which the Closing
takes place being referred to herein as the "CLOSING DATE").
3.2. SELLERS' CLOSING DELIVERIES. At the Closing, Sellers shall
deliver to Purchaser (i) stock certificates evidencing the Shares, duly endorsed
in blank or accompanied by a stock power duly executed in blank, and (ii) the
other documents required to be delivered by Sellers pursuant to Article IX
hereof.
3.3. PURCHASER'S CLOSING DELIVERIES. At the Closing, (i) Purchaser
shall pay to each Seller such Seller's Pro Rata Share of the Cash Consideration
(as provided in Section 2.2 hereof), (ii) Purchaser shall execute and deliver
the Note; (iii) Purchaser shall pay to Merchant's Bank of New York ("Merchant's
Bank") an amount equal to the entire outstanding balance of the Company's line
of credit with Merchant's Bank; (iv) Purchaser shall issue the Warrants and (v)
Purchaser shall deliver to Sellers the other documents required to be delivered
by Purchaser pursuant to Article IX hereof.
ARTICLE IV.
REPRESENTATIONS AND WARRANTIES
OF THE COMPANY AND SELLERS
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The Company and Sellers hereby jointly and severally represent
and warrant to Purchaser as follows, which representations and warranties were,
as of September 1, 1998, true and correct and, with respect to the
representations and warranties set forth in SECTIONS 4.1 through 4.7, SECTION
4.20, and SECTIONS 4.24 through 4.26, will be, as of the Closing Date, true and
correct:
4.1. ORGANIZATION. The Company is a corporation duly organized,
validly existing and in good standing under the laws of the State of New York
with full corporate power and authority to conduct the Business as it is
presently being conducted and to own and lease its properties and assets. The
Company is duly qualified to do business as a foreign corporation and is in good
standing in each jurisdiction where the character of its properties owned or
leased or the nature of its activities make such qualification necessary, except
where the failure to be so qualified or in good standing would not have a
Material Adverse Effect. Copies of the certificate of incorporation and bylaws
of the Company, and all amendments thereto, heretofore delivered to Purchaser
are accurate and complete as of the date hereof. SCHEDULE 4.1 contains a true,
correct and complete list of all jurisdictions in which the Company is qualified
to do business as a foreign corporation.
4.2. SUBSIDIARIES. The Company has no direct or indirect stock or
other equity or ownership interest (whether controlling or not) in any
corporation, association, partnership, limited liability company, joint venture
or other entity.
4.3. CAPITALIZATION.
(a) The authorized capital stock of the Company consists
solely of 200 shares of Company Common Stock, of which 100 shares are issued and
outstanding. All of the issued and outstanding shares of the Company Common
Stock have been duly authorized and validly issued and are fully paid and
nonassessable and are not subject to any preemptive rights. Each of the Sellers
owns of record and beneficially the number of shares of Company Common Stock as
are set forth on SCHEDULE 4.3(a), free and clear of all Encumbrances and such
shares of Company Common Stock constitute all of the issued and outstanding
shares of capital stock of the Company.
(b) The Company has not issued or granted any outstanding
options, warrants, rights or other securities convertible into or exchangeable
or exercisable for shares of the capital stock of the Company, any other
commitments or agreements providing for the issuance of additional shares of the
capital stock of the Company, the sale of treasury shares, or for the repurchase
or redemption of shares of the Company's capital stock, or any obligations
arising from canceled stock. There are no agreements of any kind which may
obligate the Company to issue, purchase, register for sale, redeem or otherwise
acquire any of its securities or interests. There are no outstanding or
authorized stock appreciation, phantom stock or similar rights with respect to
the Company.
(c) There are no voting trusts, stockholder agreements,
proxies or other agreements in effect with respect to the voting or transfer of
the Shares.
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4.4. AUTHORIZATION.
(a) The Company has all requisite corporate power and
authority, and has taken all corporate action necessary, to execute and deliver
this Agreement and the Ancillary Agreements, to consummate the transactions
contemplated hereby and thereby and to perform its obligations hereunder and
thereunder. The execution and delivery of this Agreement and the Ancillary
Agreements by the Company and the consummation by the Company of the
transactions contemplated hereby and thereby have been duly approved by the
board of directors and stockholders of the Company. No other corporate
proceedings on the part of the Company are necessary to authorize this Agreement
and the Ancillary Agreements and the transactions contemplated hereby and
thereby.
(b) This Agreement has been duly executed and delivered by the
Company and each of Sellers and is, and upon execution and delivery of the
Ancillary Agreements each such Ancillary Agreement will be, legal, valid and
binding obligations of the Company and each of Sellers enforceable against them
in accordance with its terms.
4.5. NO CONFLICT OR VIOLATION. Neither the execution, delivery or
performance of this Agreement and the Ancillary Agreements nor the consummation
of the transactions contemplated hereby, nor compliance by the Company or any of
Sellers with any of the provisions hereof, does or will violate any provision
of, or result in the breach of, any applicable law, rule or regulation of any
Governmental Authority, the articles of incorporation or bylaws of the Company,
or, except as set forth on SCHEDULE 4.5, any contract, agreement, indenture or
other instrument to which any of the Sellers or the Company is a party or by
which any of the Sellers or the Company may be bound, or of any order, judgment
or decree applicable to any of them, or terminate or result in the termination
of any such agreement, indenture or instrument, or result in the creation of any
lien, charge or Encumbrance upon any of the properties or assets of the Company,
constitute any event which, after notice or lapse of time or both, would result
in any such violation, breach, acceleration, termination or creation of a lien
or result in a violation or revocation of any required license, permit or
approval from any Governmental Authority or other third party.
4.6. FINANCIAL STATEMENTS. Attached as SCHEDULE 4.6 hereto are (i)
the audited balance sheets of the Company as of December 31, 1997 and the
related audited statements of earnings, shareholders equity and cash flows of
the Company for each of the twelve-month periods then ended, together with the
independent auditor's report thereon and (ii) the unaudited balance sheet of the
Company as of June 30, 1998 and the related unaudited statements of earnings,
shareholders' equity and cash flows of the Company for the six month period then
ended (collectively, the "FINANCIAL STATEMENTS"). The Financial Statements
(including the notes thereto) were prepared in accordance with GAAP,
consistently applied throughout the periods indicated, and present fairly and
accurately the financial condition and results of operation of the Company as of
and for the periods indicated; PROVIDED, HOWEVER, that the unaudited Financial
Statements as of and for the periods ending June 30, 1998 are subject to normal
year-end adjustments (which will not be material individually or in the
aggregate) and lack footnotes and other presentation items.
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4.7. BOOKS AND RECORDS. The Company has made and kept (and given
Purchaser access to) Books and Records and accounts, which, in reasonable
detail, accurately and fairly reflect the activities of the Company. The minute
books of the Company previously delivered to Purchaser accurately and adequately
reflect all action previously taken by the shareholders, board of directors and
committees of the board of directors of the Company. The copies of the stock
book records of the Company previously delivered to Purchaser are true, correct
and complete, and accurately reflect all transactions effected in the Company's
capital stock through and including the date hereof. The Company has not engaged
in any transaction, maintained any bank account or used any corporate funds
except for transactions, bank accounts and funds which have been and are
reflected in the normally maintained Books and Records of the Company.
4.8. UNDISCLOSED LIABILITIES. Except as set forth on SCHEDULE 4.8,
the Company has no material Liabilities except for liabilities and obligations
(a) reflected or reserved for on the Interim Balance Sheet or (b) that have
arisen since the date of the Interim Balance Sheet in the ordinary course of the
operation of the business and consistent with past practice of the Company (all
of which are current liabilities similar in type to those reflected on the
Interim Balance Sheet).
4.9. ABSENCE OF CERTAIN CHANGES OR EVENTS. Since the Interim
Balance Sheet Date, except as disclosed on SCHEDULE 4.9, there has not been any:
(a) material adverse change in the business, operations,
condition (financial or otherwise), assets, liabilities, or prospects of the
Company, except as may result from general economic conditions;
(b) (i) except for normal periodic increases in the ordinary
course of business consistent with past practice, increase in the compensation
payable or to become payable by the Company to any of its officers, employees or
agents (collectively, "PERSONNEL"), (ii) bonus, incentive compensation, service
award or other like benefit granted, made or accrued, contingently or otherwise,
for or to the credit of any of the Personnel, (iii) employee welfare, pension,
retirement, profit-sharing or similar payment or arrangement made or agreed to
by the Company for any Personnel except pursuant to the existing plans and
arrangements described in the Disclosure Schedules hereto, or (iv) new
employment agreement to which the Company is a party;
(c) addition to or modification of the employee benefit plans,
arrangements or practices affecting Personnel other than (i) contributions made
for 1998 in accordance with the normal practices of the Company or (ii) the
extension of coverage to other Personnel who became eligible after the Interim
Balance Sheet Date;
(d) sale, assignment or transfer of any material assets of the
Company other than in the ordinary course;
(e) cancellation of any indebtedness or waiver of any rights
of substantial value to the Company, whether or not in the ordinary course of
business;
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(f) amendment, cancellation or termination of any Contract,
license or other instrument material to the Company;
(g) capital expenditure or the execution of any lease or any
incurring of liability therefor by the Company, involving payments in excess of
Fifty Thousand Dollars ($50,000) in the aggregate;
(h) failure to operate the business of the Company in the
ordinary course so as to use reasonable efforts to preserve the Business intact,
to keep available the services of the Personnel, and to preserve the goodwill of
the Company's suppliers, customers and others having business relations with the
Company;
(i) change in accounting methods or practices by the Company;
(j) revaluation by the Company of any of its respective
assets, including without limitation, writing off notes, inventory or accounts
receivable;
(k) damage, destruction or loss (whether or not covered by
insurance) adversely affecting the properties, business or prospects of the
Company;
(l) dividends or distributions in respect of any shares of the
Company's capital stock, or repurchase or redemption of any shares of the
Company's capital stock;
(m) indebtedness incurred by the Company for borrowed money or
commitment to borrow money entered into by the Company, or any loans made or
agreed to be made by the Company; or
(n) increase in the amount outstanding under the Company's
line of credit with Merchant's Bank.
4.10. CONTRACTS; NO DEFAULTS.
(a) SCHEDULE 4.10 contains a listing of all Contracts
described in (i) through (xv) below to which the Company is a party. Such
listing identifies, among other things, the parties to and the expiration date
of the contracts the expiration date of the contract and the office of the
Company where details relating to the contract are located. True, correct and
complete copies of contracts (or a summary thereof, if oral) referred to in
clauses (i) through (xv) below have been delivered to or made available to
Purchaser and its agents and representatives.
(i) Each Contract which involves performance of
services or delivery of goods and/or materials, by or to the Company of
an amount or value in excess of $25,000;
(ii) Each note, debenture, other evidence of
indebtedness, guarantee, loan, letter of credit, surety-bond or
financing agreement or instrument or other contract for money borrowed,
including any agreement or commitment for future loans, credit or
financing;
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(iii) Each Contract not in the ordinary course of
business;
(iv) Each lease, rental or occupancy agreement,
license, installment and conditional sale agreement, and other Contract
affecting the ownership of, leasing of, title to, use of, or any
leasehold or other interest in, any real or personal property
constituting fixed assets;
(v) Each material licensing agreement or other
Contract with respect to patents, trademarks, copyrights, or other
intellectual property, including agreements with current or former
employees, consultants or contractors regarding the appropriation or
the nondisclosure of Intellectual Property;
(vi) Each Contract to which any employee of the
Company is bound which in any manner purports to (A) restrict such
Person's freedom to engage in any line of business or to compete with
any other Person, or (B) assign to any other Person its rights to any
material invention, improvement, or discovery;
(vii) Each employment agreement, collective
bargaining agreement or other Contract to or with any employee or any
labor union or other employee representative of a group of employees
relating to wages, hours, and other conditions of employment;
(viii) Each joint venture Contract, partnership
agreement, limited liability company agreement or other Contract
(however named) involving a sharing of profits, losses, costs, or
liabilities by the Company with any other Person;
(ix) Each Contract containing covenants which in any
way purport to restrict the Company's business activity or purport to
limit the freedom of the Company to engage in any line of business or
to compete with any Person;
(x) Each Contract providing for payments to or by any
Person or entity based on sales, purchases or profits, other than
direct payments for goods;
(xi) Each power of attorney which is currently
effective and outstanding;
(xii) Each Contract under which the Company is
obligated to incur capital expenditures after the date hereof in an
aggregate amount in excess of Fifty Thousand Dollars ($50,000);
(xiii) Each written warranty, guaranty or other
similar undertaking with respect to contractual performance extended by
the Company;
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(xiv) Any other Contract material to the business
or operations of the Company;
(xv) Each amendment, supplement, and modification
(whether written or oral) in respect of any of the foregoing.
(b) Except as set forth on SCHEDULE 4.10, all of the Contracts
listed pursuant to paragraph (a) hereof (i) are in full force and effect, (ii)
represent the legal, valid and binding obligations of the Company and are
enforceable against the Company in accordance with their terms and (iii)
represent the legal, valid and binding obligations of the other parties thereto
and are enforceable against such parties in accordance with their terms. No
condition exists or event has occurred which, with notice or lapse of time or
both, would constitute a default or a basis for force majeure or the claim of
excusable delay or nonperformance under such Contracts.
(c) Except as set forth on SCHEDULE 4.10, there are no
renegotiations of, or attempts to renegotiate, or outstanding rights to
renegotiate, any material amounts paid or payable to the Company under current
or completed Contracts, with any Person having the contractual or statutory
right to require such renegotiation. Neither Sellers, nor the Company, has
received any written demand for such renegotiation in respect of any such
Contract. Except as set forth on SCHEDULE 4.10, no customer or government
contracting officer has asserted that any material adjustments are required to
the terms of any Contracts.
(d) Except as specifically noted on SCHEDULE 4.10, no consent
of any party to any such Contract is required in connection with the
Transactions.
(e) Except as set forth on SCHEDULE 4.10, no Contract has
accrued, or is expected by the Company to result in, any losses. For the
purposes of this subsection (e) a Contract shall be deemed to accrue or result
in losses if the revenues payable to the Company under such Contract exceed the
sum of (i) the cost of goods sold, plus (ii) any commissions payable to
salespersons and allocable to such revenues.
(f) Except as set forth on SCHEDULE 4.10, neither Sellers, nor
the Company, has committed any act or omission which would result in, and there
has been no occurrence which would give rise to, any material product liability
or liability for breach of warranty on the part of the Company.
4.11. GOVERNMENT CONTRACTS; BACKLOG. There is no suit or
investigation pending or, to the best knowledge of the Company, threatened
against the Company asserting or alleging the commission of criminal acts or
bribery by the Company with respect to any Contract between the Company and any
Governmental Authority including the United States Government or any department
or agency thereof (a "GOVERNMENT CONTRACT"). The Company is not a party to any
Government Contract.
4.12. TANGIBLE ASSETS. The Company owns or leases all buildings,
machinery, equipment, and other tangible assets necessary for the conduct of its
businesses as presently conducted and as presently proposed to be conducted.
Each such tangible asset is free from
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defects (patent and latent), has been maintained in accordance with normal
industry practice, is in good operating condition and repair (subject to normal
wear and tear), and is suitable for the purposes for which it presently is used
and presently is proposed to be used.
4.13. INTELLECTUAL PROPERTY.
(a) The Company owns or has the right to use pursuant to
license, sublicense, agreement, or permission all Intellectual Property
necessary or desirable for the operation of the businesses of the Company as
presently conducted and as presently proposed to be conducted. Each item of
Intellectual Property owned or used by the Company immediately prior to the
Closing hereunder will be owned or available for use by the Company on identical
terms and conditions immediately subsequent to the Closing hereunder. The
Company has taken all necessary and desirable action to maintain and protect
each item of Intellectual Property that it owns or uses.
(b) The Company has not interfered with, infringed upon,
misappropriated, or otherwise come into conflict with any Intellectual Property
rights of third parties, and none of the Sellers and the directors and officers
(and employees with responsibility for Intellectual Property matters) of the
Company has ever received any charge, complaint, claim, demand, or notice
alleging any such interference, infringement, misappropriation, or violation
(including any claim that the Company must license or refrain from using any
Intellectual Property rights of any third party). To the Knowledge of any of the
Sellers and the directors and officers (and employees with responsibility for
Intellectual Property matters) of the Company, no third party has interfered
with, infringed upon, misappropriated, or otherwise come into conflict with any
Intellectual Property rights of the Company.
(c) Section 4.13(c) of the Disclosure Schedule identifies each
patent or registration which has been issued to the Company with respect to any
of its Intellectual Property, identifies each pending patent application or
application for registration which the Company has made with respect to any of
its Intellectual Property, and identifies each license, agreement, or other
permission which the Company has granted to any third party with respect to any
of its Intellectual Property (together with any exceptions). The Sellers have
delivered to Purchaser correct and complete copies of all such patents,
registrations, applications, licenses, agreements, and permissions (as amended
to date) and have made available to Purchaser correct and complete copies of all
other written documentation evidencing ownership and prosecution (if applicable)
of each such item. Section 4.13(c) of the Disclosure Schedule also identifies
each trade name or unregistered trademark used by the Company in connection with
any of its businesses. With respect to each item of Intellectual Property
required to be identified in Section 4.13(c) of the Disclosure Schedule:
(i) the Company possess all right, title, and
interest in and to the item, free and clear of any Encumbrance,
license, or other restriction;
(ii) the item is not subject to any outstanding
injunction, judgment, order, decree, ruling, or charge;
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(iii) no action, suit, proceeding, hearing,
investigation, charge, complaint, claim, or demand is pending or, to
the Knowledge of the Sellers and the directors and officers (and
employees with responsibility for Intellectual Property matters) of the
Company, is threatened which challenges the legality, validity,
enforceability, use, or ownership of the item; and
(iv) the Company has never agreed to indemnify any
Person for or against any interference, infringement, misappropriation,
or other conflict with respect to the item.
(d) Section 4.13(d) of the Disclosure Schedule identifies each
item of Intellectual Property that any third party owns and that the Company
uses pursuant to license, sublicense, agreement, or permission except for
generally available personal computer applications. The Sellers have delivered
to Purchaser correct and complete copies of all such licenses, sublicenses,
agreements, and permissions (as amended to date) except for generally available
personal computer applications. With respect to each item of Intellectual
Property:
(i) the license, sublicense, agreement, or permission
covering the item is legal, valid, binding, enforceable, and in full
force and effect;
(ii) the license, sublicense, agreement, or
permission will continue to be legal, valid, binding, enforceable, and
in full force and effect on identical terms following the consummation
of the transactions contemplated hereby;
(iii) no party to the license, sublicense, agreement,
or permission is in breach or default, and no event has occurred which
with notice or lapse of time would constitute a breach or default or
permit termination, modification, or acceleration thereunder;
(iv) no party to the license, sublicense, agreement,
or permission has repudiated any provision thereof;
(v) with respect to each sublicense, the
representations and warranties set forth in subsections (I) through
(IV) above are true and correct with respect to the underlying license;
(vi) the underlying item of Intellectual Property is
not subject to any outstanding injunction, judgment, order, decree,
ruling, or charge;
(vii) no action, suit, proceeding, hearing,
investigation, charge, complaint, claim, or demand is pending or, to
the Knowledge of any of the Sellers and the directors and officers (and
employees with responsibility for Intellectual Property matters) of the
Company, is threatened which challenges the legality, validity, or
enforceability of the underlying item of Intellectual Property; and
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(viii) the Company has not granted any sublicense or
similar right with respect to the license, sublicense, agreement, or
permission.
(e) To the Knowledge of any of the Sellers and the directors
and officers (and employees with responsibility for Intellectual Property
matters) of the Company, the Company will not interfere with, infringe upon,
misappropriate, or otherwise come into conflict with, any Intellectual Property
rights of third parties as a result of the continued operation of its businesses
as presently conducted and as presently proposed to be conducted.
(f) None of the Sellers and the directors and officers (and
employees with responsibility for Intellectual Property matters) of the Company
has any Knowledge of any new products, inventions, procedures, or methods of
manufacturing or processing that any competitors or other third parties have
developed which reasonably could be expected to supersede or make obsolete any
product or process of the Company.
4.14. REAL PROPERTY.
(a) SCHEDULE 4.14 lists and describes all real property
(together with all improvements thereon, the "REAL PROPERTY") now used, operated
or occupied by the Company and the name of the record owner thereof. For each
parcel of Real Property listed on SCHEDULE 4.14, which is owned by the Company,
the Company holds good and marketable fee simple title to such Real Property
free and clear of any Encumbrances except for Permitted Encumbrances. For each
parcel of Real Property listed on SCHEDULE 4.14, which is not owned by the
Company, the Company has made available to Purchaser true and correct copies of
the Real Property lease or sublease (each a "REAL PROPERTY LEASE") with respect
to such Real Property. Each Real Property Lease is legal, valid, binding,
enforceable, and in full force and effect and Seller has not assigned,
transferred, conveyed, mortgaged, deeded in trust, or encumbered any interest in
the leasehold or subleasehold. The Company enjoys peaceful and undisturbed
possession of all Real Property, and the Company has fulfilled in all material
respects all the obligations required to be performed by it through the date
hereof with respect to each Real Property Lease.
(b) The Company has received all required material approvals
of Governmental Authorities (including Permits and material certificates of
occupancy or other similar certificates permitting lawful occupancy of the Real
Property) required in connection with the present use of the Real Property and
all the Improvements thereon.
(c) All the Real Property are supplied with utilities and
other services necessary for the operation of such facilities as currently
operated.
(d) All Improvements, and all Fixtures and Equipment and other
tangible assets owned, leased, or used by the Company on the Real Property are
in good condition and repair in all material respects, and such Improvements and
Fixtures are free from structural defects.
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(e) The Company has not received notice of any special
assessment relating to any Real Property or any portion thereof, and the Company
has no knowledge of any pending or threatened special assessment.
(f) There is not now pending, or to the knowledge of the
Company, threatened, any eminent domain or condemnation proceeding affecting the
Real Property or any portion thereof.
4.15. LITIGATION AND PROCEEDINGS. There are no lawsuits, actions,
suits, claims or other proceedings at law or in equity (including, without
limitation, investigations by any Government Authority involving any Government
Contract wherein a claim for improper charges was made), or before or by any
court or Governmental Authority or before any arbitrator pending or, to the
knowledge of the Company, threatened, against either the Sellers or the Company.
There is no unsatisfied judgment, order, injunction or decree binding upon
either of the Sellers or the Company.
4.16. EMPLOYEE BENEFIT PLANS.
(a) DEFINITIONS. The following terms, when used in this
Section 4.16, shall have the following meanings. Any of these terms may, unless
the context otherwise requires, be used in the singular or the plural depending
on the reference.
(i) "BENEFIT ARRANGEMENT" shall mean any employment,
consulting, severance or other similar contract, arrangement or policy
and each plan, arrangement (written or oral), program, agreement or
commitment providing for insurance coverage (including without
limitation any self-insured arrangements), workers' compensation,
disability benefits, fringe benefits, supplemental unemployment
benefits, vacation benefits, retirement benefits, life, health,
disability or accident benefits (including without limitation any
"voluntary employees' beneficiary association" as defined in SECTION
501(c)(9) of the Code providing for the same or other benefits) or for
deferred compensation, profit-sharing bonuses, stock options,
restricted stock, stock appreciation rights, stock purchases or other
forms of incentive compensation or post-retirement insurance,
compensation or benefits which (A) is not a Welfare Plan, Pension Plan
or Multiemployer Plan, (B) is entered into, maintained, contributed to
or required to be contributed to, as the case may be, by the Company,
and (C) covers any employee or former employee of the Company (with
respect to their relationship with the Company).
(ii) "EMPLOYEE PLANS" shall mean all Benefit
Arrangements, Multiemployer Plans, Pension Plans and Welfare Plans.
(iii) "ERISA" shall mean the Employee Retirement
Income Security Act of 1974, as amended.
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(iv) "ERISA AFFILIATE" shall mean any entity which is
(or at any relevant time was) a member of a "controlled group of
corporations" with, under "common control" with, a member of an
"affiliated service group" with, or otherwise required to be aggregated
with, the Company as set forth in Section 414(b), (c), (m) or (o) of
the Code.
(v) "MULTIEMPLOYER PLAN" shall mean any
"multiemployer plan," as defined in Section 4001(a)(3) of ERISA, (A)
which the Company or any ERISA Affiliate maintains, administers,
contributes to or is required to contribute to and (B) which covers any
employee or former employee of the Company or any ERISA Affiliate (with
respect to their relationship with such entities).
(vi) "PBGC" shall mean the Pension Benefit Guaranty
Corporation.
(vii) "PENSION PLAN" shall mean any "employee pension
benefit plan" as defined in Section 3(2) of ERISA (other than a
Multiemployer Plan) (A) which the Company or any ERISA Affiliate
maintains, administers, contributes to or is required to contribute to
and (B) which covers any employee or former employee of the Company or
any ERISA Affiliate (with respect to their relationship with such
entities).
(viii) "WELFARE PLAN" shall mean any "EMPLOYEE
WELFARE BENEFIT PLAN" as defined in Section 3(1) of ERISA, (A) which
the Company or any ERISA Affiliate maintains, administers, contributes
to or is required to contribute to, and (B) which covers any employee
or former employee of the Company or any ERISA Affiliate (with respect
to their relationship with such entities).
(b) DISCLOSURE; DELIVERY OF COPIES OF RELEVANT DOCUMENTS AND
OTHER INFORMATION. SCHEDULE 4.16 contains a complete list of Employee Plans.
(c) REPRESENTATIONS. Except as set forth in SCHEDULE 4.16:
(i) PENSION PLANS.
(A) No "accumulated funding deficiency"
(for which an excise tax is due or would be due in the absence of a
waiver) as defined in Section 412 of the Code or as defined in Section
302(a)(2) of ERISA, whichever may apply, has been incurred with
respect to any Pension Plan with respect to any plan year, whether or
not waived. Neither the Company nor any ERISA Affiliate has failed to
pay when due any "required installment", within the meaning of Section
412(m) of the Code and Section 302(e) of ERISA, whichever may apply,
with respect to any Pension Plan. Neither the Company nor any ERISA
Affiliate is subject to any lien imposed under Section 412(n) of the
Code or Section 302(f) or 4068 of ERISA, whichever may apply, with
respect to any Pension Plan. Neither the Company nor any ERISA
Affiliate has any liability for unpaid contributions
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with respect to any Pension Plan. All "benefit liabilities," within
the meaning of Section 4001(a)(16) of ERISA, are fully funded as of
the Closing Date with respect to each Pension Plan on a termination
basis with an assumed interest rate of six percent (6%).
(B) Neither the Company nor any ERISA
Affiliate is required to provide security to a Pension Plan under
Section 401(a)(29) of the Code.
(C) Each Pension Plan and each related trust
agreement, annuity contract or other funding instrument has been
determined by the Internal Revenue Service to be qualified and
tax-exempt under the provisions of Code Sections 401(a) and 501(a).
(D) Each Pension Plan and each related trust
agreement, annuity contract or other funding instrument is in material
compliance with its terms and, both as to form and in operation, with
the requirements prescribed by any and all statutes, orders, rules and
regulations which are applicable to such plans, including without
limitation ERISA and the Code.
(E) The Company or an ERISA Affiliate has
paid all premiums (and interest charges and penalties for late
payment, if applicable) due the PBGC with respect to each Pension Plan
for each plan year thereof for which such premiums are required.
Neither the Company nor any ERISA Affiliate has engaged in, or is a
successor or parent corporation to an entity that has engaged in, a
transaction which, to the best knowledge of the Company, is described
in Section 4069 of ERISA. There has been no "reportable event" (as
defined in Section 4043(b) of ERISA and the PBGC regulations under
such Section) requiring notice to the PBGC with respect to any Pension
Plan. No filing has been made by the Company or any ERISA Affiliate
with the PBGC, and no proceeding has been commenced by the PBGC, to
terminate any Pension Plan. No condition exists and no event has
occurred that could constitute grounds for the termination of any
Pension Plan by the PBGC, or which could reasonably be expected to
result in liability of the Company or any ERISA Affiliate to the PBGC
with respect to any Pension Plan, other than liabilities for premium
payments. Neither the Company nor any ERISA Affiliate has, at any
time, (1) ceased operations at a facility so as to become subject to
the provisions of Section 4062(e) of ERISA, (2) withdrawn as a
substantial employer so as to become subject to the provisions of
Section 4063 of ERISA, or (3) ceased making contributions on or before
the Closing Date to any Pension Plan subject to Section 4064(a) of
ERISA to which the Company or any ERISA Affiliate made contributions
during the six years prior to the Closing Date.
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(ii) MULTIEMPLOYER PLANS. There are no Multiemployer
Plans, and neither the Company nor any ERISA Affiliate has ever
maintained, contributed to, participated or agreed to participate in a
Multiemployer Plan.
(iii) WELFARE PLANS.
(A) Each Welfare Plan which covers or has
covered employees or former employees of the Company (with respect to
their relationship with such entities) is in material compliance with
its terms and, both as to form and operation, with the requirements
prescribed by any and all statutes, orders, rules and regulations
which are applicable to such Welfare Plan, including without
limitation ERISA and the Code.
(B) An estimate of the liabilities of the
Company and any ERISA Affiliate for providing retiree life and medical
benefits coverage to active and retired employees of the Company and
any ERISA Affiliates has been made and is reflected on the appropriate
balance sheet and books and records according to Statement of
Financial Accounting Standards No. 106. The Company or an ERISA
Affiliate has the right to modify and to terminate Welfare Plans which
cover retirees with respect to both retired and active employees.
(C) Each Welfare Plan which is a "group
health plan," as defined in Section 607(1) of ERISA, has been operated
in material compliance with the provisions of Part 6 of Title I,
Subtitle B of ERISA and Section 4980B of the Code at all times.
(iv) BENEFIT ARRANGEMENTS. Each Benefit Arrangement
is in material compliance with its terms and with the requirements
prescribed by any and all statutes, orders, rules and regulations which
are applicable to such Benefit Arrangement, including without
limitation the Code.
(v) FIDUCIARY DUTIES AND PROHIBITED TRANSACTIONS.
Neither the Company has any liability with respect to any transaction
in violation of Sections 404 or 406 of ERISA or any "prohibited
transaction," as defined in Section 4975(c)(1) of the Code, for which
no exemption exists under Section 408 of ERISA or Section 4975(c)(2) or
(d) of the Code with respect to any Welfare Plan or Pension Plan.
Neither the Company nor any of its Subsidiary has participated in a
violation of Part 4 of Title I, Subtitle B of ERISA by any plan
fiduciary of any Welfare Plan or Pension Plan or has any unpaid civil
penalty under Section 502(l) of ERISA.
(vi) LITIGATION. There is no material action, order,
writ, injunction, judgment or decree outstanding or claim, suit,
litigation, proceeding, arbitral action, governmental audit or
investigation relating to or seeking benefits under any Employee Plan
that is pending, threatened or anticipated against the Company or any
ERISA Affiliate other than routine claims for benefits.
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(vii) UNPAID CONTRIBUTIONS. Neither the Company nor
any ERISA Affiliate has any liability for unpaid contributions with
respect to any Pension Plan, Multiemployer Plan or Welfare Plan. The
Company or an ERISA Affiliate has made all required contributions under
each Employee Plan for all periods through and including the Closing
Date or proper accruals have been made and are reflected on the
appropriate balance sheet and books and records.
(viii) The Company has delivered pursuant to this
Agreement a true and complete set of copies of (a) all Employee Plans
and related trust agreements, annuity contracts or other funding
instruments as in effect immediately prior to the Closing Date,
together with all amendments thereto which shall become effective at a
later date; (b) the latest Internal Revenue Service determination
letter obtained with respect to any such Employee Plan qualified or
exempt under Section 401 or 501 of the Code; (c) Forms 5500 and
certified financial statements for the most recently completed three
fiscal years for each Employee Plan required to file such form,
together with the most recent actuarial report, if any, prepared by the
Employee Plan's enrolled actuary; (d) all summary plan descriptions for
each Employee Plan required to prepare, file and distribute summary
plan descriptions; (e) all summaries furnished employees, officers and
directors of the Company of all incentive compensation, other plans and
fringe benefits for which a summary plan description is not required;
(f) current registration statements on Form S-8 and amendments thereto
with respect to any Employee Plan; and (g) the notifications to
employees of their rights under Section 4980B of the Code.
(ix) No payment made to any Person who constitutes a
"disqualified individual" within the meaning of Section 280G(c) of the
Code with respect to the Company ("RECIPIENTS") pursuant to any
employment contract, severance agreement or other arrangement to which
the Company is a party ("GOLDEN PARACHUTE PAYMENT"), other than any
payment made or to be made under any of the Employment and
Non-Competition Agreements, will be nondeductible to the Company
because of the applicability of Section 280G of the Code to the Golden
Parachute Payment, nor will the Company be required to "gross up" or
otherwise compensate any Recipient because of the imposition of any
excise tax (including any interest or penalties related thereto) on the
Recipient because of the applicability of Sections 280G and 4999 of the
Code.
4.17. LABOR RELATIONS. The persons listed on EXHIBIT B are all of
the employees of the Company as of the date of this Agreement whose services are
billed to customers of the Company on an hourly or other basis. The Company is
not a party to any collective bargaining agreement. The Contracts listed on
SCHEDULE 4.10 also include all written employment or severance agreements to
which the Company is a party with respect to any employee or former employee and
which may not be terminated at will, or by giving notice of 30 days or less,
without cost or penalty including, without limitation, any severance payment.
The Company has delivered or made available to Purchaser true, correct and
complete copies of each such Contract,
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as amended to date. Neither the Company, nor to the knowledge of the Company,
the other party or parties thereto, is in breach of any term of any such
Contract. The Company has not engaged in any unfair labor practice and there are
no complaints against the Company pending before the National Labor Relations
Board or any similar state or local labor agency by or on behalf of any employee
of the Company. There are no representation questions, arbitration proceedings,
labor strikes, slow downs or stoppages, grievances or other labor disputes
pending or, to the knowledge of the Company, threatened with respect to the
employees of the Company, and the Company has not experienced any attempt by
organized labor to cause the Company to comply or conform to demands of
organized labor relating to its employees. Except as listed on SCHEDULE 4.10,
the Company has not entered into any severance or similar arrangement in respect
of any present employee of the Company that will result in any obligation
(absolute or contingent) of the Company to make any payment to any present
employee of the Company following termination of employment. The Company has
complied in all material respects with all laws, rules and regulations relating
to employment, equal employment opportunity, nondiscrimination, immigration,
wages, hours, benefits, collective bargaining, the payment of social security
and similar taxes, occupational safety and health and plant closings
(hereinafter collectively referred to as the "EMPLOYMENT LAWS"). The Company is
not liable for the payment of taxes, fines, penalties or other amounts, however
designated, for failure to comply with any of the foregoing Employment Laws.
4.18. LEGAL COMPLIANCE. The Company is, and at all times has been,
in compliance in all material respects with all laws (including rules and
regulations thereunder) of federal, state, and local governments (and all
agencies thereof) applicable thereto.
4.19. ENVIRONMENTAL PROTECTION.
(a) The Company is, and at all times has been, in compliance
with all Environmental Laws.
(b) There are no existing or threatened Environmental Claims
against any of the Sellers or the Company, nor have any of the Sellers or the
Company received any notification or knowledge of any allegation of any actual,
or potential responsibility for, or any inquiry or investigation regarding, any
disposal, release, or threatened release at any location of any Hazardous
Materials generated or transported by the Company.
(c) (i) No underground tank or other underground storage
receptacle for Hazardous Materials is currently located on the Real Property and
there have been no releases of any Hazardous Materials from any such underground
tank or related piping; and (ii) there have been no releases (i.e., any past or
present releasing, spilling, leaking, pumping, pouring, emitting, emptying,
discharging, injecting, escaping, leaching, disposing, or dumping) by the
Company of Hazardous Materials on, upon, or into the Real Property. In addition,
there have been no such releases by the Company's corporate predecessors and no
releases on, upon, or into any Real Property in the vicinity of any of the Real
Property which, through soil or ground water contamination, has come to be
located on any of the Real Property.
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(d) There are no Environmental Conditions that diminish the
value of any Real Property or that will interfere in any material respect with
the current or reasonably foreseeable use of the Real Property or that would
reasonably be expected to cause the incurrence of any Environmental Expense.
(e) There are no consent decrees, consent orders, judgments,
judicial or administrative orders, agreements with, or liens by, any
Governmental Authority or quasi-governmental entity relating to any
Environmental Law which regulate, obligate, or bind the Company.
(f) There are no written environmental reports, audits and
assessments on any of the Real Property which have been conducted, by the
Company or any Person engaged by the Company for such purpose, at any facility
owned or formerly owned by the Company.
(g) Neither the Company nor any of the Sellers has released
any other Person from any claim under any Environmental Law or waived any rights
concerning any Environmental Condition.
(h) The Company has given all notices and warnings, made all
reports, and has kept and maintained all records required by, and in compliance
with, all Environmental Laws.
4.20. TAXES.
(a) Except as otherwise disclosed in SCHEDULE 4.20:
(i) The Company has timely filed, or been included
in, all Tax Returns required to be filed through the date hereof and
will timely file any such Tax Returns required to be filed on or prior
to the Closing Date, in each case, subject to any applicable
extensions. All such Tax Returns are complete and accurate in all
material respects.
(ii) All Taxes that accrue or are payable by the
Company (i) in respect of taxable periods that end before the Closing
Date and (ii) for any taxable period that begins before the Closing
Date and ends thereafter, to the extent such Taxes are attributable to
the portion of such period ending on or before the day prior to the
Closing Date under the terms of Section 13.6, have or will have been
timely paid on or before the Closing Date unless (A) a reserve for such
amount has been be established therefor in the Interim Balance Sheet
(other than any reserve for deferred Taxes established to reflect
timing differences between book and Tax income), (B) such Taxes are
imposed by the City of New York or the State of New York, are measured
or based upon income and have been incurred by the Company in the
ordinary course of business since the Interim Balance Sheet Date, or
(C) such Taxes are other than any federal, state or local income Tax
and have been incurred by the Company in the ordinary course of
business since the Interim Balance Sheet Date.
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(iii) The Company has not requested any extension of
time within which to file any Tax Return which is currently pending or
has been granted and is in effect and the Company has not waived any
statute of limitations in respect of Taxes or agreed to any extension
of time with respect to a Tax assessment or deficiency;
(iv) There are no pending, or to the best of each
Seller's knowledge, proposed or threatened (whether orally or in
writing), audits, investigations or claims for or relating to any Taxes
of the Company, except to the extent that adequate liabilities or
reserves with respect thereto are accrued on the Interim Balance Sheet
in accordance with GAAP or (i) such deficiency or claim is being
contested in good faith by appropriate proceedings, (ii) no such
accrual is required by GAAP and (iii) the nature and amount of the
disputed Tax is set forth on Schedule 4.20;
(v) No claim has ever been made by an authority in a
jurisdiction where the Company does not file Tax Returns that the
Company is or may be subject to taxation by that jurisdiction;
(vi) The Company has not filed a consent under Code
Section 341(f) concerning collapsible corporations;
(vii) The Company is not a party to, or is bound by,
or has any obligation under any Tax allocation or sharing agreement
(including indemnity arrangements), and, after the Closing Date, the
Company shall not be a party to, bound by or have any obliteration
under any Tax allocation or sharing agreement or have any liability
thereunder for amounts due in respect of periods prior to the Closing
Date;
(viii) The Company (i) has not been a member of any
affiliated group filing a consolidated federal income Tax Return and
(ii) has no liability for the Taxes of any other person as defined in
Section 7701(a)(1) of the Code under Treas. Reg. ss. 1.1502-6 (or any
similar provision of state, local, or foreign law), as a transferee or
successor, by contract, or otherwise;
(ix) None of the assets of the Company (x) are
required to be treated as being owned by any other person pursuant to
the so-called safe harbor lease provisions of former Section 168(f)(8)
of the Code, (y) secures any debt the interest on which is tax-exempt
under Code Section 103(a), or (z) is tax-exempt use property within the
meaning of Code Section 168(h);
(x) The Company has not agreed to nor is it required
to make any adjustment pursuant to Code Section 481(a) by reason of a
change in accounting method initiated by the Company and none of the
Sellers have knowledge that the IRS has proposed any such adjustment or
change in accounting method;
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(xi) The transactions contemplated herein are not
subject to the Tax withholding provisions of Section 3406 of the Code,
or of Subchapter A of Chapter 3 of the Code or any other provision of
law;
(xii) There are no Encumbrances related to Taxes on
any of the assets of the Company (other than for current Taxes not yet
due and payable);
(xiii) None of the Sellers is a person other than a
United States person within the meaning of the Code;
(xiv) For Federal income Tax purposes, the Company is
an "S Corporation" as defined in Section 1361(a) and has been an S
Corporation for each taxable year since its inception. In addition, the
Company has taken all required steps to be taxed as an S Corporation
under applicable state income tax law in the State of New York and the
Company has been treated as an S Corporation in the State of New York
since its inception; and
(xv) The Company would not recognize any gain under
Section 1374 of the Code in the event that it sold its assets to
Purchaser at Closing in a transaction that constituted an actual sale
of such assets for federal income tax purposes (instead of a deemed
sale of such assets under Code Section 338(h)(10) of the Code).
(b) SCHEDULE 4.20 lists all federal, state, local, and foreign
income Tax Returns filed with respect to the Company since its inception,
indicates those Tax Returns that have been audited, and indicates those Tax
Returns that currently are the subject of audit. Correct and complete copies of
all federal income Tax Returns, examination reports, and statements of
deficiencies assessed against or agreed to by the Company for periods since its
inception have been delivered to Purchaser.
4.21. GOVERNMENTAL AUTHORITIES: CONSENTS. Assuming the truth and
completeness of the representations and warranties of Purchaser contained in
this Agreement, no consent, approval or authorization of, or designation,
declaration or filing with, any governmental authority or other third party is
required on the part of the Company with respect to the Company's execution or
delivery of this Agreement or the consummation of the transactions contemplated
hereby.
4.22. LICENSES, PERMITS AND AUTHORIZATIONS. SCHEDULE 4.22 contains a
list of all Permits (including without limitation, all facility security
clearances) of or with any governmental regulatory or administrative authority,
whether foreign, federal, state or local, which are held by the Company. All
such Permits are in full force and effect and there are no proceedings pending
or to the best knowledge of the Company, threatened that seek the revocation,
cancellation, suspension or material adverse modification thereof. Such Permits
constitute all of the Permits necessary to permit the Company to own, operate,
use and maintain their assets in the manner in which they are now operated and
maintained and to conduct the
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Business as currently conducted. All required filings with respect to such
Permits have been timely made and all required applications for renewal thereof
have been timely filed.
4.23. INSURANCE.
(a) SCHEDULE 4.23 contains an accurate and complete
description of all policies of property, fire and casualty, product liability,
workers' compensation, errors and omissions and other forms of insurance held by
the Company ("INSURANCE POLICIES"). True, correct and complete copies of such
insurance policies have been made available to Purchaser.
(b) All policies listed on SCHEDULE 4.23 (i) are valid,
outstanding, and enforceable policies, (ii) provide coverage for the assets and
the operations of the Company for all material risks normally insured against by
a Person or entity carrying on the same business or businesses as the Company,
and (iii) will not terminate, or lapse by reason of, the transactions
contemplated by this Agreement.
(c) The Company has not received (i) any notice of
cancellation of any policy described in paragraph (a) hereof or refusal of
coverage thereunder, (ii) any notice that any issuer of such policy has filed
for protection under applicable bankruptcy laws or is otherwise in the process
of liquidating or has been liquidated, or (iii) any other notice that such
policies are no longer in full force or effect or that the issuer of any such
policy is no longer willing or able to perform its obligations thereunder.
4.24. BROKERS' FEES. No broker, finder, investment banker or other
Person is entitled to any brokerage fee, finders' fee or other commission for
which Purchaser or the Company could become liable in connection with the
transactions contemplated by this Agreement based upon arrangements made by
Seller, the Company or any of their respective Affiliates.
4.25. NO OTHER AGREEMENTS TO SELL THE SHARES.
None of the Sellers, the Company or any officer, director,
shareholder or Affiliate of the Company are subject to any commitment or legal
obligation, absolute or contingent, to any Person other than Purchaser to sell,
assign, transfer or effect a sale of any of the capital stock of the Company, to
effect any merger, consolidation, liquidation, dissolution or other
reorganization of the Company, or to enter into any agreement or cause the
entering into of an agreement with respect to any of the foregoing.
4.26. TRANSACTIONS WITH CERTAIN PERSONS. Except as set forth on
SCHEDULE 4.26, no officer, director or employee of the Company or any Seller nor
any Affiliate of any such person is presently, or within the past five (5) years
has been, a party to any transaction with the Company, including without
limitation, any contract, agreement or other arrangement (a) providing for the
furnishing of services by, (b) providing for the rental of real or personal
property from, or (c) otherwise requiring payments to (other than for services
as officers, directors or employees of the Company) any such person or
corporation, partnership, trust or other entity in which any such Person has an
interest as a shareholder, officer, director, trustee or
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partner. Furthermore, except as set forth on SCHEDULE 4.26, the Company has no
liability or obligation to make any payment on behalf of or for the benefit of
any of the Sellers, or any officer, director or employee of the Company or any
such person's immediate family that is not directly related to, and in
furtherance of, the Business.
4.27. CUSTOMERS, DISTRIBUTORS AND SUPPLIERS.
(a) SCHEDULE 4.27 sets forth a complete and accurate list of
the names and addresses of the Company's (a) 10 largest customers, showing the
approximate total sales in dollars by the Company to each such customer for the
six months ended June 30, 1998; and (b) suppliers with purchases greater than
$250,000 on an annualized basis during the last six months, showing the
approximate total purchases in dollars by the Company from each such supplier
during each such calendar year. Since the Interim Balance Sheet Date there has
been no material adverse change in the business relationship of the Company with
any customer, distributor or supplier named on SCHEDULE 4.27. The Company has
not received any communication from any customer, distributor or supplier named
on SCHEDULE 4.27 notifying the Company of any intention to terminate or
materially reduce purchases from, or supplies to, the Company or to take any
other action which could reasonably be expected to have a Material Adverse
Effect.
(b) Each service provided or product manufactured, sold,
leased, or delivered, by the Company has been in conformity, in all material
respects, with all applicable contractual commitments and all express and
implied warranties, and all applicable industry standards, and the Company has
no Liability (and there is no basis for any present or future action, suit,
proceeding, hearing, investigation, charge, complaint, claim, or demand against
the Company giving rise to any Liability) for replacement or repair thereof or
other damages in connection with such products or services subject only to the
reserve for product warranty claims set forth on the face of the Interim Balance
Sheet (rather that in any notes thereto) as adjusted for the passage of time
through the Closing Date in accordance with the past custom and practice of the
Company. No service provided or product manufactured, sold, leased, or
delivered, by the Company is subject to any guaranty, warranty, or other
indemnity beyond the applicable standard terms and conditions of service, sale
or lease of the Company. Section 4.27 of the Disclosure Schedule includes copies
of the standard terms and conditions of service or sale for the Company
(containing applicable guaranty, warranty, and indemnity provisions).
4.28. BANKING RELATIONSHIPS. SCHEDULE 4.28 sets forth a complete and
accurate description of all arrangements that the Company has with any banks,
savings and loan associations or other financial institutions providing for
checking accounts, safe deposit boxes, borrowing arrangements, and certificates
of deposit or otherwise, indicating in each case account numbers, if applicable,
and the Person or Persons authorized to act or sign on behalf of the Company in
respect of any of the foregoing.
4.29. ACCOUNTS RECEIVABLE. The amount of accounts receivable,
unbilled receivables, and other debts due or recorded in the records and books
of account of the Company as being due to the Company as of the Closing Date
will be, subject to the reserves reflected on the Interim Balance Sheet and
except for Accounts Receivable required to be written off due to
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the insolvency of a debtor of the Company, good and collectible in full in the
ordinary course of business and in any event not later than one hundred eighty
(180) days after the Closing Date, and none of such accounts receivable or other
debts is subject to any counterclaim or set-off except to the extent of any such
reserve. Since the Interim Balance Sheet Date, the Company has not made any
change in its credit policies nor has it materially deviated from its credit
policies.
4.30. YEAR 2000. The Company has all systems and software solutions
necessary or appropriate to address and accommodate Year 2000 computer systems
issues, and the Intellectual Property has been tested and is fully capable of
providing accurate results using data having date ranges spanning the twentieth
and twenty-first centuries. Without limiting the generality of the foregoing,
the Intellectual Property is able to (i) manage and manipulate data involving
all dates from the twentieth and twenty-first centuries without functional or
data abnormality related to such dates; (ii) manage and manipulate data
involving all dates from the twentieth and twenty-first centuries without
inaccurate results related to such dates; (iii) have user interfaces and data
fields formatted to distinguish between dates from the twentieth and
twenty-first centuries; and (iv) represent all data related to include
indications of the millennium, century and decade as well as the actual year.
4.31. INVESTMENT. Each of the Sellers that is receiving Warrants (i)
understands that the Warrants have not been, and will not be, registered under
the Securities Act of 1933, as amended, (the "Securities Act") or under any
state securities laws, and are being offered and sold in reliance upon federal
and state exemptions for transactions not involving any public offering, (ii) is
acquiring the Warrants solely for his own account for investment purposes, and
not with a view to the distribution thereof, (iii) is a sophisticated investor
with knowledge and experience in business and financial matters, (iv) has
received certain information concerning Purchaser and has had the opportunity to
obtain additional information as desired in order to evaluate the merits and the
risks inherent in holding the Warrants, (E) is able to bear the economic risk
and lack of liquidity inherent in holding the Warrants, and (F) is an
"Accredited Investor" as defined by Rule 501 under the Securities Act for the
reasons set forth in the Accredited Investor questionnaire previously delivered
to Purchaser by each of such Sellers.
ARTICLE V.
REPRESENTATIONS AND WARRANTIES OF PURCHASER
Purchaser hereby represents and warrants to Seller as follows,
which representations and warranties are, as of the date hereof, and will be, as
of the Closing Date, true and correct:
5.1. ORGANIZATION OF PURCHASER. Purchaser is a corporation duly
organized, validly existing and in good standing under the laws of the State of
Delaware with full corporate power and authority to conduct its business as it
is presently being conducted and to own and lease its properties and assets.
