<PAGE>
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED JUNE 30, 1999
OR
[_] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
FOR THE TRANSITION PERIOD FROM TO
COMMISSION FILE NUMBER: 0-26795
TANNING TECHNOLOGY CORPORATION
------------------------------
(Exact Name of Registrant as Specified in Its Charter)
DELAWARE 84-1381662
(State or Other Jurisdiction of (I.R.S. Employer
Incorporation or Organization) Identification No.)
4600 South Ulster Street, Suite 380
Denver, Colorado 80237
(Address of Principal Executive Offices, Including Zip Code)
(303) 220-9944
(Registrant's Telephone Number, Including Area Code)
(Former Name, Former Address and Former Fiscal Year, if Changed Since Last
Report)
Indicate by check mark whether the registrant: (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes [ ] No [X]
As of August 25, 1999 there were 20,174,086 shares of our Common Stock,
$.01 par value, outstanding.
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TANNING TECHNOLOGY CORPORATION
FORM 10-Q
TABLE OF CONTENTS
<TABLE>
<CAPTION>
Page
Number
------------
<S> <C>
PART I. FINANCIAL INFORMATION
Item 1. Consolidated Financial Statements:
Consolidated Balance Sheets as of June 30, 1999 and December 31, 1998....... 2
Consolidated Statements of Income for the Three and Six Months Ended
June 30, 1999 and 1998.................................................... 3
Consolidated Statements of Cash Flows for the Six Months Ended
June 30, 1999 and 1998.................................................... 4
Notes to Consolidated Financial Statements.................................. 5
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations................................................... 7
Item 3. Qualitative and Quantitative Disclosure About Market Risk..................... 11
PART II. OTHER INFORMATION
Item 1. Legal Proceedings............................................................. 13
Item 2. Changes in Securities and Use of Proceeds..................................... 13
Item 3. Defaults Upon Senior Securities............................................... 14
Item 4. Submission of Matters to a Vote of Security Holders........................... 14
Item 5. Other Information............................................................. 14
Item 6. Exhibits and Reports on Form 8-K.............................................. 14
Signatures................................................................................ 16
</TABLE>
1
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PART I. FINANCIAL INFORMATION
Item 1. Consolidated Financial Statements
TANNING TECHNOLOGY CORPORATION
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
June 30, December 31,
1999 1998
------------- -------------
(Unaudited)
<S> <C> <C>
Assets
Current assets:
Cash and cash equivalents............................................ $ 6,564,345 $ 10,446,111
Accounts receivable - trade, net..................................... 15,007,158 9,225,153
Prepaid expenses and other current assets............................ 1,991,368 914,925
------------- -------------
Total current assets.................................................... 23,562,871 20,586,189
Property and equipment, net.......................................... 4,051,335 3,215,032
Deposits and other long-term assets.................................. 169,696 121,854
------------- -------------
Total assets............................................................ $ 27,783,902 $ 23,923,075
============= =============
Liabilities and stockholders' equity
Current liabilities:
Accounts payable..................................................... $ 2,585,655 $ 1,554,871
Accrued compensation................................................. 2,564,899 2,280,842
Other current liabilities............................................ 2,726,456 2,745,781
------------- -------------
Total current liabilities............................................... 7,877,010 6,581,494
Other long-term liabilities............................................. 534,391 569,536
Stockholders' equity:
Common stock:
Class A shares, $0.01 par value:
Authorized shares - 9,520,293
Issued and outstanding shares - 9,520,293 at
June 30, 1999 and December 31, 1998............................. 290,795 290,795
Class B shares, $0.01 par value:
Authorized shares - 5,696,770
Issued and outstanding shares - 5,696,770 at
June 30, 1999 and December 31, 1998............................. 151,376 151,376
Class C shares, $0.01 par value:
Authorized shares - 8,536,568
Issued and outstanding shares - 388,938 at
June 30, 1999 and none at December 31, 1998..................... 11,880 -
Additional paid-in capital......................................... 15,781,423 14,178,203
Retained earnings.................................................. 3,266,399 2,159,428
Accumulated comprehensive income (loss)............................ (129,372) (7,757)
------------- -------------
Total stockholders' equity.............................................. 19,372,501 16,772,045
------------- -------------
Total liabilities and stockholders' equity.............................. $ 27,783,902 $ 23,923,075
============= =============
</TABLE>
See accompanying notes to consolidated financial statements.
2
<PAGE>
TANNING TECHNOLOGY CORPORATION
CONSOLIDATED STATEMENTS OF INCOME
(UNAUDITED)
<TABLE>
<CAPTION>
Three Months Ended June 30, Six Months Ended June 30,
--------------------------------- ---------------------------------
1999 1998 1999 1998
------------- ------------- ------------- -------------
<S> <C> <C> <C> <C>
Services revenue................................... $ 13,214,258 $ 5,574,257 $ 24,519,307 $ 10,187,470
Product sales...................................... - 58,555 - 628,355
------------- ------------- ------------- -------------
Net revenues....................................... 13,214,258 5,632,812 24,519,307 10,815,825
Operating expenses:
Project personnel costs.......................... 6,377,710 2,872,820 11,870,005 5,761,329
Selling, marketing and administrative
expenses........................................ 6,503,921 2,649,561 11,182,684 4,970,238
Product development costs........................ - 703,117 - 1,522,975
------------- ------------- ------------- -------------
Total operating expenses....................... 12,881,631 6,225,498 23,052,689 12,254,542
------------- ------------- ------------- -------------
Income (loss) from operations...................... 332,627 (592,686) 1,466,618 (1,438,717)
Other income (expense)............................. 112,680 30,899 275,494 127,414
------------- ------------- ------------- -------------
Income (loss) before provision for
(benefit from) income taxes....................... 445,307 (561,787) 1,742,112 (1,311,303)
Provision for (benefit from) income taxes.......... 157,543 (208,965) 635,141 (487,785)
------------- ------------- ------------- -------------
Net income (loss).................................. $ 287,764 $ (352,822) $ 1,106,971 $ (823,518)
============= ============= ============= =============
Basic and diluted earnings (loss) per share........ $ 0.02 $ (0.02) $ 0.07 $ (0.06)
============= ============= ============= =============
Basic weighted average shares outstanding.......... 15,584,362 14,785,236 15,465,505 14,716,775
============= ============= ============= =============
Diluted weighted average shares outstanding........ 17,422,184 14,785,236 16,677,820 14,716,775
============= ============= ============= =============
</TABLE>
See accompanying notes to consolidated financial statements.
3
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TANNING TECHNOLOGY CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
<TABLE>
<CAPTION>
Six Months Ended June 30,
----------------------------------------------
1999 1998
------------------- -------------------
<S> <C> <C>
Operating activities
Net income (loss).............................................................. $ 1,106,971 $ (823,518)
Adjustments to reconcile net income to net cash provided by (used in)
operating activities:
Depreciation and amortization................................................ 619,353 393,354
Deferred income taxes / minority interest.................................... 8,718 91,724
Changes in operating assets and liabilities:
Accounts receivable - trade................................................. (6,056,005) (1,642,119)
Other assets................................................................ (1,122,589) (1,209,760)
Accounts payable............................................................ 1,093,784 (303,219)
Accrued compensation........................................................ 307,057 (229,096)
Other liabilities........................................................... 49,935 442,576
------------------- -------------------
Net cash used in operating activities.......................................... (3,992,776) (3,280,058)
Investing activities
Purchase of property and equipment, net........................................ (1,486,656) (952,984)
------------------- -------------------
Net cash used in investing activities.......................................... (1,486,656) (952,984)
Financing activities
Borrowings (payments) on long-term debt........................................ (58,819) 625,996
Proceeds from exercise of stock options........................................ 1,299,225 -
Proceeds from issuance of common stock......................................... 315,875 1,900,000
------------------- -------------------
Net cash provided by financing activities...................................... 1,556,281 2,525,996
Effect of exchange rate on cash................................................ 41,385 37
------------------- -------------------
Net decrease in cash and cash equivalents...................................... (3,881,766) (1,707,009)
Cash and cash equivalents at beginning of period............................... 10,446,111 7,768,636
------------------- -------------------
Cash and cash equivalents at end of period..................................... $ 6,564,345 $ 6,061,627
=================== ===================
</TABLE>
See accompanying notes to consolidated financial statements.
4
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TANNING TECHNOLOGY CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(1) BASIS OF PRESENTATION
The accompanying unaudited consolidated financial statements have been
prepared by Tanning Technology Corporation (the "Company") pursuant to the rules
and regulations of the Securities and Exchange Commission regarding interim
financial reporting. Accordingly, they do not include all of the information and
footnotes required by generally accepted accounting principles for complete
financial statements and should be read in conjunction with the consolidated
financial statements and notes thereto for the year ended December 31, 1998
included in our Registration Statement on Form S-1 (SEC File No. 333-78657). The
accompanying consolidated financial statements reflect all adjustments
(consisting solely of normal, recurring adjustments) which are, in the opinion
of management, necessary for a fair presentation of results for the interim
periods presented. The results of operations for the three and six month periods
ended June 30, 1999 are not necessarily indicative of the results to be expected
for any future period or the full fiscal year.
(2) EARNINGS PER SHARE
We have adopted Statement of Financial Accounting Standards No. 128,
"Earnings Per Share" ("SFAS 128"). SFAS 128 requires entities to present both
basic earnings per share ("EPS") and diluted EPS. Basic EPS excludes dilution
and is computed by dividing income (loss) by the weighted-average number of
common shares outstanding for the period. Diluted EPS reflects the potential
dilution that could occur if stock options were exercised, resulting in the
issuance of common stock that then shared in the earnings of the Company.
Potential dilution of stock options exercisable into common stock was computed
using the treasury stock method based on the average fair market value of the
stock. The following table reflects the basic and diluted weighted average
shares.
<TABLE>
<CAPTION>
Three Months Ended June 30, Six Months Ended June 30,
--------------------------------- ---------------------------------
1999 1998 1999 1998
------------- ------------- ------------- -------------
<S> <C> <C> <C> <C>
Weighted-average shares outstanding............ 15,584,362 14,785,236 15,465,505 14,716,775
Dilutive impact of options outstanding......... 1,837,822 - 1,212,315 -
------------- ------------- ------------- -------------
Weighted-average shares and potential dilutive
shares outstanding............................ 17,422,184 14,785,236 16,677,820 14,716,775
============= ============= ============= =============
</TABLE>
(3) CAPITAL STOCK
On July 28, 1999, we completed an initial public offering of Common
Stock, par value $.01 per share ("Common Stock"), in which we sold 4,000,000
shares of Common Stock at $15.00 per share. On August 23, 1999, we issued an
additional 310,920 shares of Common Stock in connection with the exercise of the
underwriters' over-allotment option. Proceeds to the Company from these
transactions, net of underwriting discounts and costs of the offering, were
approximately $58.4 million.
5
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In connection with the initial public offering, we effected a 1 for 3.05
reverse stock split of our Class A and Class C common shares and a 1 for 2.67
reverse stock split of our Class B common shares, and each of the Class A, Class
B and Class C common stock was converted into one class of voting common stock.
All references to common shares in the accompanying financial statements reflect
the Company's reverse stock splits, but not the conversion to one class of
common stock, retroactively applied to all periods presented.
During the six months ended June 30, 1999, we issued 388,938 shares of
Class C common stock. These shares were issued in conjunction with purchases
under our qualified stock purchase plan, as well as the exercise of vested stock
options.
(4) NEW ACCOUNTING PRONOUNCEMENTS
In June 1998, the Financial Accounting Standards Board issued Statement
of Financial Accounting Standards No. 133, "Accounting for Derivative
Instruments and Hedging Activities," ("SFAS 133"), which is required to be
adopted in years beginning after June 15, 2000. We anticipate that the adoption
of SFAS No. 133 will not have a significant effect on the financial condition of
the Company.
(5) SEGMENT REPORTING
During 1998, we adopted Statement of Financial Accounting Standards No.
131, "Disclosures about Segments of an Enterprise and Related Information"
("SFAS 131"). SFAS 131 requires a business enterprise, based upon a management
approach, to disclose financial and descriptive information about its operating
segments. Operating segments are components of an enterprise about which
separate financial information is available and regularly evaluated by the chief
operating decision maker(s) of an enterprise. Under this definition, we operated
as a single business unit for all periods presented.
SFAS 131 also requires the disclosure of certain financial information
pertaining to geographic areas. Long-lived assets located outside the United
States are not material. Information about our revenues by geographic area is as
follows (in thousands):
<TABLE>
<CAPTION>
Three Months Ended June 30, Six Months Ended June 30,
------------------------------- ---------------------------------
1999 1998 1999 1998
--------- --------- --------- ---------
<S> <C> <C> <C> <C>
Revenues from external customers:
United States......................... $ 8,097 $ 3,949 $ 15,173 $ 8,039
Denmark............................... 3,849 1,435 7,324 2,279
UK and other Europe................... 1,268 249 2,022 498
--------- --------- --------- ---------
Total.............................. $ 13,214 $ 5,633 $ 24,519 $ 10,816
========= ========= ========= =========
</TABLE>
(6) COMPREHENSIVE INCOME
During 1998, we adopted Statement of Financial Accounting Standards No.
130, "Reporting Comprehensive Income" ("SFAS 130"). SFAS 130 establishes
standards for reporting and displaying comprehensive income and its components
in financial statements. Comprehensive income, as defined, includes all changes
in equity (net assets) during a period from non-owner sources. The components of
comprehensive income are as follows:
<TABLE>
<CAPTION>
Three Months Ended June 30, Six Months Ended June 30,
------------------------------- ---------------------------------
1999 1998 1999 1998
--------- --------- --------- ---------
<S> <C> <C> <C> <C>
Net income (loss)....................... 287,764 (352,822) 1,106,971 (823,518)
Foreign currency translation............ (68,914) 1,210 (121,615) 37
</TABLE>
<TABLE>
<S> <C> <C> <C> <C>
--------- --------- --------- ---------
Comprehensive income (loss)............ 218,850 (351,612) 985,356 (823,481)
========= ========= ========= =========
</TABLE>
6
<PAGE>
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations
This Quarterly Report on Form 10-Q contains forward-looking statements
within the meaning of Section 21E of the Securities Exchange Act of 1934, as
amended, including statements relating to our expectations, beliefs, hopes,
intentions, prospects and strategies. Such forward-looking statements are
subject to various risks and uncertainties, many of which are beyond our
control. Actual results could differ materially from the forward-looking
statements and our expectations as a result of, among other things, potential
difficulties in managing growth, controlling costs, recruiting and retaining
technical and management professionals and key employees, our dependence on our
principal clients, the ability of clients to terminate projects before
completion, difficulties associated with international operations and expansion,
difficulties in estimating the time and resources necessary for project
engagements and in continuing to perform challenging and critical projects in a
manner that satisfies our clients, the intensely competitive nature of the
business areas in which we compete, difficulties in responding to changing
technology, industry standards and client preferences, dependence on continued
growth in use and acceptance of the Internet, difficulties associated with
potential acquisitions and investments, and the other factors set forth in
Exhibit 99.1 to our Securities and Exchange Commission filings as well as
factors discussed elsewhere in this Quarterly Report on Form 10-Q. We undertake
no obligation to publicly update or revise any forward-looking statements,
whether as a result of new information, future events or otherwise.
