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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
SCHEDULE 14A
Proxy Statement Pursuant to Section 14(a) of the Securities
Exchange Act of 1934 (Amendment No. )
Filed by the Registrant [X]
Filed by a Party other than the Registrant [_]
Check the appropriate box:
[_] Preliminary Proxy Statement
[_] CONFIDENTIAL, FOR USE OF THE
COMMISSION ONLY (AS PERMITTED BY
RULE 14A-6(E)(2))
[X] Definitive Proxy Statement
[_] Definitive Additional Materials
[_] Soliciting Material Pursuant to (S) 240.14a-11(c) or (S) 240.14a-12
SPR Inc.
- --------------------------------------------------------------------------------
(Name of Registrant as Specified In Its Charter)
- --------------------------------------------------------------------------------
(Name of Person(s) Filing Proxy Statement, if other than the Registrant)
Payment of Filing Fee (Check the appropriate box):
[_] No fee required.
[_] Fee computed on table below per Exchange Act Rules 14a-6(i)(4) and 0-11.
(1) Title of each class of securities to which transaction applies:
-------------------------------------------------------------------------
(2) Aggregate number of securities to which transaction applies:
-------------------------------------------------------------------------
(3) Per unit price or other underlying value of transaction computed
pursuant to Exchange Act Rule 0-11 (set forth the amount on which
the filing fee is calculated and state how it was determined):
-------------------------------------------------------------------------
(4) Proposed maximum aggregate value of transaction:
-------------------------------------------------------------------------
(5) Total fee paid:
-------------------------------------------------------------------------
[_] Fee paid previously with preliminary materials.
[X] Check box if any part of the fee is offset as provided by Exchange
Act Rule 0-11(a)(2) and identify the filing for which the offsetting fee
was paid previously. Identify the previous filing by registration statement
number, or the Form or Schedule and the date of its filing.
(1) Amount Previously Paid: $25,643
-------------------------------------------------------------------------
(2) Form, Schedule or Registration Statement No.: 333-31470
-------------------------------------------------------------------------
(3) Filing Party: Leapnet, Inc.
-------------------------------------------------------------------------
(4) Date Filed: March 2, 2000
-------------------------------------------------------------------------
Notes:
Reg. (S) 240.14a-101.
SEC 1913 (3-99)
SPR INC.
2015 SPRING ROAD
SUITE 750
OAK BROOK, ILLINOIS 60523-1874
----------------
NOTICE OF SPECIAL STOCKHOLDERS' MEETING
Date: May 1, 2000
Time: 10:00 a.m. (Central Standard Time)
Place: Hyatt Regency Oak Brook, 1909 Spring Road, Oak Brook, Illinois 60521
At the meeting you will consider and vote on a proposal to approve the
merger of Brassie Corporation, a wholly owned subsidiary of Leapnet, Inc., with
and into SPR Inc. Under the merger agreement, each outstanding share of SPR
common stock will convert into the right to receive 1.085 shares of Leapnet
common stock and SPR will become a subsidiary of Leapnet.
We will transact no other business at the special meeting, except business
which may be properly brought before the special meeting or any adjournment or
postponement of the special meeting.
Only holders of record of shares of SPR common stock at the close of
business on March 21, 2000, the record date for the special meeting, are
entitled to notice of, and to vote at, the special meeting and any adjournment
or postponement of the special meeting.
Whether or not you plan to attend the special meeting, please complete, sign
and date the enclosed proxy and return it promptly in the enclosed postage-paid
envelope. You may vote in person at the special meeting, even if you have
returned a proxy. If you do not vote by proxy or in person at the special
meeting, your shares will count as votes against the proposal.
Please do not send any stock certificates with your proxy cards at this
time.
By Order of the Board of Directors,
Stephen J. Tober, Chief Operating
Officer
Oak Brook, Illinois
March 24, 2000
A MERGER PROPOSAL--YOUR VOTE IS VERY IMPORTANT
The boards of directors of Leapnet, Inc. and SPR Inc. have agreed on a
merger of a subsidiary of Leapnet into SPR. If we complete the merger, SPR
stockholders will receive 1.085 shares of Leapnet common stock for each share
of SPR common stock that they own and SPR will become a subsidiary of Leapnet.
Leapnet common stock is traded on The Nasdaq National Market under the trading
symbol "LEAP," and on March 23, 2000, the closing price of Leapnet common stock
was $6.125 per share. Leapnet stockholders will continue to own their existing
shares after the merger and SPR stockholders will own approximately 13,915,433
shares of Leapnet common stock immediately after the merger.
We cannot complete the merger unless the stockholders of SPR approve the
merger and the stockholders of Leapnet approve the issuance of shares of
Leapnet stock to SPR stockholders in the merger. The board of directors of
Leapnet also is submitting a proposal to amend Leapnet's Employee Incentive
Compensation Plan. Approval of this proposal is not required to consummate the
merger.
This joint proxy statement/prospectus provides you with detailed information
about the proposals. In addition, you may obtain information about our
companies from documents that we have filed with the Securities and Exchange
Commission. We encourage you to read this entire document carefully. In
particular, please consider the matters discussed under "Risk Factors" on page
13 of the enclosed joint proxy statement/prospectus.
Whether or not you plan to attend a meeting, please take the time to vote by
completing and mailing the enclosed proxy card to us. Your vote is very
important.
Frederick A. Smith Robert M. Figliulo
Chairman and Chief Executive Officer Chairman and Chief Executive Officer
Leapnet, Inc. SPR Inc.
The enclosed joint proxy statement/prospectus is dated March 24, 2000, and
was first mailed to stockholders on or about March 28, 2000.
Neither the Securities and Exchange Commission nor any state securities
commission has approved or disapproved of these securities or passed upon the
adequacy or accuracy of this disclosure document. Any representation to the
contrary is a criminal offense.
i
WHERE YOU CAN FIND MORE INFORMATION
You can obtain documents incorporated by reference in this proxy
statement/prospectus without charge by requesting them in writing or by
telephone from SPR or Leapnet at the following addresses and telephone numbers:
SPR Inc. Leapnet, Inc.
2015 Spring Road 420 West Huron Street
Suite 750 Chicago, Illinois 60610
Oak Brook, Illinois 60523-1874 Attention: Beth Pastor
Attention: Michelle Banks Vice President, Corporate
Telephone: (630) 575-6200 Communications
Telephone: (312) 528-2400
If you would like to request documents from either company, please do so by
April 24, 2000 to receive them before your special meeting of stockholders.
Both Leapnet and SPR are subject to the information requirements of the
Securities Exchange Act of 1934, as amended, and file annual, quarterly and
other reports and proxy statements with the Securities and Exchange Commission.
You may read and copy any reports, statements or other information filed by SPR
or Leapnet at the Securities and Exchange Commission's public reference rooms
in Washington, D.C. at 450 5th, N.W., and in New York, New York and Chicago,
Illinois. Please call the Securities and Exchange Commission at 1-800-SEC-0330
for further information on the public reference rooms. SPR's and Leapnet's
Securities and Exchange Commission filings are also available to the public
from commercial document retrieval services and at the World Wide Web site
maintained by the Securities and Exchange Commission at www.sec.gov.
Leapnet filed a registration statement on Form S-4 to register with the
Securities and Exchange Commission the Leapnet common stock to be issued to SPR
stockholders in the merger. This joint proxy statement/prospectus is a part of
that registration statement and constitutes a prospectus of Leapnet in addition
to being a proxy statement of Leapnet and SPR for their special meetings. As
allowed by Securities and Exchange Commission rules, this joint proxy
statement/prospectus does not contain all the information you can find in the
registration statement or the exhibits to the registration statement. You can
obtain the additional information in the registration statement and the
exhibits to the registration statement by contacting Leapnet at the address and
telephone number listed above.
ii
TABLE OF CONTENTS
QUESTIONS & ANSWERS ABOUT THE MERGER....................................... vii
SUMMARY.................................................................... 1
The Companies............................................................ 1
Reasons for the Merger................................................... 2
The Special Meetings..................................................... 2
Recommendation to Stockholders........................................... 3
The Merger............................................................... 3
What SPR Stockholders Will Receive....................................... 3
Ownership of Leapnet Following the Merger................................ 4
Management of the Combined Company....................................... 4
Interests of Leapnet and SPR Directors and Management in the Merger...... 4
Conditions of the Merger................................................. 4
Termination of the Merger Agreement...................................... 5
Termination Fees......................................................... 6
Material United States Federal Income Tax Consequences of the Merger..... 6
Accounting Treatment..................................................... 6
Fairness Opinions of the Financial Advisors.............................. 6
The Stockholder Agreements............................................... 7
Appraisal Rights......................................................... 7
Conduct of Business...................................................... 7
Registration Statement on Form S-8....................................... 7
Expenses................................................................. 7
Summary Condensed Consolidated Historical and Proforma Combined Financial
Information............................................................. 8
FORWARD-LOOKING STATEMENTS................................................. 13
RISK FACTORS............................................................... 13
Leapnet may not be able to successfully integrate SPR and achieve the
benefits expected to result from the merger............................. 13
Because the exchange ratio in the merger is fixed, stockholders of
Leapnet and SPR are exposed to the risk that the market price of the
other company's stock will drop......................................... 13
The price of Leapnet common stock may be affected by factors different
from those affecting the price of SPR common stock...................... 14
Failure to complete the merger could negatively impact the market price
of Leapnet's common stock and SPR's common stock........................ 14
Neither Leapnet nor SPR may be able to enter into a merger or business
combination with another party at a favorable price because of
restrictions in the merger agreement.................................... 14
The loss of our professionals would make it difficult to complete
existing projects and bid for new projects, which could adversely affect
our businesses and results of operations................................ 15
Our revenues are difficult to predict because they are generated on a
project-by-project basis................................................ 15
Our engagements could be unprofitable if we do not perform fixed-price,
fixed-time contracts efficiently........................................ 15
Our results of operations may vary from quarter to quarter in future
periods and, as a result, we may fail to meet the expectations of our
investors and analysts, which could cause our stock price to fluctuate
or decline.............................................................. 16
Claims by the parties with whom we contract could result in losses and
damage our reputation................................................... 16
Our management has broad discretion over the use of our cash and cash
equivalents............................................................. 17
We generate a large part of our revenues from a small number of clients.. 17
Our continued growth may further strain our resources, which could hurt
our business and results of operations.................................. 17
A small number of stockholders will control Leapnet after the merger..... 17
We compete in new and highly competitive markets that have low barriers
to entry................................................................ 18
iii
We may be unable to continue our acquisition growth strategy, which could
harm our business and competitive position in the industry.............. 18
We are exposed to liabilities based on the conduct of our consultants in
other's workplaces...................................................... 19
A portion of our business depends on continued growth in the use of the
Internet................................................................ 19
Our business is subject to U.S. and foreign government regulation of the
Internet................................................................ 19
Year 2000 problems may adversely affect our business..................... 20
We are involved in litigation which may be costly and divert the efforts
and attention of our management......................................... 20
THE SPECIAL MEETING OF LEAPNET............................................. 21
Date; Time; Place........................................................ 21
Matters to be Considered at the Special Meeting.......................... 21
Revocability of Proxies.................................................. 21
Record Date; Stock Entitled to Vote; Quorum.............................. 21
Voting Procedures........................................................ 21
Solicitation of Proxies.................................................. 22
Leapnet Stockholder Agreements........................................... 22
THE SPECIAL MEETING OF SPR................................................. 24
Date; Time; Place........................................................ 24
Matters to be Considered at the Meeting.................................. 24
Revocability of Proxies.................................................. 24
Record Date; Stock Entitled to Vote; Quorum.............................. 24
Voting Procedures........................................................ 24
Solicitation of Proxies.................................................. 25
SPR Stockholder Agreements............................................... 25
THE MERGER................................................................. 26
Background of the Merger................................................. 26
Reasons for the Merger; Recommendations of the Boards.................... 27
Opinion of Leapnet's Financial Advisor................................... 31
Opinion of SPR's Financial Advisor....................................... 36
Interests of Leapnet and SPR Directors and Management in the Merger...... 45
Effective Time........................................................... 46
Accounting Treatment of the SPR Merger................................... 46
Regulatory Approvals..................................................... 46
Other Effects of the Merger; Delisting of SPR Shares..................... 47
No Appraisal Rights...................................................... 47
Material Federal Income Tax Consequences................................. 47
Resale Restrictions and Lockup Agreements................................ 48
Dividend Policy.......................................................... 48
THE MERGER AGREEMENT....................................................... 49
The Merger............................................................... 49
Conversion of Securities................................................. 49
Treatment of SPR Stock Options........................................... 49
Exchange of Shares....................................................... 49
Representations and Warranties........................................... 50
Certain Covenants........................................................ 50
Additional Agreements--Directors of Leapnet Following the Closing........ 51
Employee Benefit Plans................................................... 51
Conditions............................................................... 52
Additional Conditions to the Obligations of Leapnet...................... 52
Additional Conditions to the Obligations of SPR.......................... 52
Termination.............................................................. 53
Expenses................................................................. 54
iv
Amendment................................................................. 54
EMPLOYEE INCENTIVE COMPENSATION PLAN........................................ 55
Vote Required............................................................. 55
Recommendation of the Board............................................... 55
DESCRIPTION OF LEAPNET CAPITAL STOCK........................................ 56
Leapnet's Transfer Agent and Registrar.................................... 56
General................................................................... 56
Common Stock.............................................................. 56
Preferred Stock........................................................... 56
COMPARISON OF RIGHTS OF STOCKHOLDERS........................................ 57
Capitalization............................................................ 57
Voting Rights............................................................. 57
Number, Election, Vacancy and Removal of Directors........................ 57
Amendments To Certificates Of Incorporation............................... 58
Amendments to Bylaws...................................................... 58
Stockholder Action in Lieu of Meeting..................................... 58
Notice of Stockholder Actions............................................. 58
Special Stockholder Meetings.............................................. 59
Limitation of Personal Liability of Directors............................. 59
Dividends................................................................. 60
Conversion................................................................ 60
Delaware Takeover Statute................................................. 60
BUSINESS OF LEAPNET......................................................... 61
Overview.................................................................. 61
Industry Background....................................................... 61
The Leapnet Solution...................................................... 62
Quantum Leap Communications, Inc.......................................... 63
Eagle Technology Partners, Inc............................................ 64
YAR Communications, Inc................................................... 65
The Leap Partnership, Inc................................................. 65
Leapnet's Strategy........................................................ 66
Competition............................................................... 67
Intellectual Property Rights.............................................. 67
Employees................................................................. 67
Legal Proceedings......................................................... 67
LEAPNET SELECTED HISTORICAL CONSOLIDATED FINANCIAL INFORMATION.............. 69
LEAPNET--MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION........ 70
QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.................. 79
MANAGEMENT OF LEAPNET....................................................... 80
Directors and Executive Officers.......................................... 80
Board of Directors........................................................ 81
Compensation of Directors................................................. 82
Employment and Non-Competition Agreements................................. 82
Executive Compensation.................................................... 82
Stock Option Grants in Last Fiscal Year................................... 83
Option Exercises in the Last Fiscal Year and Year-End Option Values....... 83
Leapnet's Employee Incentive Compensation Plan............................ 83
Security Ownership of Management and Certain Beneficial Owners............ 90
PRINCIPAL STOCKHOLDERS OF LEAPNET........................................... 90
CERTAIN TRANSACTIONS OF LEAPNET............................................. 91
BUSINESS OF SPR............................................................. 92
Overview.................................................................. 92
v
Industry Background.................................................... 92
Business and Growth Strategy........................................... 93
Service Offerings...................................................... 93
Recruiting and Training................................................ 94
Marketing and Sales.................................................... 94
Client Base............................................................ 94
Competition............................................................ 94
Intellectual Property Rights........................................... 95
Employees.............................................................. 95
Property............................................................... 95
Legal Proceedings...................................................... 95
SPR SELECTED HISTORICAL FINANCIAL INFORMATION............................ 96
SPR--MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS................................................... 97
QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK............... 101
MANAGEMENT OF SPR........................................................ 101
Executive Compensation................................................. 102
Option Grants in Last Fiscal Year...................................... 102
Option Exercises in Last Fiscal Year and Year-End Option Values........ 103
Employment Agreements.................................................. 103
Stock Plans............................................................ 103
CERTAIN TRANSACTIONS OF SPR.............................................. 104
PRINCIPAL STOCKHOLDERS OF SPR............................................ 105
UNAUDITED PRO FORMA FINANCIAL INFORMATION................................ 107
SHAREHOLDER PROPOSALS.................................................... 111
EXPERTS.................................................................. 111
LEGAL MATTERS............................................................ 111
APPENDICES TO THE JOINT PROXY STATEMENT/PROSPECTUS
APPENDIX A--Agreement and Plan of Merger................................. A-1
APPENDIX B--Opinion of Legg Mason Wood Walker, Incorporated.............. B-1
APPENDIX C--Opinion of SG Cowen Securities Corporation................... C-1
APPENDIX D1--Form of Leapnet Stockholder Agreement....................... D-1
APPENDIX D2--Form of Leapnet Stockholder Agreement....................... D-2
APPENDIX E--Form of SPR Stockholder Agreement............................ E-1
APPENDIX F1--Employee Incentive Compensation Plan........................ F-1-1
APPENDIX F2--Form of Amendment to Employee Incentive Compensation Plan... F-2-1
vi
QUESTIONS & ANSWERS ABOUT THE MERGER
Q: Why are the companies proposing to merge?
A: Leapnet and SPR are proposing to merge because we believe the resulting
combination will create a stronger, more competitive company capable of
achieving greater financial strength, operational efficiencies, earning power
and growth potential than either company would have on its own.
We believe that the combined company will be a premier end-to-end, customer-
focused, e-solutions provider helping clients offer consumers and business
partners direct access to the power of large existing systems from desktop
computers. We believe that the combined company will have a broad and deep
range of expertise and experience, which together with the combined management
talent and business systems and processes, will establish the company as a
leading partner for clients seeking to participate in and profit from the new
e-business environment created by the emergence of e-commerce.
Q: How will these two companies merge?
A: Leapnet and SPR will combine under a merger agreement providing that a
wholly owned subsidiary of Leapnet will merge with and into SPR, with SPR
surviving the merger as a wholly owned subsidiary of Leapnet.
Q: What will each SPR stockholder receive in the merger?
A: If the merger is completed, SPR stockholders will receive 1.085 shares of
Leapnet common stock for each share of SPR common stock that they own. Leapnet
will not issue fractional shares of its common stock. Instead, each SPR
stockholder will receive cash, without interest, for each fractional share held
by such SPR stockholder based on the closing price of Leapnet common stock on
The Nasdaq National Market on the trading day immediately prior to the day on
which the merger is completed.
On January 27, 2000, the last full trading day before the public
announcement of the proposed merger, the last reported sale price of Leapnet
common stock on The Nasdaq National Market was $6.625 per share. On January 27,
2000, the last full trading day before the public announcement of the proposed
merger, the last reported sale price of SPR common stock on The Nasdaq National
Market was $5.625 per share. On March 23, 2000, the most recent practicable
date prior to the printing of this joint proxy statement/prospectus, the last
reported sale price of Leapnet common stock on The Nasdaq National Market was
$6.125 per share. On March 23, 2000, the most recent practicable date prior to
the printing of this joint proxy statement/prospectus, the last reported sale
price of SPR common stock on The Nasdaq National Market was $6.000 per share.
Q: What are the federal income tax consequences of the merger?
A: The merger is intended to qualify as a tax-free reorganization under the
Internal Revenue Code. Accordingly, no gain or loss will generally be
recognized by Leapnet or SPR as a result of the merger. Additionally no gain or
loss will be recognized by SPR stockholders to the extent they receive shares
of Leapnet common stock in the merger. In general, however, SPR stockholders
will recognize taxable gain to the extent they receive cash in the merger. SPR
stockholders should consult their tax advisors for a full understanding of the
tax consequences of the merger.
Q: Who must approve the merger?
A: In addition to the approvals by the Leapnet board of directors and the
SPR board of directors, each of which has already been obtained, the merger
must be approved by the SPR stockholders and the issuance of Leapnet common
stock in the merger must be approved by the Leapnet stockholders.
Q: What stockholder vote is required to approve the merger?
A: The affirmative vote of the holders of at least a majority of the
outstanding shares of Leapnet common stock and SPR common stock is required to
approve the merger agreement and the merger.
vii
Q: Do the Leapnet board of directors and the SPR board of directors
recommend approval of the merger agreement and the merger?
A: Yes. After careful consideration, the Leapnet board of directors and the
SPR board of directors recommend that their respective stockholders vote in
favor of the merger. For a more complete description of the recommendation of
both the Leapnet board of directors and the SPR board of directors, see the
section entitled "The Merger--Reasons for the Merger; Recommendations of the
Boards" on page 27.
Q: How do Leapnet stockholders vote?
A: Leapnet stockholders may indicate how they want to vote on their proxy
card and then sign and mail their proxy card in the enclosed return envelope as
soon as possible so that their shares may be represented at the Leapnet special
meeting. Leapnet stockholders may also attend the special meeting in person
instead of submitting a proxy.
If Leapnet stockholders fail either to return their proxy card or to vote in
person at the special meeting, or if they mark their proxy "abstain," the
effect will be a vote against the proposals. If they sign and send in their
proxy without indicating how they want to vote, their proxy will be counted as
a vote for the proposals unless their shares are held in a brokerage account.
Q: How do SPR stockholders vote?
A: SPR stockholders may indicate how they want to vote on their proxy card
and then sign and mail their proxy card in the enclosed return envelope as soon
as possible so that their shares may be represented at the SPR special meeting.
SPR stockholders may also attend the special meeting in person instead of
submitting a proxy.
If SPR stockholders fail either to return their proxy card or to vote in
person at the special meeting, or if they mark their proxy "abstain," the
effect will be a vote against the merger agreement and the merger. If they sign
and send in their proxy without indicating how they want to vote, their proxy
will be counted as a vote for the merger agreement and the merger unless their
shares are held in a brokerage account.
Q: What do I need to do now?
A: After carefully reading and considering the information contained in this
joint proxy statement/prospectus, please complete and sign your proxy and
return it in the enclosed return envelope as soon as possible, so that your
shares may be represented at your special meeting of stockholders. If you sign
and send in your proxy and do not indicate how you want to vote, we will count
your proxy as a vote in favor of the proposals presented at the meeting.
Q: If my shares are held in "street name" by my broker, will my broker vote
my shares for me?
A: Your broker will vote your shares only if you provide instructions on how
to vote. You should follow the directions provided by your broker regarding how
to instruct your broker to vote your shares. If you do not instruct your
broker, your shares will not be voted.
Q: Can I change my vote after I have mailed my signed proxy?
A: Yes. You can change your vote at any time before your proxy is voted at
the special meeting. If you hold your shares in your own name, you can do this
in one of three ways. First, you can send a written notice stating that you
would like to revoke your proxy. Second, you can complete and submit a new
proxy. If you choose either of these two methods, you must submit your notice
of revocation or your new proxy to the Secretary of your company at the address
set forth in the answer to the last question below. Third, you can
viii
attend your special meeting and vote in person. If you hold your shares in
"street name," you should follow the directions provided by your broker
regarding how to change your vote.
Q: Should SPR stockholders send in their stock certificates now?
A: No. After the merger is completed, SPR stockholders will receive written
instructions for exchanging SPR stock certificates. Please do not send in your
stock certificates with your proxy.
Q: When and where is the Leapnet special meeting?
A: The special meeting of Leapnet stockholders will be held at 10:00 a.m.,
Central Standard Time, on May 1, 2000 at 420 West Huron Street, Chicago,
Illinois 60610.
Q: When and where is the SPR special meeting?
A: The special meeting of SPR stockholders will be held at 10:00 a.m.,
Central Standard Time, on May 1, 2000 at Hyatt Regency Oak Brook, 1909 Spring
Road, Oak Brook, Illinois 60521.
Q: Are there any risks associated with the merger?
A: The merger does involve risks. For a discussion of risk factors that
should be considered in evaluating the merger, see "Risk Factors" on page 13.
Q: When do you expect the merger to be completed?
A: We expect to complete the merger in May of 2000.
Q: Who can help answer my questions?
A: If you have any questions about the merger or if you need additional
copies of this joint proxy statement/prospectus or the enclosed proxy, you
should contact:
Leapnet Stockholder Contact:
Attention: Beth Pastor
420 West Huron Street
Chicago, Illinois 60610
Telephone: (312) 528-2400
SPR Stockholder Contact:
Attention: Michelle Banks
2015 Spring Road
Suite 750
Oak Brook, Illinois 60523-1874
Telephone: (630) 575-6200
ix
SUMMARY
This summary highlights selected information from this joint proxy
statement/prospectus and may not contain all of the information that is
important to you. To understand the merger fully and for a more complete
description of the legal terms of the merger, you should carefully read this
entire document, including the appendices and other documents to which we have
referred you. See "Where You Can Find More Information" on the page immediately
preceding the Table of Contents.
The Companies
Leapnet, Inc.
420 West Huron Street
Chicago, Illinois 60610
Telephone: (312) 528-2400
Leapnet, Inc., develops creative solutions for the wired world by utilizing
its expertise in communication services to provide Internet consulting,
marketing and development, globalization services, and traditional advertising.
Based on its founding principles of creative and technological excellence,
Leapnet works with market-leading companies to develop compelling brand
strategies and creates integrated campaigns comprised of online and offline
communications elements. Through this integrated approach, Leapnet helps its
clients develop and improve one-to-one relationships with their customers,
extend their brand into the mass market, increase sales and market share, and
integrate their existing systems with an e-business strategy.
Leapnet's central mission is to be a leading creative and technology
services company offering Internet development, globalization, advertising, e-
business consulting and systems integration. Leapnet's core strengths include
its integrated services approach, technological sophistication, expertise in
global marketing, creativity and roster of marquee clients. Given the Company's
core strengths, management believes Leapnet is well positioned to take
advantage of the growth in the industry.
Leapnet was incorporated in Delaware in March 1996. Leapnet is headquartered
in Chicago and currently has offices in New York, San Francisco and Southern
California. Leapnet maintains a site on the World Wide Web at www.leapnet.com;
however, the information found on Leapnet's web site is not part of this joint
proxy statement/prospectus.
1
SPR Inc.
2015 Spring Road
Suite 750
Oak Brook, Illinois 60523-1874
(630) 575-6200
SPR is an information technology, or IT, solutions provider specializing in
consulting, electronic business and transformation services for the complex IT
environments inherent in the world's leading organizations. SPR has over 26
years of experience in providing IT services to clients in a variety of
industries, including financial services, healthcare, insurance, manufacturing,
oil and gas, transportation and utilities. SPR focuses its marketing efforts on
Fortune 1000 companies and other large organizations which have complex IT
operations and significant IT budgets. SPR provides IT consulting and project
based services in consulting, development and integration professional
services.
SPR believes that this breadth of service and support fosters long-term
client relationships, promotes cross-selling opportunities and minimizes SPR's
dependence upon any particular service. SPR was incorporated in Delaware in
October 1996. SPR is headquartered in Oak Brook, Illinois and currently has
offices in Milwaukee, Dallas and Tulsa.
SPR maintains a site on the World Wide Web at www.sprinc.com; however, the
information found on SPR's website is not a part of this joint proxy
statement/prospectus.
Reasons For The Merger
The Leapnet board of directors and the SPR board of directors each
considered a number of factors in determining whether to approve the merger and
recommend it to their respective stockholders. These considerations are
described below under "The Merger--Reasons for the Merger; Recommendations of
the Boards."
The Special Meetings
Leapnet
The special meeting of Leapnet stockholders will take place on May 1, 2000.
At that meeting, Leapnet stockholders will be asked to vote on two proposals:
1. to approve the issuance of shares of Leapnet common stock to the
stockholders of SPR in the merger; and
2. to approve an amendment to Leapnet's Employee Incentive Compensation Plan
to increase the number of shares of its common stock authorized for issuance
under the Employee Incentive Compensation Plan by 5,000,000 shares to
10,000,000 shares.
To approve either proposal, at least a majority of the shares issued and
outstanding and entitled to vote at the special meeting must be voted in favor
of such proposal.
As of March 21, 2000, directors and officers of Leapnet and their affiliates
were entitled to vote approximately 35% of the outstanding shares of Leapnet at
the special meeting.
2
SPR
The special meeting of SPR stockholders will take place on May 1, 2000. At
that meeting, SPR stockholders will be asked to vote on the proposal to adopt
the merger agreement.
To approve the proposal, at least a majority of the shares issued and
outstanding and entitled to vote at the special meeting must be voted in favor
of the proposal.
As of March 21, 2000, directors and officers of SPR and their affiliates
were entitled to vote approximately 31% of the outstanding shares of SPR at the
special meeting.
Recommendation To Stockholders
To Leapnet Stockholders:
The Leapnet board of directors believes that the issuance of shares of
common stock to SPR stockholders in the merger and the amendment to Leapnet's
Employee Incentive Compensation Plan are in your best interests and recommends
that you vote for the proposals.
As of January 27, 2000, three Leapnet stockholders have entered into voting
agreements in which they promise to vote shares representing approximately 32%
of Leapnet's common stock in favor of the issuance of shares of common stock to
SPR stockholders in the merger. They have also signed an irrevocable proxy to
that effect and, with the exception of George Gier, have agreed to hold their
shares until the merger closes or the merger agreement is terminated. George
Gier's agreement provides that: (i) he or his spouse may sell 200,000 shares of
Leapnet common stock after April 4, 2000 and another 200,000 shares of Leapnet
common stock after June 30, 2000 and (ii) his stockholder agreement terminates
if the merger is not completed by October 31, 2000.
To SPR Stockholders:
SPR's board of directors has determined that the merger is in the best
interests of the SPR stockholders. Accordingly, SPR's board of directors has
approved and declared advisable the merger agreement, and recommends that SPR
stockholders vote to adopt the merger agreement.
As of January 27, 2000, two SPR stockholders have entered into voting
agreements in which they promise to vote shares representing approximately 30%
of SPR's common stock in favor of the merger. They have also signed an
irrevocable proxy to that effect and have agreed to hold their shares until the
merger closes or the merger agreement is terminated.
The Merger
The merger agreement is attached as Appendix A to this joint proxy
statement/prospectus. We encourage you to read the merger agreement, as it,
rather than this joint proxy statement/prospectus, is the legal document that
governs the merger.
What SPR Stockholders Will Receive (see page 26)
In the merger, SPR stockholders will receive 1.085 shares of Leapnet common
stock for each share of SPR common stock that they own prior to the merger and
SPR will become a subsidiary of Leapnet. SPR stockholders will receive cash in
lieu of any fractional share that they would otherwise receive in the merger.
All outstanding options to purchase SPR common stock will be assumed by
Leapnet and converted into options to purchase Leapnet common stock based on
the exchange ratio of 1.085 shares of Leapnet common stock for each share of
SPR common stock.
3
Ownership of Leapnet Following the Merger
Based on the number of outstanding shares of SPR common stock as of March
23, 2000, we anticipate that SPR stockholders will receive approximately
13,915,433 shares of Leapnet common stock in the merger.
Management of the Combined Company (see page 80)
Following the merger, the board of directors of the combined company will
consist of nine directors: Frederick A. Smith, Chairman and Chief Executive
Officer of Leapnet; four additional directors named by Leapnet; Robert M.
Figliulo, Chairman and Chief Executive Officer of SPR; and three additional
directors named by SPR.
Mr. Smith will be Chairman of the combined company, Mr. Figliulo will be
Vice Chairman and Chief Executive Officer of the combined company, Robert C.
Bramlette, Chief Legal Officer of Leapnet, will be the Chief Legal Officer of
the combined company, and Stephen J. Tober, Chief Operating Officer of SPR,
will be the President and Chief Operating Officer of the combined company.
Interests of Leapnet and SPR Directors and Management in the Merger (see page
45)
A number of directors and officers of Leapnet and SPR have interests in the
merger in addition to their interests as stockholders generally. Certain
directors and officers of Leapnet and SPR will hold positions in the combined
company as described in the previous section.
Upon the completion of the merger, 90,850 unvested stock options with an
exercise price of $5.1067 held collectively by Stephen J. Tober, Chief
Operating Officer of SPR, and Stephen T. Gambill, Chief Financial Officer of
SPR, will become exercisable.
In addition, Leapnet will indemnify present and former directors and
officers of SPR against all claims arising out of actions and omissions
occurring on or prior to the effective time of the merger to the fullest extent
permitted by law, subject to certain limitations. Leapnet has also agreed to
maintain the current policy of directors' and officers' liability insurance
with respect to these matters for the benefit of SPR's directors and officers.
There are limitations on the amount Leapnet is required to spend to maintain
such insurance.
The management employment agreements for Messrs. Robert Figliulo, David
Figliulo and Stephen Tober were amended on January 27, 2000 to preserve their
target bonus program after the merger by substituting Leapnet stock for SPR
stock.
Conditions to the Merger (see page 52)
Leapnet and SPR are not obligated to complete the merger unless a number of
conditions are satisfied or otherwise waived. These conditions include the
following:
. the holders of at least a majority of SPR's outstanding common shares
must vote to adopt the merger agreement;
. the holders of at least a majority of Leapnet's outstanding common shares
must vote for the issuance of shares of Leapnet common stock to the
stockholders of SPR in the merger;
. the registration statement on Form S-4, of which this joint proxy
statement/prospectus forms a part, must become effective under the
Securities Act and must not be the subject of any stop order or
proceedings seeking a stop order;
. no legal restraints or prohibitions may exist or be pending which prevent
the consummation of the merger;
4
. any applicable waiting periods under antitrust laws must expire or be
terminated and any other required government approvals must be obtained;
. the Leapnet common stock to be issued to SPR stockholders in the merger
must be approved for quotation on The Nasdaq National Market;
. the representations and warranties of Leapnet and SPR contained in the
merger agreement must be true and correct except where failure to be true
and correct would not have a material adverse effect on the company
making the representation or warranty;
. both Leapnet and SPR must perform or comply in all material respects with
all of their respective obligations under the merger agreement;
. no material adverse change relating to either Leapnet or SPR shall have
occurred;
. each of Leapnet and SPR must receive an opinion of its tax counsel,
Morrison & Foerster LLP and Winston & Strawn, respectively, stating that,
for United States federal income tax purposes, the merger will qualify as
a reorganization within the meaning of the Internal Revenue Code;
. Leapnet must provide SPR with written evidence that it has at least
$6,000,000 in cash, cash equivalents or marketable securities as of the
effective date; and
. SPR must provide Leapnet with written evidence that it has at least
$40,000,000 in cash, cash equivalents or marketable securities as of the
effective date.
Termination of the Merger Agreement (see page 53)
Leapnet and SPR may jointly agree to terminate the merger agreement at any
time. Either Leapnet or SPR may individually terminate the merger agreement
before its completion under the following circumstances:
. the merger is not completed by August 31, 2000;
. the Leapnet stockholders do not approve the issuance of shares of Leapnet
common stock to the stockholders of SPR in the merger;
. the SPR stockholders do not approve the merger;
. action by a court or governmental authority or other legal action
permanently prohibits the completion of the merger;
. the other party materially breaches or fails to perform any of its
representations, warranties or obligations under the merger agreement and
the breach has not been or cannot be cured within 20 business days;
. the other party's board of directors withdraws or adversely modifies its
recommendation in favor of the merger;
. the other party fails to include in its respective proxy statement the
recommendation of its board of directors in favor of approval of the
merger;
. the other party's board of directors has recommended another acquisition
or similar business transaction proposal;
. the other party's officers or directors have entered into discussions or
negotiations in violation of the no solicitation provisions contained in
the merger agreement;
5
. the other party has entered into a letter of intent, agreement in
principle, acquisition agreement or similar agreement with a third party
relating to another acquisition or similar business transaction proposal;
or
. the other party has consummated another acquisition or similar business
transaction proposal.