Purchaser is duly qualified to do business as a foreign corporation and is in
good standing in each jurisdiction where the character of its properties owned
or leased or the nature of its activities make such qualification necessary,
except where the failure to be so qualified or in good standing would not have a
Material Adverse Effect on its business.
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5.2. AUTHORIZATION. Purchaser has all requisite corporate power and
authority, and has taken all corporate action necessary, to execute and deliver
this Agreement and the Ancillary Agreements, to consummate the Transactions and
to perform its obligations hereunder and thereunder. The execution and delivery
of this Agreement and the Ancillary Agreements by Purchaser and the consummation
by Purchaser of the Transactions have been duly approved by the board of
directors and stockholders of Purchaser. No other corporate proceedings on the
part of Purchaser are necessary to authorize this Agreement and the Ancillary
Agreements and the transactions contemplated hereby and thereby. This Agreement
has been duly executed and delivered by Purchaser and is, and upon execution and
delivery of the Ancillary Agreements will be, legal, valid and binding
obligations of Purchaser enforceable against it in accordance with its terms.
5.3. WARRANT SHARES. The Warrants have been duly authorized and
when issued in accordance with the terms of this Agreement will be validly
issued, fully paid and non-assessable and free of any liens and Encumbrances
except as set forth in the Warrant Agreement and not subject to any preemptive
rights. The shares of common stock, par value $.001 per share, of Purchaser (the
"Purchaser Common Stock") have been reserved for issuance in connection with the
exercise of the Warrants. The Purchaser Common Stock to be issued pursuant to
the Warrants shall, when issued, (i) be duly authorized, validly issued, fully
paid and non-assessable and free of liens and Encumbrances, (ii) be free and
clear of any transfer restrictions, liens and Encumbrances, except for the
restrictions on transfer in the Warrantholders' Agreement, and (iii) not be
subject to any pre-emptive rights created by statute, the certificate of
incorporation of the Purchaser or the Bylaws of the Purchaser.
5.4. NO CONFLICT OR VIOLATION. Neither the execution, delivery or
performance of this Agreement nor the consummation of the transactions
contemplated hereby, nor compliance by Purchaser with any of the provisions
hereof, violates any provision of, or will result in the breach of, any
applicable law, rule or regulation of any governmental body, the certificate of
incorporation, bylaws or other organizational documents of Purchaser, or any
agreement, indenture or other instrument to which Purchaser is a party or by
which Purchaser may be bound, or of any order, judgment or decree applicable to
any of them, or terminate or result in the termination of any such agreement,
indenture or instrument, or constitute any event which, after notice or lapse of
time or both, would result in any such violation, breach, acceleration,
termination or result in a violation or revocation of any required license,
permit or approval from any Governmental Authority or other third party.
5.5. GOVERNMENTAL AUTHORITIES; CONSENTS. Assuming the truth and
completeness of the representations and warranties of Sellers and the Company
contained in this Agreement, no consent, approval or authorization of, or
designation, declaration or filing with, any Governmental Authority or other
third party is required on the part of Purchaser with respect to Purchaser's
execution or delivery of this Agreement or the consummation of the transactions
contemplated hereby.
5.6. BROKERS' FEES. No broker, finder, investment banker or other
Person is entitled to any brokerage fee, finders' fee or other commission for
which Sellers could become
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liable in connection with the transactions contemplated by this Agreement based
upon arrangements made by Purchaser or any of its Affiliates.
ARTICLE VI.
COVENANTS OF SELLERS AND THE COMPANY
6.1. CONDUCT OF BUSINESS.
(a) From the date hereof through the Closing Date, Sellers
agree that they shall, and shall cause the Company, except as otherwise
contemplated by this Agreement or as consented to by Purchaser in writing, to
operate the Business in the ordinary course and consistent with past practice
and not to take any action inconsistent with this Agreement. Without limiting
the generality of the foregoing, unless consented to by Purchaser in writing,
Sellers shall cause the Company not to, except as contemplated by this
Agreement:
(i) change or amend its articles of incorporation,
bylaws or other organizational documents;
(ii) declare or pay any dividends, or make any
distributions in respect of any shares of its capital stock or other
equity interests, or repurchase or redeem any issued and outstanding
shares of its capital stock or other equity interests;
(iii) issue or sell any shares of capital stock of
the Company or equity interest or any beneficial interest therein
(including, without limitation, any options or warrants);
(iv) enter into, extend, materially modify, terminate
or renew any Contract of a type required to be listed on SCHEDULE 4.10
other than in the ordinary course of business;
(v) sell, assign, transfer, convey, lease or
otherwise dispose of any interest in the Real Property or any other
material asset;
(vi) except as otherwise required by law or
consistent with past practices, take any action with respect to the
grant of any severance or termination pay (other than pursuant to
policies or agreements of the Company as the case may be, in effect on
the date hereof);
(vii) make any change in the management structure of
the Company, including, without limitation, the hiring of additional
officers or the terminations of existing officers;
(viii) acquire by merger or consolidation with, or
merge or consolidate with, or purchase substantially all of the assets
of, or otherwise
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acquire any material assets or business of any corporation,
partnership, association or other business organization or division
thereof;
(ix) make any loans or advances to any Person;
(x) make any income tax election or settlement or
compromise with tax authorities which would affect the assets of the
Company or the Business after the Closing;
(xi) fail to maintain any material asset in
substantially its current state of repair, normal wear and tear
excepted;
(xii) make any change in its accounting policies or
practices;
(xiii) make aggregate capital expenditures in excess
of Fifty Thousand Dollars ($50,000);
(xiv) waive, settle or release any claim or cause
of action of the Company;
(xv) declare or issue any bonus or other payments,
whether or not in the ordinary course of business, to any management or
executive employees of Company or its Subsidiaries; or
(xvi) enter into any agreement, or otherwise become
obligated, to do any action prohibited hereunder.
(b) Sellers and the Company agree that, prior to the Closing,
they shall use their best efforts to (i) preserve substantially intact the
business organization of the Company, (ii) retain in its employ all of the key
employees of the Company with respect to the periods prior to and after the
Closing Date and (iii) preserve the current relationships of the Company with
the material customers and suppliers of, and other persons which have
significant business relationships with, the Company; subject in all cases to
the exercise of reasonable management discretion.
6.2. HSR ACT. In connection with the Transaction, the Company and
Seller will comply (and, to the extent required, will cause their Affiliates to
comply) with the notification and reporting requirements of the HSR Act and
shall use their respective best efforts to obtain early termination of the
waiting period under the HSR Act. Seller and the Company shall (and, to the
extent required, shall cause their Affiliates to) substantially comply with any
additional requests for information, including requests for production of
documents and production of witnesses for interviews or depositions, by any
Antitrust Authority.
6.3. NO SOLICITATIONS. From the date hereof through the Closing
Date, each of the Sellers and the Company shall not, and shall not knowingly
permit any of their Affiliates, officers, directors, employees, trustees,
representatives and agents to, directly or indirectly,
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encourage, solicit, participate in or initiate discussions or negotiations with,
or provide any information to, any Person or group of Persons (other than
Purchaser or any of its Affiliates) concerning any merger, sale of assets, sale
of shares of capital stock or similar transactions involving the Company.
Sellers and the Company shall (a) immediately notify Purchaser (orally and in
writing) if any discussions or negotiations are sought to be initiated, any
inquiry or proposal is made, any information is requested with respect to the
Transaction or any offer is made with respect to the Company, any Real Property,
or any Shares, (b) include in such notification the terms of any such proposal
or offer that it may receive with respect thereto (and provide Purchaser with a
copy thereof in writing), including the identity of the soliciting party and (c)
keep Purchaser informed with respect to the status of the foregoing.
6.4. NOTICE TO PURCHASER. Sellers and the Company will promptly
notify Purchaser of any circumstance, event or action by Sellers, the Company or
otherwise, that causes any statement made by Sellers or the Company in this
Agreement to be inaccurate or incomplete in any material respect or that may
have a Material Adverse Effect and which has not already been disclosed.
6.5. CONSENTS. Unless waived specifically in writing by Purchaser,
Sellers will obtain in writing any consents of any Governmental Authority or
other third party necessary for the consummation of the Transactions.
6.6. INSPECTIONS. Prior to the Closing, Sellers and the Company
shall provide Purchaser and its representatives (including, without limitation,
its engineers, surveyors, attorneys and accountants) access at all reasonable
times to the Real Property and other assets of the Company. At all times prior
to Closing, Purchaser and its representatives, upon reasonable notice to the
Company shall have the right to have access to the Company's employees, agents
and representatives to review all Books and Records of the Company (including
for purposes of conducting an audit of the Company's Financial Statements),
including all the Real Estate Records, to enter onto the Real Property, and to
inspect, examine and survey the Real Property or any other reasonable business
purpose; PROVIDED that such access shall be had in such a manner so as not to
unreasonably interfere with the conduct of the Business.
6.7. EMPLOYEE BENEFIT PLANS. Sellers shall prevent the Company, and
any Welfare Plan or Pension Plan, or any trust created thereunder, from engaging
in any "prohibited transaction" (as such term is defined in Section 406 of
ERISA), and prevent the Company from (a) terminating any Pension Plan in a
manner that results in the imposition of a lien on any property of the Company
pursuant to Section 4068 of ERISA or (b) take any action that adversely affects
the qualification of any Employee Plan or its compliance with the applicable
requirements of ERISA or the Code or results in a "reportable event" (as such
term is defined in Section 4043(b) of ERISA).
ARTICLE VII.
COVENANTS OF PURCHASER
7.1. HSR ACT. In connection with the transactions contemplated by
this Agreement, Purchaser has complied (and, to the extent required, has caused
its Affiliates to
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comply) with the notification and reporting requirements of the HSR Act and
shall use its reasonable best efforts to obtain early termination of the waiting
period under the HSR Act. Purchaser shall (and, to the extent required, shall
cause its Affiliates to) substantially comply with any additional requests for
information, including requests for production of documents and production of
witnesses for interviews or depositions, by any Antitrust Authority.
7.2. CONSENTS. Purchaser shall cooperate with Sellers in connection
with Sellers' efforts to obtain the consents required by SECTION 6.5.
ARTICLE VIII.
COVENANTS OF SELLERS, THE COMPANY AND PURCHASER
8.1. CONFIDENTIALITY.
(a) Except (i) for any governmental filings required in order
to complete the Transactions, and (ii) as Purchaser, the Company and each of the
Sellers may agree or consent in writing, (x) the fact of the execution of this
Agreement and (y) all information received by Purchaser, the Company or Sellers
and their respective representatives pursuant to the terms of this Agreement or
otherwise heretofore provided to the receiving party in connection with the
transactions contemplated hereby, shall be kept in confidence by the receiving
party and its representatives and shall not be used in any manner by such party
or its representatives except in connection with its performance or preparing to
perform under this Agreement; PROVIDED, HOWEVER, that any party hereto may
disclose such information to its legal and financial advisors, lenders,
financing sources and their respective legal advisors and representatives so
long as such Persons agree to maintain the confidentiality of such information
in accordance with this SECTION 8.1. If the transactions contemplated hereby
shall fail to be consummated, all copies of documents or extracts thereof
containing information and data as to one of the other parties, including all
information prepared by the receiving party or such receiving party's
representatives, shall be turned over to the party furnishing same, except that
such information prepared by the receiving party or such receiving party's
representatives may be destroyed at the option of the receiving party, with
notice of such destruction (or return) to be confirmed in writing to the
disclosing party. Any information not so destroyed (or returned) will remain
subject to these confidentiality provisions (notwithstanding any termination of
this Agreement).
(b) The foregoing confidentiality provisions shall not apply
to such portions of the information received which (i) are or become generally
available to the public through no action by the receiving party or by such
party's representatives or (ii) are or become available to the receiving party
on a nonconfidential basis from a source, other than the disclosing party or its
representatives, which the receiving party believes, after reasonable inquiry,
is not prohibited from disclosing such portions to it by a contractual, legal or
fiduciary obligation, and shall not apply to any disclosure by Purchaser or the
Company after the Closing.
8.2. COOPERATION AND RECORDS RETENTION. After the Closing Date,
Sellers and the Company shall each (i) provide the other party with such
assistance as may reasonably be requested by in connection with the preparation
of any return, audit, or other examination by any taxing authority or judicial
or administrative proceedings relating to liability for any Taxes,
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(ii) provide the other party with any records or other information that may be
relevant to such return, audit or examination, proceeding or determination, and
(iii) provide the other party with any final determination of any such audit or
examination, proceeding, or determination that affects any amount required to be
shown on any Tax Return of the other for any period. Without limiting the
generality of the foregoing, the Company and Sellers shall each retain, until
the applicable statutes of limitations (including any extensions) have expired,
copies of all Tax Returns, supporting work schedules, and other records or
information that may be relevant to such returns for all tax periods or portions
thereof ending on or before the Closing Date.
ARTICLE IX.
CONDITIONS TO OBLIGATIONS
9.1. CONDITIONS TO OBLIGATIONS OF PURCHASER, SELLERS AND THE
COMPANY. The obligations of Purchaser, Sellers and the Company to consummate, or
cause to be consummated, the Transactions are subject to the satisfaction of the
following conditions, any one or more of which may be waived in writing by such
parties:
(a) There shall not be in force any order or decree, statute,
rule or regulation nor shall there be on file any complaint by a Governmental
Authority seeking an order or decree, restraining, enjoining or prohibiting the
consummation of the Transactions and none of Purchaser, any of the Sellers or
the Company shall have received notice from any Governmental Authority that it
has determined to institute any suit or proceeding to restrain or enjoin the
consummation of the Transactions or to nullify or render ineffective this
Agreement if consummated, or to take any other action which would result in the
prohibition or a material change in the terms of the Transactions.
9.2. CONDITIONS TO OBLIGATIONS OF PURCHASER. The obligations of
Purchaser to consummate, or cause to be consummated, the Transactions are
subject to the satisfaction of the following additional conditions, any one or
more of which may be waived in writing by Purchaser:
(a) Each of the representations and warranties of Sellers and
the Company contained in this Agreement shall be true and correct in all
material respects (except where such representations and warranties are
qualified by materiality) both as of September 1, 1998 and, with respect to the
representations and warranties set forth in SECTIONS 4.1 through 4.7, SECTION
4.20 and SECTIONS 4.24, 4.25, and 4.26, as of the Closing, as if made at and as
of that time, and each of the covenants and agreements of Sellers and the
Company to be performed as of or prior to the Closing shall have been duly
performed in all material respects.
(b) All material permits, approvals, clearances, and consents
of, and all filings with, Governmental Authorities required to be procured by
any of the Sellers or the Company in connection with the Transactions shall have
been procured.
(c) The Company shall have delivered to Purchaser a
certificate signed by an officer of the Company, dated as of the Closing Date,
certifying that, the conditions specified in
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SECTION 9.1, as they relate to either or both Sellers and the Company, and
SECTION 9.2(a) have been fulfilled.
(d) Any consent required for the consummation of the
Transactions under any Contract required to be listed on SCHEDULE 4.10 hereto or
for the continued enjoyment by the Company of the benefits of any such Contract
after the Closing shall have been obtained.
(e) S. David Walden and Nancy Goertzen shall have resigned as
directors of the Company, effective as of the Closing Date.
(f) Purchaser shall have received opinions, dated as of the
Closing Date, from counsel to the Company and counsel to Sellers, in the form
attached as Exhibit H.
(g) Purchaser shall have received possession or control of all
corporate, accounting, business and tax records of the Company.
(h) Each of the Sellers shall have entered into a
Non-Competition Agreement containing the terms set forth on EXHIBIT G.
(i) Each of Matthew D. Kanter and S. David Walden shall have
entered into an Employment Agreement with the Company containing the terms set
forth on EXHIBIT I.
(j) Purchaser shall have received a true and complete copy,
certified by the Secretary or an Assistant Secretary (or similar officer) of the
Company of the resolutions duly and validly adopted by the Board of Directors of
the Company evidencing its authorization of the execution and delivery of this
Agreement and the consummation of the Transactions.
(k) Sellers shall have delivered signed UCC-3 termination
statements terminating all security interests in the assets of the Company
except for security interests securing indebtedness to be assumed or satisfied
by Purchaser.
(l) Each of the Sellers shall deliver, or cause to be
delivered, to Purchaser an executed affidavit, dated not more than thirty (30)
days prior to the Closing Date, in accordance with Code Section 1445(b)(2) and
Treasury Regulation section 1.1445-2(b), which statement certifies that the
Seller is not a foreign person and sets forth the Seller's name, identifying
number and address.
(m) Each of the Sellers shall have executed and delivered the
Warrantholders' Agreement in the form attached as EXHIBIT J.
(n) Each of the Sellers shall have executed and delivered the
Warrant Agreement in the form attached as EXHIBIT D.
(o) Each of the employee loans set forth on SCHEDULE 4.16
shall have been repaid.
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9.3. CONDITIONS TO THE OBLIGATIONS OF SELLERS AND THE COMPANY. The
obligations of Sellers and the Company to consummate the Transactions are
subject to the satisfaction of the following additional conditions, any one or
more of which may be waived in writing by Sellers:
(a) Each of the representations and warranties of Purchaser
contained in this Agreement shall be true and correct in all material respects
(except where such representations and warranties are qualified by materiality)
both on the date hereof and as of the Closing, as if made anew at and as of that
time, and each of the covenants and agreements of Purchaser to be performed as
of or prior to the Closing shall have been duly performed in all material
respects.
(b) Sellers shall have received an opinion, dated as of the
Closing Date, from counsel to Purchaser, in the form attached as EXHIBIT K.
(c) Purchaser shall have delivered to Sellers and the Company
a certificate signed by an officer of Purchaser, dated as of the Closing Date,
certifying that, the conditions specified in SECTION 9.1, as they relate to
Purchaser, and subsection 9.3(a) have been fulfilled.
(d) Sellers shall have received a true and complete copy,
certified by the Secretary or an Assistant Secretary (or similar officer) of
Purchaser, of the resolutions duly and validly adopted by the Board of Directors
of Purchaser evidencing its authorization of the execution and delivery of this
Agreement and the consummation of the transactions contemplated hereby.
(e) Purchaser shall have paid to Merchant's Bank of New York
an amount equal to the entire outstanding balance of the Company's line of
credit (the "LINE OF CREDIT") and the Sellers shall have been released from
their respective guarantees of the Line of Credit.
(f) Purchaser shall have executed and delivered the
Warrantholders' Agreement in the form attached as EXHIBIT J.
(g) Purchaser shall have executed and delivered the Warrant
Agreement in the form attached as EXHIBIT D and shall have issued 250,000
Warrants to each of Matthew D. Kanter and S. David Walden.
(h) Purchaser shall have executed and delivered the Note in
the form attached as Exhibit F.
ARTICLE X.
TERMINATION
10.1. TERMINATION. This Agreement may be terminated and the
Transactions abandoned:
(a) By mutual written consent of the parties at any time prior
to the Closing.
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(b) Prior to the Closing, by written notice to Sellers from
Purchaser, (i) pursuant to SECTION 11.1, (ii) if the Closing has not occurred on
or before October 2, 1998 and Purchaser is not in material breach of a
representation, warranty, covenant or agreement or (iii) if consummation of the
Transactions is enjoined, prohibited or otherwise restrained by the terms of a
final, non-appealable order or judgment of a court of competent jurisdiction.
(c) Prior to the Closing, by written notice to Purchaser from
Sellers, (i) pursuant to SECTION 11.1, (ii) if the Closing has not occurred on
or before October 2, 1998 and neither Sellers nor the Company are in material
breach of a representation, warranty, covenant or agreement of either Sellers or
the Company or (iii) if consummation of the Transactions is enjoined, prohibited
or otherwise restrained by the terms of a final, non-appealable order or
judgment of a court of competent jurisdiction.
10.2. EFFECT OF TERMINATION. In the event of termination of this
Agreement pursuant to SECTION 10.1, this Agreement shall forthwith become void
and have no effect, without liability on the part of any party hereto or their
respective Affiliates, officers, directors or stockholders. The provisions of
SECTION 10.1, this SECTION 10.2 and ARTICLE XI shall survive any termination of
this Agreement.
ARTICLE XI.
DEFAULT AND REMEDIES
11.1. BREACH AND OPPORTUNITY TO CURE. If any party shall breach the
terms of this Agreement or default in the performance of its obligations
hereunder, the nondefaulting party shall have the right to provide the
defaulting party with notice specifying in reasonable detail the nature of such
breach or default. If such breach or default has not been cured by the later of
(a) the Closing Date and (b) thirty (30) days after delivery of such notice,
then the party giving such notice may (i) terminate this Agreement by giving
written notice to the defaulting party hereunder, (ii) extend the Closing Date
if such default has not been cured by the Closing Date (but no such extension
shall constitute a waiver of such nondefaulting party's right to terminate as a
result of such default), (iii) exercise the remedies available to such party
pursuant to SECTIONS 11.2 or 11.3, subject to the right of the other party to
contest such action through appropriate proceedings, and/or (iv) proceed to
Closing, but which shall not constitute a waiver of such breach or default.
11.2. SELLERS' REMEDIES. Purchaser recognizes that if the
Transactions are not consummated solely as a result of Purchaser's default,
Sellers would incur damages, the extent of which is extremely difficult and
impractical to ascertain. The parties, therefore, agree that if this Agreement
is terminated or otherwise is not consummated due to the material default of
Purchaser and Sellers were ready, willing and able to consummate the
Transactions, Purchaser shall pay to each of the Sellers his or its Pro Rata
Share of $500,000, as Sellers' sole and exclusive remedy in full settlement of
any damages of any nature or kind that Sellers may suffer or allege to suffer as
the result of any default or breach by Purchaser. The parties agree that this
sum shall be in lieu of any and all other relief to which Sellers might
otherwise be entitled due to Purchaser's breach of, or default under, this
Agreement. Notwithstanding the provisions of this
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Section 11.2, in the event that Purchaser takes any action to delay the release
of the Escrow Deposit after termination of this Agreement by the Sellers
pursuant to Section 10.1(c)(i), and it is determined that Purchaser was in
material default of its obligations under this Agreement, then, in addition to
the $500,000 in liquidated damages and any amounts to which Sellers are entitled
pursuant to SECTION 15.14, Sellers shall be entitled to interest at the Prime
Rate plus 200 basis points from the date the Seller Representative submitted its
demand for release of the Escrow Deposit until the date the amount of the Escrow
Deposit was received by the Seller Representative.
11.3. PURCHASER'S REMEDIES. Sellers agree that the Shares represent
unique property that cannot be readily obtained on the open market and that
Purchaser would be irreparably injured if this Agreement is not specifically
enforced after default. Therefore, Purchaser shall have the right to
specifically enforce Sellers' performance under this Agreement, and Sellers
agree to waive the defense in any such suit that Purchaser has an adequate
remedy at law and to interpose no opposition, legal or otherwise, as to the
propriety of specific performance as a remedy, and that Purchaser shall have the
right to obtain specific performance of the terms of this Agreement without
being required to prove actual damages, post bond or furnish other security. As
a condition to seeking specific performance, Purchaser shall not be required to
have tendered the Cash Consideration, but shall be ready, willing and able to do
so.
11.4. ESCROW DEPOSIT. In the event that all of the conditions to
Closing are satisfied but Purchaser fails to tender the Cash Consideration or to
purchase the Shares on the Closing Date, the $500,000 liquidated damages set
forth in SECTION 11.2 shall be paid by Purchaser to the Company from the Escrow
Deposit. In the event that the Closing does not occur due to no fault or breach
by Purchaser, then Purchaser shall be entitled to a return of the Escrow Deposit
and interest accrued thereon.
ARTICLE XII.
POST CLOSING OBLIGATIONS; SURVIVAL OF REPRESENTATION
The parties covenant and agree as follows with respect to the
period subsequent to the Closing Date:
12.1. INDEMNIFICATION.
12.1.1. PURCHASER'S RIGHT TO INDEMNIFICATION. The Sellers,
jointly and severally, undertake and agree to indemnify, defend by counsel
reasonably acceptable to Purchaser, and hold harmless Purchaser, its parent,
affiliates, successors and assigns and their respective directors, officers,
employees, shareholders, representatives and agents (hereinafter referred to
collectively as "Purchaser Indemnitees") from and against and in respect of any
and all losses, costs, liabilities, claims, obligations, diminution in value and
expenses, including reasonable attorneys' fees ("Claims"), incurred or suffered
by a Purchaser Indemnitee arising from (a) the claims of third parties with
respect to operation of the Company prior to Closing; (b) a breach,
misrepresentation, or other violation of any of the Sellers' or the Company's
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covenants, warranties or representations contained in this Agreement excluding
those that are to be indemnified pursuant to SECTION 13.8; (c) any breach or
default by the Company under any Contract prior to Closing; (d) any Pre-Closing
Environmental Matters; and (e) any and all actions, suits, proceedings, claims
demands, assessments, judgments, costs and expenses, incident to any of the
foregoing or incurred to oppose the imposition thereof, or in enforcing this
indemnity; together with interest at the Prime Rate (as defined below) on any
such Claim from the date of incurrence by such Purchaser Indemnitee(s) until the
date of reimbursement by Sellers. "Prime Rate" shall mean the prime rate as
published in the Money Rates column of the Eastern Edition of the Wall Street
Journal (or the average of such rates if more than one rate is indicated), in
effect on the date of incurrence of such Claim. The foregoing indemnity is
intended by Sellers to cover all acts, suits, proceedings, claims, demands,
assessments, adjustments, diminution in value, costs, and expenses with respect
to any and all of the specific matters set forth in this indemnity.
12.1.2. SELLER'S RIGHT TO INDEMNIFICATION. Purchaser
undertakes and agrees to indemnify, defend by counsel reasonably acceptable to
Sellers and hold harmless Sellers, their representatives and agents (hereinafter
referred to collectively as "Seller Indemnitees") from and against and in
respect of any and all Claims incurred or suffered by a Seller Indemnitee after
Closing arising from; (a) a breach, misrepresentation, or other violation of any
of Purchaser's covenants, warranties and representations contained in this
Agreement excluding those that are to be indemnified pursuant to Section 13.8;
(b) any claims of third parties with respect to the operation of the Company on
or after the Closing Date; and (c) any and all actions, suits, proceedings,
claims, demands, assessments, judgments, costs and expenses, incident to any of
the foregoing or incurred to oppose the imposition thereof; together with
interest at the Prime Rate on any such claim from the date of incurrence by such
Seller Indemnitee(s) to the date of reimbursement by Purchaser. The foregoing
indemnity is intended by Purchaser to cover all acts, suits, proceedings,
claims, demands, assessments, adjustments, costs, and expenses with respect to
any and all of the specific matters set forth in this indemnity.
12.1.3. CONDUCT OF PROCEEDINGS. If any claim or proceeding
covered by the foregoing agreements to indemnify and hold harmless shall arise,
the party who seeks indemnification (the "Indemnified Party") shall give written
notice thereof to the other party (the "Indemnitor") promptly after the
Indemnified Party learns of the existence of such claim or proceeding; PROVIDED,
HOWEVER, that the Indemnified Party's failure to give the Indemnitor prompt
notice shall not bar the Indemnified Party's right to indemnification unless
such failure has materially prejudiced the Indemnitor's ability to defend the
claim or proceeding. The Indemnitor shall have the right to employ counsel
reasonably acceptable to the Indemnified Party to defend against any such claim
or proceeding, or to compromise, settle or otherwise dispose of the same, if the
Indemnitor deems it advisable to do so, all at the expense of the Indemnitor;
PROVIDED that the Indemnitor shall not have the right to control the defense of
any such claim or proceeding unless it has acknowledged in writing its
obligation to indemnify the Indemnified Party fully from all liabilities
incurred as a result of such claim or proceeding and then and periodically
thereafter provides the Indemnified Party with reasonably sufficient evidence of
the ability of the Indemnitor to satisfy any such liabilities. The parties will
fully cooperate in any such action, and shall make available to each other any
books or records useful for the defense of
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any such claim or proceeding. If the Indemnitor fails to acknowledge in writing
its obligation to defend against or settle such claim or proceeding within
twenty (20) days after receiving notice thereof from the Indemnified Party (or
such shorter time specified in the notice as the circumstances of the matter may
dictate), the Indemnified Party shall be free to dispose of the matter, at the
expense of the Indemnitor, in any way in which the Indemnified Party deems to be
in its best interest.
12.1.4. LIMITATIONS ON INDEMNIFICATION. Notwithstanding
anything to the contrary in this Section 12.1:
(a) An Indemnitor shall have no obligation with respect to any
Claims for breach of representation or warranty under this Section 12.1, except
for the representations set forth in Sections 4.3 and 4.20, until the aggregate
amount of all Claims against such Indemnitor exceeds $150,000, at which time the
amount of all Claims against such Indemnitor in excess of such amount shall be
due; and
(b) In no event shall either Party's indemnity obligations for
breaches of representations or warranties under this Section 12.1 apply to any
Claim first asserted after the survival period set forth for such Claim in
Section 12.3.
(c) Notwithstanding any other provision contained in this
Agreement, in no event shall: (i) Matthew D. Kanter, The Benjamin Kanter 1997
QSST Trust, and The Ronald Kanter 1997 QSST Trust be liable in the aggregate to
the Purchaser or any other Person in an amount in excess of 25% of the Total
Consideration received by all Sellers, and (ii) S. David Walden be liable to the
Purchaser or any other Person in an amount in excess of 25% of the Total
Consideration received by all Sellers.
12.1.5. INDEMNIFICATION SOLE REMEDY. The right to
indemnification under this Article XII subject to the limitations set forth in
Section 12.1.4, and Purchaser's right to indemnification under the Lease
Assignment Indemnification Agreement dated the date hereof (the "Lease
Assignment Agreement"), shall be the exclusive remedy of any party in connection
with any breach by another party of its representations, warranties, or
covenants or any other default under this Agreement, and neither party shall
make or assert any claim under this Agreement or related to the Transactions,
regardless of the form of action, except under and in accordance with this
Article XII, provided that this shall not affect the right of Purchaser to make
a claim for specific performance or of either party to make a claim for damages
arising from the other party's willful misrepresentation or willful misconduct
or under Article XIII up to a limit equal to the Total Consideration paid to
Sellers under this Agreement.
12.2. RIGHT OF OFFSET. Each of Purchaser and Sellers shall have the
right to offset against amounts owing to the other any amounts owing to such
party pursuant to SECTION 12.1.
12.3. SURVIVAL OF REPRESENTATIONS. The representations and
warranties contained herein shall survive for twelve months after the Closing
without limitation and without regard to any investigation made by any of the
parties hereto; PROVIDED, HOWEVER, that the representations
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and warranties made by the Company and Sellers in Sections 4.1, 4.3, 4.4 and
4.19, shall survive without limitation and the representations and warranties in
Section 4.20 shall survive for the period set forth in Section 13.8.
12.4. RIGHTS OF SET-OFF. Any Contingent Payments owed by Purchaser
to Sellers pursuant to Section 2.3 are subject to reduction for any Claims
pursuant to Section 12.1 above and Section 13.8.
ARTICLE XIII.
TAX MATTERS
13.1. ALLOCATION OF RESPONSIBILITY. From and after the Closing Date,
the Sellers shall pay any Taxes payable by the Company (i) for all taxable
periods ending prior to the Closing Date, (ii) for all taxable periods beginning
prior to the Closing Date and ending on or after the Closing Date, for that
portion of such taxable period up to and including the day prior to the Closing
Date (a "PRE-CLOSING PARTIAL PERIOD"), and (iii) as a result of any breach of
any representation, warranty or covenant in SECTION 4.20, SECTION 6.1(x) or
Article XIII of this Agreement. Notwithstanding the foregoing, no payment shall
be required to be paid hereunder for Taxes to the extent (i) reserves for such
Taxes are established on the Interim Balance Sheet (other than any reserves for
deferred Taxes established to reflect timing differences between book and Tax
income), (ii) Taxes imposed by the City of New York or the State of New York
that are measured or based upon income incurred by the Company in the ordinary
course of business since the Interim Balance Sheet Date, or (iii) in the case of
Taxes other than any federal, income tax, such Taxes have been incurred by the
Company in the ordinary course of business since the Interim Balance Sheet Date
(the taxes in clauses (ii) and (iii) are collectively referred to as, "Assumed
Interim Taxes").
13.2. PAYMENT OF TAXES. Purchaser shall notify the Seller
Representative of any Tax obligation of the Company at least thirty (30) days
before such obligation is due to be paid. Seller Representative shall wire
transfer funds to Purchaser for value no later than three (3) days before such
payments are due.
13.3. TAX RETURNS. The Seller Representative shall prepare or cause
to be prepared, in a manner consistent with past practices all Tax Returns for
the Company for all taxable years or periods ending before the Closing Date but
which are due to be filed after the Closing Date (taking into account all
applicable extensions of time for filing). The Seller Representative shall cause
such Tax Returns to be delivered to Purchaser for comment and approval, which
approval shall not be unreasonably withheld, no later than fifteen (15) days
prior to the due date for filing any such Tax Return (taking into account any
applicable extensions of time to file). The parties hereto acknowledge and agree
that, for federal and New York State income tax purposes, the Company's election
pursuant to section 1362(a) of the Code and the corresponding provisions of the
New York State Tax Law shall be terminated upon the closing of the transactions
contemplated hereby. Accordingly, and in accordance with Code section 1362(e)
and Treas. Reg. section 1.1362-3, the Company's short taxable year for the
Company as an S corporation will end on the day prior to the Closing Date.
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13.4. REFUNDS. Seller Representative shall be entitled to retain, or
receive payment from Purchaser within five (5) days of the receipt of any Tax
refunds or credits relating to the Company that were paid with respect to (i)
all taxable periods ending prior to the Closing Date and (ii) Pre-Closing
Partial Periods, provided, however, Seller Representative shall not be entitled
to Tax refunds or credits relating to Assumed Interim Taxes. Purchaser shall, if
Seller Representative so requests and at Seller Representative's expense, cause
the Company to file for and obtain any refund to which Seller Representative is
entitled to under this Section 13.4, provided that Seller Representative shall
not file, and Purchaser shall not be obligated to file, to obtain any refund
that would have the effect of (x) increasing any Tax liability of the Company or
(y) otherwise materially and adversely affect any item or Tax attribute of the
Company, in each case for any taxable period ending on or after the Closing
Date, without Seller Representative first obtaining the Company's consent, which
consent shall not be unreasonably withheld. Purchaser shall permit Seller
Representative to control (at the Seller Representative's expense) the
prosecution of such refund claim, and shall cause powers of attorney authorizing
Seller Representative to represent the Company before the relevant taxing
authority with respect to such refund to be executed, provided that Seller
Representative (i) shall keep Purchaser informed regarding the progress and
substantive aspect of any such refund and (ii) shall not compromise or settle
any such refund without obtaining Purchaser's consent, which consent shall not
be unreasonably withheld, if such compromise or settlement would have the effect
of (x) increasing any Tax liability of the Company or (y) otherwise materially
and adversely affect any item or Tax attribute of the Company, in each case for
any taxable period ending after the Closing Date. In the event that any refund
or credit of Taxes for which a payment has been made pursuant to this Section
13.4 is subsequently reduced or disallowed, the Sellers shall indemnify and hold
Purchaser harmless for any Taxes assessed against the Company by reason of the
reduction or disallowance.
13.5. CONTESTS. Purchaser and the Seller Representative agree to
give prompt notice to each other of any proposed adjustment to Taxes for any
periods of the Company ending prior to the Closing Date or any Pre-Closing
Partial Period. Purchaser and the Seller Representative shall cooperate with
each other in the conduct of any audit or other proceeding involving the Company
for such periods and each party may participate at its own expense. Seller
Representative shall have the right to control the conduct of any such audit or
proceeding for which the Sellers agree that any resulting Tax allocable to any
period prior to the Closing Date is covered by the indemnity set forth in
Section 13.8 of this Agreement, (such audit or proceeding, a "Seller's Contest")
provided that: (i) Seller Representative shall keep Purchaser informed regarding
the progress and substantive aspects of any Seller's Contest and (ii) Seller
Representative shall not compromise or settle any Seller's Contest if such
compromise or settlement would have the effect of (x) increasing any Tax
liability of the Company or (y) otherwise materially and adversely affect any
item or Tax attribute of the Company, in each case for any taxable period ending
after the Closing Date, without obtaining Purchaser's consent, which consent
shall not be unreasonably withheld. If Seller Representative chooses to direct a
Seller's Contest, Purchaser shall cause powers of attorney authorizing Seller
Representative to represent the Company before the relevant taxing authority and
such other documents as are reasonably necessary for Seller Representative to
control the conduct of any Sellers' Contest, consistent with the terms of this
Section 13.5
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13.6. ALLOCATION OF TAXES. For purposes of Section 4.20 and this
Article XIII, in the case of Taxes that are payable with respect to a taxable
period that begins before the Closing Date and ends after the Closing Date, the
portion of such Taxes payable for the period ending on the day prior to the
Closing Date shall be (a) in the case of any Tax based upon or measured by
income, and in the case of sale or use tax, the amount which would be payable if
the taxable year ended as of the end of said date and (b) in the case of any
other Tax, such as personal or real property, the amount of such tax for the
entire period multiplied by a fraction, the numerator of which is the number of
days in the period ending on the day prior to the Closing Date and the
denominator of which is the number of days in the entire period.
13.7. TREATMENT OF INDEMNITY PAYMENTS. All indemnity and other
payments made under this Agreement shall be considered to be adjustments to the
Total Consideration.
13.8. INDEMNIFICATION. The covenants and agreements of the parties
contained in this Article XIII and the representations and warranties contained
in Section 4.20 of this Agreement shall survive the Closing and shall remain in
full force and effect until sixty (60) days following the expiration of the
applicable statutes of limitations with respect to any Taxes that would be
indemnifiable under this Article XIII. The procedures set forth in Section
12.1.3 of this Agreement shall apply to any claims made by the parties to this
Agreement pursuant to this Article XIII. The Sellers shall, jointly and
severally, undertake and agree to indemnify, defend by counsel reasonably
acceptable to Purchaser, and hold Purchaser and the Company harmless from and
against all Claims arising out of, any breach of representation or warranty in
Section 4.20 of this Agreement or any covenant made by the Sellers or Seller
Representative in this Article XIII or in Section 6.1(x) of this Agreement,
together with interest at the Prime Rate on any such Claim from the date of
incurrence by the Purchaser or the Company until the date of reimbursement by
Sellers. Purchaser undertakes and agree to indemnify, defend by counsel
reasonably acceptable to Sellers, and hold Sellers harmless from and against all
Claims arising out of breach of any covenant made by Purchaser under this
Article XIII, together with interest at the Prime Rate on any such Claim from
the date of incurrence by the Sellers until the date of reimbursement by
Purchaser. Notwithstanding anything to the contrary in this Agreement, to the
extent that the provisions contained in this Article XIII conflict with any
provision of Article XII of this Agreement, the provisions contained in this
Article XIII shall control.
13.9. SUCCESSORS. For purposes of this Article XIII, all references
to the Purchaser, the Sellers and the Company shall include successors.
ARTICLE XIV.
SELLER REPRESENTATIVE
14.1. DESIGNATION OF SELLER REPRESENTATIVE. The parties agree that
it is desirable to designate a representative to act on behalf of Sellers (the
"SELLER REPRESENTATIVE"). The parties have designated Matthew D. Kanter as the
Seller Representative, and approval of this Agreement by Sellers shall
constitute certification and approval of such designation.
14.2. AUTHORITY AND RIGHTS OF SELLER REPRESENTATIVE; LIMITATIONS ON
LIABILITY. The Seller Representative shall have full power, authority and
discretion to act on
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behalf of the Sellers for all purposes under this Agreement and the Ancillary
Agreements. The Seller Representative will have no liability to the Sellers with
respect to actions taken or omitted to be taken in its capacity as Seller
Representative, except with respect to the Seller Representative's gross
negligence or willful misconduct. The Seller Representative shall be entitled to
reimbursement, from the Sellers for all reasonable expenses, disbursements and
advances (including fees and disbursements of its counsel, experts and other
agents and consultants) incurred by the Seller Representative in such capacity,
and for indemnification against any loss, liability or expenses arising out of
actions taken or omitted to be taken in its capacity as Seller Representative
(except for those arising out of Seller Representative's gross negligence or
willful misconduct).
ARTICLE XV.
MISCELLANEOUS
15.1. WAIVER. Either party to this Agreement may, at any time prior
to the Closing, waive any of the terms or conditions of this Agreement;
PROVIDED, HOWEVER, any such waiver must be in writing, executed in the same
manner as this Agreement.
15.2. NOTICES. All notices and other communications among the
parties shall be in writing and shall be deemed to have been duly given when (i)
delivered in person, or (ii) five (5) days after posting in the United States
mail having been sent registered or certified mail return receipt requested, or
(iii) delivered by telecopy and promptly confirmed by delivery in person or post
as aforesaid in each case, with postage prepaid, addressed as follows:
If to Purchaser, to:
USinternetworking, Inc.
One USi Plaza
175 Admiral Cochrane Drive
Annapolis, MD 21401
Attention: Stephen E. McManus
Telecopy No.: (410) 897-4400
with copies to (which shall not constitute notice):
Latham & Watkins
1001 Pennsylvania Avenue, N.W.
Suite 1300
Washington, D.C. 20004
Attention: James F. Rogers
Telecopy No.: (202) 637-2201
If to Sellers, to:
Matthew D. Kanter
299 Brower Avenue
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Rockville Centre, NY 11570
The Benjamin Kanter 1997 QSST Trust
c/o Nancy Goertzen
299 Brower Avenue
Rockville Centre, NY 11570
The Ronald Kanter 1997 QSST Trust
c/o Nancy Goertzen
299 Brower Avenue
Rockville Centre, NY 11570
S. David Walden
49 Roger Drive
Port Washington, NY 11050
with copies to (which shall not constitute notice):
Morse, Zelnick, Rose & Lander, LLP
450 Park Avenue
New York, New York 10022
Attention: Kenneth S. Rose
Telecopy No.: (212) 838-9190
If to Company, to:
Advanced Communication Resources, Inc.
1250 Broadway
Suite 3401
New York, NY 10001-3782
Attention: Matthew Kanter
Telecopy No.: (212) 629-4309
with copies to (which shall not constitute notice):
Morse, Zelnick, Rose & Lander, LLP
450 Park Avenue
New York, New York 10022
Attention: Kenneth S. Rose
Telecopy No.: (212) 838-9190
or to such other address or addresses as the parties may from time to time
designate in writing.
15.3. ASSIGNMENT. Either party hereto may assign its rights (but not
its obligations) under this Agreement without the consent of the other party
hereto; PROVIDED; HOWEVER in the event that Purchaser conveys the Shares or
substantially all of the assets of the
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Business after the Closing Date, Purchaser may assign its rights and obligations
under this Agreement to the transferee thereof.
15.4. RIGHTS OF THIRD PARTIES. Nothing expressed or implied in this
Agreement is intended or shall be construed to confer upon or give any Person,
other than the parties hereto, any right or remedies under or by reason of this
Agreement.
15.5. RELIANCE. Each of the parties to this Agreement shall be
deemed to have relied upon the accuracy of the written representations and
warranties made to it in or pursuant to this Agreement, notwithstanding any
investigations conducted by or on its behalf or notice, knowledge or belief to
the contrary.
15.6. TRANSFER TAXES; TITLE COSTS; EXPENSES. Notwithstanding any
other provision hereof, Sellers shall be solely responsible for the costs and
expenses of all recording fees (on a per-page basis or otherwise), transfer
taxes, conveyance taxes, sales and use taxes, stamp taxes and other taxes
incurred or otherwise payable in connection with the Transaction. Such payments
shall be made by Sellers promptly after incurred, but in any event on or prior
to the Closing Date or, in the case of taxes, fees and charges that may accrue
or arise after the Closing Date, promptly after the date that such obligation so
accrues or arises. Any filing fees payable in connection with the parties'
compliance with the HSR Act shall be paid one half by Purchaser. All other costs
and expenses incurred by the parties in connection with the transactions
contemplated hereby shall be borne by the party incurring such expense.
15.7. CONSTRUCTION. This Agreement shall be construed and enforced
in accordance with the laws of the State of New York. Unless otherwise stated,
references to Sections, Articles, Exhibits or Schedules refer to the Sections,
Articles, Exhibits and Schedules to this Agreement. The parties to this
Agreement participated jointly in the negotiation and drafting of this
Agreement. If any ambiguity or question of intent or interpretation shall arise
with respect to this Agreement, then this Agreement shall be construed as if
drafted jointly by the parties and no presumption or burden of proof will arise
favoring or disfavoring any party to this Agreement by virtue of the authorship
of any provision of this Agreement.
15.8. CAPTIONS; COUNTERPARTS. The captions in this Agreement are for
convenience only and shall not be considered a part of or affect the
construction or interpretation of any provision of this Agreement. 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.
15.9. ENTIRE AGREEMENT. This Agreement (together with the Schedules
and Exhibits to this Agreement, the Escrow Agreement and the Lease Assignment
Agreement, which constitute part of this Agreement) constitutes the entire
agreement among the parties and supersede any other agreements, whether written
or oral, that may have been made or entered into by or among any of the parties
hereto or any of their respective Subsidiaries relating to the Transactions. No
representations, warranties, covenants, understandings, agreements, oral or
otherwise, relating to the transactions contemplated by this Agreement exist
between the parties except as expressly set forth in this Agreement.
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15.10. AMENDMENTS. This Agreement may be amended or modified in whole
or in part, only by a duly authorized agreement in writing executed in the same
manner as this Agreement and which makes reference to this Agreement.
15.11. SEVERABILITY. If any term or provision of this Agreement that
is invalid or unenforceable in any situation in any jurisdiction, then all other
terms and provisions of this Agreement shall nevertheless remain in full force
and effect so long as the economic or legal substance of the transactions
contemplated hereby is not affected in any manner materially adverse to any
party.
15.12. PUBLICITY. All press releases or other public communications
of any nature whatsoever, or other notices to third parties except as
contemplated by Section 8.1 relating to the transactions contemplated by this
Agreement, and the method of the release for publication thereof, shall be
subject to the prior mutual approval of Purchaser and the Company which approval
shall not be unreasonably withheld by any party; PROVIDED, HOWEVER, that,
nothing herein shall prevent any party from publishing such press releases or
other public communications as such party may consider necessary in order to
satisfy such party's legal or contractual obligations after such consultation
with the other parties hereto as is reasonable under the circumstances.
15.13. FURTHER ASSURANCES. The parties agree to: (a) furnish upon
request to each other such further information, (b) execute and deliver such
other documents, and (c) do such other acts and things, all as the other party
may reasonably request for the purpose of carrying out the intent of this
Agreement, including providing to Purchaser all of the rights, benefits and
services enjoyed by the Company in the operation of the Business from whatever
source.
15.14. ATTORNEY'S FEES. In the event of any litigation arising under
this Agreement, the prevailing party shall be entitled to recover his or its
reasonable attorney's fees from the non-prevailing party.
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IN WITNESS WHEREOF the parties have hereunto caused this
Agreement to be duly executed as of the date first above written.
ADVANCED COMMUNICATION RESOURCES, INC.
By:
-----------------------------------------
Name:
------------------------------------
Title:
-----------------------------------
SELLERS:
--------------------------------
Matthew D. Kanter
THE BENJAMIN KANTER 1997 QSST TRUST
By:
-----------------------------------------
Nancy Goertzen, Trustee
THE RONALD KANTER 1997 QSST TRUST
By:
-----------------------------------------
Nancy Goertzen, Trustee
----------------------------------
S. David Walden
USINTERNETWORKING, INC.
By:
-----------------------------------------
Name:
------------------------------------
Title:
-----------------------------------
<PAGE>
Schedule to Exhibit 10.22
Omitted Documents
The following documents have been omitted in accordance with Instruction
No. 2 to Item 601 of Regulation S-K because they are substantially identical
to Exhibit 10.22 in all material respects except as indicated in this
schedule.
<TABLE>
<CAPTION>
Difference from
Exhibit No. Description Exhibit 10.22
- ----------- ----------- ----------------
<S> <C> <C>
10.20 Note Purchase Agreement Contracting parties
among USi and the Account and principal amount
Management Purchasers dated
September 8, 1998
10.21 Note Purchase Agreement Contracting parties
between USi and Southeastern and principal amount
Technology Fund, L.P. dated
September 8, 1998
10.23 Note Purchase Agreement Contracting parties
between USi and U S WEST and principal amount
dated September 8, 1998
</TABLE>
<PAGE>
Exhibit 10.22
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
NOTE PURCHASE AGREEMENT
BY
AND
AMONG
USINTERNETWORKING, INC.
BLUE CHIP CAPITAL FUND II LIMITED PARTNERSHIP
MIAMI VALLEY VENTURE FUND L.P.
GROTECH PARTNERS IV L.P.
GROTECH PARTNERS V L.P.
SOUTHERN VENTURE FUND II, L.P.
VENROCK ASSOCIATES
VENROCK ASSOCIATES II, L.P.
AND
USI PARTNERS, LTD.