OVERVIEW
We are an information technology services provider that architects,
builds and deploys enterprise solutions for companies in the United States and
internationally. We specialize in large, complex, integrated solutions that
incorporate online transaction processing and very large databases. Internet
technologies are central to many of our solutions, enabling direct interaction
among customers and business partners on the World Wide Web, and among employees
within the organization on their private intranets.
Our revenue is comprised primarily of fees generated for professional
services. Historically, we have generally provided services to clients on a time
and materials basis, although we sometimes work on a fixed-fee basis. Under time
and materials contracts, we recognize revenue as services are provided. Under
fixed-fee contracts, we recognize revenue on a percentage of completion basis.
In the future, we anticipate that an increasing percentage of our client
engagements will be subject to fixed-fee or other arrangements that are not
solely based on time and materials. We are generally reimbursed for reasonable
expenses under our contracts.
Revenue from foreign operations represents revenue for professional
services performed for clients outside the United States. Revenue from foreign
operations has made an increasing contribution to our total services revenue and
we anticipate continued growth in revenue from foreign operations. Foreign
operations represented approximately 35% of services revenue in 1998 and 38% of
services revenue in the first six months of 1999.
Revenue from a limited number of clients has comprised a very
substantial portion of our revenues and is expected to represent a very
substantial portion of our revenues in the foreseeable future. Any cancellation,
deferral or significant reduction in work performed for these principal clients
could have a material adverse effect on our business, financial condition and
results of operations.
In 1998, we had revenue from both services and, to a lesser extent,
product sales. We completed the sale of the rights to one of our software
products in the third quarter of 1998. We have shifted our business focus to
concentrate solely on generating revenues from services.
7
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Project personnel costs represent our most significant expense and
consist primarily of salaries, bonuses and employee benefits for company
personnel dedicated to client assignments, and fees paid to subcontractors for
work performed on our projects. Subcontractors generally cost us more than our
own project personnel; consequently, we usually generate lower gross profit
margins by using subcontractors. Non-billable time incurred by our project
personnel resulting from start-up time for new hires and training time incurred
to upgrade the skills of existing staff may cause gross profit margins to
decrease.
Selling, marketing and administrative expenses consist primarily of
salaries, bonuses and employee benefits for non-project personnel, occupancy
costs, staff recruiting costs, travel expenses, depreciation expenses and
promotional costs. Our sales and marketing costs are expected to increase as a
percentage of revenue in the future as we enhance our selling effort. We also
expect to expand geographically by opening new offices in 1999 and 2000. This
will require us to purchase office equipment and computer networking equipment,
both of which will increase our depreciation expense.
In anticipation of business growth, we expect to incur costs and expend
capital. We can give no assurances that we will continue to grow, or that we
will grow at a pace that will support these costs and expenditures. To the
extent revenues do not increase at a rate commensurate with these additional
costs and expenditures, our results of operations and liquidity could be
materially and adversely affected. In particular, we expect that our plans for
increases in expenses and capital expenditures over the next year to support our
growth will negatively impact profitability.
RESULTS OF OPERATIONS
The following table sets forth the percentage of revenues of certain
items included in the Company's consolidated statements of income.
<TABLE>
<CAPTION>
Three Months Six Months
Ended June 30, Ended June 30,
----------------------------- ------------------------------
1999 1998 1999 1998
------------ ------------ ------------ ------------
<S> <C> <C> <C> <C>
Services revenue................................... 100% 99% 100% 94%
Product sales...................................... 0 1 0 6
------------ ------------ ------------ ------------
Net revenues....................................... 100 100 100 100
Project personnel costs............................ 48 51 48 53
------------ ------------ ------------ ------------
Gross profit margin................................ 52 49 52 47
Selling, marketing and administrative.............. 49 47 46 46
Product development costs.......................... 0 13 0 14
------------ ------------ ------------ ------------
Income (loss) from operations...................... 3 (11) 6 (13)
Interest income (expense) and other, net........... 0 1 1 1
------------ ------------ ------------ ------------
Income (loss) before income taxes.................. 3 (10) 7 (12)
Income tax provision (benefit)..................... 1 (4) 3 (4)
------------ ------------ ------------ ------------
Net income (loss) 2% (6)% 4% (8)%
============ ============ ============ ============
</TABLE>
Comparison of Three Months Ended June 30, 1998 and 1999
Net revenues
Our net revenues increased $7.6 million, or 136%, to $13.2 million for
the second quarter of 1999 from $5.6 million for the second quarter of 1998. The
increase in revenues reflects an increase in the average size of client projects
as well as higher average billing rates. During the second quarter of 1999, as
compared to the second quarter of 1998, our average revenue per customer
increased by 184%. The increase in services revenue from our foreign operations
also contributed to this increase in overall
8
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revenue. The revenue from foreign operations increased $3.4 million, or 204%, to
$5.1 million for the second quarter of 1999 from $1.7 million for the second
quarter of 1998. Revenues from our five largest clients as a percentage of total
revenues was 74% for both periods.
Project personnel costs
Our project personnel costs increased $3.5 million, or 122%, to $6.4
million for the second quarter of 1999 from $2.9 million for the second quarter
of 1998. This increase was primarily due to an increase in project personnel
from 85 at June 30, 1998 to 163 at June 30, 1999, as well as higher salaries.
Our gross profit margin increased from 49% for the second quarter of 1998 to 52%
for the same period in 1999, principally as a result of higher average billing
rates and increased utilization of project personnel.
Selling, marketing and administrative
Our selling, marketing and administrative expenses increased $3.9
million, or 145%, to $6.5 million for the second quarter of 1999 from $2.6
million for the second quarter of 1998. The increase in selling, marketing and
administrative expenses was primarily due to additional selling and marketing
activities undertaken to drive our revenue growth, and higher administrative
expenses resulting from increases in our employee headcount and related
infrastructure costs. Our sales, marketing and administrative staff grew from 30
employees at June 30, 1998 to 65 employees at June 30, 1999.
Product development costs
We incurred costs associated with software product sales during the
second quarter of 1998 of $0.7 million, or 13% of net revenues. No such costs
were incurred in 1999. We have no plans to continue the development of software
for resale purposes.
Provision for (benefit from) income taxes
Income tax expense represents combined federal, state, and foreign
taxes. Our income tax provision increased to $0.2 million on pre-tax profits of
$0.4 million for the second quarter of 1999 as compared to a tax benefit of $0.2
million on pre-tax losses of $0.6 million for the second quarter of 1998. The
tax benefit was recorded in the first quarter of 1998 on the pre-tax losses in
anticipation of applying the tax benefit to future tax provisions as we generate
future profits. Our effective tax rate was 35% for the second quarter of 1999
and 37% for the same period in 1998.
Comparison of Six Months Ended June 30, 1998 and 1999
Net revenues
Our net revenues increased $13.7 million, or 127% to $24.5 million for
the first half of 1999 from $10.8 million for the first half of 1998. Included
in the first half of 1998 net revenue is $0.6 million of revenue from product
sales; there was no revenue from product sales in the first half of 1999. The
increase in services revenue of 141% reflects an increase in the average size of
client projects as well as higher average billing rates. During the first half
of 1999, as compared to the first half of 1998, our average revenue per customer
increased by 132%. The increase in services revenue from our foreign operations
also contributed to this increase in overall revenue. The revenue from foreign
operations increased $6.5 million, or 237%, to $9.3 million for the first half
of 1999 from $2.8 million for the first half of 1998. Revenues from our five
largest clients as a percentage of total revenues were 73% for both periods.
Project personnel costs
Our project personnel costs increased $6.1 million, or 106%, to $11.9
million for the first half of 1999 from $5.8 million for the first half of 1998.
This increase was primarily due to an increase in
9
<PAGE>
project personnel from 85 at June 30, 1998 to 163 at June 30, 1999, as well as
higher salaries. Our gross profit margin increased from 47% for the first half
of 1998 to 52% for the same period in 1999, principally as a result of higher
average billing rates and increased utilization of project personnel.
Selling, marketing and administrative
Our selling, marketing and administrative expenses increased $6.2
million, or 125%, to $11.2 million for the first half of 1999 from $5.0 million
for the first half of 1998. The increase in selling, marketing and
administrative expenses was primarily due to additional selling and marketing
activities undertaken to drive our revenue growth, and higher administrative
expenses resulting from increases in our employee headcount and related
infrastructure costs. Our sales, marketing and administrative staff grew from 30
employees at June 30, 1998 to 65 employees at June 30, 1999.
Product development costs
We incurred costs associated with software product sales during the
first half of 1998 of $1.5 million, or 14% of net revenues. No such costs were
incurred in 1999.
Provision for (benefit from) income taxes
Our income tax provision increased to $0.6 million on pre-tax profits of
$1.7 million at the end of the first half of 1999 as compared to a tax benefit
of $0.5 million on pre-tax losses of $1.3 million for the comparable period of
1998. The tax benefit was recorded in the first quarter of 1998 on the pre-tax
losses in anticipation of applying the tax benefit to future tax provisions as
we generate future profits. Our effective tax rate was 36% for the first half of
1999 and 37% for the same period in 1998.
Liquidity and Capital Resources
Historically, we have funded operations and investments in property and
equipment primarily through cash generated from operations, the sale of common
stock and, to a lesser extent, borrowings. Outstanding debt of $1.1 million was
paid off in 1998 with the net proceeds from the sale of common stock of $1.9
million. At June 30, 1999, we had a bank note outstanding of approximately
$520,000, the proceeds of which were used to acquire office furniture and
fixtures. The note bears interest at 8.71% and principal and interest payments
are payable over a 60-month term.
Cash and cash equivalents decreased to $6.6 million at June 30, 1999
from $10.4 million at December 31, 1998. The decrease was primarily due to
investments in property and equipment, and the timing of client remittances;
partially offset by proceeds from the issuance of common stock and the exercise
of stock options in the amount of $1.6 million.
On July 28, 1999, we completed an initial public offering of Common
Stock which resulted in the sale of 4,000,000 shares of Common Stock at $15.00
per share. On August 23, 1999, we issued an additional 310,920 shares of Common
Stock in connection with the exercise of the underwriters' over-allotment
option. Proceeds to the Company from these transactions, net of underwriting
discounts and costs of the offering, were approximately $58.4 million. The net
proceeds of the offering (including the net proceeds of the underwriters'
exercise of the over-allotment option) have been invested in short-term,
interest bearing, investment grade obligations. Based on our current business
plan, we believe that the cash provided from operations, cash on hand, and our
proceeds from the initial public offering will be sufficient to meet our cash
requirements at least through the end of 2000. We currently have no material
commitments for capital expenditures.
10
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Year 2000 Readiness
Until recently, computer programs were written to store only two digits of
date-related information in order to more efficiently handle and store data.
These programs were unable to distinguish properly between the year 1900 and the
year 2000, and as such, risk failure with the changing of the century. This
circumstance is frequently referred to as the "Year 2000 issue."
We rely on information technology systems, applications and devices in
several aspects of our business, including service delivery, time reporting, and
financial accounting. In this regard, we have conducted an assessment of our
information technology systems and believe that significant changes will not be
necessary in order to achieve a Year 2000 date conversion with no effect on
customers or disruption of business operations. We have obtained written and/or
verbal confirmation, either directly or through published materials, from our
major third-party software providers that those applications currently being
used are Year 2000 compliant or that revised versions that are compliant will
become available. Internally generated applications have been largely tested and
deemed compliant as well. Our computer hardware platforms, principally servers,
have been confirmed as Year 2000 compliant by the server manufacturers, or have
been appropriately upgraded in order to achieve compliance. Based on currently
available information, we believe that the total expense related to these
efforts will not have a material impact on our results of operations.
In addition to our internal systems, we also rely, directly and indirectly,
on the systems of business enterprises such as clients, suppliers, utilities,
creditors and financial institutions, both domestic and international. We plan
to obtain assurances from those material third-party vendors with which we
transact business that there will be no interruption of service as a result of
the Year 2000 issue. To the extent that assurances are not given, we intend to
devise contingency plans to mitigate the negative effects on our company in the
event the Year 2000 issue results in the unavailability of services. In
addition, the failure of the accounting systems of our clients due to the Year
2000 issue could result in a delay in the payment of invoices we have issued for
services rendered. A delay in payment of invoices could have a material negative
effect on us. Although we have not yet done so, we intend to inquire of, and
obtain assurances from, our major customers regarding the compliance of their
accounting systems. We also plan to assess risks related to the potential
failure of our non-information technology systems, which include, among other
things, our climate control systems and elevators. We expect to complete our
comprehensive risk assessment and related contingency plan in the third quarter
of 1999.
Although our principal service offerings generally do not include Year 2000
remediation services, former, present and future clients could assert claims
against us related to the Year 2000 issue. There can be no assurance that all
information technology systems we have designed, developed, recommended or
deployed will be Year 2000 compliant. Any Year 2000-related failure of critical
client systems in which we were involved could result in claims being asserted
against us, regardless of whether the failure is related to the services
provided by us. If asserted, any liability that may result, and the time and
resources used in resolving these claims, could have a material adverse effect
on us.
Item 3. Qualitative and Quantitative Disclosures About Market Risk
We are exposed to market risk principally as a result of changes in
interest rates and foreign currency exchange rates. Through June 30, 1999, we
invested our excess cash in cash equivalents. As of June 30, 1999, our exposure
to reasonably possible near-term changes in interest rates was not significant
to our financial position, results of operations and cash flows. Our exposure to
interest rate changes subsequent to June 30, 1999 is greater as a result of
investing the proceeds of our initial public offering in July 1999 in cash
equivalents. At June 30, 1999, our pro forma cash and cash equivalents assuming
the completion of the public offering at that date is $65 million.
11
<PAGE>
We provide our services to customers primarily in the United States, the
United Kingdom and Denmark. As a result, our financial results could be affected
by factors such as changes in foreign currency exchange rates or weak economic
conditions in those foreign markets. Historically we have not experienced
material fluctuations in our results of operations due to foreign currency
exchange rate changes.
12
<PAGE>
PART II. OTHER INFORMATION
Item 1. Legal Proceedings
Not applicable.
Item 2. Changes in Securities and Use of Proceeds
Sales of Unregistered Securities. On April 15, 1999, we sold an aggregate
of 180,500 shares of Class C common stock, par value $.01 per share (all of
which was reclassified as Common Stock, par value $.01 per share, on a 1-for-
3.05447 basis upon the completion of our initial public offering) to our
employees at a purchase price of $1.75 per share pursuant to our 1999 Qualified
Stock Purchase Plan. All of such sales were made pursuant to the exemption from
the registration requirements of the Securities Act of 1933, as amended,
afforded by Rule 701 promulgated thereunder.
Use of Proceeds from Sales of Registered Securities. On July 28, 1999, we
completed an initial public offering of Common Stock, par value $.01 per share.