Termination Fees (see page 53)
If the merger agreement is terminated under the circumstances described
above in this joint proxy statement/prospectus, Leapnet or SPR, as the case may
be, must pay to the other party a $3,500,000 non-refundable fee in cash or in
shares of its common stock.
Material United States Federal Income Tax Consequences of the Merger (see page
47)
The merger is intended to qualify as a reorganization within the meaning of
the Internal Revenue Code. It is a condition to the merger that each of Leapnet
and SPR receive an opinion from their respective tax counsel stating that the
merger will qualify for U.S. federal income tax purposes as a reorganization
within the meaning of the Internal Revenue Code. Assuming that the merger
qualifies as a reorganization within the meaning of the Internal Revenue Code,
holders of SPR common stock will generally not recognize gain or loss for U.S.
federal income tax purposes as a result of the exchange of their SPR common
stock for Leapnet common stock in the merger, except for cash received in lieu
of fractional shares of Leapnet common stock.
Tax matters are very complicated and the tax consequences of the merger to
you will depend on the facts of your own situation. You should consult your own
tax advisors for a full understanding of the tax consequences of the merger to
you.
Accounting Treatment (see page 46)
The merger will be accounted for under the purchase method of accounting in
accordance with generally accepted accounting principles. This means that, for
accounting and financial reporting purposes, the assets and liabilities of SPR
will be recorded at their fair value, and any excess of Leapnet's purchase
price over the fair value of SPR's tangible net assets will be recorded as
intangible assets, including goodwill.
Fairness Opinions of Financial Advisors (see pages 31 and 36)
In deciding to approve the merger agreement the Leapnet board of directors
considered a number of factors, including the opinion of its financial advisor,
Legg Mason Wood Walker, Incorporated. On January 27, 2000, Legg Mason Wood
Walker, Incorporated delivered to the Leapnet board of directors its opinion
that the exchange ratio was fair to Leapnet's stockholders from a financial
point of view as of January 27, 2000. The full text of this opinion is attached
as Appendix B to this joint proxy statement/prospectus. The opinion of Legg
Mason Wood Walker, Incorporated does not constitute a recommendation as to how
any Leapnet stockholder should vote on the proposals related to the merger.
In deciding to approve the merger agreement, the SPR board of directors
considered a number of factors, including the opinion of its financial advisor,
SG Cowen Securities Corporation. On January 27, 2000, SG Cowen Securities
Corporation delivered to the SPR board of directors its opinion that based upon
and subject to the various considerations in its letter, the exchange ratio,
pursuant to the merger agreement, was fair to SPR's stockholders from a
financial point of view as of January 27, 2000. This opinion is attached as
Appendix C to this joint proxy statement/prospectus. The opinion of SG Cowen
Securities Corporation does not constitute a recommendation as to how any SPR
stockholder should vote on the proposals related to the merger.
We urge stockholders to read these opinions carefully and in their entirety.
6
The Stockholder Agreements
As of January 27, 2000, three Leapnet stockholders have entered into
stockholder agreements in which they promise to vote shares representing
approximately 32% of Leapnet's common stock in favor of the proposals related
to the merger so long as the merger agreement has not been terminated. They
have also signed an irrevocable proxy to that effect and, with the exception of
George Gier, have agreed to hold their shares until the merger closes or the
merger agreement is terminated. George Gier's agreement provides that: (i) he
or his spouse may sell 200,000 shares of Leapnet common stock after April 4,
2000 and another 200,000 shares of Leapnet common stock after June 30, 2000 and
(ii) his stockholder agreement terminates if the merger is not completed by
October 31, 2000.
As of January 27, 2000, two SPR stockholders have entered into stockholder
agreements in which they promise to vote shares representing approximately 30%
of SPR's common stock in favor of the merger. They have also signed an
irrevocable proxy to that effect and have agreed to hold their shares until the
merger closes or the merger agreement is terminated.
The forms of the stockholder agreements signed by Leapnet and SPR
stockholders are attached as Appendices D-1, D-2 and E, respectively.
Appraisal Rights (see page 47)
Neither Leapnet nor SPR stockholders are entitled to exercise dissenters' or
appraisal rights with respect to the merger or to demand payment for their
shares under Delaware General Corporation Law.
Conduct of Business
Leapnet and SPR are required to conduct their business in the ordinary
course consistent with past practice until the effective time of the merger. In
addition, subject to certain exceptions, they may not engage in material
transactions during this period.
Registration Statement on Form S-8
Promptly following the merger, Leapnet will file a Registration Statement on
Form S-8 under the Securities Act covering the shares of Leapnet common stock
issuable with respect to options to purchase SPR common stock assumed by
Leapnet.
Expenses
Each of Leapnet and SPR will bear all expenses it incurs in connection with
the merger, except that Leapnet and SPR will share equally the costs of filing
with the Securities and Exchange Commission the registration statement of which
this joint proxy statement/prospectus is a part and printing and mailing this
joint proxy statement/prospectus.
7
Summary Condensed Consolidated Historical and Proforma Combined Financial
Information
Leapnet and SPR are providing you the following information to aid you in
your analysis of the financial aspects of the merger. The following summary
historical financial information of Leapnet and SPR has been derived from their
audited historical financial statements. The condensed consolidated financial
statements for Leapnet for the five fiscal years ended January 31, 2000, 1999,
and 1998 for SPR for the three years ended December 31, 1999, 1998 and 1997 are
included elsewhere in this joint proxy statement/prospectus.
This information should be read in conjunction with the financial statements
and notes thereto and with "Leapnet--Management's Discussion and Analysis of
Financial Condition and Results of Operations" and "SPR--Management's
Discussion and Analysis of Financial Condition and Results of Operations."
LEAPNET SUMMARY HISTORICAL CONSOLIDATED FINANCIAL INFORMATION
(in thousands, except per share data)
Years Ended January 31,
---------------------------------------------
2000 1999(2) 1998(2) 1997(1) 1996
------- --------- ------- ------- -------
Statement of Operations Data:
Revenues....................... $36,309 $ 35,920 $30,660 $16,088 $ 8,210
Operating income (loss)........ $ (769) $ (14,124) $(9,390) $ 1,386 $ 1,356
Net income (loss).............. $ (311) $ (18,323) $(5,611) $ 1,306 $ 700
Net income (loss) per share:
Basic........................ $ (0.02) $ (1.34) $ (0.41) $ 0.12 $ 0.07
Diluted...................... $ (0.02) $ (1.34) $ (0.41) $ 0.12 $ 0.07
Weighted average shares
Basic........................ 14,256 13,688 13,615 10,933 9,600
Diluted...................... 14,256 13,688 13,615 11,126 10,310
Balance Sheet Data:
Cash and cash equivalents(1)... $15,652 $ 14,076 $ 7,214 $32,313 $ 48
Working capital................ $18,289 $ 11,573 $ 820 $34,630 $ (973)
Total assets................... $30,336 $ 23,733 $46,054 $39,860 $ 2,053
Long-term obligations.......... $ 8,715 $ 706 $ 421 $ 366 $ 448
Total stockholders' equity
(deficit)..................... $15,839 $ 13,489 $30,841 $36,583 $ (440)
Other data: (unaudited):
Book value per share........... $ 1.11 $ 0.99 $ 2.27 $ 3.29 $ (0.04)
- --------
(1) In September 1996, Leapnet (formerly, The Leap Group, Inc.) completed its
initial public offering (the "Leapnet IPO") and issued 4,000,000 shares of
its common stock at $10.00 per share. The Company received the proceeds of
approximately $35.7 million in cash, net of underwriting commissions and
other offering costs.
(2) The results of operations have been included for each subsidiary since its
inception or acquisition date. The results of YAR Communications, Inc., a
wholly owned subsidiary of Leapnet, have been included since April 1, 1997.
The results of One World Communications, Inc. (now known as Leap Global
Communications, Inc.), have been included from November 1, 1997, through
September 30, 1999, the effective date of the sale of assets to Young &
Rubicam, Inc.
8
SPR SUMMARY HISTORICAL CONSOLIDATED FINANCIAL INFORMATION
(in thousands, except per share data)
Years Ended December 31,
-------------------------------------------
1999 1998 1997 1996 1995
------- ------- ------- -------- --------
Statement of Operations Data:
Revenues........................ $58,104 $85,344 $53,422 $ 32,511 $ 22,908
Cost of services................ 43,242 50,508 32,377 23,287 15,525
------- ------- ------- -------- --------
Gross Profit.................. 14,862 34,836 21,045 9,224 7,383
Costs and expenses
Selling....................... 4,966 5,275 4,855 3,046 2,141
Recruiting.................... 1,205 1,827 1,608 1,323 777
Stock-based compensation (1).. -- -- -- 12,231 27,987
General and administrative
expenses..................... 11,893 12,320 8,438 3,742 1,642
------- ------- ------- -------- --------
Total costs and expenses.... 18,064 19,422 14,901 20,342 32,547
------- ------- ------- -------- --------
Operating income (loss) (1)..... (3,202) 15,414 6,144 (11,118) (25,164)
Other income (expense).......... 2,645 2,083 47 (71) (109)
------- ------- ------- -------- --------
Income (loss) before income
taxes (1)...................... (557) 17,497 6,191 (11,189) (25,273)
Provision (benefit) for income
taxes.......................... (911) 6,999 1,553 9 21
------- ------- ------- -------- --------
Net income (loss), as reported
(1)............................ $ 354 $10,498 $ 4,638 $(11,198) $(25,294)
======= ======= ======= ======== ========
Historical diluted net income
(loss) per share (1)........... $ 0.03 $ 0.77 $ 0.43 $ (1.15) $ (2.61)
======= ======= ======= ======== ========
Pro forma diluted net income
(loss) per common share--
includes adjustment to
recognize C corporation
provision for income taxes (2). $ -- $ -- $ 0.30 $ (1.19) $ (2.72)
======= ======= ======= ======== ========
Balance Sheet Data (at end of
period):
Cash and short-term investments. $50,549 $51,113 $21,177 $ 356 $ 1,109
Working capital................. 54,915 58,650 23,072 1,194 2,370
Total assets.................... 64,160 71,438 31,943 7,131 5,584
Long-term debt, less current
portion........................ -- -- -- 206 704
Total stockholders' equity...... 58,762 62,808 25,530 2,507 2,275
Other data (unaudited):
Book value per share............ $ 4.35 $ 4.60 $ 2.39 $ 0.25 $ 0.23
- --------
(1) In 1994, Systems & Programming Resources, Inc. transferred certain assets
and liabilities to SPR Chicago and SPR Wisconsin. Inasmuch as such 1994
transactions were among family members within a control group, such
transactions have been recorded in SPR's financial statements as if the
stockholders of SPR Chicago and SPR Wisconsin received non-cash, stock-
based compensation during 1994, 1995 and 1996 in an amount equal to the
increase in the estimated value of such companies since 1994. This expense
is non-recurring subsequent to October 31, 1996. Such compensation expense
is recorded as stock-based compensation with the corresponding credit
included in additional paid-in capital. Upon conversion of SPR to a C
corporation upon closing of its initial public offering (the "SPR IPO"),
the retained deficit of SPR, which includes the aggregate stock-based
compensation expense, was reclassified and netted against additional paid-
in capital.
(2) Prior to the SPR IPO, SPR was an S corporation and was not subject to
Federal and certain state corporate income taxes. The Statement of
Operations Data reflects a pro forma provision for income taxes as if SPR
had been subject to Federal and state corporate income taxes. The pro forma
provision for income taxes is computed by multiplying the effective tax
rate times the income (loss) before income taxes adjusted to eliminate the
stock-based compensation expense and subtracting income taxes previously
recorded.
9
UNAUDITED PROFORMA COMBINED FINANCIAL INFORMATION
The following financial information is derived from the unaudited pro forma
financial statements appearing elsewhere in this joint proxy
statement/prospectus, which give effect to the merger as a purchase
transaction. For purposes of the pro forma operating data, SPR's consolidated
financial statements for the year ended December 31, 1999, have been combined
with Leapnet's consolidated financial statements for the fiscal year ended
January 31, 2000. SPR's most recent financial statements end within 90 days of
the Leapnet fiscal year end. The pro forma information is presented for
illustrative purposes only and is not necessarily indicative of the operating
results or financial position that would have occurred if the merger had been
consummated at the beginning of the periods indicated, nor is it necessarily
indicative of future operating results or financial position. You should read
it in conjunction with those unaudited pro forma statements and the separate
audited consolidated financial statements of Leapnet and SPR included or
incorporated by reference in this joint proxy statement/prospectus. See
"Unaudited Pro Forma Financial Information" on page 109, and "Where You Can
Find More Information" on the page immediately preceding the Table of Contents.
LEAPNET AND SPR SUMMARY
UNAUDITED PRO FORMA FINANCIAL INFORMATION
(in thousands, except per share data)
Year Ended
January 31,
2000
-----------
Pro Forma Statement of Operations Data:
Revenue........................................................... $ 94,413
Net income (loss)................................................. $(14,565)
Net income (loss) per share....................................... $ (0.51)
Pro Forma Balance Sheet Data:
Total assets...................................................... $126,196
Working capital................................................... $ 70,985
Long-term debt.................................................... $ 8,715
Stockholder's equity.............................................. $104,080
Book value per share.............................................. $ 3.62
10
Unaudited Comparative Per Share Information
The following table summarizes per share information for Leapnet and SPR on
a historical, pro forma combined and equivalent basis. The pro forma
information gives effect to the merger accounted for on a purchase transaction
basis. The information listed as "per equivalent SPR share" was obtained by
multiplying the pro forma combined amounts by the exchange ratio of 1.085 to 1.
You should read this information together with the historical financial
statements included elsewhere in this joint proxy statement/prospectus or
incorporated in it by reference. You should also read this information in
connection with the pro forma condensed consolidated financial information set
forth starting on page 109. You should not rely on the pro forma condensed
consolidated financial information to indicate the results that would have been
achieved had the companies combined at a prior date or the future results that
the combined company will experience after the merger.
As of and for the
Year-Ended
January 31, 2000
-----------------
Earnings (loss) per share--basic
Historical Leapnet.......................................... $(0.02)
Historical SPR.............................................. $ 0.03
Pro forma combined.......................................... $(0.51)
Earnings (loss) per share--diluted
Historical Leapnet.......................................... $(0.02)
Historical SPR.............................................. $ 0.03
Pro forma combined.......................................... $(0.51)
Book value per share (diluted)
Historical Leapnet.......................................... $ 1.11
Historical SPR.............................................. $ 4.35
Pro forma combined.......................................... $ 3.62
11
Comparative Market Price Information
The following table presents historical trading information for Leapnet
common stock and SPR common stock showing the high and low sales prices
reported on The Nasdaq National Market for each period.
Leapnet
Common SPR
Stock Common Stock
--------- -------------
High Low High Low
---- ---- ------ ------
Year Ended December 31, 1998:
First Quarter......................................... 1.88 1.00 23.50 10.75
Second Quarter........................................ 7.88 1.38 22.50 17.17
Third Quarter......................................... 7.62 2.12 25.00 14.50
Fourth Quarter........................................ 5.00 2.00 18.75 12.50
Year Ended December 31, 1999:
First Quarter......................................... 4.12 1.94 22.38 4.00
Second Quarter........................................ 3.25 2.25 6.72 3.75
Third Quarter......................................... 4.25 2.00 6.00 3.56
Fourth Quarter........................................ 9.75 2.16 5.88 3.56
Year Ended December 31, 2000:
First Quarter through January 27, 2000................ 7.50 4.88 5.81 5.28
The following table shows the last reported sales price of the common stock
of Leapnet and common stock of SPR on January 27, 2000, the last full trading
day before the public announcement of the merger agreement, each as reported on
The Nasdaq National Market:
Pro Forma
Equivalent
Value of
Leapnet SPR SPR
------- ----- ----------
Last reported sale price on January 27, 2000........... $6.62 $5.62 $6.10
The equivalent value per share is equal to the closing price of a share of
SPR common stock on that date multiplied by the exchange ratio of 1.085, which
is the number of shares of Leapnet stock to be issued in the merger in exchange
for each share of SPR stock.
Leapnet common stock is traded on The Nasdaq National Market under the
symbol "LEAP." SPR common stock is traded on The Nasdaq National Market under
the symbol "SPRI."
On March 23, 2000, the most recent practicable date prior to the printing of
this joint proxy statement/prospectus, the last reported sale price of Leapnet
common stock was $6.125 per share, and the last reported sale price of SPR
common stock was $6.000 per share, each as reported on The Nasdaq National
Market.
Since they began public trading, neither Leapnet nor SPR has ever paid
dividends to its stockholders and Leapnet does not expect to pay dividends in
the foreseeable future.
12
FORWARD-LOOKING STATEMENTS
This joint proxy statement/prospectus contains forward-looking statements
within the safe harbor provisions of the Private Securities Litigation Reform
Act of 1995. Forward-looking statements include assumptions as to how Leapnet
may perform after the merger. When we use words like "believes," "expects,"
"anticipates" or similar expressions, we are also making forward-looking
statements. Forward-looking statements are not guarantees of performance. It is
uncertain whether any of the events anticipated by the forward-looking
statements will occur, or if any of them do, what impact they will have on the
results of operations and financial condition of Leapnet or the price of its
stock.
RISK FACTORS
In addition to the other information included in this joint proxy
statement/prospectus, you should carefully consider the following risk factors
in determining how to vote. These factors include, without limitation, material
changes in economic conditions in the markets served by Leapnet's clients;
changes in government regulation and legal uncertainties; competition in
Leapnet's industry; uncertainties relating to the developing market for new
media; changing technologies and Year 2000 compliance issues; any inability to
meet expectations in the performance of services which could lead to claims or
liabilities; seasonality; costs and uncertainties relating to establishing new
offices and bringing new or existing offices to profitability; any inability of
Leapnet to raise additional financing in the future on favorable terms, or at
all; potential adverse effects of litigation; Leapnet's dependence on key
personnel and vendors; Leapnet's dependence on key clients and projects; and
possible continued volatility and wide fluctuations in the price of Leapnet's
stock. While Leapnet reduced certain expenses in fiscal 2000, as Leapnet works
to grow and expand the business, management will need to increase expenses to
expand operations. Management will continue to assess its overall cost
structure in relation to existing and anticipated revenues. Due to the nature
of client contracts, which are difficult to forecast precisely or for any
extended period of time, if Leapnet experiences declines in client demand, or
if significant expenses precede or are not immediately followed by increased
revenues, the results of operations and financial condition may suffer. These
matters should be considered in conjunction with the other information included
or incorporated by reference in this joint proxy statement/prospectus.
Risks Related to the Merger
Leapnet may not be able to successfully integrate SPR and achieve the benefits
expected to result from the merger.
The merger will present challenges to management, including the integration
of the operations, technologies and personnel of Leapnet and SPR, and special
risks, including possible unanticipated liabilities, unanticipated costs,
diversion of management attention and loss of personnel.
Leapnet cannot assure you that it will successfully integrate or profitably
manage SPR's businesses. In addition, Leapnet cannot assure you that, following
the transaction, its businesses will achieve sales levels, profitability,
efficiencies or synergies that justify the merger or that the merger will
result in increased earnings for the combined company in any future period.
Also, the combined company may experience slower rates of growth as compared to
historical rates of growth of Leapnet and SPR independently.
Because the exchange ratio in the merger is fixed, stockholders of Leapnet and
SPR are exposed to the risk that the market price of the other company's stock
will drop.
Under the merger agreement, each share of SPR common stock will convert into
the right to receive 1.085 shares of Leapnet common stock. This exchange ratio
is a fixed number and will not be adjusted if the price of Leapnet common stock
or SPR common stock increases or decreases. The prices of Leapnet common stock
and
13
SPR common stock at the closing of the merger may vary from their prices on the
date of this joint proxy statement/prospectus and on the date of each special
meeting.
. These prices may vary because of changes in the business, operations or
prospects of Leapnet or SPR, market assessments of the likelihood that
the merger will be completed, the timing of the completion of the merger,
the prospects of post-merger operations, regulatory considerations,
general market and economic conditions and other factors.
. Because the date that the merger is completed may be later than the date
of the special meeting, the prices of Leapnet common stock and SPR common
stock on the date of the special meetings may not be indicative of their
respective prices on the date the merger is completed.
. We urge both Leapnet and SPR stockholders to obtain current market
quotations for Leapnet common stock and SPR common stock, and to be aware
that the relative prices of Leapnet and SPR common stock may change
dramatically after the special meeting.
The price of Leapnet common stock may be affected by factors different from
those affecting the price of SPR common stock.
When the merger is completed, holders of SPR common stock will become
holders of Leapnet common stock. Leapnet's business differs from that of SPR,
and Leapnet's results of operations, as well as the price of Leapnet common
stock, may be affected by factors different from those affecting SPR's results
of operations and the price of SPR common stock. Different factors include the
following:
. gain or loss of a significant client;
. gain or loss of a strategic partner;
. failure to achieve and sustain Internet revenue growth;
. a large retail shareholder base may cause price volatility; and
. unsubstantiated information on Internet message boards.
Failure to complete the merger could negatively impact the market price of
Leapnet's common stock and SPR's common stock.
If the merger is not completed for any reason, both Leapnet and SPR may be
subject to a number of material risks, including:
. the market price of either or both companies' stock may decline to the
extent that the current market price reflects a market assumption that
the merger will be completed;
. either party may be required to pay the other a termination fee of
$3,500,000; and
. costs related to the merger, such as legal and accounting fees, must be
paid even if the merger is not completed.
Neither Leapnet nor SPR may be able to enter into a merger or business
combination with another party at a favorable price because of restrictions in
the merger agreement.
While the merger agreement is in effect, subject to specified exceptions,
both Leapnet and SPR are prohibited from soliciting, initiating or encouraging
any inquiries or proposals that may lead to a proposal or offer for a merger,
consolidation, business combination, sale of substantial assets, tender offer,
sale of shares of capital stock or other similar transaction with any other
person. As a result of this prohibition, Leapnet and SPR may be unable to enter
into an alternative transaction at a favorable price.
14
Risks Related to the Combined Business of Leapnet and SPR
The loss of our professionals would make it difficult to complete existing
projects and bid for new projects, which could adversely affect our businesses
and results of operations.
Both of our businesses are labor intensive, and our success depends on
identifying, hiring, training and retaining professionals. If a significant
number of our current employees or any of our senior managers or key project
managers leave, we may be unable to complete or retain existing projects or bid
for new projects of similar scope and revenue. We have entered into employment
agreements and non-competition agreements with some of our senior managers, but
these key personnel may still leave us or compete with us. In addition, the
non-competition provisions of these agreements might not be enforced by a
court. Even if we retain our current employees, our management must continually
recruit talented professionals in order for our business to grow. These
professionals must have skills in business strategy, marketing, branding,
technology and creative design. There is currently a shortage of qualified
personnel in the markets in which we do business, and this shortage will likely
continue. We compete intensely with our competitors for qualified personnel. If
we cannot attract, motivate and retain qualified professionals, our business
and results of operations could suffer material harm.
Prior to January 31, 2000, George Gier and Joseph Sciarrotta submitted their
resignations to Leapnet and have since terminated their employment
relationships with Leapnet. Mr. Gier served as Executive Vice President and
Chief Marketing Officer of Leapnet, as well as on Leapnet's Board of Directors.
He continues in his role as a Director of Leapnet. Mr. Sciarrotta served as
Executive Vice President and Chief Creative Officer of Leapnet.
Our revenues are difficult to predict because they are generated on a project-
by-project basis.
We will derive our revenues primarily from fees for services generated on a
project-by-project basis. These projects vary in size and scope. Therefore, a
client that accounts for a significant portion of our respective revenues in a
given period may not generate a similar amount of revenues, if any, in
subsequent periods. In addition, after we complete a project, we can have no
assurance that the client will retain us in the future.
We have clients who may terminate their agreements with us, whether time and
materials or fixed-fee based, on 60 or fewer days' prior written notice. We
cannot give any assurances that a client will not terminate a project before
its completion. If our clients terminate existing agreements, our business,
financial condition and results of operations could suffer material harm.
On November 23, 1999, Leapnet was informed by Hardee's Food Systems, Inc., a
client accounting for 32% of consolidated revenue for Leapnet for the fiscal
year ended January 31, 2000, that it was terminating its National Advertising
Agency Agreement effective February 22, 2000.
Our engagements could be unprofitable if we do not perform fixed-price, fixed-
time contracts efficiently.
Both Leapnet and SPR have undertaken projects on a fixed-price, fixed-time
basis, and have derived a portion of its revenues from fixed price, fixed-time
contracts. When working on that basis, we agree with the customer on a
statement of work. We warrant that we will deliver the specified work at a
specified time at the fixed price. In making proposals for fixed-price, fixed-
time contracts, we estimate the time and money required to complete the
project. These estimates reflect judgments about the complexity of the
engagement and the efficiency of our methods, technologies and marketing when
applied to the project. Unexpected delays and costs may arise, often outside of
our control. To remedy these delays, we may sometimes need to devote
unanticipated additional resources to complete some of our projects. Devoting
extra resources in that way reduces the profitability of the contracts, and can
even lead to losses. We recognize that we may experience similar situations in
the future. The losses or diminished profitability on fixed-fee, fixed-time
contracts could materially harm our business, financial condition and results
of operations.
15
Our results of operations may vary from quarter to quarter in future periods
and, as a result, we may fail to meet the expectations of our investors and
analysts, which could cause our stock price to fluctuate or decline.
Our revenues and results of operations have fluctuated significantly in the
past and could fluctuate significantly in the future due to a variety of
factors, many of which are outside of our control. These factors include:
. demand for our services;
. our ability to attract and retain clients;
. our ability to attract, motivate, and retain qualified personnel;
. the number, timing, and significance of new services introduced by our
competitors;
. our ability to develop, market, and introduce new and enhanced services
on a timely basis;
. the level of service and price competition;
. changes in operating expenses; and
. changes in the mix of services offered.
A substantial portion of our operating expense is related to personnel
costs, marketing programs, and overhead, which cannot be adjusted quickly and
are therefore relatively fixed in the short term. Our operating expense is
based, in significant part, on our expectations of future revenue. If actual
revenues are below our expectations, our results of operations and financial
condition could be materially and adversely affected.
Due to all of the foregoing factors and the other risks discussed in this
prospectus, you should not rely on period-to-period comparisons of operations
as an indication of future performance. It is possible that in some future
periods our results of operations may be below the expectations of public
market analysts and investors. In this event, the market price of our common
stock is likely to fall.
Claims by the parties with whom we contract could result in losses and damage
our reputation.
Many of our engagements involve the delivery of information technology
services that are critical to our clients' businesses. Any defects or errors in
these services or failure to meet clients' specifications or expectations could
result in:
. delayed or lost revenues due to adverse client reaction;
. requirements to provide additional services to a client at no or a
limited charge;
. refunds of fees for failure to meet obligations;
. negative publicity about us and our services; and
. claims for substantial damages against us.
Any of the foregoing results could adversely affect our business. In
addition, we sometimes implement critical functions for high profile clients or
which have high visibility and widespread usage in the marketplace. If these
functions experience difficulties, whether or not as a result of errors in our
services, our name could be associated with these difficulties, and our
reputation could be damaged, which would harm our business.
Furthermore, we enter into numerous agreements in the course of our business
in addition to our engagements. In the event we have a disagreement relating to
one or more of these agreements, any resulting litigation could involve the
commitment of significant monetary resources and divert the attention of
management from the operation of our business.
16
Our management has broad discretion over the use of our cash and cash
equivalents.
Our management has significant flexibility in utilizing our cash and cash
equivalents. We intend to use a portion of our available cash and cash
equivalents to repay indebtedness, increase our marketing and advertising
efforts, hire additional personnel, increase our office space and improve our
facilities, to finance ongoing operations at the subsidiary level and to expand
into other geographic regions. See "Risk Factors--Our results of operations may
vary from quarter to quarter in future periods and, as a result, we may fail to
meet the expectations of our investors and analysts, which could cause our
stock price to fluctuate or decline".
We generate a large part of our revenues from a small number of clients.
We derive a significant portion of our revenues from a limited number of
large clients. For Leapnet, for example, five clients collectively accounted
for approximately 58% of Leapnet's revenues for the fiscal year ended January
31, 2000. Further, for the fiscal year ended January 31, 2000, Hardees Food
Systems, Inc. accounted for approximately 32% of Leapnet's revenues.
For SPR, five clients collectively accounted for approximately 41% of SPR's
revenues in the year ended December 31, 1999. One of SPR's customers in the
telecommunications and energy industries accounted for approximately 11% of
revenues for the year ended December 31, 1999.
These clients may not sustain the volume of work performed for them 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 materially harm our business, financial condition and results of
operations. On November 23, 1999, Leapnet was informed by Hardees Food Systems,
Inc., a client accounting for 32% of consolidated revenue for Leapnet for the
fiscal year ended January 31, 2000, that it was terminating its National
Advertising Agency Agreement effective February 22, 2000.
Our continued growth may further strain our resources, which could hurt our
business and results of operations.
A key part of our strategy is to grow by hiring more personnel and, in some
cases, retraining existing personnel, which may continue to strain our
managerial and operational resources. We cannot assure you that our managers
will be able to manage our growth effectively. To manage future growth, our
management must continue to improve our operational and financial systems,
procedures and controls and expand, train, retain and manage our employee base.
If our systems, procedures and controls are inadequate to support our
operations, our expansion would halt, and we could lose our opportunity to gain
significant market share. Any inability to manage growth effectively could
materially harm our business, results of operations and financial condition.
A small number of stockholders will control Leapnet after the merger.
If the stockholders listed below choose to act or vote in concert, they will
have the power to influence the election of our directors, the appointment of
new management and the approval of any other action requiring the approval of
our stockholders, including any amendments to our certificate of incorporation
and mergers or sales of all of Leapnet's assets. In addition, without the
consent of these stockholders, we could be prevented from entering into
transactions that could be beneficial to our company or its stockholders in
general. Also, third parties could be discouraged from making a tender offer or
bid to acquire our stock at a price per share that is above the price at which
it trades on The Nasdaq National Market.
17
Immediately following the merger, the following stockholders collectively
will own approximately 34.6% of the outstanding shares of Leapnet common stock
and will beneficially own individually the percentage set forth opposite their
respective names:
Robert M. Figliulo................................................. 7.9%
Frederick A. Smith................................................. 7.5%
David A. Figliulo.................................................. 6.9%
George Gier........................................................ 6.3%
Thomas R. Sharbaugh................................................ 6.0%
We compete in new and highly competitive markets that have low barriers to
entry.
We compete in the information technology services, e-business consulting,
Internet advertising and strategy and traditional advertising markets, which
are in some cases relatively new and in each case intensely competitive. We
expect competition to continue to intensify as these markets evolve. We compete
with the following kinds of companies:
. Internet service firms;
. technology consulting firms;
. technology integrators;
. strategic consulting firms;
. in-house information technology, marketing and design departments;
. advertising agencies;
. systems integrators; and
. global marketing firms.
Many of our competitors have longer operating histories, larger client
bases, longer relationships with clients, greater brand or name recognition and
significantly greater financial, technical, marketing and public relations
resources than we have.
Relatively few barriers prevent competitors from entering our markets. As a
result, new market entrants pose a threat to our business. We do not own any
patented technology that prevents or discourages competitors from entering
these markets. Existing or future competitors may develop or offer services
that are comparable or superior to ours at a lower price, which could
materially harm our business, results of operations and financial condition.
We believe that establishing and maintaining a good reputation and name
recognition is critical for attracting and expanding our targeted client base.
We also believe that the importance of reputation and name recognition will
increase due to the growing number of service providers in our areas of
expertise. If our reputation is damaged or if potential clients do not know
what services we provide, we may become less competitive or lose our share of
the markets in which we compete. Promotion and enhancement of our name will
depend largely on our success in providing high quality services, which we
cannot ensure. If clients do not perceive our services to be effective or of
high quality, our brand name and reputation could be materially and adversely
affected.
We may be unable to continue our acquisition growth strategy, which could harm
our business and competitive position in the industry.
Our business strategy includes making strategic acquisitions of other
companies that conduct business in areas similar to ours. Our continued growth
will depend on our ability to identify and acquire companies that
18
complement or enhance our business on acceptable terms. We may not be able to
complete or identify future acquisitions or realize the anticipated results of
future acquisitions. Some of the risks that we may encounter in implementing
our acquisition growth strategy include:
. expenses and difficulties in identifying potential targets and the costs
associated with incomplete acquisitions;
. higher prices for acquired companies because of greater competition for
attractive acquisition targets;
. expenses, delays and difficulties of integrating the acquired company
into our existing organization;
. greater impact of the goodwill of acquired companies on our statement of
income and cash flows when pooling accounting for acquisitions is
eliminated;
. dilution of the interest of existing stockholders if we sell stock to the
public to raise cash for acquisitions;
. diversion of management's attention;
. expenses of amortizing the acquired company's intangible assets;
. impact on our financial condition due to the timing of the acquisition;
and
. expense of any undisclosed or potential legal liabilities of the acquired
company.
If realized, any of these risks could have a material adverse effect on our
business, results of operations and financial condition.
We are exposed to liabilities based on the conduct of our consultants in
other's workplaces.
We generally place our consultants in the workplaces of other businesses.
Risks of such placement include possible claims of errors and omissions, misuse
of client proprietary information, misappropriation of funds, discrimination,
harassment, theft of client property, other criminal activity or torts and
other claims. Historically, we have not experienced any material claims of
these types other than those covered by insurance. However, we cannot be sure
that we will not experience such claims in the future. To reduce our exposure
to such claims, we maintain insurance covering general liability, workers'
compensation claims and errors and omissions. We cannot, however, be sure that
our insurance will cover all such claims, that such insurance coverage will
continue to be economically available in amounts adequate to cover our
potential liability or that such coverage will adequately compensate us for
such liabilities.
A portion of our business depends on continued growth in the use of the
Internet.
Our future success depends, in part, on continued growth in the acceptance
and use of the Internet, which is new and rapidly evolving. Leapnet's Internet
related business accounted for approximately 29% of Leapnet's revenues for the
year ended January 31, 2000. SPR's Internet related business accounted for
approximately 10% of its revenues in fiscal year 1999. We are focused on
delivering Internet-based, e-commerce solutions. If businesses do not consider
the Internet a viable commercial medium, our client base may not grow as
rapidly as we currently anticipate. The adoption of the Internet for commerce
and communications, particularly by those individuals and companies that have
historically relied on alternative means of commerce and communications,
generally requires the understanding and acceptance of a new, way of conducting
business and exchanging information. In particular, companies that have already
invested substantial resources in other means of conducting commerce and
exchanging information may be particularly reluctant or slow to adopt a new,
Internet-based strategy that may make their existing personnel and
infrastructure obsolete.
Our business is subject to U.S. and foreign government regulation of the
Internet.
State, local and federal governments in the U.S. and local and national
governments in the European Union have recently passed legislation relating to
the Internet. Because these laws are still being implemented,
19
we are not certain how they will affect our business. This new legislation may
indirectly affect us through its impact on our clients and potential clients.
In addition, U.S. and foreign governmental bodies are considering, and may
consider in the future, other legislative proposals to regulate the Internet.
We cannot predict if or how any future legislation would impact our business,
results of operations or financial condition.
Year 2000 problems may adversely affect our business.
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. Our internal
software and hardware systems have functioned properly with respect to dates in
the year 2000 and we believe will continue to function properly in the future,
but we cannot assure that all year 2000 related problems have been remedied.
We are involved in litigation which may be costly and divert the efforts and
attention of our management.