-----------------------------------------
DATED AS OF SEPTEMBER 8, 1998
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
<PAGE>
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
<S> <C> <C>
ARTICLE 1. DEFINITIONS.....................................................................................1
1.1. Definitions.....................................................................................1
1.2. Accounting Terms: Financial Statements..........................................................4
1.3. Knowledge Standard..............................................................................4
1.4. Other Defined Terms.............................................................................5
ARTICLE 2. AUTHORIZATION OF NOTES AND WARRANTS; PURCHASE AND SALE OF NOTES AND WARRANTS;
MAKING OF LOANS.................................................................................5
2.1. Notes and Warrants..............................................................................5
2.2. Purchase and Sale of Notes and Warrants.........................................................6
2.3. Closing.........................................................................................6
2.4. The Loans.......................................................................................6
2.5. Fees and Expenses...............................................................................6
ARTICLE 3. CONDITIONS TO THE OBLIGATION OF THE PURCHASERS TO PURCHASE THE NOTES............................6
3.1. Representations and Warranties..................................................................6
3.2. Compliance with Terms and Conditions of this Agreement..........................................7
3.3. Delivery of Notes and Warrants..................................................................7
3.4. Closing Certificates............................................................................7
3.5. Secretary's Certificates........................................................................7
3.6. Documents.......................................................................................7
3.7. Purchase Permitted By Applicable Laws...........................................................7
3.8. Consents and Approvals..........................................................................7
3.9. No Material Judgment or Order...................................................................8
3.10. Legal Opinion...................................................................................8
3.11. SBIC Forms......................................................................................8
3.12. IIT Transaction.................................................................................8
3.13. Amendment to the Shareholders Agreement.........................................................8
3.14. Waiver of Rights................................................................................8
ARTICLE 4. [Intentionally Deleted].........................................................................9
ARTICLE 5. CONDITIONS TO THE OBLIGATION OF USI TO CLOSE....................................................9
5.1. Representations and Warranties..................................................................9
5.2. Compliance with this Agreement..................................................................9
5.3. Closing Certificate.............................................................................9
5.4. Issuance Permitted by Applicable Laws...........................................................9
</TABLE>
i
<PAGE>
<TABLE>
<CAPTION>
PAGE
<S> <C> <C>
5.5. Loans...........................................................................................9
5.6. Consents and Approvals..........................................................................9
5.7. No Material Judgment or Order..................................................................10
ARTICLE 6. REPRESENTATIONS AND WARRANTIES OF USI..........................................................10
6.1. Corporate Existence and Authority..............................................................10
6.2. Corporate Authorization; No Contravention......................................................10
6.3. Governmental Authorization; Third Party Consents...............................................10
6.4. Binding Effect.................................................................................10
6.5. Capitalization.................................................................................11
6.6. Private Offering...............................................................................11
6.7. Litigation.....................................................................................12
6.8. Financial Statements...........................................................................12
6.9. Tax Matters....................................................................................12
6.10. Investment Company/Government Regulations......................................................12
6.11. Broker's Finder's or Similar Fees..............................................................12
6.12. Labor Relations and Employee Matters...........................................................12
6.13. Employee Benefits Matters......................................................................13
6.14. Outstanding Borrowings.........................................................................13
6.15. Insurance Schedule.............................................................................13
6.16. Solvency.......................................................................................13
6.17. No Other Agreements to Sell Assets or Capital Stock............................................13
6.18. Compliance with Law............................................................................13
6.19. The Acquisition................................................................................13
6.20. Disclosure.....................................................................................13
6.21. Small Business Concern: Affiliates.............................................................14
6.22. Qualified Small Business.......................................................................14
ARTICLE 7. REPRESENTATIONS AND WARRANTIES OF THE PURCHASERS...............................................14
7.1. Partnership or Corporate Existence and Authority...............................................14
7.2. Organization; Authorization; No Contravention..................................................14
7.3. Binding Effect.................................................................................15
7.4. Purchase for Own Account.......................................................................15
7.5. Financial Condition............................................................................15
7.6. Receipt of Information.........................................................................15
7.7. Broker's, Finder's or Similar Fees.............................................................16
7.8. Governmental Authorization: Third Party Consent................................................16
7.9. Litigation.....................................................................................16
ARTICLE 8. COVENANTS OF USI WITH RESPECT TO THE PERIOD FOLLOWING THE CLOSING..............................16
8.1. Reservation of Shares..........................................................................16
8.2. Information and Reports for SBIC Purchasers....................................................16
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
PAGE
<S> <C> <C>
ARTICLE 9. INDEMNIFICATION................................................................................17
9.1. Indemnification................................................................................17
9.2. Notification...................................................................................18
ARTICLE 10. MISCELLANEOUS..................................................................................18
10.1. Survival of Representations and Warranties.....................................................18
10.2. Notices........................................................................................18
10.3. Successors and Assigns.........................................................................20
10.4. Amendment and Waiver...........................................................................20
10.5. Counterparts...................................................................................21
10.6. Headings.......................................................................................21
10.7. Governing Law..................................................................................21
10.8. Jurisdiction...................................................................................21
10.9. Severability...................................................................................21
10.10. Rules of Construction..........................................................................21
10.11. Entire Agreement...............................................................................21
10.12. Publicity......................................................................................22
10.13. Further Assurances.............................................................................22
10.14. Waiver of Jury Trial...........................................................................22
</TABLE>
<PAGE>
NOTE PURCHASE AGREEMENT
THIS NOTE PURCHASE AGREEMENT (the "Agreement") is entered into
as of the 8th day of September, 1998, by and among USinternetworking, Inc., a
Delaware corporation ("USi"), Blue Chip Capital Fund II Limited Partnership, an
Ohio limited partnership ("Blue Chip"), Miami Valley Venture Fund L.P., an Ohio
limited partnership ("Miami"), Grotech Partners IV L.P., a Delaware limited
partnership ("Grotech"), Grotech Partners V L.P., a Delaware limited partnership
("Grotech II"), Southern Venture Fund II, L.P., a Delaware limited partnership
("Massey II"), Venrock Associates, a New York limited partnership ("Venrock"),
Venrock Associates II, L.P., a New York limited partnership ("Venrock II") and
USi Partners, Ltd., an Ohio limited liability company ("USi Partners") (Blue
Chip, Miami, Grotech, Grotech II, Massey II, Venrock, Venrock II and Usi
Partners are referred to collectively herein as the "Purchasers" and
individually as a "Purchaser").
RECITALS:
A. USi desires to acquire (the "Acquisition") all of the stock
of IIT Holding, Inc., a Florida corporation ("IIT").
B. In order to finance the Acquisition, upon the terms and
subject to the conditions set forth in this Agreement, USi proposes to issue and
sell its Convertible Promissory Notes (the "Notes") to the Purchasers and to
obtain from the Purchasers the Loans as contemplated thereby.
C. The Purchasers desire to purchase from USi the Notes and to
make the Loans as contemplated thereby, as set forth on SCHEDULE 1 hereto.
AGREEMENT
NOW, THEREFORE, in consideration of the mutual covenants and
agreements set forth herein and for good and valuable consideration, the receipt
and adequacy of which is hereby acknowledged, the parties hereto hereby agree as
follows:
ARTICLE 1.
DEFINITIONS
1.1. DEFINITIONS.
As used in this Agreement, and unless the context requires a
different meaning, the following terms have the meanings indicated:
"AFFILIATE" means, with respect to any specified Person, any
Person that, directly or indirectly, controls, is controlled by, or is under
common control with, such specified Person, whether by contract, through one or
more intermediaries, or otherwise.
"BUDGET" means a fiscal year operating budget, which shall
include monthly capital and operating expense budgets, cash flow statements,
capital expenditure budgets, profit and loss projections and employee hiring
projections.
"BUSINESS" means the business of USi as conducted and planned
to be conducted on the date hereof.
<PAGE>
"BUSINESS DAY" shall mean a day other than a Saturday or
Sunday or any federal holiday.
"COMMISSION" means the Securities and Exchange Commission or
any similar agency then having jurisdiction to enforce the Securities Act (as
defined below).
"CONDITION OF USI" means the assets, business, properties,
operations, financial condition or prospects of USi.
"CONTRACTUAL OBLIGATION" means any contract or agreement by
which a person is bound or to which its assets are subject.
"CONVERSION SHARES" has the meaning assigned thereto in the
Notes.
"EMPLOYEE PLANS" means all benefits arrangements, pensions
plans or welfare plans adopted by USi for its employees.
"EMPLOYEE STOCK OPTION PLAN" means an employee stock option
plan adopted by the Compensation Committee of the Board of Directors of USi
providing for the issuance to certain employees of USi of options to purchase a
certain number of shares of USi Common Stock at a certain exercise price per
share; the total number of shares of USi Common Stock which may be issued under
such plan shall not exceed 6.5% of the total number of outstanding shares of
common stock calculated on a fully diluted basis, not including the options and
shares issuable or issued on exercise of options pursuant to the Employee Stock
Option Plan.
"EXCHANGE ACT" means the Securities Exchange Act of 1934, as
amended, and the rules and regulations of the Commission thereunder.
"GAAP" means United States generally accepted accounting
principles, in effect from time to time, consistently applied.
"GOVERNMENTAL AUTHORITY" means the government of any nation,
state, city, locality or other political subdivision of any thereof, any entity
exercising executive, legislative, judicial, regulatory or administrative
functions of or pertaining to government, and any corporation or other entity
owned or controlled, through stock or capital ownership or otherwise, by any of
the foregoing.
"IIT PURCHASE AGREEMENT" means the Stock Purchase Agreement
dated as of August 28, 1998 among USi, IIT, Luis Sebastian Alegrett, Michael
Mai, Carlos E. Bravo and Vicente Perez de Tudela.
"IIT TRANSACTION" means the purchase by USi of all of the
stock of IIT pursuant to the IIT Purchase Agreement.
"INDEBTEDNESS" means, as to any Person: (a) all obligations,
whether or not contingent, of such Person for borrowed money (including, without
limitation, reimbursement and all other obligations with respect to surety
bonds, letters of credit and bankers' acceptances, whether or not matured), (1))
all obligations of such Person evidenced by notes, bonds, debentures or similar
instruments, (c) all obligations of such Person representing the balance of
deferred purchase price of property or services, except trade accounts payable
and accrued commercial or trade liabilities arising in the ordinary course of
business, (d) all interest rate and currency swaps, caps, collars and similar
agreements or hedging devices under which payments are obligated to be made by
such Person, whether periodically or upon the
2
<PAGE>
happening of a contingency, (e) all indebtedness created or arising under any
conditional sale or other title retention agreement with respect to property
acquired by such Person (even though the rights and remedies of the seller or
lender under such agreement in the event of default are limited to repossession
or sale of such property), (f) all obligations of such Person under leases which
have been or should be, in accordance with GAAP, recorded as capital leases, (g)
all indebtedness secured by any Lien (other than Liens in favor of lessors under
leases other than leases included in clause (f)) on any property or asset owned
or held by that Person regardless of whether the indebtedness secured thereby
shall have been assumed by that Person or is non-recourse to the credit of that
Person, and (h) all Indebtedness of any other Person referred to in clauses (a)
through (f) above, guaranteed, directly or indirectly, by that Person.
"LIEN" means any mortgage, deed of trust, pledge,
hypothecation, assignment, encumbrance, lien (statutory or other) or other
security interest of any kind or nature whatsoever (excluding preferred stock or
equity related preferences) including, without limitation, those created by,
arising under or evidenced by any conditional sale or other title retention
agreement, the interest of a lessor under a capital lease obligation, or any
financing lease having substantially the same economic effect as any of the
foregoing.
"OUTSTANDING BORROWINGS" means as to any Person all
Indebtedness of such Person for borrowed money (including, without limitation,
reimbursement and all other obligations with respect to surety bonds, letters of
credit and bankers' acceptances, whether or not matured).
"PERSON" means any individual, firm, corporation, partnership,
trust, incorporated or unincorporated association, joint venture, joint stock
company, Governmental Authority or other entity of any kind, and shall include
any successor (by merger or otherwise) of such entity.
"QUOTED PRICE" means the last reported sales price of the
applicable security as reported by the National Association of Securities
Dealers, Inc., Automatic Quotations System, National Market System, or, if the
applicable security is listed or admitted for trading on a securities exchange,
the last reported sales price of the applicable security on the principal
exchange on which the applicable security is listed or admitted for trading
(which shall be consolidated trading if applicable to such exchange), or if
neither so reported or listed or admitted for trading, the last reported bid
price of the applicable security in the over-the-counter market. In the event
that the Quoted Price cannot be determined as aforesaid, the Board of Directors
of USi shall determine the Quoted Price in such a manner as it in good faith
considers appropriate. Such determination may be challenged in good faith by
holders of a majority in interest of the Warrants and any dispute shall be
resolved at USi's cost, by an investment banking firm of recognized national
standing selected by USi and acceptable to such holders of the Warrants and
shall be made in good faith and be conclusive absent manifest error.
"REQUIREMENTS OF LAW" means, as to any Person, the provisions
of the Certificate of Incorporation and By-laws or other organizational or
governing documents of such Person, and any law, treaty, rule, regulation,
right, privilege, qualification, license or franchise, order, judgment, or
determination of an arbitrator or a court or other Governmental Authority, in
each case, applicable or binding upon such Person or any of its property or to
which such Person or any of its property is subject or applicable to any or all
of the transactions contemplated by or referred to in the Transaction Documents.
"SBIC" means a Small Business Investment Corporation.
3
<PAGE>
"SECURITIES ACT" means the Securities Act of 1933, as amended,
and the rules and regulations of the Commission thereunder.
"SHAREHOLDERS AGREEMENT" means the Shareholders' Agreement
between USI and its shareholders dated as of May 28, 1998, as amended.
"TRADING DAY" means any day on which any market in which the
applicable security is then traded and in which a Quoted Price may be
ascertained is open for business.
"TRANSACTION DOCUMENTS" means collectively, this Agreement,
the Notes, the Warrants and Amendment No. 2 to the Shareholders Agreement.
"TRANSACTION EXPENSES" means any and all reasonable
out-of-pocket (i) legal expenses incurred by the Purchasers in connection with
the negotiation and preparation of the Transaction Documents, the consummation
of the transactions contemplated thereby and preparation for any of the
foregoing, including, without limitation, travel expenses, reasonable fees,
charges and disbursements of counsel and any similar or related legal costs and
legal expenses, provided, however, that USi shall pay only for one primary
counsel of Purchasers and for the reasonable attorney fees of the individual
counsel of each Purchaser incurred by such counsel in reviewing the Transaction
Documents, but only to the extent that the use of such individual counsel is
required by such Purchaser's institutional policies and procedures; and (ii)
other expenses incurred by the Purchasers in connection with the negotiation,
preparation and consummation of the Transaction Documents and the transactions
contemplated thereby.
"USI STOCK" means Common Stock, par value $.001 per share, of
USi, or any other capital stock of USi into which such stock is reclassified or
reconstituted.
"WARRANT SHARES" means shares of USi Stock to be issued upon
exercise of the Warrants.
1.2. ACCOUNTING TERMS: FINANCIAL STATEMENTS.
All accounting terms used herein not expressly defined in this
Agreement shall have the respective meanings given to them in accordance with
sound accounting practice. The term "sound accounting practice" shall mean such
accounting practice as, in the opinion of the independent certified public
accountants regularly retained by USi conforms at the time to GAAP applied on a
consistent basis except for changes with which such accountants concur.
1.3. KNOWLEDGE STANDARD.
When used herein, the phrase "to the knowledge of" any Person,
"to the best knowledge of" any Person or any similar phrase shall mean, (i) with
respect to any individual, the actual knowledge of such Person, (ii) with
respect to any corporation, the actual knowledge of the officers and directors
of such corpOration and the knowledge of such facts that such persons should
have in the exercise of their duties after reasonable inquiry, and (iii) with
respect to a partnership, the actual knowledge of the officers and directors of
the general partner of such partnership and the knowledge of such facts that
such persons should have in the exercise of their duties after reasonable
inquiry.
4
<PAGE>
1.4. OTHER DEFINED TERMS.
The following terms shall have the meanings specified in the
Sections set forth below:
TERM SECTION
Actions 6.7
Acquisition Recital A
Closing Date 2.2
Closing 2.3
Indemnified Party 9.2
Indemnifying Party 9.2
Liabilities 2.2
Loans 2.2
Notes Recital B
Purchasing Indemnified Party 9.1(a)
Purchasing Indemnifying Party 9.1(b)
SBA 3.11
Selling Indemnified Party 9.1(b)
Selling Indemnifying Party 9.1(a)
Warrants 2.2
ARTICLE 2.
AUTHORIZATION OF NOTES AND WARRANTS;
PURCHASE AND SALE OF NOTES AND WARRANTS;
MAKING OF LOANS
2.1. NOTES AND WARRANTS.
On or before the Closing Date, the Board of Directors of USi
will authorize the issuance and sale of the Notes and Warrants as contemplated
hereby, including authorizing the issuance of Conversion Shares upon conversion
of the Notes and the issuance of the Warrant Shares upon exercise of the
Warrants.
5
<PAGE>
2.2. PURCHASE AND SALE OF NOTES AND WARRANTS.
Upon the terms and subject to the conditions herein contained,
on September 8, 1998 or such other day as the parties may agree (the "Closing
Date"), USi shall issue to each of the Purchasers, and each Purchaser shall
acquire from USi, a note (the "Notes") in the form of Exhibit A hereto and in
the principal amounts shown on SCHEDULE 1 hereto. In order to induce the
Purchasers to purchase the Notes and to make the loans (the "Loans")
contemplated thereby, at the Closing USi will issue to each of the Purchasers a
Warrant (the "Warrants") in the form of Exhibit B hereto with respect to the
number of shares of USi stock shown on SCHEDULE 1 hereto. USi may offer to its
other current shareholders the opportunity to purchase additional notes on the
same terms as the Notes. If any of such shareholders purchases such notes and
makes the loan contemplated thereby on or before the Closing Date, it shall
receive warrants on the same terms as the Warrants.
2.3. CLOSING.
The closing of the sale to and purchase by the Purchasers of
the Notes (the "Closing") shall occur at 11 o'clock A.M., local time on the
Closing Date at the offices of USi, 175 Admiral Cochrane Drive, Annapolis,
Maryland. At the Closing, USi shall also deliver to each Purchaser the Note and
Warrant being purchased by such Purchaser, free and clear of any Liens of any
nature whatsoever, registered in such Purchaser's name.
2.4. THE LOANS. Subject to the terms and conditions herein
contained, at the Closing each of the Purchasers shall make a Loan to USi (by
wire transfer of immediately available funds) in the amount set forth opposite
its name on SCHEDULE 1. The obligation of the Purchasers to purchase the Notes
and to make the Loans shall be several and not joint or joint and several.
2.5. FEES AND EXPENSES.
Concurrently with or as promptly as practicable after the
Closing, USi shall reimburse the Purchasers for the Transaction Expenses, which
payment shall be made by wire transfer of immediately available funds to an
account or accounts designated by the Purchasers.
ARTICLE 3.
CONDITIONS TO THE OBLIGATION OF THE
PURCHASERS TO PURCHASE THE NOTES
The obligation of each Purchaser to purchase its Note, to make
its Loan and to perform any of its obligations hereunder (unless otherwise
specified) shall be subject to the satisfaction of the following conditions on
or before the Closing Date:
3.1. REPRESENTATIONS AND WARRANTIES.
The representations and warranties of USi contained in Section
6 hereof shall be true and correct in all material respects at and as of that
date, as if made at and as of such date.
3.2. COMPLIANCE WITH TERMS AND CONDITIONS OF THIS AGREEMENT.
USi shall have performed and complied with all of the
agreements and conditions set forth herein that are required to be performed or
complied with by USi on or before that date.
6
<PAGE>
3.3. DELIVERY OF NOTES AND WARRANTS.
USi shall have delivered to each Purchaser the Note and the
Warrant to be received by such Purchaser.
3.4. CLOSING CERTIFICATES.
USi shall have delivered to each Purchaser a certificate
executed by an authorized officer of USi certifying that the representations and
warranties of USi are true and correct in all material respects on and as of
that date, and that the conditions set forth in this Section 3 to be satisfied
by USi have been satisfied on and as of that date.
3.5. SECRETARY'S CERTIFICATES.
Each Purchaser shall have received a certificate from USi,
dated as of that date and signed by the Secretary or an Assistant Secretary of
USi, certifying that the attached copies of the Certificate of Incorporation and
By-laws of USi and resolutions of the Board of Directors of USi approving the
Transaction Documents and the transactions referred to therein, are all true,
complete and correct and remain unamended and in full force and effect.
3.6. DOCUMENTS.
Each Purchaser or one Purchaser on behalf of all Purchasers
shall have received true, complete and correct copies of such documents and such
other information as it may have reasonably requested in connection with or
relating to the sale of the Notes and the transactions required to be performed
by the Transaction Documents.
3.7. PURCHASE PERMITTED BY APPLICABLE LAWS.
The acquisition of and payment for the Notes to be acquired by
the Purchasers hereunder and the consummation of this Agreement (a) shall not be
prohibited by any Requirements of Law, and (b) shall not conflict with or be
prohibited by any Contractual Obligation of USi or IIT.
3.8. CONSENTS AND APPROVALS.
All consents, exemptions, authorizations, or other actions by,
or notices to, or filings with, Governmental Authorities and other Persons in
respect of all Requirements of Law and with respect to Contractual Obligations
of USi necessary or required in connection with the execution, delivery or
performance (including, without limitation, the issuance of shares of the
Conversion Shares and the Warrant Shares) by USi shall have been obtained and be
in full force and effect and all waiting periods shall have lapsed without
extension or the imposition of any conditions or restrictions.
3.9. NO MATERIAL JUDGMENT OR ORDER.
There shall not be any judgment or order of a court of
competent jurisdiction or any ruling of any Governmental Authority or any
condition imposed under any Requirement of Law which, in the reasonable judgment
of the Purchaser, would (i) prohibit the purchase of the Notes and Warrants
hereunder, (ii) subject the Purchaser to any penalty if the Notes and Warrants
were to be purchased hereunder, or (iii) question the validity or legality of
the transactions required to be performed under this Agreement.
7
<PAGE>
3.10. LEGAL OPINION.
The Purchasers shall have received an opinion of counsel for
USi in form and substance reasonably acceptable to the Purchasers.
3.11. SBIC FORMS.
USi shall have furnished to all Purchasers that are SBICs all
forms which such Purchasers shall have informed USi are required by the United
States Small Business Administration ("SBA") in connection with the transactions
contemplated hereby, including without limitation a Size Status Declaration on
SBA Form 480, an Assurance of Compliance on SBA Form 652-D, and a Portfolio
Financing Report on SBA Form 1031, which forms (except for execution by the
respective licensee), shall be in proper form for filing with the SBA.
3.12. IIT TRANSACTION.
USi shall be prepared to consummate the IIT Transaction
substantially on the terms set forth in the IIT Purchase Agreement without any
waiver by USi of any material right or condition immediately after the Closing
hereunder and the Purchasers shall have received a certificate of USi to that
effect.
3.13. AMENDMENT TO THE SHAREHOLDERS AGREEMENT.
Amendment No. 2 to the Shareholders Agreement shall have been
executed and delivered by the parties thereto in the form of Exhibit C hereto.
3.14. WAIVER OF RIGHTS.
All antidilutive and pre-emptive rights of shareholders of USi
with respect to the issuance of the Notes and the Warrants and the Conversion
Shares and Warrant Shares shall have been waived.
ARTICLE 4.
[INTENTIONALLY DELETED]
ARTICLE 5.
CONDITIONS TO THE OBLIGATION OF
USI TO CLOSE
The obligation of USi to issue and sell the Notes and issue
the Warrants and the other obligations of USi hereunder, shall be subject to the
satisfaction of the following conditions on or before the Closing Date:
5.1. REPRESENTATIONS AND WARRANTIES.
The representations and warranties of the Purchasers contained
in Section 7 hereof shall be true and correct in all material respects at and as
of the Closing Date as if made at and as of such date.
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5.2. COMPLIANCE WITH THIS AGREEMENT.
The Purchasers shall have performed and complied with all of
the agreements and conditions set forth herein that are required to be performed
or complied with by the Purchasers on or before the Closing Date.
5.3. CLOSING CERTIFICATE.
Each Purchaser shall have delivered to USi a certificate
executed by such Purchaser certifying that the representations and warranties of
such Purchaser contained in this Agreement are true and correct in all material
respects on and as of the Closing Date and that the conditions contained in this
Article 5 to be satisfied by such Purchaser have been satisfied on and as of the
Closing Date.
5.4. ISSUANCE PERMITTED BY APPLICABLE LAWS.
The issuance of the Notes and the Warrants hereunder and the
consummation of this Agreement (a) shall not be prohibited by any Requirements
of Law, and (b) shall not conflict with or be prohibited by any Contractual
Obligations of the Purchaser.
5.5. LOANS.
The Purchasers shall have made the Loans as set forth in
Section 2.4(a) hereof.
5.6. CONSENTS AND APPROVALS.
All consents, exemptions, authorizations, or other actions by,
or notices to, or filings with, Governmental Authorities and other Persons in
respect of all Requirements of Law and with respect to those material
Contractual Obligations of the Purchasers necessary or required in connection
with the execution, delivery or performance by each Purchaser shall have been
obtained and be in full force and effect and all waiting periods shall have
lapsed without extension or imposition of any conditions or restrictions.
5.7. NO MATERIAL JUDGMENT OR ORDER.
There shall not be any judgment or order of a court of
competent jurisdiction or any ruling of any Governmental Authority or any
condition imposed under any Requirements of Law which, in the reasonable
judgment of USi would (i) prohibit the sale of the Notes or the Warrants or the
consummation of the other transactions hereunder, (ii) subject USi to any
penalty if the Notes or the Warrants were to be sold hereunder or (iii) question
the validity or legality of the transactions required to be performed under this
Agreement.
ARTICLE 6.
REPRESENTATIONS AND WARRANTIES
OF USI
USi represents and warrants to, and covenants with, the
Purchasers as of the date hereof and as of the Closing Date as follows:
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6.1. CORPORATE EXISTENCE AND AUTHORITY.
USi was incorporated on January 14, 1998 and (a) is a
corporation duly organized, validly existing and in good standing under the laws
of the State of Delaware, (b) has all requisite corporate power and authority to
own and operate its property, to lease the property it operates as lessee and to
conduct the business in which it is currently, or is currently proposed to be,
engaged, and (c) has the corporate power and authority to execute, deliver and
perform its obligations under each Transaction Agreement to which it is or will
be a party.
6.2. CORPORATE AUTHORIZATION; NO CONTRAVENTION.
The execution, delivery and performance by USi of each of the
Transaction Documents and the consummation of the transactions contemplated
thereby, including, without limitation, the issuance of the Notes and the
Warrants by USi, (a) on or before the Closing Date, shall have been duly
authorized by all necessary corporate action, including the approval of the
holders of two-thirds of the outstanding Series A Convertible Preferred Stock of
USi, do not conflict with or contravene the terms of the Certificate or the
Bylaws of USi, or any amendment thereof; and (b) will not violate, conflict with
or result in any material breach or contravention of (i) any Contractual
Obligation of USi or (ii) any Requirements of Law applicable to USi.
6.3. GOVERNMENTAL AUTHORIZATION; THIRD PARTY CONSENTS.
No approval, consent, compliance, exemption, authorization, or
other action by, or notice to, or filing with, any Governmental Authority or any
other Person in respect of any applicable Requirements of Law in effect on the
date hereof and no lapse of a waiting period under any applicable Requirements
of Law in effect on the date hereof, is necessary or required in connection with
the execution and delivery of the Transaction Documents by USi or the
performance by USi or enforcement against USi of any material obligation by USi
under the Transaction Documents or the transactions to be performed hereunder.
6.4. BINDING EFFECT.
This Agreement has been duly executed and delivered by Usi and
constitutes its legal, valid and binding obligation enforceable against it in
accordance with its terms, except as enforceability may be limited by applicable
bankruptcy, insolvency or other similar laws affecting the enforcement of
creditors' rights generally and by general principles of equity relating to
enforceability.
6.5. CAPITALIZATION.
(a) On the Closing Date, the authorized capital stock of USi
shall consist of three hundred million (300,000,000) shares of Common Stock and
two hundred thousand (200,000) shares of preferred stock. Of the authorized
shares of USi Common Stock, immediately after the Closing, (i) ninety-nine
million (99,000,000) shares of Common Stock will be reserved for issuance upon
conversion of shares of the Series A Preferred Stock, (ii) six million six
hundred thousand (6,600,000) shares of USi Common Stock will be reserved for
issuance pursuant to the Employee Stock Option Plan; (iii) up to six million one
hundred twenty thousand (6,120,000) shares of USi Common Stock will be reserved
for issuance upon exercise of the Warrants, and (iv) no more than nineteen
million (19,000,000) fully diluted shares of Common Stock will be outstanding
(excluding any shares subject to the Employee Stock Option Plan, the Conversion
Shares and any shares issuable upon conversion of the Conversion
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Shares). As of the Closing Date, all outstanding shares of capital stock of USi,
including the Warrant Shares (when issued in accordance with the terms of the
Warrants), will be duly authorized and validly issued, fully paid, nonassessable
and free and clear of any Liens, preferential rights, priorities, claims,
options, charges or other encumbrances or restrictions other than those created
by the Certificate of Incorporation and the Bylaws of USi and the Shareholders'
Agreement and all preemptive and anti-dilution rights relating to the issuance
of the Warrants and the Warrant Shares shall have been waived.
(b) SCHEDULE 6.5 sets forth the name of each holder of
the issued and outstanding capital stock of USi, the number of shares of such
capital stock held beneficially or of record by each such holder, the name of
each Person holding any options or other rights to purchase any capital stock of
USi (except as may be permitted under the Shareholders Agreement), the number,
class and series of shares of capital stock subject to each such option or right
and the exercise price of each such option or right. Except for the options
under the Employee Stock Option Plan, the Series A Convertible Preferred Shares
of USi, the Warrants and the Notes, there are no outstanding securities
convertible into or exchangeable for capital stock of USi or options, warrants
or other rights to purchase or subscribe to capital stock of USi or contracts,
commitments, agreements, understandings or arrangements of any kind to which USi
is a party relating to the issuance of any capital stock of USi, any such
convertible or exchangeable securities or any such options, warrants or rights.
Except for IIT upon the completion of the Acquisition, USi has no subsidiaries.
6.6. PRIVATE OFFERING.
No form of general solicitation or general advertising was
used by USi or its representatives in connection with the offer or sale of the
Notes or Warrants. No registration of the Notes or Warrants pursuant to the
provisions of the Securities Act or any state securities or "blue sky" laws will
be required by the offer, sale or issuance of the Notes or Warrants pursuant to
this Agreement. USi agrees that neither it, nor anyone authorized to act on its
behalf will offer or sell the Notes or Warrants or any other security so as to
require the registration of the Notes or Warrants pursuant to the provisions of
the Securities Act or any state securities or "blue sky" laws, unless such Notes
or Warrants are so registered.
6.7. LITIGATION.
USi has not received any notice of any governmental charge,
complaint or action or court order, writ, injunction, judgment or decree
outstanding or any claim, suit, litigation, legal proceeding, (collectively,
"Actions") which if adversely determined would have a material adverse effect on
(i) the Condition of USi (ii) the transactions required to be performed by USi
under this Agreement or the Transaction Documents and, to USi's knowledge, there
is no valid basis therefor, and no Action is threatened against USi.
6.8. FINANCIAL STATEMENTS.
USi has delivered to the Purchasers its audited financial
statements as of June 30, 1998 and for the period then ended. Such financial
statements are true and complete in all material respects and fairly present the
financial condition and results of operations of USi as of June 30, 1998 and for
the period then ended in accordance with generally accepted accounting
principles. Since June 30, 1998 there has been no material adverse change in the
business, financial condition, operating results or prospects of USi. USi has no
material liabilities except for liabilities reflected in such financial
statements and liabilities incurred in the ordinary course of business since
June 30, 1998.
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6.9. TAX MATTERS.
USi has duly filed all tax reports and returns required to be
filed by it, including all federal, state, local and foreign tax returns and
reports and paid all taxes due with respect thereto.
6.10. INVESTMENT COMPANY/GOVERNMENT REGULATIONS.
Immediately following the Closing, after giving effect to the
transactions contemplated by the Transaction Documents, neither USi nor any
Person controlling, controlled by or under common control with USi will be an
"investment company" within the meaning of the Investment Company Act of 1940,
as amended. USi is not subject to regulation under the Public Utility Holding
Company Act of 1935, as amended, the Federal Power Act, or any federal or state
statute or regulation limiting its ability to incur Indebtedness.
6.11. BROKER'S FINDER'S OR SIMILAR FEES.
There are no brokerage commissions, finder's fees or similar
fees or commissions payable in connection with the transactions contemplated
hereby based on any agreement, arrangement or understanding with USi or any
officer, director, shareholder, or Affiliate of USi or any action taken by any
such person.
6.12. LABOR RELATIONS AND EMPLOYEE MATTERS.
(a) USi is not and has not engaged in any unfair labor
practice.
(b) Except as set forth on SCHEDULE 6.12, USi is not a
party to any employment agreement (other than "at will" employment
relationships), collective bargaining agreement or covenant not to compete.
(c) No complaint under any statute or regulation relating
to employment has been filed against USi.
6.13. EMPLOYEE BENEFITS MATTERS.
Except as set forth on SCHEDULE 6.13, USi has not adopted or
implemented any Employee Plan.
6.14. OUTSTANDING BORROWINGS.
SCHEDULE 6.14 lists the amount of all Outstanding Borrowings
of USi as of the date hereof and the name of each lender thereof.
6.15. INSURANCE SCHEDULE.
USi maintains insurance policies with reputable insurers
covering such risks and in such amounts as are customary for similar businesses.
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6.16. SOLVENCY.
USi has not (i) made a general assignment for the benefit of
its creditors, (ii) filed any voluntary petition in bankruptcy or suffered the
filing of any involuntary petition in bankruptcy by its creditors, (iii)
suffered the appointment of a receiver to take possession of all or
substantially all of its assets or properties, (iv) suffered the attachment or
other judicial seizure of all or substantially all of its assets or (v) admitted
in writing its inability to pay its debts as they come due.
6.17. NO OTHER AGREEMENTS TO SELL ASSETS OR CAPITAL STOCK.
Other than as otherwise set forth in this Agreement, USi has
no legal obligation, absolute or contingent, other than obligations under the
Transaction Documents, to any person or firm to (i) sell any of its capital
stock or, outside of the ordinary course of business, assets, or effect any
merger, consolidation or other reorganization or (ii) enter into any agreement
with respect any of the foregoing.
6.18. COMPLIANCE WITH LAW.
In its conduct of its business and affairs since its
formation, USi has complied in all material respects with all applicable
Requirements of Law.
6.19. THE ACQUISITION.
USi has delivered to the Purchasers a true and complete copy
of the IIT Purchase Agreement and all documents relating thereto. To the
knowledge of USi, all of the representations and warranties of the sellers made
in the IIT Purchase Agreement are true and complete in all material respects.
6.20. DISCLOSURE.
USi has, to the best of its knowledge, fully responded to all
requests for information, and each of USi has accurately answered all questions
from the Purchasers concerning the Condition of USi, and has not knowingly
withheld any facts relating thereto which it reasonably believes to be material
with respect to its Condition. No information in this Agreement or in any
Exhibit or Schedule attached to this Agreement, contains or will contain any
untrue statement of a material fact or when considered together with all such
information delivered to the Purchasers omits to state any material fact. The
disclosures made in writing by USi in connection with this Agreement when read
in the light of the circumstances when made and taken as a whole, did not when
made contain any untrue statement of a material fact.
6.21. SMALL BUSINESS CONCERN: AFFILIATES.
USi, together with its "affiliates" (as that term is defined
in Title 13, United States Code of Federal Regulations, Section 121.103), if
any, is a "small business concern" within the meaning of 13 C.F.R. ss. 107.50
and which meets the size standards under 13 C.F.R. ss. 131.301(c). SCHEDULE 5.24
hereto sets forth a complete list of such SBA affiliates, with a brief statement
describing the basis of each affiliation. The information set forth in the SBA
FORM 480, FORM 652-D and PART A OF FORM 1031 regarding USi, all of which will be
provided prior to Closing, will be accurate and complete.
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6.22. QUALIFIED SMALL BUSINESS.
USi represents that, as of the date of this Agreement, it
qualifies as a "Qualified Small Business" as defined in Section 1202(d) of the
Code and covenants that so long as its shares are held by the Purchasers (or a
transferee in whose hands the shares are eligible to qualify as Qualified Small
Business Stock as defined in Section 1202(c) of the Code), it will use its
reasonable efforts to cause the shares to qualify as Qualified Small Business
Stock; provided that, notwithstanding the foregoing, USi shall not be obligated
to take any action, or refrain from any action, which in its good faith business
judgment is not in the best interests of USi or its stockholders.
Notwithstanding the foregoing, the Purchasers acknowledge and agree that it is
in the best interests of USi and its stockholders for USi at any time after the
Closing to pursue and obtain at least $50 million of additional financing for
the Company's working capital, operating assets, and/or investment activities.
ARTICLE 7.
REPRESENTATIONS AND
WARRANTIES OF THE PURCHASERS
Each Purchaser, severally and not jointly, hereby represents
and warrants to USi as of the date hereof as follows:
7.1. PARTNERSHIP OR CORPORATE EXISTENCE AND AUTHORITY.
As applicable, such Purchaser is either a limited partnership,
limited liability company, or corporation (a) duly organized, validly existing
and in good standing under the laws of the jurisdiction of its formation, (b)
has all requisite power and authority to own its assets and operate its
business, and (c) has all requisite power and authority to execute, deliver and
perform its obligations under each of the Transaction Documents to which it is
or will be a party.
7.2. ORGANIZATION; AUTHORIZATION; NO CONTRAVENTION.
The execution, delivery and performance by such Purchaser of
the Transaction Documents to which it is a party and the consummation of the
transactions contemplated thereby, including, without limitation, the
acquisition of the Preferred Shares: (a) is within such Purchaser's partnership,
limited liability company, or corporate power and authority, as applicable, and
has been duly authorized by all necessary action on the part of such Purchaser;
does not conflict with or contravene the terms of such Purchaser's charter or
by-laws, as applicable; and (c) will not violate, conflict with or result in any
material breach or contravention of (i) any Contractual Obligation of such
Purchaser, or (ii) the Requirements of Law or any order or decree applicable to
such Purchaser.
7.3. BINDING EFFECT.
This Agreement has been duly executed and delivered by such
Purchaser, and this Agreement constitutes the legal, valid and binding
obligation of such Purchaser, enforceable against it in accordance with its
terms, except as enforceability may be limited by applicable bankruptcy,
insolvency, or similar laws affecting the enforcement of creditors' rights
generally or by equitable principles relating to enforceability.
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7.4. PURCHASE FOR OWN ACCOUNT.
The Notes and Warrants, and the Conversion Shares and Warrant
Shares, are being or will be acquired by such Purchaser for its own account and
with no intention of distributing or reselling such securities or any part
thereof in any transaction that would be in violation of the securities laws of
the United States of America, or any state, without prejudice, however, to the
rights of such Purchaser at all times to sell or otherwise dispose of all or any
part of such stock under an effective registration statement under the
Securities Act, or under an exemption from such registration available under the
Securities Act, and subject, nevertheless, to the disposition of such
Purchaser's property being at all times within its control. If such Purchaser
should in the future decide to dispose of any of the Notes, Warrants, Conversion
Shares or Warrant Shares, such Purchaser understands and agrees that it may do
so only in compliance with the Securities Act and applicable state securities
laws, as then in effect. Such Purchaser agrees to the imprinting, so long as
required by law, of a legend on certificates representing all of the Notes,
Warrants, Conversion Shares or Warrant Shares, to the following effect:
"THE SECURITIES REPRESENTED BY THIS CERTIFICATE HAVE NOT BEEN
REGISTERED UNDER THE SECURITIES ACT OF 1933. AS AMENDED. OR THE SECURITIES LAWS
OF ANY STATE AND MAY NOT BE SOLD OR OTHERWISE DISPOSED OF EXCEPT PURSUANT TO AN
EFFECTIVE REGISTRATION STATEMENT UNDER SUCH ACT AND APPLICABLE STATE SECURITIES
LAWS OR PURSUANT TO AN APPLICABLE EXEMPTION TO THE REGISTRATION REQUIREMENTS OF
SUCH ACT OR SUCH LAWS. THE SECURITIES REPRESENTED BY THIS CERTIFICATE ARE
SUBJECT TO CERTAIN RESTRICTIONS SET FORTH IN A SHAREHOLDERS AGREEMENT DATED AS
OF MAY 28, 1998. A COPY OF SUCH AGREEMENT MAY BE OBTAINED FROM USI UPON REQUEST"
7.5. FINANCIAL CONDITION.
Such Purchaser's financial condition is such that it is able
to bear the risk of holding the Notes and Warrants for an indefinite period of
time and can bear the loss of its entire investment in the Notes and Warrants.
Such Purchaser has such knowledge and experience in financial and business
matters and in making high risk investments of this type that it is capable of
evaluating the merits and risks of the purchase of the Notes and Warrants.
7.6. RECEIPT OF INFORMATION.
Such Purchaser has been furnished access to the business
records of USi and such additional information and documents as such Purchaser
has requested and has been afforded an opportunity to ask questions of and
receive answers from representatives of USi concerning the terms and condition
of this Agreement, the purchase of the Notes and Warrants, the prospective
operations, market potential, capitalization, financial conditions, and
prospects of the business to be conducted by USi, and all other matters deemed
relevant by such Purchaser.
7.7. BROKER'S, FINDER'S OR SIMILAR FEES.
There are no brokerage commissions, finder's fees or similar
fees or commissions payable in connection with the transactions contemplated
hereby based on any agreement, arrangement or understanding with such Purchaser
or any action taken by such Purchaser.
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7.8. GOVERNMENTAL AUTHORIZATION: THIRD PARTY CONSENT.
No approval, consent, compliance, exemption, authorization, or
other action by, or notice to, or filing with, any Governmental Authority or any
other Person in respect of any Requirements of Law, and no lapse of a waiting
period under any Requirements of Law, is necessary or required in connection
with the execution, delivery or performance by such Purchaser (including,
without limitation, the acquisition of the Notes and Warrants) or enforcement
against such Purchaser of this Agreement or the Other Transaction Documents to
which it is a party or the transactions contemplated thereby.
7.9. LITIGATION.
No Actions are pending, or to the best knowledge of such
Purchaser, threatened relating to or affecting the transactions required to be
performed by such Purchaser under the Transaction Documents.
ARTICLE 8.
COVENANTS OF USI WITH RESPECT
TO THE PERIOD FOLLOWING THE CLOSING
Until all Notes and Warrants are no longer outstanding due to
conversion and exercise or otherwise and until the payment by USi of all other
amounts due to the Purchasers under the Transaction Documents, USi hereby
covenants and agrees with each Purchaser as follows:
8.1. RESERVATION OF SHARES.
USi shall at all times reserve and keep available out of its
authorized capital stock, solely for the purpose of issue or delivery upon the
exercise of the Warrants, the maximum number of Warrant Shares that may be
issuable or deliverable upon such exercise. When the financing contemplated by
the Notes is authorized, the Company will reserve the maximum number of
Conversion Shares that may be issuable or deliverable upon conversion of the
Notes. The Conversion Shares and the Warrant Shares shall, when issued or
delivered in accordance with the provisions of USI's Certificate of
Incorporation, be duly authorized, validly issued and fully paid and
non-assessable. USi shall issue such Conversion Shares and Warrant Shares in
accordance with the provisions of its Certificate of Incorporation and shall
otherwise comply with the terms thereof.
8.2. INFORMATION AND REPORTS FOR SBIC PURCHASERS.
USi will furnish to any Purchaser that is an SBIC such
financial data and other information relating to the business of USi as such
Purchaser reasonably may request from time to time. USi, upon reasonable
request, will cooperate fully with such Purchaser, its representatives and
counsel, in the preparation of any document or other material which may be
required by the SBA or any other governmental agency as a predicate to or result
of the transaction herein contemplated. In addition to the foregoing, no later
than ninety (90) days after the Closing, USi shall furnish to any Purchaser that
is an SBIC a certificate executed by the president of USi itemizing the use of
proceeds from the Loans, and USi shall cooperate with such Purchaser in
connection with a post-closing review. Within ninety (90) days after the end of
each fiscal year of USi, USi will, if required by law, submit to any Purchaser
that is an SBIC an economic impact report in form reasonably satisfactory to
such Purchaser.
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ARTICLE 9.
INDEMNIFICATION
9.1. INDEMNIFICATION.
(a) In addition to all other sums due hereunder or
provided for in this Agreement, USi (the "Selling Indemnifying Party") shall
defend, indemnify and hold harmless each Purchaser and its Affiliates and their
respective officers, directors, agents, employees, subsidiaries, partners and
assigns (each a "Purchasing Indemnified Party") to the fullest extent permitted
by law from and against any and all losses, costs, claims, damages, expenses
(including reasonable fees, disbursements and other charges of counsel, as
limited by Section 9.2 below) and other liabilities (collectively,
"Liabilities") incurred or suffered by any Purchasing Indemnified Party
resulting from or arising out of (i) any breach by any Selling Indemnifying
Party of any representation or warranty, covenant or agreement of the Selling
Indemnifying Party in this Agreement; provided, however, that no Selling
Indemnifying Party shall be liable under this Section 9.1 to any Purchasing
Indemnified Party to the extent that it is finally judicially determined that
such Liabilities resulted primarily from the material breach by such Purchasing
Indemnified Party of any representation, warranty, covenant or other agreement
of such Purchasing Indemnified Party contained in this Agreement; or (ii) any
material liability of USi on the Closing Date not disclosed in this Agreement.
(b) In addition to all other sums due hereunder or
provided for in this Agreement, each Purchaser (each a "Purchasing Indemnifying
Party"), severally and not jointly, shall defend, indemnify and hold harmless
USi and its Affiliates and its officers, directors, agents, employees,
subsidiaries, partners and assigns (each a "Selling Indemnified Party") to the
fullest extent permitted by law from and against any and all Liabilities
incurred or suffered by such Selling Indemnified Parties resulting from or
arising out of any breach of any representation, warranty, covenant or agreement
of such Purchasing Indemnifying Party in this Agreement; provided, however, that
no Purchasing Indemnifying Party shall be labile under this Section 9.1 to a
Selling Indemnified Party to the extent that it is finally judicially determined
that such Liabilities resulted primarily from the material breach by such
Selling Indemnified Party of any representation, warranty, covenant or other
agreement of such Selling Indemnified Party contained in this Agreement.
(c) If and to the extent that any indemnification
provided for in this Agreement is unenforceable for any reason, the Indemnifying
Parties (as defined below) obligated to indemnify any Indemnified Party (as
defined below) shall make the maximum contribution to the payment and
satisfaction of such indemnified liability which shall be permissible under
applicable laws. In connection with the obligation of the Indemnifying Parties
to indemnify for expenses as set forth herein, the Indemnifying Parties further
agree, upon presentation of appropriate invoices containing reasonable detail,
to reimburse each Indemnified Party for all such expenses (including reasonable
fees, disbursements and other charges of counsel, as limited by Section 9.2
below) as they are incurred by such Indemnified Party.
9.2. NOTIFICATION.
If any action or proceeding (including any governmental
investigation or inquiry) shall be brought or asserted against any party
entitled to indemnification pursuant to this Section 8 (an "Indemnified Party")
in respect of which indemnity may be sought from any party required to indemnify
such Indemnified Party (an "Indemnifying Party"), such Indemnified Party shall
promptly notify the Indemnifying Party in writing, and such Indemnifying Party
shall assume the defense thereof, including
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the employment of counsel selected by such Indemnifying Party and reasonably
satisfactory to such Indemnified Party and the payment of all expenses;
PROVIDED, HOWEVER, that any failure to so notify such Indemnifying Party shall
not impair obligations hereunder except if and only to the extent that such
failure results in actual prejudice to such Indemnifying Party. Such Indemnified
Party shall have the right to employ separate counsel in any such action and to
participate in the defense thereof, but the fees and expenses of such counsel
shall be the expense of such Indemnified Party unless (a) such Indemnifying
Party agreed to pay such fees and expenses or (b) such Indemnifying Party shall
have failed to assume the defense of such action or proceeding or has failed to
employ counsel reasonably satisfactory to such Indemnified Party in any such
action or proceeding or (c) the named parties to any such action or proceeding
(including any impleaded parties) include both such Indemnified Party and such
Indemnifying Party, and such Indemnified Party shall have been advised by
counsel that there may be one or more legal defenses available to such
Indemnified Party which are different from or additional to those available to
such Indemnifying Party (in which case, such Indemnifying Party shall employ
separate counsel at the expense of such Indemnifying Party, it being understood,
however, that such Indemnifying Party shall not, in connection with any one such
action or proceeding or separate but substantially similar or related actions or
proceedings in the same jurisdiction arising out of the same general allegations
or circumstances, be liable for the reasonable fees and expenses of more than
one separate firm of attorneys at any time for such Indemnified Party and any
other Indemnified Parties). No Indemnifying Party shall be liable for any
settlement of any such action or proceeding effected without its written consent
(which shall not be withheld unreasonably), but if settled with its written
consent, or if there be a final judgment for the plaintiff in any such action or
proceeding, such Indemnifying Parry agrees to indemnify and hold harmless such
Indemnified Party from and against any Liabilities by reason of such settlement
or judgment. No Indemnifying Party shall agree to any settlement of any third
party claim without the consent of the Indemnified Party, which shall not be
withheld if such settlement provides only for the payment of money to be paid by
the Indemnifying Party.
ARTICLE 10.
MISCELLANEOUS
10.1. SURVIVAL OF REPRESENTATIONS AND WARRANTIES.
All of the representations and warranties made herein shall
survive the Closing.
10.2. NOTICES.
All notices, demands and other communications provided for or
permitted hereunder shall be made in writing and shall be by registered or
certified first-class mail, return receipt requested, courier service or
personal delivery or via facsimile:
(a) if to Purchasers:
If to Blue Chip or Miami:
Blue Chip Venture Company, Ltd.
2000 PNC Center
201 East Fifth Street
Cincinnati, Ohio 45202
Attention: John H. Wyant
18
<PAGE>
If to Grotech or Grotech II:
Grotech Capital Group
9690 Deereco Road
Timonium, MD 21093
Attention: Frank A. Adams
If to Massey II:
Massey Burch Capital Corporation
310 25th Avenue North
Nashville, TN 37203
Attention: William F. Earthman
If to Venrock or Venrock II:
Venrock Associates
Room 5506
30 Rockefeller Plaza
New York, NY 10112
Attention: Ray A. Rothrock
If to USi Partners:
The Crisler Company
441 Vine Street
Suite 3900
Cincinnati, Ohio 45202
Attention: R. Dean Meiszer
with a copy to:
Taft, Stettinius & Hollister LLP
1800 Star Bank Center
425 Walnut Street
Cincinnati, Ohio 45202
Attention: Gerald S. Greenberg, Esq.
(b) if to USi:
USinternetworking, Inc.
175 Admiral Cochrane Drive
Suite 400
Annapolis, Maryland 21401
Attention: Christopher R. McCleary
with a copy to:
Latham & Watkins
1001 Pennsylvania Avenue, N.W.
Suite 1300
Washington, D.C. 20004-2505
Attention: James F. Rogers, Esq.
19
<PAGE>
All such notices and communications shall be deemed to have been duly given:
when delivered by hand, if personally delivered; when delivered by courier, if
delivered by commercial overnight courier service; if delivered by facsimile,
upon confirmation of such transmission; and five business days after being
deposited in the mail, postage prepaid, if mailed.