The managing underwriters for the offering were Credit Suisse First Boston
Corporation, Salomon Smith Barney Inc., CIBC World Markets Corp., ING Barings
LLC and Adams, Harkness & Hill, Inc. (the "Underwriters"). The shares of Common
Stock sold in the offering were registered under the Securities Act of 1933, as
amended, on a Registration Statement on Form S-1 (File No. 333-78657) (the
"Registration Statement") that was declared effective by the Securities and
Exchange Commission on July 22, 1999. The offering commenced on July 23, 1999.
On July 28, 1999, 4,000,000 shares of Common Stock registered under the
Registration Statement were sold at a price of $15.00 per share. On August 23,
1999, we issued an additional 310,920 shares of Common Stock in connection with
the exercise of the underwriters' over-allotment option.
The aggregate price of the offering amount registered and sold (including
pursuant to the underwriters' exercise of their over-allotment option) was
$64,663,800. In connection with the offering, we paid an aggregate of $4,526,466
in underwriting discounts and commissions to the Underwriters. In addition, the
following table sets forth the other estimated expenses incurred in connection
with the offering.
<TABLE>
<S> <C>
Registration fee under Securities Act $ 15,985
NASD filing fee 6,250
The Nasdaq National Market fees 95,000
Legal fees and expenses 750,000
Accounting fees and expenses 200,000
Advisory fee 250,000
Printing and engraving expenses 200,000
Registrar and transfer agent fees 10,000
Miscellaneous expenses 222,765
----------
Total $1,750,000
==========
</TABLE>
Included in the expenses incurred in the offering is a fee of $250,000 we paid
to AEA Investors Inc., the parent of AEA Tanning Investors Inc., which is a
beneficial owner of our common stock, for strategic advisory services in
connection with the offering. Included in the expenses incurred in the offering
is a fee we paid to Fried, Frank, Harris, Shriver & Jacobson. Frederick H. Fogel
has joined us as Vice President of Business Affairs and General Counsel. Mr.
Fogel is and will continue as a partner at Fried, Frank, Harris, Shriver &
Jacobson. After deducting the underwriting discounts and commissions and the
estimated offering expenses described above, we received net proceeds from the
offering of approximately $58.4 million.
The net proceeds of the offering (including the net proceeds of the
underwriters' exercise of their
13
<PAGE>
option) have been invested in short-term, interest bearing, investment grade
obligations, pending their use for other purposes. None of the net proceeds of
the offering will be paid directly or indirectly to any of our directors,
officers, general partners or their associates, persons owning 10% or more of
any class of our equity securities or our affiliates. We expect to use such
proceeds for working capital and general corporate purposes.
Item 3. Defaults Upon Senior Securities
Not applicable.
Item 4. Submission of Matters to a Vote of Security Holders
On April 16, 1999, at an annual meeting of the Company's stockholders,
holders of a majority of the outstanding shares of voting stock of the Company
elected Bipin Agarwal, Toni S. Hippeli, Christopher P. Mahan, Joseph P. Roebuck,
Henry F. Skelsey and Larry G. Tanning to the Board of Directors of the Company
and elected Larry G. Tanning as Chairman of the Board.
Item 5. Other Information
Not applicable.
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits
4.2 Amended and Restated Registration Rights Agreement, dated as of
July 20, 1999, by and among Tanning and the parties listed as
signatories thereto
10.4 Form of Employment, Confidentiality and Non-Competition
Agreement (including Employee-Specific Terms) between Tanning
and Larry Tanning*
10.5 Form of Promissory Note in the amount of $250,000, made by Larry
Tanning in favor of Tanning*
10.6 Form of Employment, Confidentiality and Non-Competition
Agreement (including Employee-Specific Terms) between Tanning
and Bipin Agarwal*
10.7 Form of Promissory Note in the amount of $250,000, made by Bipin
Agarwal in favor of Tanning*
10.8 Form of Employment, Confidentiality and Non-Competition
Agreement between Tanning and each of Henry F. Skelsey, John
Piccone and Frederick H. Fogel*
10.9 Employee-Specific Terms of Employment, Confidentiality and Non-
Competition Agreement between Tanning and Henry F. Skelsey,
dated as of June 1, 1999*
10.10 Employee-Specific Terms of Employment, Confidentiality and Non-
Competition Agreement between Tanning and John Piccone, dated as
of June 30, 1999*
10.11 Employee-Specific Terms of Employment, Confidentiality and Non-
Competition Agreement between Tanning and Frederick H. Fogel,
dated as of June 30, 1999*
10.12 Amended and Restated Shareholder Agreement, dated as of July 20,
1999, by and among Tanning and the parties listed as signatories
thereto
10.13 Separation Agreement and Release between Tanning and Thomas J.
Stack, dated as of May 14, 1999*
27.1 Financial Data Schedule
99.1 Cautionary Statement for Purpose of the "Safe Harbor" Provisions
of The Private Securities Litigation Reform Act of 1995
14
<PAGE>
* Incorporated by reference to the Company's Registration Statement
on Form S-1 (SEC File No. 333-78657) filed with the Commission on
July 21, 1999
(b) Reports on Form 8-K.
We did not file any Reports on Form 8-K during the quarter ended June 30,
1999.
15
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
TANNING TECHNOLOGY CORPORATION
Date: August 26, 1999 By: /s/ Larry G. Tanning
--------------------
Name: Larry G. Tanning
Title: President, Chief Executive Officer and
Director
Date: August 26, 1999 By: /s/ Henry F. Skelsey
--------------------
Name: Henry F. Skelsey
Title: Executive Vice President, Chief Financial
Officer and Director (Principal Financial
and Accounting Officer)
16
<PAGE>
================================================================================
EXHIBIT 4.2
AMENDED AND RESTATED
REGISTRATION RIGHTS AGREEMENT
by and among
TANNING TECHNOLOGY CORPORATION
and
the parties listed as signatories hereto
Dated as of July 20, 1999
================================================================================
<PAGE>
TABLE OF CONTENTS
<TABLE>
<S> <C>
ARTICLE I DEFINITIONS................................................. 2
Section 1.1. Definitions........................................... 2
ARTICLE II REPRESENTATIONS AND WARRANTIES.............................. 4
Section 2.1. Representations and Warranties........................ 4
ARTICLE III REGISTRATION RIGHTS........................................ 4
Section 3.1. Demand Registrations.................................. 4
Section 3.2. Piggyback Registration................................ 5
Section 3.3. Holdback Agreements................................... 7
Section 3.4. Registration Procedures............................... 8
Section 3.5. Registration Expenses................................. 10
Section 3.6. Indemnification....................................... 11
Section 3.7. Participation in Underwritten Registrations........... 13
Section 3.8. Current Public Information............................ 14
Section 3.9. Cooperation........................................... 14
ARTICLE IV TERMINATION................................................. 14
ARTICLE V GENERAL PROVISIONS........................................... 14
Section 5.1. Effective Date........................................ 14
Section 5.2. Exclusive Agreement; No Third-Party Beneficiaries..... 15
Section 5.3. Governing Law, Etc.................................... 15
Section 5.4. Successors and Assigns................................ 15
Section 5.5. Severability.......................................... 16
Section 5.6. Notices............................................... 16
Section 5.7. Counterparts; Facsimile Signatures.................... 17
Section 5.8. Interpretation........................................ 17
Section 5.9. Amendment............................................. 17
Section 5.10. Extension; Waiver..................................... 17
Section 5.11. Enforcement of Agreement.............................. 17
Section 5.12. Further Assurances.................................... 18
</TABLE>
<PAGE>
AMENDED AND RESTATED
REGISTRATION RIGHTS AGREEMENT
-----------------------------
THIS AMENDED AND RESTATED REGISTRATION RIGHTS AGREEMENT, is made as of
July 20, 1999 (this "Agreement"), by and among Tanning Technology Corporation, a
---------
Delaware corporation (the "Company"), Courtney Rose Corporation, a Colorado
-------
corporation ("Courtney"), WinSoft Corporation, a Colorado corporation
--------
("WinSoft"), Hippeli Enterprises, Inc., a Colorado corporation ("Hippeli"),
------- -------
Stephen Brobst, (Courtney, WinSoft, Hippeli and Stephen Brobst are collectively
referred to herein as the "Original Members"), Tanning Family Partnership,
----------------
L.L.L.P. ("TFP"), Larry G. Tanning, Christine A. Tanning, Larry G. Tanning
Irrevocable Trust for the Benefit of His Lineal Descendants ("LGT Trust"),
---------
Christine A. Tanning Irrevocable Trust for the Benefit of Her Lineal Descendants
("CAT Trust"), Bipin Agarwal, Toni Hippeli and Henry Skelsey (the Original
---------
Members and TFP, Larry G. Tanning, Christine A. Tanning, LGT Trust, CAT Trust,
Bipin Agarwal, Toni Hippeli and Henry Skelsey are referred to herein as the
"Tanning Parties"), AEA Tanning Investors Inc., a Delaware corporation ("AEA"),
--------------- ---
TTC Investors I LLC, a Delaware limited liability company ("TTC I"), TTC
-----
Investors II LLC, a Delaware limited liability company ("TTC II"), TTC Investors
------
IA LLC, a Delaware limited liability company ("TTC IA") and TTC Investors IIA
------
LLC, a Delaware limited liability company ("TTC IIA"), (AEA, TTC I, TTC II, TTC
-------
IA and TTC IIA are collectively referred to herein as "TTC").
---
WHEREAS, the Company, the Tanning Parties (with the exception of Henry
Skelsey) and TTC are party to a Registration Rights Agreement dated as of
January 31, 1997, as amended prior to the date hereof, (the "Original
--------
Registration Rights Agreement");
- -----------------------------
WHEREAS, the parties to the Original Registration Rights Agreement
desire to make certain changes to such Original Registration Rights Agreement,
including adding Henry Skelsey as a party thereto, and to amend and restate such
Original Registration Rights Agreement to read in its entirety as set forth
below;
NOW, THEREFORE, in consideration of the foregoing, and of the
representations, warranties, covenants and agreements contained herein and for
other good and valuable consideration, the receipt and sufficiency of which is
hereby acknowledged, the parties hereto hereby agree as follows:
<PAGE>
ARTICLE I
DEFINITIONS
Section 1.1. Definitions.
-----------
"Agreement": as defined in the preamble to this Agreement.
---------
"Board of Directors": the board of directors of the Company.
------------------
"CAT Trust": as defined in the preamble to this Agreement.
---------
"Commission": the Securities and Exchange Commission or any other
----------
Federal agency at the time administering the Securities Act.
"Common Stock": the common stock of the Company (all classes) now or
------------
hereafter authorized to be issued.
"Company": as defined in the preamble to this Agreement.
-------
"Courtney": as defined in the preamble to this Agreement.
--------
"Demand Registrations": as defined in Section 3.1(a).
--------------------
"Director": a member of the Board of Directors.
--------
"Effective Date": as defined in Section 5.1.
--------------
"Exchange Act": the Securities Exchange Act of 1934, as amended, and
------------
the rules and regulations of the Commission thereunder, all as the same shall be
in effect at the time.
"Hippeli": as defined in the preamble to this Agreement.
-------
"LGT Trust": as defined in the preamble to this Agreement.
---------
"Original Registration Rights Agreement": as defined in the preamble
--------------------------------------
to this Agreement.
"Person": any natural person, corporation, partnership, firm,
------
association, trust, government, governmental agency or other entity, whether
acting in an individual, fiduciary or other capacity.
"Piggyback Registration": as defined in Section 3.2(a).
----------------------
"Registrable Securities": (i) any shares of Common Stock owned by, or
----------------------
otherwise hereafter acquired by, TTC or the Tanning Parties and (ii) any
securities issued
-2-
<PAGE>
as a dividend on or other distribution with respect to or in exchange,
replacement or in subdivision of, any such Common Stock. As to any particular
Registrable Securities, such securities shall cease to be Registrable Securities
when (i) a registration statement with respect to the sale of such securities
shall have been declared effective under the Securities Act and such securities
shall have been disposed of in accordance with such registration statement, or
(ii) such securities shall have been sold pursuant to Rule 144 (or any successor
provision) under the Securities Act.
"Registration Expenses": as defined in Section 3.5(a).
---------------------
"Securities Act": the Securities Act of 1933, as amended, and the
--------------
rules and regulations of the Commission thereunder, as the same shall be in
effect at the time.
"Shareholders": TTC and the Tanning Parties.
------------
"Shares": shares of Common Stock.
------
"Short-Form Registrations": as defined in Section 3.1(a).
------------------------
"Stock Purchase Agreement": the Stock Purchase Agreement, dated as of
------------------------
December 24, 1996, as amended and supplemented, among the Company, the Tanning
Parties, Stephen Brobst and TTC.
"Subsidiary": of any Person shall mean any corporation or other legal
----------
entity of which such Person (either alone or through or together with any other
Subsidiary) owns, directly or indirectly, 50% or more of the stock or other
equity interests, the holders of which are generally entitled to vote for the
election of the board of directors or other governing body of such corporation
or other legal entity.
"Tanning Parties": as defined in the preamble to this Agreement.
---------------
"TFP": as defined in the preamble to this Agreement.
---
"TTC": as defined in the preamble to this Agreement.
---
"Voting Common Stock": Common Stock the holders of which are
-------------------
generally entitled to vote for the election of the board of directors of the
Company.
"WinSoft": as defined in the preamble to this Agreement.
-------
-3-
<PAGE>
ARTICLE II
REPRESENTATIONS AND WARRANTIES
Section 2.1. Representations and Warranties. (a) Each of the parties
------------------------------
hereto hereby represents and warrants to each other party hereto as follows: It
has all requisite power (corporate or otherwise) and authority to enter into
this Agreement and to consummate the transactions contemplated hereby. The
execution and delivery by it of this Agreement, and the consummation by it of
the transactions contemplated hereby, have been duly authorized by all necessary
action (corporate or otherwise) on its part. This Agreement has been duly
executed and delivered by it and constitutes a valid and binding obligation
enforceable against it in accordance with its terms except to the extent such
enforceability may be limited by bankruptcy, insolvency, reorganization,
fraudulent conveyance, moratorium or other similar laws relating to creditors'
rights generally and to general principles of equity (regardless of whether
enforcement is considered in a proceeding in equity or at law). No consent,
approval, order or authorization of, or registration, declaration or filing
with, any court, administrative agency or commission or other governmental
authority or instrumentality, domestic or foreign, is required by, or with
respect to, it in connection with the execution and delivery of this Agreement
by it or the consummation by it of the transactions contemplated hereby. The
execution and delivery of this Agreement by it and the consummation of the
transactions contemplated hereby by it does not conflict with, or result in a
breach of, any law or regulation of any governmental authority applicable to it
or any material agreement to which it is a party.
(b) Each of the Shareholders hereby represents and warrants to each
other Shareholder and the Company, that he or it is the record and beneficial
owner of the Shares as set forth on Schedule 2.1, free and clear of all liens
and encumbrances.
ARTICLE III
REGISTRATION RIGHTS
Section 3.1. Demand Registrations.