In November 1999, POW, Inc., doing business as "Tomandandy", filed a lawsuit
against The Leap Partnership, Inc. in the United States District Court,
Southern District of New York seeking damages in the amount of $285,228 plus
interest for failure to pay for work performed by POW, Inc. In January 2000,
POW, Inc. filed a motion for summary judgment, which The Leap Partnership, Inc.
is opposing. The Leap Partnership, Inc. intends to vigorously defend its
position and to pursue all remedies available to it.
In October 1999, The Crystal Juke Box, Inc., Wixen Music Publishing, Inc.,
Charles McCormick, Charles Love, Willis Draffen, Jr., Harry Williams,
individually and doing business as the group "Bloodstone", a recording and
performing group filed a lawsuit against a subsidiary of Leapnet, The Leap
Partnership, Inc., Anheuser-Busch Corporation, and Andy Milburn, an individual
and doing business as "Tomandandy", in the United States District Court, for
the Central District of California. The complaint alleges copyright
infringement, statutory and common law violation of the right of publicity,
violation of section 43 of the Lanham Act, unfair competition, and
misappropriation stemming from the airing of a television commercial created by
The Leap Partnership, Inc. for a client. The Leap Partnership, Inc. has filed
cross-claims against Andy Milburn doing business as "Tomandandy" and POW, Inc.
doing business as "Tomandandy" for negligence, indemnity, contribution and
breach of contract. The parties are currently undergoing discovery. The suit
has been referred to The Leap Partnership, Inc.'s insurance carrier and legal
counsel. The Leap Partnership, Inc. is vigorously defending its position and
pursuing all remedies available to it. It is difficult to ascertain the
ultimate outcome of this litigation. An adverse determination and an award of
damages not covered by insurance or recoverable in The Leap Partnership, Inc.'s
cross-claim could have a material adverse effect on The Leap Partnership,
Inc.'s results of operations.
In February 1998, Venture Direct Worldwide, Inc. filed a lawsuit in the
Supreme Court of New York against an employee of Quantum Leap Communications,
Inc. and The Leap Group, Inc., now known as Leapnet, Inc. (collectively
"Leapnet"). The complaint alleges that the employee's e-mail message response
to an e-mail communication from the plaintiff caused damage to the plaintiff.
Leapnet has received from the plaintiff a settlement proposal that does not
involve monetary payment. Leapnet intends to vigorously defend the suit and
believes that the employee's actions were outside the scope of employment. The
complaint alleges six causes of action, each seeking ten million dollars plus
punitive damages. Management does not believe that the claims have any merit or
that the ultimate outcome of this matter will have a material adverse impact on
Leapnet's financial position or results of operations. Although we believe we
have meritorious defenses to these claims and intend to vigorously defend
against the lawsuit, we can not predict our exposure on this matter to any
degree of certainty.
20
THE SPECIAL MEETING OF LEAPNET
Date; Time; Place
The special meeting of Leapnet stockholders will be held at 10:00 a.m.
(Central Standard Time) on May 1, 2000 at 420 West Huron Street, Chicago,
Illinois 60610.
Matters to be Considered at the Special Meeting
At the special meeting Leapnet stockholders will be asked to vote on two
proposals:
1. to approve the issuance of shares of Leapnet common stock to the
stockholders of SPR in the merger of SPR with Brassie Corporation, a wholly
owned subsidiary of Leapnet. Under the merger agreement, each outstanding
share of SPR common stock will convert into the right to receive 1.085
shares of Leapnet common stock; and
2. to approve an amendment to Leapnet's Employee Incentive Compensation
Plan to increase the number of shares of common stock authorized for
issuance under the Incentive Plan by an additional 5,000,000 shares to
10,000,000 shares.
Under the merger agreement, Brassie Corporation, a wholly owned subsidiary
of Leapnet, will be merged with and into SPR. SPR, as the surviving
corporation, will become a wholly owned subsidiary of Leapnet. Proposal 1, but
not proposal 2, must be approved for the transaction to be completed. For
additional information about the terms of the merger, please refer to "The
Merger Agreement" on page 49.
Revocability of Proxies
You may revoke a proxy at any time before it is voted by filing with the
Secretary of Leapnet an instrument revoking the proxy. Leapnet stockholders
should make such filing to the attention of Robert C. Bramlette, Secretary,
Leapnet, Inc. 420 West Huron Street, Chicago, Illinois 60610. You may also
revoke a proxy at any time before it is voted by returning a duly executed
proxy bearing a later date or by attending the special meeting and voting in
person. Your attendance at the special meeting will not by itself constitute
revocation of a proxy.
Record Date; Stock Entitled to Vote; Quorum
The record date for the determination of the stockholders entitled to vote
at the special meeting is the close of business on March 21, 2000. On the
record date, 14,867,249 shares of Leapnet common stock were issued, outstanding
and entitled to vote and were held by approximately 177 holders of record. A
quorum is present at the special meeting if a majority of the shares of Leapnet
common stock issued and outstanding and entitled to vote on the record date are
represented in person or by proxy. In the event that a quorum is not present at
the special meeting, it is expected that the meeting will be adjourned or
postponed to solicit additional proxies. Holders of record of Leapnet common
stock on the record date are entitled to one vote per share at the special
meeting on each of the proposals.
Voting Procedures
To approve proposals 1 and 2, at least a majority of the shares issued and
outstanding and entitled to vote at the special meeting must be voted in favor
of the respective proposal.
Only shares affirmatively voted for approval of the proposals, including
properly executed proxies that do not contain voting instructions, will be
counted as favorable votes for the proposals. If a Leapnet stockholder abstains
from voting or does not vote, either in person or by proxy, it will have the
effect of a vote against approval of the proposals. All shares represented by
properly executed proxies received in time for the special meeting will be
voted at the special meeting in the manner specified by their holders.
21
Shares of Leapnet common stock represented at the special meeting but not
voted, including shares of Leapnet common stock for which proxies have been
received but for which holders of shares have abstained, will be treated as
present at the special meeting for purposes of determining the presence or
absence of a quorum for the transaction of all business.
Brokers who hold shares of Leapnet common stock in street name for
customers who are the beneficial owners of such shares may not give a proxy to
vote those customers' shares in the absence of specific instructions from
those customers. These non-voted shares are referred to as broker non-votes
and have the effect of votes against approval of the proposals.
The persons named as proxies by a stockholder may propose and vote for one
or more adjournments of the special meeting, including adjournments to permit
further solicitations of proxies. No proxy voted against approval of the
proposals will be voted in favor of any such adjournment or postponement.
Leapnet does not expect that any matter other than the proposals described
in this joint proxy statement/prospectus will be brought before the special
meeting. If, however, other matters are properly brought before the special
meeting, the persons named as proxies will vote in accordance with their
judgment.
Solicitation of Proxies
Leapnet will bear the cost of the solicitation of proxies from its
stockholders. In addition, Leapnet and SPR have retained MacKenzie Partners,
Inc. as solicitation agent to solicit proxies from stockholders by telephone
or other electronic means or in person and will receive an aggregate fee of
approximately $8,000. Leapnet will cause brokerage houses and other
custodians, nominees and fiduciaries to forward solicitation materials to the
beneficial owners of stock held of record by such persons. Leapnet will
reimburse such custodians, nominees and fiduciaries for their reasonable out-
of-pocket expenses in doing so.
Leapnet stockholders should not surrender their stock certificates in
connection with the merger.
Leapnet Stockholder Agreements
As a condition to signing the merger agreement, SPR required Leapnet
stockholders, Frederick A. Smith, George Gier and R. Steven Lutterbach to
enter into agreements to vote their shares representing approximately 32% of
the outstanding Leapnet common stock as of January 27, 2000 in favor of the
merger and the transactions specifically contemplated in the merger agreement.
They have also signed an irrevocable proxy to that effect and, with the
exception of George Gier, have agreed to hold their shares until the merger
closes or the merger agreement is terminated. George Gier's agreement provides
that: (i) he or his spouse may sell 200,000 shares of Leapnet common stock
after April 4, 2000 and another 200,000 shares of Leapnet common stock after
June 30, 2000 and (ii) his stockholder agreement terminates if the merger is
not completed by October 31, 2000.
The Leapnet stockholders' agreements and the proxies terminate if the
merger agreement terminates, which may occur if:
. (i) the board of directors of SPR shall have withdrawn or modified in a
manner adverse to the other its recommendation of approval of the merger
agreement, (ii) SPR shall have failed to include in the proxy statement
the recommendation of the board of directors of SPR in favor of approval
of the merger agreement, (iii) the board of directors of SPR or any
committee thereof shall have recommended any alternative acquisition
proposal, (iv) any of the officers or directors of SPR shall have entered
into discussions or negotiations in violation of the merger agreement,
(v) SPR shall have entered into an alternative acquisition agreement,
(vi) the board of directors of SPR or any committee thereof shall have
resolved to do any of the foregoing or (vii) any alternative acquisition
proposal is consummated;
. a judgment, order, decree, statute, law, ordinance, rule or regulation,
entered, enacted, promulgated, enforced or issued by any court or other
governmental entity of competent jurisdiction or other legal
22
restraint or prohibition preventing the consummation of the merger or
making the merger illegal has been rendered final and non-appealable;
. if SPR shall have breached or failed to perform any of its
representations, warranties, covenants or other agreements contained in
the merger agreement;
. the closing of the merger has not occurred on or prior to August 31,
2000; or
. SPR's stockholders fail to approve the merger.
The forms of Leapnet Stockholders Agreement are attached to this joint proxy
statement/prospectus as Appendix D-1 and D-2.
23
THE SPECIAL MEETING OF SPR
Date; Time; Place
The special meeting of SPR stockholders will be held at 10:00 a.m. (Central
Standard Time) on May 1, 2000 at the Hyatt Regency Oak Brook, 1909 Spring Road,
Oak Brook, Illinois 60521.
Matters to be Considered at the Special Meeting
SPR stockholders will be asked to vote to approve the merger agreement.
Pursuant to the merger agreement, Brassie Corporation, a wholly owned
subsidiary of Leapnet, will be merged with and into SPR. SPR, as the surviving
corporation, will become a wholly owned subsidiary of Leapnet. Under the merger
agreement, each outstanding share of SPR common stock will convert into the
right to receive 1.085 shares of Leapnet common stock.
Revocability of Proxies
You may revoke a proxy at any time before it is voted by filing with the
Secretary of SPR an instrument revoking the proxy. SPR stockholders should make
such filing to the attention of Michelle Banks, SPR, 2015 Spring Road, Suite
750, Oak Brook, Illinois 60523-1874. You may also revoke a proxy at any time
before it is voted by returning a duly executed proxy bearing a later date or
by attending the special meeting and voting in person. Your attendance at the
special meeting will not by itself constitute revocation of a proxy.
Record Date; Stock Entitled to Vote; Quorum
The record date for the determination of stockholders entitled to vote at
the special meeting is the close of business on March 21, 2000. On the record
date, 12,825,284 shares of SPR common stock were issued, outstanding and
entitled to vote and were held by approximately 79 holders of record. A quorum
is present at the special meeting if a majority of the shares of SPR common
stock issued and outstanding and entitled to vote on the record date are
represented in person or by proxy. In the event that a quorum is not present at
the special meeting, it is expected that the meeting will be adjourned or
postponed to solicit additional proxies. Holders of record of SPR common stock
on the record date are entitled to one vote per share at the special meeting on
the proposal to approve the merger.
Voting Procedures
To approve the merger agreement, at least a majority of the shares issued
and outstanding and entitled to vote at the special meeting must be voted in
favor of the proposal.
Only shares affirmatively voted for approval of the merger, including
properly executed proxies that do not contain voting instructions, will be
counted as favorable votes for that proposal. If an SPR stockholder abstains
from voting or does not vote, either in person or by proxy, it will have the
effect of a vote against approval of the merger. All shares represented by
properly executed proxies received in time for the special meeting will be
voted at the special meeting in the manner specified by their holders.
Shares of SPR common stock represented at the special meeting but not voted,
including shares of SPR common stock for which proxies have been received but
for which holders of shares have abstained, will be treated as present at the
special meeting for purposes of determining the presence or absence of a quorum
for the transaction of all business.
Brokers who hold shares of SPR common stock in street name for customers who
are the beneficial owners of such shares may not give a proxy to vote those
customers' shares in the absence of specific instructions from those customers.
These non-voted shares are referred to as broker non-votes and have the effect
of votes against approval of the merger.
The persons named as proxies by a stockholder may propose and vote for one
or more adjournments of the special meeting, including adjournments to permit
further solicitations of proxies. No proxy voted against approval of the merger
will be voted in favor of any such adjournment or postponement.
24
SPR does not expect that any matter other than the proposal to approve the
merger described in this joint proxy statement/prospectus will be brought
before the special meeting. If, however, other matters are properly brought
before the special meeting, the persons named as proxies will vote in
accordance with their judgment.
Solicitation of Proxies
SPR will bear the cost of the solicitation of proxies from its stockholders.
In addition, Leapnet and SPR have retained Mackenzie Partners, Inc. as
solicitation agent to solicit proxies from stockholders by telephone or other
electronic means or in person and will receive an aggregate fee of
approximately $8,000. SPR will cause brokerage houses and other custodians,
nominees and fiduciaries to forward solicitation materials to the beneficial
owners of stock held of record by such persons. SPR will reimburse such
custodians, nominees and fiduciaries for their reasonable out-of-pocket
expenses in doing so.
SPR stockholders should not send stock certificates with their proxies. A
transmittal form with instructions for the surrender of SPR common stock
certificates will be mailed to SPR stockholders as soon as practicable after
completion of the merger.
SPR Stockholder Agreements
As a condition to signing the merger agreement, Leapnet required SPR
stockholders, Robert M. Figliulo, SPR's Chairman and Chief Executive Officer,
and David A. Figliulo, one of SPR's directors and Executive Vice Presidents, to
agree to vote their shares in favor of the merger and related transactions.
They have signed a stockholder agreement containing an irrevocable proxy
promising to hold their shares until the merger is completed or the merger
agreement is terminated, and to vote their shares in favor of the merger.
The SPR stockholder agreement and the proxies terminate if the merger
agreement terminates, which may occur if:
. (i) the board of directors of Leapnet shall have withdrawn or modified in
a manner adverse to the other its recommendation of approval of the
merger agreement and the issuance of Leapnet common stock pursuant to the
merger agreement, (ii) Leapnet shall have failed to include in the proxy
statement the recommendation of the board of directors of either party in
favor of approval of the merger agreement and the issuance of Leapnet
common stock pursuant to the merger, (iii) the board of directors of
Leapnet or any committee thereof shall have recommended any alternative
acquisition proposal, (iv) any of the officers or directors of Leapnet
shall have entered into discussions or negotiations in violation of the
merger agreement, (v) Leapnet shall have entered into an alternative
acquisition agreement, (vi) the board of directors of Leapnet or any
committee thereof shall have resolved to do any of the foregoing or (vii)
any alternative acquisition proposal is consummated;
. a judgment, order, decree, statute, law, ordinance, rule or regulation,
entered, enacted, promulgated, enforced or issued by any court or other
governmental entity of competent jurisdiction or other legal restraint or
prohibition preventing the consummation of the merger or making the
merger illegal has been rendered final and non-appealable;
. if Leapnet shall have breached or failed to perform any of its
representations, warranties, covenants or other agreements contained in
the merger agreement;
. the closing of the merger has not occurred on or prior to August 31,
2000; or
. Leapnet's stockholders fail to approve the merger.
The form of SPR Stockholder Agreement is attached to this joint proxy
statement/prospectus as Appendix E.
25
THE MERGER
This section summarizes the material terms of the proposed merger. It is
qualified in its entirety by reference to the merger agreement, which is
attached as Appendix A to this joint proxy statement/prospectus. You are urged
to read the merger agreement.
The merger agreement provides that the merger will be consummated if the
approvals of the SPR stockholders and the Leapnet stockholders are obtained and
all other conditions to the merger are satisfied or waived as provided in the
merger agreement. On completion of the merger, each outstanding share of SPR
common stock will be converted into the right to receive 1.085 shares of fully
paid and nonassessable Leapnet common stock, par value $0.01 per share. Cash
will be delivered to each SPR stockholder in lieu of any fractional shares
remaining after the exchange.
Following the completion of the merger, SPR stockholders will own
approximately 13,915,433 shares of Leapnet common stock.
Background of the Merger
On January 4, 2000, Frederick Smith, the Chairman and Chief Executive
Officer of Leapnet, met with Robert Figliulo, Chairman and Chief Executive
Officer of SPR, David Figliulo, an Executive Vice President of SPR, and Stephen
Tober, Chief Operating Officer of SPR, as part of ongoing discussions relating
to SPR providing services to employees of Quantum Leap, one of Leapnet's
subsidiaries. In connection with this discussion, these parties commenced a
discussion of a possible business combination because of the strategic benefits
that became apparent as a result of these discussions.
On January 12, 2000, the SPR board of directors met to discuss a possible
business combination with Leapnet, to receive a briefing on the conversations
that had taken place to date, to receive an overview of Leapnet, and to meet
Frederick A. Smith, Chairman and Chief Executive Officer of Leapnet. As a
result of the meeting, management of SPR was authorized to continue exploring a
possible business combination with Leapnet and SPR engaged financial and legal
advisors.
On January 12, 2000, the Leapnet board of directors met to discuss a
possible business combination with SPR, receive a briefing on the conversations
that had taken place to date, to receive an overview of SPR, and to meet Robert
M. Figliulo, Chairman and Chief Executive Officer of SPR. At the conclusion of
the meeting, management of Leapnet was authorized to continue exploring a
possible business combination with SPR.
Leapnet and SPR entered into a confidentiality agreement dated January 17,
2000. On January 17, 2000, SPR delivered to Leapnet a draft of a proposed
merger agreement and related documents.
Beginning on January 17th and continuing through January 27th, management of
Leapnet and SPR and their financial advisors met and conducted their financial
and management due diligence review of the other party's business. During this
period, legal counsel for both parties negotiated the merger agreement and
conducted their legal due diligence review.
On January 19, 2000, the SPR board of directors held a telephonic meeting at
which the board discussed the status of the proposed transaction and the
results of the due diligence review with SPR management and the company's
advisors.
On January 19, 2000, the Leapnet board of directors met to discuss further a
potential business combination with SPR. At this meeting, they received an
update on the status of the discussions from Frederick A. Smith and Robert
Bramlette, including the structuring of the possible business combination as a
merger, and a review of the financial and business due diligence which had been
conducted up to that time. Robert M. Figliulo also attended the meeting for the
purpose of answering additional questions regarding SPR. At the conclusion of
the meeting, management of Leapnet was authorized to continue exploring and
negotiating the terms of a potential merger with SPR. Subsequent to this
meeting, management of Leapnet retained Ernst & Young LLP to conduct financial
due diligence on SPR on Leapnet's behalf.
26
On January 27, 2000, the SPR board of directors held a meeting to approve
the proposed merger. At this meeting SPR management presented the proposed
transaction to the board and responded to questions from the board. Following
this discussion, a representative from Winston & Strawn, special counsel to
SPR, briefed the SPR board on the terms of the merger agreement and fiduciary
duties of the board in connection with the proposed merger. Representatives
from SG Cowen Securities Corporation, the financial advisor to SPR, made a
presentation relating to the proposed merger and delivered its oral opinion,
which was subsequently confirmed by delivery of a written opinion, dated
January 27, 2000, the date of the merger agreement, to the effect that as of
the date of the opinion and based upon the matters stated in the opinion, the
exchange ratio of 1.085 shares of Leapnet common stock for each share of SPR
common stock was fair, from a financial point of view, to the SPR stockholders.
After further discussion, the SPR board of directors determined that the merger
agreement and the merger were fair to and in the best interests of SPR and its
stockholders. Accordingly, SPR's board of directors approved and declared
advisable the merger agreement, and recommended that SPR stockholders vote to
adopt the merger agreement.
On January 27, 2000, the Leapnet board of directors held a meeting at which
all directors were initially present to approve the proposed merger. At this
meeting, Leapnet management presented the proposed transaction to the board and
responded to questions from the board. Following this discussion,
representatives from Ernst & Young LLP briefed the board on the financial due
diligence which they had conducted on behalf of Leapnet, and responded to
questions from the board relating thereto. Mr. John G. Keane, who had
previously indicated that he would have to leave the meeting for a prior
committment, left the meeting. He therefore abstained from any vote of the
board at this meeting relating to the proposed merger and matters related
thereto. As a quorum of the board was still present, the meeting of the board
continued with a presentation by representatives from Legg Mason Wood Walker,
Incorporated, the financial advisor to Leapnet, relating to the proposed
merger. Legg Mason delivered its oral opinion, which was subsequently confirmed
by delivery of a written opinion dated January 27, 2000, the date of the merger
agreement, to the effect that as of the date of the opinion and based upon the
matters stated in the opinion, the exchange ratio of 1.085 shares of Leapnet
common stock for each share of SPR common stock was fair, from a financial
point of view, to Leapnet's stockholders. Following this presentation, a
representative from Morrison & Foerster LLP briefed the Leapnet board on the
terms of the merger agreement and the fiduciary duties of the board in
connection with the proposed merger. Management indicated to the board that an
agreement had been reached on all material terms related to the key issues of
the merger agreement, and that definitive transaction documents would be
completed later in the evening. The members of the board then present concluded
that the transaction was fair to, and in the best interests of, Leapnet's
stockholders and all board members present voted to approve the transaction and
authorized the execution and delivery of the merger agreement and the related
documentation.
Following the conclusion of the respective board meetings, discussions
ensued among the representatives of Leapnet and SPR at which point the Leapnet
representatives requested an additional closing condition in the merger
agreement with respect to each party's cash or cash equivalent positions as of
the closing date.
During the evening of January 27, the SPR board of directors reconvened and
discussed proposed changes to the merger agreement, including adding the
additional closing condition. SG Cowen confirmed that the changes would not
affect its fairness opinion. After further discussions on the matter, the SPR
board of directors reaffirmed its approval of the merger agreement.
Negotiations regarding the merger agreement and related documents continued
throughout the evening of January 27, 2000, and the merger agreement and
related documents were executed late that evening. A public announcement of the
merger was made on January 28, 2000.
Reasons for the Merger; Recommendations of the Boards
Joint reasons for the merger. The boards of directors of Leapnet and SPR
have each determined that, compared to continuing to operate their companies on
a stand-alone basis, the combined company would have better potential to
improve long-term operating and financial results and would have a superior
competitive
27
position. With the increasing importance of the Internet and e-commerce,
Leapnet and SPR have each been shaping themselves to provide a full spectrum of
service offerings needed by clients to compete in this new e-business
environment. Leapnet develops creative and technology solutions for the wired
world by combining expertise in Internet development and communications, e-
business consulting and systems integration, globalization services and
traditional advertising, while SPR is a leading provider of IT consulting and
project based services focused on maximizing the value of existing systems. The
combined company is expected to be a premier end-to-end, customer-focused, e-
solutions provider helping clients offer consumers direct access to the power
of large existing systems from desktop computers. Both companies believe that
this broad and deep range of expertise and experience, together with their
combined management talent and business systems and processes, will establish
the combined company as a leading partner for clients seeking to participate in
and profit from the new e-business environment created by the emergence of e-
commerce.
Each company's board of directors has identified a number of additional
potential benefits of the merger that they believe will contribute to the
success of the combined company. These potential benefits principally include
the following:
. The combined company should be able to leverage its market position and
brand recognition with Leapnet's strength in front-end Internet
development, e-business consulting and systems integration, global
marketing communication and traditional advertising and SPR's strength in
back-end mainframe consulting to support the combined company's efforts
to broaden its market, increase demand for its services and win new
customers;
. The combination should facilitate the offering of a full spectrum of
integrated e-business services, from front end to back end;
. The two companies' complementary service offerings and lack of overlap of
existing customers provide the opportunity to cross-sell services in the
areas of their respective strengths, creating the potential for increased
revenue per customer;
. The diversification of service offerings and customer base and the
increased scale of business should give the combined company improved
stability and reduced risk of volatility of financial performance;
. The combined experience, financial resources, size and breadth of service
offerings of Leapnet and SPR are expected to allow the combined company
to respond more quickly and effectively to increased competition and
market demands in an industry experiencing rapid innovation and change;
and
. The increased number of publicly traded shares could make the market for
Leapnet shares after the merger more liquid than the market for either
SPR or Leapnet shares before the merger.
The boards of directors of Leapnet and SPR have each identified separate,
additional reasons for the combination, which are discussed below. However,
each board of directors recognizes that the potential benefits of the merger
may not be realized. See "Risk Factors."
Leapnet's reasons for merger. In reaching its decision to approve the merger
agreement and to recommend approval of the merger-related proposals by Leapnet
stockholders, the Leapnet board of directors consulted with its management team
and advisors and independently considered the proposed merger agreement and the
transactions contemplated by the merger agreement.
Together with the factors enumerated above, these matters encompassed all
the material factors the board of directors of Leapnet considered. Among these
factors, the Leapnet board of directors considered in particular the following:
. presentations from, discussions with, and/or information provided by,
senior management, representatives of its outside legal counsel, its
accounting firms, Arthur Andersen LLP and Ernst & Young LLP, and Legg
Mason regarding the business, financial, accounting and legal due
diligence;
. current industry, economic and market conditions, including increased
competition;
. the competitive importance of market position, size and adequacy of
financial resources;
28
. the potential benefits of the merger to Leapnet customers and employees;
. the terms and conditions of the merger agreement, which were the product
of extensive arm's-length negotiations;
. current and historical market valuations of the two companies;
. the opinion of Legg Mason that, as of January 27, 2000, based upon and
subject to the various considerations set forth in the opinion, the
exchange ratio was fair to Leapnet's stockholders from a financial point
of view;
. the relative advantages and disadvantages of a number of other strategic
alternatives, taking into account the risks and uncertainties associated
with such alternatives;
. the complementary characteristics of the respective business and
management philosophies and corporate cultures of SPR and Leapnet;
. the likelihood that the merger will close;
. SPR's strong strategic, technology development, integration and migration
skills;
. SPR's proven ability to rapidly scale up to meet customer demand;
. SPR's strong recruiting and training capabilities;
. SPR's certified project management program; and
. the benefits to Leapnet stockholders of holding shares in a larger and
financially stronger enterprise.
In addition, the Leapnet board believes the complementary service offerings
of Leapnet and SPR bring Leapnet closer to its goal of becoming a leading
provider of integrated e-business solutions.
In assessing the transaction, the Leapnet board considered several sources
of information, including the following:
. historical information concerning the businesses, financial performance,
condition, operations and results of operation, technology, management
style, competitive position, trends and prospects of Leapnet and SPR;
. Securities and Exchange Commission filings by SPR;
. current and historical market prices, volatility and trading data for the
two companies;
. information and advice based on due diligence investigations by members
of Leapnet's board and management and Leapnet's legal, financial and
accounting advisors concerning the business, technology, services,
operations, properties, assets, financial condition, operating results
and prospects of SPR, trends in SPR's business and financial results and
capabilities of SPR's management team; and
. the presentation of Legg Mason to the Leapnet board of directors at its
meeting held on January 27, 2000.
The Leapnet board also identified and considered a number of uncertainties
and risks in its deliberations concerning the merger, including the following:
. the risk that the potential benefits sought in the merger might not be
fully realized, if at all;
. the risk that, although the merger agreement gives Leapnet the right to
terminate the agreement if a superior proposal for a business combination
with Leapnet is made, the termination fee provisions of the merger
agreement would have the effect of discouraging such a proposal;
. the risk that the combined company might experience slow growth relative
to the prior growth rate of the individual companies; and
. the other risks associated with the businesses of Leapnet, SPR and the
combined company and the merger described in this joint proxy
statement/prospectus under "Risk Factors."
29
As a result of the foregoing considerations, Leapnet's board believed that
the potential benefits associated with the merger outweighed the risks of the
merger and determined that the potential advantages of the merger outweighed
the benefits of remaining alone. Leapnet's board believes that the combined
company would have a far greater opportunity than Leapnet alone to compete in
its markets.
In view of the variety of factors considered in connection with its
evaluation of the merger, Leapnet's board did not find it practicable to
quantify or otherwise assign relative weights to the specific factors
considered in reaching its determination and did not do so.
In addition, many of the factors contained elements that may affect the
fairness of the merger in both a positive and negative way. Except as described
above, the Leapnet board, as a whole, did not attempt to analyze each
individual factor separately to determine how it impacted the fairness of the
merger. Consequently, individual members of the Leapnet board may have given
different weights to different factors and may have viewed different factors as
affecting the determination of fairness differently.
SPR's reasons for the merger. In arriving at its decision to approve the
merger agreement, the SPR board considered a number of factors, including those
set forth under "Joint Reasons for the Merger." Together with the joint reasons
enumerated above, these matters encompassed all the material factors the board
of directors of SPR considered. In particular, the board of directors of SPR
considered the following:
. the strategic benefits expected from the merger and the anticipated
effect of the merger on long-term stockholder value;
. the business, financial condition, results of operations and prospects of
SPR and Leapnet;
.the current economic and industry environment;
. the risks and uncertainties of proceeding as a stand alone company;
. the relative advantages and disadvantages of a number of other strategic
alternatives, taking into account the risks and uncertainties associated
with such alternatives;
. the complementary characteristics of the respective business and
management philosophies and corporate cultures of SPR and Leapnet;
. the potential benefits of the merger to SPR customers and employees;
. the potential for reduced stockholder risk after the merger as a result
of the diversification of service offerings and revenue bases;
. the terms and conditions of the merger agreement, which were the product
of extensive arm's-length negotiations;
. the likelihood that the merger will close;
. the premium for SPR shares implied by the exchange ratio and the fact
that SPR stockholders will retain an equity interest in the combined
company; and
. the opinion of SG Cowen that, as of January 27, 2000, and based upon and
subject to the various considerations set forth in the opinion, the
exchange ratio was fair to SPR's stockholders as of the date of such
opinion from a financial point of view.
In assessing the transaction, the SPR board considered several sources of
information, including the following:
. historical information concerning the businesses, financial performance,
condition, operations and results of operation, technology, management
style, competitive position, trends and prospects of Leapnet and SPR;
. Securities and Exchange Commission filings by Leapnet;
. current and historical market prices, volatility and trading data for the
two companies;
30
. information and advice based on due diligence investigations by members
of SPR's board and management and SPR's legal, financial and accounting
advisors concerning the business, technology, services, operations,
properties, assets, financial condition, operating results and prospects
of Leapnet, trends in Leapnet's business and financial results and
capabilities of Leapnet's management team; and
. reports from SG Cowen on companies comparable to Leapnet and other
financial analyses performed by SG Cowen.
The SPR board also identified and considered a number of uncertainties and
risks in its deliberations concerning the merger, including the following:
. the risk that the potential benefits sought in the merger might not be
fully realized, if at all;
. the risk of loss of current brand awareness before the combined company's
new brand gains market acceptance;
. the risk that, although the merger agreement gives SPR the right to
terminate the agreement if a superior proposal for a business combination
with SPR is made, the termination fee provisions of the merger agreement
would have the effect of discouraging such a proposal;
. the risk that the combined company might experience slow growth relative
to the prior growth rate of the individual companies; and
. the other risks associated with the businesses of Leapnet, SPR and the
combined company and the merger described in this joint proxy
statement/prospectus under "Risk Factors."
As a result of the foregoing considerations, SPR's board believed that the
potential benefits associated with the merger outweighed the risks of the
merger and determined that the potential advantages of the merger outweighed
the benefits of remaining alone. SPR's board believes that the combined company
would have a far greater opportunity than SPR alone to compete in its industry.
In view of the variety of factors considered in connection with its
evaluation of the merger, the SPR board did not find it practicable to quantify
or otherwise assign relative weights to the specific factors considered in
reaching its determination and did not do so.
In addition, many of the factors contained elements that may affect the
fairness of the merger in both a positive and negative way. Except as described
above, the SPR board, as a whole, did not attempt to analyze each individual
factor separately to determine how it impacted the fairness of the merger.
Consequently, individual members of the SPR board may have given different
weights to different factors and may have viewed different factors as affecting
the determination of fairness differently.
Opinion of Leapnet's Financial Advisor
Under an engagement letter dated January 14, 2000, Leapnet retained Legg
Mason to act as its exclusive financial advisor in connection with the merger.
Legg Mason is a nationally recognized investment banking firm and was selected
by Leapnet based on the firm's reputation and experience in investment banking
in general, its recognized expertise in the valuation of middle-market
businesses, and its knowledge of the information technology industry. Legg
Mason, as part of its investment banking business, is continually engaged in
the valuation of businesses and their securities in connection with mergers and
acquisitions, negotiated underwritings, secondary distributions of listed
securities, private placements and valuations for corporate and other purposes.
On January 27, 2000, Legg Mason rendered its opinion that, as of that date,
based upon and subject to the various considerations set forth in the Legg
Mason opinion, the exchange ratio was fair to Leapnet's stockholders, from a
financial point of view.
The full text of the Legg Mason opinion sets forth, among other things,
assumptions made, procedures followed, matters considered and limitations on
the scope of the review undertaken by Legg Mason in rendering its opinion. The
full text of the opinion is attached as Appendix B to this proxy
31
statement/prospectus and is incorporated by reference in its entirety. Leapnet
stockholders are urged to read the Legg Mason opinion carefully and in its
entirety. The Legg Mason opinion addresses only the fairness of the exchange
ratio to Leapnet's stockholders from a financial point of view as of the date
of the Legg Mason opinion, and does not constitute a recommendation to any
stockholder as to how such stockholder should vote at the Leapnet special
meeting. The summary of the Legg Mason opinion in this proxy
statement/prospectus is qualified in its entirety by reference to the full text
of the Legg Mason opinion.
In connection with rendering its opinion, Legg Mason:
. reviewed and analyzed draft copies of the Agreement;
. reviewed and analyzed audited consolidated financial statements of
Leapnet contained on Form 10-K for the fiscal year ended January 31, 1999
and unaudited consolidated financial statements contained on Form 10-Q
for the quarters ended July 31, 1999, and October 31, 1999;
. reviewed and analyzed audited consolidated financial statements of SPR
contained on Form 10-K for the fiscal year ended December 31, 1998 and
unaudited condensed statements contained on Form 10-Q for the quarters
ended June 30, 1999, and September 30, 1999;
. reviewed and analyzed internal information, primarily financial in
nature, concerning the business and operations of Leapnet prepared by the
management of Leapnet, including five-year financial projections;
. reviewed and analyzed internal information, primarily financial in
nature, concerning the business and operations of SPR prepared by the
management of SPR, including five-year financial projections;
. reviewed and analyzed publicly available information concerning Leapnet
and SPR;
. reviewed the reported stock prices and trading values for Leapnet common
stock and the SPR common stock;
. reviewed and analyzed financial and market data and operating statistics
relating to Leapnet and SPR and compared them with similar information of
publicly available selected public companies that Legg Mason deemed
relevant to its inquiry;
. reviewed the financial terms, to the extent publicly available, of
certain acquisition transactions involving companies Legg Mason deemed to
be comparable to Leapnet and SPR;
. held meetings and discussions with officers and employees of Leapnet and
SPR concerning the past and current operations, financial condition and
prospects of SPR and Leapnet; and
. conducted other financial studies, analyses and investigations and
considered other information as Legg Mason deemed appropriate for the
purposes of its opinion.
In connection with its review, Legg Mason did not assume any responsibility
for independent verification of any information that was publicly available or
supplied by Leapnet or SPR and relied on such information being complete and
accurate in all material respects. With respect to financial forecasts, Legg
Mason assumed that they had been reasonably prepared on bases reflecting the
best currently available estimates and judgments of the managements of Leapnet
and SPR as to the future financial performance of Leapnet and SPR,
respectively. Legg Mason assumed, based upon assurances of Leapnet management,
that the merger would be treated as a tax-free reorganization for federal
income tax purposes. In addition, Legg Mason did not make an independent
evaluation or appraisal of the assets or liabilities (contingent or otherwise)
of Leapnet or SPR, nor was Legg Mason furnished with any such evaluations or
appraisals. The Legg Mason opinion is necessarily based upon financial,
economic, market and other conditions as they existed and could be evaluated on
the date of the Legg Mason opinion. Legg Mason did not express any opinion as
to what the value of the Leapnet common stock actually will be when issued to
SPR's stockholders pursuant to the merger or the prices at which such Leapnet
common stock will trade subsequent to the merger.