10.3. SUCCESSORS AND ASSIGNS.
This Agreement shall inure to the benefit of and be binding
upon the successors and permitted assigns of the parties hereto. This Agreement
may be assigned by any Purchaser to any permitted transferee of all or part of
the Notes, Warrants, Conversion Shares or Warrant Shares. USi may not assign any
of its rights under this Agreement without the written consent of the
Purchasers. Except as provided in this Section 10.3, no Person other than the
parties hereto and their successors and permitted assigns is intended to be a
beneficiary of any of the Transaction Documents.
10.4. AMENDMENT AND WAIVER.
(a) No failure or delay on the part of USi or the
Purchasers in exercising any right, power or remedy hereunder shall operate as a
waiver thereof; nor shall any single or partial exercise of any such right,
power or remedy preclude any other or further exercise thereof or the exercise
of any other right, power or remedy. The remedies provided for herein are
cumulative and are not exclusive of any remedies that may be available to USi or
the Purchasers at law, in equity or otherwise.
(b) Any amendment, supplement or modification of or to
any provision of this Agreement, any waiver of any provision of this Agreement,
and any consent to any departure by any party from the terms of any provision of
this Agreement, shall be effective (i) only if it is made or given in writing
and signed by USi (if applicable) and the Purchasers, and (ii) only in the
specific instance and for the specific purpose for which made or given. Except
where notice is specifically required by this Agreement, no notice to or demand
on any party in any case shall entitle any party hereto to any other or further
notice or demand in similar or other circumstances.
10.5. COUNTERPARTS.
This Agreement may be executed in any number of counterparts
and by the parties hereto in separate counterparts, each of which when so
executed shall be deemed to be an original and all of which taken together shall
constitute one and the same agreement.
10.6. HEADINGS.
The headings in this Agreement are for convenience of
reference only and shall not limit or otherwise affect the meaning hereof.
10.7. GOVERNING LAW.
This Agreement shall be governed by and construed in
accordance with the laws of the State of Maryland, without regard to the
principles of conflicts of law of such state.
10.8. JURISDICTION.
Each party to this Agreement hereby irrevocably agrees that
any legal action or proceeding arising out of or relating to this Agreement or
any agreements or transactions contemplated
20
<PAGE>
hereby may be brought in the courts of the State of Maryland or of the United
States of America for the District of Maryland and hereby expressly submits to
the personal jurisdiction and venue of such courts for the purposes thereof and
expressly waives any claim of improper venue and any claim that such courts are
an inconvenient forum. Each party hereby irrevocably consents to the service of
process of any of the aforementioned courts in any such suit, action or
proceeding by the mailing of copies thereof by registered or certified mail,
postage prepaid, to the address set forth in Section 10.2, such service to
become effective 10 days after such mailing.
10.9. SEVERABILITY.
If any one or more of the provisions contained herein, or the
application thereof in any circumstance, is held invalid, illegal or
unenforceable in any respect for any reason, the validity, legality and
enforceability of any such provision in every other respect and of the remaining
provisions hereof shall not be in any way impaired, unless the provisions held
invalid, illegal or unenforceable shall substantially impair the benefits of the
remaining provisions hereof.
10.10. RULES OF CONSTRUCTION.
Unless the context otherwise requires, "or" is not exclusive,
and references to sections or subsections refer to sections or subsections of
this Agreement.
10.11. ENTIRE AGREEMENT.
This Agreement, together with the exhibits and schedules
hereto and the other Transaction Documents, is intended by the parties as a
final expression of their agreement and intended to be a complete and exclusive
statement of the agreement and understanding of the parties hereto in respect of
the subject matter contained herein and therein. There are no restrictions,
promises, warranties or undertakings, other than those set forth or referred to
herein or therein. This Agreement, together with the exhibits hereto, and the
other Transaction Documents supersede all prior agreements and understandings
between the parties with respect to such subject matter.
10.12. PUBLICITY.
Except as may be required by applicable law, none of the
parties hereto shall issue a publicity release or announcement or otherwise make
any public disclosure concerning this Agreement or the transactions contemplated
hereby, without prior approval by the other parties hereto, provided that a
Purchaser may nonetheless communicate with its partners concerning such
transactions and investment in USi and may publish a "tombstone" in the
customary form with respect to its investment. If any announcement is required
by law to be made by any party hereto, prior to making such announcement such
party will deliver a draft of such announcement to the other parties and shall
give the other parties an opportunity to comment thereon.
10.13. FURTHER ASSURANCES.
Each of the parties shall execute such documents and perform
such further acts (including, without limitation, obtaining any consents,
exemptions, authorizations, or other actions by, or giving any notices to, or
making any filings with, any Governmental Authority or any other Person) as may
be reasonably required or desirable to carry out or to perform the provisions of
this Agreement.
21
<PAGE>
10.14. WAIVER OF JURY TRIAL.
EACH PARTY HERETO HEREBY WAIVES, TO THE FULLEST EXTENT
PERMITTED BY APPLICABLE LAW, ANY RIGHT IT MAY HAVE TO A TRIAL BY JURY IN ANY
LEGAL PROCEEDING DIRECTLY OR INDIRECTLY ARISING OUT OF OR RELATING TO THIS
AGREEMENT OR THE TRANSACTIONS CONTEMPLATED HEREBY (WHETHER BASED ON CONTRACT,
TORT OR ANY OTHER THEORY). EACH PARTY HERETO (A) CERTIFIES THAT NO
REPRESENTATIVE, AGENT OR ATTORNEY OF ANY OTHER PARTY HAS REPRESENTED, EXPRESSLY
OR OTHERWISE, THAT SUCH OTHER PARTY WOULD NOT, IN THE EVENT OF LITIGATION, SEEK
TO ENFORCE THE FOREGOING WAIVER AND (B) ACKNOWLEDGES THAT IT AND THE OTHER
PARTIES HERETO HAVE BEEN INDUCED TO ENTER INTO THIS AGREEMENT BY, AMONG OTHER
THINGS, THE MUTUAL WAIVERS AND CERTIFICATIONS IN THIS SECTION.
IN WITNESS WHEREOF, the parties hereto have caused this
Agreement to be executed and delivered by their respective officers hereunto
duly authorized as of the date first above written.
USINTERNETWORKING, INC.
By:
-----------------------------------------
Name:
---------------------------------------
Title:
--------------------------------------
BLUECHIP CAPITAL FUND II LIMITED PARTNERSHIP
By: BLUE CHIP VENTURE COMPANY, LTD.
Its General Partner
By:
-----------------------------------------
John H. Wyant
Manager
22
<PAGE>
MIAMI VALLEY VENTURE FUND L.P.
By: BLUE CHIP VENTURE COMPANY OF DAYTON, LTD.
Its Special Limited Partner
By:
-----------------------------------------
John H. Wyant
Manager
GROTECH PARTNERS IV L.P.
By: GROTECH CAPITAL GROUP IV, LLC
Its General Partner
By:
-----------------------------------------
Name:
---------------------------------------
Title:
--------------------------------------
GROTECH PARTNERS V L.P.
By: GROTECH CAPITAL GROUP V, LLC
Its General Partner
By:
-----------------------------------------
Name:
---------------------------------------
Title:
--------------------------------------
SOUTHERN VENTURE FUND SBIC, L.P.
By: SVF SBIC, L.P.
Its General Partner
By:
-----------------------------------------
Partner
23
<PAGE>
By:
-----------------------------------------
Partner
SOUTHERN VENTURE FUND, II, L.P.
By:
-----------------------------------------
Partner
VENROCK ASSOCIATES
By:
-----------------------------------------
Partner
VENROCK ASSOCIATES II, L.P.
By:
-----------------------------------------
General Partner
USI PARTNERS, LTD.
By:
-----------------------------------------
24
<PAGE>
SCHEDULE 1
<TABLE>
<CAPTION>
- ----------------------------------------------------- ----------------------------------- ----------------------------
PURCHASER AMOUNT OF NOTES WARRANT SHARES
- ----------------------------------------------------- ----------------------------------- ----------------------------
<S> <C> <C>
Blue Chip $1,700,000 1,457,143
- ----------------------------------------------------- ----------------------------------- ----------------------------
Miami 300,000 257,143
- ----------------------------------------------------- ----------------------------------- ----------------------------
Grotech 1,500,000 1,285,714
- ----------------------------------------------------- ----------------------------------- ----------------------------
Grotech II 1,500,000 1,285,714
- ----------------------------------------------------- ----------------------------------- ----------------------------
Massey II 150,000 128,571
- ----------------------------------------------------- ----------------------------------- ----------------------------
Venrock 553,500 474,429
- ----------------------------------------------------- ----------------------------------- ----------------------------
Venrock II 676,500 579,857
- ----------------------------------------------------- ----------------------------------- ----------------------------
USi Partners 140,000 120,000
------------ -----------
- ----------------------------------------------------- ----------------------------------- ----------------------------
Total $6,520,000 5,588,571
------------ -----------
------------ -----------
- ----------------------------------------------------- ----------------------------------- ----------------------------
</TABLE>
25
<PAGE>
<PAGE>
Exhibit 10.24
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
NOTE PURCHASE AGREEMENT
BY
AND
AMONG
USINTERNETWORKING, INC.
GROTECH PARTNERS V L.P.
SOUTHERN VENTURE FUND II, L.P.
VENROCK ASSOCIATES
VENROCK ASSOCIATES II, L.P.
SOUTHEASTERN TECHNOLOGY FUND, L.P.
AND
SIEBEL SYSTEMS, INC.
Dated as of December 16, 1998
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
<PAGE>
TABLE OF CONTENTS
<TABLE>
<CAPTION>
Page
<S> <C>
ARTICLE I. DEFINITIONS............................................................................................1
1.1. Definitions.........................................................................................1
1.2. Accounting Terms: Financial Statements..............................................................4
1.3. Knowledge Standard..................................................................................4
1.4. Other Defined Terms.................................................................................4
ARTICLE II. AUTHORIZATION OF NOTES; PURCHASE AND SALE OF NOTES; MAKING OF LOANS...................................5
2.1. Notes...............................................................................................5
2.2. Purchase and Sale of Notes..........................................................................5
2.3. Closing.............................................................................................5
2.4. The Loans...........................................................................................5
2.5. Fees and Expenses...................................................................................6
ARTICLE III. CONDITIONS TO THE OBLIGATION OF THE PURCHASERS TO PURCHASE THE NOTES.................................6
3.1. Representations and Warranties......................................................................6
3.2. Compliance with Terms and Conditions of this Agreement..............................................6
3.3. Delivery of Notes...................................................................................6
3.4. Closing Certificates................................................................................6
3.5. Secretary's Certificates............................................................................6
3.6. Documents...........................................................................................7
3.7. Purchase Permitted By Applicable Laws...............................................................7
3.8. Consents and Approvals..............................................................................7
3.9. No Material Judgment or Order.......................................................................7
3.10. Waiver of Rights...................................................................................7
ARTICLE IV. CONDITIONS TO THE OBLIGATION OF USI TO CLOSE..........................................................7
4.1. Representations and Warranties......................................................................8
4.2. Compliance with this Agreement......................................................................8
4.3. Issuance Permitted by Applicable Laws...............................................................8
4.4. Loans...............................................................................................8
4.5. Consents and Approvals..............................................................................8
4.6. No Material Judgment or Order.......................................................................8
ARTICLE V. REPRESENTATIONS AND WARRANTIES OF USI..................................................................8
5.1. Corporate Existence and Authority...................................................................9
5.2. Corporate Authorization; No Contravention...........................................................9
</TABLE>
2
<PAGE>
<TABLE>
<S> <C>
5.3. Governmental Authorization; Third Party Consents....................................................9
5.4. Binding Effect......................................................................................9
5.5. Capitalization......................................................................................9
5.6. Private Offering...................................................................................10
5.7. Litigation.........................................................................................10
5.8. Financial Statements...............................................................................10
5.9. Tax Matters........................................................................................11
5.10. Investment Company/Government Regulations.........................................................11
5.11. Broker's Finder's or Similar Fees.................................................................11
5.12. Labor Relations and Employee Matters..............................................................11
5.13. Employee Benefits Matters.........................................................................11
5.14. Outstanding Borrowings............................................................................12
5.15. Insurance Schedule................................................................................12
5.16. Solvency..........................................................................................12
5.17. No Other Agreements to Sell Assets or Capital Stock...............................................12
5.18. Compliance with Law...............................................................................12
5.19. Disclosure........................................................................................12
ARTICLE VI. REPRESENTATIONS AND WARRANTIES OF THE PURCHASERS.....................................................13
6.1. Partnership or Corporate Existence and Authority...................................................13
6.2. Organization; Authorization; No Contravention......................................................13
6.3. Binding Effect.....................................................................................13
6.4. Purchase for Own Account...........................................................................13
6.5. Financial Condition................................................................................14
6.6. Receipt of Information.............................................................................14
6.7. Broker's, Finder's or Similar Fees.................................................................14
6.8. Governmental Authorization: Third Party Consent....................................................14
6.9. Litigation.........................................................................................15
ARTICLE VII. COVENANTS OF USI WITH RESPECT TO THE PERIOD FOLLOWING THE CLOSING...................................15
7.1. Reservation of Shares..............................................................................15
ARTICLE VIII. INDEMNIFICATION....................................................................................15
8.1. Indemnification....................................................................................15
8.2. Notification.......................................................................................16
ARTICLE IX. MISCELLANEOUS........................................................................................17
9.1. Survival of Representations and Warranties.........................................................17
9.2. Notices............................................................................................17
9.3. Successors and Assigns.............................................................................19
9.4. Amendment and Waiver...............................................................................19
9.5. Counterparts.......................................................................................19
9.6. Headings...........................................................................................19
</TABLE>
3
<PAGE>
<TABLE>
<S> <C>
9.7. Governing Law......................................................................................19
9.8. Severability.......................................................................................19
9.9. Rules of Construction..............................................................................20
9.10. Entire Agreement..................................................................................20
9.11. Further Assurances................................................................................20
9.12. Publicity.........................................................................................20
9.13. Jurisdiction......................................................................................20
9.14. Waiver of Jury Trial..............................................................................21
</TABLE>
4
<PAGE>
NOTE PURCHASE AGREEMENT
THIS NOTE PURCHASE AGREEMENT (the "Agreement") is entered into
as of the 16th day of December, 1998, by and among USinternetworking, Inc., a
Delaware corporation ("USi"), Grotech Partners V L.P., a Delaware limited
partnership ("Grotech II"), Southern Venture Fund II, L.P., a Delaware limited
partnership ("Massey II"), Venrock Associates, a New York limited partnership
("Venrock"), Venrock Associates II, L.P., a New York limited partnership
("Venrock II"), Southeastern Technology Fund, L.P., a Delaware limited
partnership ("Southeastern"), and Siebel Systems, Inc., a Delaware corporation
("Siebel") (Grotech II, Massey II, Venrock, Venrock II, Southeastern and Siebel)
are referred to collectively herein as the "Purchasers" and individually as a
"Purchaser").
RECITALS:
A. USi and the purchasers desire to complete an equity
financing on substantially the terms set forth in the term sheet attached hereto
as Exhibit A (the "Financing")
B. In order to provide USi with necessary working capital
prior to the consummation of the Financing, upon the terms and subject to the
conditions set forth in this Agreement, USi proposes to issue and sell its
Convertible Promissory Notes (the "Notes") to the Purchasers and to obtain from
the Purchasers the loans as contemplated thereby.
C. The Purchasers desire to purchase from USi the Notes and to
make the Loans as contemplated thereby, as set forth on Schedule 1 hereto.
AGREEMENT
NOW, THEREFORE, in consideration of the mutual covenants and
agreements set forth herein and for good and valuable consideration, the receipt
and adequacy of which is hereby acknowledged, the parties hereto hereby agree as
follows:
ARTICLE I.
DEFINITIONS
1.1. DEFINITIONS.
As used in this Agreement, and unless the context requires a
different meaning, the following terms have the meanings indicated:
"AFFILIATE" means, with respect to any specified Person, any
Person that, directly or indirectly, controls, is controlled by, or is under
common control with, such specified Person, whether by contract, through one or
more intermediaries, or otherwise.
"BUSINESS" means the business of USi as conducted and planned
to be conducted on the date hereof.
"BUSINESS DAY" shall mean a day other than a Saturday or
Sunday or any federal
5
<PAGE>
holiday.
"COMMISSION" means the Securities and Exchange Commission or
any similar agency then having jurisdiction to enforce the Securities Act (as
defined below).
"CONDITION OF USI" means the assets, business, properties,
operations, financial condition or prospects of USi.
"CONTRACTUAL OBLIGATION" means any contract or agreement by
which a person is bound or to which its assets are subject.
"CONVERSION SHARES" has the meaning assigned thereto in the
Notes.
"EMPLOYEE PLANS" means all benefits arrangements, pensions
plans or welfare plans adopted by USi for its employees.
"EMPLOYEE STOCK OPTION PLAN" means an employee stock option
plan adopted by the Compensation Committee of the Board of Directors of USi
providing for the issuance to certain employees of USi of options to purchase a
certain number of shares of USi Common Stock at a certain exercise price per
share; the total number of shares of USi Common Stock which may be issued under
such plan shall not exceed 6.5% of the total number of outstanding shares of
common stock calculated on a fully diluted basis, not including the options and
shares issuable or issued on exercise of options pursuant to the Employee Stock
Option Plan.
"EXCHANGE ACT" means the Securities Exchange Act of 1934, as
amended, and the rules and regulations of the Commission thereunder.
"GAAP" means United States generally accepted accounting
principles, in effect from time to time, consistently applied.
"GOVERNMENTAL AUTHORITY" means the government of any nation,
state, city, locality or other political subdivision of any thereof, any entity
exercising executive, legislative, judicial, regulatory or administrative
functions of or pertaining to government, and any corporation or other entity
owned or controlled, through stock or capital ownership or otherwise, by any of
the foregoing.
"INDEBTEDNESS" means, as to any Person: (a) all obligations,
whether or not contingent, of such Person for borrowed money (including, without
limitation, reimbursement and all other obligations with respect to surety
bonds, letters of credit and bankers' acceptances, whether or not matured), (1))
all obligations of such Person evidenced by notes, bonds, debentures or similar
instruments, (c) all obligations of such Person representing the balance of
deferred purchase price of property or services, except trade accounts payable
and accrued commercial or trade liabilities arising in the ordinary course of
business, (d) all interest rate and currency swaps, caps, collars and similar
agreements or hedging devices under which payments are obligated to be made by
such Person, whether periodically or upon the happening of a contingency, (e)
all indebtedness created or arising under any conditional sale or other title
6
<PAGE>
retention agreement with respect to property acquired by such Person (even
though the rights and remedies of the seller or lender under such agreement in
the event of default are limited to repossession or sale of such property), (f)
all obligations of such Person under leases which have been or should be, in
accordance with GAAP, recorded as capital leases, (g) all indebtedness secured
by any Lien (other than Liens in favor of lessors under leases other than leases
included in clause (f)) on any property or asset owned or held by that Person
regardless of whether the indebtedness secured thereby shall have been assumed
by that Person or is non-recourse to the credit of that Person, and (h) all
Indebtedness of any other Person referred to in clauses (a) through (f) above,
guaranteed, directly or indirectly, by that Person.
"LIEN" means any mortgage, deed of trust, pledge,
hypothecation, assignment, encumbrance, lien (statutory or other) or other
security interest of any kind or nature whatsoever (excluding preferred stock or
equity related preferences) including, without limitation, those created by,
arising under or evidenced by any conditional sale or other title retention
agreement, the interest of a lessor under a capital lease obligation, or any
financing lease having substantially the same economic effect as any of the
foregoing.
"OUTSTANDING BORROWINGS" means as to any Person all
Indebtedness of such Person for borrowed money (including, without limitation,
reimbursement and all other obligations with respect to surety bonds, letters of
credit and bankers' acceptances, whether or not matured).
"PERSON" means any individual, firm, corporation, partnership,
trust, incorporated or unincorporated association, joint venture, joint stock
company, Governmental Authority or other entity of any kind, and shall include
any successor (by merger or otherwise) of such entity.
"REQUIREMENTS OF LAW" means, as to any Person, the provisions
of the Certificate of Incorporation and By-laws or other organizational or
governing documents of such Person, and any law, treaty, rule, regulation,
right, privilege, qualification, license or franchise, order, judgment, or
determination of an arbitrator or a court or other Governmental Authority, in
each case, applicable or binding upon such Person or any of its property or to
which such Person or any of its property is subject or applicable to any or all
of the transactions contemplated by or referred to in the Transaction Documents.
"SECURITIES ACT" means the Securities Act of 1933, as amended,
and the rules and regulations of the Commission thereunder.
"SHAREHOLDERS AGREEMENT" means the Shareholders' Agreement
between USi and its shareholders dated as of May 28, 1998, as amended.
"TRADING DAY" means any day on which any market in which the
applicable security is then traded and in which a Quoted Price may be
ascertained is open for business.
"TRANSACTION DOCUMENTS" means collectively, this Agreement and
the Notes.
"TRANSACTION EXPENSES" means any and all reasonable
out-of-pocket (i) legal
7
<PAGE>
expenses incurred by the Purchasers in connection with the negotiation and
preparation of the Transaction Documents, the consummation of the transactions
contemplated thereby and preparation for any of the foregoing, including,
without limitation, travel expenses, reasonable fees, charges and disbursements
of counsel and any similar or related legal costs and legal expenses, provided,
however, that USi shall pay only for one primary counsel of Purchasers and for
the reasonable attorney fees of the individual counsel of each Purchaser
incurred by such counsel in reviewing the Transaction Documents, but only to the
extent that the use of such individual counsel is required by such Purchaser's
institutional policies and procedures; and (ii) other expenses incurred by the
Purchasers in connection with the negotiation, preparation and consummation of
the Transaction Documents and the transactions contemplated thereby.
"USi STOCK" means Common Stock, par value $.001 per share, of
USi, or any other capital stock of USi into which such stock is reclassified or
reconstituted.
1.2. ACCOUNTING TERMS: FINANCIAL STATEMENTS.
All accounting terms used herein not expressly defined in this
Agreement shall have the respective meanings given to them in accordance with
sound accounting practice. The term "sound accounting practice" shall mean such
accounting practice as, in the opinion of the independent certified public
accountants regularly retained by USi conforms at the time to GAAP applied on a
consistent basis except for changes with which such accountants concur.
1.3. KNOWLEDGE STANDARD.
When used herein, the phrase "to the knowledge of" any Person,
"to the best knowledge of" any Person or any similar phrase shall mean, (i) with
respect to any individual, the actual knowledge of such Person, (ii) with
respect to any corporation, the actual knowledge of the officers and directors
of such corporation and the knowledge of such facts that such persons should
have in the exercise of their duties after reasonable inquiry, and (iii) with
respect to a partnership, the actual knowledge of the officers and directors of
the general partner of such partnership and the knowledge of such facts that
such persons should have in the exercise of their duties after reasonable
inquiry.
1.4. OTHER DEFINED TERMS.
The following terms shall have the meanings specified in the
Sections set forth below:
<TABLE>
<CAPTION>
Term Section
<S> <C>
Actions 5.7
Closing Date 2.2
Closing 2.3
Dispute 9.8
</TABLE>
8
<PAGE>
<TABLE>
<S> <C>
Financing Recital A
Indemnified Party 8.2
Indemnifying Party 8.2
Liabilities 8.2
Notes Recital B
Purchasing Indemnified Party 8.1(a)
Purchasing Indemnifying Party 8.1(b)
Selling Indemnified Party 8.1(b)
Selling Indemnifying Party 8.1(a)
</TABLE>
ARTICLE II.
AUTHORIZATION OF NOTES;
PURCHASE AND SALE OF NOTES;
MAKING OF LOANS
2.1. NOTES.
On or before the Closing Date, the Board of Directors of USi
will authorize the issuance and sale of the Notes as contemplated hereby,
including authorizing the issuance of Conversion Shares upon conversion of the
Notes.
2.2. PURCHASE AND SALE OF NOTES.
Upon the terms and subject to the conditions herein contained,
on December 16, 1998 or such other day as the parties may agree (the "Closing
Date"), USi shall issue to each of the Purchasers, and each Purchaser shall
acquire from USi, a note (a "Note" and, collectively, the "Notes") in the form
of Exhibit B hereto and in the principal amounts shown on Schedule 1 hereto.
2.3. CLOSING.
The closing of the sale to and purchase by the Purchasers of
the Notes (the "Closing") shall occur at 11 o'clock A.M., local time on the
Closing Date at the offices of USi, One USi Plaza, Annapolis, Maryland. At the
Closing, USi shall deliver to each Purchaser the Note being purchased by such
Purchaser, free and clear of any Liens of any nature whatsoever, registered in
such Purchaser's name.
2.4. THE LOANS.
9
<PAGE>
Subject to the terms and conditions herein contained, at the
Closing each of the Purchasers shall make a loan to USi (by wire transfer of
immediately available funds) in the amount set forth opposite its name on
Schedule 1. The obligation of the Purchasers to purchase the Notes and to make
the loans shall be several and not joint or joint and several.
2.5. FEES AND EXPENSES.
Concurrently with or as promptly as practicable after the
Closing, USi shall reimburse the Purchasers for the Transaction Expenses, which
payment shall be made by wire transfer of immediately available funds to an
account or accounts designated by the Purchasers.
ARTICLE III.
CONDITIONS TO THE OBLIGATION OF THE
PURCHASERS TO PURCHASE THE NOTES
The obligation of each Purchaser to purchase its Note, to make
its loan and to perform any of its obligations hereunder (unless otherwise
specified) shall be subject to the satisfaction of the following conditions on
or before the Closing Date:
3.1. REPRESENTATIONS AND WARRANTIES.
The representations and warranties of USi contained in Section
5 hereof shall be true and correct in all material respects at and as of that
date, as if made at and as of such date.
3.2. COMPLIANCE WITH TERMS AND CONDITIONS OF THIS
AGREEMENT.
USi shall have performed and complied with all of the
agreements and conditions set forth herein that are required to be performed or
complied with by USi on or before that date.
3.3. DELIVERY OF NOTES.
USi shall have delivered to each Purchaser the Note to be
received by such Purchaser.
3.4. CLOSING CERTIFICATES.
USi shall have delivered to each Purchaser a certificate
executed by an authorized officer of USi certifying that the representations and
warranties of USi are true and correct in all material respects on and as of
that date, and that the conditions set forth in this Section 3 to be satisfied
by USi have been satisfied on and as of that date.
3.5. SECRETARY'S CERTIFICATES.
Each Purchaser shall have received a certificate from USi,
dated as of that date and signed by the Secretary or an Assistant Secretary of
USi, certifying that the attached copies of the Certificate of Incorporation and
By-laws of USi and resolutions of the Board of Directors of USi approving the
Transaction Documents and the transactions referred to therein, are all true,
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complete and correct and remain unamended and in full force and effect.
3.6. DOCUMENTS.
Each Purchaser or one Purchaser on behalf of all Purchasers
shall have received true, complete and correct copies of such documents and such
other information as it may have reasonably requested in connection with or
relating to the sale of the Notes and the transactions required to be performed
by the Transaction Documents.
3.7. PURCHASE PERMITTED BY APPLICABLE LAWS.
The acquisition of and payment for the Notes to be acquired by
the Purchasers hereunder and the consummation of this Agreement (a) shall not be
prohibited by any Requirements of Law, and (b) shall not conflict with or be
prohibited by any Contractual Obligation of USi.
3.8. CONSENTS AND APPROVALS.
All requisite consents, exemptions, authorizations, or other
actions by, or notices to, or filings with, Governmental Authorities and other
Persons in respect of all Requirements of Law and with respect to Contractual
Obligations of USi necessary or required in connection with the execution,
delivery or performance by USi shall have been obtained and be in full force and
effect and all waiting periods shall have lapsed without extension or the
imposition of any conditions or restrictions.
3.9. NO MATERIAL JUDGMENT OR ORDER.
There shall not be any judgment or order of a court of
competent jurisdiction or any ruling of any Governmental Authority or any
condition imposed under any Requirement of Law which, in the reasonable judgment
of the Purchaser, would (i) prohibit the purchase of the Notes hereunder, (ii)
subject the Purchaser to any penalty if the Notes were to be purchased
hereunder, or (iii) question the validity or legality of the transactions
required to be performed under this Agreement.
3.10. WAIVER OF RIGHTS.
All antidilutive and pre-emptive rights of shareholders of USi
with respect to the issuance of the Notes and the Conversion Shares shall have
been waived.
ARTICLE IV.
CONDITIONS TO THE OBLIGATION OF
USI TO CLOSE
The obligation of USi to issue and sell the Notes and the
other obligations of USi hereunder shall be subject to the satisfaction of the
following conditions on or before the Closing
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Date:
4.1. REPRESENTATIONS AND WARRANTIES.
The representations and warranties of the Purchasers contained
in Section 6 hereof shall be true and correct in all material respects at and as
of the Closing Date as if made at and as of such date.
4.2. COMPLIANCE WITH THIS AGREEMENT.
The Purchasers shall have performed and complied with all of
the agreements and conditions set forth herein that are required to be performed
or complied with by the Purchasers on or before the Closing Date.
4.3. ISSUANCE PERMITTED BY APPLICABLE LAWS.
The issuance of the Notes hereunder and the consummation of
this Agreement (a) shall not be prohibited by any Requirements of Law, and (b)
shall not conflict with or be prohibited by any Contractual Obligations of the
Purchaser.
4.4. LOANS.
The Purchasers shall have made the loans as set forth in
Section 2.4 hereof.
4.5. CONSENTS AND APPROVALS.
All consents, exemptions, authorizations, or other actions by,
or notices to, or filings with, Governmental Authorities and other Persons in
respect of all Requirements of Law and with respect to those material
Contractual Obligations of the Purchasers necessary or required in connection
with the execution, delivery or performance by each Purchaser shall have been
obtained and be in full force and effect and all waiting periods shall have
lapsed without extension or imposition of any conditions or restrictions.
4.6. NO MATERIAL JUDGMENT OR ORDER.
There shall not be any judgment or order of a court of
competent jurisdiction or any ruling of any Governmental Authority or any
condition imposed under any Requirements of Law which, in the reasonable
judgment of USi would (i) prohibit the sale of the Notes or the consummation of
the other transactions hereunder, (ii) subject USi to any penalty if the Notes
were to be sold hereunder or (iii) question the validity or legality of the
transactions required to be performed under this Agreement.
ARTICLE V.
REPRESENTATIONS AND WARRANTIES
OF USI
USi represents and warrants to, and covenants with, the
Purchasers as of the date
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hereof and as of the Closing Date as follows:
5.1. CORPORATE EXISTENCE AND AUTHORITY.
USi was incorporated on January 14, 1998 and (a) is a
corporation duly organized, validly existing and in good standing under the laws
of the State of Delaware, (b) has all requisite corporate power and authority to
own and operate its property, to lease the property it operates as lessee and to
conduct the business in which it is currently, or is currently proposed to be,
engaged, and (c) has the corporate power and authority to execute, deliver and
perform its obligations under each Transaction Agreement to which it is or will
be a party.
5.2. CORPORATE AUTHORIZATION; NO CONTRAVENTION.
The execution, delivery and performance by USi of each of the
Transaction Documents and the consummation of the transactions contemplated
thereby, including, without limitation, the issuance of the Notes by USi, (a) on
or before the Closing Date, shall have been duly authorized by all necessary
corporate action, including the approval of the holders of two-thirds of the
outstanding Series A Convertible Preferred Stock of USi, do not conflict with or
contravene the terms of the Certificate or the Bylaws of USi, or any amendment
thereof; and (b) will not violate, conflict with or result in any material
breach or contravention of (i) any Contractual Obligation of USi or (ii) any
Requirements of Law applicable to USi.
5.3. GOVERNMENTAL AUTHORIZATION; THIRD PARTY CONSENTS.
No approval, consent, compliance, exemption, authorization, or
other action by, or notice to, or filing with, any Governmental Authority or any
other Person in respect of any applicable Requirements of Law in effect on the
date hereof and no lapse of a waiting period under any applicable Requirements
of Law in effect on the date hereof, is necessary or required in connection with
the execution and delivery of the Transaction Documents by USi or the
performance by USi or enforcement against USi of any material obligation by USi
under the Transaction Documents or the transactions to be performed hereunder.
5.4. BINDING EFFECT.
This Agreement has been duly executed and delivered by USi and
constitutes its legal, valid and binding obligation enforceable against it in
accordance with its terms, except as enforceability may be limited by applicable
bankruptcy, insolvency or other similar laws affecting the enforcement of
creditors' rights generally and by general principles of equity relating to
enforceability.
5.5. CAPITALIZATION.
(a) On the Closing Date, the authorized capital stock
of USi shall consist of three hundred million (300,000,000) shares of Common
Stock and two hundred
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thousand (200,000) shares of preferred stock. Of the authorized shares of USi
Common Stock, immediately after the Closing, (i) ninety-nine million
(99,000,000) shares of Common Stock will be reserved for issuance upon
conversion of shares of the Series A Preferred Stock, (ii) six million, six
hundred thousand (6,600,000) shares of USi Common Stock will be reserved for
issuance pursuant to the Employee Stock Option Plan; (iii) up to nine million,
two hundred ninety thousand, nine hundred fifty seven (9,290,957) shares of USi
Common Stock will be reserved for issuance upon exercise of Common Stock
purchase warrants (the "Warrants"), and (iv) twenty million (20,000,000) shares
of Common Stock will be issued and outstanding. As of the Closing Date, all
outstanding shares of capital stock of USi will be duly authorized and validly
issued, fully paid, nonassessable and free and clear of any Liens, preferential
rights, priorities, claims, options, charges or other encumbrances or
restrictions other than those created by the Certificate of Incorporation and
the Bylaws of USi and the Shareholders' Agreement.
(b) SCHEDULE 5.5 sets forth the name of each holder
of the issued and outstanding capital stock of USi, the number of shares of such
capital stock held beneficially or of record by each such holder, the name of
each Person holding any options or other rights to purchase any capital stock of
USi (except as may be permitted under the Shareholders Agreement), the number,
class and series of shares of capital stock subject to each such option or right
and the exercise price of each such option or right. Except as set forth on
SCHEDULE 5.5, there are no outstanding securities convertible into or
exchangeable for capital stock of USi or options, warrants or other rights to
purchase or subscribe to capital stock of USi or contracts, commitments,
agreements, understandings or arrangements of any kind to which USi is a party
relating to the issuance of any capital stock of USi, any such convertible or
exchangeable securities or any such options, warrants or rights.
5.6. PRIVATE OFFERING.
No form of general solicitation or general advertising was
used by USi or its representatives in connection with the offer or sale of the
Notes. No registration of the Notes pursuant to the provisions of the Securities
Act or any state securities or "blue sky" laws will be required by the offer,
sale or issuance of the Notes pursuant to this Agreement. USi agrees that
neither it, nor anyone authorized to act on its behalf will offer or sell the
Notes or any other security so as to require the registration of the Notes
pursuant to the provisions of the Securities Act or any state securities or
"blue sky" laws, unless such Notes are so registered.
5.7. LITIGATION.
USi has not received any notice of any governmental charge,
complaint or action or court order, writ, injunction, judgment or decree
outstanding or any claim, suit, litigation, legal proceeding, (collectively,
"Actions") which if adversely determined would have a material adverse effect on
(i) the Condition of USi (ii) the transactions required to be performed by USi
under this Agreement or the Transaction Documents and, to USi's knowledge, there
is no valid basis therefor, and no Action is threatened against USi.
5.8. FINANCIAL STATEMENTS.
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USi has delivered to the Purchasers its audited financial
statements as of June 30, 1998 and unaudited financials as of October 31, 1998
and for the period then ended. Such financial statements are true and complete
in all material respects and fairly present the financial condition and results
of operations of USi as of October 31, 1998 and for the period then ended in
accordance with generally accepted accounting principles. Since October 31, 1998
there has been no material adverse change in the business, financial condition,
operating results or prospects of USi. All of USi's material liabilities are
reflected in such financial statements or on SCHEDULE 5.8 attached hereto, other
than liabilities incurred in the ordinary course of business since October 31,
1998.
5.9. TAX MATTERS.
USi has duly filed all tax reports and returns required to be
filed by it, including all federal, state, local and foreign tax returns and
reports and paid all taxes due with respect thereto.
5.10. INVESTMENT COMPANY/GOVERNMENT REGULATIONS.
Immediately following the Closing, after giving effect to the
transactions contemplated by the Transaction Documents, neither USi nor any
Person controlling, controlled by or under common control with USi will be an
"investment company" within the meaning of the Investment Company Act of 1940,
as amended. USi is not subject to regulation under the Public Utility Holding
Company Act of 1935, as amended, the Federal Power Act, or any federal or state
statute or regulation limiting its ability to incur Indebtedness.
5.11. BROKER'S FINDER'S OR SIMILAR FEES.
There are no brokerage commissions, finder's fees or similar
fees or commissions payable in connection with the transactions contemplated
hereby based on any agreement, arrangement or understanding with USi or any
officer, director, shareholder, or Affiliate of USi or any action taken by any
such person.
5.12. LABOR RELATIONS AND EMPLOYEE MATTERS.
(a) USi is not and has not engaged in any unfair
labor practice.
(b) Except as set forth on SCHEDULE 5.12, USi is not
a party to any employment agreement (other than "at will" employment
relationships), collective bargaining agreement or covenant not to compete.
(c) No complaint under any statute or regulation
relating to employment has been filed against USi.
5.13. EMPLOYEE BENEFITS MATTERS.
Except as set forth on SCHEDULE 5.13, USi has not adopted or
implemented any Employee Plan.
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5.14. OUTSTANDING BORROWINGS.
SCHEDULE 5.14 lists the amount of all Outstanding Borrowings
of USi as of the date hereof and the name of each lender thereof.
5.15. INSURANCE SCHEDULE.
USi maintains insurance policies with reputable insurers
covering such risks and in such amounts as are customary for similar businesses.
5.16. SOLVENCY.
USi has not (i) made a general assignment for the benefit of
its creditors, (ii) filed any voluntary petition in bankruptcy or suffered the
filing of any involuntary petition in bankruptcy by its creditors, (iii)
suffered the appointment of a receiver to take possession of all or
substantially all of its assets or properties, (iv) suffered the attachment or
other judicial seizure of all or substantially all of its assets or (v) admitted
in writing its inability to pay its debts as they come due.
5.17. NO OTHER AGREEMENTS TO SELL ASSETS OR CAPITAL STOCK.
Other than as otherwise set forth in this Agreement, USi has
no legal obligation, absolute or contingent, other than obligations under the
Transaction Documents, to any person or firm to (i) sell any of its capital
stock or, outside of the ordinary course of business, assets, or effect any
merger, consolidation or other reorganization or (ii) enter into any agreement
with respect to any of the foregoing.
5.18. COMPLIANCE WITH LAW.
In its conduct of its business and affairs since its
formation, USi has complied in all material respects with all applicable
Requirements of Law.
5.19. DISCLOSURE.
USi has, to the best of its knowledge, fully responded to all
requests for information, and each of USi has accurately answered all questions
from the Purchasers concerning the Condition of USi, and has not knowingly
withheld any facts relating thereto which it reasonably believes to be material
with respect to its Condition. No information in this Agreement or in any
Exhibit or Schedule attached to this Agreement, contains or will contain any
untrue statement of a material fact or when considered together with all such
information delivered to the Purchasers omits to state any material fact. The
disclosures made in writing by USi in connection with this Agreement when read
in the light of the circumstances when made and taken as a whole, did not when
made contain any untrue statement of a material fact.
ARTICLE VI.
REPRESENTATIONS AND
WARRANTIES OF THE PURCHASERS
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Each Purchaser, severally and not jointly, hereby represents
and warrants to USi as of the date hereof as follows:
6.1. PARTNERSHIP OR CORPORATE EXISTENCE AND AUTHORITY.
As applicable, such Purchaser is either a limited partnership,
limited liability company, or corporation (a) duly organized, validly existing
and in good standing under the laws of the jurisdiction of its formation, (b)
has all requisite power and authority to own its assets and operate its
business, and (c) has all requisite power and authority to execute, deliver and
perform its obligations under each of the Transaction Documents to which it is
or will be a party.
6.2. ORGANIZATION; AUTHORIZATION; NO CONTRAVENTION.
The execution, delivery and performance by such Purchaser of
the Transaction Documents to which it is a party and the consummation of the
transactions contemplated thereby, including, without limitation, the
acquisition of the Notes: (a) is within such Purchaser's partnership, limited
liability company, or corporate power and authority, as applicable, and has been
duly authorized by all necessary action on the part of such Purchaser; does not
conflict with or contravene the terms of such Purchaser's charter or by-laws, as
applicable; and (c) will not violate, conflict with or result in any material
breach or contravention of (i) any Contractual Obligation of such Purchaser, or
(ii) the Requirements of Law or any order or decree applicable to such
Purchaser.
6.3. BINDING EFFECT.
This Agreement has been duly executed and delivered by such
Purchaser, and this Agreement constitutes the legal, valid and binding
obligation of such Purchaser, enforceable against it in accordance with its
terms, except as enforceability may be limited by applicable bankruptcy,
insolvency, or similar laws affecting the enforcement of creditors' rights
generally or by equitable principles relating to enforceability.
6.4. PURCHASE FOR OWN ACCOUNT.
The Notes and the Conversion Shares are being or will be
acquired by such Purchaser for its own account and with no intention of
distributing or reselling such securities or any part thereof in any transaction
that would be in violation of the securities laws of the United States of
America, or any state, without prejudice, however, to the rights of such
Purchaser at all times to sell or otherwise dispose of all or any part of such
stock under an effective registration statement under the Securities Act, or
under an exemption from such registration available under the Securities Act,
and subject, nevertheless, to the disposition of such Purchaser's property being
at all times within its control. If such Purchaser should in the future decide
to dispose of any of the Notes or Conversion Shares, such Purchaser understands
and agrees that it may do so only in compliance with the Securities Act and
applicable state securities laws, as then in effect. Such Purchaser agrees to
the imprinting, so long as required by law, of a legend on certificates
representing all of the Notes and Conversion Shares to the following effect:
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"THE SECURITIES REPRESENTED BY THIS CERTIFICATE HAVE NOT BEEN
REGISTERED UNDER THE SECURITIES ACT OF 1933. AS AMENDED. OR THE SECURITIES LAWS
OF ANY STATE AND MAY NOT BE SOLD OR OTHERWISE DISPOSED OF EXCEPT PURSUANT TO AN
EFFECTIVE REGISTRATION STATEMENT UNDER SUCH ACT AND APPLICABLE STATE SECURITIES
LAWS OR PURSUANT TO AN APPLICABLE EXEMPTION TO THE REGISTRATION REQUIREMENTS OF
SUCH ACT OR SUCH LAWS. THE SECURITIES REPRESENTED BY THIS CERTIFICATE ARE
SUBJECT TO CERTAIN RESTRICTIONS SET FORTH IN A SHAREHOLDERS AGREEMENT DATED AS
OF MAY 28, 1998. A COPY OF SUCH AGREEMENT MAY BE OBTAINED FROM USi UPON REQUEST"
6.5. FINANCIAL CONDITION.
Such Purchaser's financial condition is such that it is able
to bear the risk of holding the Notes for an indefinite period of time and can
bear the loss of its entire investment in the Notes. Such Purchaser has such
knowledge and experience in financial and business matters and in making high
risk investments of this type that it is capable of evaluating the merits and
risks of the purchase of the Notes.
6.6. RECEIPT OF INFORMATION.
Such Purchaser has been furnished access to the business
records of USi and such additional information and documents as such Purchaser
has requested and has been afforded an opportunity to ask questions of and
receive answers from representatives of USi concerning the terms and condition
of this Agreement, the purchase of the Notes, the prospective operations, market
potential, capitalization, financial conditions, and prospects of the business
to be conducted by USi, and all other matters deemed relevant by such Purchaser.
6.7. BROKER'S, FINDER'S OR SIMILAR FEES.
There are no brokerage commissions, finder's fees or similar
fees or commissions payable in connection with the transactions contemplated
hereby based on any agreement, arrangement or understanding with such Purchaser
or any action taken by such Purchaser.
6.8. GOVERNMENTAL AUTHORIZATION: THIRD PARTY CONSENT.
No approval, consent, compliance, exemption, authorization, or
other action by, or notice to, or filing with, any Governmental Authority or any
other Person in respect of any Requirements of Law, and no lapse of a waiting
period under any Requirements of Law, is necessary or required in connection
with the execution, delivery or performance by such Purchaser (including,
without limitation, the acquisition of the Notes) or enforcement against such
Purchaser of this Agreement or the Other Transaction Documents to which it is a
party or the transactions contemplated thereby.
6.9. LITIGATION.
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No Actions are pending, or to the best knowledge of such
Purchaser, threatened relating to or affecting the transactions required to be
performed by such Purchaser under the Transaction Documents.
ARTICLE VII.
COVENANTS OF USI WITH RESPECT
TO THE PERIOD FOLLOWING THE CLOSING
Until all Notes are no longer outstanding due to conversion or
otherwise and until the payment by USi of all other amounts due to the
Purchasers under the Transaction Documents, USi hereby covenants and agrees with
each Purchaser as follows:
7.1. RESERVATION OF SHARES.
When the Financing is authorized, the Company will reserve the
maximum number of Conversion Shares that may be issuable or deliverable upon
conversion of the Notes. The Conversion Shares shall, when issued or delivered
in accordance with the provisions of USi's Certificate of Incorporation, be duly
authorized, validly issued and fully paid and non-assessable. USi shall issue
such Conversion Shares in accordance with the provisions of its Certificate of
Incorporation and shall otherwise comply with the terms thereof.
ARTICLE VIII.
INDEMNIFICATION
8.1. INDEMNIFICATION.
(a) In addition to all other sums due hereunder or
provided for in this Agreement, USi (the "Selling Indemnifying Party") shall
defend, indemnify and hold harmless each Purchaser and its Affiliates and their
respective officers, directors, agents, employees, subsidiaries, partners and
assigns (each a "Purchasing Indemnified Party") to the fullest extent permitted
by law from and against any and all losses, costs, claims, damages, expenses
(including reasonable fees, disbursements and other charges of counsel, as
limited by Section 8.2 below) and other liabilities (collectively,
"Liabilities") incurred or suffered by any Purchasing Indemnified Party
resulting from or arising out of (i) any breach by any Selling Indemnifying
Party of any representation or warranty, covenant or agreement of the Selling
Indemnifying Party in this Agreement; provided, however, that no Selling
Indemnifying Party shall be liable under this Section 8.1 to any Purchasing
Indemnified Party to the extent that it is finally judicially determined that
such Liabilities resulted primarily from the material breach by such Purchasing
Indemnified Party of any representation, warranty, covenant or other agreement
of such Purchasing Indemnified Party contained in this Agreement; or (ii) any
material liability of USi on the Closing Date not disclosed in this Agreement.
(b) In addition to all other sums due hereunder or
provided for in this Agreement, each Purchaser (each a "Purchasing Indemnifying
Party"), severally and not jointly, shall defend, indemnify and hold harmless
USi and its Affiliates and its officers, directors, agents, employees,
subsidiaries, partners and assigns (each a "Selling Indemnified Party") to the
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fullest extent permitted by law from and against any and all Liabilities
incurred or suffered by such Selling Indemnified Parties resulting from or
arising out of any breach of any representation, warranty, covenant or agreement
of such Purchasing Indemnifying Party in this Agreement; provided, however, that
no Purchasing Indemnifying Party shall be liable under this Section 8.1 to a
Selling Indemnified Party to the extent that it is finally judicially determined
that such Liabilities resulted primarily from the material breach by such
Selling Indemnified Party of any representation, warranty, covenant or other
agreement of such Selling Indemnified Party contained in this Agreement.
(c) If and to the extent that any indemnification
provided for in this Agreement is unenforceable for any reason, the Indemnifying
Parties (as defined below) obligated to indemnify any Indemnified Party (as
defined below) shall make the maximum contribution to the payment and
satisfaction of such indemnified liability which shall be permissible under
applicable laws. In connection with the obligation of the Indemnifying Parties
to indemnify for expenses as set forth herein, the Indemnifying Parties further
agree, upon presentation of appropriate invoices containing reasonable detail,
to reimburse each Indemnified Party for all such expenses (including reasonable
fees, disbursements and other charges of counsel, as limited by Section 8.2
below) as they are incurred by such Indemnified Party.
8.2. NOTIFICATION.
If any action or proceeding (including any governmental
investigation or inquiry) shall be brought or asserted against any party
entitled to indemnification pursuant to this Section 8 (an "Indemnified Party")
in respect of which indemnity may be sought from any party required to indemnify
such Indemnified Party (an "Indemnifying Party"), such Indemnified Party shall
promptly notify the Indemnifying Party in writing, and such Indemnifying Party
shall assume the defense thereof, including the employment of counsel selected
by such Indemnifying Party and reasonably satisfactory to such Indemnified Party
and the payment of all expenses; provided, however, that any failure to so
notify such Indemnifying Party shall not impair obligations hereunder except if
and only to the extent that such failure results in actual prejudice to such
Indemnifying Party. Such Indemnified Party shall have the right to employ
separate counsel in any such action and to participate in the defense thereof,
but the fees and expenses of such counsel shall be the expense of such
Indemnified Party unless (a) such Indemnifying Party agreed to pay such fees and
expenses or (b) such Indemnifying Party shall have failed to assume the defense
of such action or proceeding or has failed to employ counsel reasonably
satisfactory to such Indemnified Party in any such action or proceeding or (c)
the named parties to any such action or proceeding (including any impleaded
parties) include both such Indemnified Party and such Indemnifying Party, and
such Indemnified Party shall have been advised by counsel that there may be one
or more legal defenses available to such Indemnified Party which are different
from or additional to those available to such Indemnifying Party (in which case,
such Indemnifying Party shall employ separate counsel at the expense of such
Indemnifying Party, it being understood, however, that such Indemnifying Party
shall not, in connection with any one such action or proceeding or separate but
substantially similar or related actions or proceedings in the same jurisdiction
arising out of the same general allegations or circumstances, be liable for the
reasonable fees and expenses of more than one separate firm of attorneys at any
time for such
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Indemnified Party and any other Indemnified Parties). No Indemnifying Party
shall be liable for any settlement of any such action or proceeding effected
without its written consent (which shall not be withheld unreasonably), but if
settled with its written consent, or if there be a final judgment for the
plaintiff in any such action or proceeding, such Indemnifying Parry agrees to
indemnify and hold harmless such Indemnified Party from and against any
Liabilities by reason of such settlement or judgment. No Indemnifying Party
shall agree to any settlement of any third party claim without the consent of
the Indemnified Party, which shall not be withheld if such settlement provides
only for the payment of money to be paid by the Indemnifying Party.