--------------------
(a) Requests for Registration. Subject to Sections 3.1(c) and 3.3,
-------------------------
(x) TTC shall have the right to make a total of two requests for registration
under the Securities Act of all or part of the Registrable Securities held by
TTC on Form S-1 or any similar long-form registration or, if available, on Form
S-2 or S-3 or any similar short-form registration ("Short-Form Registrations")
------------------------
and (y) during any twelve month period following the date hereof, the
Shareholders owning a majority of the Shares held by the Tanning Parties shall
have the right to request one registration of all or part of the Registrable
Securities held by them; provided that any request for a Demand Registration (as
defined below) shall not be otherwise deemed to be effective unless such request
includes Registrable Securities which have an estimated value of no less than
$25 million
-4-
<PAGE>
in the case of Demand Registrations other than Short-Form Registrations, and $15
million, in the case of Short-Form Registrations. Each request for a Demand
Registration shall specify the approximate number of Registrable Securities
requested to be registered and the anticipated per share price range for such
offering. All registrations requested pursuant to this Section 3.1(a) are
referred to herein as "Demand Registrations."
--------------------
(b) Short-Form Registrations. Demand Registrations will be Short-Form
------------------------
Registrations whenever the Company is permitted to use a Short-Form
Registration.
(c) Restrictions on Demand Registrations. The Company will not be
------------------------------------
obligated to effect any Demand Registration within six months after the
effective date of a previous Demand Registration. Not more than once in any
twelve month period following the date hereof, the Company may postpone for up
to six months the filing or the effectiveness of a registration statement for a
Demand Registration if the Board of Directors determines, in its good faith
judgment, that there exists material nonpublic information about the Company
which the Board of Directors does not wish to disclose in a registration
statement and which information would otherwise be required by the Securities
Act to be disclosed in a registration statement to be filed pursuant to this
Article III, provided that, in such event, the holders of Registrable Securities
initially requesting such Demand Registration will be entitled to withdraw such
request and, if such request is withdrawn, such Demand Registration will not
count as a Demand Registration hereunder and the Company will pay all
Registration Expenses in connection with such registration.
(d) Selection of Underwriters. TTC shall have the right to select the
-------------------------
managing underwriters for any Demand Registration requested by it. Such
managing underwriter shall be of national prominence and shall have nationally
recognized research coverage in the information technology sector. If the
Tanning Parties make a request for a Demand Registration, the Shareholders
owning a majority of the Shares held by the Tanning Parties will have the right
to select the managing underwriters to administer the offering, who shall be of
national prominence and reasonably acceptable to the Company.
(e) Other Registration Rights. Except as provided in this Agreement,
-------------------------
the Company will not grant to any Person the right to request or require the
Company to register any equity securities of the Company, or any securities
convertible or exchangeable into or exercisable for such securities without the
prior written consent of TTC.
Section 3.2. Piggyback Registration.
----------------------
(a) Right to Piggyback. Whenever the Company proposes to register any
------------------
of its equity securities under the Securities Act (other than its initial public
offering
-5-
<PAGE>
and other than a registration on Form S-4 or Form S-8 or any successor or
similar forms) and the registration form to be used may be used for the
registration of Registrable Securities (a "Piggyback Registration"), whether or
----------------------
not for sale for its own account, the Company will give prompt written notice to
TTC and each Tanning Party, of its intention to effect such a registration and
will (subject to subparagraphs (b) and (c), below) include in such registration
all Registrable Securities with respect to which the Company has received
written requests for inclusion therein within 15 days after the receipt of the
Company's notice.
(b) Priority on Primary Registrations. If a Piggyback Registration is
---------------------------------
an underwritten primary registration on behalf of the Company, and the managing
underwriters advise the Company in writing that in their opinion the number of
securities requested to be included in such registration exceeds the number
which can be sold in such offering within a price range reasonably acceptable to
the Company, the Company will include in such registration (i) first, the
securities the Company proposes to sell and (ii) second, the Registrable
Securities requested to be included in such registration, pro rata among the
respective holders thereof on the basis of the number of Shares of Registrable
Securities held (or subject to stock options held) by each such holder and (iii)
third, other securities requested to be included in such registration pro rata
among the respective holders thereof on the basis of the number of Shares of
securities held by each such holder.
(c) Priority on Secondary Registrations. If a Piggyback Registration
-----------------------------------
is an underwritten secondary registration on behalf of holders of the Company's
securities and the managing underwriters advise the Company in writing that in
their opinion the number of securities requested to be included in such
registration exceeds the number which can be sold in such offering within a
price range reasonably acceptable to such holders, the Company will include in
such registration, subject to Section 3.2.(e), (i) first, the Registrable
Securities requested to be included in such registration, pro rata among the
respective holders thereof on the basis of the number of Shares of Registrable
Securities held (or subject to stock options held) by each such holder and (ii)
second, other securities requested to be included in such registration, pro rata
among the respective holders thereof on the basis of the number of Shares of
securities held by each such holder.
(d) Unlimited Piggyback Registrations. There is no limitation on the
---------------------------------
number of Piggyback Registrations which the Company is obligated to effect. No
Piggyback Registration shall relieve the Company of its obligations to effect
Demand Registrations.
(e) The Company's Right to Participate in a Demand Registration. The
-----------------------------------------------------------
Company may participate in any Demand Registration effected pursuant to Section
3.1 in
-6-
<PAGE>
an amount up to 25% of the shares of Common Stock to be registered for sale in
such offering.
Section 3.3. Holdback Agreements. (a) (i) If requested in writing by
-------------------
the Company or the managing underwriters, if any, of any registration effected
pursuant to Section 3.1 or 3.2, the parties hereto agree not to effect any
public sale or distribution (including sales pursuant to Rule 144) of equity
securities of the Company, or any securities convertible into or exchangeable or
exercisable for such securities, during the time period reasonably requested by
the Company or the managing underwriters, not to exceed seven days prior to and
the 180-day period beginning on the effective date of such underwritten
registration (except as part of such underwritten registration).
(ii) In connection with the termination, liquidation or dissolution of
any of the limited liability companies comprising TTC, AEA agrees (A) that
Common Stock of the Company owned by such limited liability companies shall be
distributed subject to such customary transfer restrictions (not to exceed 180
days in duration) as shall be reasonably requested (in connection with the
execution of such offering) by the managing underwriters of any registration
effected or to be effected pursuant to Section 3.1 or 3.2 (or, if no such
registration is then contemplated to be effected, transfer restrictions (not to
exceed 180 days in duration) of the same nature and extent as those agreed to by
holders of 80% of the registrable securities held by the Tanning Parties), and
(B) to arrange for extensions of such restrictions at the termination thereof to
the extent, on the terms (not to exceed 180 days in duration), and with respect
to those shareholders ("Covered Shareholders") reasonably requested (in
connection with the execution of such offering) by the managing underwriter of
any registration effected or to be effected pursuant to Section 3.1 or 3.2. In
no event shall the transfer restrictions referred to in the preceding sentence
exceed a total duration of 18 months, and in no event shall AEA be obligated to
obtain transfer restriction arrangements with respect to any holder of Common
Stock who was previously determined by the relevant underwriter not to be a
Covered Shareholder.
(b) If requested in writing by the managing underwriters of any
registration effected pursuant to Section 3.1 or 3.2, the Company agrees (i) not
to effect any public sale or distribution of its equity securities, or any
securities convertible into or exchangeable or exercisable for such securities,
during the time period reasonably requested by the managing underwriters, not to
exceed seven days prior to and during the 180-day period beginning on the
effective date of any such underwritten registration (except as part of such
underwritten registration or pursuant to registrations on Form S-4 or Form S-8
or any successor forms), and (ii) to cause each holder of its Common Stock, or
any securities convertible into or exchangeable or exercisable for Common Stock,
purchased from the Company at any time after the date of this Agreement (other
than in a registered public offering), to so agree (except as part of such
underwritten registration, if otherwise permitted).
-7-
<PAGE>
Section 3.4. Registration Procedures. Whenever the parties hereto
-----------------------
have requested that any Registrable Securities be registered pursuant to this
Agreement, the Company will use its best efforts to effect the registration and
the sale of such Registrable Securities in accordance with the intended method
of disposition thereof, and pursuant thereto the Company will as expeditiously
as possible:
(a) prepare and file with the Commission a registration statement
with respect to such Registrable Securities and thereafter use its best efforts
to cause such registration statement to become effective (provided that, before
filing a registration statement or prospectus or any amendments or supplements
thereto, the Company will furnish to the counsel selected by the holders of a
majority of the Registrable Securities covered by such registration statement
copies of all such documents proposed to be filed, which documents will be
subject to review of such counsel);
(b) prepare and file with the Commission such amendments and
supplements to such registration statement and the prospectus used in connection
therewith as may be necessary to keep such registration statement effective for
a period of either (i) not less than six months (subject to extension pursuant
to Section 3.7(b)) or, if such registration statement relates to an underwritten
offering, such longer period as, in the opinion of counsel for the underwriters,
a prospectus is required by law to be delivered in connection with sales of
Registrable Securities by an underwriter or dealer or (ii) such shorter period
as will terminate when all of the securities covered by such registration
statement have been disposed of in accordance with the intended methods of
disposition by the seller or sellers thereof set forth in such registration
statement (but in any event not before the expiration of any longer period
required under the Securities Act), and to comply with the provisions of the
Securities Act with respect to the disposition of all securities covered by such
registration statement until such time as all of such securities have been
disposed of in accordance with the intended methods of disposition by the seller
or sellers thereof set forth in such registration statement;
(c) furnish to each seller of Registrable Securities such number of
copies of such registration statement, each amendment and supplement thereto,
the prospectus included in such registration statement (including each
preliminary prospectus) and such other documents as such seller may reasonably
request in order to facilitate the disposition of the Registrable Securities
owned by such seller;
(d) use its best efforts to register or qualify such Registrable
Securities under such other securities or blue sky laws of such jurisdictions as
any seller reasonably requests and do any and all other acts and things which
may be reasonably necessary or advisable to enable such seller to consummate the
disposition in such jurisdictions of the Registrable Securities owned by such
seller (provided that the Company will not be required to (i) qualify generally
to do business in any jurisdiction where it would not otherwise be required to
qualify but for this subparagraph, (ii) subject itself to taxation in
-8-
<PAGE>
any such jurisdiction or (iii) consent to general service of process in any such
jurisdiction);
(e) notify each seller of such Registrable Securities, at any time
when a prospectus relating thereto is required to be delivered under the
Securities Act, upon discovery that, or upon the discovery of the happening of
any event as a result of which, the prospectus included in such registration
statement contains an untrue statement of a material fact or omits any fact
necessary to make the statements therein not misleading in the light of the
circumstances under which they were made, and, at the request of any such
seller, the Company will prepare and furnish to such seller a reasonable number
of copies of a supplement or amendment to such prospectus so that, as thereafter
delivered to the purchasers of such Registrable Securities, such prospectus will
not contain an untrue statement of a material fact or omit to state any fact
necessary to make the statements therein not misleading in the light of the
circumstances under which they were made;
(f) cause all such Registrable Securities to be listed on each
securities exchange on which similar securities issued by the Company are then
listed and, if not so listed, to be listed on the Nasdaq National Market;
(g) provide a transfer agent and registrar for all such Registrable
Securities not later than the effective date of such registration statement;
(h) enter into such customary agreements (including underwriting
agreements in customary form) and take all such other actions as the holders of
a majority of the Registrable Securities being sold or the underwriters, if any,
reasonably request in order to expedite or facilitate the disposition of such
Registrable Securities (including, without limitation, effecting a stock split
or a combination of shares);
(i) make available for inspection by any seller of Registrable
Securities, any underwriter participating in any disposition pursuant to such
registration statement, and any attorney, accountant or other agent retained by
any such seller or underwriter, all financial and other records, pertinent
corporate documents and properties of the Company, and cause the Company's
officers, directors, employees and independent accountants to supply all
information reasonably requested by any such seller, underwriter, attorney,
accountant or agent in connection with such registration statement;
(j) otherwise use its best efforts to comply with all applicable
rules and regulations of the Commission, and make available to its security
holders, as soon as reasonably practicable, an earnings statement covering the
period of at least twelve months beginning with the first day of the Company's
first full calendar quarter after the effective date of the registration
statement, which earnings statement shall satisfy the provisions of Section
11(a) of the Securities Act and Rule 158 thereunder;
-9-
<PAGE>
(k) in the event of the issuance of any stop order suspending the
effectiveness of a registration statement, or of any order suspending or
preventing the use of any related prospectus or suspending the qualification of
any securities included in such registration statement for sale in any
jurisdiction, the Company will use its reasonable best efforts promptly to
obtain the withdrawal of such order;
(l) obtain a cold "comfort letter", dated the effective date of such
registration statement (and, if such registration includes an underwritten
public offering, dated the date of the closing under the underwriting
agreement), signed by the Company's independent public accountants in customary
form and covering such matters of the type customarily covered by cold comfort
letters as the holders of a majority of the Registrable Securities being sold
reasonably request; and
(m) provide a legal opinion of the Company's outside counsel, dated
the effective date of such registration statement (and, if such registration
includes an underwritten public offering, dated the date of the closing under
the underwriting agreement), with respect to the registration statement, each
amendment and supplement thereto, the prospectus included herein (including the
preliminary prospectus) and such other documents relating thereto in customary
form and covering such matters of the type customarily covered by legal opinions
of such nature.
The Company may require each seller of Registrable Securities as to which any
registration is being effected to furnish the Company such information regarding
such seller and the distribution of such securities as the Company may from time
to time reasonably request in writing.
Section 3.5. Registration Expenses. (a) The Company shall pay all
---------------------
Registration Expenses relating to any registration of Registrable Securities
hereunder. "Registration Expenses" shall mean any and all fees and expenses
---------------------
incident to the Company's performance of or compliance with this Article III,
including, without limitation: (i) Commission, stock exchange or National
Association of Securities Dealers, Inc. registration and filing fees and all
listing fees and fees with respect to the inclusion of securities on the Nasdaq
National Market, (ii) fees and expenses of compliance with state securities or
"blue sky" laws and in connection with the preparation of a "blue sky" survey,
including, without limitation, reasonable fees and expenses of blue sky counsel,
(iii) printing expenses, (iv) messenger and delivery expenses, (v) fees and
disbursements of counsel for the Company, (vi) with respect to each
registration, reasonable fees and disbursements of one counsel for all of the
selling holders of Shares (selected by the holders making the Demand
Registration request, in the case of a registration pursuant to Section 3.1, and
selected by the holders of a majority of the Registrable Securities included in
such registration, in the case of a registration pursuant to Section 3.2), (vii)
fees and disbursements of all independent public accountants (including the
expenses of any audit and/or "cold comfort" letter) and fees and expenses
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<PAGE>
of other persons, including special experts, retained by the Company, and (viii)
any other fees and disbursements of underwriters, if any, customarily paid by
issuers or sellers of securities.
(b) Notwithstanding the foregoing, (i) the provisions of this Section
3.5 shall be deemed amended to the extent necessary to cause these expense
provisions to comply with "blue sky" laws of each state in which the offering is
made and (ii) in connection with any registration hereunder, each holder of
Registrable Securities being registered shall pay all underwriting discounts and
commissions and transfer taxes, if any, attributable to the Registrable
Securities included in the offering by such holder.