32
The exchange ratio was determined by arm's-length negotiation between the
parties. Legg Mason advised Leapnet during negotiations, but did not recommend
a specific exchange ratio. In preparing the Legg Mason opinion, Legg Mason
performed a variety of financial and comparative analyses. The preparation of a
fairness opinion is a complex process and is not necessarily susceptible to
partial analysis or summary description. Legg Mason believes that its analyses
must be considered as a whole and that selecting portions of its analyses and
of the factors considered by it, without considering all analyses and factors,
could create a misleading view of the processes underlying the Legg Mason
opinion. No company or transaction used in the analysis performed by Legg Mason
as a comparison is identical to Leapnet, SPR or the contemplated merger. In
addition, Legg Mason may have given various analyses more or less weight than
other analyses, and may have deemed various assumptions more or less probable
than other assumptions, so that the range of valuation resulting from any
particular analysis described below should not be taken to be Legg Mason's view
of the actual value of Leapnet or SPR. In performing its analyses, Legg Mason
made numerous assumptions with respect to industry performance, general
business and economic conditions and other matters, many of which are beyond
the control of Leapnet and SPR. The analyses performed by Legg Mason are not
necessarily indicative of actual values or actual future results, which may be
significantly more or less favorable than suggested by such analyses. In
addition, analyses relating to the value of businesses or assets do not purport
to be appraisals or to necessarily reflect the prices at which businesses or
assets may actually be sold. The analyses performed were prepared solely as
part of Legg Mason's analysis of the fairness of the exchange ratio to Leapnet
from a financial point of view and were provided to the Leapnet board of
directors in connection with the delivery of the Legg Mason opinion.
The following is a summary of the material financial analyses performed by
Legg Mason in connection with the preparation of its opinion, and reviewed with
the Leapnet board of directors at a meeting of the Leapnet board of directors
held on January 27, 2000. Certain of the summaries of those financial analyses
include information presented in tabular format. In order to understand fully
the material financial analyses used by Legg Mason, the tables should be read
together with the text of each summary. The tables alone do not constitute a
complete description of the material financial analyses.
Financial Analysis
(a) Implied Market Exchange Ratio History Analysis. Legg Mason compared the
historical ratios of the average closing price of SPR common stock to the
average closing price of Leapnet common stock over various periods ended
January 24, 2000. The following table sets forth the ratios of the average
closing prices of SPR common stock compared to Leapnet common stock for the
various periods ended January 24, 2000:
Average Market Exchange
Period Ended January 24, 2000 Ratio over Period
----------------------------- -----------------------
10 trading days................................. 1.06x
20 trading days................................. 1.04x
30 trading days................................. 1.01x
60 trading days................................. 0.90x
90 trading days................................. 0.99x
These ratios can be compared to the exchange ratio of 1.085x.
(b) Public Company Trading Analysis. Legg Mason compared certain financial
market and operating information and commonly used valuation measurements for
Leapnet and SPR with corresponding data for two groups of publicly held
companies. The first group included several firms in the advertising, marketing
and promotional services industry (which we refer to collectively to as the
"Advertising/Marketing Group") including:
. Co-Active Marketing Group, Inc.
. Grey Advertising, Inc.
. HA-LO Industries, Inc.
33
. Interpublic Group of Companies, Inc.
. Omnicom Group, Inc.
The second group included several firms that engage in IT services
application development and management (which we refer to collectively to as
the "IT Application Developers Group") including:
. Analysts International Corp.
. Computer Horizons Corp.
. Computer Task Group, Inc.
. Cotelligent, Inc.
. Keane, Inc.
. RWD Technologies, Inc.
Leapnet was compared to the Advertising/Marketing Group and SPR was compared
to the IT Application Developers Group. Legg Mason observed that over the
period from January 26, 1999 to January 25, 2000, the market price of Leapnet
common stock increased 82.6%, compared with a mean decrease of 3.1% for the
Advertising/Marketing Group. Legg Mason also observed that over the same
period, the market price of SPR common stock decreased 76.1%, compared with a
mean decrease of 32.8% for the IT Application Developers Group.
In addition to market return, Legg Mason compared data and ratios including,
among other things, enterprise value or levered market capitalization (current
stock price multiplied by shares outstanding plus debt minus cash and cash
equivalents) to latest twelve months ("LTM") revenues. LTM earnings before
interest, tax, depreciation and amortization ("EBITDA"), and LTM earnings
before interest and taxes ("EBIT"), as well as calendar year 1999 and 2000
estimated price-to-earnings ("P/E") ratios (estimates provided by First Call)
and calendar year 2000 P/E multiples to five-year growth rates. First Call is a
service that monitors and publishes compilations of earnings estimates by
selected research analysts regarding companies of interest to institutional
investors.
Advertising/Marketing
----------------------------
Leapnet Maximum Mean Median Minimum
------- ------- ----- ------ -------
Enterprise Value/LTM Revenues.......... 2.4x 3.7x 1.8x 0.8x 0.5x
Enterprise Value/LTM EBITDA............ 72.3x 36.5x 17.5x 15.1x 6.8x
Enterprise Value/LTM EBIT.............. 268.4x 26.5x 19.7x 22.3x 7.6x
Advertising/Marketing
----------------------------
Leapnet Maximum Mean Median Minimum
------- ------- ----- ------ -------
Calendar Year 1999 P/E Multiple........ 167.7x 137.5x 42.7x 42.7x 39.5x
Calendar Year 2000 P/E Multiple........ 65.8x 52.4x 42.2x 39.7x 34.4x
Calendar Year 2000 P/E Multiple to
Five-Year Growth Rate................. 3.3x 2.6x 2.4x 2.3x 2.2x
IT Application Developers
----------------------------
SPR Maximum Mean Median Minimum
------- ------- ----- ------ -------
Enterprise Value/LTM Revenues.......... 0.4x 1.8x 0.7x 0.8x 0.4x
Enterprise Value/LTM EBITDA............ NEG 10.2x 7.9x 7.9x 6.0x
Enterprise Value/LTM EBIT.............. NEG 11.6x 9.6x 9.6x 8.3x
IT Application Developers
----------------------------
SPR Maximum Mean Median Minimum
------- ------- ----- ------ -------
Calendar Year 1999 P/E Multiple........ NEG 23.7x 19.9x 21.2x 13.3x
Calendar Year 2000 P/E Multiple........ 81.7x 30.0x 25.4x 28.1x 15.4x
Calendar Year 2000 P/E Multiple to
Five-Year Growth Rate................. 4.9x 1.8x 1.5x 1.5x 1.1x
34
The implied exchange ratio for this analysis was 1.41x utilizing the
enterprise value to LTM revenues multiple.
No company utilized in the peer group comparison analysis is identical to
Leapnet or SPR. In evaluating the peer groups, Legg Mason made judgments and
assumptions with regard to industry performance, general business, economic,
market and financial conditions and other matters, many of which are beyond the
control of Leapnet or SPR, such as the impact of competition on the businesses
of Leapnet or SPR and the industry generally, industry growth and the absence
of any adverse material change in the financial condition and prospects of
Leapnet or SPR or the industry or in the financial markets in general.
Mathematical analysis, such as determining the average or median, is not in
itself a meaningful method of using peer group data.
(c) Selected Precedent Transaction Analysis. Legg Mason analyzed certain
information relating to selected precedent transactions in the advertising and
marketing industry (the "Selected Advertising/Marketing Transactions")
including:
. the acquisition of NFO Worldwide Inc. by Interpublic Group of Companies
. the acquisition of Marketing Facts, Inc. by Aegis Group, Plc.
. the acquisition of Cassidy Companies, Inc. by Interpublic Group of
Companies
. the acquisition of the Financial Relations Board by True North
Communications, Inc.
Legg Mason also analyzed certain information relating to selected precedent
transactions in the IT industry (the "Selected IT Transactions") including:
. the acquisition of Acuity Technology Services, L.L.C. by Metro
Information Services, Inc.
. the acquisition of Metier, Inc. by Syntel, Inc.
. the acquisition of Neverdahl-Loft & Associates, Inc. by IMRglobal Corp.
. the acquisition of Integrated Computer Management by Computer Horizons
Corp.
. the acquisition of Counseltec LLC by Affiliated Computer Services, Inc.
. the acquisition of Data Processing Resources Corporation by Compuware
Corp.
Such analysis indicated that for the Selected Advertising/Marketing
Transactions, enterprise value or aggregate consideration as a multiple of LTM
revenues ranged from 2.02x to 1.03x with a mean of 1.66x. There was
insufficient publicly available information to determine enterprise value or
aggregate consideration as a multiple of EBITDA or equity value as a multiple
of net income for the Advertising/Marketing transactions.
Legg Mason analyzed certain information related to selected transaction in
the IT industry. Such analysis indicated that for the Selected IT Transactions,
enterprise value or aggregate consideration as a multiple of LTM revenues
ranged from 1.57x to 0.98x with a mean of 1.27x. There was insufficient
publicly available information to determine aggregate consideration as a
multiple of EBITDA or equity value as a multiple of net income for the IT
transactions.
The implied exchange ratio for this analysis was 2.09x.
No company, transaction or business used in the "Selected Precedent
Transaction Analysis" as a comparison is identical to Leapnet or SPR or the
Merger. Accordingly, an analysis of the results of the foregoing is not
entirely mathematical. Instead, it involves complex considerations and
judgments concerning differences in financial and operating characteristics and
other factors that could affect the acquisition, public trading or other values
of the peer companies, selected transactions or the business segment, company
or transaction to which they are being compared.
(d) Discounted Cash Flow Analysis. Legg Mason performed a discounted cash
flow analysis of Leapnet and SPR using projections provided by the respective
company managements. Legg Mason calculated a net
35
present value of estimated free cash flows for the calendar years 2000 through
2004 using discount rates of 16.6% and 17.7%, for Leapnet and SPR,
respectively. Legg Mason calculated terminal values in the year 2004 based on
dividing projected net operating profit after taxes by the respective discount
rate. These terminal values were then discounted to present value using the
applicable discount rate. Using the foregoing terminal values and discounted
cash flows for Leapnet and SPR, equity value per share for Leapnet and SPR was
$5.07 and $6.56 per share, respectively.
The implied exchange rate utilizing these values was 1.29x.
(e) Contribution Analysis. Legg Mason analyzed the percentage contribution
of Leapnet to pro forma combined results prior and subsequent to the merger,
using financial data supplied by Leapnet and SPR management. Legg Mason
calculated that Leapnet's percentage contribution to combined revenues and net
income would be:
Year Revenues Net Income
---- -------- ----------
1999................................................. 38.8% NMF
2000................................................. 40.9% 63.9%
2001................................................. 46.3% 61.9%
2002................................................. 51.2% 60.5%
As described above, Legg Mason's opinion and presentation to the Leapnet
board of directors was one of many factors taken into consideration by the
Leapnet board of directors in making its determination to recommend the merger
agreement and the transactions contemplated thereby. Consequently, the analyses
described above should not be viewed as determinative of the opinion of the
Leapnet board of directors or the management of Leapnet with respect to the
value of SPR or whether the Leapnet board of directors would have been willing
to agree to a different exchange ratio. None of SPR, Leapnet, Legg Mason or any
other person assumes responsibility if future results are materially different
from those projected.
In the ordinary course of its business, Legg Mason and its affiliates may
actively trade the equity securities of Leapnet and SPR for its own account and
for the accounts of its customers and, accordingly, may at any time hold a long
or short position in such securities. Legg Mason and its affiliates in the
ordinary course of business may in the future provide commercial and investment
banking services to SPR and Leapnet, including serving as a financial advisor
in potential acquisitions and as an underwriter on equity offerings, and may in
the future receive fees for the rendering of such services.
Pursuant to an engagement letter dated January 14, 2000, Leapnet engaged
Legg Mason to provide financial advisory services to the Leapnet board of
directors in connection with the merger, including, among other things,
rendering its opinion and making the presentation referred to above. Legg Mason
received a retainer of $100,000. Following delivery of its opinion, Legg Mason
is to be paid an additional $100,000. This $200,000 aggregate payment is non-
refundable. If the transaction is consummated, Legg Mason will be paid an
additional fee of $145,000. In addition, Leapnet has agreed to reimburse Legg
Mason for its out-of-pocket expenses, including attorney's fees, incurred in
connection with its engagement and to indemnify Legg Mason and certain related
persons against certain liabilities and expenses arising out of or in
conjunction with its rendering of services under its engagement, including
liabilities arising under the federal securities laws and to pay $25,000 (none
of which is refundable) for each update of its opinion.
Opinion of SPR's Financial Advisor
Pursuant to an engagement letter dated January 17, 2000, SPR retained SG
Cowen Securities Corporation to render an opinion to the board of directors of
SPR as to the fairness, from a financial point of view, to the holders of SPR
common stock of the exchange ratio.
On January 27, 2000, SG Cowen delivered certain of its written analyses and
its oral opinion to the SPR board, subsequently confirmed in writing as of the
same date, to the effect that and subject to the various
36
assumptions set forth therein, as of January 27, 2000, the exchange ratio in
the transaction was fair, from a financial point of view, to the SPR
stockholders. The full text of the written opinion of SG Cowen, dated January
27, 2000, is attached as Appendix C and is incorporated by reference. Holders
of SPR common stock are urged to read the opinion in its entirety for the
assumptions made, procedures followed, other matters considered and limits of
the review by SG Cowen. The summary of the written opinion of SG Cowen set
forth herein is qualified in its entirety by reference to the full text of such
opinion. SG Cowen's analyses and opinion were prepared for and addressed to the
SPR board and are directed only to the fairness, from a financial point of
view, of the exchange ratio in the transaction, and do not constitute an
opinion as to the merits of the transaction or a recommendation to any
stockholder as to how to vote on the proposed transaction. The exchange ratio
in the transaction was determined through negotiations between SPR and Leapnet,
Inc. and not pursuant to recommendations of SG Cowen.
In arriving at its opinion, SG Cowen reviewed and considered such financial
and other matters as it deemed relevant, including, among other things:
. a draft of the merger agreement dated January 21, 2000;
. certain publicly available information for the Company, including its
annual reports filed on Form 10-K for each of the years ended December
31, 1997 and 1998, and its quarterly reports filed on Form 10-Q in 1999
for each of the fiscal quarters ended March 31, June 30 and September 30
and certain other relevant financial and operating data furnished to SG
Cowen by SPR management;
. certain publicly available information for Leapnet, including its annual
reports filed on Form 10-K for each of the years ended January 31, 1997,
1998 and 1999, and its quarterly reports filed on Form 10-Q in 1999 for
each of the quarters ended April 30, July 31 and October 31 and certain
other relevant financial and operating data furnished to SG Cowen by
Leapnet management;
. certain internal financial analyses, financial forecasts, reports and
other information concerning SPR and Leapnet, prepared by the management
of SPR and Leapnet, respectively, and the amounts and timing of revenue
benefits and cost savings expected to result from the transaction,
furnished to SG Cowen by the management of SPR and Leapnet;
. discussions SG Cowen has had with certain members of the managements of
each of SPR and Leapnet concerning the historical and current business
operations, financial conditions and prospects of SPR and Leapnet, the
expected synergies as a result of the transaction and such other matters
as SG Cowen deemed relevant;
. certain operating results and the reported price and trading histories of
the shares of the common stock of SPR and Leapnet as compared to
operating results and the reported price and trading histories of certain
publicly traded companies SG Cowen deemed relevant;
. certain financial terms of the transaction as compared to the financial
terms of certain selected business combinations SG Cowen deemed relevant;
. based on SPR forecasts and Leapnet forecasts, the cash flows generated by
SPR and Leapnet on a stand-alone basis to determine the present value of
the discounted cash flows;
. certain pro forma financial effects of the transaction including on an
earnings accretion/dilution basis; and
. such other information, financial studies, analyses and investigations
and such other factors that SG Cowen deemed relevant for the purposes of
its opinion.
In conducting its review and arriving at its opinion, SG Cowen, with SPR's
consent, assumed and relied, without independent investigation, upon the
accuracy and completeness of all financial and other information provided to it
by SPR and Leapnet or which was publicly available, and SG Cowen did not
undertake any responsibility for the accuracy, completeness or reasonableness
of, or independently to verify, this information. In addition, SG Cowen did not
conduct any physical inspection of the properties or facilities of SPR or
Leapnet. SG Cowen further relied upon the assurance of management of SPR that
they were unaware of any
37
facts that would make the information provided to SG Cowen incomplete or
misleading in any respect. SG Cowen, with SPR's consent, assumed that the
financial forecasts and synergies provided to SG Cowen were reasonably prepared
by the management of SPR, and reflected the best available estimates and good
faith judgments of such management as to the future performance of SPR and the
expected synergies resulting from the transaction. Management of each of SPR
and Leapnet confirmed to SG Cowen, and SG Cowen assumed, with SPR's consent,
that each of the financial forecasts and synergies with respect to SPR and
Leapnet provided a reasonable basis for its opinion.
SG Cowen did not make or obtain any independent evaluations, valuations or
appraisals of the assets or liabilities of SPR or Leapnet, nor was SG Cowen
furnished with any such materials. With respect to all legal matters relating
to SPR and Leapnet, SG Cowen relied on the advice of legal counsel to SPR. SG
Cowen expresses no opinion with respect to any legal matter. SG Cowen's
services to SPR in connection with the transaction were comprised solely of
rendering an opinion from a financial point of view of the exchange ratio. SG
Cowen's opinion was necessarily based upon economic and market conditions and
other circumstances as they existed and could be evaluated by SG Cowen on the
date of its opinion. It should be understood that, although subsequent
developments may affect its opinion, SG Cowen does not have any obligation to
update, revise or reaffirm its opinion, and SG Cowen expressly disclaims any
responsibility to do so. Additionally, SG Cowen was not authorized or requested
to, and did not, solicit alternative offers for SPR or its assets, nor did SG
Cowen investigate any other alternative transactions that may be available to
SPR.
In rendering its opinion, SG Cowen assumed, in all respects material to its
analysis, that the representations and warranties of each party contained in
the merger agreement are true and correct, that each party will perform all of
the covenants and agreements required to be performed by it under the merger
agreement and that all conditions to the consummation of the transaction will
be satisfied without waiver thereof. SG Cowen assumed that the final form of
the merger agreement would be substantially similar to the last draft received
by SG Cowen prior to rendering its opinion. SG Cowen also assumed that all
governmental, regulatory and other consents and approvals contemplated by the
merger agreement would be obtained, and that, in the course of obtaining any of
those consents, no restrictions will be imposed or waivers made that would have
an adverse effect on the contemplated benefits of the transaction. SPR informed
SG Cowen, and SG Cowen assumed, that the transaction (i) will be recorded as a
purchase transaction under generally accepted accounting principles and (ii)
will be treated as a tax-free reorganization within the meaning of Section
368(a) of the Internal Revenue Code of 1986, as amended.
SG Cowen's opinion does not constitute a recommendation to any stockholder
as to how the stockholder should vote on the proposed transaction. SG Cowen's
opinion does not imply any conclusion as to the likely trading range for SPR or
Leapnet common stock following consummation of the transaction or otherwise,
which may vary depending on numerous factors that generally influence the price
of securities. SG Cowen's opinion is limited to the fairness, from a financial
point of view, of the exchange ratio in the transaction. SG Cowen expresses no
opinion as to the underlying business reasons that may support the decision of
the SPR board to approve, or SPR's decision to consummate, the transaction.
The following is a summary of the principal financial analyses performed by
SG Cowen to arrive at its opinion. Some of the summaries of financial analyses
include information presented in tabular format. In order to fully understand
the financial analyses, the tables must be read together with the text of each
summary. The tables alone do not constitute a complete description of the
financial analyses. Considering the data set forth in the tables without
considering the full narrative description of the financial analyses, including
the methodologies and assumptions underlying the analyses, could create a
misleading or incomplete view of the financial analyses. SG Cowen performed
certain procedures, including each of the financial analyses described below,
and reviewed with the management of SPR and Leapnet the assumptions on which
such analyses were based and other factors, including the historical and
projected financial results of SPR and Leapnet. No limitations were imposed by
the SPR board with respect to the investigations made or procedures followed by
SG Cowen in rendering its opinion.
38
Analysis of Premiums Paid in Selected Transactions. SG Cowen reviewed the
premium of the offer price over the trading prices 1 trading day and 4 weeks
prior to the announcement date of selected acquisition transactions in the IT
Services industry (the "IT Services Transactions") announced since December 5,
1997.
The following table presents the premium of the offer prices over the
trading prices 1 day and 4 weeks prior to the announcement date for the IT
Services Transactions and the premiums implied for SPR, based on the exchange
ratio in the transaction pursuant to the agreement. The information in the
table is based on the closing stock price of SPR stock on January 24, 2000.
Premiums Paid
for:
IT Services
Transactions Premium Implied
--------------- by Exchange Ratio in
Premiums Paid to Stock Price: Median Mean the Transaction for SPR
----------------------------- ------ ----- -----------------------
1 day prior to announcement 17.4% 28.3% 34.8%
4 weeks prior to announcement 33.8% 39.1% 23.8%
Analysis of Certain Transactions (SPR). SG Cowen reviewed the financial
terms, to the extent publicly available, of 23 IT Services Transactions which
were announced or completed since December 5, 1997. These transactions were
(listed as acquiror/target):
. Sapient Corp./ Exor Technologies Inc.
. Complete Business Solutions/ Costello & Associates
. Romac International/ Source Services Corp
. Renaissance Worldwide, Inc./ Triad, Inc.
. Aris Corp./ InTime Systems International, Inc.
. Data Processing Resources Corp./ Systems & Programming Consulting
. CACI International Inc./ QuesTech, Inc.
. Keane Inc./ Icom Systems
. Cambridge Technology Partners/ Excell Data Corporation
. Logica PLC/ Carnegie Group, Inc.
. Electronic Data Systems/ MCI Systemhouse
. Intelligroup, Inc./ Empower Solutions
. Maximus/ Control Software
. Metamor Worldwide/ GE Capital Consulting
. Welsh, Carson/ BancTec, Inc.
. Getronics NV/ Wang Laboratories
. Dendrite International, Inc./ CorNet International Ltd.
. KPMG/ Softline Systems & Integrators, Inc.
. Future Next Consulting/ Core Technologies Group
. GTCR Golder Rauner, LLC/ Metamor Software Solutions
. Compuware Corp./ Data Processing Resources Corp.
. Razorfish, Inc./ i-Cube
. Computer Sciences Corporation/ Nichols Research Corporation
SG Cowen reviewed the market capitalization of common stock plus total debt
less cash and equivalents ("Enterprise Value") of acquired companies in the IT
Services Transactions as a multiple of latest reported
39
twelve month ("LTM") revenues and earnings before interest expense and income
taxes ("EBIT"), and also examined the multiples of equity value in the IT
Services Transactions to LTM earnings.
The following table presents, for the periods indicated, the multiples
implied by the ratio of Enterprise Value to LTM revenues and LTM EBIT, and the
ratio of equity value to LTM earnings. The information in the table is based on
the closing stock price of SPR stock on January 24, 2000.
Multiples for IT Services Multiples
Transactions Implied by
------------------------- transaction
Low Mean Median High for SPR
----- ----- ------ ------ -----------
Enterprise Value as a ratio of:
LTM Revenue..................... 0.54x 1.89x 1.38x 11.43x 0.61x
LTM EBIT........................ 11.5x 22.6x 15.9x 47.1x 44.2x
Equity Value as a ratio of:
LTM Earnings.................... 15.4x 33.5x 25.2x 62.3x 40.0x
Although the IT Services Transactions were used for comparison purposes,
none of those transactions is directly comparable to the transaction, and none
of the companies in those transactions is directly comparable to SPR.
Accordingly, an analysis of the results of such a comparison is not purely
mathematical, but instead involves complex considerations and judgments
concerning differences in historical and projected financial and operating
characteristics of the companies involved and other factors that could affect
the acquisition value of such companies or SPR to which they are being
compared.
Analysis of Certain Transactions (Leapnet). SG Cowen reviewed the financial
terms, to the extent publicly available, of 14 transactions (the "Internet
Transactions") involving the acquisition of companies in the Internet
Integration business, which were announced or completed since March 31, 1998,
and of 8 transactions (the "Advertising Transactions") involving the
acquisition of companies in the Advertising industry, which were announced or
completed since May 16, 1997. These transactions were (listed as
acquiror/target):
Internet Transactions:
. Whittman-Hart, Inc./USWeb Corp.
. Macromedia, Inc./Adromedia, Inc.
. Razorfish, Inc./i-Cube
. AnswerThink Consulting Group/THINK New Ideas
. i-Cube/Conduit Communications
. Exodus Communications, Inc./Cohesive Technology Solutions, Inc.
. Verio/Web Communications
. Sapient Corp./Adjacency, Inc.
. Sapient Corporation/Studio Archetype, Inc.
. US Interactive/Digital Evolution
. Think New Ideas/InterWeb Inc.
. Platinum Software/Vivid Studios
. Metamor Worldwide/NDC Group
. Renaissance Worldwide, Inc./Neoglyphics Media Corp.
Advertising Transactions:
. Cordiant Communications/Healthworld
. TMP Worldwide Inc./LIDA Advertising Inc.
40
. Source Information Management/Brand Manufacturing Corp.
. Prepaid Legal Services Inc./TPN Inc.
. Chancellor Media Corp./Martin Media L.P.
. Snyder Communications, Inc./Arnold Communications, Inc.
. X-ceed Inc./Zabit & Associates Inc.
. CKS Group, Inc./Sitespecific, Inc.
SG Cowen reviewed the Enterprise Value of acquired companies in the Internet
Transactions and Advertising Transactions as a multiple of LTM revenues and LTM
EBIT, and also examined the multiples of equity value in the Internet
Transactions and Advertising Transactions to LTM earnings.
The following table presents, for the periods indicated, the multiples
implied by the ratio of Enterprise Value to LTM revenues and LTM EBIT, and the
ratio of equity value to LTM earnings. The information in the table is based on
the closing stock price of Leapnet stock on January 21, 2000.
Multiples for Internet
and Advertising
Transactions
------------------------- Leapnet
Low Mean Median High Multiples
----- ----- ------ ------ ---------
Enterprise Value as a ratio of:
LTM Revenue....................... 0.88x 4.99x 3.57x 14.63x 2.20x
LTM EBIT.......................... 16.4x 24.1x 22.1x 40.1x NM
Equity Value as a ratio of:
LTM Earnings...................... 21.3x 39.1x 37.2x 70.2x NM
Although the Internet Transactions and Advertising Transactions were used
for comparison purposes, none of those transactions is directly comparable to
the transaction, and none of the companies in those transactions is directly
comparable to Leapnet. Accordingly, an analysis of the results of such a
comparison is not purely mathematical, but instead involves complex
considerations and judgments concerning differences in historical and projected
financial and operating characteristics of the companies involved and other
factors that could affect the acquisition value of such companies or Leapnet to
which they are being compared.
Analysis of Certain Publicly Traded Companies (SPR). To provide contextual
data and comparative market information, SG Cowen compared selected historical
operating and financial data and ratios for SPR to the corresponding financial
data and ratios of nine other companies (the "Selected Companies") whose
securities are publicly traded and which SG Cowen believes have operating,
market valuation and trading valuations similar to what might be expected of
SPR. These companies were:
. The A Consulting Team
. Aris Corporation
. Atlantic Data Services
. Brightstar Information Technology Group
. Computer Horizons
. Computer Task Group
. DA Consulting Group
. IMRglobal
. Tier Technologies
The data and ratios included the Enterprise Value of the Selected Companies
as multiples of LTM and projected calendar year ("CY") 2000 and LTM EBIT. SG
Cowen also examined the ratios of the current share
41
prices of the Selected Companies to the LTM earnings per share ("EPS") and
estimated CY2000 EPS (in each case, as available from research analyst reports
or, if not so available, First Call) for the Selected Companies.
The following table presents, for the periods indicated, the multiples
implied by the ratio of Enterprise Value to LTM and projected CY2000 revenues
and LTM EBIT, and the ratio of equity value to LTM earnings and estimate for
CY2000 earnings. The information in the table is based on the closing stock
price of SPR stock on January 24, 2000.
Selected Company
Multiples
------------------------ Multiple Implied by Exchange Ratio
Low Mean Median High in the transaction for SPR
----- ----- ------ ----- ----------------------------------
Enterprise Value as a
ratio of:
LTM Revenue........... 0.14x 0.92x 0.93x 1.81x 0.61x
CY2000 Revenue........ 0.53 0.98 0.95 1.51 0.68
LTM EBIT.............. 7.8 12.6 11.0 23.9 44.2
Equity Value as a ratio
of:
LTM Earnings.......... 14.0x 30.8x 22.4x 74.3x 40.0x
CY2000 Earnings....... 10.9 26.4 19.9 53.4 106.6
Although the Selected Companies were used for comparison purposes, none of
those companies is directly comparable to SPR. Accordingly, an analysis of the
results of such a comparison is not purely mathematical, but instead involves
complex considerations and judgments concerning differences in historical and
projected financial and operating characteristics of the Selected Companies and
other factors that could affect the public trading value of the Selected
Companies or SPR to which they are being compared.
Analysis of Certain Publicly Traded Companies (Leapnet). To provide
contextual data and comparative market information, SG Cowen compared selected
historical operating and financial data and ratios for Leapnet to the
corresponding financial data and ratios of seven Internet Integration/Branding
companies (the "Selected Internet Companies") and six Advertising/Marketing
Communications companies (the "Selected Advertising Companies") whose
securities are publicly traded and which SG Cowen believes have operating,
market valuation and trading valuations similar to what might be expected of
Leapnet. These companies were:
Selected Internet Companies
. Answerthink Consulting Group
. iXL Enterprises
. K2 Design
. Modem Media.Poppe Tyson
. Scient
. Viant
. Xceed
Selected Advertising Companies
. Alternate Marketing Networks
. Coactive Marketing Group
. GenesisIntermedia.com
. Grey Advertising
42
. Marketing Services Group
. Obie Media Corp.
The data and ratios included the Enterprise Value of the Selected Internet
Companies and Selected Advertising Companies as multiples of LTM, last quarter
annualized ("LQA") and projected CY2000 revenues. SG Cowen also examined the
ratios of the current share prices of the Selected Internet Companies and
Selected Advertising Companies to the estimated CY2000 EPS (in each case, as
available from research analyst reports or, if not so available, First Call)
for the Selected Internet Companies and Selected Advertising Companies.
The following table presents, for the periods indicated, the multiples
implied by the ratio of Enterprise Value to LTM, LQA and projected CY2000
revenues, and the ratio of equity value to the estimated CY2000 earnings. The
information in the table is based on the closing stock price of Leapnet stock
on January 21, 2000.
Selected Internet and
Advertising Companies
-------------------------
Low Mean Median High Leapnet Multiple
---- ----- ------ ----- ----------------
Enterprise Value as a ratio
of:
LTM Revenue.............. 0.27x 16.99x 5.34x 58.11x 2.20x
LQA Revenue.............. 0.30 10.31 4.53 51.50 2.05
CY2000 Revenue........... 1.51 10.08 4.95 29.80 1.79
Equity Value as a ratio of:
CY2000 Earnings.......... 22.9x 81.9x 65.1x 157.6x 51.9x
Although the Selected Internet Companies and Selected Advertising Companies
were used for comparison purposes, none of those companies is directly
comparable to Leapnet. Accordingly, an analysis of the results of such a
comparison is not purely mathematical, but instead involves complex
considerations and judgments concerning differences in historical and projected
financial and operating characteristics of the Selected Internet Companies and
Selected Advertising Companies and other factors that could affect the public
trading value of the Selected Internet Companies and Selected Advertising
Companies or Leapnet to which they are being compared.
Historical Exchange Ratio Analysis. SG Cowen analyzed the ratios of the
closing prices of SPR common stock to those of Leapnet common stock over
various periods ending January 24, 2000. The table below illustrates the ratios
for those periods.
Period Ratio
------ -----
Latest 5 trading days average....................................... 1.00
Latest 10 trading days average...................................... 1.06
Latest 30 trading days average...................................... 1.02
Latest 60 trading days average...................................... 0.92
Latest 90 trading days average...................................... 1.07
Latest 180 trading days average..................................... 1.62
Latest 250 trading days average..................................... 2.18
-----
Implied Exchange Ratio for SPR...................................... 1.085
Stock Trading History. To provide contextual data and comparative market
data, SG Cowen reviewed the historical market prices of SPR common stock for
the twelve month period ended January 21, 2000. SG Cowen noted that over the
indicated period the high and low prices for shares of SPR were:
. $22.44 and $3.44 for the 12 month period
SG Cowen also reviewed the historical market prices of Leapnet common stock
from for the twelve month period ended January 21, 2000. SG Cowen noted that
over the indicated periods the high and low prices for shares of Leapnet common
stock were:
. $9.75 and $1.94 for the 12 month period
43
Contribution Analysis. SG Cowen analyzed the respective contributions of
LTM, LQA and projected CY2000 revenues and LTM Net Income of SPR and Leapnet to
the combined company, based upon the historical and projected financial results
of SPR and Leapnet prepared by managements of both SPR and Leapnet.
% of Combined Company
-------------------------
Leapnet SPR
Contribution Contribution
------------ ------------
Operating Results
Revenue
LTM......................................... 34% 66%
LQA......................................... 40 60
CY2000E..................................... 41 59
Net Income
CY2000E..................................... 64% 36%
Pro Forma Ownership Analysis. SG Cowen analyzed the pro forma ownership in
the combined company by the holders of SPR and noted that holders of SPR common
stock would own approximately 13,915,433 shares of common stock of the combined
company.
Discounted Cash Flow Analysis (SPR). SG Cowen estimated a range of values
for SPR common stock based upon the discounted present value of the projected
after-tax cash flows of SPR described in the financial forecasts provided by
management of SPR, and in the financial forecasts on a fully taxed basis, for
the fiscal years ended December 31, 2000 through December 31, 2004, and of the
terminal value of SPR at December 31, 2004, based upon multiples of revenue.
After-tax cash flow was calculated by taking projected EBIT and subtracting
from this amount projected taxes, capital expenditures, changes in working
capital and changes in other assets and liabilities and adding back projected
depreciation and amortization. This analysis was based upon certain assumptions
described by, projections supplied by and discussions held with the management
of SPR. In performing this analysis, SG Cowen utilized discount rates ranging
from 16.0% to 20.0%, which were selected based on the estimated industry
weighted average cost of capital. SG Cowen utilized terminal multiples of
revenue ranging from 0.5 times to 0.9 times, these multiples representing the
general range of multiples of revenue for the Selected Companies.
Utilizing this methodology, the per share equity value of SPR ranged from:
. $6.91 to $9.34 per share, based on the fully taxed financial forecasts
The transaction value per share of SPR common stock based on the price of
Leapnet stock on January 24, 2000 is $7.12.