ARTICLE IX.
MISCELLANEOUS
9.1. SURVIVAL OF REPRESENTATIONS AND WARRANTIES.
All of the representations and warranties made herein shall
survive the Closing.
9.2. NOTICES.
All notices, demands and other communications provided for or
permitted hereunder shall be made in writing and shall be by registered or
certified first-class mail, return receipt requested, courier service or
personal delivery or via facsimile:
(a) if to Purchasers:
If to Grotech II:
Grotech Capital Group
9690 Deereco Road
Timonium, MD 21093
Attention: Frank A. Adams
If to Massey II:
Massey Burch Capital Corporation
310 25th Avenue North
Nashville, TN 37203
Attention: William F. Earthman
If to Venrock or Venrock II:
Venrock Associates
Room 5506
30 Rockefeller Plaza
New York, NY 10112
Attention: Ray A. Rothrock
with a copy to:
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Taft, Stettinius & Hollister LLP
1800 Star Bank Center
425 Walnut Street
Cincinnati, Ohio 45202
Attention: Gerald S. Greenberg, Esq.
If to Southeastern:
Southeastern Technology Fund, L.P.
4040 Memorial Parkway South
Huntsville, Alabama 35802
Attention: Chris Horgen, Chairman
If to Siebel:
Siebel Systems, Inc.
1855 S. Grant St.
San Mateo, California 94402
Attention: Jeffrey Amann
(b) if to USi:
USinternetworking, Inc.
One USi Plaza
175 Admiral Cochrane Drive
Suite 400
Annapolis, Maryland 21401
Attention: Christopher R. McCleary
with a copy to:
Latham & Watkins
1001 Pennsylvania Avenue, N.W.
Suite 1300
Washington, D.C. 20004-2505
Attention: James F. Rogers, Esq.
All such notices and communications shall be deemed to have been duly given:
when delivered by hand, if personally delivered; when delivered by courier, if
delivered by commercial overnight courier service; if delivered by facsimile,
upon confirmation of such transmission; and five business days after being
deposited in the mail, postage prepaid, if mailed.
9.3. SUCCESSORS AND ASSIGNS.
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This Agreement shall inure to the benefit of and be binding
upon the successors and permitted assigns of the parties hereto. This Agreement
may be assigned by any Purchaser to any permitted transferee of all or part of
the Notes or Conversion Shares. USi may not assign any of its rights under this
Agreement without the written consent of the Purchasers. Except as provided in
this Section 9.3, no Person other than the parties hereto and their successors
and permitted assigns is intended to be a beneficiary of any of the Transaction
Documents.
9.4. AMENDMENT AND WAIVER.
(a) No failure or delay on the part of USi or the
Purchasers in exercising any right, power or remedy hereunder shall operate as a
waiver thereof; nor shall any single or partial exercise of any such right,
power or remedy preclude any other or further exercise thereof or the exercise
of any other right, power or remedy. The remedies provided for herein are
cumulative and are not exclusive of any remedies that may be available to USi or
the Purchasers at law, in equity or otherwise.
(b) Any amendment, supplement or modification of or
to any provision of this Agreement, any waiver of any provision of this
Agreement, and any consent to any departure by any party from the terms of any
provision of this Agreement, shall be effective (i) only if it is made or given
in writing and signed by USi (if applicable) and the Purchasers, and (ii) only
in the specific instance and for the specific purpose for which made or given.
Except where notice is specifically required by this Agreement, no notice to or
demand on any party in any case shall entitle any party hereto to any other or
further notice or demand in similar or other circumstances.
9.5. COUNTERPARTS.
This Agreement may be executed in any number of counterparts
and by the parties hereto in separate counterparts, each of which when so
executed shall be deemed to be an original and all of which taken together shall
constitute one and the same agreement.
9.6. HEADINGS.
The headings in this Agreement are for convenience of
reference only and shall not limit or otherwise affect the meaning hereof.
9.7. GOVERNING LAW.
This Agreement shall be governed by and construed in
accordance with the laws of the State of Maryland, without regard to the
principles of conflicts of law of such state.
9.8. SEVERABILITY.
If any one or more of the provisions contained herein, or the
application thereof in any circumstance, is held invalid, illegal or
unenforceable in any respect for any reason, the validity, legality and
enforceability of any such provision in every other respect and of the
23
<PAGE>
remaining provisions hereof shall not be in any way impaired, unless the
provisions held invalid, illegal or unenforceable shall substantially impair the
benefits of the remaining provisions hereof.
9.9. RULES OF CONSTRUCTION.
Unless the context otherwise requires, "or" is not exclusive,
and references to sections or subsections refer to sections or subsections of
this Agreement.
9.10. ENTIRE AGREEMENT.
This Agreement, together with the exhibits and schedules
hereto and the other Transaction Documents, is intended by the parties as a
final expression of their agreement and intended to be a complete and exclusive
statement of the agreement and understanding of the parties hereto in respect of
the subject matter contained herein and therein. There are no restrictions,
promises, warranties or undertakings, other than those set forth or referred to
herein or therein. This Agreement, together with the exhibits hereto, and the
other Transaction Documents supersede all prior agreements and understandings
between the parties with respect to such subject matter.
9.11. FURTHER ASSURANCES.
Each of the parties shall execute such documents and perform
such further acts (including, without limitation, obtaining any consents,
exemptions, authorizations, or other actions by, or giving any notices to, or
making any filings with, any Governmental Authority or any other Person) as may
be reasonably required or desirable to carry out or to perform the provisions of
this Agreement.
9.12. PUBLICITY.
Except as may be required by applicable law, none of the
parties hereto shall issue a publicity release or announcement or otherwise make
any public disclosure concerning this Agreement or the transactions contemplated
hereby, without prior approval by the other parties hereto, provided that a
Purchaser may nonetheless communicate with its partners concerning such
transactions and investment in USi and may publish a "tombstone" in the
customary form with respect to its investment. If any announcement is required
by law to be made by any party hereto, prior to making such announcement such
party will deliver a draft of such announcement to the other parties and shall
give the other parties an opportunity to comment thereon.
9.13. JURISDICTION.
Each party to this Agreement hereby irrevocably agrees that
any legal action or proceeding arising out of or relating to this Agreement or
any agreements or transactions contemplated hereby may be brought in the courts
of the State of Maryland or of the United States of America for the District of
Maryland and hereby expressly submits to the personal jurisdiction and venue of
such courts for the purposes thereof and expressly waives any claim of improper
venue and any claim that such courts are an inconvenient forum. Each party
hereby
24
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irrevocably consents to the service of process of any of the aforementioned
courts in any such suit, action or proceeding by the mailing of the copies
thereof by registered or certified mail, postage prepaid, to the address set
forth in Section 10.2, such service to become effective 10 days after such
mailing
9.14. WAIVER OF JURY TRIAL.
EACH PARTY HERETO HEREBY WAIVES, TO THE FULLEST EXTENT PERMITTED BY
APPLICABLE LAW, ANY RIGHT IT MAY HAVE TO A TRIAL BY JURY IN ANY LEGAL PROCEEDING
DIRECTLY OR INDIRECTLY ARISING OUT OF OR RELATING TO THIS AGREEMENT OR THE
TRANSACTIONS CONTEMPLATED HEREBY (WHETHER BASED ON CONTRACT, TORT OR ANY OTHER
THEORY). EACH PARTY HERETO (A) CERTIFIES THAT NO REPRESENTATIVE, AGENT OR
ATTORNEY OF ANY OTHER PARTY HAS REPRESENTED, EXPRESSLY OR OTHERWISE, THAT SUCH
OTHER PARTY WOULD NOT, IN THE EVENT OF LITIGATION, SEEK TO ENFORCE THE FOREGOING
WAIVER AND (B) ACKNOWLEDGES THAT IT AND THE OTHER PARTIES HERETO HAVE BEEN
INDUCED TO ENTER INTO THIS AGREEMENT BY, AMONG OTHER THINGS, THE MUTUAL WAIVERS
AND CERTIFICATIONS IN THIS SECTION.
25
<PAGE>
IN WITNESS WHEREOF, the parties hereto have caused this
Agreement to be executed and delivered by their respective officers hereunto
duly authorized as of the date first above written.
USINTERNETWORKING, INC.
By:__________________________________
Name:________________________________
Title:_________________________________
GROTECH PARTNERS V L.P.
By: GROTECH CAPITAL GROUP V, LLC
Its General Partner
By:___________________________________
Name:_________________________________
Title:__________________________________
SOUTHERN VENTURE FUND, II, L.P.
By:_________________________________
Partner
VENROCK ASSOCIATES
By:_________________________________
Partner
VENROCK ASSOCIATES II, L.P.
26
<PAGE>
By:_________________________________
General Partner
SOUTHEASTERN TECHNOLOGY FUND, L.P.
By:____________________________________
Name:
Title:
SIEBEL SYSTEMS, INC.
By:_____________________________________
Name:
Title:
27
<PAGE>
SCHEDULE 1
<TABLE>
<CAPTION>
PURCHASER AMOUNT OF NOTES
<S> <C>
Grotech II 1,000,000
Massey II 750,000
Venrock 430,000
Venrock II 570,000
Southeastern 400,000
Siebel 5,000,000
Total $8,150,000
</TABLE>
28
<PAGE>
Exhibit 10.25
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
NOTE PURCHASE AGREEMENT
BY
AND
AMONG
USINTERNETWORKING, INC.
AND
U S WEST COMMUNICATIONS, INC.
Dated as of December 29, 1998
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
<PAGE>
TABLE OF CONTENTS
<TABLE>
<CAPTION>
Page
<S> <C>
ARTICLE I. DEFINITIONS............................................................................................1
1.1. Definitions.........................................................................................1
1.2. Accounting Terms: Financial Statements..............................................................4
1.3. Knowledge Standard..................................................................................4
1.4. Other Defined Terms.................................................................................4
ARTICLE II. AUTHORIZATION OF NOTES; PURCHASE AND SALE OF NOTES; MAKING OF LOANS...................................5
2.1. Note................................................................................................5
2.2. Purchase and Sale of Note...........................................................................5
2.3. Closing.............................................................................................5
2.4. The Loans...........................................................................................6
2.5. Fees and Expenses...................................................................................6
ARTICLE III. CONDITIONS TO THE OBLIGATION OF THE PURCHASER TO PURCHASE THE NOTE...................................6
3.1. Representations and Warranties......................................................................6
3.2. Compliance with Terms and Conditions of this Agreement..............................................6
3.3. Delivery of Note....................................................................................6
3.4. Closing Certificates................................................................................6
3.5. Secretary's Certificates............................................................................7
3.6. Documents...........................................................................................7
3.7. Purchase Permitted By Applicable Laws...............................................................7
3.8. Consents and Approvals..............................................................................7
3.9. No Material Judgment or Order.......................................................................7
3.10. Waiver of Rights...................................................................................7
ARTICLE IV. CONDITIONS TO THE OBLIGATION OF USI TO CLOSE..........................................................8
4.1. Representations and Warranties......................................................................8
4.2. Compliance with this Agreement......................................................................8
4.3. Issuance Permitted by Applicable Laws...............................................................8
4.4. Loans...............................................................................................8
4.5. Consents and Approvals..............................................................................8
4.6. No Material Judgment or Order.......................................................................9
ARTICLE V. REPRESENTATIONS AND WARRANTIES OF USI..................................................................9
5.1. Corporate Existence and Authority...................................................................9
5.2. Corporate Authorization; No Contravention...........................................................9
5.3. Governmental Authorization; Third Party Consents....................................................9
</TABLE>
2
<PAGE>
<TABLE>
<S> <C>
5.4. Binding Effect.....................................................................................10
5.5. Capitalization.....................................................................................10
5.6. Private Offering...................................................................................10
5.7. Litigation.........................................................................................11
5.8. Financial Statements...............................................................................11
5.9. Tax Matters........................................................................................11
5.10. Investment Company/Government Regulations.........................................................11
5.11. Broker's Finder's or Similar Fees.................................................................11
5.12. Labor Relations and Employee Matters..............................................................11
5.13. Employee Benefits Matters.........................................................................12
5.14. Outstanding Borrowings............................................................................12
5.15. Insurance Schedule................................................................................12
5.16. Solvency..........................................................................................12
5.17. No Other Agreements to Sell Assets or Capital Stock...............................................12
5.18. Compliance with Law...............................................................................12
5.19. Disclosure........................................................................................13
5.20. Regulatory Affiliate..............................................................................13
ARTICLE VI. REPRESENTATIONS AND WARRANTIES OF THE PURCHASER......................................................13
6.1. Partnership or Corporate Existence and Authority...................................................13
6.2. Organization; Authorization; No Contravention......................................................13
6.3. Binding Effect.....................................................................................14
6.4. Purchase for Own Account...........................................................................14
6.5. Financial Condition................................................................................14
6.6. Receipt of Information.............................................................................14
6.7. Broker's, Finder's or Similar Fees.................................................................15
6.8. Governmental Authorization: Third Party Consent....................................................15
6.9. Litigation.........................................................................................15
ARTICLE VII. COVENANTS OF USI WITH RESPECT TO THE PERIOD FOLLOWING THE CLOSING...................................15
7.1. Reservation of Shares..............................................................................15
ARTICLE VIII. INDEMNIFICATION....................................................................................15
8.1. Indemnification....................................................................................16
8.2. Notification.......................................................................................16
ARTICLE IX. MISCELLANEOUS........................................................................................17
9.1. Survival of Representations and Warranties.........................................................17
9.2. Notices............................................................................................17
9.3. Successors and Assigns.............................................................................18
9.4. Amendment and Waiver...............................................................................19
9.5. Counterparts.......................................................................................19
9.6. Headings...........................................................................................19
</TABLE>
3
<PAGE>
<TABLE>
<S> <C>
9.7. Governing Law......................................................................................19
9.8. Severability.......................................................................................19
9.9. Rules of Construction..............................................................................19
9.10. Entire Agreement..................................................................................20
9.11. Further Assurances................................................................................20
9.12. Publicity.........................................................................................20
9.13. Jurisdiction......................................................................................20
9.14. Waiver of Jury Trial..............................................................................20
</TABLE>
4
<PAGE>
NOTE PURCHASE AGREEMENT
THIS NOTE PURCHASE AGREEMENT (the "Agreement") is entered into
as of the 29th day of December, 1998, by and among USinternetworking, Inc., a
Delaware corporation ("USi") and US WEST Communications, Inc., a Colorado
corporation ("US WEST" or the "Purchaser").
RECITALS:
A. USi and the Purchaser desire to complete an equity
financing on substantially the terms set forth in the term sheet attached hereto
as Exhibit A (the "Financing")
B. In order to provide USi with necessary working capital
prior to the consummation of the Financing, upon the terms and subject to the
conditions set forth in this Agreement, USi proposes to issue and sell a
Convertible Promissory Note (the "Note") to the Purchaser and to obtain from the
Purchaser the loan as contemplated thereby.
C. The Purchaser desires to purchase from USi the Note and to
make the Loan as contemplated thereby, as set forth on Schedule 1 hereto.
AGREEMENT
NOW, THEREFORE, in consideration of the mutual covenants and
agreements set forth herein and for good and valuable consideration, the receipt
and adequacy of which is hereby acknowledged, the parties hereto hereby agree as
follows:
ARTICLE I.
DEFINITIONS
1.1. DEFINITIONS.
As used in this Agreement, and unless the context requires a
different meaning, the following terms have the meanings indicated:
"AFFILIATE" means, with respect to any specified Person, any
Person that, directly or indirectly, controls, is controlled by, or is under
common control with, such specified Person, whether by contract, through one or
more intermediaries, or otherwise.
"BUSINESS" means the business of USi as conducted and planned
to be conducted on the date hereof.
"BUSINESS DAY" shall mean a day other than a Saturday or
Sunday or any federal holiday.
"COMMISSION" means the Securities and Exchange Commission or
any similar agency then having jurisdiction to enforce the Securities Act (as
defined below).
5
<PAGE>
"CONDITION OF USI" means the assets, business, properties,
operations, financial condition or prospects of USi.
"CONTRACTUAL OBLIGATION" means any contract or agreement by
which a person is bound or to which its assets are subject.
"CONVERSION SHARES" has the meaning assigned thereto in the
Note.
"EMPLOYEE PLANS" means all benefits arrangements, pensions
plans or welfare plans adopted by USi for its employees.
"EMPLOYEE STOCK OPTION PLAN" means an employee stock option
plan adopted by the Compensation Committee of the Board of Directors of USi
providing for the issuance to certain employees of USi of options to purchase a
certain number of shares of USi Common Stock at a certain exercise price per
share; the total number of shares of USi Common Stock which may be issued under
such plan shall not exceed 6.5% of the total number of outstanding shares of
common stock calculated on a fully diluted basis, not including the options and
shares issuable or issued on exercise of options pursuant to the Employee Stock
Option Plan.
"EXCHANGE ACT" means the Securities Exchange Act of 1934, as
amended, and the rules and regulations of the Commission thereunder.
"FINANCING" means USi's issuance and sale on or prior to March
31, 1999 of shares of its Series B Preferred Stock with the terms and conditions
set forth on Exhibit A hereto, and otherwise on terms and conditions reasonably
acceptable to the Purchaser, resulting in net proceeds to USi of not less than
$50,000,000.
"GAAP" means United States generally accepted accounting
principles, in effect from time to time, consistently applied.
"GOVERNMENTAL AUTHORITY" means the government of any nation,
state, city, locality or other political subdivision of any thereof, any entity
exercising executive, legislative, judicial, regulatory or administrative
functions of or pertaining to government, and any corporation or other entity
owned or controlled, through stock or capital ownership or otherwise, by any of
the foregoing.
"INDEBTEDNESS" means, as to any Person: (a) all obligations,
whether or not contingent, of such Person for borrowed money (including, without
limitation, reimbursement and all other obligations with respect to surety
bonds, letters of credit and bankers' acceptances, whether or not matured), (b)
all obligations of such Person evidenced by notes, bonds, debentures or similar
instruments, (c) all obligations of such Person representing the balance of
deferred purchase price of property or services, except trade accounts payable
and accrued commercial or trade liabilities arising in the ordinary course of
business, (d) all interest rate and currency swaps, caps, collars and similar
agreements or hedging devices under which payments are obligated to be made by
such Person, whether periodically or upon the happening of a contingency, (e)
all indebtedness created or arising under any conditional sale or other title
6
<PAGE>
retention agreement with respect to property acquired by such Person (even
though the rights and remedies of the seller or lender under such agreement in
the event of default are limited to repossession or sale of such property), (f)
all obligations of such Person under leases which have been or should be, in
accordance with GAAP, recorded as capital leases, (g) all indebtedness secured
by any Lien (other than Liens in favor of lessors under leases other than leases
included in clause (f)) on any property or asset owned or held by that Person
regardless of whether the indebtedness secured thereby shall have been assumed
by that Person or is non-recourse to the credit of that Person, and (h) all
Indebtedness of any other Person referred to in clauses (a) through (f) above,
guaranteed, directly or indirectly, by that Person.
"LIEN" means any mortgage, deed of trust, pledge,
hypothecation, assignment, encumbrance, lien (statutory or other) or other
security interest of any kind or nature whatsoever (excluding preferred stock or
equity related preferences) including, without limitation, those created by,
arising under or evidenced by any conditional sale or other title retention
agreement, the interest of a lessor under a capital lease obligation, or any
financing lease having substantially the same economic effect as any of the
foregoing.
"OUTSTANDING BORROWINGS" means as to any Person all
Indebtedness of such Person for borrowed money (including, without limitation,
reimbursement and all other obligations with respect to surety bonds, letters of
credit and bankers' acceptances, whether or not matured).
"PERSON" means any individual, firm, corporation, partnership,
trust, incorporated or unincorporated association, joint venture, joint stock
company, Governmental Authority or other entity of any kind, and shall include
any successor (by merger or otherwise) of such entity.
"REGULATORY AFFILIATE" means an "Affiliate" of the Purchaser,
as that term is defined in Section 3(1) of the Communications Act of 1934, as
amended, 47 U.S.C. ss. 153(1).
"REQUIREMENTS OF LAW" means, as to any Person, the provisions
of the Certificate of Incorporation and By-laws or other organizational or
governing documents of such Person, and any law, treaty, rule, regulation,
right, privilege, qualification, license or franchise, order, judgment, or
determination of an arbitrator or a court or other Governmental Authority, in
each case, applicable or binding upon such Person or any of its property or to
which such Person or any of its property is subject or applicable to any or all
of the transactions contemplated by or referred to in the Transaction Documents.
"SECURITIES ACT" means the Securities Act of 1933, as amended,
and the rules and regulations of the Commission thereunder.
"SHAREHOLDERS AGREEMENT" means the Shareholders' Agreement
between USi and its shareholders dated as of May 28, 1998, as amended.
"TRADING DAY" means any day on which any market in which the
applicable security is then traded and in which a Quoted Price may be
ascertained is open for business.
7
<PAGE>
"TRANSACTION DOCUMENTS" means collectively, this Agreement and
the Note.
"TRANSACTION EXPENSES" means any and all reasonable
out-of-pocket (i) legal expenses incurred by the Purchaser in connection with
the negotiation and preparation of the Transaction Documents, the consummation
of the transactions contemplated thereby and preparation for any of the
foregoing, including, without limitation, travel expenses, reasonable fees,
charges and disbursements of counsel and any similar or related legal costs and
legal expenses; and (ii) other expenses incurred by the Purchaser in connection
with the negotiation, preparation and consummation of the Transaction Documents
and the transactions contemplated thereby.
"USI STOCK" means Common Stock, par value $.001 per share, of
USi, or any other capital stock of USi into which such stock is reclassified or
reconstituted.
1.2. ACCOUNTING TERMS: FINANCIAL STATEMENTS.
All accounting terms used herein not expressly defined in this
Agreement shall have the respective meanings given to them in accordance with
sound accounting practice. The term "sound accounting practice" shall mean such
accounting practice as, in the opinion of the independent certified public
accountants regularly retained by USi conforms at the time to GAAP applied on a
consistent basis except for changes with which such accountants concur.
1.3. KNOWLEDGE STANDARD.
When used herein, the phrase "to the knowledge of" any Person,
"to the best knowledge of" any Person or any similar phrase shall mean, (i) with
respect to any individual, the actual knowledge of such Person, (ii) with
respect to any corporation, the actual knowledge of the officers and directors
of such corporation and the knowledge of such facts that such persons should
have in the exercise of their duties after reasonable inquiry, and (iii) with
respect to a partnership, the actual knowledge of the officers and directors of
the general partner of such partnership and the knowledge of such facts that
such persons should have in the exercise of their duties after reasonable
inquiry.
1.4. OTHER DEFINED TERMS.
The following terms shall have the meanings specified in the
Sections set forth below:
<TABLE>
<CAPTION>
Term Section
<S> <C>
Actions 5.7
Closing Date 2.2
Closing 2.3
Dispute 9.8
</TABLE>
8
<PAGE>
<TABLE>
<S> <C>
Financing Recital A
Indemnified Party 8.2
Indemnifying Party 8.2
Liabilities 8.2
Note Recital B
Purchasing Indemnified Party 8.1(a)
Purchasing Indemnifying Party 8.1(b)
Selling Indemnified Party 8.1(b)
Selling Indemnifying Party 8.1(a)
</TABLE>
ARTICLE II.
AUTHORIZATION OF NOTES;
PURCHASE AND SALE OF NOTES;
MAKING OF LOANS
2.1. NOTE.
On or before the Closing Date, the Board of Directors of USi
will authorize the issuance and sale of the Note as contemplated hereby,
including authorizing the issuance of Conversion Shares upon conversion of the
Note.
2.2. PURCHASE AND SALE OF NOTE.
Upon the terms and subject to the conditions herein contained,
on December 24, 1998 or such other day as the parties may agree (the "Closing
Date"), USi shall issue to Purchaser, and Purchaser shall acquire from USi, a
note (a "Note") in the form of Exhibit B hereto and in the principal amount
shown on Schedule 1 hereto.
2.3. CLOSING.
The closing of the sale to and purchase by the Purchaser of
the Note (the "Closing") shall occur at 11 o'clock A.M., local time on the
Closing Date at the offices of USi, One USi Plaza, Annapolis, Maryland. At the
Closing, USi shall also deliver to the Purchaser the Note being purchased by the
Purchaser, free and clear of any Liens of any nature whatsoever, registered in
the Purchaser's name.
2.4. THE LOANS.
Subject to the terms and conditions herein contained, at the
Closing the Purchaser
9
<PAGE>
shall make a loan to USi (by wire transfer of immediately available funds) in
the amount set forth opposite its name on Schedule 1.
2.5. FEES AND EXPENSES.
Concurrently with or as promptly as practicable after the
Closing, USi shall reimburse the Purchaser for the Transaction Expenses, which
payment shall be made by wire transfer of immediately available funds to an
account or accounts designated by the Purchaser.
ARTICLE III.
CONDITIONS TO THE OBLIGATION OF THE
PURCHASER TO PURCHASE THE NOTE
The obligation of the Purchaser to purchase the Note, to make
its loan and to perform any of its obligations hereunder (unless otherwise
specified) shall be subject to the satisfaction of the following conditions on
or before the Closing Date:
3.1. REPRESENTATIONS AND WARRANTIES.
The representations and warranties of USi contained in Section
5 hereof shall be true and correct in all material respects at and as of that
date, as if made at and as of such date.
3.2. COMPLIANCE WITH TERMS AND CONDITIONS OF THIS
AGREEMENT.
USi shall have performed and complied with all of the
agreements and conditions set forth herein that are required to be performed or
complied with by USi on or before that date.
3.3. DELIVERY OF NOTE.
USi shall have delivered to the Purchaser the Note to be
received by the Purchaser.
3.4. CLOSING CERTIFICATES.
USi shall have delivered to the Purchaser a certificate
executed by an authorized officer of USi certifying that the representations and
warranties of USi are true and correct in all material respects on and as of
that date, and that the conditions set forth in this Section 3 to be satisfied
by USi have been satisfied on and as of that date.
3.5. SECRETARY'S CERTIFICATES.
The Purchaser shall have received a certificate from USi,
dated as of that date and signed by the Secretary or an Assistant Secretary of
USi, certifying that the attached copies of the
10
<PAGE>
Certificate of Incorporation and By-laws of USi and resolutions of the Board of
Directors of USi approving the Transaction Documents and the transactions
referred to therein, are all true, complete and correct and remain unamended and
in full force and effect.
3.6. DOCUMENTS.
The Purchaser shall have received true, complete and correct
copies of such documents and such other information as it may have reasonably
requested in connection with or relating to the sale of the Note and the
transactions required to be performed by the Transaction Documents.
3.7. PURCHASE PERMITTED BY APPLICABLE LAWS.
The acquisition of and payment for the Note to be acquired by
the Purchaser hereunder and the consummation of this Agreement (a) shall not be
prohibited by any Requirements of Law, and (b) shall not conflict with or be
prohibited by any Contractual Obligation of USi.
3.8. CONSENTS AND APPROVALS.
All requisite consents, exemptions, authorizations, or other
actions by, or notices to, or filings with, Governmental Authorities and other
Persons in respect of all Requirements of Law and with respect to Contractual
Obligations of USi necessary or required in connection with the execution,
delivery or performance by USi shall have been obtained and be in full force and
effect and all waiting periods shall have lapsed without extension or the
imposition of any conditions or restrictions.
3.9. NO MATERIAL JUDGMENT OR ORDER.
There shall not be any judgment or order of a court of
competent jurisdiction or any ruling of any Governmental Authority or any
condition imposed under any Requirement of Law which, in the reasonable judgment
of the Purchaser, would (i) prohibit the purchase of the Note hereunder, (ii)
subject the Purchaser to any penalty if the Note were to be purchased hereunder,
or (iii) question the validity or legality of the transactions required to be
performed under this Agreement.
3.10. WAIVER OF RIGHTS.
All antidilutive and pre-emptive rights of shareholders of USi
with respect to the issuance of the Note and the Conversion Shares shall have
been waived.
3.11. LEGAL OPINION.
The Purchaser shall have received an opinion of counsel for
USi in form and substance reasonably acceptable to the Purchaser.
11
<PAGE>
ARTICLE IV.
CONDITIONS TO THE OBLIGATION OF
USI TO CLOSE
The obligation of USi to issue and sell the Note and the other
obligations of USi hereunder shall be subject to the satisfaction of the
following conditions on or before the Closing Date:
4.1. REPRESENTATIONS AND WARRANTIES.
The representations and warranties of the Purchaser contained
in Section 6 hereof shall be true and correct in all material respects at and as
of the Closing Date as if made at and as of such date.
4.2. COMPLIANCE WITH THIS AGREEMENT.
The Purchaser shall have performed and complied with all of
the agreements and conditions set forth herein that are required to be performed
or complied with by the Purchaser on or before the Closing Date.
4.3. ISSUANCE PERMITTED BY APPLICABLE LAWS.
The issuance of the Note hereunder and the consummation of
this Agreement (a) shall not be prohibited by any Requirements of Law, and (b)
shall not conflict with or be prohibited by any Contractual Obligations of the
Purchaser.
4.4. LOAN.
The Purchaser shall have made the loan as set forth in Section
2.4 hereof.
4.5. CONSENTS AND APPROVALS.
All consents, exemptions, authorizations, or other actions by,
or notices to, or filings with, Governmental Authorities and other Persons in
respect of all Requirements of Law and with respect to those material
Contractual Obligations of the Purchaser necessary or required in connection
with the execution, delivery or performance by the Purchaser shall have been
obtained and be in full force and effect and all waiting periods shall have
lapsed without extension or imposition of any conditions or restrictions.
4.6. NO MATERIAL JUDGMENT OR ORDER.
There shall not be any judgment or order of a court of
competent jurisdiction or any ruling of any Governmental Authority or any
condition imposed under any Requirements of Law which, in the reasonable
judgment of USi would (i) prohibit the sale of the Note or the consummation of
the other transactions hereunder, (ii) subject USi to any penalty if the Note
were to be sold hereunder or (iii) question the validity or legality of the
transactions required to be performed under this Agreement.
12
<PAGE>
ARTICLE V.
REPRESENTATIONS AND WARRANTIES
OF USI
USi represents and warrants to, and covenants with, the
Purchaser as of the date hereof and as of the Closing Date as follows:
5.1. CORPORATE EXISTENCE AND AUTHORITY.
USi was incorporated on January 14, 1998 and (a) is a
corporation duly organized, validly existing and in good standing under the laws
of the State of Delaware, (b) has all requisite corporate power and authority to
own and operate its property, to lease the property it operates as lessee and to
conduct the business in which it is currently, or is currently proposed to be,
engaged, and (c) has the corporate power and authority to execute, deliver and
perform its obligations under each Transaction Agreement to which it is or will
be a party.
5.2. CORPORATE AUTHORIZATION; NO CONTRAVENTION.
The execution, delivery and performance by USi of each of the
Transaction Documents and the consummation of the transactions contemplated
hereby and thereby, including, without limitation, the issuance of the Note by
USi and the consummation by USi of the Financing, (a) on or before the Closing
Date, shall have been duly authorized by all necessary corporate action,
including the approval of the holders of two-thirds of the outstanding Series A
Convertible Preferred Stock of USi, do not conflict with or contravene the terms
of the Certificate or the Bylaws of USi, or any amendment thereof; and (b) will
not violate, conflict with or result in any material breach or contravention of
(i) any Contractual Obligation of USi or (ii) any Requirements of Law applicable
to USi.
5.3. GOVERNMENTAL AUTHORIZATION; THIRD PARTY CONSENTS.
No approval, consent, compliance, exemption, authorization, or
other action by, or notice to, or filing with, any Governmental Authority or any
other Person in respect of any applicable Requirements of Law in effect on the
date hereof and no lapse of a waiting period under any applicable Requirements
of Law in effect on the date hereof, is necessary or required in connection with
the execution and delivery of the Transaction Documents by USi or the
performance by USi or enforcement against USi of any material obligation by USi
under the Transaction Documents or the transactions to be performed hereunder.
5.4. BINDING EFFECT.
This Agreement has been duly executed and delivered by USi and
constitutes its legal, valid and binding obligation enforceable against it in
accordance with its terms, except as enforceability may be limited by applicable
bankruptcy, insolvency or other similar laws affecting the enforcement of
creditors' rights generally and by general principles of equity relating to
enforceability.
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5.5. CAPITALIZATION.
(a) On the Closing Date, the authorized capital stock
of USi shall consist of three hundred million (300,000,000) shares of Common
Stock and two hundred thousand (200,000) shares of preferred stock. Of the
authorized shares of USi Common Stock, immediately after the Closing, (i)
ninety-nine million (99,000,000) shares of Common Stock will be reserved for
issuance upon conversion of shares of the Series A Preferred Stock, (ii) six
million, six hundred thousand (6,600,000) shares of USi Common Stock will be
reserved for issuance pursuant to the Employee Stock Option Plan; (iii) up to
nine million, two hundred ninety thousand, nine hundred fifty seven (9,290,957)
shares of USi Common Stock will be reserved for issuance upon exercise of Common
Stock purchase warrants (the "Warrants"), and (iv) twenty million (20,000,000)
shares of Common Stock will be issued and outstanding. As of the Closing Date,
all outstanding shares of capital stock of USi will be duly authorized and
validly issued, fully paid, nonassessable and free and clear of any Liens,
preferential rights, priorities, claims, options, charges or other encumbrances
or restrictions other than those created by the Certificate of Incorporation and
the Bylaws of USi and the Shareholders' Agreement.
(b) SCHEDULE 5.5 sets forth the name of each holder
of the issued and outstanding capital stock of USi, the number of shares of such
capital stock held beneficially or of record by each such holder, the name of
each Person holding any options or other rights to purchase any capital stock of
USi (except as may be permitted under the Shareholders Agreement), the number,
class and series of shares of capital stock subject to each such option or right
and the exercise price of each such option or right. Except as set forth on
SCHEDULE 5.5, there are no outstanding securities convertible into or
exchangeable for capital stock of USi or options, warrants or other rights to
purchase or subscribe to capital stock of USi or contracts, commitments,
agreements, understandings or arrangements of any kind to which USi is a party
relating to the issuance of any capital stock of USi, any such convertible or
exchangeable securities or any such options, warrants or rights.
5.6. PRIVATE OFFERING.
No form of general solicitation or general advertising was
used by USi or its representatives in connection with the offer or sale of the
Note. No registration of the Note pursuant to the provisions of the Securities
Act or any state securities or "blue sky" laws will be required by the offer,
sale or issuance of the Note pursuant to this Agreement. USi agrees that neither
it, nor anyone authorized to act on its behalf will offer or sell the Note or
any other security so as to require the registration of the Note pursuant to the
provisions of the Securities Act or any state securities or "blue sky" laws,
unless the Note is so registered.
5.7. LITIGATION.
USi has not received any notice of any governmental charge,
complaint or action or court order, writ, injunction, judgment or decree
outstanding or any claim, suit, litigation, legal proceeding, (collectively,
"Actions") which if adversely determined would have a material adverse effect on
(i) the Condition of USi (ii) the transactions required to be performed by USi
under this Agreement or the Transaction Documents and, to USi's knowledge, there
is no valid
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<PAGE>
basis therefor, and no Action is threatened against USi.
5.8. FINANCIAL STATEMENTS.
USi has delivered to the Purchaser its audited financial
statements as of June 30, 1998 and unaudited financials as of October 31, 1998
and for the period then ended. Such financial statements are true and complete
in all material respects and fairly present the financial condition and results
of operations of USi as of October 31, 1998 and for the period then ended in
accordance with generally accepted accounting principles. Since October 31, 1998
there has been no material adverse change in the business, financial condition,
operating results or prospects of USi. All of USi's material liabilities are
reflected in such financial statements or on SCHEDULE 5.8 attached hereto, other
than liabilities incurred in the ordinary course of business since October 31,
1998.
5.9. TAX MATTERS.
USi has duly filed all tax reports and returns required to be
filed by it, including all federal, state, local and foreign tax returns and
reports and paid all taxes due with respect thereto.
5.10. INVESTMENT COMPANY/GOVERNMENT REGULATIONS.
Immediately following the Closing, after giving effect to the
transactions contemplated by the Transaction Documents, neither USi nor any
Person controlling, controlled by or under common control with USi will be an
"investment company" within the meaning of the Investment Company Act of 1940,
as amended. USi is not subject to regulation under the Public Utility Holding
Company Act of 1935, as amended, the Federal Power Act, or any federal or state
statute or regulation limiting its ability to incur Indebtedness.
5.11. BROKER'S FINDER'S OR SIMILAR FEES.
There are no brokerage commissions, finder's fees or similar
fees or commissions payable in connection with the transactions contemplated
hereby based on any agreement, arrangement or understanding with USi or any
officer, director, shareholder, or Affiliate of USi or any action taken by any
such person.
5.12. LABOR RELATIONS AND EMPLOYEE MATTERS.
(a) USi is not and has not engaged in any unfair
labor practice.
(b) Except as set forth on SCHEDULE 5.12, USi is not
a party to any employment agreement (other than "at will" employment
relationships), collective bargaining agreement or covenant not to compete.
(c) No complaint under any statute or regulation
relating to employment has been filed against USi.
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<PAGE>
5.13. EMPLOYEE BENEFITS MATTERS.
Except as set forth on SCHEDULE 5.13, USi has not adopted or
implemented any Employee Plan.
5.14. OUTSTANDING BORROWINGS.
SCHEDULE 5.14 lists the amount of all Outstanding Borrowings
of USi as of the date hereof and the name of each lender thereof.
5.15. INSURANCE SCHEDULE.
USi maintains insurance policies with reputable insurers
covering such risks and in such amounts as are customary for similar businesses.
5.16. SOLVENCY.
USi has not (i) made a general assignment for the benefit of
its creditors, (ii) filed any voluntary petition in bankruptcy or suffered the
filing of any involuntary petition in bankruptcy by its creditors, (iii)
suffered the appointment of a receiver to take possession of all or
substantially all of its assets or properties, (iv) suffered the attachment or
other judicial seizure of all or substantially all of its assets or (v) admitted
in writing its inability to pay its debts as they come due.
5.17. NO OTHER AGREEMENTS TO SELL ASSETS OR CAPITAL STOCK.
Other than as otherwise set forth in this Agreement, USi has
no legal obligation, absolute or contingent, other than obligations under the
Transaction Documents, to any person or firm to (i) sell any of its capital
stock or, outside of the ordinary course of business, assets, or effect any
merger, consolidation or other reorganization or (ii) enter into any agreement
with respect to any of the foregoing.
5.18. COMPLIANCE WITH LAW.
In its conduct of its business and affairs since its
formation, USi has complied in all material respects with all applicable
Requirements of Law.
5.19. DISCLOSURE.
USi has, to the best of its knowledge, fully responded to all
requests for information, and USi has accurately answered all questions from the
Purchaser concerning the Condition of USi, and has not knowingly withheld any
facts relating thereto which it reasonably believes to be material with respect
to its Condition. No information in this Agreement or in any Exhibit or Schedule
attached to this Agreement, contains or will contain any untrue statement of a
material fact or when considered together with all such information delivered to
the Purchaser omits to state any material fact. The disclosures made in writing
by USi in connection with this Agreement when read in the light of the
circumstances when made and taken as a whole, did not
16
<PAGE>
when made contain any untrue statement of a material fact.
5.20. REGULATORY AFFILIATE.
USi has not redeemed or repurchased any of its equity
securities (including options, warrants and convertible securities) or otherwise
taken any action which would cause USi to become a Regulatory Affiliate of US
WEST.
ARTICLE VI.
REPRESENTATIONS AND
WARRANTIES OF THE PURCHASER
The Purchaser hereby represents and warrants to USi as of the
date hereof as follows:
6.1. PARTNERSHIP OR CORPORATE EXISTENCE AND AUTHORITY.
The Purchaser is a corporation (a) duly organized, validly
existing and in good standing under the laws of the jurisdiction of its
formation, (b) has all requisite power and authority to own its assets and
operate its business, and (c) has all requisite power and authority to execute,
deliver and perform its obligations under each of the Transaction Documents to
which it is or will be a party.
6.2. ORGANIZATION; AUTHORIZATION; NO CONTRAVENTION.
The execution, delivery and performance by the Purchaser of
the Transaction Documents to which it is a party and the consummation of the
transactions contemplated thereby, including, without limitation, the
acquisition of the Note: (a) is within the Purchaser's corporate power and
authority and has been duly authorized by all necessary action on the part of
the Purchaser; does not conflict with or contravene the terms of the Purchaser's
charter or by-laws, as applicable; and (c) will not violate, conflict with or
result in any material breach or contravention of (i) any Contractual Obligation
of the Purchaser, or (ii) the Requirements of Law or any order or decree
applicable to the Purchaser.
6.3. BINDING EFFECT.
This Agreement has been duly executed and delivered by the
Purchaser, and this Agreement constitutes the legal, valid and binding
obligation of the Purchaser, enforceable against it in accordance with its
terms, except as enforceability may be limited by applicable bankruptcy,
insolvency, or similar laws affecting the enforcement of creditors' rights
generally or by equitable principles relating to enforceability.
6.4. PURCHASE FOR OWN ACCOUNT.
The Note and the Conversion Shares are being or will be
acquired by the Purchaser for its own account and with no intention of
distributing or reselling such securities or any part thereof in any transaction
that would be in violation of the securities laws of the United
17
<PAGE>
States of America, or any state, without prejudice, however, to the rights of
the Purchaser at all times to sell or otherwise dispose of all or any part of
such stock under an effective registration statement under the Securities Act,
or under an exemption from such registration available under the Securities Act,
and subject, nevertheless, to the disposition of the Purchaser's property being
at all times within its control. If the Purchaser should in the future decide to
dispose of the Note or any of the Conversion Shares, the Purchaser understands
and agrees that it may do so only in compliance with the Securities Act and
applicable state securities laws, as then in effect. The Purchaser agrees to the
imprinting, so long as required by law, of a legend on certificates representing
the Note and all of the Conversion Shares to the following effect:
"THE SECURITIES REPRESENTED BY THIS CERTIFICATE HAVE NOT BEEN
REGISTERED UNDER THE SECURITIES ACT OF 1933. AS AMENDED. OR THE SECURITIES LAWS
OF ANY STATE AND MAY NOT BE SOLD OR OTHERWISE DISPOSED OF EXCEPT PURSUANT TO AN
EFFECTIVE REGISTRATION STATEMENT UNDER SUCH ACT AND APPLICABLE STATE SECURITIES
LAWS OR PURSUANT TO AN APPLICABLE EXEMPTION TO THE REGISTRATION REQUIREMENTS OF
SUCH ACT OR SUCH LAWS. THE SECURITIES REPRESENTED BY THIS CERTIFICATE ARE
SUBJECT TO CERTAIN RESTRICTIONS SET FORTH IN A SHAREHOLDERS AGREEMENT DATED AS
OF MAY 28, 1998. A COPY OF SUCH AGREEMENT MAY BE OBTAINED FROM USi UPON REQUEST"
6.5. FINANCIAL CONDITION.
The Purchaser's financial condition is such that it is able to
bear the risk of holding the Note for an indefinite period of time and can bear
the loss of its entire investment in the Note. The Purchaser has such knowledge
and experience in financial and business matters and in making high risk
investments of this type that it is capable of evaluating the merits and risks
of the purchase of the Note.
6.6. RECEIPT OF INFORMATION.
The Purchaser has been furnished access to the business
records of USi and such additional information and documents as the Purchaser
has requested and has been afforded an opportunity to ask questions of and
receive answers from representatives of USi concerning the terms and conditions
of this Agreement, the purchase of the Note, the prospective operations, market
potential, capitalization, financial conditions, and prospects of the business
to be conducted by USi, and all other matters deemed relevant by the Purchaser.
6.7. BROKER'S, FINDER'S OR SIMILAR FEES.
There are no brokerage commissions, finder's fees or similar
fees or commissions payable in connection with the transactions contemplated
hereby based on any agreement, arrangement or understanding with the Purchaser
or any action taken by the Purchaser.
6.8. GOVERNMENTAL AUTHORIZATION: THIRD PARTY CONSENT.
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<PAGE>
No approval, consent, compliance, exemption, authorization, or
other action by, or notice to, or filing with, any Governmental Authority or any
other Person in respect of any Requirements of Law, and no lapse of a waiting
period under any Requirements of Law, is necessary or required in connection
with the execution, delivery or performance by the Purchaser (including, without
limitation, the acquisition of the Note) or enforcement against the Purchaser of
this Agreement or the Other Transaction Documents to which it is a party or the
transactions contemplated thereby.
6.9. LITIGATION.
No Actions are pending, or to the best knowledge of the
Purchaser, threatened relating to or affecting the transactions required to be
performed by the Purchaser under the Transaction Documents.
ARTICLE VII.
COVENANTS OF USI WITH RESPECT
TO THE PERIOD FOLLOWING THE CLOSING
Until the Note is no longer outstanding due to conversion or
otherwise and until the payment by USi of all other amounts due to the Purchaser
under the Transaction Documents, USi hereby covenants and agrees with the
Purchaser as follows:
7.1. RESERVATION OF SHARES.
The Company will reserve the maximum number of Conversion
Shares that may be issuable or deliverable upon conversion of the Note. The
Conversion Shares shall, when issued or delivered in accordance with the
provisions of USi's Certificate of Incorporation, be duly authorized, validly
issued and fully paid and non-assessable. USi shall issue such Conversion Shares
in accordance with the provisions of its Certificate of Incorporation and shall
otherwise comply with the terms thereof.
ARTICLE VIII.
INDEMNIFICATION
8.1. INDEMNIFICATION.
(a) In addition to all other sums due hereunder or
provided for in this Agreement, USi (the "Selling Indemnifying Party") shall
defend, indemnify and hold harmless the Purchaser and its Affiliates and their
respective officers, directors, agents, employees, subsidiaries, partners and
assigns (each a "Purchasing Indemnified Party") to the fullest extent permitted
by law from and against any and all losses, costs, claims, damages, expenses
(including reasonable fees, disbursements and other charges of counsel, as
limited by Section 8.2 below) and other liabilities (collectively,
"Liabilities") incurred or suffered by any Purchasing Indemnified Party
resulting from or arising out of (i) any breach by any Selling Indemnifying
Party of any representation or warranty, covenant or agreement of the Selling
Indemnifying Party in this Agreement; provided, however, that no Selling
Indemnifying Party shall be liable under
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<PAGE>
this Section 8.1 to any Purchasing Indemnified Party to the extent that it is
finally judicially determined that such Liabilities resulted primarily from the
material breach by such Purchasing Indemnified Party of any representation,
warranty, covenant or other agreement of such Purchasing Indemnified Party
contained in this Agreement; or (ii) any material liability of USi on the
Closing Date not disclosed in this Agreement.
(b) In addition to all other sums due hereunder or
provided for in this Agreement, the Purchaser (the "Purchasing Indemnifying
Party"), severally and not jointly, shall defend, indemnify and hold harmless
USi and its Affiliates and its officers, directors, agents, employees,
subsidiaries, partners and assigns (each a "Selling Indemnified Party") to the
fullest extent permitted by law from and against any and all Liabilities
incurred or suffered by such Selling Indemnified Parties resulting from or
arising out of any breach of any representation, warranty, covenant or agreement
of the Purchasing Indemnifying Party in this Agreement; provided, however, that
the Purchasing Indemnifying Party shall not be liable under this Section 8.1 to
a Selling Indemnified Party to the extent that it is finally judicially
determined that such Liabilities resulted primarily from the material breach by
such Selling Indemnified Party of any representation, warranty, covenant or
other agreement of such Selling Indemnified Party contained in this Agreement.
(c) If and to the extent that any indemnification
provided for in this Agreement is unenforceable for any reason, the Indemnifying
Parties (as defined below) obligated to indemnify any Indemnified Party (as
defined below) shall make the maximum contribution to the payment and
satisfaction of such indemnified liability which shall be permissible under
applicable laws. In connection with the obligation of the Indemnifying Parties
to indemnify for expenses as set forth herein, the Indemnifying Parties further
agree, upon presentation of appropriate invoices containing reasonable detail,
to reimburse each Indemnified Party for all such expenses (including reasonable
fees, disbursements and other charges of counsel, as limited by Section 8.2
below) as they are incurred by such Indemnified Party.
8.2. NOTIFICATION.
If any action or proceeding (including any governmental
investigation or inquiry) shall be brought or asserted against any party
entitled to indemnification pursuant to this Section 8 (an "Indemnified Party")
in respect of which indemnity may be sought from any party required to indemnify
such Indemnified Party (an "Indemnifying Party"), such Indemnified Party shall
promptly notify the Indemnifying Party in writing, and such Indemnifying Party
shall assume the defense thereof, including the employment of counsel selected
by such Indemnifying Party and reasonably satisfactory to such Indemnified Party
and the payment of all expenses; provided, however, that any failure to so
notify such Indemnifying Party shall not impair obligations hereunder except if
and only to the extent that such failure results in actual prejudice to such
Indemnifying Party. Such Indemnified Party shall have the right to employ
separate counsel in any such action and to participate in the defense thereof,
but the fees and expenses of such counsel shall be the expense of such
Indemnified Party unless (a) such Indemnifying Party agreed to pay such fees and
expenses or (b) such Indemnifying Party shall have failed to assume the defense
of such action or proceeding or has failed to employ counsel reasonably
satisfactory
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to such Indemnified Party in any such action or proceeding or (c) the named
parties to any such action or proceeding (including any impleaded parties)
include both such Indemnified Party and such Indemnifying Party, and such
Indemnified Party shall have been advised by counsel that there may be one or
more legal defenses available to such Indemnified Party which are different from
or additional to those available to such Indemnifying Party (in which case, such
Indemnifying Party shall employ separate counsel at the expense of such
Indemnifying Party, it being understood, however, that such Indemnifying Party
shall not, in connection with any one such action or proceeding or separate but
substantially similar or related actions or proceedings in the same jurisdiction
arising out of the same general allegations or circumstances, be liable for the
reasonable fees and expenses of more than one separate firm of attorneys at any
time for such Indemnified Party and any other Indemnified Parties). No
Indemnifying Party shall be liable for any settlement of any such action or
proceeding effected without its written consent (which shall not be withheld
unreasonably), but if settled with its written consent, or if there be a final
judgment for the plaintiff in any such action or proceeding, such Indemnifying
Parry agrees to indemnify and hold harmless such Indemnified Party from and
against any Liabilities by reason of such settlement or judgment. No
Indemnifying Party shall agree to any settlement of any third party claim
without the consent of the Indemnified Party, which shall not be withheld if
such settlement provides only for the payment of money to be paid by the
Indemnifying Party.