Section 3.6. Indemnification. (a) The Company agrees to indemnify
---------------
and hold harmless, to the extent permitted by law, each holder of Registrable
Securities, its officers and directors and each Person who controls such holder
(within the meaning of the Securities Act) against any losses, claims, damages,
liabilities, joint or several, to which such holder or any such director or
officer or controlling person may become subject under the Securities Act or
otherwise, insofar as such losses, claims, damages or liabilities (or actions or
proceedings, whether commenced or threatened, in respect thereof) arise out of
or are based upon (i) any untrue or alleged untrue statement of a material fact
contained (A) in any registration statement, prospectus or preliminary
prospectus or any amendment thereof or supplement thereto or (B) in any
application or other document or communication (in this Section 3.6 collectively
called an "application") executed by or on behalf of the Company or based upon
written information furnished by or on behalf of the Company filed in any
jurisdiction in order to qualify any securities covered by such registration
statement under the "blue sky" or securities laws thereof, or (ii) any omission
or alleged omission of a material fact required to be stated therein or
necessary to make the statements therein not misleading, and the Company will
reimburse such holder and each such director, officer and controlling person for
any legal or any other expenses incurred by them in connection with
investigating or defending any such loss, claim, liability, action or
proceeding; provided that the Company shall not be liable in any such case to
the extent that any such loss, claim, damage, liability (or action or proceeding
in respect thereof) or expense arises out of or is based upon an untrue
statement or alleged untrue statement, or omission or alleged omission, made in
such registration statement, any such prospectus or preliminary prospectus or
any amendment or supplement thereto, or in any application, in reliance upon and
in conformity with written information prepared and furnished to the Company by
such holder expressly for use therein or by such holder's failure to deliver a
copy of the registration statement or prospectus or any amendments or
supplements thereto after the Company has furnished such holder with a
sufficient number of copies of the same. In connection with an underwritten
offering, the Company will indemnify such underwriters, their officers and
directors and each Person who controls such underwriters (within the
-11-
<PAGE>
meaning of the Securities Act) to the same extent as provided above with respect
to the indemnification of the holders of Registrable Securities.
(b) In connection with any registration statement in which a holder
of Registrable Securities is participating, each such holder will furnish to the
Company in writing such information and documents as the Company reasonably
requests for use in connection with any such registration statement or
prospectus and, to the extent permitted by law, will indemnify and hold harmless
the Company, its directors and officers and each other Person who controls the
Company (within the meaning of the Securities Act) and its attorneys and
accountants against any losses, claims, damages, liabilities, joint or several,
to which the Company or any such director or officer, controlling person,
attorney or accountant may become subject under the Securities Act or otherwise,
insofar as such losses, claims, damages or liabilities (or actions or
proceedings, whether commenced or threatened, in respect thereof) arise out of
or are based upon (i) any untrue or alleged untrue statement of a material fact
contained in the registration statement, prospectus or preliminary prospectus or
any amendment thereof or supplement thereto or in any application or (ii) any
omission or alleged omission of a material fact required to be stated therein or
necessary to make the statements therein not misleading, but only to the extent
that such untrue statement or omission is made in such registration statement,
any such prospectus or preliminary prospectus or any amendment or supplement
thereto, or in any application, in reliance upon and in conformity with written
information prepared and furnished to the Company by such holder expressly for
use therein, and such holder will reimburse the Company and each such director,
officer and controlling person for any legal or any other expenses incurred by
them in connection with investigating or defending any such loss, claim,
liability, action or proceeding; provided that the obligation to indemnify will
be individual to each holder and will be limited to the net amount of proceeds
received by such holder from the sale of Registrable Securities pursuant to such
registration statement.
(c) Any Person entitled to indemnification hereunder will (i) give
prompt written notice to the indemnifying party of any claim with respect to
which it seeks indemnification and (ii) unless in such indemnified party's
reasonable judgment a conflict of interest between such indemnified and
indemnifying parties may exist with respect to such claim, permit such
indemnifying party to assume the defense of such claim with counsel reasonably
satisfactory to the indemnified party. If such defense is assumed, the
indemnifying party will not be subject to any liability for any settlement made
by the indemnified party without its consent (but such consent will not be
unreasonably withheld). An indemnifying party who is not entitled to, or elects
not to, assume the defense of a claim will not be obligated to pay the fees and
expenses of more than one counsel for all parties indemnified by such
indemnifying party with respect to such claim, unless in the reasonable judgment
of any indemnified party a conflict of
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<PAGE>
interest exists between such indemnified party and any other of such indemnified
parties with respect to such claim.
(d) The indemnification provided for under this Agreement will remain
in full force and effect regardless of any investigation made by or on behalf of
the indemnified party or any officer, director or controlling Person of such
indemnified party and will survive (for the benefit of the transferor) the
transfer of securities by any holder thereof. The Company also agrees to make
such provisions, as are reasonably requested by any indemnified party, for
contribution to such party in the event the Company's indemnification is
unavailable for any reason.
Section 3.7. Participation in Underwritten Registrations. (a) If
-------------------------------------------
requested by the underwriters for any underwritten offering pursuant to a Demand
Registration requested under Section 3.1, the Company shall enter into a
customary underwriting agreement with the underwriters. Such underwriting
agreement shall be satisfactory in form and substance to the party making such
Demand Registration and shall contain such representations and warranties by,
and such other agreements on the part of, the Company and such other terms as
are generally prevailing in agreements of that type, including, without
limitation, indemnities and contribution agreements. Such underwriting agreement
shall also contain such representations, warranties, indemnities and
contributions by the participating holders as are customary in agreements of
that type. In the case of a registration pursuant to Section 3.2 hereof, if the
Company shall have determined to enter into any underwriting agreements in
connection therewith, all of the holders' Registrable Securities to be included
in such registration shall be subject to such underwriting agreement. Such
underwriting agreement shall also contain such representations, warranties,
indemnities and contributions by the participating holders as are customary in
agreements of that type. Any holder participating in such Piggyback Registration
may, at its option, require that any or all of the representations and
warranties by, and the other agreements on the part of, the Company to and for
the benefit of such underwriters shall also be made to and for the benefit of
such holder and that any or all of the conditions precedent to the obligations
of such underwriters under such underwriting agreement be conditions precedent
to the obligations of such holder.
(b) Each Person that is participating in any registration hereunder
agrees that, upon receipt of any notice from the Company of the happening of any
event of the kind described in Section 3.4(e) above, such Person will forthwith
discontinue the disposition of its Registrable Securities pursuant to the
registration statement until such Person's receipt of the copies of a
supplemented or amended prospectus as contemplated by such Section 3.4(e). In
the event the Company shall give any such notice, the applicable time period
mentioned in Section 3.4(b) during which a registration statement is to remain
effective shall be extended by the number of days during the period from and
including the date of the giving of such notice pursuant to this paragraph to
and including
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<PAGE>
the date when each seller of a Registrable Security covered by such registration
statement shall have received the copies of the supplemented or amended
prospectus contemplated by Section 3.4(e).
Section 3.8. Current Public Information. At all times after the
--------------------------
Company has filed a registration statement with the Commission pursuant to the
requirements of either the Securities Act or the Exchange Act, the Company will
file all reports required to be filed by it under the Securities Act and the
Exchange Act and the rules and regulations adopted by the Commission thereunder,
and will take such further action as any holder or holders of Registrable
Securities may reasonably request, all to the extent required to enable such
holders to sell Registrable Securities pursuant to Rule 144.
Section 3.9. Cooperation. Each of the parties hereto agrees to
-----------
cooperate with the Company and to take all action necessary to assist the
Company in the registration of any debt or equity securities, subject to the
terms and conditions of this Agreement.
ARTICLE IV
TERMINATION
The rights and obligations of any Shareholder contained in this
Agreement, including the rights to Demand Registrations and Piggyback
Registration shall terminate, at any time from and after the date hereof, upon
the earlier of (a) the first date on which such Shareholder (including TTC,
prior to the termination, liquidation or dissolution of the limited liability
companies comprising TTC) owns less than 200,000 shares of Common Stock or, (b)
with respect to the persons who were members of the limited liability companies
comprising TTC (following the termination, liquidation or dissolution thereof),
the date that the transfer restrictions to which such persons are subject
pursuant to Section 3.3(a)(ii) lapse, are terminated, or otherwise cease to be
effective, but, with respect to this clause (b), in no event later than 18
months following the date of termination, liquidation, or dissolution of any of
the limited liability companies comprising TTC.
ARTICLE V
GENERAL PROVISIONS
Section 5.1. Effective Date. The effective date of this Agreement
--------------
shall be the closing date of the Company's initial public offering (the
"Effective Date"). If the Effective Date does not occur on or prior to October
--------------
31, 1999, or the transactions contemplated thereby are abandoned, this Agreement
shall be of no further force and effect and the Original Registration Rights
Agreement shall continue to be in full force and effect. Notwithstanding the
foregoing, by their execution hereof, the parties hereto
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<PAGE>
confirm their waiver of any rights to participate in the initial public offering
contemplated by the Company's Registration Statement on S-1 initially filed with
the Securities and Exchange Commission on May 17, 1999.
Section 5.2. Exclusive Agreement; No Third-Party Beneficiaries. This
-------------------------------------------------
Agreement, the Stock Purchase Agreement and the Related Agreements (as defined
in the Stock Purchase Agreement) constitute the sole understanding of the
parties with respect to the subject matter hereof and any verbal or written
communication between the parties prior to the adoption of this Agreement shall
be deemed merged herein and of no further force and effect. Notwithstanding
anything contained in this Agreement to the contrary, nothing in this Agreement,
express or implied, is intended to confer on any Person other than the parties
hereto or their respective heirs, successors, executors, administrators and
assigns any rights, remedies, obligations or liabilities under or by reason of
this Agreement.
Section 5.3. Governing Law, Etc. This Agreement shall be construed
------------------
in accordance with and governed by the laws of the State of Delaware applicable
to agreements made and to be performed wholly within such jurisdiction. Each of
the parties hereto hereby irrevocably and unconditionally consents to submit to
the exclusive jurisdiction of the courts of the State of Delaware and of the
United States of America in each case located in the County of New Castle for
any Litigation arising out of or relating to this Agreement and the transactions
contemplated hereby (and agrees not to commence any Litigation relating thereto
except in such courts), and further agrees that service of any process, summons,
notice or document by U.S. registered mail to its respective address set forth
in Section 5.6 shall be effective service of process for any Litigation brought
against it in any such court. Each of the parties hereto hereby irrevocably and
unconditionally waives any objection to the laying of venue of any Litigation
arising out of this Agreement or the transactions contemplated hereby in the
courts of the State of Delaware or the United States of America in each case
located in the County of New Castle and hereby further irrevocably and
unconditionally waives and agrees not to plead or claim in any such court that
any such Litigation brought in any such court has been brought in an
inconvenient forum.
Section 5.4. Successors and Assigns. Except as otherwise provided
----------------------
herein, neither this Agreement nor any of the rights, interests or obligations
hereunder shall be assigned by any of the parties hereto (whether by operation
of law or otherwise) without the prior written consent of the holders of 80% of
the issued and outstanding Voting Common Stock held by the parties hereto.
Subject to the preceding sentence, this Agreement shall be binding upon and
shall inure to the benefit of the parties hereto and their respective successors
and assigns. Notwithstanding anything contained in this Agreement to the
contrary, but subject to Article IV hereof, following the termination,
liquidation or dissolution of any of the limited liability companies comprising
TTC, the
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<PAGE>
rights herein to request and participate in registrations, and all other rights
with respect to TTC, shall continue in full force and effect for the benefit of
the members of such limited liability companies, such rights to be exercised on
their behalf by AEA (provided that Section 3.1(e) shall terminate and be of no
further force or effect upon such termination, liquidation or dissolution).
Section 5.5. Severability. If any term or other provision of this
------------
Agreement is invalid, illegal or incapable of being enforced by any rule of law
or public policy, all other conditions 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 adverse
manner to any party. Upon such determination that any term or other provision is
invalid, illegal or incapable of being enforced, the parties hereto shall
negotiate in good faith to modify this Agreement so as to effect the original
intent of the parties as closely as possible in an acceptable manner so that the
transactions contemplated hereby are fulfilled to the greatest extent possible.
Section 5.6. Notices. Any notice, request, instruction or other
-------
document to be given hereunder by any party hereto to any other party shall be
in writing and shall be given (and will be deemed to have been duly given upon
receipt) by delivery in person, by electronic facsimile transmission, cable,
telegram, telex or other standard forms of written telecommunications, by
overnight courier or by registered or certified mail, postage prepaid:
(a) If to any of the Tanning Parties, to:
Tanning Technology Corporation
4600 South Ulster Street, Suite 380
Denver, Colorado 80237
Attention: Mark W. Reinhardt
Telecopy: 303 220-9958
(b) If to TTC, to:
AEA Tanning Investors Inc.
c/o AEA Investors Inc.
Park Avenue Tower
65 East 55th Street
New York, New York 10022
Attention: Christine J. Smith, Esq.
Telecopy: 212 702-0518
with a copy to:
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<PAGE>
Fried, Frank, Harris, Shriver & Jacobson
One New York Plaza
New York, New York 10004
Attention: Sanford Krieger, Esq.
Telecopy: 212 859-4000
or at such other address for a party as shall be specified by like notice.
Section 5.7. Counterparts; Facsimile Signatures. This Agreement may
----------------------------------
be executed in any number of counterparts, each of which shall be deemed to be
an original, but all of which together shall constitute but one and the same
agreement. Delivery of a photocopy or transmission by telecopy of a signed
signature page of this Agreement shall constitute delivery of such signed
signature page; provided, however, that each party shall provide each other
party an originally executed copy of such signature page as promptly as
practicable.
Section 5.8. Interpretation. When a reference is made in this
--------------
Agreement to Articles, Sections, Schedule or Exhibits, such reference is to an
Article or a Section of, Schedule to, or an Exhibit to, this Agreement, unless
otherwise indicated. The table of contents and headings contained in this
Agreement are for reference purposes only and shall not affect in any way the
meaning or interpretation of this Agreement. Whenever the words "include,"
"includes" or "including" are used in this Agreement, they shall be understood
to be followed by the words "without limitation."
Section 5.9. Amendment. This Agreement may not be amended except by
---------
an instrument in writing signed on behalf of the holders of 80% of the issued
and outstanding Voting Common Stock held by the parties hereto; provided
however, that no amendment may be made which adversely affects any rights of a
party hereto without the written agreement of such party (except to the extent
affecting all Shareholders equally with respect to rights granted to all
Shareholders equally).
Section 5.10. Extension; Waiver. At any time the parties may extend
-----------------
the time for the performance of any of the obligations or other acts of the
other parties, waive any inaccuracies in the representations and warranties
contained in this Agreement and waive compliance with any of the agreements or
conditions contained in this Agreement. Any agreement on the part of a party to
any such extension or waiver shall be valid only if set forth in an instrument
signed on behalf of such party. The waiver by any party hereto of a breach of
any provision hereunder shall not operate to be construed as a waiver of any
prior or subsequent breach of the same or any other provision hereunder.