Discounted Cash Flow Analysis (Leapnet). SG Cowen estimated a range of
values for Leapnet common stock based upon the discounted present value of the
projected after-tax cash flows of Leapnet described in the financial forecasts
provided by management of Leapnet, and in the financial forecasts on a fully
taxed basis, for the calendar years ended December 31, 2000 through December
31, 2004, and of the terminal value of Leapnet at December 31, 2004, based upon
multiples of revenue. After-tax cash flow was calculated by taking projected
EBIT and subtracting from this amount projected taxes, capital expenditures,
changes in working capital and changes in other assets and liabilities and
adding back projected depreciation and amortization. This analysis was based
upon certain assumptions described by, projections supplied by and discussions
held with the management of Leapnet. In performing this analysis, SG Cowen
utilized discount rates ranging from 24.0% to 28.0%, which were selected based
on the estimated industry weighted average cost of capital. SG Cowen utilized
terminal multiples of revenue ranging from 2.0 times to 3.0 times, these
multiples representing the general range of multiples of revenue for the
Selected Internet Companies and Selected Advertising Companies.
Utilizing this methodology, the per share equity value of Leapnet ranged
from:
. $7.63 to $12.28 per share, based on the fully taxed financial forecasts
44
The summary set forth above does not purport to be a complete description of
all the analyses performed by SG Cowen. The preparation of a fairness opinion
involves various determinations as to the most appropriate and relevant methods
of financial analyses and the application of these methods to the particular
circumstances and, therefore, such an opinion is not readily susceptible to
partial analysis or summary description. SG Cowen did not attribute any
particular weight to any analysis or factor considered by it, but rather made
qualitative judgments as to the significance and relevance of each analysis and
factor. Accordingly, notwithstanding the separate factors summarized above, SG
Cowen believes, and has advised the SPR board, that its analyses must be
considered as a whole and that selecting portions of its analyses and the
factors considered by it, without considering all analyses and factors, could
create an incomplete view of the process underlying its opinion. In performing
its analyses, SG Cowen made numerous assumptions with respect to industry
performance, business and economic conditions and other matters, many of which
are beyond the control of SPR and Leapnet. These analyses performed by SG Cowen
are not necessarily indicative of actual values or future results, which may be
significantly more or less favorable than suggested by such analyses. In
addition, analyses relating to the value of businesses do not purport to be
appraisals or to reflect the prices at which businesses or securities may
actually be sold. Accordingly, such analyses and estimates are inherently
subject to uncertainty, being based upon numerous factors or events beyond the
control of the parties or their respective advisors. None of SPR, Leapnet, SG
Cowen or any other person assumes responsibility if future results are
materially different from those projected. The analyses supplied by SG Cowen
and its opinion were among several factors taken into consideration by the SPR
board in making its decision to enter into the agreement and should not be
considered as determinative of such decision.
SG Cowen was selected by the SPR board to render an opinion to the SPR board
because SG Cowen is a nationally recognized investment banking firm and
because, as part of its investment banking business, SG Cowen is continually
engaged in the valuation of businesses and their securities in connection with
mergers and acquisitions, negotiated underwritings, secondary distributions of
listed and unlisted securities, private placements and valuations for corporate
and other purposes. In the ordinary course of its business, SG Cowen and its
affiliates may trade the equity securities of SPR and Leapnet for their own
account and for the accounts of their customers, and, accordingly, may at any
time hold a long or short position in such securities. SG Cowen and its
affiliates in the ordinary course of business may in the future provide
commercial and investment banking services to SPR and Leapnet, including
serving as a financial advisor on potential acquisitions and as an underwriter
on equity offerings, and may in the future receive fees for the rendering of
such services.
SG Cowen received a retainer fee of $50,000. If the transaction is
consummated, SG Cowen will be paid a fee of $700,000 for rendering its opinion.
If the transaction is not consummated, the fee will be $350,000. Additionally,
SPR has agreed to reimburse SG Cowen for its out-of-pocket expenses, including
attorneys' fees, and has agreed to indemnify SG Cowen against certain
liabilities, including liabilities under the federal securities laws. The terms
of the fee arrangement with SG Cowen, which are customary in transactions of
this nature, were negotiated at arm's length between SPR and SG Cowen, and the
SPR board was aware of the arrangement, including the fact that a significant
portion of the fee payable to SG Cowen is contingent upon the completion of the
transaction.
Interests of Leapnet and SPR Directors and Management in the Merger
Executive officers and members of the boards of both Leapnet and SPR have
interests in the merger that differ from the interests of other stockholders
generally. Both boards were aware of these interests and considered them, among
other matters, in approving the merger agreement and the transactions
contemplated thereby.
The merger agreement provides that after the effective time of the merger:
. Leapnet will indemnify present and former directors and officers of SPR
against all claims arising out of actions or omissions occurring on or
prior to the effective time to the fullest extent permitted by law,
45
including as provided for in the charter and by-laws of SPR and the
indemnification actually provided by SPR as of the date of the merger
agreement; and
. Leapnet will maintain in effect for at least six years the current
policies of directors' and officers' liability insurance and fiduciary
liability insurance maintained by SPR, Leapnet and their subsidiaries
respectively (except that Leapnet may substitute policies with coverage
in amount and scope substantially similar to such existing policies,
provided that Leapnet is not required to pay aggregate premiums in excess
of 200% of the aggregate premium paid by SPR in 1999 on an annualized
basis) with respect to any claims arising from facts or events which
occurred on or before the effective time of the merger.
At the time of the merger, stock options with an exercise price of $5.1067 a
share totaling 62,654 SPR shares for Stephen J. Tober, SPR's Chief Operating
Officer, and 28,196 SPR shares for Stephen T. Gambill, SPR's Chief Financial
Officer, will vest and become immediately exercisable.
At the time of the merger, Leapnet will appoint Frederick A. Smith,
Leapnet's Chairman and Chief Executive Officer, to be a director and chairman
of the combined company, Robert M. Figliulo, SPR's Chairman and Chief Executive
Officer, to be a director and the Vice Chairman and Chief Executive Officer of
the combined company, Robert C. Bramlette, Leapnet's Chief Legal Officer, to be
the Chief Legal Officer of the combined company, and Stephen J. Tober, SPR's
Chief Operating Officer, to be the President and Chief Operating Officer of the
combined company.
On January 27, 2000, the management employment agreements for each of Robert
Figliulo, David Figliulo and Steve Tober were amended to modify the bonus
program provisions in each agreement. The bonus program provision enabled the
officers to receive a bonus if SPR's common stock price reaches certain target
levels. The existing management employment agreements also provided that the
officers were to receive the middle range target bonus if a change of control
of SPR occurred. The amendments to each agreement deleted the change of control
provision and, to the extent the proposed merger is consummated, amended the
bonus program provision to enable the officers to receive the same bonus if
Leapnet's common stock price reaches the same target levels.
Effective Time
The merger will occur upon the filing of a certificate of merger with the
Secretary of State of the State of Delaware. The filing of the certificate of
merger is required to occur no later than the first business day after the
satisfaction or waiver of the closing conditions set forth in the merger
agreement.
Accounting Treatment of the SPR Merger
We intend to account for the SPR merger as a purchase for financial
reporting and accounting purposes, under generally accepted accounting
principles. After the merger, the results of operations of Leapnet and SPR will
be included in the consolidated financial statements of the combined company.
The purchase price will be allocated based on the fair values of the assets
acquired and the liabilities assumed. Any excess of cost over fair value of the
net tangible assets of SPR will be recorded as goodwill and other intangible
assets and will be amortized by charges to operations under generally accepted
accounting principles. These allocations will be made based upon valuations and
other studies that have not yet been finalized.
Regulatory Approvals
The parties have concluded that the merger is not subject to the
notification and specified waiting period requirements under the Hart-Scott-
Rodino Antitrust Improvements Act of 1976 and related rules. However, at any
time before or after consummation of the merger, any state could take any
action under its antitrust laws that it deems necessary or desirable in the
public interest, including seeking to enjoin the consummation of the merger or
seeking divestiture of particular assets of Leapnet or SPR. Private parties
also may seek to take legal
46
action under antitrust laws. In addition, non-United States governmental and
regulatory authorities may seek to take action under applicable antitrust laws.
We cannot be sure that a challenge to the merger will not be made or, if such
challenge is made, that we will prevail.
Other Effects Of The Merger; Delisting Of SPR Shares
After the merger, SPR stockholders will become stockholders of Leapnet. The
rights of all such stockholders will be governed by the certificate of
incorporation and bylaws of Leapnet. For a description of the difference
between the rights of Leapnet and SPR stockholders, see "Comparison of Rights
of Leapnet Stockholders and SPR Stockholders."
If the merger is consummated, shares of SPR common stock will cease to be
listed on The Nasdaq National Market. In addition, SPR will deregister the SPR
common stock under the Exchange Act and, accordingly, will no longer be
required to file periodic reports pursuant to the Exchange Act.
No Appraisal Rights
Under Delaware corporate law, holders of SPR common stock are not entitled
to exercise dissenters' appraisal rights in connection with the merger because,
on the record date, SPR common stock was designated and quoted for trading on
The Nasdaq National Market and will be converted into shares of Leapnet common
stock, which at the effective time of the merger will be listed on The Nasdaq
National Market.
Holders of Leapnet common stock prior to the merger are also not entitled to
appraisal rights in connection with the merger.
Material Federal Income Tax Consequences
In the opinion of Winston & Strawn, tax counsel to SPR, subject to the
qualifications set forth below and contained herein, the following summary sets
forth the principal United States federal income tax consequences of the merger
to holders of SPR common stock who exchange such stock for Leapnet common stock
pursuant to the merger agreement. The following discussion only addresses the
United States federal income tax consequences to stockholders who hold their
SPR common stock as a capital asset and does not address all of the United
States federal income tax consequences that may be relevant to particular
stockholders in light of their individual circumstances or stockholders who are
subject to special rules (including, without limitation, financial
institutions, tax-exempt organizations, insurance companies, dealers in
securities or foreign currencies, foreign holders, persons who hold their SPR
common stock as a hedge against currency risk, or a constructive sale, or
conversion transaction, or holders who acquired their shares pursuant to the
exercise of an employee stock options or otherwise as compensation). The
following summary is not binding on the Internal Revenue Service. It is based
upon the Internal Revenue Code, laws, regulations, rulings, and decisions in
effect on the date hereof, all of which are subject to change, possibly with
retroactive effect. Tax consequences under state, local, and foreign laws are
not addressed herein. No rulings have been or will be requested from the
Internal Revenue Service with respect to any of the matters discussed herein.
There can be no assurance that future legislation, regulations, administrative
rulings or court decisions would not alter the consequences set forth below.
HOLDERS OF SPR COMMON STOCK ARE STRONGLY URGED TO CONSULT THEIR OWN TAX
ADVISORS AS TO THE SPECIFIC TAX CONSEQUENCES TO THEM OF THE MERGER, INCLUDING
THE APPLICABILITY AND EFFECT OF FEDERAL, STATE, LOCAL, AND FOREIGN INCOME AND
OTHER TAX LAWS IN THEIR PARTICULAR CIRCUMSTANCES.
It is a condition to the consummation of the merger that SPR receive an
opinion from its counsel, Winston & Strawn, and that Leapnet receive an opinion
from its counsel, Morrison & Foerster LLP, stating that the merger will be
treated for United States federal income tax purposes as a reorganization
within the meaning of
47
Section 368(a) of the Internal Revenue Code. The issuance of such opinions will
be conditioned on certain assumptions set forth therein and on representations
made by SPR, Brassie Corporation, and Leapnet. An opinion of counsel is not
binding on the Internal Revenue Service or a court.
Based on the above assumptions and qualifications, and assuming the merger
constitutes a reorganization within the meaning of Section 368(a) of the
Internal Revenue Code, holders of SPR common stock who exchange their SPR
common stock for Leapnet common stock will not recognize gain or loss for
United States federal income tax purposes, except with respect to cash, if any,
they receive in lieu of fractional shares of Leapnet common stock. The
aggregate tax basis in the Leapnet common stock received in the merger by each
holder of SPR common stock will the same as his or her aggregate tax basis in
the SPR common stock surrendered in the merger, decreased by the amount of any
tax basis allocable to any fractional share interest for which cash is
received. The holding period of the Leapnet common stock received in the merger
by a holder of SPR common stock will include the holding period of the SPR
common stock that he or she surrendered in the merger.
Holders of SPR common stock who receive cash in lieu of fractional shares of
Leapnet common stock in the merger generally will recognize gain or loss equal
to the difference between the amount of cash received and his or her tax basis
in the Leapnet common stock that is allocable to the fractional share. The gain
or loss generally will be capital gain or loss. In the case of an individual
shareholder, capital gain is subject to a maximum tax rate of 20% if the
individual held his or her SPR common stock for more than 12 months at the
effective time of the merger. The deductibility of capital losses is subject to
limitations for both individuals and corporations.
Resale Restrictions And Lockup Agreements
Leapnet common stock issued in the merger will not be subject to any
restrictions on transfer arising under the Securities Act of 1933, as amended,
except for shares issued to any SPR stockholder who may be deemed to be an
"affiliate" of SPR or Leapnet for purposes of Rule 145 under the Securities
Act. Each such affiliate receiving Leapnet shares in the merger will agree not
to transfer any Leapnet common stock received in the merger except in
compliance with the resale provisions of Rule 144 or 145 under the Securities
Act of 1933 or as otherwise permitted under the Securities Act of 1933. This
proxy statement/prospectus does not cover resales of Leapnet common stock
received by any person upon completion of the merger, and no person is
authorized to make any use of this proxy statement/prospectus in connection
with any such resale.
Dividend Policy
Since they began public trading, neither Leapnet nor SPR has ever paid
dividends to its stockholders, nor does Leapnet expect to pay dividends in the
foreseeable future.
48
THE MERGER AGREEMENT
The following is a brief summary of the material provisions of the merger
agreement. Leapnet and SPR urge you to read the entire merger agreement, which
is attached as Appendix A to this joint proxy statement/prospectus. This
summary is qualified in its entirety by reference to the full text of the
merger agreement.
The Merger
At the effective time of the merger agreement, Brassie Corporation, a wholly
owned subsidiary of Leapnet, will merge with and into SPR. As a result of the
merger, SPR will become a wholly owned subsidiary of Leapnet.
Conversion of Securities
Each share of SPR common stock issued and outstanding immediately before the
effective time of the merger will automatically convert into the right to
receive 1.085 shares of Leapnet common stock. If a stock split, stock dividend
or similar transaction takes place before the effective time of the merger, the
exchange ratio will adjust accordingly. Leapnet will not issue any fractional
shares. Instead of receiving a fractional share, an SPR stockholder will
receive cash equal to the same fraction of the closing price of the Leapnet
common stock on the day of the closing.
Treatment of SPR Stock Options
At the closing, Leapnet will assume each outstanding option to purchase
shares of SPR common stock that is then outstanding and unexercised. Each
option will continue to have the same terms and conditions as before the
closing, except that the option will be exercisable, or will become exercisable
on vesting in accordance with its terms (which provides for accelerated vesting
upon the closing), for the number of shares of Leapnet common stock equal to
the number of shares of SPR common stock purchasable under the original option
times 1.085. The exercise price per share of Leapnet common stock of the
assumed SPR options will be equal to the exercise price per share of SPR common
stock under the original SPR options divided by 1.085.
On March 21, 2000, options to purchase a total of 1,577,778 shares of SPR
common stock were outstanding, at a weighted average exercise price of
approximately $6.16 per share, at exercise prices ranging from $3.75 to $21.00
per share.
Exchange of Shares
Leapnet presently plans to retain the services of First Chicago Trust
Company of New York to act as exchange agent to facilitate the exchange of
shares. After the effective time, the exchange agent will mail a letter of
transmittal and instructions to each holder of record of SPR common stock. When
an SPR stockholder surrenders share certificates to the exchange agent, the
stockholder will receive a certificate for a number of whole shares of Leapnet
common stock equal to the exchange ratio multiplied by the number of shares of
SPR common stock surrendered, plus a check for any dividends declared and paid
on Leapnet common stock after the effective time, and the value of fractional
shares. SPR stockholders should not send in their SPR stock certificates until
they receive a letter of transmittal.
Stockholders who request that the shares of Leapnet common stock be issued
in a different name than the one on the SPR stock certificates they surrender
must pay any transfer or other taxes required by the change or demonstrate that
the tax has been paid or is not applicable.
The stock transfer books of SPR will close at the effective time and no
further transfers of SPR shares will take place. After the effective time, SPR
certificates surrendered in accordance with the merger agreement will be
cancelled and exchanged for Leapnet shares.
49
Representations And Warranties
The merger agreement contains substantially reciprocal representations and
warranties of SPR and Leapnet customary for a transaction similar to the
merger. None of the representations and warranties made in the merger agreement
survive the closing of the merger.
Certain Covenants
Each of Leapnet and SPR has undertaken certain covenants in the merger
agreement. The following summarizes the more significant of these covenants.
No Solicitation. Leapnet and SPR have agreed that they and their
subsidiaries and their directors, officers, affiliates will not take action to
solicit or encourage, and will use its reasonable best efforts to cause their
respective investment bankers, representatives and agents not to take action to
solicit or encourage, an offer for an alternative acquisition transaction
involving Leapnet or SPR of a nature defined in the merger agreement.
Restricted actions include engaging in any discussions with, or furnishing
any information to, a potential bidder or knowingly take any other action
designed to facilitate an alternative transaction. However, Leapnet or SPR, as
the case may be, is permitted to take these actions in response to an
unsolicited offer if the board of Leapnet or SPR, as the case may be,
determines in good faith after consultation with outside counsel that such
action is required by its fiduciary duties and that the unsolicited offer is
likely to result in a more favorable transaction for its stockholders. In such
event, the Leapnet or SPR board, as the case may be, must inform the non-acting
party of the material terms of the unsolicited offer no less than within one
business day of such unsolicited offer being made or proposed to be made. Each
of Leapnet and SPR must keep the other reasonably informed of the status and
any material change to the terms of the unsolicited offer.
SPR Board's Covenant To Recommend. The SPR board has agreed to recommend to
SPR's stockholders the approval and adoption of the merger agreement and the
merger. However, the SPR board may withhold or modify its recommendation if SPR
board determines in good faith, after consultation with outside counsel, that
such withdrawal or modification is required by its fiduciary duties.
Leapnet Board's Covenant To Recommend. The Leapnet board has agreed to
recommend the approval of the merger agreement and the issuance of shares of
Leapnet common stock in the merger to Leapnet's stockholders. However, the
Leapnet board may withhold or modify its recommendation if the Leapnet board
determines in good faith, after consultation with outside counsel, that such
withdrawal or modification is required by its fiduciary duties.
Covenant To Hold Stockholder Meetings. Leapnet and SPR have agreed to submit
the merger agreement and any related transactions to their stockholders at the
meetings even if their boards of directors no longer recommend approval and
adoption of the merger agreement and any related transactions.
Conduct Of Business Of Leapnet And SPR. Leapnet and SPR are required to
conduct their business in the ordinary course consistent with the past practice
until the effective time of the merger and, subject to certain exceptions, may
not engage in certain material transactions during this period.
Cooperation Covenant. Leapnet and SPR have agreed to cooperate with each
other to use their reasonable best efforts to take all actions and do all
things necessary, proper or appropriate to complete the merger and the other
transactions contemplated by the merger agreement as soon as practicable.
Indemnification And Insurance Of Leapnet And SPR Directors And Officers. The
merger agreement provides that after the effective time of the merger:
. Leapnet will indemnify present and former directors and officers of SPR
against all claims arising out of actions or omissions occurring on or
prior to the effective time to the fullest extent permitted by law,
including as provided for in the charter and by-laws of SPR and the
indemnification actually provided by SPR as of the date of the merger
agreement; and
50
. Leapnet will maintain in effect for at least six years the current
policies of directors' and officers' liability insurance and fiduciary
liability insurance maintained by SPR, Leapnet and their subsidiaries
respectively (except that Leapnet may substitute policies with coverage
in amount and scope substantially similar to such existing policies,
provided that Leapnet is not required to pay aggregate premiums in excess
of 200% of the aggregate premium paid by SPR in 1999 on an annualized
basis) with respect to any claims arising from facts or events which
occurred on or before the effective time of the merger, subject to
certain cost limitations.
Filing Of Registration Statement On Form S-8. Promptly following the closing
date, Leapnet will file a Registration Statement on Form S-8 under the
Securities Act covering the shares of Leapnet common stock issuable with
respect to options to purchase SPR common stock assumed by Leapnet.
Affiliate Letters. SPR has agreed to use its reasonable best efforts to
obtain written agreements from each individual deemed an affiliate of SPR under
the Securities Act of 1933, as amended.
Accountant's Letter. Leapnet and SPR have agreed to use their reasonable
best efforts to cause their respective independent accountants to deliver
certain comfort letters to the other party.
Certain Other Covenants. The merger agreement contains other mutual
covenants of the parties that are typical for a transaction similar to the
merger.
Additional Agreements--Directors of Leapnet Following the Closing
Immediately following the closing, Leapnet's board of directors will consist
of nine people: Frederick A. Smith, Leapnet's current Chairman and Chief
Executive Officer, Robert M. Figliulo, SPR's current chairman and Chief
Executive Officer, four other individuals to be designated by Leapnet, and
three other individuals to be designated by SPR.
Leapnet and SPR have also agreed that, at the closing, Frederick Smith will
be appointed Chairman of the combined company, Robert M. Figliulo will be
appointed Vice Chairman and Chief Executive Officer of the combined company,
Robert C. Bramlette, Leapnet's current Chief Legal Officer, will be appointed
Chief Legal Officer of the combined company, and Stephen J. Tober, SPR's
current Chief Operating Officer, will be appointed President and Chief
Operating Officer of the combined company.
Employee Benefit Plans
After the closing, Leapnet will either continue the welfare benefit plans
formerly maintained by SPR for the benefit of former SPR participants or offer
coverage to those individuals under one or more of Leapnet's welfare benefit
plans. If coverage under the Leapnet plans is utilized, all of the following
will be true:
. the Leapnet plans offer SPR employees coverage that is at least as
favorable as that provided to Leapnet employees in similar circumstances,
. the Leapnet plans credit service with SPR and its affiliates prior to the
closing for purposes of any service and waiting period requirements,
. Leapnet uses reasonable commercial best efforts to have its plans not
provide any pre-existing condition exclusions for individuals who were
not excluded under SPR's plans, and
. the deductibles and co-payments in effect under Leapnet's plans will be
reduced by the deductibles and co-payments paid by SPR employees under
the corresponding SPR plans for the plan year in which the closing
occurs. In addition, for purposes of all Leapnet compensation and benefit
programs, service with SPR will be recognized as if it had been service
with Leapnet or its affiliates, except where such crediting would result
in a duplication of benefits or not be legally permissible.
At the effective time of the merger agreement, SPR's Employee Stock Purchase
Plan will terminate and all employees who were eligible to participate in that
plan will be allowed to participate in Leapnet's Employee Stock Purchase Plan.
SPR and Leapnet will evaluate whether the termination of any of their 401(k)
plans is reasonable in light of the merger. Participants in any such terminated
plan will be eligible to participate in a surviving 401(k) plan.
51
Conditions
Neither Leapnet nor SPR will be obligated to complete the merger unless
certain conditions are satisfied or are waived, including the following:
. holders of the requisite majority of Leapnet common stock and SPR common
stock must approve the merger agreement;
. the registration statement on Form S-4, of which this joint proxy
statement/prospectus forms a part, must become effective under the
Securities Act of 1933 and must not be the subject of any stop order or
proceedings seeking a stop order;
. no law, judgment, regulation or order may be in effect for either party
that prevents the merger or is reasonably likely to cause material harm
to Leapnet or SPR;
. the waiting period under applicable federal antitrust laws, and any
extension, must have expired or been terminated;
. the shares of Leapnet common stock issuable to SPR stockholders in the
merger shall have been registered under the Securities Act of 1933 and
approved for quotation on The Nasdaq National Market System; and
. each of Leapnet and SPR must receive an opinion of its tax counsel,
Morrison & Foerster LLP and Winston & Strawn, respectively, stating that
for United States federal income tax purposes the merger will qualify as
a reorganization within the meaning of the Internal Revenue Code.
Additional Conditions to the Obligations of Leapnet
The obligations of Leapnet and Brassie Corporation to effect the merger are
also subject to the satisfaction or waiver of the following additional
conditions:
. SPR's representations and warranties remain true on the closing date;
. SPR has performed in all material respects all of its obligations;
. SPR has delivered an officers' certificate certifying the completion of
certain closing conditions;
. no material adverse change has occurred relating to SPR after the date of
the agreement; and
. SPR shall have provided written evidence that it has at least $40,000,000
in cash, cash equivalents or marketable securities on the closing date.
If a condition is not satisfied because a party failed to fulfill its
obligations under the merger agreement, the same party cannot use the failure
of the condition to avoid its obligations under the merger agreement.
Additional Conditions to the Obligations of SPR
SPR is not obligated to complete the merger unless the following additional
conditions are satisfied or waived by SPR:
. the representations and warranties of Leapnet remain true on the closing
date;
. Leapnet has performed in all material respects all its obligations;
. Leapnet has delivered an officers' certificate certifying the completing
of certain closing conditions;
. no material adverse change has occurred relating to Leapnet after the
date of the agreement; and
. Leapnet shall have provided written evidence that it has at least
$6,000,000 in cash, cash equivalents or marketable securities on the
closing date.
If a condition is not satisfied because a party failed to fulfill its
obligations under the merger agreement, the same party cannot use the failure
of the condition to avoid its obligations under the merger agreement.
52
Termination
The merger agreement may be terminated at any time prior to the closing,
whether before or after the SPR or Leapnet stockholder approval of the merger
agreement, as follows:
. by mutual written consent of Leapnet and SPR;
. by either Leapnet or SPR if the merger is not completed by August 31,
2000, unless the party relying on this provision caused the delay;
. if a court or other United States governmental authority issues an order,
decree, ruling or takes any other action restraining, enjoining or
otherwise prohibiting the merger, and that order, decree, ruling or other
action has become final and non-appealable, so long as the party relying
on this provision to terminate the merger agreement made reasonable
attempts to prevent the imposition of the restraint, injunction or
prohibition and to remove it;
. if the SPR stockholders have not approved the merger agreement at the SPR
stockholder meeting or any adjournment of that meeting;
. if the Leapnet stockholders have not approved the merger at the Leapnet
stockholders' meeting or any adjournment of that meeting;
. by Leapnet, if SPR materially breached its representations, warranties or
obligations under the merger agreement, and the breach or failure cannot
be cured within 20 business days;
. by Leapnet, if SPR's board of directors withdraws or adversely modifies
its approval or recommendation of the merger, SPR fails to include the
board's recommendation in the proxy statement, SPR's board recommends any
other acquisition proposal, SPR or any of its directors or officers
participate in discussions or negotiations regarding another acquisition
proposal or other similar business transaction with third parties in
material breach of the merger agreement, SPR's board resolves to do any
of the foregoing or SPR consummates another acquisition proposal;
. by SPR, if Leapnet materially breached its representations, warranties or
obligations under the merger agreement, and the breach or failure cannot
be cured within 20 business days; and
. by SPR, if Leapnet's board of directors withdraws or adversely modifies
its approval or recommendation of the merger, Leapnet fails to include
the board's recommendation in the proxy statement, Leapnet's board
recommends any other acquisition proposal, Leapnet or any of its
directors or officers participate in discussions or negotiations
regarding another acquisition proposal or other similar business
transaction with third parties in material breach of the merger
agreement, Leapnet's board resolves to do any of the foregoing or Leapnet
consummates another acquisition proposal;
If the agreement terminates, Leapnet and SPR will each continue to have an
obligation to keep the other party's nonpublic information confidential, and
the parties will have the obligation to share equally the costs and expenses
incurred in connection with the filing, printing and mailing of this joint
proxy statement/prospectus. In addition, the merger agreement obligates payment
of a termination fee of $3,500,000 under the following circumstances:
. if an acquisition proposal or the intention to make an acquisition
proposal to either SPR or Leapnet shall have been made directly to the
stockholders or such company, generally or otherwise publicly announced
by such company or the person making the acquisition proposal, and the
acquisition proposal or intention is not irrevocably and publicly
withdrawn prior to the vote of such company's stockholders at the duly
held stockholders' meeting, and thereafter the merger agreement is
terminated by either party due to (i) the merger not occurring prior to
August 31, 2000; or (ii) the requisite stockholder approval of such
company's stockholders not having been obtained at the duly held
stockholders' meeting; provided, however, that no termination fee will be
payable to the company which was not subject to the acquisition proposal
unless and until within twelve (12) months of such termination the
company which was subject to the acquisition proposal or any of its
subsidiaries enters into any acquisition agreement with respect to, or
consummates any acquisition proposal, in which event the termination fee
will be
53
payable upon the first to occur of such events. Also, if either Leapnet or
SPR consummates an acquisition proposal during the twelve (12) month
period subsequent to such termination contemplated by this paragraph with
the same person or an affiliate of the person that made and withdrew an
acquisition proposal prior to such termination, such company will pay the
termination fee; or prior to such termination, such company will pay the
termination fee; or
. if Leapnet or SPR terminate the merger agreement because the other
party's board of directors has withdrawn or adversely modified its
recommendation of the merger or the merger agreement, such other party
failed to include its board's recommendation of the merger in this joint
proxy statement/prospectus, such other party's board recommended another
acquisition proposal, such other party or any of its directors or
officers participated in discussions or negotiations regarding another
acquisition proposal or similar business transaction with third parties
in material breach of the merger agreement, such other party's board of
directors resolved to do any of the foregoing or such other party
consummated another acquisition proposal.
. in lieu of a cash payment, Leapnet or SPR, as the case may be, can elect
to pay the fee by issuing to the party owed the fee shares of its common
stock of equivalent value.
In the event of (i) a willful breach by the other party of any provision of
the merger agreement in any material respect, or (ii) the intentional or
knowing misrepresentation in connection with the merger agreement or the
transactions contemplated thereby, the non-breaching party shall have all
right, powers and remedies against the breaching party which may be available
at law or in equity.
Expenses
Each of Leapnet and SPR will bear its own costs and expenses incurred in
connection with the merger agreement and the transactions contemplated thereby,
except that (a) the combined company shall pay any property or transfer taxes
imposed on the combined company as a result of the merger and (b) the printing
of the registration statement that includes this joint proxy
statement/prospectus will be shared equally by Leapnet and SPR.
Amendment
The merger agreement may be amended, either before or after the stockholders
of SPR or Leapnet approve the merger, by an instrument in writing signed by the
parties. However, after the stockholders of either party approve the merger,
any later amendment which by law requires stockholder approval may only be made
with such approval.
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EMPLOYEE INCENTIVE COMPENSATION PLAN
This section of the joint proxy statement/prospectus describes the proposals
to amend Leapnet's Employee Stock Incentive Plan. To the extent that the
proposals relate to the Employee Stock Incentive Plan and the terms of the
plan, the following description is qualified in its entirety by reference to
the Employee Incentive Compensation Plan, which is attached as an Appendix F1
to this joint proxy statement/prospectus. You are urged to read the Employee
Incentive Compensation Plan in its entirety.
Leapnet stockholders are being asked to approve an amendment to Leapnet's
Employee Incentive Compensation Plan that will increase the maximum number of
shares of common stock authorized for issuance under the Employee Incentive
Compensation Plan by an additional 5,000,000 shares from 5,000,000 shares to
10,000,000 shares to meet Leapnet's need for a bigger incentive pool for the
larger employee base after the merger.
The Employee Incentive Compensation Plan was adopted by Leapnet's board of
directors and approved by its stockholders in May 1996. The Employee Incentive
Compensation Plan was last amended in June 1999. In February 2000, Leapnet's
board adopted the amendment to the Employee Incentive Compensation Plan, for
which stockholder approval is now being sought at the Leapnet special meeting.
Leapnet's Employee Incentive Compensation Plan is described below under
"Leapnet's Employee Incentive Compensation Plan".
Vote Required
The affirmative vote of the holders of a majority of the outstanding shares
of Leapnet's common stock is required for approval of the amendment to the
Employee Incentive Compensation Plan. Leapnet will need to increase the number
of shares available for issuance under the Employee Incentive Compensation Plan
to cover new options that may be issued after the merger. Should stockholder
approval for this increase of authorized shares not be obtained, then Leapnet
will not be able to make grants in excess of the shares previously authorized.
The Employee Incentive Compensation Plan will, however, continue to remain in
effect, and awards may continue to be made pursuant to the provisions of the
Employee Incentive Compensation Plan in effect prior to the amendment
summarized in this joint proxy/prospectus until the available reserve of common
stock as last approved by the stockholders has been issued pursuant to the
grants made under the Employee Incentive Compensation Plan.
Recommendation of the Board
The board of directors recommends that the stockholders vote FOR the
proposal to amend Leapnet's Employee Incentive Compensation Plan to increase
the maximum number of shares of common stock authorized for issuance under the
Employee Incentive Compensation Plan by an additional 5,000,000 shares to
10,000,000 shares.
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DESCRIPTION OF LEAPNET CAPITAL STOCK
Leapnet's Transfer Agent And Registrar
First Chicago Trust Company of New York, a division of Equiserve, is the
transfer agent and registrar of the Leapnet common stock.
General
Leapnet's current authorized capital stock consists of 100,000,000 shares,
$0.01 par value per share, of common stock, and 20,000,000 shares, $0.01 par
value per share, of preferred stock.
The following summary of the terms and provisions of Leapnet's capital stock
are not complete, and you should read Leapnet's Amended and Restated
Certificate of Incorporation and Amended and Restated Bylaws, which have been
filed as exhibits to the Registration Statement on Form S-1 filed with the
Securities and Exchange Commission in connection with the Leapnet IPO. See
"Where You Can Find More Information."
Common Stock
At the close of business on March 21, 2000 there were 14,867,249 shares of
Leapnet common stock outstanding. Each stockholder is entitled to one vote for
each share owned on all matters voted upon by stockholders, including the
election of directors. Subject to the rights of any then outstanding shares of
preferred stock, stockholders are entitled to dividends that the board of
directors may declare. The decision to declare dividends is made by the board
of directors in its sole discretion, but the board of directors may only
declare dividends if there are funds legally available to pay for the
dividends.
Stockholders are entitled to share ratably in the net assets of Leapnet upon
liquidation after payment or provisions for all liabilities and any
preferential liquidation rights of any preferred stock then outstanding.
Stockholders have no preemptive rights to purchase shares of stock of
Leapnet. Shares of common stock are not subject to any redemptive provisions
and are not convertible into any other securities of Leapnet. All outstanding
shares of common stock are, and the shares of common stock will, when issued by
Leapnet in this offering, be fully paid and non-assessable.
Preferred Stock
At the close of business on March 21, 2000, there were no shares of Leapnet
preferred stock outstanding. Pursuant to Leapnet's certificate of
incorporation, the board of directors has the authority, without further action
by Leapnet's stockholders, to issue up to 20,000,000 shares of preferred stock.
The board of directors may issue this stock in one or more series and may fix
the rights, preferences, privileges and restrictions of this stock. Some of the
rights and preferences that the board of directors may designate include
dividend rights, conversion rights, voting rights, terms of redemption,
liquidation preferences and sinking fund terms. The board of directors may
determine the number of shares constituting any series or the designation of
such series. Any or all of the rights and preferences selected by the board of
directors may be greater than the rights of the common stock. The issuance of
preferred stock could adversely affect the voting power of holders of common
stock and the likelihood that stockholders will receive dividend payments and
payments upon liquidation. The issuance of preferred stock could also have the
effect of delaying, deferring or preventing a change in control of Leapnet.
Leapnet has no present plan to issue shares of preferred stock.
56
COMPARISON OF RIGHTS OF STOCKHOLDERS
The rights of Leapnet stockholders are currently governed by the Delaware
General Corporation Law, Leapnet's certificate of incorporation and Leapnet's
bylaws. The rights of SPR stockholders are currently governed by the Delaware
General Corporation Law, SPR's certificate of incorporation and SPR's bylaws.
Upon completion of the merger, the rights of SPR stockholders who become
stockholders of Leapnet in the merger will be governed by the Delaware General
Corporation Law, Leapnet's certificate of incorporation and Leapnet's bylaws.