ARTICLE IX.
MISCELLANEOUS
9.1. SURVIVAL OF REPRESENTATIONS AND WARRANTIES.
All of the representations and warranties made herein shall
survive the Closing.
9.2. NOTICES.
All notices, demands and other communications provided for or
permitted hereunder shall be made in writing and shall be by registered or
certified first-class mail, return receipt requested, courier service or
personal delivery or via facsimile:
(a) if to Purchaser:
US WEST Communications, Inc.
1801 California Street
Suite 5100
Denver, Colorado 80202
Attention: Law Department, Strategic
Transactions Group
with a copy to:
Brownstein Hyatt Farber & Strickland, P.C.
410 Seventeenth Street
Suite 2200
Denver, Colorado 80202
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Attention: John R. Garrett, Esq.
(b) if to USi:
USinternetworking, Inc.
One USi Plaza
175 Admiral Cochrane Drive
Suite 400
Annapolis, Maryland 21401
Attention: Christopher R. McCleary
with a copy to:
Latham & Watkins
1001 Pennsylvania Avenue, N.W.
Suite 1300
Washington, D.C. 20004-2505
Attention: James F. Rogers, Esq.
All such notices and communications shall be deemed to have been duly given:
when delivered by hand, if personally delivered; when delivered by courier, if
delivered by commercial overnight courier service; if delivered by facsimile,
upon confirmation of such transmission; and five business days after being
deposited in the mail, postage prepaid, if mailed.
9.3. SUCCESSORS AND ASSIGNS.
This Agreement shall inure to the benefit of and be binding
upon the successors and permitted assigns of the parties hereto. This Agreement
may be assigned by the Purchaser to any permitted transferee of all or part of
the Note or Conversion Shares. USi may not assign any of its rights under this
Agreement without the written consent of the Purchaser. Except as provided in
this Section 9.3, no Person other than the parties hereto and their successors
and permitted assigns is intended to be a beneficiary of any of the Transaction
Documents.
9.4. AMENDMENT AND WAIVER.
(a) No failure or delay on the part of USi or the
Purchaser in exercising any right, power or remedy hereunder shall operate as a
waiver thereof; nor shall any single or partial exercise of any such right,
power or remedy preclude any other or further exercise thereof or the exercise
of any other right, power or remedy. The remedies provided for herein are
cumulative and are not exclusive of any remedies that may be available to USi or
the Purchaser at law, in equity or otherwise.
(b) Any amendment, supplement or modification of or
to any provision of this Agreement, any waiver of any provision of this
Agreement, and any consent to any departure by any party from the terms of any
provision of this Agreement, shall be effective
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<PAGE>
(i) only if it is made or given in writing and signed by USi (if applicable) and
the Purchaser, and (ii) only in the specific instance and for the specific
purpose for which made or given. Except where notice is specifically required by
this Agreement, no notice to or demand on any party in any case shall entitle
any party hereto to any other or further notice or demand in similar or other
circumstances.
9.5. COUNTERPARTS.
This Agreement may be executed in any number of counterparts
and by the parties hereto in separate counterparts, each of which when so
executed shall be deemed to be an original and all of which taken together shall
constitute one and the same agreement.
9.6. HEADINGS.
The headings in this Agreement are for convenience of
reference only and shall not limit or otherwise affect the meaning hereof.
9.7. GOVERNING LAW.
This Agreement shall be governed by and construed in
accordance with the laws of the State of New York, without regard to the
principles of conflicts of law of such state.
9.8. SEVERABILITY.
If any one or more of the provisions contained herein, or the
application thereof in any circumstance, is held invalid, illegal or
unenforceable in any respect for any reason, the validity, legality and
enforceability of any such provision in every other respect and of the remaining
provisions hereof shall not be in any way impaired, unless the provisions held
invalid, illegal or unenforceable shall substantially impair the benefits of the
remaining provisions hereof.
9.9. RULES OF CONSTRUCTION.
Unless the context otherwise requires, "or" is not exclusive,
and references to sections or subsections refer to sections or subsections of
this Agreement.
9.10. ENTIRE AGREEMENT.
This Agreement, together with the exhibits and schedules
hereto and the other Transaction Documents, is intended by the parties as a
final expression of their agreement and intended to be a complete and exclusive
statement of the agreement and understanding of the parties hereto in respect of
the subject matter contained herein and therein. There are no restrictions,
promises, warranties or undertakings, other than those set forth or referred to
herein or therein. This Agreement, together with the exhibits hereto, and the
other Transaction Documents supersede all prior agreements and understandings
between the parties with respect to such subject matter.
9.11. FURTHER ASSURANCES.
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<PAGE>
Each of the parties shall execute such documents and perform
such further acts (including, without limitation, obtaining any consents,
exemptions, authorizations, or other actions by, or giving any notices to, or
making any filings with, any Governmental Authority or any other Person) as may
be reasonably required or desirable to carry out or to perform the provisions of
this Agreement.
9.12. PUBLICITY.
Except as may be required by applicable law, none of the
parties hereto shall issue a publicity release or announcement or otherwise make
any public disclosure concerning this Agreement or the transactions contemplated
hereby, without prior approval by the other parties hereto, provided that the
Purchaser may nonetheless communicate with its partners concerning such
transactions and investment in USi and may publish a "tombstone" in the
customary form with respect to its investment. If any announcement is required
by law to be made by any party hereto, prior to making such announcement such
party will deliver a draft of such announcement to the other parties and shall
give the other parties an opportunity to comment thereon.
9.13. JURISDICTION.
Each party to this Agreement hereby irrevocably agrees that
any legal action or proceeding arising out of or relating to this Agreement or
any agreements or transactions contemplated hereby may be brought in the courts
of the State of Maryland or of the United States of America for the District of
Maryland and hereby expressly submits to the personal jurisdiction and venue of
such courts for the purposes thereof and expressly waives any claim of improper
venue and any claim that such courts are an inconvenient forum. Each party
hereby irrevocably consents to the service of process of any of the
aforementioned courts in any such suit, action or proceeding by the mailing of
the copies thereof by registered or certified mail, postage prepaid, to the
address set forth in Section 10.2, such service to become effective 10 days
after such mailing
9.14. WAIVER OF JURY TRIAL.
EACH PARTY HERETO HEREBY WAIVES, TO THE FULLEST EXTENT PERMITTED BY
APPLICABLE LAW, ANY RIGHT IT MAY HAVE TO A TRIAL BY JURY IN ANY LEGAL PROCEEDING
DIRECTLY OR INDIRECTLY ARISING OUT OF OR RELATING TO THIS AGREEMENT OR THE
TRANSACTIONS CONTEMPLATED HEREBY (WHETHER BASED ON CONTRACT, TORT OR ANY OTHER
THEORY). EACH PARTY HERETO (A) CERTIFIES THAT NO REPRESENTATIVE, AGENT OR
ATTORNEY OF ANY OTHER PARTY HAS REPRESENTED, EXPRESSLY OR OTHERWISE, THAT SUCH
OTHER PARTY WOULD NOT, IN THE EVENT OF LITIGATION, SEEK TO ENFORCE THE FOREGOING
WAIVER AND (B) ACKNOWLEDGES THAT IT AND THE OTHER PARTIES HERETO HAVE BEEN
INDUCED TO ENTER INTO THIS AGREEMENT BY, AMONG OTHER THINGS, THE MUTUAL WAIVERS
AND CERTIFICATIONS IN THIS SECTION.
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IN WITNESS WHEREOF, the parties hereto have caused this
Agreement to be executed and delivered by their respective officers hereunto
duly authorized as of the date first above written.
USINTERNETWORKING, INC.
By:__________________________________
Name:________________________________
Title:_______________________________
U S WEST COMMUNICATIONS, INC.
By:__________________________________
Name:
Title:
25
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SCHEDULE 1
<TABLE>
<CAPTION>
PURCHASER AMOUNT OF NOTE
<S> <C>
U S WEST $5,000,000
</TABLE>
26
<PAGE>
Exhibit 10.28
AGREEMENT OF LEASE
BY AND BETWEEN
CONSORTIUM ONE--ANNAPOLIS, LLC
A MARYLAND LIMITED COMPANY
(LANDLORD)
AND
USinternetworking, INC.
A DELAWARE CORPORATION
(Tenant)
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AGREEMENT OF LEASE
THIS AGREEMENT OF LEASE is made and entered into this 3rd day of April
1998 by and between CONSORTIUM ONE--ANNAPOLIS, LLC, a Maryland limited
company, hereinafter referred to as "Landlord" and USinternetworking, INC., a
corporation organized and existing under the law of Delaware, hereinafter
referred to as "Tenant".
W I T N E S S E T H:
- - - - - - - - - -
1. PREMISES. In consideration of the rent hereinafter reserved and of
the covenants hereinafter contained, Landlord does hereby lease to Tenant,
and Tenant hereby leases from Landlord, that certain office space consisting
of: (i) the entire Third (3rd) Floor of the Building, as defined below,
consisting of the agreed size of 12,290 rentable square feet of office space;
and (ii) the entire Fourth (4th) Floor of the Building, as defined below,
consisting of 11,970 rentable square feet, all of which as shown on the floor
plans attached hereto as Exhibit A-1 and A-2 respectively, and designated as
Suite 300 and Suite 400 respectively, which space is hereinafter referred to
as the "Premises". The agreed aggregate square footage of the Premises is
approximately 24,260 rentable square feet. The term "Building" shall mean 175
Admiral Cochran Drive, Annapolis, Maryland (the "Building"). Landlord
expressly reserves the right to change the name of the Building; however, in
the event of any such change, Landlord shall provide Tenant with thirty (30)
days advance notice of such change.
2. TERM.
2.1. The term of this Lease shall commence on the date of full
execution hereof by the parties (the "Commencement Date") and shall terminate
at 12:00 o'clock midnight on the last day of the calendar month which
completes Sixty (60) full months of tenancy hereunder. Notwithstanding the
foregoing, and provided Tenant is not otherwise in default of its obligations
hereunder, Basic Rent shall be due commencing on the Rent Commencement Date
as defined at Section 3.1 below.
2.2. After commencement of the Lease Term delivery of possession,
Landlord and Tenant will execute a Confirmation of Lease Certificate, in
accordance with the form attached hereto as Exhibit "B."
3. RENT.
3.1. Commencing on April 1, 1998 (the "Rent Commencement Date")
Tenant covenants and agrees to pay to Landlord annual Basic Rent (at the rate
of $22.00 per square foot) in the amount of Five Hundred Thirty Three
Thousand Seven Hundred Twenty and 00/100 Dollars ($533,720.00), payable in
equal monthly installments of Forty Four Thousand Four Hundred Seventy Six
and 67/100 Dollars ($44,476.67), (the "Monthly Rent") in advance on the first
day of the month during the term of the Lease, less any credits granted by
Landlord pursuant to Section 3.8 below.
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3.2. The Monthly Rent and all additional rent as provided for under
this Lease shall be paid promptly when due, in cash or by check, in lawful
money of the United States, without notice or prior demand and without
deduction, diminution, abatement, counterclaim or setoff of any amount or for
any reason whatsoever, payable to LANDLORD, C/O THE BERNSTEIN COMPANIES,
AGENT 3299 K STREET, N.W., SUITE 700, WASHINGTON, D.C. 20007 or to such other
person and place as may be designated by notice in writing from Landlord to
Tenant from time to time. If Tenant shall present to Landlord more than twice
during the term of this Lease checks or drafts not honored by the institution
upon which they are issued, then Landlord reserves its rights to require that
future payments of rent and additional rent and other sums thereafter payable
be made by certified or cashier's check.
3.3. Other remedies for non-payment notwithstanding, any
installment of rent which is not paid within seven (7) days after the due
date shall be subject, at Landlord's option each month, to a late charge
equal to five percent (5%) of the amount due, which shall be payable as
additional rent. Any installment of Basic Rent or additional rent not paid
within thirty (30) days from the date due shall accrue interest at the rate
of twelve percent (12%) per annum (but in no event at a rate higher than the
maximum rate allowed by law) until paid in full, which interest shall be
deemed additional rent hereunder.
3.4. No payment by Tenant or receipt by Landlord of a lesser amount
than the monthly installments of rent herein stipulated shall be deemed to be
other than on account of the stipulated rent nor shall any endorsement or
statement on any check or any letter accompanying any check or payment as
rent be deemed an accord and satisfaction, and Landlord may accept such check
for payment without prejudice to Landlord's right to recover the balance of
such rent or pursue any other remedy provided in this Lease.
3.5. (a) Simultaneously with the execution of this Lease by Tenant,
Tenant shall deposit with Landlord the sum of Four Hundred Thousand and
00/100 Dollars ($400,000.00), as an additional security deposit in the form
of a Letter of Credit (or a cash deposit to be replaced thereafter by a
Letter of Credit) substantially in the form attached hereto Exhibit E, (the
"Letter of Credit"), which shall not bear interest to Tenant. The Letter of
Credit shall be security for the payment and performance by Tenant of all
Tenant's obligations, covenants, conditions and agreements under this Lease up
through and including December 31, 1999. In the event of any default by
Tenant under the Lease beyond any applicable cure and grace period, or
failure by Tenant to provide landlord with any evidence of extensions of said
credit until December 31, 1999 within 30 days of the expiration of the
initial term of said Letter of Credit, Landlord may immediately draw down on
the Letter of Credit without requirement of notice to Tenant. Landlord shall
have the right, but shall not be obligated, to apply all or any portion of
the Letter of Credit to cure any default by Tenant under the Lease, in which
event Tenant shall be obligated to promptly deposit with Landlord the amounts
necessary to restore the Letter of Credit to its original amount. In the
event Tenant fails to perform its obligations hereunder and Landlord
exercises its rights, the Letter of Credit shall not be deemed liquidated
damages and Landlord may apply the Letter of Credit to reduce Landlord's
damages. Any such application of the Letter of Credit shall not preclude
Landlord from recovering from Tenant all additional damages incurred by
Landlord. In the event of the sale of the Building or the sale or other
transfer of Landlord's interest in the Building, Landlord shall have the
right to transfer the Letter of Credit to the purchaser or transferee,
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in which event Tenant shall look only to the new Landlord for the return of the
Letter of Credit and Landlord shall thereupon be released from all liability to
Tenant for the return of the Letter of Credit.
(b) On or before January 1, 2000, Tenant shall deposit with
Landlord the amount of Forty Four Thousand Seven Hundred Seventy Six and
67/100 Dollars ($44,776.67) which shall be held by Landlord (the "Security
Deposit") as security for the faithful performance by Tenant of all of the
terms, covenants and conditions of this Lease to be kept and performed by
Tenant during the Lease Term. If Tenant defaults with respect to any
provisions of this Lease, including but not limited to the provisions
relating to rent, in addition to Landlord's other remedies hereunder,
Landlord may (but shall not be required to) use, apply or retain all or any
part of the Security Deposit for the payment of any rent or other sum in
default, or to compensate Landlord for any loss or damage which Landlord may
suffer by reason of Tenant's default. If any portion of said deposit is so
used or applied, Tenant, within five (5) days after demand therefor, shall
deposit cash with Landlord in an amount sufficient to restore the Security
Deposit to its original amount, and Tenant's failure to do so shall be a
material breach of this Lease. Said deposit shall not bear interest to
Tenant, unless so required by an applicable provision of law, and shall be
paid to Tenant at the end of the Lease Term, if Tenant is not in default. In
the event Tenant fails to perform its obligations and take possession of the
Premises on the Commencement Date provided for herein, the Security Deposit
shall not be deemed liquidated damages and Landlord may apply the Security
Deposit to reduce Landlord's damages. Any such application of the Security
Deposit shall not preclude Landlord from recovering from Tenant all
additional damages incurred by Landlord. Notwithstanding anything to the
contrary contained in this Lease, prior to any such application, Landlord
shall provide Tenant with ten (10) days written notice of default and intent
to apply the Security Deposit. Within thirty (30) days after the expiration
of the term hereof (as same may be renewed or extended), and provided that
Tenant is not in default under the terms of this Lease, Landlord shall return
the Security Deposit to Tenant, less such portion thereof as Landlord shall
have retained to cure any default by Tenant with respect to any of tenant's
obligations, covenants, conditions or agreements under the Lease. In the
event of the sale of the Building or the sale or other transfer of Landlord's
interest in the Building, Landlord shall have the right to transfer the
Security Deposit to the purchaser or transferee, in which event Tenant shall
look only to the new landlord for the return of the Security Deposit and
Landlord shall thereupon be released from all liability to Tenant for the
return of the Security Deposit. Notwithstanding anything to the contrary set
forth in this Section 3.5, in the event Tenant is not in default of any
provision of this Lease beyond any applicable cure and grace period, Landlord
shall upon tender of the Security Deposit release the Letter of Credit.
3.7. Tenant's pro rata share of increases in Operating Expenses, as
defined in Article 6, is agreed to be Forty One and 33/100 percent (41.33%).
3.8. Notwithstanding anything to the contrary contained in this
Article 3, provided Tenant is not in default of its obligations hereunder
beyond any applicable cure and grace period, Landlord shall provide Tenant
with a rent credit in the aggregate amount of $302,906.68 (the "Rent Credit")
which shall be offset by Tenant in twenty-one (21) equal monthly installments
of $14,424.13 against each month's Monthly Rent commencing on the Rent
Commencement Date
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up through and including Monthly Rent owing for December, 1999. Thereafter,
commencing with the Monthly Rent due on January 1, 2000, Tenant covenants and
agrees to pay to Landlord the full Basic Rent, as adjusted pursuant to
Article 5, absent any credits and offsets of any kind. In the Event of any
Default by Tenant of its obligations under this Lease, Landlord reserves the
right to seek a repayment of this Rent Credit as additional damages in addition
to all other amounts owed under the Lease.
4. USE OF PREMISES.
4.1. Tenant covenants to use the Premises only to carry on the
business of general computer programming and central computer facility,
general office use and for no other purpose, subject to and in accordance
with all applicable zoning and other zoning and other governmental
regulations. Tenant, at its own expense, shall comply with and promptly carry
out all orders, requirements or conditions, imposed by the ordinances, laws
and regulations of all of the governmental authorities having jurisdiction
over the Premises, which are occasioned by or required in the conduct of
Tenant's business within the Premises and to obtain all licenses, permits and
the like required to permit Tenant to occupy the Premises.
4.2. Tenant accepts the Premises from Landlord in "As Is"
condition, except to the extent specifically provided in Exhibit D of this
Lease.
4.3. Tenant shall not permit the Premises, or any part thereof, to
be used for any disorderly, unlawful or hazardous purpose, nor as a source of
annoyance or embarrassment to Landlord or other tenants, nor for any purpose
other than hereinbefore specified, nor for the manufacture of any commodity
therein, without the prior written consent of Landlord.
5. RENT ADJUSTMENT. The first "Lease Year" shall be the period beginning
with the Commencement Date if it is the first day of a calendar month, or if
it is not, then on the first day of the calendar month next succeeding the
Commencement Date and ending twelve (12) months thereafter, with each
succeeding "Lease Year" to be the twelve (12) month period commencing with
the anniversary of the Commencement Date. Effective on the first day of each
successive Lease Year, so long as this Lease remains in effect, the Basic
Rent set forth in Article 3.01 shall be increased on an annual basis by three
percent (3%) of the amount of the Basic Rent which was in effect for the
Lease Year immediately preceding the Lease Year for which the adjustment is
being made, and Tenant thereafter covenants to pay Landlord, during each
ensuing Lease Year such now adjusted Basic Rent.
6. OPERATING EXPENSES--ESCALATION.
6.1. Following the end of each Comparison Year, Tenant shall pay to
Landlord, Additional Rent, within thirty (30) days after receipt of a
statement of the amount thereof, Tenant's pro rata share, as specified in
Paragraph 3.7, of the amount of the increase, if any, of the Operating
Expenses, including Real Estate Taxes for the Comparison Year over the Base
Year. If the system of real estate taxation shall be altered or varied and
any new tax or levy shall be levied or imposed on said land, Building and
improvements, and/or Landlord, in substitution for real estate taxes
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presently levied or imposed on immovables in the jurisdiction where the Building
is located, then any such new tax or levy shall be included within the term
"Real Estate Taxes."
6.2. For purposes of this Article: (a) The term "Operating
Expenses" shall mean any and all expenses incurred by Landlord in connection
with the operation, maintenance and repair of the Building including, but not
limited to the following: Real Estate Taxes, as defined below, and
impositions, general and special, of whatever kind or description levied
against the Building, electricity, fuel, water, sewer, gas, oil and other
utility charges (except to the extent separately submetered pursuant to
Paragraph 8.2 below); security; pest control; cleaning of windows and
exterior curtain walls; janitorial services; trash and snow removal;
landscaping and repair and maintenance of grounds; salaries, wages, and
benefits for employees of Landlord engaged in the operation, maintenance or
repair of the Building, including benefits, payroll taxes and worker's
compensation insurance; license fees, casualty and liability insurance;
building or cleaning supplies; uniforms and dry cleaning service; supplies,
repairs, replacements and other expenses for maintaining and operating the
Building; the cost, including interest, amortized over its useful life or
payback period of any capital improvement made to the Building which is
required under any governmental law or regulation that was not applicable to
the Building at the time it was constructed or of installation of any device
or other equipment which improves the operating efficiency of any system
within the Building and thereby reduces operating expenses; service or
management contracts with independent contractors, general overhead;
administrative expenses; management fees; telephone, telegraph and
stationery. (b) The term "Base Year" shall mean the calendar year 1998. (c)
the term "Comparison Year" shall mean the period of twelve months commencing
on January 1st of each year and ending on December 31st of each year.
6.3. Operating Costs for each calendar year shall be those actually
incurred, provided, however, that if the Building was not at least ninety
five percent (95%) occupied during the entire calendar year, the Operating
Costs shall be adjusted to project the Operating Costs as if the building was
ninety five percent (95%) occupied. in computing the Operating Costs for any
year in which the occupancy level of the Building does not average at least
ninety five percent (95%), the actual cost of all Operating Costs which
fluctuate with the level of occupancy of the Building, (the "Fluctuating
Expenses") including, by way of example and not as a limitation, janitorial
services, maintenance contracts, management fees and utility services, shall
be adjusted by dividing the actual cost of such items by the percentage of
average occupancy of the Building for that year (i.e., if the Building
averaged 50% occupancy, the actual cost of the Fluctuating Expenses would be
divided by.50 to determine the adjusted cost of these items). This adjusted
cost for Fluctuating Expenses would then be multiplied by ninety five percent
(95%) and the resulting product would be added to ninety-five percent (95%)
of the cost of the non-fluctuating expenses to determine the applicable
Operating Expenses for that calendar year. Landlord shall submit to Tenant a
statement of the aforesaid determination, including Tenant's pro rata share
of any increase.
6.4. For purposes of this Article: (a) The term "Real Estate Taxes"
means all taxes, rates and assessments, general and special, levied or
imposed with respect to the land, Building and improvements constructed
thereon including all taxes, rates and assessments, general and special,
levied or imposed for school, public betterment and/or general or local
improvements. (b) The term "Base Real Estate Taxes" means the assessed value
of said land, Building and improvements, multiplied by the then current rate,
for the fiscal year 1997/1998. (c) The term "Real
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Estate Tax Year" means each successive twelve month period following and
corresponding to the period in respect of which the Base Real Estate Taxes are
established, irrespective of the period or periods which may from time to time
in the future be established by competent authority for the purposes of levying
or imposing real estate taxes. (d) Reasonable expenses incurred by Landlord in
obtaining or attempting to obtain a reduction of any Real Estate Taxes shall be
added to and included in the amount of any such Real Estate Taxes. Real Estate
Taxes which are being contested by Landlord shall nevertheless be included for
purposes of the computation of the liability of Tenant under paragraph 6.1
hereof; provided, however, that in the event that Tenant shall have paid any
amount of increased rent pursuant to this Article 6 and Landlord shall
thereafter receive a refund of any portion of any Real Estate Taxes on which
such payment shall have been based, Landlord shall pay to Tenant the appropriate
portion of such refund. Landlord shall have no obligation to contest, object or
litigate the levying or imposition of any Real Estate Taxes and may settle,
compromise, consent to, waive or otherwise determine in its discretion any Real
Estate Taxes without consent or approval of Tenant.
6.5. Nothing contained in this Article 6 shall be construed at any
time to reduce the rents payable pursuant to Articles 3 and 5 of this Lease.
6.6. If the termination date of this Lease shall not coincide with
the end of a Comparison Year, then in computing the amount payable under this
Article 6 for the period between the commencement of the applicable
Comparison Year in question and the termination date of this Lease, the
amount that would have been due from Tenant for the full year, if Tenant had
been a tenant for the entire Comparison Year, shall be pro-rated over the
portion of the Comparison Year that Tenant is a tenant in the Building.
Tenant's obligation to pay increased Operating Expenses under this Article 6
for the final period of the Lease (as well as for any earlier period not paid
as of the expiration of the Lease) shall survive the expiration of the term
of this Lease.
6.7. As soon as practicable after the first day of January next
following the Commencement Date of this Lease, and as soon as practicable
after each first day of January thereafter during the term of the Lease,
Landlord shall submit to Tenant a statement of Landlord's estimate of the
amount by which Operating Expenses for the Comparison Year are expected to
exceed the amount of the Operating Expenses for the Base Year. Commencing
with the first day of the month immediately following the delivery of such
statement, Tenant will pay to Landlord, as additional rent and with the
Monthly Rent, one twelfth (1/12th) of Tenant's Proportionate Share of such
excess of estimated Operating Expenses over Operating Expenses for the Base
Year, together with any arrearage in said excess estimated Operating Expenses
accruing since January 1 of that calendar year. Tenant shall continue to make
payment of one twelfth (1/12) of Tenant's Proportionate Share of such excess
estimated Operating Expenses monthly thereafter, on or before the first day
of each calendar month, until the amount of such payment is next adjusted
after January 1st of the following calendar year for increases in the amounts
of Tenant's Proportionate Share of Operating Expenses as provided for herein.
Landlord reserves the right, throughout the term of this Lease, to require
that Tenant pay each month in advance, as additional rent, one-twelfth of
Tenant's estimated annual obligation under this Article 6. Such payments
shall in no way limit Tenant's annual obligation. If the total of such
monthly installments paid is less than Tenant's total obligation, Tenant
shall promptly pay the difference upon receipt of Landlord's statement. Any
overpayment shall be credited to Tenant's obligation for the next succeeding
period.
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6.8. Within thirty (30) days after the delivery of the Annual
Operating Expense Statement (including any such statement delivered after the
expiration of the term of this Lease), Tenant shall pay to Landlord an amount
equal to (i) Tenant's Proportionate Share of the increase, if any, in the
actual amount of Operating Expenses for the Comparison Year over the Base
Operating Expenses (ii) less the aggregate amount of any monthly payments
toward additional rent made by Tenant during such calendar year and
attributed to the estimated increases in Operating Expenses for such calendar
year. If the aggregate amount of such payments for estimated increases in
Operating Expenses paid by Tenant during such calendar year exceeds Tenant's
Proportionate Share of the actual increases in Operating Expenses, the excess
shall be credited toward payment of the next installments) of estimated
Operating Expense payments required from Tenant pursuant to Section 6.6,
above.
7. REPAIRS AND MAINTENANCE.
7.1. Subject to the provisions hereinafter contained with regard to
damage by fire, Tenant accepts the Premises as being in good and sanitary
order and agrees to maintain the Premises in good order and will suffer no
waste thereto. Tenant shall repair, maintain and preserve the Premises during
the term of this Lease at its sole cost and expense, reasonable use and wear
excepted.
7.2. Landlord shall make structural repairs to the Building
necessary for safety and tenantability, and shall bear the cost thereof
unless required by any act or neglect of Tenant, its agents, employees or
invitee. Landlord shall make such other repairs to the Premises and Building
as may be necessary or desirable in Landlord's judgment, and the cost of such
repairs shall be included in the Operating Expenses. Tenant agrees to report
immediately in writing to Landlord any defective condition in or about the
Premises known to Tenant which Landlord is required to repair, and a failure
to report shall make Tenant liable for any expense, damage or liability
resulting from such defects.
7.3. Landlord reserves the right at any time and from time to time,
as often as Landlord deems desirable, without the same constituting an actual
or constructive eviction and without incurring any liability to Tenant or
otherwise affecting Tenant's obligations under this Lease, to make such
changes, alterations, additions, improvements, repairs, relocations or
replacements in or to the Building (including the Premises if required by any
applicable law or regulation) and the fixtures and equipment thereof, as well
as in or to the street entrances, halls, passages, stairways and other common
facilities thereof, and to change the name by which the Building is commonly
known and/or the Building's address. Landlord reserves the right from time to
time to install, use, maintain, repair and replace pipes, ducts, conduits,
wires and appurtenant meters and equipment for service to other parts of the
Building, above the ceiling surfaces, below the floor surfaces, within the
walls and in the central core areas, and to relocate any pipes, ducts,
conduits, wires and appurtenant meters and equipment included in the Premises
which are located in the Premises or located elsewhere outside the Premises,
and to expand the Building. Nothing contained herein shall be deemed to
relieve Tenant of any duty, obligation or liability with respect to making
any repair, replacement or improvement or complying with any law, order or
requirement of any government or other authority and nothing contained herein
shall be deemed not
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construed to impose upon Landlord any obligation, responsibility or liability
whatsoever, for the care, supervision or repair of the Building or any part
thereof, other than as expressly provided in this Lease.
8. LANDLORD'S SERVICES.
8.1. Landlord covenants and agrees that it shall maintain the
Building in a manner consistent with other Class A office buildings located
in the Annapolis Metropolitan area and shall furnish, between the hours of
8:00 A.M. and 6:00 P.M. Monday through Friday of each week, except holidays
recognized by the U.S. Government, without additional charge: (a) heat and
air conditioning to maintain the Premises at a reasonably adequate
temperature; (b) electricity for lighting purposes and operation of ordinary
office equipment, including computers, telephone equipment, supplemental
HVAC, and other equipment installed in the Premises as of the Commencement
Date excluding such other equipment requiring heavier than normal office use
of electricity, as provided for in paragraph 8.2; (c) elevator service; (d)
janitor and char services; and (e) twenty four (24) hour access to the
Building via a "Kastle type" card system. Overtime HVAC may be available by
prior arrangement with Landlord, and Tenant will be billed at the prevailing
rate then being charged by the utility company, plus Landlord's actual cost
of providing same (including but not limited to engineering costs and an
overhead factor of fifteen percent (15%)). It being understood and agreed,
however, that Landlord shall not be liable in any way for any damage or
inconvenience caused by the cessation or interruption of such heating,
air-conditioning, electricity, elevator, janitor or char service occasioned
by fire, accident, strikes, necessary maintenance, alterations or repairs, or
other causes beyond Landlord's control and Tenant shall not be entitled to
any abatement or reduction of rent by reason thereof. Notwithstanding the
foregoing, Landlord expressly disclaims any representations or warranties of
any kind including but not limited to fitness for a particular purpose that
the present electrical, HVAC and telephone communication systems are
satisfactory for the contemplated use by Tenant of the Premises.
8.2. (a) Tenant shall separately meter and pay, at its sole and
absolute expense, for all electric utility costs incurred in connection with
its use and occupancy of the Premises, including without limitation, the cost
of installing, servicing and maintaining all inside or outside wiring or
lines, meters or submeters, transformers, poles, air-conditioning and heating
costs, or the cost of any other equipment necessary for the Premises.
(b) Tenant shall pay all wiring and utility costs occasioned
by eletrodata processing machines, telephone equipment, fiber optic
equipment, computers and other extraordinary equipment not found in modern
offices of higher than normal electrical consumption which are necessary for
a 24-hour central computing networking facility, including without
limitation, the cost of installing, servicing and maintaining any special or
additional inside or outside wiring or lines, meters or submeters,
transformers, poles, air-conditioning costs, or the cost of any other
equipment necessary for the contemplated power usage of the Premises as a
twenty four hour computing facility.
8.2. Landlord, its agents, employees or contractors may enter the
Premises at all reasonable times and in a reasonable manner, without
diminution in the Monthly Rent payable by Tenant, to examine, inspect, or
protect same, to supply janitor service and any other service to be
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provided by Landlord to Tenant hereunder, to exhibit the Premises to prospective
lenders, purchasers and tenants, and to alter, improve or repair the Premises or
any other portion of the Building. Upon delivery of one (1) day's written notice
to Tenant, Landlord, in order to carry out any construction, maintenance or
repair work deemed necessary by Landlord to the Premises or Building, may erect
scaffolding and other structure where reasonably required by the character of
the work to be performed, provided that Landlord shall use reasonable efforts to
perform its work in a manner that will minimize any interference with the
business of Tenant. Tenant shall furnish Landlord, at all times, with a key to
unlock all of the doors in the Premises, and Landlord shall have the right to
use such keys or any other means which Landlord may deem proper to open said
doors in an emergency. No provision of this Lease shall be construed as
obligating Landlord to perform any repairs, alterations or decorations, except
as otherwise expressly agreed herein to be performed by Landlord. Landlord shall
use reasonable efforts to minimize interference to Tenant's business when making
repairs or installations, but Landlord shall not be required to perform same at
a time other than during normal working hours.
8.3. In the event of an emergency, Landlord may enter the Premises
without notice and make whatever repairs are necessary to protect the
Premises or the Building without any liability whatsoever resulting from such
entry.
9. TENANT'S AGREEMENT.
9.1. Tenant covenants and agrees: (a) not to obstruct or interfere
with the rights of other tenants, or injure or annoy them or those having
business with them or conflict with them, or conflict with the fire laws or
regulations, or with any insurance policy upon said Building or any part
thereof, or with any statutes, rules or regulations now existing or
subsequently enacted or established by the local, state or federal
governments and Tenant shall be answerable for all nuisances caused or
suffered on the Premises, or caused by Tenant in the Building, or parking
facilities, or on the approaches thereto; (b) not to place a load on any
floor exceeding the floor load which such floor was designed to carry in
accordance with the plans and specifications of the Building, and not to
install, operate or maintain in the Premises any unsafe or heavy item of
equipment, without obtaining Landlord's prior written consent (c) not to
strip or overload, damage or deface the Premises, hallways, stairways,
elevators, parking facilities or other public areas of the Building, or the
fixtures therein or used therewith, nor to permit any hole to be made in any
of the same; (d) not to suffer or permit any trade or occupation to be
carried on or use made of the Premises which shall be unlawful, noisy,
offensive, or injurious to any person or property, or such as to increase the
danger of fire or affect or make void or voidable any insurance on the
Building, or which may render any increased or extra premium payable for such
insurance, or which shall be contrary to any law or ordinance, rule or
regulation from time to time established by any public authority; (e) not to
move any furniture or equipment into or out of the Premises except at such
times and in such manner as Landlord may from time to time designate; (f) not
to place upon the interior or exterior of the Building, or any window or any
part thereof or door of the Premises, any placard, sign, lettering, window
covering or drapes, except such and in such place and manner as shall have
been first approved in writing by Landlord and to use building standard
signage on its suite entry door, which shall be installed at Tenant's cost;
(g) to park vehicles only in the area from time to time designated by
Landlord; (h) to conform to all rules and regulations from time to time
established by the appropriate insurance rating organization and to all rules
and regulations from
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time to time established by Landlord, including those attached as Exhibit "C"
hereto; (i) to be responsible for the cost of removal of Tenant's bulk trash
during occupancy and move-out; (j) not to conduct nor permit in the Premises
either the generation, treatment, storage or disposal of any hazardous wastes
or toxic substances of any kind shall include, but not be limited to
substances defined as "hazardous substances" or "toxic substances" in the
Comprehensive Environmental Response, Compensation and Liability Act of 1980,
as amended, 42 U.S.C. Section 9061 ET SEQ.; Hazardous Materials
Transportation Act, 49 U.S.C. Section 1802; and Resource Conservation and
Recovery Act of 1976, 42 U.S.C. Section 6901 ET SEQ. and any other substances
considered hazardous, toxic or the equivalent pursuant to any other
applicable laws and in the regulations adopted and publications promulgated
pursuant to said laws or any other present or future federal, state, county
or local laws or regulations concerning environmental protection, including,
without limitation, any material or substance which is (i) defined or listed
as a "hazardous waste," "extremely hazardous waste," "restricted hazardous
waste," "hazardous material," "pollutant" or "contaminant" under any law,
(ii) petroleum or a petroleum derivative, (iii) a flammable explosive, (iv) a
radioactive material, (v) a polychlorinated biphenyl, or (vi) asbestos or an
asbestos derivative) or future federal, state, county or local laws or
regulations concerning environmental protection, and shall prohibit its
assignees and sublessees and its and their employees, agents and contractors
(collectively: "Permitees") from doing so; and Tenant shall indemnify, defend
and hold Landlord and its agents and partners harmless from all loss; costs,
foreseeable and unforeseeable, direct or consequential; damages; liability;
fines; prosecutions; judgments; litigation; and expenses, including but not
limited to, clean-up costs, court costs and reasonable attorneys' fees
arising out of any violation of the provisions of this Article by Tenant, or
its employees, agents, representatives and invitees.
9.2. Tenant shall be liable for and shall pay when due all taxes
levied against any personal property or trade fixtures placed by Tenant in or
about the Premises. If any such taxes on Tenant's personal property or trade
fixtures are levied against Landlord or Landlord's property, or if the
assessed value of the Premises is increased by the inclusion therein of a
value placed upon such personal property or trade fixtures of Tenant, then
Tenant shall pay to Landlord, as additional rent, the amount of such taxes or
assessments within five (5) days of Landlord's written request for such
payment. In any such event, Tenant shall have the right, at Tenant's sole
cost and expense, to bring suit in the Landlord's name to recover the amount
of any such taxes so paid under protest, and any amount so recovered shall
belong to Tenant.
10. ALTERATIONS.
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10.1. Any and all Tenant Work, as evidenced in the Tenant Work
Schedule attached hereto as Exhibit "D", alterations or improvements shall be
constructed by Tenant at its sole cost and expense in conformance with all
relevant terms and conditions set forth in this Lease. Tenant acknowledges
that Landlord shall bear no liability for damages of any kind to Tenant in
connection with the Tenant Work, except to the extent caused by the gross
negligence and willful misconduct. Tenant further covenants and agrees that
no Tenant Work specifically including any demolition undertaken in connection
therewith may be commenced until the satisfaction of the following conditions
precedent: (i) submission by Tenant to Landlord of final Building Plans and
specifications (the "Plans"); (ii) delivery to Landlord of copies of all
permits and licenses necessary for the Tenant Work; (iii) proof of insurance
for all contractors and subcontractors as provided for in 10.2 below; (iv)
evidence that Tenant has contracted to utilize Union contractors and
subcontractors based upon such proof and documentation satisfactory to
Landlord in its reasonable discretion; (v) approval by Landlord of the Plans;
and (vi) satisfaction of all remaining conditions set forth in Section 10.2.
Upon Landlord's reasonable request during construction and upon completion of
the Tenant Work, Tenant shall provide Landlord with evidence of all lien,
waivers and releases from all contractors and subcontractors.
10.2. Tenant shall not paint the Premises or make any alterations,
additions, or other improvements in or to the Premises or install any
equipment of any kind that will require any alterations or additions or
affect the use of the Building's water system, heating system, plumbing
system, HVAC system, or electrical system, or install any telephone antennae
on the roof, in the windows, or upon the exterior of the Premises, without
the prior written consent of Landlord. If any such alterations or additions
are made by Tenant without Landlord's consent, Landlord may correct or remove
them and Tenant shall be liable for any and all costs and expenses incurred
in the correction or removal of such work. All plans and specifications for
any such work shall be prepared by Tenant at Tenant's expense and shall
thereafter be submitted to Landlord for review. All alterations and additions
to the Premises shall be performed by Landlord, or Landlord's contractor
unless Landlord shall otherwise agree in writing. If any alterations or
additions with Landlord's consent are not performed by Landlord or its
contractor, Tenant shall nevertheless pay Landlord a fee of ten percent of
the total cost of the work to be performed, payable five percent prior to the
beginning of the work and the remaining five percent upon completion of the
work. This fee is to compensate Landlord for coordinating Tenant's
contractor's use of the Building's systems and for access to the electrical,
mechanical and telephone closets, as necessary. As a further condition of
Landlord's consent to the use of Tenant's contractor, Tenant or Tenant's
contractor must evidence to Landlord certain criteria including but not
limited to: (a) insurance coverage to include: (i) worker's compensation
coverage and (ii) public liability and property damage Insurance in the
amount of not less than One Million Dollars ($1,000,000.00) in the aggregate;
(b) lien waivers for such contractor or other persons; (c) specified
completion performance and/or lien indemnity bonds and insurance; and (d) an
acknowledgement by the contractor that such work is being performed for
Tenant who is not the owner of the Building but a tenant. All work with
respect to such alterations and additions shall be done, at Tenant's sole
expense, in a good and workmanlike manner and diligently prosecuted to
completion to the end that Premises shall at all times be a complete unit
except during the period necessarily required for such work. Tenant covenants
and agrees that all Alterations contracted for by Tenant shall be performed
in full compliance with all laws, ordinances, regulations and requirements of
all governmental and quasi-governmental authorities having jurisdiction.
Landlord shall not be liable for any damages or
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losses caused by Tenant's contractors, and Tenant agrees to pay any and all
expenses, reasonable attorneys' fees, claims for and damages to persons or
property which may arise directly or indirectly by reason of making any
Alterations.
10.3. Tenant shall not permit a mechanic's lien(s) to be placed
upon the Premises, the Building as a result of any alterations or
improvements made by it and agrees, if any such lien be filed on account of
the acts of Tenant, promptly to pay the same. In the event Tenant fails to
pay any such lien, it may be paid by Landlord and the cost charged to Tenant
as additional rent under this Lease. Tenant hereby expressly recognizes that
in no event shall it be deemed an agent of Landlord and no contractor of
Tenant shall by virtue of its contract be entitled to assert any lien against
the Building. If any mechanic's lien, whether final, interlocutory or
otherwise, is filed against the Premises or the Building for work claimed to
have been furnished to Tenant, such mechanic's lien shall be discharged by
Tenant, at its sole cost and expense, within five (5) days from receipt of
notice of such lien, either by the satisfaction in full of the lien or by
filing any bond required by law to fully discharge the lien. If Tenant shall
fail to discharge any such mechanic's lien, Landlord may, at its option,
discharge the same the treat the cost thereof, together with any other costs
or expenses incurred by Landlord, including reasonable attorneys' fees, as
additional rent, due and payable upon receipt by Tenant of a written
statement of costs from Landlord. It is hereby expressly agreed that such
discharge of any mechanic's lien by Landlord shall not be deemed to waive or
release Tenant from its default under the Lease for failing to discharge the
same.
10.4. All alterations or additions shall become a part of the
realty and surrendered to Landlord upon the expiration or termination of this
Lease, unless Landlord shall at the time of its approval of such work require
removal or restoration on the part of Tenant as a condition of such approval.
All Alterations, Pre-occupancy Tenant Work, approved Tenant Work,
decorations, additions or improvements upon the Premises, made by either
party shall become and remain the property of Landlord. Provided this Lease
is not in default by Tenant, Landlord may, by written notice to Tenant,
permit Tenant to remove at its sole expense, without causing material damage
to the Premises and the Building, any fixtures, property or Alterations
installed by Tenant, which Tenant has not been granted any credit or
allowance by Landlord. Tenant shall repair any damage to the Premises arising
from such removal or, at Landlord's option, shall pay to Landlord all
Landlord's reasonable costs of such repair.
10.5. Any further changes, modifications, alterations or additional
work within the premises shall be at Tenant's sole cost and expense. Tenant
shall be responsible for all costs and compliance with any permit required by
the applicable federal, county and/or state codes in connection with the
Alterations, including any requirements of the Americans With Disabilities
Act (42 U.S.C. Section 120101 ET. SEQ.).
10.6. Business machines and mechanical equipment belonging to
Tenant, which cause noise, vibration or other types of interference that may
be transmitted to the structure of the Building or to any space therein to
such a degree as to be objectionable to Landlord or to any tenant in the
Building, shall be installed and maintained by Tenant, at its sole expense,
on vibration eliminators or other devices sufficient to eliminate such noise,
vibration or interference.
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10.7. Subject to the terms and conditions of this Article 10 and
9.1 above, Landlord hereby consents to Tenant's installation, for no
additional rent, one (1) diesel generator (the "Generator") upon such portion
of the exterior common area of the Building as reasonably requested by Tenant
and consented to by Landlord, in its reasonable discretion conditioned upon,
amongst other things, the installation of a "shed" over the Generator to be
used to minimize any unappealing characteristics of the Generator. The
Generator will be located in such area, as established by Landlord in its
reasonable discretion, and in such a manner that the visibility and aesthetic
character of the Generator will be minimized from the front of the Building
and not otherwise detract from the appearance of the Building. The
installation of the Generator will be subject to the following provisions:
(a) Tenant at its own expenses, shall install such
Generator, in accordance with all the applicable codes of the appropriate
governing authority and using licensed and bonded contractors.
(b) The installation of the Generator and use shall not
interfere with any existing equipment of the Landlord or other tenants of the
Building; Provided, however, if Tenant is unable to eliminate the inference
at a reasonable cost to Tenant and to Landlord's reasonable satisfaction, and
Landlord elects to require the removal of the Generator, then Tenant shall
remove same.
(c) Tenant shall be responsible for all costs and expense
related to installing, maintaining, repairing, replacing and removing the
Generator including but not limited to regulatory approval and compliance
(including costs of Landlord's attorneys fees if necessary), liability,
property casualty insurance (at market levels) plus other insurance as from
time to time reasonably specified by Landlord;
(d) The Generator shall be installed and maintained at
Tenant's sole risk of loss and no claim shall be made shall be made against
Landlord by Tenant, or by any agent or servant of Tenant for any injury, loss
or damage to the Generator or to any person performing work on the Generator
unless due to the negligence or willful misconduct of Landlord, its agents or
employees. In no event shall Landlord be liable to Tenant for any
consequential damages sustained by Tenant arising out of the loss or damage
to the Generator;
(e) Tenant shall save Landlord and Landlord's Agent
harmless and indemnified from all loss, damage, liability or expense of any
kind, incurred, suffered or claimed by any person whomsoever, including but
not limited to Landlord, its Agent, and other tenants of the Building, for
any damage or injury to any persons or property from any cause whatsoever
relating to the Generator unless due to the gross negligence or willful
misconduct of Landlord, its agents or employees;
(f) Tenant shall obtain, at its sole cost and expense, all
necessary permits and regulatory approval from the applicable government
and/or regulatory agencies for the operation of the Generator.
(g) That the Generator shall be deemed to be an Alteration
and subject to the express provisions of Article 10, except that no
additional consent shall be required and so long as
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no default exits and remains uncured beyond any applicable cure and grace period
Tenant may remove the Generator at its sole cost and expense and thereafter
restore the common area to the condition as of the Commencement Date;
10.8. Further, and subject to the terms of this Article 10, Tenant
is hereby authorized, at its sole cost and expense to install a "Battery
Powered Backup System" (the "Battery Pack") within the Premises which shall
be maintained by Tenant at its sole risk of loss. Tenant shall be required to
pay for all additional installation, connection, utilities, maintenance and
repairs caused by such Battery Pack. Tenant further covenants and agrees that
any installation of such Battery Pack will be removed if it causes any
disturbance to the quiet enjoyment of any other tenant in the Building. And,
Tenant shall be permitted, provided no event of default exists and remains
uncured beyond any applicable cure and grace period, to remove the Battery
Pack at the expiration of the Lease Term.
10.9 (a) The Premises shall be delivered to Tenant on the Effective
Date in "as is" condition existing as of the date of this Lease. Any and all
Tenant Work shall be constructed by Tenant at its sole cost and risk of loss,
and in conformance with all relevant terms and conditions set forth in the
Lease. Landlord shall bear no liability for any damages to Tenant relating to
any Alterations.
(b) The Alterations shall include but not be limited to
demolition of the third (3rd) floor, the installation of partitions, wall
finishes, raised floor computing room, window coverings, electrical system,
and lighting, and any space planning, architectural and engineering plans in
connection therewith all of which shall be subject to Landlord's prior
written approval.
11. HOLD HARMLESS.
11.1. Excepting any damage caused by Landlord's gross negligence or
willful misconduct, Landlord shall not be liable for any damage to, or loss
of, personal property in the Premises belonging to Tenant, its employees,
agents, visitors, licensees or other persons in or about the Premises, or for
damage or loss suffered by the business of Tenant, from any cause whatsoever,
including, without limiting the generality thereof, such damage, or loss
resulting from fire, steam, smoke, electricity, gas, water, rain, ice or
snow, which may leak or flow from or into any part of the Premises, or from
the breakage, leakage, obstruction or other defects of the pipes, wires,
appliances, plumbing, air-conditioning or lighting fixtures of the same,
whether the said damage or injury results from conditions arising upon the
Premises or upon other portions of the Building of which the Premises are a
part, or from other sources. Landlord shall not be liable in any manner to
Tenant, its agents, employees, invitees or visitors for any injury or damage
to Tenant, Tenant's agents, employees, invitees or visitors, or their
property, caused by the criminal or intentional misconduct, or by any act or
neglect of third parties or of Tenant, Tenant's agents, employees, invitees
or visitors, or of any other tenant of the Building. Tenant covenants that no
claim shall be made against Landlord by Tenant, or by any agent or servant of
Tenant, or by others claiming the right to be in the Premises or in the
Building through or under Tenant, for any injury, loss or damage to the
Premises or to any person or property occurring upon the Premises from any
cause other than the gross negligence or willful misconduct of Landlord. In
no event shall Landlord be liable to Tenant for any consequential damages
sustained by Tenant arising out of the loss or
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damage to any property of Tenant.