Section 5.11. Enforcement of Agreement. The parties hereto agree that
------------------------
irreparable damage would occur in the event that any of the provisions of this
Agreement were not performed in accordance with its specific terms or was
otherwise breached. It is
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<PAGE>
accordingly agreed that the parties shall be entitled to any injunction or
injunctions to prevent breaches of this Agreement and to enforce specifically
the terms and provisions hereof in any Delaware court, this being in addition to
any other remedy to which they may be entitled at law or in equity.
Section 5.12. Further Assurances. At any time, or from time to time,
------------------
after the date hereof, the parties agree to cooperate with each other , and at
the request of any other party, to execute and deliver any further instruments
or documents and to take all such further actions as any party may reasonably
request in order to evidence or effectuate the consummation of the transactions
contemplated hereby and to otherwise carry out the intent of the parties
hereunder.
-18-
<PAGE>
IN WITNESS WHEREOF, this Agreement has been signed on behalf of each
of the parties hereto as of the date first above written.
TANNING TECHNOLOGY CORPORATION
/s/ Larry G. Tanning
By: ------------------------------------------
Name: Larry G. Tanning
Title: President
COURTNEY ROSE CORPORATION
/s/ Larry G. Tanning
By: ------------------------------------------
Name: Larry G. Tanning
Title: President
WINSOFT CORPORATION
/s/ Bipin Agarwal
By: ------------------------------------------
Name: Bipin Agarwal
Title: President
HIPPELI ENTERPRISES, INC.
/s/ Toni S. Hippeli
By: ------------------------------------------
Name: Toni S. Hippeli
Title: President
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<PAGE>
/s/ Stephen A. Brobst
----------------------------------------------
Stephen Brobst
TANNING FAMILY PARTNERSHIP, L.L.L.P.
By Courtney Rose Corporation,
its general partner
/s/ Larry G. Tanning
By: ------------------------------------------
Name: Larry G. Tanning
Title: President
/s/ Larry G. Tanning
-----------------------------------------------
Larry G. Tanning
/s/ Christine A. Tanning
----------------------------------------------
Christine A. Tanning
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<PAGE>
/s/ Bipin Agarwal
-----------------------------------------------
Bipin Agarwal
/s/ Toni Hippeli
-----------------------------------------------
Toni Hippeli
/s/ Henry Skelsey
-----------------------------------------------
Henry Skelsey
AEA TANNING INVESTORS INC.
By: /s/ Christopher Mahan
-------------------------------------------
Name: Christopher Mahan
Title: Vice President
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<PAGE>
TTC INVESTORS I LLC
By AEA Tanning Investors Inc.,
its managing member
/s/ Christopher Mahan
By: -------------------------------------------
Name: Christopher Mahan
Title: Vice President
TTC INVESTORS II LLC
By AEA Tanning Investors Inc.,
its managing member
/s/ Christopher Mahan
By: -------------------------------------------
Name: Christopher Mahan
Title: Vice President
TTC INVESTORS IA LLC
By AEA Tanning Investors Inc.,
its managing member
/s/ Christopher Mahan
By: -------------------------------------------
Name: Christopher Mahan
Title: Vice President
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<PAGE>
TTC INVESTORS IIA LLC
By AEA Tanning Investors Inc.,
its managing member
By: /s/ Christopher Mahan
-------------------------------------------
Name: Christopher Mahan
Title: Vice President
LARRY G. TANNING IRREVOCABLE TRUST FOR THE BENEFIT
OF HIS LINEAL DESCENDANTS
By: Mark W. Tanning,
its trustee
/s/ Mark W. Tanning
-------------------------------------------
Name: Mark W. Tanning
Title: Trustee
CHRISTINE A. TANNING IRREVOCABLE TRUST FOR THE
BENEFIT OF HER LINEAL DESCENDANTS
By: Mark W. Tanning,
its trustee
/s/ Mark W. Tanning
-------------------------------------------
Name: Mark W. Tanning
Title: Trustee
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<PAGE>
================================================================================
EXHIBIT 10.12
AMENDED AND RESTATED
SHAREHOLDER AGREEMENT
by and among
TANNING TECHNOLOGY CORPORATION
and
the parties listed as signatories hereto
Dated as of July 20, 1999
================================================================================
<PAGE>
TABLE OF CONTENTS
<TABLE>
<S> <C>
ARTICLE I: DEFINITIONS............................................... 1
Section 1.1. Definitions........................................... 1
ARTICLE II: REPRESENTATIONS AND WARRANTIES............................ 3
Section 2.1. Representations and Warranties........................ 3
ARTICLE III: CORPORATE GOVERNANCE...................................... 4
Section 3.1. Voting of Shares...................................... 4
Section 3.2. Composition of the Board of Directors................. 4
Section 3.3. Committees............................................ 5
Section 3.4. Certificate of Incorporation and By-Laws.............. 5
ARTICLE IV: TERMINATION............................................... 6
ARTICLE V: GENERAL PROVISIONS........................................ 6
Section 5.1. Effective Date........................................ 6
Section 5.2. Exclusive Agreement; No Third-Party Beneficiaries..... 6
Section 5.3. Governing Law, Etc.................................... 6
Section 5.4. Successors and Assigns................................ 7
Section 5.5. Severability.......................................... 7
Section 5.6. Notices............................................... 7
Section 5.7. Counterparts; Facsimile Signatures.................... 8
Section 5.8. Interpretation........................................ 8
Section 5.9. Amendment............................................. 9
Section 5.10. Extension; Waiver..................................... 9
Section 5.11. Enforcement of Agreement.............................. 9
Section 5.12. Further Assurances.................................... 9
</TABLE>
<PAGE>
AMENDED AND RESTATED
SHAREHOLDER AGREEMENT
---------------------
THIS AMENDED AND RESTATED SHAREHOLDER AGREEMENT, is made as of July
20, 1999 (this "Agreement"), by and among Tanning Technology Corporation, a
---------
Delaware corporation (the "Company"), Courtney Rose Corporation, a Colorado
-------
corporation ("Courtney"), WinSoft Corporation, a Colorado corporation
--------
("WinSoft"), Hippeli Enterprises, Inc., a Colorado corporation ("Hippeli"),
------- -------
(Courtney, WinSoft and Hippeli are collectively referred to herein as the
"Original Members"), Tanning Family Partnership, L.L.L.P. ("TFP"), Larry G.
- -----------------
Tanning, Christine A. Tanning, Larry G. Tanning Irrevocable Trust for the
Benefit of His Lineal Descendants ("LGT Trust"), Christine A. Tanning
---------
Irrevocable Trust for the Benefit of Her Lineal Descendants ("CAT Trust"), Bipin
---------
Agarwal, Toni Hippeli (the Original Members and TFP, Larry G. Tanning, Christine
A. Tanning, LGT Trust, CAT Trust, Bipin Agarwal and Toni Hippeli are referred to
herein as the "Tanning Parties"), AEA Tanning Investors Inc., a Delaware
---------------
corporation ("AEA"), TTC Investors I LLC, a Delaware limited liability company
---
("TTC I"), TTC Investors II LLC, a Delaware limited liability company ("TTC
----- ---
II"), TTC Investors IA LLC, a Delaware limited liability company ("TTC IA") and
------
TTC Investors IIA LLC, a Delaware limited liability company ("TTC IIA") (AEA,
-------
TTC I, TTC II, TTC IA and TTC IIA are collectively referred to herein as "TTC").
---
WHEREAS, the parties are party to a Shareholder Agreement dated as of
January 31, 1997, as amended prior to the date hereof (the "Original Shareholder
--------------------
Agreement");
- ---------
WHEREAS, the parties desire to make certain changes to the Original
Shareholder Agreement, and to amend and restate such Original Shareholder
Agreement to read in its entirety as set forth below;
NOW, THEREFORE, in consideration of the foregoing, and of the
representations, warranties, covenants and agreements contained herein and for
other good and valuable consideration, the receipt and sufficiency of which is
hereby acknowledged, the parties hereto hereby agree as follows, effective as of
the Effective Date:
ARTICLE I
DEFINITIONS
Section 1.1. Definitions.
-----------
"Agreement": as defined in the preamble to this Agreement.
---------
1
<PAGE>
"Audit Committee": means such committee as established by the Board
---------------
of Directors.
"Board of Directors": the board of directors of the Company.
------------------
"By-Laws": means the Amended and Restated By-Laws of the Company as
-------
in effect on the date hereof, as they may be amended from time to time
hereafter.
"CAT Trust": as defined in the preamble to this Agreement.
---------
"Certificate of Incorporation": means the Amended and Restated
----------------------------
Certificate of Incorporation of the Company as in effect on the date hereof, as
it may be amended from time to time hereafter.
"Common Stock": the common stock of the Company (all classes) now or
------------
hereafter authorized to be issued.
"Company": as defined in the preamble to this Agreement.
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"Compensation Committee": means such committee as established by the
----------------------
Board of Directors.
"Courtney": as defined in the preamble to this Agreement.
--------
"Director": a member of the Board of Directors.
--------
"Effective Date": as defined in Section 5.1.
--------------
"Hippeli": as defined in the preamble to this Agreement.
-------
"LGT Trust": as defined in the preamble to this Agreement.
---------
"Litigation": as defined in Section 4.2.
----------
"Original Shareholder Agreement": as defined in the preamble to this
------------------------------
Agreement.
"Person": any natural person, corporation, partnership, firm,
------
association, trust, government, governmental agency or other entity, whether
acting in an individual, fiduciary or other capacity.
"Shareholders": the Tanning Parties and TTC.
------------
"Shares": shares of Common Stock.
------
2
<PAGE>
"Stock Purchase Agreement": the Stock Purchase Agreement, dated as of
------------------------
December 24, 1996, as amended and supplemented, among the Company, the Tanning
Parties, Stephen Brobst and TTC.
"Tanning Parties": as defined in the preamble to this Agreement.
---------------
"TFP": as defined in the preamble to this Agreement.
---
"TTC": as defined in the preamble to this Agreement.
---
"Voting Common Stock": Common Stock the holders of which are
-------------------
generally entitled to vote for the election of the board of directors of the
Company.
"WinSoft": as defined in the preamble to this Agreement.
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ARTICLE II
REPRESENTATIONS AND WARRANTIES
Section 2.1. Representations and Warranties. (a) Each of the parties
------------------------------
hereto hereby represents and warrants to each other party hereto as follows: It
has all requisite power (corporate or otherwise) and authority to enter into
this Agreement and to consummate the transactions contemplated hereby. The
execution and delivery by it of this Agreement, and the consummation by it of
the transactions contemplated hereby, have been duly authorized by all necessary
action (corporate or otherwise) on its part. This Agreement has been duly
executed and delivered by it and constitutes a valid and binding obligation
enforceable against it in accordance with its terms except to the extent such
enforceability may be limited by bankruptcy, insolvency, reorganization,
fraudulent conveyance, moratorium or other similar laws relating to creditors'
rights generally and to general principles of equity (regardless of whether
enforcement is considered in a proceeding in equity or at law). No consent,
approval, order or authorization of, or registration, declaration or filing
with, any court, administrative agency or commission or other governmental
authority or instrumentality, domestic or foreign, is required by, or with
respect to, it in connection with the execution and delivery of this Agreement
by it or the consummation by it of the transactions contemplated hereby. The
execution and delivery of this Agreement by it and the consummation of the
transactions contemplated hereby by it does not conflict with, or result in a
breach of, any law or regulation of any governmental authority applicable to it
or any material agreement to which it is a party.
(b) Each of the Shareholders hereby represents and warrants to each
other Shareholder and the Company, that he or it is the record and beneficial
owner of the Shares as set forth on Schedule 2.1, free and clear of all liens
and encumbrances.
3
<PAGE>
ARTICLE III
CORPORATE GOVERNANCE
Section 3.1. Voting of Shares. (a) From and after the date hereof,
----------------
each Shareholder shall vote all Shares owned or controlled by him or it and
shall take all other necessary or desirable actions within his or its control
(including, without limitation, attendance at meetings in person or by proxy for
purposes of obtaining a quorum and execution of written consents in lieu of
meetings), to effectuate the provisions of this Agreement including, without
limitation, causing the composition of the Company's Board of Directors and
committees to be as contemplated by Sections 3.2 and 3.3 and to cause the
election of the nominees described therein.
(b) From and after the date hereof, the Company and its Subsidiaries
shall take all necessary or desirable actions within its control (including,
without limitation, calling special board and stockholder meetings) to
effectuate the provisions of this Agreement.
Section 3.2. Composition of the Board of Directors. (a) On and after
-------------------------------------
the date hereof, the Board of Directors shall initially be comprised of seven
Directors, subject to expansion after the date hereof by action of the Board of
Directors.
(b) The Shareholders acknowledge that Article VII of the Company's
Certificate of Incorporation provides for staggered terms of the Directors, with
Directors serving in Class I, Class II, or Class III. The Shareholders agree
that until the first annual meeting of shareholders following the date hereof,
the Board of Directors shall be composed as follows:
(i) Class I - Toni Hippeli and Michael Shanahan
(ii) Class II - Christopher Mahan and Joseph Roebuck
(iii) Class III - Larry Tanning, Bipin Agarwal and Henry Skelsey
(c) From and after the date hereof, Directors shall be nominated as
follows (it being understood that such nomination shall include any nomination
of any incumbent Director for reelection to the Board of Directors):
(i) TTC shall have the right to designate one Director in
Class II of the Board of Directors (it being understood that Christopher Mahan
is TTC's initial designee as set forth in clause (b) above);
(ii) TFP shall have the right to designate one Director, in any
class, to the Board of Directors (it being understood that Larry Tanning is
TFP's initial designee as set forth in clause (b) above);
4
<PAGE>
(iii) WinSoft shall have the right to designate one Director, in
any class, to the Board of Directors (it being understood that Bipin Agarwal is
WinSoft's initial designee as set forth in clause (b) above);
(d) If there are insufficient vacancies in a particular class of
directors, the available positions shall be allocated first to the nominee of
TTC (as to Class II only), second to the nominee of TFP, and third to the
nominee of WinSoft (it being understood that each of TTC, TFP and WinSoft shall
not have the right to have more than one nominee on the Board of Directors at
any time).
(e) Each of TTC, TFP and WinSoft, respectively, shall have the right
(i) to remove, with or without cause, any Director nominated in accordance with
this Section 3.2 by each of TTC, TFP or Winsoft, respectively, and (ii) to
designate any replacement for a Director nominated in accordance with this
Section 3.2 by TTC, TFP or Winsoft, respectively, (including the initial
designees during the period prior to the first annual meeting of shareholders
following the date hereof) upon the death, resignation, retirement,
disqualification or removal from office of such Director. The Board of Directors
shall duly appoint as a Director each person so designated to fill a vacancy on
the Board of Directors.
Section 3.3. Committees. TTC shall have the right to designate one
----------
member of each of the Audit Committee and the Compensation Committee of the
Board of Directors.
Section 3.4. Certificate of Incorporation and By-Laws. The parties to
----------------------------------------
this Agreement shall take or cause to be taken all lawful action necessary to
ensure at all times that the Company's Certificate of Incorporation and By-Laws
are not at any time inconsistent with the provisions of this Agreement.