The following description summarizes the material differences which may
affect the rights of stockholders of Leapnet and SPR but does not purport to be
a complete statement of all such differences or a complete description of the
specific provisions referred to in this summary. The identification of specific
differences is not intended to indicate that other equally or more significant
differences do not exist. Stockholders should read carefully the relevant
provisions of the Delaware General Corporation Law, Leapnet's certificate of
incorporation, Leapnet's bylaws, SPR's certificate of incorporation and SPR's
bylaws.
Capitalization
Leapnet. Leapnet's authorized capital stock is described above under
"Description of Leapnet Capital Stock."
The Leapnet board of directors is authorized to issue preferred stock from
time to time in one or more series, and to determine and fix voting powers,
designations, preferences, and rights granted to or imposed upon any unissued
series of preferred shares, including the rights and terms of dividends,
redemption, conversion and liquidation preference, of the shares of any such
series. The Leapnet board of directors, without stockholder approval, can issue
Leapnet preferred stock with dividend, voting, conversion or other rights that
could adversely affect the voting power and other rights of the holders of
Leapnet common stock. Leapnet preferred stock could thus be issued quickly with
terms calculated to delay or prevent a change in control of Leapnet or make
removal of management more difficult. Additionally, issuing Leapnet preferred
stock may cause the market price of Leapnet common stock to decrease.
SPR. The total authorized shares of capital stock of SPR consist of (1)
25,000,000 shares of common stock, $0.01 par value per share, and (2) 3,000,000
shares of preferred stock, $0.01 par value per share. At the close of business
on March 21, 2000, there were 12,825,284 shares of SPR common stock outstanding
and no shares of SPR preferred stock outstanding.
The SPR board of directors' right to issue preferred stock is similar to the
right of the Leapnet board to issue preferred stock. The board of directors is
authorized to issue preferred stock from time to time in one or more series,
and to determine and fix voting powers, designations, preferences, and rights
granted to or imposed upon any unissued series of preferred shares, including
the rights and terms of dividends, redemption, conversion and liquidation
preference, of the shares of any such series. The SPR board of directors,
without stockholder approval, can issue SPR preferred stock with dividend,
voting, conversion or other rights that could adversely affect the voting power
and other rights of the holders of SPR common stock. SPR preferred stock could
thus be issued quickly with terms calculated to delay or prevent a change in
control of SPR or make removal of management more difficult. Additionally,
issuing SPR preferred stock may cause the market price of SPR common stock to
decrease.
Voting Rights
Leapnet. Each holder of Leapnet common stock is entitled to one vote for
each share held of record and may not cumulate votes for the election of
directors.
SPR. Each holder of SPR common stock is entitled to one vote for each share
held of record. Elections of directors are determined by a plurality of the
votes cast by the stockholders entitled to vote at the election.
Number, Election, Vacancy and Removal of Directors
Leapnet. Leapnet's board of directors currently has six members. Leapnet's
certificate of incorporation provides that the number of directors shall be
determined from time to time by resolution adopted by the
57
affirmative vote of a majority of the directors in office at the time of
adoption of such resolution. Leapnet's certificate of incorporation and
Leapnet's bylaws provide for a staggered board of directors. Leapnet's
certificate of incorporation provides that a vacancy on the Leapnet board of
directors or an increase in the number of directors may be filled by a majority
of the directors then in office, even if less than a quorum. A director elected
to fill a vacancy or newly created directorship will serve for the unexpired
portion of the term of the director and until such director's successor will
have been duly elected and qualified.
SPR. SPR's board of directors currently has six members. SPR's certificate
of incorporation and bylaws provide that the number of directors will be fixed
from time to time by resolution of SPR's board of directors. Under SPR's
certificate of incorporation and bylaws, a vacancy or newly created
directorship may be filled by a vote of a majority of the directors then in
office, even if less than a quorum. A director elected to fill a vacancy or
newly created directorship will serve until the next annual election and until
such director's successor has been duly elected and qualified. SPR's
certificate of incorporation provides that directors may be removed only for
cause and only by the affirmative vote of the holders of at least sixty-six
percent of the shares of capital stock issued and outstanding and entitled to
vote generally in the election of directors.
Amendments to Certificates of Incorporation
Leapnet. Leapnet's certificate of incorporation reserves the right to amend,
alter, change or repeal any provision contained in the certificate of
incorporation in the manner prescribed by statute. Notwithstanding the
foregoing, the affirmative vote of at least 80% of the votes entitled to be
cast by the shares entitled to vote generally in the election of directors is
required to amend, alter or repeal, or to adopt any provision inconsistent with
Articles V or XI of the certificate of incorporation. Article V relates to the
number and classes of the board of directors. Article XI deals with meetings
following the closing of a public offering of Leapnet's common stock and
notification provisions for special meetings. The amendment of Leapnet's
certificate of incorporation requires the affirmative vote of a majority of the
outstanding shares under the applicable provisions of the Delaware General
Corporation Law.
SPR. An amendment to SPR's certificate of incorporation requires the
affirmative vote of a majority of the outstanding shares.
Amendments to Bylaws
Leapnet. Leapnet's certificate of incorporation provides that Leapnet's
bylaws may be altered, amended, or repealed by the board of directors or by the
vote of stockholders representing at least 66 2/3% of the votes entitled to be
cast by the shares entitled to vote generally for the election of directors if
notice of such alteration, amendment, repeal or adoption of new bylaws is
contained in the notice of such special meeting.
SPR. SPR's bylaws may be altered, amended or repealed and new bylaws may be
adopted by the directors at any regular or special meeting or by the
stockholders at any regular or at any special meeting if notice of such
alteration, amendment, repeal or adoption was given in the notice of such
special meeting of the stockholders.
Stockholder Action in Lieu of Meeting
Leapnet. Any action required or permitted to be taken at any annual or
special meeting of stockholders of Leapnet may be taken without a meeting,
without prior notice and without a vote, if a consent or consents in writing,
setting forth the action so taken, is signed by the holders of outstanding
stock of Leapnet having not less than the minimum number of votes that would be
necessary to authorize or take such action at a meeting at which all shares
entitled to vote on such action were present and voted.
SPR. SPR's certificate of incorporation provides that stockholders may not
take any action by written consent in lieu of a meeting.
Notice of Stockholder Actions
Leapnet. Leapnet's bylaws provide that a stockholder must give advance
written notice of nominations for election of directors and to properly bring
business before an annual meeting of stockholders.
58
Nominations of persons for election to Leapnet's board of directors must be
made by notice in writing and received by the Secretary of Leapnet at the
principal executive offices of Leapnet not less than 60 nor more than 90 days
prior to the meeting; provided, however, that if Leapnet has not "publicly
disclosed" the date of the meeting at least 70 days prior to the meeting date,
notice may be timely made by a stockholder if received by the Secretary of
Leapnet not later than the close of business on the 10th day following the day
on which Leapnet publicly disclosed the meeting date. Specific information
regarding the nomination must be included in the notice.
For business to be properly brought before an annual meeting by a
stockholder, the stockholders must deliver written notice to, or mail such
written notice so that it is received by, the Secretary of Leapnet, at the
principal executive offices of Leapnet, not less than 60 nor more than 90 days
prior to the first anniversary of the date of Leapnet's consent solicitation or
proxy statement released to stockholders in connection with the previous year's
election of directors or meeting of stockholders, except that if no annual
meeting of stockholders or election by consent was held in the previous year or
if the date of the annual meeting has been changed by more than 30 days from
the previous year's meeting, a proposal shall be received by Leapnet within 10
days after Leapnet has "publicly disclosed" the date of the meeting. Specific
information regarding the business must be included in the notice.
SPR. SPR's certificate of incorporation and bylaws provide that a
stockholder must give advance written notice of nominations for directors and
of any other proposed business to be brought before an annual meeting of
stockholders.
Nominations for election to the board of directors of SPR at a meeting of
stockholders, other than those made by or on behalf of the board of directors,
must be made by notice in writing delivered or mailed by first
class United States mail, postage prepaid, to the Secretary, and received not
less than 60 days nor more than 90 days prior to such meeting; provided,
however, that if less than 70 days' notice or prior public disclosure of the
date of the meeting is given to stockholders, such nomination shall have been
mailed or delivered to the Secretary not later than the close of business on
the 10th day following the date on which the notice of the meeting was mailed
or such public disclosure was made, whichever occurs first. Specific
information regarding the nomination must be included in the notice.
For business to be properly brought before an annual meeting by a
stockholder, if such business relates to a matter other than the election of
directors of SPR, the stockholder must have given advance written notice to the
Secretary. To be timely, a stockholder's notice must be delivered to or mailed
and received at the principal executive offices of SPR not less than 60 days
nor more than 90 days prior to the meeting; provided, however, that in the
event that less than 70 days' notice or prior public disclosure of the date of
the meeting is given or made to stockholders, notice by the stockholder to be
timely must be so received not later than the close of business on the 10th day
following the date on which such notice of the date of meeting was mailed or
such public disclosure was made, whichever occurs first. Specific information
regarding the business to be brought before the meeting must be included in the
notice.
Special Stockholder Meetings
Leapnet. Leapnet's bylaws provide that special meetings of Leapnet's
stockholders may be called only by the board of directors. The business
transacted at any special meeting of the stockholders shall be limited to the
purposes stated in the notice for the meeting transmitted to the stockholders.
SPR. SPR's certificate of incorporation and bylaws provide that special
meetings of SPR's stockholders may be called only by the chairman of the board
of directors. Business transacted at any special meeting of stockholders shall
be limited to matters relating to the purpose or purposes stated in the notice
of meeting.
Limitation of Personal Liability of Directors
The Delaware General Corporation Law provides that a corporation's
certificate of incorporation may include a provision limiting the personal
liability of a director to the corporation or its stockholders for monetary
damages for breach of fiduciary duty as a director. However, no such provision
can eliminate or limit the liability of a director for the following:
. any breach of the director's duty of loyalty to the corporation or its
stockholders;
59
. acts or omissions not in good faith or which involve intentional
misconduct or a knowing violation of the law;
. violation of Section 174 of the Delaware General Corporation Law
regarding unlawful payment of dividends or unlawful stock purchases or
redemptions;
. any transaction from which the director derived an improper personal
benefit; and
. any act or omission prior to the adoption of such a provision in the
certificate of incorporation.
Leapnet. Leapnet's certificate of incorporation provides that no director
will be personally liable to Leapnet or to its stockholders for monetary
damages for any breach of fiduciary duty by such director as a director, except
that a director will be liable to the extent provided by law as follows:
. for any breach of the director's duty of loyalty to Leapnet or its
stockholders;
. acts or omissions not in good faith or which involve intentional
misconduct or a knowing violation of law;
. under Section 174 of the Delaware General Corporation Law; and
. for any transaction from which the director derived an improper personal
benefit.
SPR. SPR's certificate of incorporation provides that except to the extent
the Delaware General Corporation Law prohibits the elimination or limitation of
liability of directors for breaches of fiduciary duty, no director of SPR will
be personally liable to the corporation or its stockholders for monetary
damages for any breach of fiduciary duty as a director, notwithstanding any
provision of law imposing such liability.
Dividends
Leapnet. Leapnet's bylaws provide that dividends may be declared by the
board of directors at any regular or special meeting, pursuant to law.
Dividends may be paid in cash, in property, or in shares of the capital stock
or rights to acquire shares of the capital stock of Leapnet, subject to the
provisions of the certificate of incorporation. Additionally, the directors,
before payment of a dividend, may from time to time, in their absolute
discretion, set aside, out of any of Leapnet's fund, such sum or sums as they
think proper as a reserve or reserves to meet contingencies, or for equalizing
dividends, or for any such purpose as the directors think conducive to the
interest of the corporation.
SPR. SPR's certificate of incorporation provides that dividends may be
declared and paid on the SPR common stock from funds lawfully available
therefor as and when determined by the board of directors and subject to any
preferential dividend rights of any then outstanding preferred stock.
Conversion
Leapnet. Holders of Leapnet common stock have no rights to convert their
shares into any other securities.
SPR. Holders of SPR common stock have no rights to convert their shares into
any other securities.
Delaware Takeover Statute
Section 203 of the Delaware General Corporation Law, an anti-takeover
statute, restricts the circumstances under which an "interested" stockholder
may engage in a business combination with a Delaware corporation until and
unless three years have passed since such stockholder became an "interested"
stockholder. Section 203 applies to SPR but, because of an election in its
certificate of incorporation, does not apply to Leapnet. Because neither party
is an "interested" stockholder with respect to the other within the meaning of
Section 203, Section 203 does not apply to this merger.
60
BUSINESS OF LEAPNET
Overview
Leapnet develops creative solutions for the wired world by utilizing its
expertise in communication services to provide Internet consulting, marketing
and development, globalization services, and traditional advertising. Based on
its founding principles of creative and technological excellence, Leapnet works
with market-leading companies to develop compelling brand strategies and
creates integrated campaigns comprised of online and offline communications
elements. Through this integrated approach, Leapnet helps its clients develop
and improve one-to-one relationships with their customers, extend their brand
into the mass market, increase sales and market share and integrate their
existing systems with an e-business strategy.
Leapnet's clients include American Airlines, Ernst & Young LLP, Microsoft
Network Internet Access, Microsoft Slate, Microsoft Encarta, Morningstar,
MSNBC.com, SAM'S Club, The University of Chicago Graduate School of Business,
Wal-Mart Stores, EDS, Western Union, Unisys, Anheuser-Busch and Starwood Hotels
and Resorts. To date, Leapnet's business has primarily grown organically from
referrals and other sources. In the upcoming year, with the planned acquisition
of SPR, contingent upon stockholder approval, Leapnet is looking forward to
utilizing a dedicated sales force to attract additional high calibre clients
such as these.
Leapnet's central mission is to be a leading creative and technology
services company offering Internet development, globalization, advertising, e-
business consulting and systems integration. Leapnet's core strengths include
its integrated services approach, technological sophistication, expertise in
global marketing, creativity and roster of marquee clients. Given the Company's
core strengths, management believes Leapnet is well positioned to take
advantage of the growth in the industry.
Industry Background
Overview. The e-commerce solutions industry is, like most industries
involving the Internet, dynamic and growing. The growing acceptance and use of
the Internet has changed the way consumers and businesses obtain information,
transact business, and communicate. According to International Data
Corporation, the worldwide market for Internet-related services is expected to
jump from $4.6 billion in 1997 to $43.7 billion by 2002, fueled largely by the
rush to deploy e-commerce web sites. Companies are increasing expenditures for
the e-commerce part of their business and consider an e-commerce strategy a
leading corporate priority.
As companies expand their Internet strategy from one of simple "brochure-
ware" to a more interactive, transaction-based systems, they require increased
services client/server application integration. Companies' internal information
technology, or IT, departments are not staffed with resources or capabilities
sufficient to build more complex, electronic business systems. As the demand
for more complex e-business systems rises, so does the demand for the
integration with existing systems. With this increased business element, IT
departments are relying more and more on the services of outside vendors to
complement in-house capabilities.
In addition to Internet solutions designed to help companies communicate
with customers, vendors, business partners and employees, companies are also
increasingly demanding integrated solutions that involve traditional
advertising or globalization capabilities. Companies are increasingly operating
on a global scale with needs to standardize their communications across many
cultures and media. Internet content is currently transmitted primarily in
English; however, a growing number of Internet users do not speak English as
their first language. The ability to provide companies with an integrated,
seamless communication solution that includes an Internet presence, traditional
media communications and globalization or localization is a critical service
offering in the marketplace today.
61
There has been a paradigm shift occurring among client companies who are
increasingly demanding integrated solutions that offer expertise in creative,
strategy and technology resources. Several companies exist that are
predominantly focused on one of those three skill sets. Very few companies are
equipped with a balanced offering in creative, strategy, globalization and
technology expertise and have the ability to offer integrated solutions to
clients for one-stop shopping.
The e-commerce solutions services industry, as it currently stands,
generally suffers from the following:
Lack of Integrated End-to-End Capabilities. The common thinking in the e-
commerce solutions industry--which is at least partially supported by the
business models that have been used by many companies in the industry--is that
companies in the industry must offer the full range of services that are
needed to create an e-business. Clearly, from the client's perspective,
working with one provider of e-commerce solutions simplifies the process and
reduces project risks.
Clients are finding, however, that there are major drawbacks to working
with one e-commerce solutions provider. One downside is that many e-commerce
solutions providers have limited core competencies in many aspects of an e-
commerce project directed toward consumers. For example, while many of these
companies have extensive experience in the highly profitable business-to-
business sector of e-commerce, they have little experience in direct marketing
to consumers or establishing or maintaining a company's brand within an e-
business strategy.
Lack of Focus on the Consumer. Many e-commerce solutions providers have
suboptimized e-business initiatives of their clients by creating "quick fix"
Web sites aimed at minimizing disruption of current operations. The Gartner
Group predicts that by the end of 2002, approximately 75% of e-business
projects will fail to meet their objectives, due to fundamental flaws in
project planning.
Unmet Needs of E-Commerce Businesses. While many larger integrators are
growing their strategy groups, they cannot keep up with their clients' demand
for these services. These needs of clients have resulted in a growing
fragmentation of the industry. As a result, newer firms like Zefer are
focusing solely on the strategy business.
A survey by The Standish Group International Inc. in 1998 indicated that
46% of the IT projects in its survey group were over budget and overdue, and
28% had failed altogether. These figures indicate that most e-commerce
solution providers still suffer from weak project management skills. It also
indicates that the people who understand project management have failed to
implement their expertise. As these projects grow in size and scope, the
impact of project management will only become more critical.
The Leapnet Solution
Leapnet offers a wide range of services to help companies develop and
implement their e-business strategies:
. Strategic Internet Marketing and Brand Development
. Large-Scale Web Development
. Digital Strategy and Design
. Award-Winning User Interface Design
. E-Commerce/Internet/Intranet/Extranet Solutions
. Online Advertising and Promotions
. Programming/Database Mining/Systems Integration
. Dynamic Publishing Development
. Content Production and Management
62
. Innovative Technology Applications Development
. Template Development/Custom Applications Management
. Navigation Strategy and Design
. Packaging Design
. Business and Information Technology Strategy
. Operations and Process Re-engineering
. Advanced IT Architectures, including Transaction Processing, Distributed
Object
. Computing, and Legacy System Integration
. Multimedia and Usability Design
. Software Engineering and Project Management
. Multilingual Web Site Localization
. Multicultural Language Management
. Globalization Strategy
. Award-Winning TV, Print & Radio Advertising
Leapnet's central mission is to be a leading creative and technology
services company offering Internet development, globalization, advertising, e-
business consulting and systems integration.
Leapnet conducts its business through the following subsidiaries: Quantum
Leap Communications, Inc., Eagle Technology Partners, Inc., YAR Communications,
Inc., and The Leap Partnership, Inc.
Quantum Leap Communications, Inc.
Quantum Leap Communications, Inc. is focused on the development of large-
scale Internet-based business solutions and the creation of strategic,
interactive brand advertising and marketing executed primarily for Internet
brands.
Quantum Leap is a consumer-focused, e-solutions provider in the forefront of
implementing new and developing technologies for the advancement of Internet-
based marketing solutions. Quantum Leap uses technology to help its clients
advance their business objectives via the Internet and manage the back-end
information systems that support Internet sites. Quantum Leap possesses
technology expertise in the areas of programming, multiple system
architectures, end-use interface and navigation design, digital media planning
and placement, Intranet and Extranet development and broadband technologies.
As a consumer-focused, e-solutions provider of award-winning work, Quantum
Leap creates digital points-of-contact between brands and consumers. Quantum
Leap is a front-end developer that builds large-scale Web sites and creates
programs to drive qualified traffic to sites utilizing an arsenal of market-
tested consumer development modules. Quantum Leap focuses on implementing
"consumer-first" digital solutions combining third-party technology, such as
BroadVision's ONE-TO-ONE(TM) database platform and Object Design's OBJECT
STORE(TM), with custom applications and systems integration.
Quantum Leap focuses on understanding how mainstream consumers use
technology. Quantum Leap also works to understand consumer's needs, preferences
and desires for its clients. By keeping the consumer at the center of its
efforts, Quantum Leap's goal is to strengthen a consumer's relationship with a
client's brand.
Quantum Leap has developed a highly specialized base of expertise in
implementing BroadVision's ONE-TO-ONE(TM) database marketing software. This
software enables Quantum Leap's "consumer first" approach to web design by
creating an individualized web experience for each consumer. Quantum Leap has
collaborated
63
with BroadVision on several large-scale e-commerce initiatives for clients,
including American Airlines, Ernst &Young, Wal-Mart Stores and SAM's Club.
Quantum Leap has been successful in building intricate yet consumer friendly
websites for Fortune 50 companies such as these from the ground up in a six-to-
twelve month time frame. Due to the highly technical nature of and level of
training and sophistication required to successfully utilize the BroadVision
products, Quantum Leap believes it has a strategic advantage over its
competitors due to its extensive experience with these products and believes
there is significant opportunity in continuing to expand its BroadVision
implementation practice with other international and nationally-known
companies.
Quantum Leap perceives a significant gap between what corporate web sites
offer today and what consumers really want and need. Quantum Leap is leveraging
its management team's extensive marketing and technology experience to improve
consumers' online experience by facilitating web site navigations, thus
resulting in increased Internet sales.
Quantum Leap's clients include American Airlines, Ernst & Young LLP,
Microsoft Network Internet Access, Microsoft Slate, Microsoft Encarta,
Morningstar, MSNBC.com, SAM'S Club, the University of Chicago Graduate School
of Business, and Wal-Mart Stores.
Eagle Technology Partners, Inc.
In November 1999, Eagle Technology Partners, Inc. was formed as a wholly-
owned subsidiary of Leapnet. Eagle Technology provides e-business consulting
services.
Eagle Technology is focused on providing clients with high-end, business-to-
business Internet solutions. The company solves complex business problems with
complete solutions including strategy, architecture and planning, accelerated
solution delivery and technology integration. The company employs leading IT
and consulting professionals with substantial expertise in e-business and IT
strategy, operations and process re-engineering, advanced IT and legacy
architectures, distributed object computing, software engineering and project
management. As of January 31, 2000, nine of Eagle Technology's nineteen
consultants have postgraduate degrees.
Eagle Technology delivers its solutions through an integrated full life
cycle e-business integration methodology that includes four practice areas:
. e-business strategy;
. architecture and planning;
. accelerated solution delivery; and
. technology and integration.
It works with companies to broaden and deepen relationships with customers,
better integrate with and manage suppliers, and strengthen ties to employees to
improve productivity.
The e-business strategy practice helps clients formulate a robust strategy
by identifying key issues, the competitive landscape and emerging threats and
opportunities. Eagle Technology assesses the strengths a company can leverage
in the e-business world and seeks to develop strategies that will serve well in
multiple scenarios and provide flexibility as the environment changes.
Ultimately, Eagle Technology develops a high-level business case for a
significant e-business investment.
Eagle Technology's architecture and planning practice works with market-
leading companies to achieve high-level corporate e-business objectives by
developing a complete e-business architecture, implementation plan and business
case that designs how a company will build and execute an e-business strategy.
The e-business architecture includes business process, organizational and
technology architectures.
64
Eagle Technology's accelerated solution delivery practice works with clients
to rapidly implement sophisticated e-business solutions that deliver business
value. Solutions typically involve technology enabled relationship management,
business-to-business extranets, Web-based EDI and procurement, and Intranet-
based knowledge management solutions.
The technology and integration practice utilizes Eagle Technology's
experienced e-business technical architects to plan, design and implement high-
performance, reliable and secure e-business technology infrastructures. Within
this practice, Eagle Technology is involved in Internet/Extranet/Intranet
planning and implementation, performance reviews, security reviews, disaster
recovery planning and operations consulting.
Eagle Technology has announced one client to date, Starwood Hotels and
Resorts. Eagle Technology is also working with Quantum Leap Communications on
the development of a dynamic Web site for the University of Chicago Graduate
School of Business.
YAR Communications, Inc.
YAR provides globalization services to market-leading companies, which
involves the process of adapting communications elements to meet the demands
and requirements of local cultures. YAR is involved in the creation, adaptation
and translation of a broad spectrum of offline and online communication tools
including both print and Internet-based elements.
YAR's services cover a range of activities, including:
. consulting, research and analysis of cultural issues and marketplace
potential as input to clients' global marketing strategies;
. global extension of client brands, including development of appropriate
brand identity for new markets around the world;
. globalization/localization of existing communication materials to make
them suitable and effective for use in other languages and cultures; and
. creation and production of original marketing plans and materials for
select markets, including advertising campaigns, promotions, direct
response material efforts, media plans, etc.
YAR's globalization services are able to service a client's needs for all of
the major countries, languages and cultures of the world. These services cover
a full spectrum of media including: television, radio, out-of-home, print,
brochures, point of sale materials, packaging, and annual reports. However, YAR
currently focuses on globalizing Internet and web-site content, as more and
more clients rely on the Internet to facilitate their worldwide communication
and e-commerce efforts.
As companies have increasingly moved a portion of their marketing
communication to the Internet, YAR has increased the percentage of its business
that is Internet-related. YAR is positioned to participate in new product
launches, electronic brochure-ware, web site localization, technical
translation, multicultural marketing communications and global Internet
strategy and implementation.
YAR's clients include Apple Computer, Adobe, EDS, Unisys, Western Union,
Chase Bank, Fleet Bank and Medtronic.
The Leap Partnership, Inc.
The Leap Partnership, Inc., established in September 1993, is a creatively-
focused advertising agency that provides clients with:
. intelligent, consumer-driven brand strategies;
. innovative business building ideas;
65
. award winning, high quality advertising campaigns that can penetrate
popular culture; and
. a unique understanding of how to bridge from traditional media to the
Internet.
The Leap Partnership typically works with its clients in two ways. First, it
can act as "agency of record" for assigned brands, for which it is compensated
with a monthly retainer fee and possible other commissions for work performed.
Second, it can also work for clients on a project basis, where the service
required by the client is more short-term in nature. For this type of work, The
Leap Partnership is compensated based on a fixed project fee or a time-and-
materials basis.
The Leap Partnership works with its own clients in a unilateral fashion and
also provides advertising services as needed to the clients of other Leapnet
subsidiaries. The principal clients of The Leap Partnership include Anheuser-
Busch, Inc. (Michelob Beer) and Columbia Tri-Star Television Distribution.
Leapnet's Strategy
Leapnet's network of companies provides expertise in strategy, creative and
technology services that develop integrated solutions for clients. By combining
a strong balance of business strategy, customer insights, creative excellence
and superior technological skills, Leapnet can provide its clients with end-to-
end e-business solutions. Leapnet relies on and will continue to expand the
following areas of expertise to build its business:
Balance of Integrated Services--Leapnet provides a full range of strategic,
creative and technology services that can be utilized on a client's behalf to
develop offline or online solutions. Leapnet's processes and skills are
designed to integrate the most effective and beneficial aspects of a wide array
of media so that a company can execute an effective, integrated e-business
strategy.
Expertise with Existing and Emerging Technologies--Leapnet, through Quantum
Leap and Eagle Technology, is in the forefront of existing and emerging
technologies for the advancement of e-business solutions. Leapnet uses
technology to help its clients advance their e-business objectives and manage
the systems integration and back-end information systems that support their
Internet sites. Leapnet, through Quantum Leap, possesses skills in strategic
consulting, development of custom applications, information architecture
design, end-user interface development and systems integration. Eagle
Technology's solutions typically involve technology enabled relationship
management, business-to-business extranets, Web-based EDI and procurement, and
Intranet-based knowledge management solutions. Eagle Technology's e-business
technical architects plan, design and implement infrastructures, which are
designed to be high-performance, reliable and secure. Within this practice,
Eagle Technology is involved in Internet/Extranet/Intranet planning and
implementation, performance reviews, security reviews, disaster recovery
planning and operations consulting.
E-Business Consulting and Systems Integration Capabilities--Leapnet helps
clients formulate a compelling e-strategy by identifying key issues, the
competitive landscape and emerging threats and opportunities. Leapnet assesses
the strengths of its clients which are applicable in the e-business world and
seeks to develop strategies that will apply to multiple scenarios and provide
flexibility as the environment changes.
Customer Experience Expertise--Leapnet believes in the power of learning
about consumer wants, preferences and desires as a way to empower its e-
business solutions. Leapnet does extensive qualitative research in a variety of
settings to determine how consumers interact with, use and respond to
difference Internet-based e-business solutions. Leapnet utilizes this research
to create solutions designed to provide effective, clear communication with
consumers leading to successful e-business initiatives.
Brand Strategy and Creative Expertise--Leapnet translates a client's
business objectives into a detailed project plan that meets consumers' needs
and creates a positive, long-term consumer relationship with the brand. Leapnet
believes that comprehensive branding and digital strategy helps insure the
long-term success of the project. Leapnet conducts an extensive analysis in
each of its projects that evaluates the client's current and future objectives,
company history, products or services, customer base, competitive environments,
brand position and marketing programs, as well as any existing online activity.
66
Globalization Services--YAR's globalization services extend to all of the
major languages and cultures of the world. These services cover a full spectrum
of media including television, radio, out-of-home, print, brochures, point of
sale materials, packaging, and annual reports. However, YAR's services are
currently focused heavily on globalizing Internet and web site content as more
and more clients rely on the Internet to facilitate their worldwide
communication and e-commerce efforts.
Strategic Alliances--In July 1998, Leapnet announced a strategic alliance
between Quantum Leap and BroadVision, Inc. with the goal of providing full
service Internet relationship marketing and commerce solutions. Quantum Leap
and BroadVision have collaborated on two large scale Internet development
projects to date. Leapnet expects to enter into additional projects with
BroadVision and would also consider alliances with other companies that can
complement the services provided by Leapnet.
Competition
The market for Leapnet's services is highly competitive and is characterized
by pressures to incorporate emerging technologies, accelerate job completion
schedules and reduce prices. Leapnet faces competition from a number of
sources, including specialized and integrated Internet development, marketing
and communications firms; information technology consulting firms; national and
regional advertising agencies; translation management companies and ethnic
specialty marketing and advertising companies.
Many of Leapnet's competitors or potential competitors have longer operating
histories, longer client relationships and significantly greater financial,
management, technology, development, sales, marketing and other resources.
Leapnet competes on the basis of a client's perception of the quality and
creativity of the work, as well as the technical proficiency of its digital,
interactive services. Leapnet believes that the principal competitive factors
are its abilities to understand a client's business and develop strategically
sound interactive solutions, present unique creative concepts, demonstrate
breadth and depth of technical and new media expertise, help clients develop
strong one-to-one consumer relationships and produce high quality products with
speed and efficiency. Leapnet believes that it competes favorably with respect
to each of these factors; however, there can be no assurance that Leapnet will
continue to compete successfully. To the extent that Leapnet's competitors are
perceived as providing superior products, services or terms, or to the extent
that Leapnet's clients are dissatisfied with its products, services or terms,
Leapnet's business, operating results and financial condition could be
materially adversely affected.
Intellectual Property Rights
Leapnet generally relies on a combination of trade secrets, copyright laws
and contractual rights to establish and protect its proprietary rights to
intellectual property. Leapnet may, where appropriate, take actions to further
protect certain proprietary rights through software or other patents. Leapnet
does not believe that the legal protections afforded to its intellectual
property rights are material to its business, financial condition or results of
operations.
Employees
As of January 31, 2000, Leapnet and its subsidiaries employed a total of 252
employees. None of these employees are represented by a labor union, and
Leapnet believes that its relations with its employees are good.
Legal Proceedings
In November 1999, POW, Inc., doing business as "Tomandandy," filed a lawsuit
against The Leap Partnership, Inc. in the United States District Court,
Southern District of New York seeking damages in the amount of $285,228 plus
interest for failure to pay for work performed by POW, Inc. In January 2000,
POW, Inc. filed a motion for summary judgment, which The Leap Partnership, Inc.
is opposing.
67
In October 1999, The Crystal Juke Box, Inc., Wixen Music Publishing, Inc.,
Charles McCormick, Charles Love, Willis Draffen, Jr., Harry Williams,
individually and doing business as the group "Bloodstone," a recording and
performing group filed a lawsuit against a subsidiary of Leapnet, The Leap
Partnership, Inc., Anheuser-Busch Corporation, and Andy Milburn, an individual
and doing business as "Tomandandy," in the United States District Court, for
the Central District of California. The complaint alleges copyright
infringement, statutory and common law violation of the right of publicity,
violation of section 43 of the Lanham Act, unfair competition, and
misappropriation stemming from the airing of a television commercial created by
The Leap Partnership, Inc. for a client. The Leap Partnership, Inc. has filed
cross-claims against Andy Milburn doing business as "Tomandandy" and POW, Inc.
doing business as "Tomandandy" for negligence, indemnity, contribution and
breach of contract. The parties are currently undergoing discovery. The suit
has been referred to The Leap Partnership, Inc.'s insurance carrier and legal
counsel.
In February 1998, Venture Direct Worldwide, Inc. filed a lawsuit in the
Supreme Court of New York against an employee of Quantum Leap Communications,
Inc. and The Leap Group, Inc., now known as Leapnet, Inc. (collectively
"Leapnet"). The complaint alleges that the employee's e-mail message response
to an e-mail communication from the plaintiff caused damage to the plaintiff.
Leapnet has received from the plaintiff a settlement proposal that does not
involve monetary payment. Leapnet intends to vigorously defend the suit and
believes that the employee's actions were outside the scope of employment. The
complaint alleges six causes of action, each seeking ten million dollars plus
punitive damages. Management does not believe that the claims have any merit or
that the ultimate outcome of this matter will have a material adverse impact on
Leapnet's financial position or results of operations.
Properties
Leapnet is headquartered in Chicago and has offices in New York City and
California. On July 2, 1999, Leapnet entered into contracts to purchase a
35,000 square foot building in Chicago for $2.8 million. The purchase of the
building is scheduled to occur in three phases. As of January 31, 2000, the
first and second portions of the building were purchased for $1.8 million. The
final phase of the purchase is scheduled to occur no later than October 2000,
when the fourth floor of the building is expected to be purchased for $1.0
million. The portion of the building that is not presently owned is leased.
Leapnet also leases approximately 10,500 square feet of additional space in
Chicago, approximately 23,000 square feet in New York City, and approximately
11,000 square feet in three locations in California.
68
LEAPNET SELECTED HISTORICAL CONSOLIDATED FINANCIAL INFORMATION (In Thousands,
Except Per Share Data)
Year Ended January 31,
------------------------------------------ -------
2000 1999(2) 1998(2) 1997(1) 1996
------- -------- ------- ------- ------
Statement of Operations
Data:
Revenues................. $36,309 $ 35,920 $30,660 $16,088 $8,210
Operating income (loss).. $ (769) $(14,124) $(9,390) $ 1,386 $1,356
Net income (loss)........ $ (311) $(18,323) $(5,611) $ 1,306 $ 700
Basic.................. $ (0.02) $ (1.34) $ (0.41) $ 0.12 $ 0.07
Diluted................ $ (0.02) $ (1.34) $ (0.41) $ 0.12 $ 0.07
Weighted average shares..
Basic.................. 14,256 13,688 13,615 10,933 9,600
Diluted................ 14,256 13,688 13,615 11,126 10,310
Balance Sheet Data:
Cash and cash equivalents
(1)..................... $15,652 $ 14,076 $ 7,214 $32,313 $ 48
Working capital.......... $18,289 $ 11,573 $ 820 $34,630 $ (973)
Total assets............. $30,336 $ 23,733 $46,054 $39,860 $2,053
Long-term obligations.... $ 8,715 $ 706 $ 421 $ 366 $ 448
Total stockholders'
equity (deficit)........ $15,839 $ 13,489 $30,841 $36,583 $ (440)
Other Data (unaudited):
Book value per share..... $ 1.11 $ 0.99 $ 2.27 $ 3.29 $(0.04)
- --------
(1) In September 1996, Leapnet (formerly, The Leap Group, Inc.) completed the
Leapnet IPO and issued 4,000,000 shares of its common stock at $10.00 per
share. The Company received the proceeds of approximately $35.7 million in
cash, net of underwriting commissions and other offering costs.