11.2. Tenant covenants and agrees to save Landlord and Landlord's
Agent harmless and indemnified from all loss, damage, liability or expense of
any kind, incurred, suffered or claimed by any person whomsoever, or for any
damage or injury to any persons or property from any cause whatsoever, by
reason of the use or occupancy by Tenant, its agents, employees, invitees or
visitors of the Premises, or of the Building, or the parking facilities or
any other common element not caused by the gross negligence or willful
misconduct of Landlord.
11.3. It is understood that employees of Landlord are prohibited as
such from receiving any packages or other articles delivered to the Building
for Tenant and that should any such employee receive any such packages or
articles, he or she in so doing shall be the agent of Tenant and not of
Landlord.
12. LIEN ON TENANT'S PROPERTY.
12.1. Landlord shall have a lien for the payment of the rent
aforesaid upon all of the goods, wares, chattels, fixtures, furniture and
other personal property of Tenant which may be in or upon the Premises.
Tenant hereby specifically waives any and all exemptions allowed by law; and
such lien may be enforced on the nonpayment of any installment of rent by the
taking and selling of such property in the same manner as in the case of
chattel mortgages on default thereunder, said sale to be made upon ten days
notice served upon Tenant by posting upon the Premises or by leaving same at
his place of residence; or such lien may be enforced in any other lawful
manner at the option of the Landlord.
12.2. Provided Tenant is not in default of this Lease, Tenant, at
its sole expense, shall remove all articles of personal property and all
business and trade fixtures, machinery and equipment, furniture and movable
partitions installed by Tenant ("Tenant's Property") at the expiration,
surrender or earlier termination of the Lease. Tenant shall repair any damage
caused by such removal to the condition of the Premises as of the
Commencement Date. Tenant's obligation to repair any damage to the Premises
caused by such removal shall survive the expiration or earlier termination of
the Lease term. If Tenant, for any reason whatsoever, shall fail to remove
all of its effects from the Premises upon termination or expiration of this
Lease, Landlord, at its option, may remove same in any manner that Landlord
shall choose, and store said effects, at Tenant's sole expense, without
liability to Tenant for loss thereof. Tenant agrees to pay Landlord as
Additional Rent, upon demand, any and all reasonable expenses incurred in
such removal, including court costs and reasonable attorneys' fees and
reasonable storage charges on such effects for any length of time that the
same shall be in Landlord's possession, custody or control, in addition,
Landlord, at its option and pursuant to the laws of the jurisdiction in which
this Building is located, may sell said effects, or any of them, at private
sale and without legal process, for such price as Landlord may obtain and
apply the proceeds of such sale against any amounts due under this Lease from
Tenant to Landlord and against the expenses incidental to the removal and
sale of said effects.
13. INSURANCE.
13.1. Tenant shall, at its cost and expense, obtain and maintain at
all times during
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the term of this Lease, for the protection of Landlord and Tenant, Public
Liability Insurance (Comprehensive General Liability or Commercial General
Liability) including Contractual Liability Insurance, with a combined personal
injury and property damage limit of not less than Five Hundred Thousand Dollars
($500,000.00) each occurrence and not less than One Million Dollars
($1,000,000.00) in the aggregate, insuring against all liability of Tenant and
its authorized representatives arising out of and in connection with Tenant's
use or occupancy of the Premises. Landlord and Landlord's Agent shall be named
as additional insureds.
13.2. Tenant shall, at its cost and expense, obtain and maintain at
all times during the term of this Lease, fire and extended coverage insurance
on the Premises and its contents, including any leasehold improvements made
by Tenant, in an amount sufficient so that no coinsurance penalty shall be
invoked in case of loss.
13.3. Tenant shall increase its insurance coverage, as required,
but not more frequently than each year if, in the opinion of Landlord or the
mortgagee of Landlord, the amount of public liability and property damage
insurance coverage at that time is not adequate.
13.4. All insurance required under this Lease shall be issued by
insurance companies licensed to do business in the jurisdiction where the
Building of which the Premises is a part is located. Such companies shall
have a policyholder rating of at least "A" and be assigned a financial size
category of at least "Class VIII" as rated in the most recent edition of
"Best's Key Rating Guide" for insurance companies. Each policy shall contain
an endorsement requiring thirty days written notice from the insurance
company to Landlord before cancellation or any change in the coverage, scope
or amount of any policy. Each policy, or a certificate showing it is in
effect, together with evidence of payment of premiums, shall be deposited
with Landlord at the commencement of the Lease, and renewal certificates or
copies of renewal policies shall be delivered to Landlord at least thirty
days prior to the expiration date of any policy.
13.5. Landlord and Tenant, for themselves and their respective
successors in interest, each waive the right of subrogation for all risk of
loss or damage to property of the other located in the Premises, regardless
whether such loss or damage is caused by the negligence of either party. Any
willful or malicious action on the part of either party voids this waiver.
Landlord and Tenant shall each obtain and maintain endorsements to their
respective insurance policies containing such a mutual waiver of the right of
subrogation. This waiver of subrogation does not extend to claims which are
required to be covered by Tenant's contractor's insurance required under
Paragraph 10.01, above.
14. ASSIGNMENT & SUBLETTING.
14.1. Tenant shall not assign, transfer, mortgage or encumber this
Lease or sublet the Premises without obtaining the prior written consent of
Landlord, which shall not be unreasonably withheld nor shall any assignment
or transfer of this Lease be effectuated by operation of law or otherwise
without the prior written consent of Landlord. Consent shall not be
unreasonably withheld or delayed; excepting however, Tenant shall not assign
this Lease, sublet the Premises, or permit occupancy or use of the Premises
or any part thereof by another party or parties, without giving Landlord
fifteen (15) days written notice of proposed assignment or
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proposed subletting of all or any part of the Premises. The consent by Landlord
to any assignment, transfer, or subletting to any party other than Landlord
shall not be construed as a waiver or release of Tenant from the terms of any
covenant or obligation under this Lease, nor shall the collection or acceptance
of rent from any such assignee, transferee, subtenant or occupant constitute a
waiver or release of Tenant from any covenant or obligation contained in this
Lease, nor shall such assignment or subletting be construed to relieve Tenant
from obtaining the consent in writing of Landlord to any further assignment or
subletting. In the event that Tenant defaults hereunder, Tenant hereby assigns
to Landlord the rent due from any subtenant of Tenant and hereby authorizes each
such subtenant to pay said rent directly to Landlord.
14.2. Any transfer of a cumulative total of more than twenty-five
percent (25%) of any legal and/or beneficial interest in Tenant (regardless
of whether Tenant is a corporation, partnership or other entity), after the
date hereof, whether to one or more persons or entities, whether at one or
more different times, and whether voluntarily, by operation of law, or
otherwise, shall be deemed as assignment of this Lease within the meaning of
Article 14.
14.3. In the event a portion of the Premises is subleased, Tenant
shall continue to pay Basic Rent as provided in Paragraph 3.01 above, and, in
addition, Tenant shall be required to pay to Landlord during each month of
the term of the sublease, and within five (5) days of receipt of rent from
subtenant, fifty percent (50%) of the amount of payable by such subtenant in
excess of the amount of Basic Rent payable by Tenant hereunder with respect
to that portion of the sublet Premises.
14.4 Notwithstanding anything to the contrary contained in this
Section 14, commencing upon the approval by Landlord of an acceptable form of
sublease, Tenant shall be authorized to sublease a portion of the Premises on
the Fourth Floor to Lear Siglar, Inc. ("Siglar"). Except for Siglar's rights
against Tenant as a subtenant, Siglar shall not be granted any possessory,
occupancy or similar interest in and to the Premises by virtue of their
subtenancy. Siglar is bound to comply with all terms of this Lease concerning
use and occupancy of the Premises and the conduct of their business therein.
No act or omission by Siglar shall constitute an excuse of performance for
any of Tenant's obligations hereunder. In the event that the Lease is
terminated, surrendered or rejected, then the Siglar subtenancy shall by
deemed terminated and they will be required to immediately vacate the
Premises.
15. LANDLORD'S RIGHT OF ACCESS.
15.1. Landlord may, at any time during Tenant's occupancy during
reasonable business hours, enter either to view the Premises or to show the
same to others, or to facilitate repairs to the Building, or to introduce,
replace, repair, alter or make new or change existing connections from any
fixtures, pipes, wires, ducts, conduits or other construction therein, or
remove, without being held responsible therefor, placards, signs, lettering,
window or door coverings and the like not expressly consented to by Landlord.
15.2. If Tenant shall carpet over the access panels of the
underfloor duct system in the floor of the Premises (if applicable), Landlord
is hereby authorized and permitted to cut such carpeting to reach the ducts
in such panels in order to make any necessary connections therefrom to
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service other parts of the Building. Landlord shall have the carpeting
restitched in a workmanlike manner and Tenant agrees to reimburse Landlord for
the cost of such cutting and restitching.
15.3. Landlord may within sixty days next preceding the expiration
of the term, enter the Premises free from hindrance or control of Tenant to
show the Premises to prospective tenants at times which will not unreasonably
interfere with Tenant's business. If Tenant shall vacate the Premises during
the last month of the term of this Lease, Landlord shall have the
unrestricted right to enter the same after Tenant's moving to commence
preparations for the succeeding tenant or for any other purpose whatever,
without affecting Tenant's obligation to pay rent for the full term.
16. FIRE CLAUSE.
16.1. If the Premises shall be damaged by fire or other casualty
insured against by Landlord's fire and extended coverage insurance policy
covering the Building, and the Premises can be fully repaired, in Landlord's
opinion, within one hundred and eighty (180) days from the date of such
damage, Landlord, at Landlord's expense, shall repair such damage; provided,
however, Landlord shall have no obligation: (a) to repair any damage to, or
to replace, Tenant's non-Preoccupancy Tenant Work standard tenant
improvements or any other property located in the Premises; (b) to repair if
such damage occurs during the last year of the lease term (excluding any
renewal option which is unexercised at the date of such damage); or (c) to
repair if the mortgagee does not allow the insurance proceeds to be used for
such purposes. Except as otherwise provided herein, until the repairs to the
Premises are substantially completed, the Monthly Base Rent shall abate
pro-rata based on the part of the Premises which is unusable by Tenant. No
compensation or rent deduction shall be made for inconvenience, annoyance or
injury to business. If, however, the Premises are rendered wholly
untenantable by fire or other cause as determined by the Fire Marshall for
Anne Arundel County, Maryland or such other duly authorized governmental
individual or entity having jurisdiction over said matters, and Landlord
shall decide not to rebuild the same, or if the entire Building be so damaged
that Landlord shall decide to demolish it or not to rebuild it, then or in
any of such events, Landlord may, at its option, cancel and terminate this
Lease by giving Tenant notice in writing, within sixty (60) days of the
occurrence of the event causing the damage, of its intention to cancel this
Lease, whereupon the term of this Lease shall terminate upon the thirtieth
(30th) day after such notice is given and Tenant shall vacate the Premises
and surrender the same to Landlord. In no event shall Landlord be liable to
Tenant except to the extent provided in this Article 16, and without limiting
the foregoing, Landlord shall not be responsible for consequential damages,
lost profits or any damage to Tenant's personal property.
16.2. Effective upon any termination of this Lease and the
surrender of the Premises by Tenant under any of the provisions of this
Article 16, the parties shall be released thereby and neither party shall
have any further liability to the other for any matters arising under this
Lease, except for rent, violations regarding Hazardous Materials and other
items which accrued prior to the effective date of termination and are then
unpaid or which this Lease provides shall survive its termination.
16.3. It is hereby understood that if Landlord is obligated or
elects to repair or restore as herein provided, Landlord shall be obligated
to make repairs or restoration only of those
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portions of the Building and the Premises which were originally provided at
Landlord's expense, and the repair and restoration of items not provided at
Landlord's expense shall be the obligation of Tenant. In no event shall Landlord
be obligated to repair or restore any trade fixture, furnishings, equipment or
personal property belonging to Tenant.
17. CONDEMNATION.
17.1. This Lease shall be terminated and the rental payable
hereunder shall be abated to the date of such termination in either of the
two following events, namely: (a) the forcible leasing or condemnation of the
Premises, Building or any part thereof by any competent authority under right
of eminent domain for any public or quasi-public use or purpose; and (b) the
condemnation by competent authority under right of eminent domain for any
public or quasi-public use or purpose of twenty-five percent or more of the
Building in which the Premises are located. The forcible leasing by any
competent authority of any portion of the Building other than the Premises
shall have no effect upon this Lease. In case of any taking or condemnation,
whether or not the term of this Lease shall cease and terminate, the entire
award shall be the property of Landlord, and Tenant hereby assigns to
Landlord all its right, title and interest in and to any such award. Tenant,
however, shall be entitled to claim, prove and receive in the condemnation
proceeding such awards as may be allowed for fixtures and other equipment
installed by it, but only if such awards shall be made by the Court in
addition to the award made by it to Landlord for the land and improvements or
part thereof so taken.
18. DEFAULTS AND REMEDIES.
18.1. It is hereby mutually covenanted and agreed that: (a) if
Tenant shall fail to make any payment of Basic Rent or Additional Rent, or
keep and perform each and every covenant, condition and agreement herein
contained on the part of Tenant to be kept and performed; or (b) if Tenant
shall abandon or evidence any intention to abandon all or any portion of the
Premises; or (c) if the estate hereby created shall be taken by execution or
other process of law; or (d) if Tenant shall (i) generally not pay Tenant's
debts as such debts become due, (ii) become insolvent (iii) make an
assignment for the benefit of creditors, (iv) file, be the entity subject to,
or acquiesce in a petition in any court (whether or not filed by or against
Tenant pursuant to any statute of the United States or any state and whether
or not for a trustee, custodian, receiver, agent, or other officer for Tenant
or for all or any portion of Tenant's property) in any proceeding whether
bankruptcy, reorganization, composition, extension, arrangement, insolvency
proceedings, or otherwise; or (e) violate any term or condition of Article 10
above; then, and in each and every such case, from thenceforth and at all
times thereafter, at the sole option of Landlord, Tenant's right of
possession shall thereupon cease and terminate, and Landlord shall be
entitled to the possession of the Premises and to remove all persons and
property therefrom and to reenter the same without further demand of rent or
demand of possession of the Premises, either with or without process of law
and without becoming liable to prosecution therefore, any notice to quit or
of intention to reenter being hereby expressly waived by Tenant. In the event
of such reentry or retaking by Landlord, Tenant shall nevertheless remain in
all events liable and answerable for the full rental to the date of retaking
or reentry, and Tenant shall also be and remain answerable in damages for the
deficiency or loss of rent as well as all related expenses which Landlord may
thereby sustain in respect to the balance of the term; and in such case
Landlord reserves full power, which is hereby acceded to by Tenant, to let
said Premises for
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the benefit of Tenant, in liquidation and discharge in whole or in part, as the
case may be, of the liability of Tenant under the terms and provisions of this
Lease, and such damages and related expenses, at the option of Landlord, may be
recovered by it at the time of the retaking and reentry, or in separate actions,
from time to time, as Tenant's obligation to pay rent would have accrued if the
term had continued, or from time to time, as said damages and related expenses
shall have been made more easily ascertainable by relettings of the Premises, or
such action by Landlord may, at the option of Landlord, be deferred until the
expiration of the term, in which latter event the cause of action shall not be
deemed to have accrued until the date of the termination of said term.
18.2. The provisions of this Article 18 are subject to the
Bankruptcy Laws of the United States which may, in certain cases, limit the
rights of Landlord to enforce some of the provisions of this Article in
proceedings thereunder. To the extent that limitations exist by virtue
thereof, the remaining provisions hereof shall not be affected thereby but
shall remain in full force and effect. The provisions of this Article 18
shall be interpreted in a manner which reserves Landlord's rights to
terminate this Lease in each and every instance, and to the fullest extent
and at the earliest moment that such termination is permitted under the
federal bankruptcy laws, it being of prime importance to the Landlord to deal
only with Tenants who have, and continue to have, a strong degree of
financial strength and financial stability.
18.3. All rents received by Landlord in any reletting after
Tenant's default shall be applied, first to the payment of such expenses as
Landlord may have incurred in recovering possession of the Premises and in
reletting the same (including brokerage fees), second to the payment of any
costs and expenses incurred by Landlord, either for making the necessary
repairs (including fitting up the space for such reletting) to the Premises
or in curing any default on the part of the Tenant of any covenant or
condition herein made binding upon Tenant, and last, any remaining rent shall
be applied toward the payment of rent due from Tenant under the terms of this
Lease, together with interest and penalties as defined in Article 3.04, and
Tenant expressly agrees to pay any deficiency then remaining. Landlord shall
in no event be liable in any way whatsoever (nor shall Tenant be entitled to
any setoff) for Landlord's failure to relet the Premises, and Landlord, at
its option, may refrain from terminating Tenant's right of possession, and in
such case may enforce against Tenant the provisions of this Lease for the
full term thereof.
18.4. In the event Tenant defaults in the performance of any of the
terms, covenants, agreements or conditions contained in this Lease and
Landlord places in the hands of an attorney or collection agency the
enforcement of all or any part of this Lease, the collection of any rent due
or to become due or recovery of the possession of the Premises, Tenant agrees
to pay to Landlord as Additional Rent Landlord's costs of collection and
enforcement, including reasonable attorney's fees, whether suit is actually
filed or not, architect's fees and real estate broker's fees.
18.5. To the fullest extent permitted by law, and notwithstanding
any further or additional remedies afforded Landlord in this Lease, at law or
in equity, in the event Tenant, for two (2) or more consecutive months, is in
default of its obligations under this Lease, and such default remains uncured
at the expiration of applicable notice and cure periods, if any, Landlord may
accelerate and declare to be immediately due, and Tenant agrees to pay to
Landlord promptly upon receipt of written demand therefor, all sums which
would otherwise be due from Tenant to Landlord throughout the remainder of
the term of this Lease, including any renewal period for
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which Tenant is then obligated discounted at a rate equal to two (2) points
below the one (1) year United States Treasury Note rate in effect as of the date
of acceleration (i.e. if the one year United States Treasury Note rate is 8%,
the discount rate is 6%). Such sums shall include but not be limited to Monthly
Rent, costs of Pre-occupancy Tenant Work and any sums, charges, expenses and
costs of any kind or nature identified in this Lease as additional rent. In the
event of any such acceleration by Landlord and payment by Tenant, if Landlord
shall relet the Premises or any part thereof (the parties expressly
acknowledging that Landlord shall be under no such obligation to relet the
Premises), Landlord shall, on an annual basis, within sixty (60) days of the end
of each calendar year, provide Tenant with an accounting of all sums received by
Landlord as rent or otherwise from any such reletting. If the accelerated amount
collected by Landlord from Tenant for the relevant period, together with the sum
actually collected from the follow-on tenant for that period, exceed the amount
to which Landlord would otherwise have been entitled under this Lease absent the
acceleration provided for in this Section, Landlord shall reimburse Tenant for
such excess up to the accelerated amount actually paid by Tenant for the
relevant period. Notwithstanding the foregoing, Tenant shall not be entitled to
any such excess sums unless and until Landlord has been fully reimbursed for any
and all expenses or any party thereof, with such expenses to include but not be
limited to brokerage fees, reasonable attorneys' fees, advertising costs,
build-out costs incurred to restore the Premises to first class rentable
condition for the replacement tenant.
19. SUBORDINATION CLAUSE. This Lease shall be subject and subordinate at
all times to the lien of any mortgage or deed of trust encumbrance or
encumbrances which may now or which may at any time hereafter be made upon
the Building of which the Premises is a part or upon Landlord's interest
therein. This clause shall be self operative, and no further instrument of
subordination shall be required to effect the subordination of this Lease.
Nonetheless, in confirmation of such subordination, Tenant shall execute and
deliver such further instrument or instruments subordinating this Lease to
the lien of any such mortgage or deed of trust, encumbrance or encumbrances
as shall be desired by any mortgagee or party secured or proposed mortgagee
or party proposed to be secured, and Tenant hereby appoints Landlord the
attorney-in-fact of Tenant, irrevocably, to execute and deliver any such
instrument or instruments for Tenant. if the interests of Landlord under this
Lease shall be transferred by reason of foreclosure or other proceedings for
enforcement of any mortgage or deed of trust on the Premises or Building,
Tenant shall be bound to the transferee at the option of the transferee,
under the terms, covenants and conditions of this Lease for the balance of
the term remaining, including any extensions or renewals, with the same force
and effect as if the transferee were Landlord under this Lease, and, if
requested by transferee, Tenant agrees to attorn to the transferee as its
Landlord.
20. SURRENDER OF POSSESSION. Tenant covenants, at the expiration or
other termination of this Lease, to remove all goods and effects from the
Premises not the property of Landlord, remove all non-standard alterations
and restore the Premises to its initial state, unless Landlord has agreed in
writing to allow such alterations to remain, all at Tenant's expense, and to
yield up to Landlord the Premises and all keys, gate cards, security cards,
locks and other fixtures connected therewith in good repair, order and
condition in all respects, reasonable wear and use thereof and damage by fire
or other casualty, not caused by Tenant's act or neglect, only excepted. A
fee of Twenty-five and 00/100 Dollars ($25.00) each shall be charged for
parking passes and security cards not returned to Landlord.
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21. TENANT HOLDING OVER.
21.1. If Tenant shall not immediately surrender possession of the
Premises at the termination of this Lease, Tenant shall become a tenant from
month-to-month, provided rent shall be paid to and accepted by Landlord, in
advance, at one hundred fifty percent (150%) of the rate of rental payable
hereunder just prior to the expiration of this Lease but unless and until
Landlord shall accept such rental from Tenant, Landlord shall continue to be
entitled to retake or recover possession of the Premises as hereinbefore
provided in case of default on the part of Tenant, and Tenant shall be liable
to Landlord for any loss or damage it may sustain by reason of Tenant's
failure to surrender possession of the Premises immediately upon the
expiration of the term hereof. Tenant hereby agrees that all the obligations
of Tenant and all rights of Landlord applicable during the term of this Lease
shall be equally applicable during such period of subsequent occupancy,
whether or not a month-to-month tenancy shall have been created as aforesaid.
Tenant shall be entitled to thirty (30) days' written notice to quit the
Premises, except in the event of non-payment of the modified Monthly Rent or
additional rent, or any other default by Tenant of its obligations under this
Lease, in which event Tenant shall not be entitled to any notice to quit, the
usual thirty (30) days' notice to quit being hereby expressly waived.
Acceptance by Landlord of rent after such expiration or earlier termination
date shall not constitute a holdover hereunder or result in a renewal of the
Lease Term.
21.2. In the event that Tenant shall hold over after the expiration
of the term of the Lease or any approved extension period thereof, and if
Landlord shall desire to regain possession of the Premises promptly at the
expiration of the term of this Lease or the extension period, then at any
time prior to Landlord's acceptance of modified Monthly Rent from Tenant as a
month-to-month tenant hereunder, Landlord, at its option, may forthwith
re-enter and take possession of the Premises: a) without process; and b) by
any legal process available in the jurisdiction in which the Building is
located.
21.3. If Tenant fails to surrender the Premises upon the expiration
of this Lease despite demand to do so by Landlord, Tenant shall indemnify and
hold Landlord harmless from all injury, loss, claims, expenses and liability,
including without limitation, any claim made by any succeeding tenant and any
reasonable attorneys' fees, founded on or resulting from such failure to
surrender. In addition, Tenant shall be liable to Landlord for any damages
incurred by Landlord due to its inability to timely regain possession of the
Premises, including but not limited to contract damages for which Landlord
might to liable to a follow-on tenant or any economic losses, costs, expenses
or other damages, including reasonable attorneys' fees, incurred by Landlord
due to Tenant's failure to timely surrender possession of the Premises.
22. ESTOPPELS. Tenant shall, without charge therefor, at any time and
from time to time, within five days after request by Landlord, execute,
acknowledge and deliver to Landlord a written estoppel certificate certifying
to Landlord, any mortgagee, assignee of a mortgagee, or any purchaser of the
Building, or any other person designated by Landlord, as of the date of such
estoppel certificate: (a) that Tenant is in possession of the Premises; (b)
that this Lease is unmodified and in full force an effect (or if there have
been modifications, that the Lease is in full force and effect as modified
and setting forth such modification); (c) whether or not there are then
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existing any set-offs or defenses against the enforcement of any right or remedy
of Landlord, or any duty or obligation of Tenant hereunder (and, if so,
specifying the same in detail); (d) the amount of the Basic Rent and the dates
through which Basic Rent and additional rent have been paid; (e) that Tenant has
no knowledge of any then uncured defaults on the part of Landlord under this
Lease (or if Tenant has knowledge of any such uncured defaults, specifying the
same in detail); (f) that Tenant has no knowledge of any event having occurred
that authorizes the termination of this Lease by Tenant (or if Tenant has such
knowledge, specifying the same in detail); (g) the amount of any security
deposit held by Landlord; and (h) such reasonable other information requested by
mortgagor. Failure to deliver the certificate within ten days shall be
conclusive upon Tenant for the benefit of Landlord and any successor to Landlord
that this Lease is in full force and effect and has not been modified except as
may b represented by the party requesting the certificate. If Tenant fails to
deliver the certificate within the ten (10) days after request, Tenant by such
failure irrevocably constitutes and appoints Landlord as its special
attorney-in-fact to execute and deliver the certificate to any third party.
23. MISCELLANEOUS.
23.1. The term "Tenant" shall include legal representatives,
successors and assigns. All covenants herein made binding upon Tenant shall
be construed to be equally applicable to and binding upon its agents,
employees and others claiming the right to be in the Premises or in the
Building through or under Tenant.
23.2. If more than one individual, firm, or corporation shall join
as Tenant, singular context shall be construed to be plural wherever
necessary and the covenants of Tenant shall be the joint and several
obligations of each party signing as Tenant and when the parties signing as
Tenant are partners, shall be the obligation of the firm and of the
individual members thereof.
23.3. No waiver, breach or failure to act to enforce any covenant,
condition or agreement herein contained shall operate as a waiver of the
covenant, condition or agreement itself, or of any subsequent breach thereof.
23.4. Notwithstanding anything to the contrary contained in this
Lease, Tenant shall look only to Landlord's ownership interest in the
Building for satisfaction of Tenanfs remedies for the collection of a
judgment (or other judicial process) requiring the payment of money by
Landlord in the event of any default by Landlord hereunder, and no other
property or assets of the partners, general or limited, or principals of
Landlord, disclosed or undisclosed, shall be subject to levy, execution or
the enforcement procedure for the satisfaction of Tenant's remedies under or
with respect to this Lease, the relationship of Landlord and Tenant hereunder
or Tenant's use or occupancy of the Premises. If any provision of this Lease
either expressed or implied obligates Landlord not to unreasonably withhold
its consent or approval, an action for declaratory judgment or specific
performance will be Tenant's sole right and remedy in any dispute as to
whether Landlord has breached such obligation.
23.5. TENANT AND LANDLORD EXPRESSLY AGREE THAT THERE ARE AND SHALL
BE NO IMPLIED WARRANTIES OF MERCHANTABILITY, HABITABILITY,
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FITNESS FOR A PARTICULAR PURPOSE OR ANY OTHER KIND ARISING OUT OF THIS LEASE,
AND THERE ARE NO WARRANTIES WHICH EXTEND BEYOND THOSE EXPRESSLY SET FORTH IN
THIS LEASE.
23.6. Feminine or neuter pronouns shall be substituted for those of
the masculine form and the plural shall be substituted for the singular,
wherever the context shall require. It is also agreed that no specific words,
phrases or clauses herein used shall be taken or construed to control, limit
or cut down the scope or meaning of any general words, phrases or clauses
used in connection therewith.
23.7. This Lease shall likewise be binding upon and shall inure to
the benefit of the parties hereto and their respective heirs, personal
representatives, successors and assigns. This provision shall not be deemed
to grant Tenant any right to assign this Lease or sublet the Premises or any
part thereof other than as provided in Article 14 hereof.
23.8. It is understood and agreed by and between the parties hereto
that this Lease contains the final and entire agreement between said parties,
and that they shall not be bound by any terms, statements, conditions or
representations, oral or written, express or implied, not herein contained.
This Lease may not be modified orally or in any manner other than by written
agreement signed by the parties hereto.
24. BROKERS. Landlord and Tenant, each on their respective behalf hereby
certify that no person or company has provided services as a broker, agent,
finder or assisted in the negotiations of this Lease other than Pinnacle
Realty Management Company and Mackenzie Commercial Real Estate Services, LLC
(collectively the "Brokers") who shall be compensated by separate agreement
with Landlord. It is understood that each party agrees to indemnify the other
for any claim, including attorneys' fees asserted by any person or company
other than the aforesaid Broker(s) purporting to act on its behalf in
providing services as a broker, agent or finder in connection with this Lease.
25. NOTICES AND DEMANDS. All notices required or permitted hereunder
shall be in writing and shall be deemed to have been given if upon delivery
or refusal for delivery by personal delivery, one business day after deposit
with recognized courier (i.e. Federal Express, Purolator, Express Mail, etc.)
or three days after deposit by United States certified or registered mail,
postage prepaid, return receipt requested, at the following addresses or to
such other addresses as the parties hereto may designate in writing from time
to time:
LANDLORD:
c/o The Bernstein Companies
3299 K Street, N.W., Suite 700
Washington, D.C. 20007
Attn.: Director of Property Management
With a copy to:
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Louis M. Aronson, Esq.
RUBEN & ARONSON, LLP
3299 K Street, N.W., Suite 403
Washington, D.C. 20007
TENANT:
175 Admiral Cochrane Drive, Suite 400
Annapolis, Maryland 21401
Attn.: Mr. Christopher R. McCleary
With a copy to:
Jim Rodgers, Esq.
Latham & Watkins
1001 Pennsylvania Avenue
Washington, D.C. 20004
26. QUIET ENJOYMENT. Landlord covenants and agrees that so long as
Tenant is not in default of any term, condition or covenant of this Lease
beyond any applicable cause and grace period, Tenant may peaceably and
quietly enjoy the Premises hereby demised, subject, nevertheless, to the terms
and conditions of this Lease and to any mortgages and deeds of trust
hereinbefore mentioned.
27. WAIVER OF TRIAL BY JURY. Landlord and Tenant each agree to and they
hereby DO WAIVE TRIAL BY JURY in any action, proceeding or counterclaim
brought by either of the parties hereto against the other on any matters
whatsoever arising out of or in any way connected with this Lease, the
relationship of Landlord and Tenant, Tenant's use or occupancy of the Premises
and/or any claim of injury or damage, and any statutory remedy.
28. GOVERNING LAW. This Lease shall be construed and governed by the
laws of the state in which the Premises are located. Should any provision of
this Lease and/or its conditions be illegal or not enforceable under the laws
of said state, it or they shall be considered severable, and the Lease and
its conditions shall remain in force and be binding upon the parties as
though the said provision had never been included.
29. PARKING. Tenant shall have the right to utilize the Building's
facilities on a nonexclusive basis with other tenants of the Building, upon
such terms and conditions as may from time to time be established by
Landlord. It is understood and agreed that Landlord assumes no
responsibility, and shall not be held liable, for any damage or loss to any
automobiles parked in the parking facilities or to any personal property
located therein, or for any injury sustained by any person in or about the
parking facilities.
30. TIME. Time is of the essence with respect to the performance of
every provision of this Lease in which time or performance is a factor.
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31. CORPORATE AUTHORITY.
(A) If Tenant is a corporation, each of the persons executing this
Lease on behalf of Tenant does hereby covenant and warrant that (a) Tenant is
a duly authorized and a validly existing corporation under the laws of the
State of Delaware and duly qualified to do business in the State of Maryland,
(b) the corporation has full right and authority to enter into this Lease,
and (c) each person executing this Lease on behalf of the corporation is
authorized to do so.
32. NO REPRESENTATIONS. Tenant acknowledges that neither Landlord nor
any agent or employee of Landlord has made any representations or warranties
with respect to the Premises or the Building or with respect to the
suitability of same for the conduct of Tenant's business.
33. RIGHT OF FIRST OFFER.
Subject to any pre-existing rights of any other tenants in the
Building, Tenant, at its option, shall have the right of first offer to lease
the remaining space in the Building which becomes available for lease, from
time to time, during the original term of the Lease or any Renewal Term,
subject to the following terms and conditions:
33.01 Provided Tenant is not in default under any of its
obligations under the Lease, Landlord shall not lease, or enter into any
lease agreement regarding said newly available space (the "Offer Space")
without first providing Tenant with an offer to lease such Offer Space for
the remainder of Tenant's lease term and/or remaining option term. Such offer
shall be made in writing to Tenant. Tenant shall have five (5) business days
from receipt of such offer to accept or reject it. Time is of the essence in
the exercise of Tenant's first offer rights. Tenant must accept and lease the
entire space then available, and may not elect to lease less than the entire
amount of space which is available. In the event Tenant accepts the offer,
Tenant shall have an additional ten (10) business days to execute a lease or
lease amendment for such space. In the event that Tenant does not exercise
its first offer rights or timely execute such lease or amendment, Landlord
may thereafter lease the Offer Space to any tenant on any terms Landlord
deems acceptable.
33.02 The rental rates for the Offer Space shall be the market
rental rate per square foot for existing occupants in the Building. In no
event, however, shall market rate be less than the escalated rent to be paid
by Tenant in the Lease Year next following Tenant's election.
33.03 Unless otherwise expressly provided for hereinabove, any
Offer Space leased by Tenant shall become part of the Premises upon the
delivery of said space to Tenant. The term "Premises" shall thereafter be
deemed to include both the Premises as previously existing and the Offer
Space, and the Offer Space shall be subject to all terms and conditions of
this Lease. The lease term of the Offer Space shall be concurrent with and
expire at the end of the remaining term for the Premises, including any
Renewal Term opted for by Tenant.
33.04 The exercise by Tenant of its option to lease any Offer Space
shall be final and Tenant, after the exercise of said option, cannot rescind,
limit or modify same except as
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expressly provided for herein. Tenant, immediately upon exercising any option,
shall be deemed to have leased the subject space at the rent stated and for the
term provided for in this Section, subject to all the conditions and provisions
of, and Tenant's obligations under, the Lease.
34. FINANCIAL REPORTS. Simultaneously with the delivery of an executed
copy of this Lease and thereafter within two (2) business days after any
request in conjunction with a notice of offer set forth in Section 33 or
reasonable request by Landlord, above, Tenant will furnish Tenant's most
recent audited financial statements (including any notes to them) to
Landlord, or, if no such audited statements have been prepared, such other
financial statements (and notes to them) as may have been prepared by an
independent certified public accountant or, failing those, Tenant's
internally prepared financial statements. Tenant will discuss its financial
statements with Landlord and will give Landlord access to Tenant's books and
records in order to enable Landlord to verify the financial statements.
Landlord will not disclose any aspect of Tenant's financial statements that
Tenant designates to Landlord as confidential except (i) to Landlord's
lenders or prospective purchasers of the project, (ii) in litigation between
Landlord and Tenant; and (iii) if required by court order.
35. ADDENDA. Exhibit A "Floor Plan," Exhibit B "Confirmation of Lease,"
Exhibit C "Rules and Regulations" and Exhibit D "Tenant Work" are attached
hereto and made a part hereof.
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IN WITNESS WHEREOF, Landlord has hereunto set its hand and seal, or has
caused its name to be hereunto subscribed and Tenant has hereunto set its
hand and seal, or has caused its corporate name to be hereunto subscribed and
its corporate seal to be hereunto affixed and attested by its duly authorized
officers, as the case may be, as of the day and year first above written.
WITNESS: LANDLORD:
CONSORTIUM ONE--ANNAPOLIS, LLC
By: Consortium One, LP
Its: Managing Member
By: Millbank Capital Partners, L.L.C.
General Partner
By: Bernstein Millbank Capital Partners, L.L.C.
Its: Managing Member
[ILLEGIBLE] /s/ Adam K. Bernstein
- ------------------- ----------------------------------------------
By: Adam K. Bernstein
Its: Managing Member
ATTEST: TENANT:
USinternetworking, INC.
[ILLEGIBLE] /s/ Christopher R. McCleary
- ------------------- ----------------------------------------------
By: Christopher R. McCleary
Its: Chairman and Chief Executive Officer
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EXHIBIT A
<PAGE>
3RD FLOOR
[FLOOR PLAN GRAPHIC] 12,290 SI
4TH FLOOR
[FLOOR PLAN GRAPHIC] 11,970 SL
<PAGE>
EXHIBIT B
CERTIFICATE CONFIRMING LEASE COMMENCEMENT DATE
THIS CERTIFICATE CONFIRMING THE LEASE COMMENCEMENT DATE is attached to
and made a part of the Lease Agreement dated the 3rd day of April 1998, by
and between CONSORTIUM ONE--ANNAPOLIS, LLC (as "Landlord"), and
USinternetworking, INC. (as "Tenant").
The construction and finish of the demised premises has been
satisfactorily completed by Landlord in accordance with Exhibit "A."
The Lease Commencement Date is April 1, 1998.
The Rent Commencement Date is April 1, 1998.
The lease termination date is March 31, 2003.
WITNESS: LANDLORD:
CONSORTIUM ONE--ANNAPOLIS, LLC
By: Consortium One, LP
Its: Managing Member
By: Millbank Capital Partners, L.L.C.
General Partner
By: Bernstein Millbank Capital Partners, L.L.C.
Its: Managing Member
[ILLEGIBLE] /s/ Adam K. Bernstein
- ------------------- -----------------------------------------------
By: Adam K. Bernstein
Its: Managing Member
ATTEST: TENANT:
USinternetworking, INC.
[ILLEGIBLE] /s/ Christopher R. McCleary
- ------------------- -----------------------------------------------
By: Christopher R. McCleary
Its: Chairman and Chief Executive Officer
30
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EXHIBIT D
TENANT WORK
This Exhibit D is made a part of the Office Lease Agreement dated the
3rd day of April, 1998, by and between CONSORTIUM ONE--ANNAPOLIS, LLC, (as
"Landlord") and USinternetworking, INC. (as "Tenant") for space located at on
the Third (3rd) and Fourth (4th) Floors of the Building known as 175 Admiral
Cochrane Drive, Annapolis, Maryland 21401.
1. Completion of Premises
Tenant shall, on a one-time basis at its sole cost and expense,
subject to final pricing perform the items of work (the "Tenant Work"): in
accordance with the pricing schedule plans and specifications set forth on
Exhibit D-1 to be attached hereto and incorporated herein upon approval by
Landlord.
2. Tenant shall be permitted to install at its sole expense (including
permit costs if any) and risk of loss approved signage in the upper corner on
the exterior of the Building in a design submitted by Tenant and approved by
Landlord in its sole and absolute discretion.
WITNESS: LANDLORD:
CONSORTIUM ONE--ANNAPOLIS, LLC
By: Consortium One, LP
Its: Managing Member
By: Millbank Capital Partners, L.L.C.
General Partner
By: Bernstein Millbank Capital Partners, L.L.C.
Its: Managing Member
[ILLEGIBLE] /s/ Adam K. Bernstein
- ------------------- ------------------------------------------------
By: Adam K. Bernstein
Its: Managing Member
ATTEST: TENANT:
USinternetworking, INC.
[ILLEGIBLE] /s/ Christopher R. McCleary
- ------------------- ------------------------------------------------
By: Christopher R. McCleary
Its: Chairman and Chief Executive Officer
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EXHIBIT C
RULES AND REGULATIONS
1. Landlord agrees to furnish Tenant with ____ keys without charge.
Additional keys shall be furnished at a nominal charge. Tenant shall
not change locks or install additional locks on doors without prior
written consent of Landlord. Tenant shall not make or cause to be made
duplicates of keys without prior approval of Landlord. All keys to the
Premises shall be surrendered to Landlord upon termination of this
Lease.
2. Tenant shall refer all contractor's representatives and installation
technicians rendering any service for Tenant at the Premises to
Landlord before performance of any contractual service. Tenant's
contractors and installation technicians shall comply with Landlord's
rules and regulations pertaining to construction and installation. This
provision shall apply to all work performed on or about the Premises
including installation of telephones, telegraph equipment, electrical
devices and attachments and installations of any nature affecting
floors, walls, woodwork, trim, windows, ceilings and equipment or any
other physical portion of the Premises.
3. Tenant shall not at any time occupy any part of the Premises as
sleeping or lodging quarters.
4. Tenant shall not place, install or operate on the Premises or in any
part of the Building any engine, stove or machinery, conduct mechanical
operations, cook thereon or therein or place or use in or about the
Premises any explosives, gasoline, kerosene, oil, acids, caustics,
flammable explosives or hazardous material without written consent of
Landlord.
5. Landlord shall not be responsible for lost or stolen personal property,
equipment, money or jewelry from the Premises regardless of whether or
not such loss occurs when the area is locked against entry.
6. No dogs, cats, fowl or other animals shall be brought into or kept in
or about the Premises.
7. Employees of Landlord shall not receive or carry messages for or to any
Tenant or other person nor shall they render free or paid services to
any Tenant, its agents, employees or invitees.
8. None of the parking, plaza, recreation or lawn areas, entries,
passages, doors, elevators, hallways or stairways shall be locked or
obstructed with any rubbish, litter, trash or material of any nature
which would be placed, emptied or thrown into these areas by Tenant's
agents, employees or invitees at any time.
9. The water closets and other water fixtures shall not be used for any
purpose other than those for which they were constructed. Any damage
resulting to them from misuse or by the defacing of any part of the
Building shall be borne by the person who shall occasion it. No
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<PAGE>
person shall waste water by interfering with the faucets or otherwise.
10. No person shall disturb occupants of the Building by the use of any
radios, record players, tape recorders, musical instruments, the making
of unseemly noises or any other unreasonable use.
11. Nothing shall be thrown out of the windows of the Building or down the
stairways or other passages.
12. Tenant, its employees, agents and invitees shall park their vehicles
only in those parking areas designated by Landlord. Tenant shall
furnish Landlord within five days after taking possession of the
Premises state automobile license numbers of all Tenant's vehicles.
Tenant shall notify Landlord of any changes within five days after such
change occurs. Tenant shall not leave any vehicle at the Building in a
state of disrepair including without limitation, flat tires, out of
date inspection stickers or license plates. If Tenant, its employees,
agents or invitees park their vehicles in areas other than the
designated parking areas or leave any vehicle in a state of disrepair,
Landlord, after giving written notice to Tenant of such violation,
shall have the right to remove such vehicle at Tenant's expense.
13. Parking in a parking garage shall be in compliance with all parking
rules and regulations including any sticker or other identification
system established by Landlord or the garage operator. Failure to
observe the rules and regulations shall terminate Tenant's right to use
the parking garage and subject the vehicle in violation to removal
and/or impoundment. No termination of parking privileges or removal of
a vehicle shall create any liability on Landlord or be deemed to
interfere with Tenant's right to possession of the Premises. Vehicles
must be parked entirely within the stall lines and all directional
signs, arrows and posted speed limits must be observed. Parking is
prohibited in areas not striped for parking, in aisles, where "No
Parking" signs are posted, on ramps, in cross hatched areas and in
other areas as may be designated by Landlord or the garage operator.
Parking stickers or other forms of identification supplied by Landlord
shall remain the property of Landlord and not the property of Tenant
and are not transferable. Every person is required to park and lock his
vehicle. All responsibility for damage to vehicles or persons is
assumed by the owner of the vehicle or its driver.
14. Movement of furniture or office supplies and equipment, in or out of
the Building, dispatch or receipt by Tenant of any merchandise or
materials which requires use of elevators or stairways, or movement
through the Building entrances or lobby shall be restricted to hours
designated by Landlord. All such movement shall be under the
supervision of Landlord and carried out in the manner agreed to between
Tenant and Landlord by prearrangement. Such prearrangement will include
determination by Landlord of time, method and routing of movement and
limitations imposed by safety or other concerns which may prohibit any
article, equipment or any other item from being brought into the
Building. Tenant shall indemnify Landlord against all risks and claims
of damage to person and property arising in connection with any said
movement.
15. Landlord shall not be liable for any damages from the stoppage of
elevators for necessary or
33
<PAGE>
desirable repairs or improvements or delays of any sort in connection
with the elevator service.
16. Tenant shall not lay floor covering within the Premises without written
approval of Landlord. The use of cement or other similar adhesive
materials not easily removed with water is expressly prohibited.
17. Tenant agrees to cooperate and assist Landlord in the prevention of
canvassing, soliciting and peddling within the Building.
18. Landlord reserves the right to exclude from the Building between the
hours of 6:00 p.m. and 8:00 a.m. on weekdays, Saturday, Sunday and
holidays recognized by the U.S. Government, all persons who are not
known to the Building or security personnel and who do not present a
pass signed by Tenant. Tenant shall be responsible for all persons for
whom he supplies a pass.
19. It is Landlord's desire to maintain in the Building the highest
standard of dignity and good taste consistent with comfort and
convenience for all Tenants. Any action or condition not meeting this
high standard should be reported directly to Landlord. Your cooperation
will be mutually beneficial and sincerely appreciated.
20. Landlord reserves the right to make such other and further reasonable
rules and regulations as in its judgement may from time to time be
necessary for the safety, care and cleanliness of the Premises and for
the preservation of good order therein.
21. Please be advised that the building will be closed this year in
observance of the following holidays:
Memorial Day _______________________
Independence Day _______________________
Labor Day _______________________
Thanksgiving Day _______________________
Christmas Day _______________________
New Year's Day _______________________
When the holiday falls on a Saturday, Friday will be observed.
When the holiday falls on a Sunday, Monday will be observed.
34
<PAGE>
EXHIBIT E
, 1998
Consortium One--Annapolis, LLC
c/o the Bernstein Companies
3299 K Street, N.W.
7th Floor
Washington, D.C. 20007
Dear Sir(s):
We hereby issue in your favor this Letter of Credit in the amount of
S400,000 which is available by your draft(s) on us at _______________ bearing
the clause "Drawn under _________________ Bank Letter of Credit No. ____________
___________" accompanied by the following documents:
1. The original Letter of Credit.
2. A written, notarized statement executed by a managing member of
Consortium One Annapolis, LLC, a Maryland limited liability company
("Landlord"), that the Tenant is in default beyond the expiration
of the applicable notice and grace periods (specifying the default
and amount, if any due) under:
That certain Lease Agreement dated ___________,1998 between
Landlord and USinternetworking, INC. ("Tenant") with respect
to that certain leasable area of 24,260 square feet located
at 175 Admiral Cochran Drive, Annapolis, Maryland.
This Letter of Credit shall expire on December 31, 1999. It is a
condition of this Letter of Credit that it shall be deemed automatically
extended without amendment for one (1) year from the present or any future
expiration date unless thirty (30) days prior to such expiration date you are
notified by registered letter that we elect not to consider this Letter of
Credit for any such additional period.
If this Letter of Credit is to be cancelled before the expiration date
herein (as extended from time to time), the original of the Letter of Credit
and a statement executed by the Managing Member of Consortium One--Annapolis,
LLC requesting cancellation must be returned to us at the address above.
This Letter of Credit is subject to the Uniform Customs and Practice for
Documentary Credits (1983 revision), International Chamber of Commerce
Publication No. 400.
______________________ Bank
By:________________________
<PAGE>
RENEWAL OPTION ADDENDUM
This Renewal Option Addendum, is made this ____ day of March, 1998, by
and between CONSORTIUM ONE--ANNAPOLIS, LLC (as "Landlord"), and
USinternetworking, INC. (as "Tenant"), and modifies that certain Lease
between Landlord and Tenant (the "Lease") of even date herewith for the
leasing by Tenant of the agreed upon 23,940 square feet of space in the
office building known as 175 Admiral Cochran, Annapolis, Maryland 21401 (the
"Building").
In consideration of TENANT signing the Lease, and to induce TENANT to
execute the Lease, the parties hereby agree that TENANT, at its option, may
renew this Lease for one (1) additional three (3) year term (the "Renewal
Tenn"), with the Renewal Term commencing immediately upon the expiration of
the original term of the Lease, subject to the following terms and conditions:
(1) TENANT must deliver to LANDLORD written notice of its intention
to exercise its option for the Renewal Term not less than three hundred sixty
(360) days before the expiration of the original Lease Term. Time is of the
essence in the exercise of this option and TENANT's failure to timely deliver
such written notice renders such renewal option null and void, and any rights
which TENANT otherwise might have had with respect to such option shall be
deemed waived.
(2) Annual Rent for the first Lease Year of the First Renewal Term
shall be set at one hundred percent (100%) of the market rate ("Market Rate")
for similar space similarly located and prevailing at the time of
commencement of the Renewal Term. Market Rate shall be the gross, per foot
charge for similar space then prevailing, without reduction for "free" rent,
buildout allowances or any other tenant concessions from time to time
available in the market. Annual Rent for each succeeding Lease Year of the
Renewal Term shall be equal to the Annual Rent paid for the immediately
preceding Lease Year, increased by three percent (3%). The Market Rate shall
be determined by an independent real estate broker, working for an
independent company which shall be defined as a company not controlling,
controlled or under common control of LANDLORD, designated by LANDLORD at its
cost and expense, with at least seven (7) years experience in leasing office
space in the Annapolis, Maryland metropolitan area. If the Market Rate for
any reason is not determined as of the commencement date of the Renewal Term,
the parties agree that TENANT shall pay as Annual Rent for the first Lease
Year of the Renewal Term, until such time as the Annual Rent for the Renewal
Term shall be determined as provided for above, an amount equal to one
hundred fifty percent (150%) of the Annual Rent in effect for the last Lease
Year of the initial term of the Lease. Upon the determination of the Market
Rate, LANDLORD and TENANT shall adjust the amount payable for such interim
period. In the event the amount actually paid by TENANT as Annual Rent during
said interim period is less than the amount actually due as Annual Rent for
said period based on the determination of the Market Rate as provided for
above, TENANT shall pay any such deficit to LANDLORD as additional rent
within ten (10) days of the date of determination of the Annual Rent for the
Renewal Term. In the event the amount actually paid by TENANT as Annual Rent
during said interim period is greater than the amount actually due as Annual
Rent for said period, any such excess shall be credited towards the next
payment(s) of Monthly Rent due under the Lease. In no event, however, shall
the Annual Rent for the first Lease Year of the
<PAGE>
Renewal Term be less than the Annual Rent for the last Lease Year of the Initial
Term of the Lease.
(3) TENANT may exercise its renewal option and continue to occupy
the Leased Premises during the Renewal Term only in the event TENANT is not
in default of any of its obligations under this Lease at the time it
exercises the renewal option and on the date the Renewal Term commences.