ARTICLE IV
TERMINATION
The rights and obligations of any Shareholder contained in this
Agreement, including the rights to nominate a director and/or to appoint
committee members, shall terminate if, at any time from and after the date
hereof, such Shareholder either (a) owns less than 10% of the issued and
outstanding Common Stock or, (b) in the case of TTC, owns less than 10% of the
issued and outstanding Common Stock or its constituent limited liability
companies have been terminated, liquidated or dissolved.
5
<PAGE>
ARTICLE V
GENERAL PROVISIONS
Section 5.1. Effective Date. The effective date of this Agreement
--------------
shall be the closing date of the Company's initial public offering (the
"Effective Date"). Notwithstanding the foregoing, the provisions of Section
--------------
3.2(a) increasing the size of the Company's board of directors to seven persons
shall be effective as of the date hereof. If the Effective Date does not occur
on or prior to October 31, 1999, or the transactions contemplated thereby are
abandoned, this Agreement shall be of no further force and effect and the
Original Shareholders Agreement shall continue to be in full force and effect.
Section 5.2. Exclusive Agreement; No Third-Party Beneficiaries. This
-------------------------------------------------
Agreement, the Stock Purchase Agreement and the Related Agreements (as defined
in the Stock Purchase Agreement) constitute the sole understanding of the
parties with respect to the subject matter hereof and any verbal or written
communication between the parties prior to the adoption of this Agreement shall
be deemed merged herein and of no further force and effect. Notwithstanding
anything contained in this Agreement to the contrary, nothing in this Agreement,
express or implied, is intended to confer on any Person other than the parties
hereto or their respective heirs, successors, executors, administrators and
assigns any rights, remedies, obligations or liabilities under or by reason of
this Agreement.
Section 5.3. Governing Law, Etc. This Agreement shall be construed in
------------------
accordance with and governed by the laws of the State of Delaware applicable to
agreements made and to be performed wholly within such jurisdiction. Each of the
parties hereto hereby irrevocably and unconditionally consents to submit to the
exclusive jurisdiction of the courts of the State of Delaware and of the United
States of America in each case located in the County of New Castle for any
action, proceeding or investigation in any court or before any governmental
authority ("Litigation") arising out of or relating to this Agreement and the
----------
transactions contemplated hereby (and agrees not to commence any Litigation
relating thereto except in such courts), and further agrees that service of any
process, summons, notice or document by U.S. registered mail to its respective
address set forth in Section 5.6 shall be effective service of process for any
Litigation brought against it in any such court. Each of the parties hereto
hereby irrevocably and unconditionally waives any objection to the laying of
venue of any Litigation arising out of this Agreement or the transactions
contemplated hereby in the courts of the State of Delaware or the United States
of America in each case located in the County of New Castle and hereby further
irrevocably and unconditionally waives and agrees not to plead or claim in any
such court that any such Litigation brought in any such court has been brought
in an inconvenient forum.
6
<PAGE>
Section 5.4. Successors and Assigns. Neither this Agreement nor any
----------------------
of the rights, interests or obligations hereunder shall be assigned by any of
the parties hereto (whether by operation of law or otherwise) without the prior
written consent of the holders of 75% of the issued and outstanding Voting
Common Stock held by the parties hereto. Subject to the preceding sentence, this
Agreement shall be binding upon and shall inure to the benefit of the parties
hereto and their respective successors and assigns.
Section 5.5. Severability. If any term or other provision of this
------------
Agreement is invalid, illegal or incapable of being enforced by any rule of law
or public policy, all other conditions 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 adverse
manner to any party. Upon such determination that any term or other provision is
invalid, illegal or incapable of being enforced, the parties hereto shall
negotiate in good faith to modify this Agreement so as to effect the original
intent of the parties as closely as possible in an acceptable manner so that the
transactions contemplated hereby are fulfilled to the greatest extent possible.
Section 5.6. Notices. Any notice, request, instruction or other
-------
document to be given hereunder by any party hereto to any other party shall be
in writing and shall be given (and will be deemed to have been duly given upon
receipt) by delivery in person, by electronic facsimile transmission, cable,
telegram, telex or other standard forms of written telecommunications, by
overnight courier or by registered or certified mail, postage prepaid:
(a) If to any of the Tanning Parties, to:
Tanning Technology Corporation
4600 South Ulster Street, Suite 380
Denver, Colorado 80237
Attention: Mark W. Reinhardt
Telecopy: 303 220-9958
(b) If to TTC, to:
AEA Tanning Investors Inc.
c/o AEA Investors Inc.
Park Avenue Tower
65 East 55th Street
New York, New York 10022
Attention: Christine J. Smith, Esq.
Telecopy: 212 702-0518
7
<PAGE>
with a copy to:
Fried, Frank, Harris, Shriver & Jacobson
One New York Plaza
New York, New York 10004
Attention: Sanford Krieger, Esq.
Telecopy: 212 859-4000
or at such other address for a party as shall be specified by like notice.
Section 5.7. Counterparts; Facsimile Signatures. This Agreement may
----------------------------------
be executed in any number of counterparts, each of which shall be deemed to be
an original, but all of which together shall constitute but one and the same
agreement. Delivery of a photocopy or transmission by telecopy of a signed
signature page of this Agreement shall constitute delivery of such signed
signature page; provided, however, that each party shall provide each other
party an originally executed copy of such signature page as promptly as
practicable.
Section 5.8. Interpretation. When a reference is made in this
--------------
Agreement to Articles, Sections, Schedule or Exhibits, such reference is to an
Article or a Section of, Schedule to, or an Exhibit to, this Agreement, unless
otherwise indicated. The table of contents and headings contained in this
Agreement are for reference purposes only and shall not affect in any way the
meaning or interpretation of this Agreement. Whenever the words "include,"
"includes" or "including" are used in this Agreement, they shall be understood
to be followed by the words "without limitation."
Section 5.9. Amendment. This Agreement may not be amended except by
---------
an instrument in writing signed on behalf of the holders of 75% of the issued
and outstanding Voting Common Stock held by the parties hereto; provided
however, that no amendment may be made which adversely affects the rights of a
party hereto without the written agreement of such party (except to the extent
affecting all Shareholders equally with respect to rights granted to all
Shareholders equally).
Section 5.10. Extension; Waiver. At any time the parties may extend
-----------------
the time for the performance of any of the obligations or other acts of the
other parties, waive any inaccuracies in the representations and warranties
contained in this Agreement and waive compliance with any of the agreements or
conditions contained in this Agreement. Any agreement on the part of a party to
any such extension or waiver shall be valid only if set forth in an instrument
signed on behalf of such party. The waiver by any party hereto of a breach of
any provision hereunder shall not operate to be construed as a waiver of any
prior or subsequent breach of the same or any other provision hereunder.
8
<PAGE>
Section 5.11. Enforcement of Agreement. The parties hereto agree that
------------------------
irreparable damage would occur in the event that any of the provisions of this
Agreement were not performed in accordance with its specific terms or was
otherwise breached. It is accordingly agreed that the parties shall be entitled
to any injunction or injunctions to prevent breaches of this Agreement and to
enforce specifically the terms and provisions hereof in any Delaware court, this
being in addition to any other remedy to which they may be entitled at law or in
equity.
Section 5.12. Further Assurances. At any time, or from time to time,
------------------
after the date hereof, the parties agree to cooperate with each other, and at
the request of any other party, to execute and deliver any further instruments
or documents and to take al such further actions as any party may reasonably
request in order to evidence or effectuate the consummation of the transactions
contemplated hereby and to otherwise carry out the intent of the parties
hereunder.
9
<PAGE>
IN WITNESS WHEREOF, this Agreement has been signed on behalf of each
of the parties hereto as of the date first above written.
TANNING TECHNOLOGY CORPORATION
/s/ Larry G. Tanning
By:---------------------------------------
Name: Larry G. Tanning
Title: President
COURTNEY ROSE CORPORATION
/s/ Larry G. Tanning
By:---------------------------------------
Name: Larry G. Tanning
Title: President
WINSOFT CORPORATION
/s/ Bipin Agarwal
By:---------------------------------------
Name: Bipin Agarwal
Title: President
HIPPELI ENTERPRISES, INC.
/s/ Toni S. Hippeli
By:---------------------------------------
Name: Toni S. Hippeli
Title: President
10
<PAGE>
TANNING FAMILY PARTNERSHIP, L.L.L.P.
By Courtney Rose Corporation,
its general partner
/s/ Larry G. Tanning
By:------------------------------------
Name: Larry G. Tanning
Title: President
/s/ Larry G. Tanning
----------------------------------------
Larry G. Tanning
/s/ Christine A. Tanning
----------------------------------------
Christine A. Tanning
11
<PAGE>
/s/ Bipin Agarwal
----------------------------------------
Bipin Agarwal
/s/ Toni Hippeli
----------------------------------------
Toni Hippeli
AEA TANNING INVESTORS INC.
/s/ Christopher Mahan
By:-------------------------------------
Name: Christopher Mahan
Title: Vice President
12
<PAGE>
TTC INVESTORS I LLC
By AEA Tanning Investors Inc.,
its managing member
/s/ Christopher Mahan
By:---------------------------------------
Name: Christopher Mahan
Title: Vice President
TTC INVESTORS II LLC
By AEA Tanning Investors Inc.,
its managing member
/s/ Christopher Mahan
By:---------------------------------------
Name: Christopher Mahan
Title: Vice President
TTC INVESTORS IA LLC
By AEA Tanning Investors Inc.,
its managing member
/s/ Christopher Mahan
By:---------------------------------------
Name: Christopher Mahan
Title: Vice President
13
<PAGE>
TTC INVESTORS IIA LLC
By AEA Tanning Investors Inc.,
its managing member
/s/ Christopher Mahan
By:---------------------------------------
Name: Christopher Mahan
Title: Vice President
LARRY G. TANNING IRREVOCABLE TRUST FOR THE BENEFIT
OF HIS LINEAL DESCENDANTS
By: Mark W. Tanning,
its trustee
/s/ Mark W. Tanning
------------------------------------
Name: Mark W. Tanning
Title: Trustee
CHRISTINE A. TANNING IRREVOCABLE TRUST FOR THE
BENEFIT OF HER LINEAL DESCENDANTS
By: Mark W. Tanning,
its trustee
/s/ Mark W. Tanning
------------------------------------
Name: Mark W. Tanning
Title: Trustee
14
<PAGE>
EXHIBIT 99.1
CAUTIONARY STATEMENT FOR PURPOSES OF THE "SAFE HARBOR" PROVISIONS OF THE PRIVATE
SECURITIES REFORM ACT OF 1995
Tanning Technology Corporation (the "Company") cautions readers that the
important factors set forth below, as well as factors discussed in other
documents filed by the Company with the Securities and Exchange Commission (the
"SEC"), among others, could cause the Company's actual results to differ
materially from forward looking statements contained in this report, future
filings by the Company with the SEC, the Company's press releases and oral
statements made by or on behalf of the Company. The words "estimate," "project,"
"anticipate," "expect," "intend," "believe," "target" and similar expressions
are intended to identify forward looking statements.
Inability to manage our growth could have a material adverse effect on the
quality of our services, our ability to retain key personnel, and our business
Our growth has placed significant demands on our management and other
resources. Our revenues for the first six months of 1999 increased approximately
127% over revenues in the same period in 1998. Our staff increased from 120
full-time employees at December 31, 1997 to 148 at December 31, 1998, and to 228
at June 30, 1999. Our future success will depend on our ability to manage our
growth effectively, including:
. continuing to train, motivate, manage and retain our existing employees
and attract and integrate new employees;
. improving our business development capabilities;
. maintaining high rates of employee utilization;
. accurately estimating time and resources for engagements;
. developing and improving our operational, financial, accounting and
other internal systems and controls; and
. maintaining project quality.
Our management has limited experience managing a business of Tanning's
size. If we are unable to manage our growth and projects effectively, it could
have a material adverse effect on the quality of our services, our ability to
retain key personnel, and our business and results of operations.
If our revenues do not increase proportionately with our planned increases in
costs and capital expenditures, then our results of operations and liquidity
will suffer
<PAGE>
In anticipation of business growth, we expect to incur costs and expend
capital. We can give no assurances that we will continue to grow, or that we
will grow at a pace that will support these costs and expenditures. To the
extent revenues do not increase at a rate commensurate with these additional
costs and expenditures, our results of operations and liquidity could be
materially and adversely affected. In particular, we expect that our plans for
increases in expenses and capital expenditures over the next year to support our
growth will negatively impact profitability.
The loss of our professionals, or the inability to recruit additional
professionals, would make it difficult to complete existing projects and bid for
new projects, which could cause our business to suffer
Our business is labor intensive, and our success depends on identifying,
hiring, training and retaining experienced, knowledgeable professionals. If a
significant number of our current employees or any of our project managers or
senior technical personnel leave, we may be unable to complete or retain
existing projects or bid for new projects of similar scope and revenue. In
addition, former employees may compete with us in the future.
Even if we retain our current employees, our management must continually
recruit talented professionals in order for our business to grow. There is
currently a shortage of qualified project managers and senior technical
personnel in the information technology services field, and this shortage is
likely to continue. Furthermore, there is significant competition for employees
with the skills required to perform the services we offer. We cannot give any
assurances that we will be able to attract a sufficient number of qualified
employees in the future, or that we will be successful in motivating and
retaining the employees we are able to attract. If we cannot attract, motivate
and retain qualified professionals, our business, financial condition and
results of operations will suffer.
We depend on our key personnel, and the loss of any key personnel may harm our
ability to obtain and retain client engagements, maintain a cohesive culture and
compete effectively
We believe that our success will depend on the continued employment of our
key management personnel. This dependence is particularly important to our
business because personal relationships are critical to obtaining and
maintaining client engagements and maintaining a cohesive culture. If one or
more members of our key management personnel were unable or unwilling to
continue in their present positions, such persons would be very difficult to
replace and our business could be seriously harmed. In addition, if any of these
key employees joins a competitor or forms a competing company, some of our
clients might choose to use the services of that competitor or new company
instead of our own. Furthermore, clients or other companies seeking to develop
in-house information technology services capabilities may hire away some of our
key employees. This would not only result in the loss of key employees but could
also result in the loss of a client relationship or a new business opportunity.
Any of the foregoing could seriously harm our business.
-2-
<PAGE>
We depend heavily on our principal clients; a significant reduction in the work
we perform for any of them could harm our revenues and earnings
We derive a large portion of our services revenue from a limited number of
clients. Services revenue constitutes substantially all of our revenues. In
1997, our five largest clients accounted for approximately 81% of our services
revenue. In 1998, our five largest clients accounted for approximately 70% of
our services revenue. In the first six months of 1999,our five largest clients
accounted for approximately 73% of our services revenue. The volume of work
performed for our principal clients may not be sustained from year to year, and
there is a risk that these principal clients may not retain us in the future.
Any cancellation, deferral or significant reduction in work performed for these
principal clients or a significant number of smaller clients could have a
material adverse effect on our financial condition and results of operations.
Our clients may terminate projects before completion; this could adversely
affect our revenues and earnings
In general, our clients may terminate project engagements upon limited
notice and without significant penalty. This makes our results of operations
difficult to predict. Our clients' termination of our project engagements would
result in lower revenues and underutilized employees and, as a result, would
negatively affect our earnings. For example, a client's termination of a
significant project in the fourth quarter of 1997 adversely affected revenues,
employee utilization and earnings in the first half of 1998.