(2) The results of operations have been included for each subsidiary since its
inception or acquisition date. The results of YAR Communications, Inc., a
wholly owned subsidiary of Leapnet, have been included since April 1, 1997.
The results of One World Communications, Inc. (now known as Leap Global
Communications, Inc.), have been included from November 1, 1997, through
September 30, 1999, the effective date of the sale of assets to Young &
Rubicam, Inc.
69
LEAPNET--MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
The following presentation of management's discussion and analysis of
Leapnet's financial condition and results of operations should be read in
conjunction with Leapnet's consolidated financial statements, accompanying
notes thereto and other financial information appearing elsewhere herein.
In reviewing Leapnet's consolidated financial statements and the discussion
of the results of operations that appears below, the following should be taken
into consideration:
In April 1997, Leapnet acquired YAR Communications, Inc. ("YAR") and in
November 1997, Leapnet formed One World Communications, Inc. and acquired
various assets of Kang & Lee Advertising, Inc. and K&L West Advertising, Inc.
(jointly referred to as "One World" or "Kang & Lee"). Both business
combinations were accounted for using the purchase accounting method. In
accordance with the purchase accounting method, YAR's and One World's results
have been included within Leapnet's results since their respective acquisition
dates of April 1, 1997 and November 1, 1997. Due to the sale of the assets of
One World to Young & Rubicam, Inc., One World's results have only been included
through the effective sale closing date of September 30, 1998.
The historical statement of operations information of Leapnet for the three
years ended January 31, 2000 has been reclassified to conform with the
financial presentation of companies within the Internet services industry. Such
classifications primarily include allocating Leapnet's salaries and related
expenses into either cost of services for billable employees or to general and
administrative expenses for non-billable employees.
Revenues
Leapnet structures its compensation arrangements to reflect the breadth of
its services and to reflect Leapnet's value-added approach to servicing its
clients. Leapnet recognizes revenues in the form of fees and retainers, time
and material-based billing, fixed fee arrangements and media commissions for
its strategic creative, technology and marketing services. Fees and billing
rates are established by Leapnet taking into consideration Leapnet's resources
and skills which will be applied to generate relevant strategic solutions for
the client's communication, technology or marketing concerns; the value of
Leapnet's strategic thinking; and Leapnet's ability to produce memorable
campaigns to drive effective results for its clients. Certain assignments may
also be based upon traditional methodologies, which include basing fees on
either an estimate of the amount and level of professional expertise to be
provided by Leapnet and other committed resources needed to execute a
particular client's engagement or based on the client's planned spending or
budget over certain periods.
Revenue from retainers is recognized over the period in which services are
rendered. Revenue from time and materials based billings is recognized as
services are performed based on actual hours incurred at a markup. Revenue from
fixed fee arrangements is recognized as services performed using the
percentage-of-completion method. Provisions for estimated losses on uncompleted
contracts are assessed on a contract by contract basis and are recognized in
the period in which such losses are determined. Revenues from production
services are recognized as the services are completed. Commissions earned from
fees based upon third-party media placements are recognized as revenues when
Leapnet-created materials appear on various media in accordance with industry
practice. Costs in excess of billings include unbilled costs which are expensed
as cost of services as services are rendered and billed. Billings in excess of
costs, or deferred revenue, includes billings made in advance of services
performed.
The term of written agreements between Leapnet and its clients vary.
However, written agreements typically are terminable by either the client or
Leapnet on short notice, often 90 days or less. Leapnet at times performs
services at the client's request prior to the execution of written agreements.
Revenues, whether predominantly retainer- or project-based, can vary materially
from period to period. Leapnet's strategy is to focus on providing expanding
ranges and amounts of services to a relatively limited number of nationally
recognized clients. Leapnet's results of operations will therefore, by design,
be dependent upon Leapnet's ability to maintain its relationships with its key
clients or to replace clients quickly should Leapnet or the client
70
desire to reduce or terminate a relationship. There can be no assurance that
period-to-period fluctuations in operating results will not occur.
Leapnet has experienced fluctuations in its revenues since inception, which
are to a significant degree a function of establishing or terminating client
relationships and to a lesser degree a reflection of its mix of fees and
production revenues. In addition, revenues have fluctuated due to unanticipated
changes in the spending levels of clients and uncontrollable or unforeseen
delays by clients to execute assignments and strategies. Revenue mix has also
been affected by Leapnet's recent acquisitions and divestitures. Leapnet has a
limited operating history upon which an evaluation of Leapnet and its prospects
may be based, and Leapnet has not identified any particular quarterly or
seasonal trends with respect to its historic revenues.
Results of Operations
The following table sets forth, as a percentage of revenues, gross profit,
other expenses and certain other items which are included in Leapnet's
statements of operations for the periods reflected below. Operating results for
any period are not necessarily indicative of results for any future periods.
Quarter
Ended
January 31,
-------------
2000 1999
----- -----
Revenues........................................................ 100.0% 100.0%
Cost of services................................................ 72.3 79.0
----- -----
Gross Profit.................................................. 27.7 21.0
Other expenses:
General and administrative.................................... 43.5 42.2
Impairment of long lived assets............................... -- 0.9
----- -----
Total other expenses.......................................... 43.5 43.1
----- -----
Operating loss.................................................. (15.8) (22.1)
Net interest income/(expenses)................................ 0.2 (0.2)
----- -----
Loss before income taxes........................................ (15.6) (22.3)
Income tax benefit/(expense).................................. 1.5 0.0
----- -----
Net loss........................................................ (14.1%) (22.3%)
===== =====
Fiscal Year Ended
January 31,
---------------------
2000 1999 1998
----- ----- -----
Revenues................................................ 100.0% 100.0% 100.0%
Cost of services........................................ 63.2 68.7 72.5
----- ----- -----
Gross Profit.......................................... 36.8 31.3 27.5
Other expenses:
General and administrative............................ 38.9 42.6 55.6
Impairment of long lived assets....................... -- 25.9 --
Restructuring expenses................................ -- 2.1 2.5
----- ----- -----
Total other expenses.................................. 38.9 70.6 58.1
----- ----- -----
Operating loss.......................................... (2.1) (39.3) (30.6)
Loss on divestitures.................................. -- (5.0) --
Gain on sale of building.............................. -- 3.2 --
Net interest income/(expenses)........................ 0.9 (0.5) 0.9
----- ----- -----
Loss before income taxes................................ (1.2) (41.6) (29.7)
Income tax benefit/(expense).......................... 0.3 (9.4) 11.4
----- ----- -----
Net loss................................................ (0.9%) (51.0%) (18.3%)
===== ===== =====
71
Three Months Ended January 31, 2000 Compared to Three Months Ended January 31,
1999
Revenues increased to $9.1 million for the quarter ended January 31, 2000
from $8.1 million for the quarter ended January 31, 1999, an increase of $.9
million, or 11%. This net increase resulted from a $2.1 million increase in
Internet related revenues from Quantum Leap and Eagle Technology and a $.4
million increase in multicultural language services revenues from YAR. The $2.5
million of increased revenues was offset by a decrease of $1.6 million in
revenues at The Leap Partnership primarily related to decreased production
spending from Hardee's. In November 1999, Hardee's, a client representing 32%
of Leapnet's revenue for the year ended January 31, 2000, notified The Leap
Partnership that it was terminating its National Advertising Agency Agreement
effective February 22, 2000. As of January 2000, Leapnet has reduced costs as a
result of the cessation of the Hardee's contract. To replace the revenues, the
Company has already been dedicating a greater amount of resources toward
communications using the Internet. In April 1999, Leapnet changed its name from
The Leap Group, Inc. to Leapnet, Inc. to reflect its stronger emphasis on the
Internet based on Leapnet's increased work using this medium and due to the
growing demand for Internet related services from new and existing clients. As
compared to the fourth quarter of fiscal year 1999, total Internet related
revenues for the fourth quarter of fiscal 2000 have grown by 225%.
Additionally, in January 2000, Leapnet announced the intent to acquire SPR
Inc., an IT services company with resources to help support Internet
development efforts and provide other technology services and solutions for
clients. The acquisition, contingent upon stockholder approval, is expected to
be completed mid-year 2000 (see Note 3 to the Consolidated Financial Statements
for the fiscal year ended January 31, 2000).
Gross profit consists of revenues less cost of services, which includes
direct costs of servicing clients, including direct labor and related benefits
and taxes, and direct production costs. Direct production costs include costs
such as freelance and contract labor, filming, animation, editing, special
effects, photography and illustrations, artwork, computer design and various
related production services which are generally outsourced and reflects
production done on traditional media as well as with new technologies and
multimedia. For the quarter ended January 31, 2000, gross profit was $2.5
million, compared to $1.7 million for the quarter ended January 31, 1999, an
increase of $0.8 million or 46%. As a percentage of revenue, gross profits
increased from 21% of revenue during the quarter ended January 31, 1999 to 28%
of revenue during the quarter ended January 31, 2000. The $0.8 million increase
in gross profits is primarily due to improved margins on new work and increased
efficiency of employees servicing the work. In the short term, margins are
expected to deteriorate as a direct result of the cessation of the Hardee's
contract. The margins are then expected to stabilize as certain other existing
clients have increased their business with Leapnet.
General and administrative expenses include salaries and benefits of
management, administrative services, recruiting expenses, space and facilities
expenses, travel expenses related to general and administrative matters,
depreciation, insurance, legal and accounting fees, management information
system expenses and other corporate costs. General and administrative expenses
increased to $3.9 million for the quarter ended January 31, 2000 from $3.4
million for the quarter ended January 31, 1999, an increase of $0.5 million or
15%. As a percentage of revenue, general and administrative expenses increased
to approximately 44% for the fiscal year ended January 31, 2000, from
approximately 42% for the prior year. This increase was primarily related to
$1.3 million in increased costs at Quantum Leap and Eagle Technology related to
the growth in their business. Specifically, both subsidiaries increased capital
expenditures for computers and the new building which resulted in higher
depreciation expense (Note 12 to the Consolidated Financial Statements for the
fiscal year ended January 31, 2000) than the prior year. Additionally,
infrastructure and support services were added at these subsidiaries to support
their revenue growth of 225% from the prior year quarter. These increases in
expenses were offset by cost savings of $0.8 million at YAR (see note 8 to the
Consolidated Financial Statements for the fiscal year ended January 31, 2000
regarding the YAR restructuring), The Leap Partnership and at corporate.
Interest income totaled approximately $180,000 and $81,000 for the quarters
ended January 31, 2000 and 1999, respectively, and was generated from short-
term US Treasury Notes, certificates of deposit and short-term Eurodollar
currency investments. Interest income was offset in part by interest expense of
approximately
72
$163,000 and $101,000 for the quarters ended January 31, 2000 and 1999,
respectively, resulting in net interest income of $17,000 and net interest
expense of $20,000, respectively. Leapnet incurred interest expense on debt
that totaled approximately $9.4 million and $5.1 million as of January 31, 2000
and 1999, respectively.
Leapnet's stated effective tax rates for the quarters ended January 31, 2000
and January 31, 1999, were (9.7%) and 0%, respectively. In the fourth quarter
ended January 31, 2000, Leapnet recorded a tax benefit related to state income
tax refunds due from the State of New York in the amount of $136,532.
Otherwise, Leapnet's effective tax rate for the fiscal year ended January 31,
2000 would have been 0% due to Leapnet's use of previously reserved tax assets
resulting from net operating losses. As of January 31, 2000, Leapnet has a
deferred tax asset of approximately $8.4 million which begins to expire in
fiscal year 2011. Leapnet has provided a full valuation reserve against the net
deferred tax asset due to its limited operating history, recent operating
losses, and the uncertainty regarding future operating results.
Fiscal Year Ended January 31, 2000 Compared to Fiscal Year Ended January 31,
1999
Revenues increased to $36.3 million for the fiscal year ended January 31,
2000 from $35.9 million for the fiscal year ended January 31, 1999, an increase
of $.4 million, or 1%. This net increase resulted from a $12 million increase
in new and existing business, offset by a decrease of $11.6 million stemming
from the sale of the One World subsidiary and the AT&T account of YAR in
October of 1998. The $12 million increase in revenue was primarily due to
growth at Quantum Leap, which grew 152% over the prior year, and at The Leap
Partnership, which also grew by approximately 50%. As described above and in
Dependence on Key Clients and Projects below, in November 1999, Hardee's, a
client representing 32% of Leapnet's revenue for the year ended January 31,
2000, notified the Leap Partnership that it was terminating its National
Advertising Agency Agreement effective February 22, 2000. To replace the
revenues, Leapnet has already been dedicating a greater amount of resources
toward communications using the Internet. As compared to fiscal year 1999,
total Internet related revenues for the fiscal year 2000 have grown by 165%.
Additionally, in January 2000, Leapnet announced the intent to acquire SPR, an
IT services company with resources to help support Internet development efforts
and provide other technology services and solutions for clients. The
acquisition, contingent upon stockholder approval, is expected to be completed
during the second quarter ended July 31, 2000 (see Note 3 to the Consolidated
Financial Statements).
For the fiscal year ended January 31, 2000, gross profit was $13.4 million,
compared to $11.2 million for the fiscal year ended January 31, 1999, an
increase of $2.1 million or 19%. As a percentage of revenue, gross profits
increased from 31% of revenue during the fiscal year 1999 to 37% of revenue
during the fiscal year ended January 31, 2000. The $2.1 million increase in
gross profits includes an increase of $4.6 million primarily due to improved
margins on new work and due to increased efficiency of employees servicing the
business. The $4.6 million increase was offset in part by a decrease of $2.5
million in gross profits due primarily to the sale of One World and the AT&T
account of YAR.
General and administrative expenses decreased to $14.1 million for the
fiscal year ended January 31, 2000 from $15.3 million for the fiscal year ended
January 31, 1999, a decrease of approximately $1.2 million or 8%. This decrease
was primarily due to the sale of One World and restructuring efforts at YAR
which together resulted in a decrease of approximately $4.7 million in general
and administrative expenses from the prior year. Also, Leapnet has already
reduced costs as a result of the cessation of the Hardee's contract. The
decreases in expenses have been offset in part by increases in general and
administrative expenses of approximately $4.3 million. These increases
primarily relate to increased facilities costs and depreciation expense and
additional professional services at the corporate level including costs
associated with Leapnet's annual report and shareholder meeting and legal and
accounting services. As a percentage of revenue, general and administrative
expenses decreased to approximately 39% for the fiscal year ended January 31,
2000, from approximately 43% for the prior year.
During the prior year, in connection with the sale of One World and the AT&T
account of YAR (the "Sale") to Young & Rubicam (see Note 3 to the Consolidated
Financial Statements for the fiscal year ended
73
January 31, 2000), Leapnet recorded the following non-recurring charges: a $1.8
million loss on the Sale; $9.3 million in losses related to impaired assets,
including goodwill and other long-lived assets (see Note 8 to the Consolidated
Financial Statements for the fiscal year ended January 31, 2000); and a
$738,000 charge related to restructuring the remaining YAR business (see Note 8
to the Consolidated Financial Statements for the fiscal year ended January 31,
2000). During the prior year, Leapnet also recorded the following non-recurring
items: (i) approximately a $3.4 million reserve against Leapnet's previously
recorded deferred tax assets (see Note 14 to the Consolidated Financial
Statements for the fiscal year ended January 31, 2000) and (ii) a $1.2 million
gain on the sale of the Los Angeles office building (Note 5 to the Consolidated
Financial Statements for the fiscal year ended January 31, 2000).
Interest income totaled approximately $790,000 and $378,000 for the years
ended January 31, 2000 and 1999, respectively, and, was generated from short-
term US Treasury Notes, certificates of deposit and short-term Eurodollar
currency investments. Interest income was offset in part by interest expense of
approximately $469,000 and $544,000 for the fiscal years ended January 31, 2000
and 1999, respectively, resulting in net interest income of $321,000 and net
interest expense of $166,000, respectively. Leapnet incurred interest expense
on debt that totaled approximately $9.4 million and $5.1 million as of January
31, 2000 and 1999, respectively.
Leapnet's stated effective tax rates for the fiscal years ended January 31,
2000 and January 31, 1999, were (30.5%) and 22.7%, respectively. In the fourth
quarter ended January 31, 2000, Leapnet recorded a tax benefit related to state
income tax refunds due from the State of New York in the amount of $136,532.
Otherwise, Leapnet's effective tax rate for the fiscal year ended January 31,
2000 would have been 0% due to Leapnet's use of previously reserved tax assets
resulting from net operating losses. As of January 31, 2000, Leapnet has a
deferred tax asset of approximately $8.4 million which begins to expire in
fiscal year 2011. Leapnet has provided a full valuation reserve against the net
deferred tax asset due to its limited operating history, recent operating
losses, and the uncertainty regarding future operating results.
Fiscal Year Ended January 31, 1999 Compared to Fiscal Year Ended January 31,
1998
Revenues increased to $35.9 million for the fiscal year ended January 31,
1999 from $30.7 million for the fiscal year ended January 31, 1998, an increase
of $5.3 million, or 17%. The increase is due to the five additional months of
revenue from One World, which contributed approximately $5.1 million of
additional revenue over the prior fiscal year. There was also a $5.1 million
increase in revenue due to new account wins and growth in existing client
business, which was offset by YAR which had a $4.9 million decrease in revenue
due to the transfer of the AT&T account to another agency (see Note 3 to the
Consolidated Financial Statements for the fiscal year ended January 31, 2000).
Gross profit increased $2.8 million or 33% during the fiscal year ended
January 31, 1999. As a percentage of revenue, gross profits increased from 28%
to 31% of revenue from fiscal year ended January 31, 1998 to the fiscal year
ended January 31, 1999. The $2.8 million increase stems from an increase of
$4.7 million in gross profits from new and existing business, an $832,000 net
increase from the inclusion of One World for a greater length of time during
fiscal year 1999, which was offset by a decrease of $2.6 million in gross
profits at YAR due to the sale of the AT&T account of YAR.
General and administrative expenses decreased to $15.3 million for the
fiscal year ended January 31, 1999 from $17.1 million for the fiscal year ended
January 31, 1998, a decrease of approximately $1.7 million, or 10%. The
decrease is primarily due to the prior restructuring efforts which resulted in
a reduction of $3.4 million in costs including primarily salary reductions and
related costs at The Leap Partnership, offset by the addition of $1.3 million
of One World's expenses and an increase of $0.4 million of primarily corporate
legal and accounting services.
74
As described above and in the Notes to the Consolidated Financial Statements
accompanying this joint proxy statement/prospectus, Leapnet recorded a pretax
charge of approximately $738,000 related to the restructuring of YAR during the
third quarter of the fiscal year 1999. Also, as a result of the transfer of the
AT&T account to another agency and due to the YAR restructuring, Leapnet
recognized impairment losses of approximately $7.0 million for goodwill and
$1.5 million for property and equipment. In total, $9.3 million of impaired
assets, including approximately $742,000 of unamortized capitalized software
costs (see Note 8 to the Consolidated Financial Statements for the fiscal year
ended January 31, 2000), were expensed during the third quarter of the fiscal
year ended January 31, 1999.
Other income and expense includes interest income of $378,000 and a $1.2
million gain on the sale of The Leap Partnership's Los Angeles office building
offset by interest expense of $544,000 and a $1.8 million loss on the sale of
various assets of One World and YAR (see Note 3 to the Consolidated Financial
Statements for the fiscal year ended January 31, 2000).
The combined effective federal and state income tax rates were 22.7% and
(38.5%) for fiscal 1999 and 1998, respectively. During the third quarter of
fiscal 1999, Leapnet provided a valuation reserve against the $3.3 million of
recorded deferred tax assets primarily as a result of the transfer of the AT&T
account to another agency and the YAR restructuring. As of January 31, 1999,
Leapnet has available net operating loss carryforwards of approximately $11.8
million for tax purposes to offset future taxable income. These net operating
loss carryforwards begin to expire in fiscal year 2011.
Fiscal Year Ended January 31, 1998 Compared to Fiscal Year Ended January 31,
1997
Revenues increased to $30.7 million for fiscal 1998 from $16.1 million for
the fiscal year ended January 31, 1997, an increase of $14.6 million, or 91%.
The increase is primarily due to the addition of YAR revenues of approximately
$16.9 million for the ten months since the acquisition and the addition of One
World revenues of approximately $2.6 million for the three months since the
acquisition. The increases were offset by a $4.9 million decrease in revenues
from The Leap Partnership during the year which was primarily due to the loss
of two key clients and decreased spending levels over the prior year.
Gross profit increased $3.0 million or by 55% during the fiscal year ended
January 31, 1998. In the fiscal year ended January 31, 1997, there was only one
operating subsidiary; by the end of fiscal year 1998, there were four. The new
subsidiaries contributed a total of $9 million in gross profits offset by a
decrease of $5.7 million in gross profits at The Leap Partnership. Leapnet took
aggressive steps to contain costs at The Leap Partnership and announced a
restructuring program in the third quarter of the fiscal year ended January 31,
1998, described below. As a percentage of revenue, gross profits decreased from
34% to 28% of revenue from fiscal year ended January 31, 1997 to the fiscal
year ended January 31, 1998.
General and administrative expenses increased to $17.1 million for the
fiscal year ended January 31, 1998 from $4 million for the fiscal year ended
January 31, 1997, an increase of $13.0 million or 328%. The increase is
primarily due to additional general and administrative expenses of $4.0 million
incurred by The Leap Partnership and Quantum Leap to support Leapnet's growth
activities through increased occupancy costs, depreciation, amortization and
approximately $1.7 million in corporate expenses related to Leapnet being a
public entity for the full fiscal year. The balance of fiscal 1998's increase
was attributable to acquisition expenses and to the addition of YAR's general
and administrative expenses of $7.0 million for ten months since its
acquisition and to the addition of One World's general and administrative
expenses of $704,000 for three months since its acquisition.
During the fiscal year January 31, 1998, approximately $770,000 in net
restructuring expenses was recorded primarily for employee termination and
severance costs and other related expenses, including legal
75
fees. During the last two quarters of fiscal 1998, Leapnet reduced salaries and
wages throughout Leapnet by working to eliminate redundancies within Leapnet,
by reducing executive compensation and by decreasing The Leap Partnership's
staff by approximately 40%.
Interest income totaled approximately $1,313,000 and $619,000 for the fiscal
year ended January 31, 1998 and the fiscal year ended January 31, 1997,
respectively. The interest income was offset by interest expense of $1,044,000
in fiscal 1998, and $163,000 in fiscal 1997, resulting in net interest income
of $269,000 and $456,000 for the respective periods. As a result of the Leapnet
IPO in late September 1996, Leapnet raised $35.7 million in cash, net of
related costs. The proceeds were invested in short-term U.S. Treasury Notes and
Bills, a certificate of deposit and a money market fund for the remaining four
months of the 1997 fiscal year. The increase in interest income during fiscal
1998 was primarily the result of the offering proceeds earning interest income
for a longer period. The increase in interest expense during fiscal 1998 was
primarily due to the cost of borrowed funds related to the acquisition of YAR
in April 1997. On September 30, 1997, Leapnet retired $23.3 million of notes
payable to a bank related to the acquisition of YAR. Also, interest expense
increased during the fourth quarter fiscal 1998, primarily as a result of
financing the acquisition of One World through a bank line of credit in the
amount of $1.3 million in November 1997. Interest expense during the year
resulted from financing related to real estate and other capital expenditures
and daily working capital requirements.
The combined effective federal and state income tax rates were (38.5%) and
29.1% for the fiscal years 1998 and 1997, respectively. The higher effective
tax in the fiscal year ended January 31, 1998 was due to higher local tax
rates. Due to the net operating loss in fiscal 1998, Leapnet recognized $3.5
million in net operating loss tax benefits compared to the $536,000 income tax
expense recorded in fiscal 1997. As of January 31, 1997, Leapnet's balance of
net operating losses was approximately $112,000. As of January 31, 1998, the
net operating losses were approximately $6.6 million for federal purposes and
$8.7 million for state purposes. At January 31, 1998, no valuation reserve was
provided against deferred tax assets since, in management's opinion, at that
time, it was more likely than not that those tax assets would be realized based
on available tax operating loss carrybacks, expected reversals of taxable
temporary differences, and estimates of future taxable income.
Liquidity & Capital Resources
Since its inception, Leapnet has primarily financed its operations and
investments in property and equipment through cash generated from bank
borrowings and equipment leases, proceeds from the Leapnet IPO, loans from a
former officer of Leapnet and from cash generated from operations.
At January 31, 2000 Leapnet had $18.3 million of working capital, inclusive
of $15.7 million in cash and cash equivalents, compared to working capital of
$11.6 at January 31, 1999. Cash and cash equivalents increased $1.6 million and
$6.9 million during fiscal year 2000 and 1999, respectively.
In fiscal 2000, the $1.6 million increase in cash was primarily due to $2.6
million in proceeds from the exercise of stock options and $4.6 million in
increased borrowings ($3.2 increase in the line of credit and a new $1.4
million mortgage payable) which were used to finance capital expenditures
related to the new building of $4.3 million and computer software and hardware
investments of $1.0 million.
In fiscal 1999, there was a net loss of $18.3 million which primarily
consisted of non-cash charges of approximately $16.8 million, including a) the
impairment losses on long-term assets (Note 8 to the Consolidated Financial
Statements for the fiscal year ended January 31, 2000), b) the establishment of
a valuation reserve against deferred income taxes (Note 14 to the Consolidated
Financial Statements for the fiscal year ended January 31, 2000), c)
depreciation and amortization and d) the loss on sale of One World. After
deducting the non-cash charges and adding in cash used in and provided from
investing and financing activities, total cash increased $6.9 million in fiscal
1999 primarily due to: (1) the $5.3 million in proceeds from the sale
76
of various assets of One World and the transfer of the YAR AT&T account to
another agency; (2) the $3.5 million of cash generated from the sale of the Los
Angeles building; (3) the $2.7 million in net cash after related expenses that
Leapnet received from an escrow settlement related to the YAR acquisition; (4)
the $1.8 million repayment of a loan from a strategic partner, Vivid
Publishing, Inc.; and (5) the $1 million in proceeds from the exercise of
Leapnet's stock options. The increases were offset by (i) a $3.3 million
retirement of a mortgage on the Los Angeles building and other Leapnet debt;
(ii) approximately $1.2 million in capital expenditures for property and
software development costs and, (iii) $2.9 million of cash used in operations.
On November 10, 1999, Leapnet obtained a new $15 million secured two-year
revolving line of credit from American National Bank, which replaced an
existing $10 million line of credit. The new line of credit matures on November
10, 2001, and bears interest at a variable rate of 1.5% above the bank's
highest CD rate. In addition, there is an unused facility fee of ten basis
points per year on the average amount of the unused facility. The line of
credit agreement requires Leapnet to maintain certain minimum levels of working
capital, net worth, and liquidity. Borrowings are collateralized by
substantially all the assets of Leapnet. As of January 31, 2000, the interest
rate was 6.9% and the outstanding balance on this line of credit was $7.3
million.
On July 2, 1999, Quantum Leap entered into contracts to purchase a 35,000
square foot building in Chicago for $2.8 million. The purchase of the building
is scheduled to occur in three phases. As of January 31, 2000, the first and
second portions of the building were purchased for $1.8 million. The final
phase of the purchase is scheduled to occur no later than October 2000, when
the remaining portion of the building is expected to be purchased for $1.0
million. On September 28, 1999, Quantum Leap entered into a contract to remodel
the building. The remodeling is scheduled to be completed during April 2000 and
the cost is approximately $2 million. As of January 31, 2000, there is
approximately $600,000 of costs remaining on this contract to be incurred
through April 2000.
On June 29, 1999, Leapnet obtained a $2.2 million multi-draw mortgage which
is secured by substantially all the assets of Leapnet as the mortgage is cross-
collateralized with the line of credit described above to the Consolidated
Financial Statements for the fiscal year ended January 31, 2000. The five-year
balloon note bears interest at a fixed rate of 8.5%. The loan payments had been
interest only until the completion of the second phase of the building
purchase. As of January 31, 2000, the second phase of the building has been
purchased so that the loan converts to a 20-year amortization schedule. As of
January 31, 2000, the outstanding balance on this loan was $1.4 million
resulting in monthly principal and interest payments of $12,497 through October
2000. The final phase of the purchase is scheduled to occur no later than
October 2000 and Leapnet plans to finance an additional $800,000 under this
loan. The monthly principal and interest payment will increase to $19,440 at
that time and will be payable monthly through the maturity date of May 31,
2004.
On October 22, 1998, Leapnet received $5.3 million in cash from the sale of
various assets of the One World subsidiary and the transfer of the YAR AT&T
account to another agency (see Note 3 to the Consolidated Financial Statements
for the fiscal year ended January 31, 2000). Additional consideration of $1.1
million was received on April 13, 1999. In total, $6.4 million of proceeds from
the sale were received.
On April 30, 1998, in connection with the YAR acquisition, Leapnet received
$3 million in cash before related expenses, due to the release of escrowed
funds. The funds reduced the purchase price of the acquisition and the amount
of recorded goodwill.
Leapnet believes that the existing credit facilities and funds from
operations will be sufficient to meet Leapnet's cash requirements for at least
the next twelve months. Leapnet's capital requirements will depend on numerous
factors, including the rates at which Leapnet grows, expands its personnel and
infrastructure to accommodate growth and invests in new technologies. Leapnet
has various ongoing needs for capital, including working capital for
operations, project development costs and capital expenditures to maintain and
expand its operations. In addition, as part of its strategy, Leapnet evaluates
potential acquisitions of, or alliances with, businesses that extend or
complement Leapnet's business. Leapnet may in the future consummate
acquisitions or alliances which may require Leapnet to make additional capital
expenditures, and such expenditures may be
77
significant. Future acquisitions and alliances may be funded with available
cash from seller financing, institutional financing, issuance of common stock
of Leapnet and/or additional equity or debt offerings. There can be no
assurance that Leapnet will be able to raise any additional required capital on
favorable terms, or at all.
Seasonality
Depending upon its client mix at any time, Leapnet could experience
seasonality in its business. Such seasonality arises from the timing of product
introductions and business cycles of Leapnet's clients and could be material to
Leapnet's interim results. Such cycles vary from client to client, and the
overall impact on Leapnet's results of operations cannot be reasonably
predicted. In addition, the advertising industry as a whole exhibits
seasonality. Typically, advertising expenditures are highest in the fourth
calendar quarter and lowest in the first calendar quarter, particularly in
January. Although Leapnet has too limited an operating history to exhibit any
discernible seasonal trend, as Leapnet matures, Management believes that the
business and results of operations could be affected by the overall seasonality
of the industry.
Dependence on Key Clients and Projects
An important part of Leapnet's strategy is to develop in-depth, long-term
relationships with a select group of clients in a variety of industries.
Consistent with such a strategy, a large portion of Leapnet's revenues has
been, and is expected to continue to be, concentrated among a relatively
limited number of nationally recognized clients. For the fiscal year ended
January 31, 2000 one client, Hardee's Food Systems, accounted for 31.7% of
consolidated revenues. However, on November 23, 1999, Leapnet was informed by
Hardees that it was terminating its National Advertising Agency Agreement
effective February 22, 2000. For the year ended January 31, 1999, two clients
accounted for 24.2% and 13.1% of consolidated revenues. For the year ended
January 31, 1998, one client accounted for 36.3% of consolidated revenues.
Due to the nature of the advertising business, any of Leapnet's clients
could at any time in the future, and for any reason, reduce its budget, alter
the timing of projects, engage another entity or take in-house all or part of
the business performed by Leapnet. Even though Leapnet has taken steps to add
new clients, diversify its client base, negotiate a greater percentage of
retainer and fixed fee arrangements with clients and develop new potential
revenue streams from licensing of proprietary software and other content, these
steps may not fully mitigate the impact that the loss of any significant
account may have on Leapnet's operations.
Management believes that the loss of key clients and varying effects of
seasonality, as described above, could also have an adverse impact on Leapnet's
business, results of operations and financial condition, particularly in the
short term.
Year 2000
During 1999, Leapnet's Year 2000 Task Force completed an inventory of the
hardware and software used in its operations and identified only non-material
Year 2000 issues and has remedied them at little cost. To date, Leapnet has not
experienced any Year 2000 related business interruptions, including its ability
to process transactions, send or receive email messages or invoices or engage
in normal business activities.
Additionally, Leapnet has been communicating with significant vendors and
other critical service providers to determine if such parties are Year 2000
compliant and to determine the extent of Leapnet's vulnerability to the failure
of such parties to remedy such issues. Based upon the responses that Leapnet
has received from these third parties, no material Year 2000 issues have been
identified. Leapnet will continue to engage in an ongoing Year 2000 assessment
but has not yet identified any Year 2000 issues and does not expect the impact
of the Year 2000 to have a material adverse impact on Leapnet's business or
results of operations. However, no assurances can be given that any
unanticipated or undiscovered Year 2000 compliance problems will not have a
material adverse effect on Leapnet's business and results of operations. In
addition, there can be no assurance
78
that Year 2000 non-compliance by any of Leapnet's clients or significant
suppliers or vendors will not have a material adverse effect on Leapnet's
business or results of operations.
Recently Issued Accounting Standards
In June 1998, the Financial Accounting Standards Board ("FASB") issued SFAS
No. 133, "Accounting for Derivative Instruments and Hedging Activities," which
is required to be adopted in years beginning after June 15, 1999. Leapnet
anticipates that the adoption of SFAS No. 133 will not have a significant
effect on the results or operations or the financial condition of Leapnet. In
July, 1999, the FASB issued SFAS No. 137, "Accounting for Derivative
Instruments and Hedging Activities-Deferral of the Effective Date of FASB
statement No. 133", which amends SFAS No. 133 to be effective for all fiscal
quarters of all fiscal years beginning after June 15, 2000.
QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The principal market risk (i.e., the risk of loss arising from adverse
changes in market rates and prices) to which Leapnet is exposed is interest
rate fluctuations on investments and debt.
As of January 31, 2000, Leapnet has $12.7 million invested in certificates
of deposit and other short-term interest bearing accounts. Leapnet
predominantly invests in instruments that are highly liquid, are of investment
grade and generally have maturities of less than one year. Leapnet does not
hold and has not issued derivative financial instruments for speculation or
trading purposes.
As of January 31, 2000, Leapnet had an outstanding balance of approximately
$7.3 million on its $15 million line of credit from American National Bank. The
outstanding balance bears interest at a variable rate of 1.5% above the bank's
highest certificates of deposit rate, which as of January 31, 2000, was 6.9%.
As of January 31, 2000, Leapnet has two mortgage loans. One has an 8.5%
fixed interest rate, an outstanding balance of $1,440,000, and matures in May
2004. The other has a 9% fixed interest rate, and an outstanding balance of
$644,000 as of January 31, 2000, and was paid in full as of March 3, 2000 (see
note 5 to the Consolidated Financial Statements).
In March 1999, one of Leapnet's subsidiaries received stock from a client in
exchange for services. The stock value appreciated by approximately $59,000
through January 31, 2000 (see balance sheet and Note 4 to the Consolidated
Financial Statements). However, the value of the equity securities may
fluctuate based on the volatility of the client's stock price and other general
market conditions. To mitigate the market risk on the equity securities, the
stock has been classified as "available for sale" as management anticipates
selling the stock within the next year at a time when a gain may be recorded.