(4) During the Renewal Term, all provisions, terms and conditions of
the Lease not inconsistent with this Addendum (i.e., additional rent,
escalations in rent, contribution for increases in Operating Expenses, default
provisions, indemnifications, etc.) shall continue in full force, with the
Renewal Term being substituted for the original term of the Lease in determining
TENANT's obligations thereunder.
(5) TENANT may not renew the Lease for less than the entire space then
leased by TENANT in the Building.
(6) The exercise by TENANT of its option for the Renewal Term as
provided in Section 1, above, shall be final and TENANT, after the exercise of
said option, cannot rescind, limit or modify same. TENANT, immediately upon its
exercise of the renewal option, shall be liable for the performance of all of
TENANT's obligations under the Lease, as modified by this Addendum, through the
expiration of the Renewal Term.
(7) All defined terms used in this Addendum shall have the meaning
provided in the Lease. Except as specifically modified by this Addendum, the
Lease shall continue in full force and effect, subject to all its terms,
provisions and conditions.
[REMAINDER OF PAGE INTENTIONALLY LEFT BLANK]
<PAGE>
IN WITNESS WHEREOF, LANDLORD and TENANT have caused this Renewal
Option Addendum to be signed in their names by their duly authorized
representatives and delivered as their act and deed, intending to be legally
bound by its terms and provisions.
WITNESS: LANDLORD:
CONSORTIUM ONE--ANNAPOLIS, LLC
By: Consortium One, LP
Its: Managing Member
By: Millbank Capital Partners, L.L.C.
General Partner
By: Bernstein Millbank Capital Partners, L.L.C.
Its: Managing Member
[ILLEGIBLE] /s/ Adam K. Bernstein
- ------------------- ---------------------------------------------------
By: Adam K. Bernstein
Its: Managing Member
ATTEST: TENANT:
USinternetworking, INC.
[ILLEGIBLE] /s/ Christopher R. McCleary
- ------------------- ---------------------------------------------------
By: Christopher R. McCleary
Its: Chairman and Chief Executive Officer
<PAGE>
Exhibit 10.29
THE AMENDED AND RESTATED
1998 STOCK OPTION PLAN
OF
USINTERNETWORKING, INC.
(Effective as of _________ ___, 1999)
USinternetworking, Inc., a Delaware corporation, has adopted The
1998 Stock Option Plan of USinternetworking, Inc. (the "Plan"), effective July
2, 1998, for the benefit of its eligible employees, directors and consultants.
The Plan has been amended from time to time to increase the number of shares
reserved for issuance hereunder and to amend the Plan in certain other respects.
This Amended and Restated 1998 Stock Option Plan of USinternetworking, Inc.
constitutes a complete amendment and restatement of the Plan effective as of
________ __, 1999.
The purposes of the Plan are as follows:
(1) To provide an additional incentive for Employees, Independent
Directors and Consultants (as such terms are defined below) to further
the growth, development and financial success of the Company by
personally benefiting through the ownership of Company stock.
(2) To enable the Company to obtain and retain the services of
Employees, Independent Directors and Consultants considered essential
to the long range success of the Company by offering them an
opportunity to own stock in the Company.
ARTICLE I.
DEFINITIONS
Whenever the following terms are used in the Plan they shall have
the meanings specified below, unless the context clearly indicates otherwise.
1.1. AWARD LIMIT. "AWARD LIMIT" shall mean 3,000,000 shares of Common
Stock, as adjusted pursuant to Section 8.3 of the Plan.
1.2. BOARD. "Board" shall mean the Board of Directors of the Company.
1.3. CODE. "Code" shall mean the Internal Revenue Code of 1986, as
amended.
1.4. COMMITTEE. "Committee" shall mean the Compensation Committee of
the Board, or another committee or subcommittee of the Board, appointed as
provided in Section 7.1.
1.5. COMMON STOCK. "Common Stock" shall mean the common stock of the
Company, par value $0.001 per share, and any equity security of the Company
issued or
<PAGE>
authorized to be issued in the future, but excluding any preferred stock and any
warrants, options or other rights to purchase Common Stock.
1.6. COMPANY. "Company" shall mean USinternetworking, Inc., a Delaware
corporation.
1.7. CONSULTANT. "Consultant" shall mean any consultant or adviser if:
(a) the consultant or adviser renders bona fide services to the
Company;
(b) the services rendered by the consultant or adviser are not in
connection with the offer or sale of securities in a capital-raising
transaction and do not directly or indirectly promote or maintain a
market for the Company's securities; and
(c) the consultant or adviser is a natural person who has
contracted directly with the Company to render such services.
1.8. DIRECTOR. "Director" shall mean a member of the Board.
1.9. DRO. "DRO" shall mean a domestic relations order as defined by the
Code or Title I of the Employee Retirement Income Security Act of 1974, as
amended, or the rules thereunder.
1.10. EMPLOYEE. "Employee" shall mean any officer or other employee (as
defined in accordance with Section 3401(c) of the Code) of the Company, or of
any corporation which is a Subsidiary.
1.11. EXCHANGE ACT. "Exchange Act" shall mean the Securities Exchange
Act of 1934, as amended.
1.12. FAIR MARKET VALUE. "Fair Market Value" of a share of Common Stock
as of a given date shall be (a) the closing price of a share of Common Stock on
the principal exchange on which shares of Common Stock are then trading, if any
(or as reported on any composite index which includes such principal exchange),
on the trading day previous to such date, or if shares were not traded on the
trading day previous to such date, then on the next preceding date on which a
trade occurred, or (b) if Common Stock is not traded on an exchange but is
quoted on NASDAQ or a successor quotation system, the mean between the closing
representative bid and asked prices for the Common Stock on the trading day
previous to such date as reported by NASDAQ or such successor quotation system;
or (c) if Common Stock is not publicly traded on an exchange and not quoted on
NASDAQ or a successor quotation system, the Fair Market Value of a share of
Common Stock as established by the Committee and the Executive Committee of the
Board acting jointly and in good faith.
1.13. HOLDER. "Holder" shall mean a person who has been granted an
Option.
1.14. INCENTIVE STOCK OPTION. "Incentive Stock Option" shall mean an
option which conforms to the applicable provisions of Section 422 of the Code
and which is designated as an
2
<PAGE>
Incentive Stock Option by the Committee.
1.15. INDEPENDENT DIRECTOR. "Independent Director" shall mean a member
of the Board who is not an Employee of the Company.
1.16. NON-QUALIFIED STOCK OPTION. "Non-Qualified Stock Option" shall
mean an Option which is not designated as an Incentive Stock Option by the
Committee.
1.17. OPTION. "Option" shall mean a stock option granted under Article
IV of the Plan. An Option granted under the Plan shall, as determined by the
Committee, be either a Non-Qualified Stock Option or an Incentive Stock Option;
PROVIDED, HOWEVER, that Options granted to Consultants and Independent Directors
shall be Non-Qualified Stock Options.
1.18. PLAN. "Plan" shall mean The Amended and Restated 1998 Stock
Option Plan of USinternetworking, Inc., as amended from time to time.
1.19. OPTION PLAN STOCKHOLDERS AGREEMENT. "Option Plan Stockholders
Agreement" shall mean the agreement between the Company and the Holder that
governs the shares acquired upon exercise of the Option, which terms may
include, without limitation, restrictions on transfer of such shares, a right of
first refusal in favor of the Company, and the right of the Company to
repurchase such shares upon certain specified events.
1.20. RULE 16B-3. "Rule 16b-3" shall mean that certain Rule 16b-3 under
the Exchange Act, as such Rule may be amended from time to time.
1.21. SECTION 162(M) PARTICIPANT. "Section 162(m) Participant" shall
mean any Employee designated by the Committee as a Employee whose compensation
for the fiscal year in which the Employee is so designated or a future fiscal
year may be subject to the limit on deductible compensation imposed by Section
162(m) of the Code.
1.22. SECURITIES ACT. "Securities Act" shall mean the Securities Act of
1933, as amended.
1.23. STOCK OPTION AGREEMENT. "Stock Option Agreement" shall mean a
written agreement executed by an authorized officer of the Company and the
Holder which shall contain such terms and conditions with respect to an Option
as the Committee shall determine, consistent with the Plan.
1.24. SUBSIDIARY. "Subsidiary" shall mean any corporation in an
unbroken chain of corporations beginning with the Company if each of the
corporations other than the last corporation in the unbroken chain then owns
stock possessing fifty percent (50%) or more of the total combined voting power
of all classes of stock in one of the other corporations in such chain.
1.25. SUBSTITUTE OPTION. "Substitute Option" shall mean an Option
granted under this Plan upon the assumption of, or in substitution for,
outstanding options previously granted by a company or other entity in
connection with a corporate transaction, such as a merger, combination,
consolidation or acquisition of property or stock; PROVIDED, HOWEVER, that in no
3
<PAGE>
event shall the term "Substitute Option" be construed to refer to an Option
granted in connection with the cancellation and repricing of an Option granted
under the Plan.
1.26. TERMINATION OF CONSULTANCY. "Termination of Consultancy" shall
mean the time when the engagement of a Holder as a Consultant to the Company or
a Subsidiary is terminated for any reason, with or without cause, including, but
not by way of limitation, by resignation, discharge, death or retirement; but
excluding a termination where there is a simultaneous commencement of employment
with the Company or any Subsidiary. The Committee, in its sole discretion, shall
determine the effect of all matters and questions relating to Termination of
Consultancy, including, but not by way of limitation, the question of whether a
Termination of Consultancy resulted from a discharge for good cause, and all
questions of whether a particular leave of absence constitutes a Termination of
Consultancy. Notwithstanding any other provision of the Plan, the Company or any
Subsidiary has an absolute and unrestricted right to terminate a Consultant's
service at any time for any reason whatsoever, with or without cause, except to
the extent expressly provided otherwise in writing.
1.27. TERMINATION OF DIRECTORSHIP. "Termination of Directorship" shall
mean the time when a Holder who is an Independent Director ceases to be a
Director for any reason, including, but not by way of limitation, a termination
by resignation, failure to be elected, death or retirement. The Board, in its
sole discretion, shall determine the effect of all matters and questions
relating to Termination of Directorship with respect to Independent Directors.
1.28. TERMINATION OF EMPLOYMENT. "Termination of Employment" shall mean
the time when the employee-employer relationship between a Holder and the
Company or any Subsidiary is terminated for any reason, with or without cause,
including, but not by way of limitation, a termination by resignation,
discharge, death, disability or retirement; but excluding (a) a termination
where there is a simultaneous reemployment or continuing employment of the
Holder by the Company or any Subsidiary, (b) at the discretion of the Committee,
a termination which results in a temporary severance of the employee-employer
relationship and (c) at the discretion of the Committee, a termination which is
followed by the simultaneous establishment of a consulting relationship by the
Company or a Subsidiary with the former employee. The Committee, in its sole
discretion, shall determine the effect of all matters and questions relating to
Termination of Employment, including, but not by way of limitation, the question
of whether a Termination of Employment resulted from a discharge for good cause,
and all questions of whether a particular leave of absence constitutes a
Termination of Employment; PROVIDED, HOWEVER, that, with respect to Incentive
Stock Options, unless otherwise determined by the Committee in its discretion, a
leave of absence, change in status from an employee to an independent contractor
or other change in the employee-employer relationship shall constitute a
Termination of Employment if, and to the extent that, such leave of absence,
change in status or other change interrupts employment for the purposes of
Section 422(a)(2) of the Code and the then applicable regulations and revenue
rulings under said Section.
4
<PAGE>
ARTICLE II.
SHARES SUBJECT TO PLAN
2.1. SHARES SUBJECT TO PLAN.
(a) The shares of stock subject to Options shall be Common Stock,
initially shares of the Company's Common Stock, par value $0.001 per
share. The shares of Common Stock issuable upon exercise of such
Options may be either previously authorized but unissued shares or
treasury shares. Subject to Section 8.3, the aggregate number of such
shares which may be reserved and issued upon exercise of such Options
shall not exceed thirteen million, four hundred fifty-eight thousand
(13,458,000); provided, however, that subject to approval by the
stockholder's of the Company and effective as of such date, the
aggregate number of such shares which may be reserved and issued upon
exercise of such Options shall not exceed thirty-seven million, four
hundred fifty-eight thousand (37,458,000).
(b) The maximum number of shares which may be subject to Options
granted under the Plan to any individual in any calendar year shall not
exceed the Award Limit. To the extent required by Section 162(m) of the
Code, shares subject to Options which are canceled continue to be
counted against the Award Limit.
2.2. ADD-BACK OF OPTIONS. If any Option expires or is canceled without
having been fully exercised, or is exercised in whole or in part for cash as
permitted by the Plan, the number of shares subject to such Option but as to
which such Option was not exercised prior to its expiration, cancellation or
exercise may again be optioned hereunder, subject to the limitations of Section
2.1. Furthermore, any shares subject to Options which are adjusted pursuant to
Section 8.3 and become exercisable with respect to shares of stock of another
corporation shall be considered canceled and may again be optioned hereunder,
subject to the limitations of Section 2.1. Shares of Common Stock which are
delivered by the Holder or withheld by the Company upon the exercise of any
Option under the Plan, in payment of the exercise price thereof or tax
withholding thereon, may again be optioned hereunder, subject to the limitations
of Section 2.1. Notwithstanding the provisions of this Section 2.2, no shares of
Common Stock may again be optioned if such action would cause an Incentive Stock
Option to fail to qualify as an incentive stock option under Section 422 of the
Code.
ARTICLE III.
GENERAL PROVISIONS
3.1. STOCK OPTION AGREEMENT. Each Option shall be evidenced by a Stock
Option Agreement. Stock Option Agreements evidencing Options intended to qualify
as performance-based compensation as described in Section 162(m)(4)(C) of the
Code shall contain such terms and conditions as may be necessary to meet the
applicable provisions of Section 162(m) of the Code. Stock Option Agreements
evidencing Incentive Stock Options shall contain such terms
5
<PAGE>
and conditions as may be necessary to meet the applicable provisions of Section
422 of the Code.
3.2. PROVISIONS APPLICABLE TO SECTION 162(M) PARTICIPANTS. The
Committee, in its discretion, may determine whether an Option is to qualify as
performance-based compensation as described in Section 162(m)(4)(C) of the Code.
3.3. CONSIDERATION. In consideration of the granting of an Option under
the Plan, the Holder shall agree, in the Stock Option Agreement or other written
agreement, to remain in the employ of (or to consult for or to serve as an
Independent Director of, as applicable) the Company or any Subsidiary for a
period of at least one year (or such shorter period as may be fixed in the Stock
Option Agreement or by action of the Committee following grant of the Option)
after the Option is granted (or, in the case of an Independent Director, until
the next annual meeting of stockholders of the Company).
3.4. AT-WILL EMPLOYMENT. Nothing in the Plan or in any Stock Option
Agreement hereunder shall confer upon any Holder any right to continue in the
employ of, or as a Consultant for, the Company or any Subsidiary, or as a
director of the Company, or shall interfere with or restrict in any way the
rights of the Company and any Subsidiary or as a director of the Company, which
are hereby expressly reserved, to discharge any Holder at any time for any
reason whatsoever, with or without cause, except to the extent expressly
provided otherwise in a written employment agreement between the Holder and the
Company and any Subsidiary.
ARTICLE IV.
GRANTING OF OPTIONS
4.1. ELIGIBILITY. Any Employee or Consultant selected by the Committee
pursuant to Section 4.4(a)(i) shall be eligible to be granted an Option. Each
Independent Director of the Company shall be eligible to be granted Options at
the times and in the manner set forth in Section 4.5.
4.2. DISQUALIFICATION FOR STOCK OWNERSHIP. No person may be granted an
Incentive Stock Option under the Plan if such person, at the time the Incentive
Stock Option is granted, owns stock possessing more than ten percent (10%) of
the total combined voting power of all classes of stock of the Company or any
then existing Subsidiary or parent corporation (within the meaning of Section
422 of the Code) unless such Incentive Stock Option conforms to the applicable
provisions of Section 422 of the Code.
4.3. QUALIFICATION OF INCENTIVE STOCK OPTIONS. No Incentive Stock
Option shall be granted to any person who is not an Employee.
4.4. GRANTING OF OPTIONS TO EMPLOYEES AND CONSULTANTS.
(a) The Committee shall from time to time, in its discretion, and
subject to applicable limitations of the Plan:
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<PAGE>
(i) Select from among the Employees or Consultants (including
Employees or Consultants who have previously received Options
under the Plan) such of them as in its opinion should be granted
Options;
(ii) Subject to the Award Limit, determine the number of
shares to be subject to such Options granted to the selected
Employees or Consultants;
(iii) Subject to Section 4.3, determine whether such Options
are to be Incentive Stock Options or Non-Qualified Stock Options
and whether such Options are to qualify as performance-based
compensation as described in Section 162(m)(4)(C) of the Code; and
(iv) Determine the terms and conditions of such Options,
consistent with the Plan; PROVIDED, HOWEVER, that the terms and
conditions of Options intended to qualify as performance-based
compensation as described in Section 162(m)(4)(C) of the Code
shall include, but not be limited to, such terms and conditions as
may be necessary to meet the applicable provisions of Section
162(m) of the Code.
(b) Upon the selection of a Employee or Consultant to be granted
an Option, the Committee shall instruct the Secretary of the Company to
issue the Option and may impose such conditions on the grant of the
Option as it deems appropriate.
(c) Any Incentive Stock Option granted under the Plan may be
modified by the Committee, with the consent of the Holder, to
disqualify such Option from treatment as an "incentive stock option"
under Section 422 of the Code.
4.5. GRANTING OF OPTIONS TO INDEPENDENT DIRECTORS. Each person who is
then serving as an Independent Director automatically shall be granted an Option
to purchase 30,000 shares of Common Stock (subject to adjustment as provided in
Section 8.3) on (i) the date the Plan is initially adopted by the Board and (ii)
the date of the first Board meeting during the second calendar quarter of each
calendar year commencing thereafter during the Term of the Plan. The Company
shall have the right to repurchase all shares of Common Stock acquired upon
exercise of Options granted to an Independent Director at the exercise price
paid therefor upon the Independent Director's Termination of Directorship for
any reason (the "Repurchase Right"); provided that such Repurchase Right shall
lapse in installments as follows:
(i) Prior to the first anniversary of the date of grant, the
Repurchase Right shall apply to all shares of Common Stock covered
by the Director's Option;
(ii) On the first anniversary of the date of grant the
Repurchase Right shall lapse with respect to one-third (1/3) of
the number of shares of Common Stock covered by the Director's
Option;
(iii) On the last day of each calendar quarter (I.E., January
31, March 31, June 30 and September 30) that begins coincident
with or following the first
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anniversary of the date of grant, the Repurchase Right shall lapse
with respect to an additional one-twelve (1/12) of the shares of
Common Stock covered by the Director's Option;
except that the Repurchase Right shall not lapse with respect to any additional
portion of the shares of Common Stock covered by the Director's Option after his
or her Termination of Directorship for any reason.
4.6. OPTIONS IN LIEU OF CASH COMPENSATION. Options may be granted under
the Plan to Employees and Consultants in lieu of cash bonuses which would
otherwise be payable to such Employees and Consultants and to Independent
Directors in lieu of directors' fees which would otherwise by payable to such
Independent Directors, pursuant to such policies which may be adopted by the
Committee from time to time.
ARTICLE V.
TERMS OF OPTIONS
5.1. OPTION PRICE. The price per share of the shares subject to each
Option granted to Employees and Consultants shall be set by the Committee;
PROVIDED, HOWEVER, that such price shall be no less than the par value of a
share of Common Stock, unless otherwise permitted by applicable state law, and:
(a) in the case of Options intended to qualify as
performance-based compensation as described in Section 162(m)(4)(C) of
the Code, such price shall not be less than 100% of the Fair Market
Value of a share of Common Stock on the date the Option is granted;
(b) in the case of Incentive Stock Options such price shall not be
less than 100% of the Fair Market Value of a share of Common Stock on
the date the Option is granted (or the date the Option is modified,
extended or renewed for purposes of Section 424(h) of the Code);
(c) in the case of Incentive Stock Options granted to an
individual then owning (within the meaning of Section 424(d) of the
Code) more than 10% of the total combined voting power of all classes
of stock of the Company or any Subsidiary or parent corporation thereof
(within the meaning of Section 422 of the Code), such price shall not
be less than 110% of the Fair Market Value of a share of Common Stock
on the date the Option is granted (or the date the Option is modified,
extended or renewed for purposes of Section 424(h) of the Code); and
(d) in the case of an Option that is a Substitute Option, such
price may be less than the Fair Market Value per share on the date of
grant, PROVIDED, that the excess of:
(i) the aggregate Fair Market Value (as of the date such
Substitute Option is granted) of the shares subject to the
Substitute Option; over
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(ii) the aggregate exercise price thereof; does not exceed the
excess of;
(iii) the aggregate fair market value (as of the time
immediately preceding the transaction giving rise to the
Substitute Option, such fair market value to be determined by the
Committee) of the shares of the predecessor entity that were
subject to the grant assumed or substituted for by the Company;
over
(iv) the aggregate exercise price of such shares.
5.2. OPTION TERM. The term of an Option granted to an Employee or
Consultant shall be set by the Committee in its discretion; PROVIDED, HOWEVER,
that, in the case of Incentive Stock Options, the term shall not be more than
ten (10) years from the date the Incentive Stock Option is granted, or five (5)
years from the date the Incentive Stock Option is granted if the Incentive Stock
Option is granted to an individual then owning (within the meaning of Section
424(d) of the Code) more than 10% of the total combined voting power of all
classes of stock of the Company or any Subsidiary or parent corporation thereof
(within the meaning of Section 422 of the Code). Except as limited by
requirements of Section 422 of the Code and regulations and rulings thereunder
applicable to Incentive Stock Options, the Committee may extend the term of any
outstanding Option in connection with any Termination of Employment or
Termination of Consultancy of the Holder, or amend any other term or condition
of such Option relating to such a termination.
5.3. OPTION VESTING
(a) The period during which the right to exercise, in whole or in
part, an Option granted to an Employee or a Consultant vests in the
Holder shall be set by the Committee and the Committee may determine
that an Option may not be exercised in whole or in part for a specified
period after it is granted; PROVIDED, HOWEVER, that, unless the
Committee otherwise provides in the terms of the Stock Option Agreement
or otherwise, no Option shall be exercisable by any Holder who is then
subject to Section 16 of the Exchange Act within the period ending six
months and one day after the date the Option is granted. At any time
after grant of an Option, the Committee may, in its sole discretion and
subject to whatever terms and conditions it selects, accelerate the
period during which an Option granted to an Employee or Consultant
vests.
(b) No portion of an Option granted to an Employee or Consultant
which is unexercisable at Termination of Employment or Termination of
Consultancy, as applicable, shall thereafter become exercisable, except
as may be otherwise provided by the Committee either in the Stock
Option Agreement or by action of the Committee following the grant of
the Option.
(c) To the extent that the aggregate Fair Market Value of stock
with respect to which "incentive stock options" (within the meaning of
Section 422 of the Code, but without regard to Section 422(d) of the
Code) are exercisable for the first time by a Holder during any
calendar year (under the Plan and all other incentive stock option
plans of the Company and any parent or subsidiary corporation (within
the meaning of Section
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422 of the Code) of the Company) exceeds $100,000, such Options shall
be treated as Non-Qualified Options to the extent required by Section
422 of the Code. The rule set forth in the preceding sentence shall be
applied by taking Options into account in the order in which they were
granted. For purposes of this Section 5.3(c), the Fair Market Value of
stock shall be determined as of the time the Option with respect to
such stock is granted.
5.4. TERMS OF OPTIONS GRANTED TO INDEPENDENT DIRECTORS . The price per
share of the shares subject to each Option granted to an Independent Director
shall equal 100% of the Fair Market Value of a share of Common Stock on the date
the Option is granted. Options granted to Independent Directors shall be
exercisable in full as of the date of grant, and subject to Section 6.6, the
term of each Option granted to an Independent Director shall be ten (10) years
from the date the Option is granted.
ARTICLE VI.
EXERCISE OF OPTIONS
6.1. PARTIAL EXERCISE. An exercisable Option may be exercised in whole
or in part. However, an Option shall not be exercisable with respect to
fractional shares and the Committee may require that, by the terms of the
Option, a partial exercise be with respect to a minimum number of shares.
6.2. MANNER OF EXERCISE. All or a portion of an exercisable Option
shall be deemed exercised upon delivery of all of the following to the Secretary
of the Company or his or her office:
(a) A written notice complying with the applicable rules
established by the Committee stating that the Option, or a portion
thereof, is exercised. The notice shall be signed by the Holder or
other person then entitled to exercise the Option or such portion of
the Option;
(b) Such representations and documents as the Committee, in its
sole discretion, deems necessary or advisable to effect compliance with
all applicable provisions of the Securities Act and any other federal
or state securities laws or regulations. The Committee may, in its sole
discretion, also take whatever additional actions it deems appropriate
to effect such compliance including, without limitation, placing
legends on share certificates and issuing stop-transfer notices to
agents and registrars;
(c) As the Committee, in its discretion may require, an executed
copy of the Option Plan Stockholders Agreement;
(d) In the event that the Option shall be exercised pursuant to
Section 8.1 by any person or persons other than the Holder, appropriate
proof of the right of such person or persons to exercise the Option;
and
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(e) Full cash payment to the Secretary of the Company for the
shares with respect to which the Option, or portion thereof, is
exercised. However, the Committee, may in its discretion (i) allow a
delay in payment up to thirty (30) days from the date the Option, or
portion thereof, is exercised; (ii) allow payment, in whole or in part,
through the delivery of shares of Common Stock which have been owned by
the Holder for at least six months, duly endorsed for transfer to the
Company with a Fair Market Value on the date of delivery equal to the
aggregate exercise price of the Option or exercised portion thereof;
(iii) allow payment, in whole or in part, through the surrender of
shares of Common Stock then issuable upon exercise of the Option having
a Fair Market Value on the date of Option exercise equal to the
aggregate exercise price of the Option or exercised portion thereof;
(iv) allow payment, in whole or in part, through the delivery of
property of any kind which constitutes good and valuable consideration;
(v) allow payment, in whole or in part, through the delivery of a full
recourse promissory note bearing interest (at no less than such rate as
shall then preclude the imputation of interest under the Code) and
payable upon such terms as may be prescribed by the Committee or the
Board; (vi) allow payment, in whole or in part, through the delivery of
a notice that the Holder has placed a market sell order with a broker
with respect to shares of Common Stock then issuable upon exercise of
the Option, and that the broker has been directed to pay a sufficient
portion of the net proceeds of the sale to the Company in satisfaction
of the Option exercise price, provided that payment of such proceeds is
then made to the Company upon settlement of such sale; or (vii) allow
payment through any combination of the consideration provided in the
foregoing subparagraphs (ii), (iii), (iv), (v) and (vi). In the case of
a promissory note, the Committee may also prescribe the form of such
note and the security to be given for such note. The Option may not be
exercised, however, by delivery of a promissory note or by a loan from
the Company when or where such loan or other extension of credit is
prohibited by law.
6.3. CONDITIONS TO ISSUANCE OF STOCK CERTIFICATES. The Company shall
not be required to issue or deliver any certificate or certificates for shares
of stock purchased upon the exercise of any Option or portion thereof prior to
fulfillment of all of the following conditions:
(a) The admission of such shares to listing on all stock exchanges
on which such class of stock is then listed;
(b) The completion of any registration or other qualification of
such shares under any state or federal law, or under the rulings or
regulations of the Securities and Exchange Commission or any other
governmental regulatory body which the Committee shall, in its sole
discretion, deem necessary or advisable;
(c) The obtaining of any approval or other clearance from any
state or federal governmental agency which the Committee shall, in its
sole discretion, determine to be necessary or advisable;
(d) The lapse of such reasonable period of time following the
exercise of the Option as the Committee (or Board, in the case of
Options granted to Independent Directors) may establish from time to
time for reasons of administrative convenience; and
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(e) The receipt by the Company of full payment for such shares,
including payment of any applicable withholding tax, which in the
discretion of the Committee or the Board may be in the form of
consideration used by the Holder to pay for such shares under Section
6.2(d).
6.4. RIGHTS AS STOCKHOLDERS. Holders shall not be, nor have any of the
rights or privileges of, stockholders of the Company in respect of any shares
purchasable upon the exercise of any part of an Option unless and until
certificates representing such shares have been issued by the Company to such
Holders.
6.5. OWNERSHIP AND TRANSFER RESTRICTIONS. The Committee, in its sole
discretion, may impose such restrictions on the ownership and transferability of
the shares purchasable upon the exercise of an Option as it deems appropriate.
Any such restriction shall be set forth in the respective Stock Option Agreement
and may be referred to on the certificates evidencing such shares. The Holder
shall give the Company prompt notice of any disposition of shares of Common
Stock acquired by exercise of an Incentive Stock Option within (a) two years
from the date of granting (including the date the Option is modified, extended
or renewed for purposes of Section 424(h) of the Code) such Option to such
Holder or (b) one year after the transfer of such shares to such Holder.
6.6. LIMITATIONS ON EXERCISE OF OPTIONS GRANTED TO INDEPENDENT
DIRECTORS. No Option granted to an Independent Director may be exercised to any
extent by anyone after the first to occur of the following events:
(a) The expiration of twelve (12) months from the date of the
Holder's death;
(b) The expiration of twelve (12) months from the date of the
Holder's Termination of Directorship by reason of his or her permanent
and total disability (within the meaning of Section 22(e)(3) of the
Code);
(c) The expiration of three (3) months from the date of the
Holder's Termination of Directorship for any reason other than such
Holder's death or his or her permanent and total disability, unless the
Holder dies within said three-month period; or
(d) The expiration of ten (10) years from the date the Option was
granted.
6.7. ADDITIONAL LIMITATIONS ON EXERCISE OF OPTIONS. Holders may be
required to comply with any timing or other restrictions with respect to the
settlement or exercise of an Option, including a window-period limitation, as
may be imposed in the discretion of the Committee.
ARTICLE VII.
ADMINISTRATION
7.1. COMMITTEE. Prior to the Company's initial registration of Common
Stock under
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Section 12 of the Exchange Act, the Compensation Committee shall administer the
Plan. Following such registration, the full Board shall administer the Plan
unless and until there is appointed a Compensation Committee (or another
committee or a subcommittee of the Board assuming the functions of the Committee
under the Plan) that shall consist solely of two or more Independent Directors
appointed by and holding office at the pleasure of the Board, each of whom is an
"outside director" for purposes of Section 162(m) of the Code. Appointment of
Committee members shall be effective upon acceptance of appointment. Committee
members may resign at any time by delivering written notice to the Board.
Vacancies in the Committee may be filled by the Board.
7.2. DUTIES AND POWERS OF COMMITTEE. It shall be the duty of the
Committee to conduct the general administration of the Plan in accordance with
its provisions. The Committee shall have the power to interpret the Plan and the
Stock Option Agreements, and to adopt such rules for the administration,
interpretation, and application of the Plan as are consistent therewith, to
interpret, amend or revoke any such rules and to amend any Stock Option
Agreement provided that the rights or obligations of the Holder of the Option
that is the subject of any such Stock Option Agreement are not affected
adversely. Any such grant or award under the Plan need not be the same with
respect to each Holder. Any such interpretations and rules with respect to
Incentive Stock Options shall be consistent with the provisions of Section 422
of the Code. In its sole discretion, the Board may at any time and from time to
time exercise any and all rights and duties of the Committee under the Plan
except with respect to matters which under Rule 16b-3 or Section 162(m) of the
Code, or any regulations or rules issued thereunder, are required to be
determined in the sole discretion of the Committee. Notwithstanding the
foregoing, (i) the full Board, acting by a majority of its members in office,
shall conduct the general administration of the Plan with respect to Options
granted to Independent Directors and references herein to "Committee" shall,
with respect to such Options, be deemed to refer to the Board and (ii) both the
full Board, acting by a majority of its members in office, and the Compensation
Committee, acting by a majority of its members in office, together shall conduct
the general administration of the Plan with respect to Options granted to to
officers of the Company subject to the provisions of Section 16 of the Exchange
Act, and references herein to "Committee" shall, with respect to such Options,
be deemed to refer to both the Board and the Compensation Committee.
7.3. MAJORITY RULE; UNANIMOUS WRITTEN CONSENT. The Committee shall act
by a majority of its members in attendance at a meeting at which a quorum is
present or by a memorandum or other written instrument signed by all members of
the Committee.
7.4. COMPENSATION; PROFESSIONAL ASSISTANCE; GOOD FAITH ACTIONS. Members
of the Committee shall receive such compensation, if any, for their services as
members as may be determined by the Board. All expenses and liabilities which
members of the Committee incur in connection with the administration of the Plan
shall be borne by the Company. The Committee may employ attorneys, consultants,
accountants, appraisers, brokers, or other persons. The Committee, the Company
and the Company's officers and Directors shall be entitled to rely upon the
advice, opinions or valuations of any such persons. All actions taken and all
interpretations and determinations made by the Committee or the Board in good
faith shall be final and binding upon all Holders, the Company and all other
interested persons. No members of the Committee or Board shall be personally
liable for any action, determination or interpretation made in good
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faith with respect to the Plan or Options, and all members of the Committee and
the Board shall be fully protected by the Company in respect of any such action,
determination or interpretation.
7.5. DELEGATION OF AUTHORITY. The Committee may, but need not, from
time to time delegate some or all of its authority to grant Options under the
Plan to a committee consisting of one or more members of the Committee or of one
or more officers of the Company; PROVIDED, HOWEVER, that the Committee may not
delegate its authority to grant Options to individuals (a) who are subject on
the date of the grant to the reporting rules under Section 16(a) of the Exchange
Act, (b) who are Section 162(m) Participants or (c) who are officers of the
Company who are delegated authority by the Committee hereunder. Any delegation
hereunder shall be subject to the restrictions and limits that the Committee
specifies at the time of such delegation, and the Committee may at any time
rescind the authority so delegated or appoint a new delegatee. At all times, the
delegatee appointed under this Section 7.5 shall serve in such capacity at the
pleasure of the Committee.
ARTICLE VIII.
MISCELLANEOUS PROVISIONS
8.1. NOT TRANSFERABLE. No Option under the Plan may be sold, pledged,
assigned or transferred in any manner other than (i) by will or the laws of
descent and distribution, (ii) subject to the consent of the Committee, pursuant
to a DRO, or (iii) with respect to Options granted to Independent Directors
pursuant to Section 4.5 hereof, to the employer of the Independent Director or
an affiliate (as such term is defined in Rule 12b-2 of the Rules promulgated
pursuant to the Exchange Act) of such employer, unless and until such Option has
been exercised, or the shares underlying such Option have been issued, and all
restrictions applicable to such shares have lapsed. No Option, interest or right
therein shall be liable for the debts, contracts or engagements of the Holder or
his or her successors in interest or shall be subject to disposition by
transfer, alienation, anticipation, pledge, encumbrance, assignment or any other
means whether such disposition be voluntary or involuntary or by operation of
law by judgment, levy, attachment, garnishment or any other legal or equitable
proceedings (including bankruptcy), and any attempted disposition thereof shall
be null and void and of no effect, except to the extent that such disposition is
permitted by the preceding sentence.
During the lifetime of the Holder, only he or she or a transferee
pursuant to a transfer permitted by the preceding paragraph of this Section 8.1
may exercise an Option (or any portion thereof) granted to him or her under the
Plan. After the death of the Holder, any exercisable portion of an Option may,
prior to the time when such portion becomes unexercisable under the Plan or the
applicable Stock Option Agreement, be exercised by his or her personal
representative or by any person empowered to do so under the deceased Holder's
will or under the then applicable laws of descent and distribution.
8.2. AMENDMENT, SUSPENSION OR TERMINATION OF THE PLAN. Except as
otherwise provided in this Section 8.2, the Plan may be wholly or partially
amended or otherwise modified, suspended or terminated at any time or from time
to time by the Board or the Committee.
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However, without approval of the Company's stockholders given within twelve
months before or after the action by the Board or the Committee, no action of
the Board or the Committee may, except as provided in Section 8.3, increase the
limits imposed in Section 2.1 on the maximum number of shares which may be
issued under the Plan. No amendment, suspension or termination of the Plan
shall, without the consent of the Holder alter or impair any rights or
obligations under any Option theretofore granted, unless the Option itself
otherwise expressly so provides. No Options may be granted during any period of
suspension or after termination of the Plan, and in no event may any Incentive
Stock Option be granted under the Plan after the first to occur of the following
events:
(a) The expiration of ten years from the date the Plan is adopted
by the Board; or
(b) The expiration of ten years from the date the Plan is approved
by the Company's stockholders under Section 8.4.
8.3. CHANGES IN COMMON STOCK OR ASSETS OF THE COMPANY, ACQUISITION OR
LIQUIDATION OF THE COMPANY, CHANGE IN CONTROL AND OTHER CORPORATE
EVENTS.
(a) Subject to Section 8.3(d), in the event that the Committee
determines that any dividend or other distribution (whether in the form
of cash, Common Stock, other securities, or other property),
recapitalization, reclassification, stock split, reverse stock split,
reorganization, merger, consolidation, split-up, spin-off, combination,
repurchase, liquidation, dissolution, or sale, transfer, exchange or
other disposition of all or substantially all of the assets of the
Company, or exchange of Common Stock or other securities of the
Company, issuance of warrants or other rights to purchase Common Stock
or other securities of the Company, or other similar corporate
transaction or event, in the Committee's sole discretion, affects the
Common Stock such that an adjustment is determined by the Committee to
be appropriate in order to prevent dilution or enlargement of the
benefits or potential benefits intended to be made available under the
Plan or with respect to an Option, then the Committee shall, in such
manner as it may deem equitable, adjust any or all of
(i) the number and kind of shares of Common Stock (or other
securities or property) with respect to which Options may be
granted (including, but not limited to, adjustments of the
limitations in Section 2.1 on the maximum number and kind of
shares which may be issued and adjustments of the Award Limit),
(ii) the number and kind of shares of Common Stock (or other
securities or property) subject to outstanding Options, and
(iii) the grant or exercise price with respect to any Option.
(b) Subject to Sections 8.3(d) and (e), in the event of any
transaction or event described in Section 8.3(a) or any unusual or
nonrecurring transactions or events affecting the Company, any
affiliate of the Company, or the financial statements of the Company
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or any affiliate, or of changes in applicable laws, regulations, or
accounting principles, the Committee, in its sole discretion, and on
such terms and conditions as it deems appropriate, either by the terms
of the Option or by action taken prior to the occurrence of such
transaction or event and either automatically or upon the Holder's
request, is hereby authorized to take any one or more of the following
actions whenever the Committee determines that such action is
appropriate in order to prevent dilution or enlargement of the benefits
or potential benefits intended to be made available under the Plan or
with respect to any Option under the Plan, to facilitate such
transactions or events or to give effect to such changes in laws,
regulations or principles:
(i) To provide for either the purchase of any such Option for
an amount of cash equal to the amount that could have been
attained upon the exercise of such Option or realization of the
Holder's rights had such Option been currently exercisable or the
replacement of such Option with other rights or property selected
by the Committee in its sole discretion;
(ii) To provide that the Option cannot vest or be exercised
after such event;
(iii) To provide that such Option shall be exercisable as to
all shares covered thereby, notwithstanding anything to the
contrary in (A) Section 5.3 or 5.4 or (B) the provisions of such
Option, and/or to provide for the lapse of restrictions on shares
acquired upon exercise of Options;
(iv) To provide that such Option be assumed by the successor
or survivor corporation, or a parent or subsidiary thereof, or
shall be substituted for by similar options, rights or Options
covering the stock of the successor or survivor corporation, or a
parent or subsidiary thereof, with appropriate adjustments as to
the number and kind of shares and prices; and
(v) To make adjustments in the number and type of shares of
Common Stock (or other securities or property) subject to
outstanding Options, and/or in the terms and conditions of
(including the exercise price), and the criteria included in,
outstanding Options, and options which may be granted in the
future.
(c) Subject to Section 8.3(d) and Section 8.4, the Committee may,
in its discretion, include such further provisions and limitations in
any Stock Option agreement, as it may deem equitable and in the best
interests of the Company.
(d) With respect to Options which are granted to Section 162(m)
Participants and are intended to qualify as performance-based
compensation under Section 162(m)(4)(C), no adjustment or action
described in this Section 8.3 or in any other provision of the Plan
shall be authorized to the extent that such adjustment or
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action would cause such Option to fail to so qualify under Section
162(m)(4)(C), or any successor provisions thereto. No adjustment or
action described in this Section 8.3 or in any other provision of the
Plan shall be authorized to the extent that such adjustment or action
would cause the Plan to violate Section 422(b)(1) of the Code.
Furthermore, no such adjustment or action shall be authorized to the
extent such adjustment or action would result in short-swing profits
liability under Section 16 or violate the exemptive conditions of Rule
16b-3 unless the Committee determines that the Option is not to comply
with such exemptive conditions. The number of shares of Common Stock
subject to any Option shall always be rounded to the next whole number.
(e) Notwithstanding the foregoing, in the event that the Company
becomes a party to a transaction that is intended to qualify for
"pooling of interest" accounting treatment and, but for one or more of
the provisions of this Plan or any Stock Option Agreement would so
qualify, then this Plan and any Stock Option Agreement shall be
interpreted so as to preserve such accounting treatment, and to the
extent that any provision of the Plan or any Stock Option Agreement
would disqualify the transaction from pooling of interests accounting
treatment (including, if applicable, an entire Stock Option Agreement),
then such provision shall be null and void. All determinations to be
made in connection with the preceding sentence shall be made by the
independent accounting firm whose opinion with respect to "pooling of
interests" treatment is required as a condition to the Company's
consummation of such transaction.
(f) The existence of the Plan, the Stock Option Agreements and the
Options granted hereunder shall not affect or restrict in any way the
right or power of the Company or the shareholders of the Company to
make or authorize any adjustment, recapitalization, reorganization or
other change in the Company's capital structure or its business, any
merger or consolidation of the Company, any issue of stock or of
options, warrants or rights to purchase stock or of bonds, debentures,
preferred or prior preference stocks whose rights are superior to or
affect the Common Stock or the rights thereof or which are convertible
into or exchangeable for Common Stock, or the dissolution or
liquidation of the company, or any sale or transfer of all or any part
of its assets or business, or any other corporate act or proceeding,
whether of a similar character or otherwise.
8.4. APPROVAL OF PLAN BY STOCKHOLDERS. The Plan will be submitted for
the approval of the Company's stockholders within twelve months after the date
of the Board's initial adoption of the Plan. Options may be granted prior to
such stockholder approval, provided that such Options shall not be exercisable
nor shall such Options vest prior to the time when the Plan is approved by the
stockholders, and provided further that if such approval has not been obtained
at the end of said twelve-month period, all Options previously granted under the
Plan shall thereupon be canceled and become null and void.
8.5. TAX WITHHOLDING. The Company shall be entitled to require payment
in cash or deduction from other compensation payable to each Holder of any sums
required by federal, state or local tax law to be withheld with respect to the
issuance, vesting, exercise or payment of any Option. The Committee may in its
discretion and in satisfaction of the foregoing requirement allow such Holder to
elect to have the Company withhold shares of Common Stock otherwise issuable
under such Option (or allow the return of shares of Common Stock) having a Fair
Market Value equal to the sums required to be withheld.
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8.6. LOANS. The Committee may, in its discretion, extend one or more
loans to key Employees in connection with the exercise of an Option granted
under the Plan. The terms and conditions of any such loan shall be set by the
Committee.
8.7. FORFEITURE PROVISIONS. Pursuant to its general authority to
determine the terms and conditions applicable to Options under the Plan, the
Committee shall have the right to provide, in the terms of Options made under
the Plan, or to require a Holder to agree by separate written instrument, that
(a) (i) any proceeds, gains or other economic benefit actually or constructively
received by the Holder upon any receipt or exercise of the Option, or upon the
receipt or resale of any Common Stock underlying the Option, must be paid to the
Company, and (ii) the Option shall terminate and any unexercised portion of the
Option (whether or not vested) shall be forfeited, if (b)(i) a Termination of
Employment, Termination of Consultancy or Termination of Directorship occurs
prior to a specified date, or within a specified time period following receipt
or exercise of the Option, or (ii) the Holder at any time, or during a specified
time period, engages in any activity in competition with the Company, or which
is inimical, contrary or harmful to the interests of the Company, as further
defined by the Committee or the Holder incurs a Termination of Employment,
Termination of Consultancy or Termination of Directorship for cause.
8.8. EFFECT OF PLAN UPON OPTIONS AND COMPENSATION PLANS. The adoption
of the Plan shall not affect any other compensation or incentive plans in effect
for the Company or any Subsidiary. Nothing in the Plan shall be construed to
limit the right of the Company (a) to establish any other forms of incentives or
compensation for Employees, Directors or Consultants of the Company or any
Subsidiary or (b) to grant or assume options or other rights or awards otherwise
than under the Plan in connection with any proper corporate purpose including
but not by way of limitation, the grant or assumption of options in connection
with the acquisition by purchase, lease, merger, consolidation or otherwise, of
the business, stock or assets of any corporation, partnership, limited liability
company, firm or association.
8.9. COMPLIANCE WITH LAWS, CERTIFICATE AND BY-LAWS. The Plan, the
granting and vesting of Options under the Plan and the issuance and delivery of
shares of Common Stock and the payment of money under the Plan or under Options
granted hereunder are subject to compliance with all applicable federal and
state laws, rules and regulations (including but not limited to state and
federal securities law and federal margin requirements) and to such approvals by
any listing, regulatory or governmental authority as may, in the opinion of
counsel for the Company, be necessary or advisable in connection therewith. Any
securities delivered under the Plan shall be subject to such restrictions, and
the person acquiring such securities shall, if requested by the Company, provide
such assurances and representations to the Company as the Company may deem
necessary or desirable to assure compliance with all applicable legal
requirements. To the extent permitted by applicable law, the Plan and Options
granted hereunder shall be deemed amended to the extent necessary to conform to
such laws, rules and regulations. Furthermore, the Plan, the granting and
vesting of Options under the Plan and the issuance and delivery of shares of
Common Stock and the payment of money under the Plan or under Options granted
hereunder are subject to compliance with all applicable provisions of the
Company's Certificate of Incorporation and By-Laws, as the same may be amended
from time to time.
18
<PAGE>
8.10. TITLES. Titles are provided herein for convenience only and are
not to serve as a basis for interpretation or construction of the Plan.
8.11. GOVERNING LAW. The Plan and any agreements hereunder shall be
administered, interpreted and enforced under the internal laws of the State of
Delaware without regard to conflicts of laws thereof.
* * *
I hereby certify that the foregoing Amended and Restated 1998
Stock Option Plan of USinternetworking, Inc. was duly adopted by the Board of
Directors of USinternetworking, Inc. on __________ ___, 1999.
I hereby certify that the foregoing Amended and Restated 1998
Stock Option Plan of USinternetworking, Inc. was duly approved by the
stockholders of the Company on __________ ___, 1999.
Executed on this ____ day of _______________, 1999.
--------------------------------
Secretary
19
<PAGE>
EXHIBIT 23.1
CONSENT OF INDEPENDENT AUDITORS
We consent to the reference to our firm under the caption "Experts" and to the
use of our report dated July 23, 1998, with respect to the financial statements
of Advanced Communication Resources, Inc., included in the Registration
Statement (Form S-1 No. 333-70717) and related Prospectus of USINTERNETWORKING,
Inc. dated February 26, 1999.
/s/ Mahoney Cohen & Company, CPA, P.C.
New York, New York
February 26, 1999
<PAGE>
EXHIBIT 23.2
CONSENT OF INDEPENDENT AUDITORS
We consent to the reference to our firm under the caption "Experts" and to the
use of our report dated August 20, 1998, with respect to the financial
statements of International Information Technology IIT, C.A., included in
Amendment No. 5 to the Registration Statement (Form S-1, No. 333-70717) and
related Prospectus of USINTERNETWORKING, Inc. dated February 26, 1999.
/s/ Bassan & Associados S.C.
Caracas, Venezuela
February 25, 1999
<PAGE>
EXHIBIT 23.3
CONSENT OF INDEPENDENT AUDITORS
We consent to the reference to our firm under the caption "Experts" and to the
use of our report dated March 1, 1999, in Amendment No. 5, with respect to the
consolidated financial statements of I.I.T. Holding, Inc. and subsidiaries,
included in the registration statement (Form S-1 No. 333-70717) and related
Prospectus of USINTERNETWORKING, Inc. dated March 2, 1999.
/s/ Ernst & Young LLP
Baltimore, Maryland
March 1, 1999
<PAGE>
EXHIBIT 23.4
CONSENT OF INDEPENDENT AUDITORS
We consent to the reference to our firm under the caption "Experts" and to the
use of our report dated January 22, 1999, except as to Note 21, as to which the
date is February 26, 1999, in Amendment No. 5, with respect to the consolidated
financial statements of USINTERNETWORKING, Inc., included in the registration
statement (Form S-1 No. 33-70717) and related Prospectus of USINTERNETWORKING,
Inc. dated February 26, 1999.
/s/ Ernst & Young LLP
Baltimore, Maryland
February 26, 1999
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
This schedule contains summary financial information extracted from
USinternetworking, Inc. and is qualified in its entirety by reference to such
financial statements.
</LEGEND>
<CIK> 0001076732
<NAME> USINTERNETWORKING, INC.
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-START> JAN-14-1998
<PERIOD-END> DEC-31-1998
<CASH> 43,802,465
<SECURITIES> 0
<RECEIVABLES> 3,024,119
<ALLOWANCES> (142,000)
<INVENTORY> 0
<CURRENT-ASSETS> 49,702,543
<PP&E> 23,208,030
<DEPRECIATION> (1,567,885)
<TOTAL-ASSETS> 107,526,574
<CURRENT-LIABILITIES> 27,151,544
<BONDS> 0
62,242,500
550
<COMMON> 625
<OTHER-SE> (1,458,147)
<TOTAL-LIABILITY-AND-EQUITY> 107,526,574
<SALES> 0
<TOTAL-REVENUES> 4,122,449
<CGS> 0
<TOTAL-COSTS> 6,658,004
<OTHER-EXPENSES> 27,362,849
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 2,681,088
<INCOME-PRETAX> (32,212,081)
<INCOME-TAX> 0
<INCOME-CONTINUING> (32,212,081)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (32,212,081)
<EPS-PRIMARY> (53.94)
<EPS-DILUTED> (53.94)
</TABLE>