Our international operations and expansion involve risks relating to
difficulties in complying with foreign laws and regulations, staffing
difficulties, currency related risks, difficulties in collecting accounts
receivable, and seasonal reductions in business activity; these risks could
result in increased costs, unanticipated liabilities, operational difficulties
and decreases in revenues and earnings
We currently have significant operations in Europe and intend to expand our
business to other regions, as attractive opportunities arise. Revenues from our
existing international operations represented 35% of services revenue in 1998
and 38% in the first six months of 1999. We may incur significant costs in
connection with our international expansion.
We also encounter risks in doing business in foreign countries, including:
. increased costs due to the need to comply with visa or other work permit
requirements, which may impair our ability to move personnel between
countries and properly staff our projects;
. to the extent we bill for our services in the functional currency of our
foreign subsidiaries, any depreciation of such currencies against the
dollar would negatively impact our results of operations;
-3-
<PAGE>
. expenses incurred to modify our accounting systems as we do more
business in the countries that are converting their currencies to the
euro;
. difficulties in staffing and managing foreign offices, such as our
office in Chertsey, England, as a result of, among other things,
distance and time zone differences;
. seasonal reductions in business activity, such as the August slowdown in
Europe, which may adversely impact our business and results of
operations;
. longer payment cycles and problems in collecting accounts receivable,
which may adversely impact our results of operations due to required
allowances for doubtful accounts and increased cost of collection
efforts; and
. lack of ability to determine the taxation to which we may be subject in
foreign countries, including the failure to evaluate complex payroll tax
regulations of foreign countries, which could cause us to underestimate
our tax liabilities.
Any of these factors could result in increased costs, unanticipated liabilities,
operational difficulties and decreases in revenues and earnings.
We may fail to accurately estimate the time and resources necessary for the
performance of our services, which could reduce the profitability of, or result
in a loss on, our projects and damage our customer relationships
To date, we have generally provided services to our clients on a time and
materials basis, although we sometimes work on a fixed-fee or capped fee basis.
In the future, we anticipate that an increasing percentage of our client
engagements will be subject to fixed-fee or other arrangements that are not
solely based on time and materials. Because we work with complex technologies in
compressed timeframes and because we have limited experience in pricing
engagements on these terms, it can be difficult to judge the time and resources
necessary to complete a project. Our failure to accurately estimate the time and
resources required for a project, or our failure to complete our obligations in
a manner consistent with the project plan upon which our fixed-fee or other
arrangements are based, could reduce the profitability of, or result in a loss
on, our projects if we are required to devote additional resources to project
engagements for which we will not receive additional compensation, and could
damage our customer relationships and our reputation.
Quarter to quarter fluctuations in our revenues and earnings could affect the
market price of our common stock
Our revenues and earnings may vary from quarter to quarter as a result of a
number of factors, including:
. number, size and scope of client engagements commenced or completed
during a quarter;
-4-
<PAGE>
. employee utilization rates;
. unanticipated project terminations, delays or deferrals;
. the accuracy of estimates of resources required to complete ongoing
projects; and
. the contractual terms and degree of completion of projects in which we
are engaged.
Because a high percentage of our expenses, particularly compensation and
rent, are fixed in advance of any particular quarter, any of the factors listed
above could cause significant variations in our earnings in any given quarter.
Any decline in revenues or earnings or a greater than expected loss for any
quarter could materially adversely affect the market price of our common stock,
even if not reflective of any long-term problems with our business.
Competition from bigger, more established competitors who have greater financial
and technical resources, and from new entrants, could cause us to lose current
or future business opportunities and harm our business, results of operations
and ability to grow
The business areas in which we compete are intensely competitive and
subject to rapid technological change. We expect competition to continue and
intensify. Our competitors fall into four major categories:
. large information technology consulting services providers, such as
Andersen Consulting, KPMG, PricewaterhouseCoopers, IBM, EDS and CSC;
. mid-tier information technology services providers, such as Cambridge
Technology Partners and Sapient;
. Internet professional service providers, such as Modem Media . Poppe
Tyson, US Interactive, Proxicom, Viant and Scient; and
. internal information technology departments of current and potential
clients.
Many of our competitors have longer operating histories and client
relationships, greater financial, technical, marketing and public relations
resources, larger client bases and greater brand or name recognition than we
have. Our competitors may be able to respond more quickly to technological
developments and changes in clients' needs.
Further, there are low barriers to entry into our business. We do not own
any technologies that preclude or inhibit competitors from entering our
industry. Existing or future competitors may independently develop and patent or
copyright technologies that are superior or substantially similar to our
technologies. The costs to develop and provide information technology consulting
services are relatively low. Therefore, we expect to continue to face additional
competition from new entrants into our industry.
-5-
<PAGE>
Year 2000 Issues could seriously harm our business as a result of reduced demand
for our services, internal and external operations difficulties, and potential
disputes with, or liabilities to, clients
The Year 2000 problem is the potential for system and processing failures
of date-related data arising from the use of two digits by computer-controlled
systems, rather than four digits, to define the applicable year. Clients' and
potential clients' purchasing patterns may be affected by Year 2000 issues as
companies expend significant resources to correct or replace their current
systems for Year 2000 compliance. These clients and potential clients may have
fewer funds available to purchase our services, which could adversely affect
our business, financial condition and results of operations. We may experience
operations difficulties because of undetected errors or defects in the
technology we use in our internal systems. We also rely, directly and
indirectly, on the systems of business enterprises such as clients, suppliers,
utilities, creditors and financial institutions, both domestic and
international, which could be subject to operational difficulties arising out of
Year 2000 issues. In addition, we have made representations to clients regarding
Year 2000 compliance and may become involved in disputes regarding Year 2000
problems involving solutions that we have developed or implemented. Any failure
on the part of our principal internal systems, other business' systems or the
systems that we create for our clients as a result of the Year 2000 problem
could seriously harm our business, reputation, financial condition and results
of operations.
Expansion of our solutions and service offerings may not be successful and we
may lose opportunities to expand our business
In addition to growing our business within the disciplines on which we
currently focus, an element of our strategy is to expand our solutions in the
area of supply chain management and our service offerings in areas such as
business consulting, process innovation and creative design. Successful
expansion in these areas will require:
. attracting, integrating and retaining talented personnel;
. successfully marketing and delivering these services; and
. successfully establishing relationships with vendors and technology
providers.
Failure to develop additional solutions and service offerings on a timely
basis could cause us to lose opportunities for business with both existing and
potential clients. We cannot assure you that this expansion will be successful.
We may have difficulty responding to changing technology, industry standards and
client preferences, which could cause us to lose business
Our success will depend in part on our ability to develop information
technology solutions that keep pace with continuing changes in technology,
involving industry standards and changing client preferences. We cannot give
any assurances that we will be successful in addressing these developments on a
timely basis or at all. Our failure to respond quickly and cost-effectively to
new developments could cause us to lose current and potential business
opportunities and have a material adverse effect on our business and results of
operations.
In particular, we have derived a significant portion of our revenues from
projects based primarily on:
. open system technologies, which are standards-based, non-proprietary
technologies;
. multi-tier software architecture, in which the key layers of an
application system are separated and optimized independently to
improve performance, scalability and reliability;
. web-based architectures; and
. electronic commerce, generally.
These areas are continuing to develop and are subject to rapid change. Any
factors negatively affecting the acceptance of information processing systems
using client/server and web-based architectures could have a material adverse
effect on our business, especially if we are unable to develop skills and
replacement technologies for these types of information processing systems.
-6-
<PAGE>
Our business may suffer if growth in the use of the Internet declines
Because Internet technologies are central to many of our solutions, our
business depends upon continued growth in the use of the Internet by our
clients, prospective clients and their customers and suppliers. Capacity
constraints caused by growth in Internet usage may, unless resolved, impede
further growth in Internet use. If the number of users on the Internet does not
increase and commerce over the Internet does not become more accepted and
widespread, demand for our services may decrease and our business and results of
operations could suffer. Factors which may affect Internet usage or electronic
commerce adoption include:
. actual or perceived lack of security of information;
. lack of access and ease of use;
. congestion of Internet traffic or other usage delays;
. inconsistent quality of service;
. increases in access costs to the Internet;
. excessive government regulation;
. uncertainty regarding intellectual property ownership;
. reluctance to adopt new business methods;
. costs associated with the obsolescence of existing infrastructure; and
. economic viability of the Internet commerce model.
If we are unable to maintain our reputation and expand our name recognition, we
may have difficulty attracting new business and retaining current clients, and
our business may suffer
We believe that establishing and maintaining a good reputation and name
recognition are critical for attracting and expanding our client base. We also
believe that the importance of reputation and name recognition will increase due
to the growing number of information technology services providers. If our
reputation is damaged or if potential clients are not familiar with us or the
services we provide, we may become less competitive or lose our market position.
Promotion and enhancement of our name will depend largely on our success in
continuing to provide large, complex, integrated information technology
solutions. If clients do not perceive our solutions to be effective or of high
quality, our brand name and reputation will suffer. In addition, if solutions
we provide have defects, critical business functions of our clients may fail,
and we would likely suffer adverse publicity and could suffer economic
liability.
-7-
<PAGE>
Misappropriation of our intellectual property could harm our reputation, affect
our competitive position and cost us money
We believe our intellectual property, including our proprietary
methodologies, is important to our success and competitive position. If we are
unable to protect our intellectual property against unauthorized use by others,
our reputation among existing and potential clients could be damaged and our
competitive position adversely affected.
Our strategies to deter misappropriation could be inadequate in light of
the following risks:
. non-recognition of the proprietary nature of or inadequate protection
of our methodologies in the United States or foreign countries;
. undetected misappropriation of our proprietary methodologies;
. development of similar software or applications by our competitors;
and
. unenforceability of the non-competition and confidentiality agreements
entered into by our key employees.
If any of these risks materialize, we could be required to spend
significant amounts to defend our rights and our managerial resources could be
diverted. In addition, our proprietary methodologies may decline in value or
our rights to them may not be enforceable.
Others could claim that we infringe on their intellectual property rights, which
may result in substantial costs, diversion of resources and management attention
and harm to our reputation
Although we believe that our services do not infringe on the intellectual
property rights of others, we cannot give any assurances that an infringement
claim will be successfully defended. A successful infringement claim against us
could materially and adversely affect us in the following ways:
. we may be liable for damages and litigation costs, including
attorneys' fees;
. we may be enjoined from further use of the intellectual property;
. we may have to license the intellectual property, incurring licensing
fees;
. we may have to develop a non-infringing alternative, which could be
costly and delay projects; and
. we may have to indemnify clients with respect to losses incurred as a
result of our infringement of the intellectual property.
-8-
<PAGE>
Regardless of the outcome, an infringement claim could result in
substantial costs, diversion of resources and management attention, clients'
termination of project engagements and harm to our reputation.
Our business and our client relationships may suffer if we have disputes over
our right to resell or reuse intellectual property developed for specific
clients
A portion of our business involves the development of software applications
for specific client engagements. Ownership of client-specific software is
generally retained by the client, although we retain rights to some of the
applications, processes and other intellectual property developed in connection
with client engagements. Issues relating to the rights to intellectual property
can be complicated. We cannot give any assurances that disputes will not arise
that affect our ability to resell or reuse such applications, processes and
other intellectual property, damage our relationships with our clients, divert
our management's attention or have a material adverse effect on our business,
financial condition and results of operations.
Potential acquisitions may result in, among other things, increased expenses,
difficulties in integrating target companies and diversion of management's
attention
An element of our strategy includes expanding our solutions and service
offerings and gaining access to new technologies through strategic acquisitions
and investments when attractive opportunities arise. Some of the risks that we
may encounter in implementing this element of our strategy include:
. expenses and difficulties in identifying potential targets and the
costs associated with acquisitions that are abandoned before
completion;
. expenses, delays and difficulties of integrating the acquired company
into our existing organization and our company's culture;
. diversion of management's attention during the acquisition process;
. diversion of management's attention following the acquisition process
where management has options or other equity incentive rights in the
acquired company;
. expenses of amortizing the acquired company's intangible assets, which
could be significant in light of the high valuations of many companies
in the information technology industry;
. impact on our financial condition due to the timing of the
acquisition; and
. expenses of any undisclosed or potential legal liabilities of the
acquired company, including intellectual property, employment, and
warranty and product liability-related problems.
-9-
<PAGE>
If realized, any of these risks could have a material adverse effect on our
business, financial condition and results of operations.
Lack of detailed written contracts could impair our ability to collect fees,
protect our intellectual property and protect ourselves from liability to others
We try to protect ourselves by entering into detailed written contracts
with our clients covering the terms and contingencies of the project engagement.
In some cases, however, consistent with what we believe to be industry practice,
work is performed for clients on the basis of a limited statement of work or
verbal agreements before a detailed written contract can be finalized. To the
extent that we fail to have detailed written contracts in place, our ability to
collect fees, protect our intellectual property and protect ourselves from
liability to others may be impaired.
Government regulation and legal uncertainties relating to the Internet could
result in decreased demand for our services, increased costs, or otherwise harm
our business
Increased regulation of the Internet might slow the growth in use of the
Internet, which could decrease demand for our services, increase our cost of
doing business or otherwise harm our business. Congress, federal regulatory
agencies and the states have recently passed legislation or taken other actions
regulating certain aspects of the Internet, including:
. on-line content;
. interaction with children;
. copyright infringement;
. user privacy;
. taxation;
. access charges;
. liability for third-party activities;
. transmission of sexually explicit material;
. defamation;
. consumer protection; and
. jurisdiction.
Foreign governments have also taken actions to regulate aspects of the
Internet, including user privacy and on-line content. In addition, federal,
state and local governmental organizations as well as foreign governments are
considering other legislative and regulatory proposals that
-10-
<PAGE>
would regulate these and other aspects of the Internet. We do not know how
courts will interpret laws governing the Internet or the extent to which they
will apply existing laws to the Internet. Therefore, we are not certain how
existing or future laws governing the Internet or applied to the Internet will
affect our business.
-11-
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM FORM 10-Q
(6-30-1999) AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL
STATEMENTS.
</LEGEND>
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-START> JAN-01-1999
<PERIOD-END> JUN-30-1999
<CASH> 6,564,345
<SECURITIES> 0
<RECEIVABLES> 15,682,755
<ALLOWANCES> 675,597
<INVENTORY> 0
<CURRENT-ASSETS> 23,562,871
<PP&E> 6,044,547
<DEPRECIATION> 1,993,212
<TOTAL-ASSETS> 27,783,902
<CURRENT-LIABILITIES> 7,877,010
<BONDS> 0
0
0
<COMMON> 454,720
<OTHER-SE> 18,918,450
<TOTAL-LIABILITY-AND-EQUITY> 27,783,902
<SALES> 24,519,307
<TOTAL-REVENUES> 24,519,307
<CGS> 0
<TOTAL-COSTS> 11,870,005
<OTHER-EXPENSES> 11,182,684
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 23,457
<INCOME-PRETAX> 1,742,112
<INCOME-TAX> 635,141
<INCOME-CONTINUING> 1,466,618
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</TABLE>