79
MANAGEMENT OF LEAPNET
Directors and Executive Officers
The following table sets forth information with respect to the directors and
executive officers of Leapnet following the merger.
Name Age Position
- ---- --- --------
Frederick A. Smith.. 45 Chairman of the Board and Chairman of Leapnet
Robert M. Figliulo.. 45 Vice Chairman of the Board and Chief Executive Officer
Stephen J. Tober.... 35 Director; President and Chief Operating Officer
George Gier......... 39 Director
John G. Keane....... 69 Director
Charles J. Ruder.... 62 Director
Thomas R. Sharbaugh. 55 Director
Stephen T. Gambill . 49 Chief Financial Officer
Robert C. Bramlette. 50 Chief Legal Officer and Secretary
Frederick Smith, a co-founder of Leapnet, was elected Chairman of the Board
of Directors and Chief Executive Officer of Leapnet in February 1998, and is
currently Chief Financial Officer. Mr. Smith also serves as President of
Quantum Leap Communications, Inc., a subsidiary of Leapnet. From January 1991
until the formation of Leapnet in September 1993, Mr. Smith was employed by DDB
Needham Chicago, where he was a Vice President, Executive Producer. While
there, his principal accounts were Bud Light, Michelob, Discover Card Services,
General Mills, and Audi. Mr. Smith's previous experience included one year at
Young and Rubicam Chicago, and five years at Leo Burnett in Chicago where his
client list included McDonald's, Kellogg and United Airlines. Mr. Smith
attended the University of Illinois, the University of California--Los Angeles
and the University of Southern California.
Robert M. Figliulo has served as Chief Executive Officer and Chairman of SPR
since June 1997 and previously served as President and Chairman of SPR Chicago.
Since joining SPR in May 1976, Mr. Figliulo has held numerous positions,
including Programmer, Analyst, Account Manager, General Manager of both the
Tulsa and Chicago offices and Vice President of Marketing. Mr. Figliulo
received a Masters in Business Administration from the University of Chicago in
1987.
Stephen J. Tober has served as SPR's Chief Operating Officer since June 1998
and as Executive Vice President--Finance and Business Development since June
1997. Mr. Tober worked in the investment banking division of Salomon Smith
Barney from 1995 through 1997. From 1991 through 1995 Mr. Tober worked in the
corporate finance group of the law firm Latham & Watkins. Mr. Tober received a
J.D. degree from the University of Virginia School of Law in 1991 and a B.A.
degree from Amherst College in 1987.
George Gier co-founded Leapnet and has served as a director of Leapnet since
its inception. Mr. Gier was appointed Executive Vice President, Chief Marketing
Officer in May 1996 and served as an officer until he resigned in December
1999. From March 1990 until joining The Leap Partnership, Inc., he was employed
by DDB Needham, Chicago, where he was a Vice President and Creative Director.
Mr. Gier's previous experience includes Hal Riney & Partners in San Francisco,
where his principal assignment was the introduction of Saturn automobiles.
Prior to joining Hal Riney & Partners, Mr. Gier spent four years at Fallon
McElligott in Minneapolis, where his client list included Lee Jeans, Horache,
Federal Express, Gilbey's Gin and Time/Life Books. Mr. Gier received a Bachelor
of Arts from Wisconsin-Stevens Point in 1982.
John G. Keane has been a member of Leapnet's Board of Directors since
September 1996. Mr. Keane is the Korth Professor of Strategic Management at The
University of Notre Dame's Mendoza College of Business. He joined The
University of Notre Dame in January 1989 as Dean of the Business School. Mr.
Keane also currently serves as Treasurer and Secretary of the Strategic
Management Society. From 1992-1999, Mr. Keane was a Director of Excel
Industries, Inc., a publicly-held manufacturer of automotive parts. Prior to
such time Mr. Keane was Director of the United States Census Bureau from 1984-
1989. From 1972-1984 Mr. Keane was President of Managing Change, Inc., a
marketing and strategic management consulting firm in Barrington, Illinois.
From 1956-1972, he worked in diverse positions for such industry leaders as
U.S. Steel, Booz . Allen
80
& Hamilton, Inc. and J. Walter Thompson Company, among other advertising
agencies. Mr. Keane received a Ph.D from the University of Pittsburgh in 1965,
a Masters in Business Administration from Indiana University in 1956, a B.S.
degree from the University of Notre Dame in 1955 and an A.B. degree from
Syracuse University in 1952.
Charles J. Ruder joined Leapnet's Board of Directors in September 1997, Mr.
Ruder served as the President and Chief Executive Officer of the Chicago United
Way/Crusade of Mercy for the greater Chicagoland area from 1994 to 1996. Mr.
Ruder worked at Sears, Roebuck and Co. from 1959 to 1993 in many management
capacities, including Vice President of Public Affairs from 1985 to 1993. Prior
to that time, he served as region manager for stores located in the Washington,
D.C. area and prior to that for the Minnesota area. Mr. Ruder received a
Bachelor of Science from Northern Illinois University in 1959.
Thomas R. Sharbaugh joined Leapnet in April 1996, became a director at that
time and is currently President. In addition, Mr. Sharbaugh serves as the
President of YAR Communications, Inc., a subsidiary of Leapnet. Prior to
joining Leapnet, Mr. Sharbaugh was employed by Sears, Roebuck and Co. from
March 1994 until February 1996 as Vice President, Strategic Marketing and
Advertising. Prior to joining Sears, Mr. Sharbaugh held various senior-level
executive marketing positions during his 16-year tenure at Anheuser-Busch. As
Vice President of Brand Management and, prior to that, as Vice President of
Budweiser Brands, he was responsible for managing brand marketing activities
and new product marketing. Mr. Sharbaugh's responsibilities at Anheuser-Busch
included the development and market launch of Bud Light; management of the
"This Bud's For You" campaign for Budweiser; the "Gimme a Light", "Spuds
McKenzie" and "Make it a Bud Light" campaigns for Bud Light; and the "Bud Bowl"
promotional campaign. Mr. Sharbaugh received a Masters in Business
Administration from the Wharton School, University of Pennsylvania in 1970 and
a B.A. degree from Pennsylvania State University in 1966.
Stephen T. Gambill has served as SPR's Vice President and Chief Financial
Officer since July 1996. From 1982 through July 1996, Mr. Gambill, a certified
public accountant, held various financial management positions within Natural
Gas Pipeline Company of America, a large natural gas pipeline, and most
recently served as its Director of Accounting. Prior to 1982, Mr. Gambill held
various auditing positions with the public accounting firms of Coopers and
Lybrand and Deloitte, Haskins & Sells. Mr. Gambill received a Masters in
Business Administration degree from the University of Chicago in 1987.
Robert C. Bramlette has served as Chief Legal and Strategic Officer and as
Secretary of Leapnet since May 1996. In addition, Mr. Bramlette serves as
President and sole director of Brassie Corporation and Vice President of YAR
Communications, Inc. Prior to joining Leapnet, Mr. Bramlette was Of Counsel to
the law firm Krupa & Braun, which he joined in February 1996. Prior to joining
Krupa & Braun, Mr. Bramlette was employed by Sears, Roebuck and Co. for sixteen
years, most recently as its Assistant General Counsel, Real Estate, and prior
to that time in a number of positions including Director of Corporate
Communications. Currently, Mr. Bramlette is Of Counsel to the firm of Braun &
Edwards, Chtd. Mr. Bramlette received a J.D. from Northwestern University in
1974 and a B.B.A. from the University of Notre Dame in 1971.
Board of Directors
Leapnet's board currently consists of six directors. Each director holds
office until his successor is duly elected and qualified or until his
resignation or removal, if earlier. Following the merger, Leapnet's board of
directors will consist of Frederick A. Smith, Robert M. Figliulo, Stephen J.
Tober, George Gier, John G. Keane, Charles J. Ruder, Thomas R. Sharbaugh and
two other persons who shall be designated by SPR.
Leapnet has established an Audit Committee, a Compensation Committee and a
Stock Committee.
The Audit Committee makes recommendations concerning the engagement of
independent public accountants, reviews with the independent public accountants
the plans and results of the audit engagement, approves professional services
provided by the independent public accountants, reviews the independence of the
independent public accountants, considers the range of audit and non-audit fees
and reviews the adequacy of Leapnet's internal accounting controls.
81
The Compensation Committee determines the compensation of Leapnet's
executive officers and makes recommendations concerning the grant of options to
purchase shares of Leapnet's stock under its Employee Incentive Compensation
Plan.
The Stock Committee is responsible for the administration of Leapnet's 1996
Stock Option Plan, Employee Incentive Compensation Plan and Employee Stock
Purchase Plan.
Compensation of Directors
Leapnet pays a fee of $2,000 per board meeting attended, $1,000 per
telephonic board meeting attended and $500 per committee meeting attended to
its directors who are not employees of Leapnet. Mr. Gier received $6,000 for
meetings attended in fiscal 2000. The directors may elect to receive options in
lieu of the cash payment. Leapnet reimburses such directors for travel and
lodging expenses incurred in connection with their activities on behalf of
Leapnet. During fiscal 2000, Messrs. Garville, Keane and Ruder were granted
options to purchase 21,500 shares, 18,000 shares and 22,500 shares of common
stock, respectively, pursuant to the Non-Employee Director's Incentive
Compensation Plan.
The Delaware General Corporation Law provides that a company may indemnify
its directors and officers for specified liabilities. Leapnet's certificate of
incorporation and bylaws provide for the indemnification of its directors and
officers to the fullest extent permitted by law. The effect of these provisions
is to indemnify the directors and officers of Leapnet against all costs,
expenses and liabilities incurred by them in connection with any action, suit
or proceeding in which they are involved by reason of their affiliation with
Leapnet. Leapnet may obtain directors and officers liability insurance to
effectuate these provisions.
Employment and Non-Competition Agreements
Leapnet has entered into an employment agreement with Mr. Smith, which
provides for an annual base salary of $200,000, expires on March 11, 2001, and
is terminable by Leapnet on 90 days prior written notice or in the event of
death or disability or for "cause" (as defined within the agreement; See "Where
You Can Find More Information"). Mr. Smith may terminate the agreement on 270
days prior written notice. The employment agreement contains provisions that
restrict the misappropriation of confidential information during the term of
employment and thereafter and from soliciting Leapnet's clients, prospects or
employees for one year following termination of employment.
Leapnet is not currently a party to employment agreements with any other
executive officer.
Executive Compensation
The table below summarizes information concerning the compensation paid by
Leapnet during its fiscal year ended January 31, 2000 to Leapnet's Chief
Executive Officer and Leapnet's four other most highly paid executive officers
for its fiscal year ended January 31, 2000 (collectively, the "Leapnet Named
Executive Officers"):
Annual Long-term
compensation compensation awards
-------------- Securities
Name and principal position Salary Bonus underlying options
--------------------------- -------- ----- -------------------
Frederick A. Smith...................... $200,000 0 0
Chief Executive Officer and Chairman of
the Board
Thomas R. Sharbaugh..................... $200,000 0 0
President
George Gier............................. $184,615 0 0
Executive Vice President and Chief
Marketing Officer
Joseph A. Sciarrotta.................... $200,000 0 0
Executive Vice President and Chief
Creative Officer
Robert C. Bramlette..................... $140,562 0 0
Chief Legal and Strategic Officer
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Stock Option Grants in Last Fiscal Year
No stock appreciation rights were granted to the Leapnet Named Executive
Officers during fiscal 2000.
The following table sets forth certain information on options granted in
fiscal 2000 to the Leapnet Named Executive Officers.
Individual grants
Robert C. Bramlette
Number of
Securities Percent of Total
Underlying Options Granted Grant Date
Options Granted to Employees in Exercise Price Expiration Present
(#) Fiscal Year ($/share) Grant Date Date Value $(1)
--------------- ---------------- -------------- ---------- ---------- ----------
30,000 1.1% $5.53 1/7/00 1/7/05 $ 82,767
50,000 1.9% $6.38 1/26/00 1/26/05 $159,148
Thomas R. Sharbaugh
Number of
Securities Percent of Total
Underlying Options Granted Grant Date
Options Granted to Employees in Exercise Price Expiration Present
(#) Fiscal Year ($/share) Grant Date Date Value $(1)
--------------- ---------------- -------------- ---------- ---------- ----------
100,000 3.8% $2.50 6/14/99 6/14/04 $123,066
- --------
(1) The grant date present value in the far right column of the above table
was calculated using the Black-Scholes option pricing model applied as of
the Grant Date, as specified in the table. The values generated by this
model depend upon certain assumptions, as follows: estimated option lives
of 3 years; an assumed annual volatility of underlying stock of 68
percent; and risk-free rates of return on the grant dates ranging from 5.7
to 6.5 percent. Leapnet made no assumptions regarding restrictions on
vesting or the likelihood of vesting.
Option Exercises in the Last Fiscal Year and Year-End Option Values
The Leapnet Named Executive Officers did not exercise any options in fiscal
2000. The following table provides information on unexercised options of the
Leapnet Named Executive Officers at January 31, 2000.
Number of securities underlying Value of unexercised in-
unexercised options at fiscal year- the-money options at
end (#) fiscal year-end ($)
-------------------------------------- -------------------------
Exercisable Unexercisable Exercisable Unexercisable
------------------ ------------------ ----------- -------------
Thomas R. Sharbaugh..... 1,734,000 166,000 105,196 204,204
Robert C. Bramlette..... 135,417 33,333 155,253 0
Leapnet's Employee Incentive Compensation Plan
On June 15, 1999, the Leapnet stockholders approved an amendment to
Leapnet's Employee Incentive Compensation Plan that increased the number of
shares of common stock authorized for issuance from 3,500,000 to 5,000,000. A
current proposal has been furnished to the Leapnet stockholders for approval
at the special meeting which would increase the number of shares of common
stock authorized for issuance thereunder from 5,000,000 to 10,000,000. As of
January 27, 2000, options to purchase 989,503 shares of common stock have been
exercised under the Employee Incentive Compensation Plan, options to purchase
3,259,883 shares of common stock are outstanding under the Employee Incentive
Compensation Plan, options to 750,834 shares have been forfeited, and 750,614
shares of common stock remain available for grant thereunder. Leapnet has not
granted any options pursuant to the Employee Incentive Compensation Plan that
are conditioned upon Leapnet's stockholders approving the amendment proposed
hereby.
The following is a brief summary of certain features of the Incentive
Compensation Plan.
83
General
The Employee Incentive Compensation Plan is a flexible plan permitting the
issuance of awards in a variety of forms, including: (i) non-qualified and
incentive stock options for the purchase of common stock, (ii) stock
appreciation rights ("SARs"), (iii) restricted stock ("Restricted Stock"), (iv)
deferred stock ("Deferred Stock"), (v) bonus stock and awards in lieu of
obligations, (vi) dividend equivalents, (vii) other stock-based awards, and
(viii) performance awards and cash incentive awards. The purpose of the
Employee Incentive Compensation Plan is to promote the overall financial
objectives of Leapnet and its stockholders by motivating eligible participants
to achieve long-term growth in shareholder equity in Leapnet and to retain the
association of these individuals.
The persons eligible to participate in the Employee Incentive Compensation
Plan are directors, officers, employees and consultants of Leapnet or any
subsidiary of Leapnet who, in the opinion of the Stock Committee of the Board
of Directors, contribute to the growth and success of Leapnet or its
subsidiaries. The Employee Incentive Compensation Plan is administered by the
Stock Committee. In the discretion of the Stock Committee, shares of common
stock subject to an award under the Employee Incentive Compensation Plan that
remain unissued upon termination of such award, are forfeited or are received
by Leapnet as consideration for the exercise or payment of an award shall
become available for additional awards under the Employee Incentive
Compensation Plan.
In the event of a stock dividend, stock split, recapitalization, sale of
substantially all of the assets of Leapnet, reorganization or other similar
event, the Stock Committee will adjust the aggregate number of shares of common
stock subject to the Employee Incentive Compensation Plan, the number of shares
available for awards and subject to outstanding awards and the exercise price
per share, performance conditions and other terms of outstanding awards.
The Board of Directors or the Stock Committee may amend, modify or
discontinue the Employee Incentive Compensation Plan at any time, except if
such amendment (i) impairs the rights of a participant without the
participant's consent, or (ii) in any manner would disqualify the Employee
Incentive Compensation Plan from the exemption provided by Rule 16b-3 under the
1934 Act. Any amendment is subject to stockholder approval, if required by
applicable law. Any amendment by the Stock Committee is subject to approval of
and any limitations imposed by the Board of Directors. The Stock Committee may
amend the terms of any award granted under the Employee Incentive Compensation
Plan (other than, in the case of a stock option, to decrease the option price),
subject to the consent of a participant if such amendment impairs the rights of
such participant unless such amendment is necessary for Leapnet to obtain
pooling of interest accounting treatment in a transaction.
Awards Under the Incentive Plan
Stock Options. Options to purchase no more than 500,000 shares of common
stock shall be granted to any one participant in any fiscal year. Subject to
such limitation, the Stock Committee shall determine the number of shares of
common stock subject to the options to be granted to each participant. The
Stock Committee may grant non-qualified stock options, incentive stock options,
or a combination thereof, to the participants. Only persons who on the date of
the grant are employees of Leapnet or any parent or subsidiary of Leapnet may
be granted options which qualify as incentive stock options. Options granted
under the Employee Incentive Compensation Plan will provide for the purchase of
common stock at prices determined by the Stock Committee, but in no event less
than fair market value on the date of grant. When incentive stock options are
granted to an individual who owns common stock possessing more than 10% of the
combined voting power of all classes of stock of Leapnet or any parent or
subsidiary of Leapnet, the option price shall not be less than 110% of fair
market value. No stock option shall be exercisable later than the tenth
anniversary date of its grant. In the case of an incentive stock option granted
to a participant who owns more than 10% of the combined voting power of all
classes of stock of Leapnet or any parent or subsidiary of Leapnet, such option
shall not be exercisable later than the fifth anniversary date of its grant. No
incentive stock option shall be granted later than the tenth anniversary date
of the adoption of the Employee Incentive Compensation Plan.
84
Options granted under the Employee Incentive Compensation Plan shall be
exercisable at such times and subject to such terms and conditions set forth in
the Employee Incentive Compensation Plan and as the Stock Committee shall
determine or provide in an option agreement. Except as provided in any option
agreement, options may only be transferred under the laws of descent and
distribution or if such transfer is permitted by Rule 16b-3 without liability
under applicable law and is consistent with the use of Form S-8. The option
exercise price is payable by the participant (i) in cash, (ii) in shares of
common stock having a fair market value equal to the exercise price, (iii) by
delivery of evidence of a note or other indebtedness, (iv) by authorizing
Leapnet to retain shares of common stock having a fair market value equal to
the exercise price, (v) by "cashless exercise" as permitted under the Federal
Reserve Board's Regulation T, or (vi) by any combination of the foregoing.
Unless otherwise provided in an option agreement or determined by the Stock
Committee, upon termination of a participant's employment with Leapnet due to
death or disability, all of such participant's options shall be exercisable for
the shorter of their remaining term or one year after termination of employment
in the case of disability or appointment of a representative in the case of
death, and a disabled participant's subsequent death shall not affect the
foregoing. Unless otherwise provided in an option agreement or determined by
the Stock Committee, if a participant retires or involuntarily ceases to be an
employee of Leapnet (other than due to death, disability or as a result of
termination for cause), all of such participant's options shall terminate,
except that, to the extent such options are then exercisable, such options may
be exercised for the shorter of their remaining terms or 90 days after
termination of employment. Unless otherwise provided in an option agreement or
determined by the Stock Committee, if a participant voluntarily ceases to be an
employee at Leapnet (other than at retirement) or is terminated for cause, all
of such participant's options shall terminate immediately.
Upon receipt of a notice from a participant to exercise an option, the Stock
Committee may elect to cash out all or part of any such option by paying the
participant, in cash or shares of common stock, the following amount: (i) the
excess of the fair market value of the common stock subject to the unexercised
option over the exercise price of the option, multiplied by (ii) the number of
shares for which the option is to be exercised.
Stock Appreciation Rights. A SAR shall entitle a participant to receive
common stock, cash or a combination thereof. If granted in conjunction with an
option, the exercise of a SAR shall require the cancellation of the
corresponding portion of the option. SARs may be granted on or after the
corresponding grant of non-qualified stock options, but only at the same time
as the corresponding grant of incentive stock options. SARs with respect to no
more than 500,000 shares of common stock shall be granted to any one
participant in any fiscal year. Subject to such limitation, the Stock Committee
in its discretion shall determine the number of SARs awarded to a participant.
The Stock Committee shall determine the terms and conditions of any SAR. The
terms and conditions shall be confirmed in and be subject to an agreement
between Leapnet and the participant. If granted in conjunction with options, a
SAR shall be exercisable for and during the same period as the corresponding
options. Upon exercise of a SAR, a participant shall receive an amount in cash,
shares of common stock or both equal to (i) the excess of the fair market value
of the common stock over the option price per share (if the SAR is granted in
conjunction with an option), multiplied by (ii) the number of shares of common
stock subject to the SAR. In the case of a SAR granted on a standalone basis,
the Stock Committee shall determine in its discretion the value to be used in
lieu of the option price. In no event shall a SAR granted in tandem with an
incentive stock option be exercised unless the fair market value of the common
stock at the time of the exercise exceeds the option price. With respect to
participants who are subject to Section 16(b) of the 1934 Act (generally
Officers and Directors of Leapnet) ("16(b) Persons"), the Stock Committee may
require that the SARs be exercised in compliance with Rule 16b-3, including the
requirement that a SAR not be exercisable within the first six months of its
term. The transferability and termination provisions of a SAR are as set forth
above with respect to stock options.
Restricted Stock. Restricted Stock awards are grants of shares of common
stock that are subject to certain restrictions and to a risk of forfeiture. The
Stock Committee in its discretion shall determine the persons to whom
Restricted Stock shall be granted, the number of shares of Restricted Stock to
be granted to each participant, the periods for which Restricted Stock is
restricted, and any other restrictions to which the
85
Restricted Stock is subject. The Stock Committee may condition the award of
Restricted Stock on such performance goals and other criteria as it may
determine. The terms and conditions of the Restricted Stock shall be confirmed
in and subject to an agreement between Leapnet and the participant. During the
restriction period, the Stock Committee may require that the certificates
evidencing the Restricted Stock be held by Leapnet. During the restriction
period, the Restricted Stock may not be sold, assigned, transferred, pledged or
otherwise encumbered. Other than the foregoing restrictions imposed by the
Stock Committee, the participant shall have all the rights of a holder of
common stock. If a participant's employment terminates during the restriction
period due to death or disability, the restrictions on the Restricted Stock
shall lapse. If a participant's employment shall terminate for any other
reason, unless otherwise agreed by the Stock Committee, the remaining
Restricted Stock shall be forfeited by the participant to Leapnet.
Deferred Stock. Deferred Stock awards are grants of rights to receive shares
of common stock, cash or a combination thereof at the end of a specified
deferral period. The Stock Committee in its discretion shall determine the
persons to whom Deferred Stock shall be granted, the number of shares of
Deferred Stock to be granted to each participant, the duration of the period
prior to which common stock will be delivered, the conditions under which
receipt of the common stock will be deferred, and any other terms and
conditions of the granting of the award. The terms and conditions of the
Deferred Stock shall be confirmed in and subject to an agreement between
Leapnet and the participant. The Stock Committee may condition the award of
Deferred Stock on such performance goals and criteria that it may determine.
During the deferral period, the Deferred Stock may not be sold, assigned,
transferred, pledged or otherwise encumbered. At the expiration of the deferral
period, the Stock Committee may deliver to the participant common stock, cash
equal to the fair market value of such common stock or a combination thereof
for the shares covered by the Deferred Stock awards. Cash dividends on common
stock, subject to Deferred Stock awards, shall be automatically deferred and
reinvested in Deferred Stock; and stock dividends on common stock, subject to
Deferred Stock awards, shall be paid in the form of Deferred Stock. If a
participant's employment terminates during the deferral period due to death or
disability, the deferral restrictions shall lapse. If a participant's
employment terminates for any other reason, unless otherwise agreed by the
Stock Committee, the rights to the shares still covered by Deferred Stock
awards shall be forfeited by the participant.
Bonus Stock and Awards in Lieu of Cash Obligations. The Stock Committee is
authorized to grant shares of common stock as a bonus free of restrictions, or
to grant shares of common stock or other awards in lieu of Company obligations
to pay cash under other plans or compensatory arrangements, subject to such
terms as the Stock Committee may specify.
Dividend Equivalents. The Stock Committee is authorized to grant dividend
equivalents conferring on participants the right to receive, currently or on a
deferred basis, cash, shares of common stock, other awards or other property
equal in value to dividends paid on a specified number of shares of common
stock. Dividend equivalents may be granted on a free-standing basis or in
connection with another award, may be paid currently or on a deferred basis,
and, if deferred, may be deemed to have been reinvested in additional shares of
common stock, awards or other investment vehicles specified by the Stock
Committee.
Other Stock-Based Awards. The Incentive Plan authorizes the Stock Committee
to grant awards that are denominated or payable in, valued by reference to, or
otherwise based on or related to the common stock. Such awards might include
convertible or exchangeable debt securities, other rights convertible or
exchangeable into shares, purchase rights for shares, awards with value and
payment contingent upon performance of Leapnet or any other factors designated
by the Stock Committee, and awards valued by reference to the book value of
shares of common stock or the value of securities of or the performance of
specified subsidiaries. The Stock Committee shall determine the terms and
conditions of such awards, including consideration to be paid to exercise
awards in the nature of purchase rights, the period during which awards will be
outstanding and forfeiture conditions and restrictions on awards.
Performance Awards, including Cash Incentive Awards. The right of a
participant to exercise or receive a grant or settlement of an award, and the
timing thereof, may be subject to such performance conditions as may
86
be specified by the Stock Committee. In addition, the Incentive Plan authorizes
specific cash incentive awards, which represent a conditional right to receive
cash upon achievement of preestablished performance goals during calendar
years, quarters or other periods specified by the Stock Committee. Performance
awards and cash incentive awards granted to persons the Stock Committee expects
will, for the year in which a deduction arises, be among the Named Executive
Officers, will, if so intended by the Stock Committee, be subject to provisions
that should qualify such awards as "performance-based compensation" not subject
to the limitation on tax deductibility by Leapnet under Section 162(m). The
performance goals to be achieved as a condition for payment or settlement of a
performance award or annual incentive award will consist of (i) one or more
business criteria and (ii) a targeted level or levels of performance with
respect to each business criteria. In the case of performance awards intended
to meet the requirements of Section 162(m), the business criteria used must be
one of those specified in the Incentive Plan, although for other participants,
the Stock Committee may specify any other criteria. The business criteria
specified in the Incentive Plan are: (1) total stockholder return; (2) such
total stockholder return as compared to total return (on a comparable basis) of
a publicly available index such as, but not limited to, the Standard & Poor's
500 or The Nasdaq Stock Market-U.S. Index; (3) net income; (4) pre-tax
earnings; (5) earnings before interest, depreciation and amortization; (6) pre-
tax operating earnings after interest expense and before bonuses, service fees
and extraordinary or special items; (7) operating margin; (8) earnings per
share; (9) return on equity; (10) return on capital; (11) return on investment;
(12) operating income before payment of executive bonuses; and (13) working
capital.
In granting cash incentive awards, the Stock Committee may grant awards on
an individual basis or may establish an unfunded cash incentive award "pool."
In either case, the amount of which will be based upon the achievement of a
performance goal or goals based on one or more of the business criteria
described in the preceding paragraph. During the period required by Section
162(m), the Stock Committee will determine who will potentially receive cash
incentive awards for the specified performance period, either individually or
out of the pool or otherwise. After the end of the specified performance
period, the Stock Committee will determine the amount, if any, of the maximum
amount of any potential individual cash incentive award payable to a
participant or the maximum amount of potential cash incentive awards payable to
each participant in the pool. Pursuant to the amendment and restatement
proposed hereby, the maximum cash incentive award payable to any one
participant in any fiscal year shall not exceed 10.0% of Leapnet's operating
income before payment of executive bonuses for such fiscal year. The Stock
Committee may, in its discretion, determine that the amount payable as a final
cash incentive award will be increased or reduced from the amount of any
potential award, but may not exercise discretion to increase any such amount
intended to qualify under Section 162(m).
Subject to the requirements of the Employee Incentive Compensation Plan, the
Stock Committee will determine other performance award and cash incentive award
terms, including the required levels of performance with respect to the
business criteria, the corresponding amounts payable upon achievement of such
levels of performance, termination and forfeiture provisions and the form of
settlement. All determinations by the Stock Committee relating to performance
awards and cash incentive awards will be made in writing with respect to any
award intended to qualify under Section 162(m).
Other Terms of Awards. Awards may be settled in the form of cash, shares,
other awards or other property, in the discretion of the Stock Committee. The
Stock Committee may accelerate the settlement of any award. The Stock Committee
may also require or permit participants to defer the settlement of all or part
of an award in accordance with such terms and conditions as the Stock Committee
may establish, including payment or crediting of interest or dividend
equivalents on deferred amounts, and the crediting of earnings, gains and
losses based on deemed investment of deferred amounts in specified investment
vehicles. The Stock Committee is authorized to place cash, shares of common
stock or other property in trusts or make other arrangements to provide for
payment of Leapnet's obligations under the Employee Incentive Compensation
Plan. The Stock Committee may condition any payment relating to an award on the
withholding of taxes and may provide that a portion of any shares of common
stock or other property to be distributed will be withheld (or previously
acquired shares of common stock or other property surrendered by the
participant) to satisfy withholding and other tax obligations. Awards granted
under the Employee Incentive Compensation Plan generally may not be
87
pledged or otherwise encumbered and are not transferable except by will or by
the laws of descent and distribution, or to a designated beneficiary upon the
participant's death.
Changes in Control
Upon the occurrence of a Change in Control (as hereinafter defined), the
following shall occur: (i) all unexercised stock options and SARs shall become
immediately exercisable, (ii) all restrictions on the Restricted Stock and
deferral limitations on the Deferred Stock shall lapse, and (iii) the
performance goals and other conditions with respect to any outstanding
performance award or cash incentive award shall be deemed satisfied in full,
and such award shall be fully distributable, to the extent provided by the
Stock Committee in an award agreement or otherwise. In addition, unless the
Stock Committee provides otherwise in an option agreement, after the Change in
Control a participant shall have the right to surrender all or part of the
outstanding awards and receive in cash from Leapnet the following amount for
each award: (i) the excess of the Change in Control Price over the exercise
price of the award, multiplied by (ii) the number of shares of common stock
subject to the award. The "Change in Control Price" is the higher of (i) the
highest reported sales price of a share of common stock in any transaction
reported on the principal exchange on which such shares are listed or on The
Nasdaq National Market during the 60-day period prior to and including the
Change of Control, or (ii) if the Change in Control event is a tender offer,
merger or other reorganization, the highest price to be paid per share of
common stock in such transaction. For purposes of the Incentive Plan, a "Change
in Control" shall be deemed to have occurred if (i) any corporation, person or
other entity (other than Leapnet, a majority-owned subsidiary of Leapnet or any
of its subsidiaries, or an employee benefit plan (or related trust) sponsored
or maintained by Leapnet), including a "group" as defined in Section 13(d)(3)
of the 1934 Act, becomes the beneficial owner of stock representing more than
the greater of (a) 50% of the combined voting power of Leapnet's then
outstanding securities or (b) the percentage of the combined voting power of
Leapnet's then outstanding securities which equals (1) 10% plus (2) the
percentage of the combined voting power of Leapnet's outstanding securities
held by such corporation, person or entity on the effective date of the
Incentive Plan; (ii)(a) the Stockholders of Leapnet approve a definitive
agreement to merge or consolidate Leapnet with or into another corporation
other than a majority-owned subsidiary of Leapnet, or to sell or otherwise
dispose of all or substantially all of Leapnet's assets, and (b) the persons
who were the members of the Board of Directors of Leapnet prior to such
approval do not represent a majority of the directors of the surviving,
resulting or acquiring entity or the parent thereof; (iii) the Stockholders of
Leapnet approve a plan of liquidation of Leapnet; or (iv) within any period of
24 consecutive months, persons who were members of the Board of Directors of
Leapnet immediately prior to such 24-month period, together with any persons
who were first elected as directors (other than as a result of any settlement
of a proxy or consent solicitation contest or any action taken to avoid such a
contest) during such 24-month period by or upon the recommendation of persons
who were members of the Board of Directors of Leapnet immediately prior to such
24-month period and who constituted a majority of the Board of Directors of
Leapnet at the time of such election, cease to constitute a majority of the
Board.
Discussion of Federal Income Tax Consequences
The following summary of Federal income tax consequences with respect to
awards under the Employee Incentive Compensation Plan is not comprehensive and
is based upon laws and regulations currently in effect. Such laws and
regulations are subject to change.
Stock Options. There are generally no Federal income tax consequences either
to the participant or to Leapnet upon the grant of a stock option. On exercise
of an incentive stock option, the participant will not recognize any income and
Leapnet will not be entitled to a deduction for tax purposes, although such
exercise may give rise to liability for the participant under the alternative
minimum tax provisions of the Code. Generally, if the participant disposes of
shares acquired upon exercise of an incentive stock option within two years of
the date of grant or one year of the date of exercise, the participant will
recognize compensation income and Leapnet will be entitled to a deduction for
tax purposes in the amount of the excess of the fair
88
market value of the shares on the date of exercise over the option exercise
price (or the gain on sale, if less). Otherwise, Leapnet will not be entitled
to any deduction for tax purposes upon disposition of such shares, and the
entire gain for the participant will generally be treated as a capital gain. On
exercise of a non-qualified stock option, the amount by which the fair market
value of the shares on the date of exercise exceeds the option exercise price
(the "spread") will generally be taxable to the participant as compensation
income and will generally be deductible for tax purposes by Leapnet. In
determining the amount of the spread or the amount of consideration paid to the
participant, the fair market value of the common stock on the date of exercise
generally is used. However, in the case of a 16(b) Person, the fair market
value will be determined six months after the date on which the option was
granted if such date is later than the exercise date, unless such participant
elects to be taxed based on the fair market value at the date of exercise. Any
such election, a "Section 83(b) Election", must be made and filed with the IRS
within 30 days after exercise in accordance with the regulations under Section
83(b) of the Code. Leapnet, in computing its Federal income tax, will generally
be entitled to a deduction in an amount equal to the compensation taxable to
the participant.
Stock Appreciation Rights. Upon the grant of a SAR, the participant will not
recognize any taxable income and Leapnet will not be entitled to a deduction.
Upon the exercise of a SAR, the consideration paid to the participant upon
exercise of the SAR will constitute compensation taxable to the participant as
ordinary income. In determining the amount of the consideration paid to the
participant upon the exercise of a SAR for common stock, the fair market value
of the shares on the date of exercise generally is used. However, in the case
of a 16(b) Person, the fair market value will be determined six months after
the date on which the SAR was granted if such date is later than the exercise
date, unless such participant makes a Section 83(b) Election to be taxed based
on the fair market value at the date of exercise within thirty days after
exercise in accordance with the regulations under Section 83(b) of the Code.
Leapnet, in computing its Federal income tax, generally will be entitled to a
deduction in an amount equal to the compensation taxable to the participant.
Other Awards. With respect to awards granted under the Employee Incentive
Compensation Plan that result in the payment or issuance of cash or shares of
common stock or other property that is either not restricted as to
transferability or not subject to a substantial risk of forfeiture, the
participant must generally recognize ordinary income equal to the cash or the
fair market value of shares or other property received. Thus, deferral of the
time of payment or issuance will generally result in the deferral of the time
at which the participant will be liable for income taxes with respect to such
payment or issuance. Leapnet generally will be entitled to a deduction in an
amount equal to the ordinary income received by the participant. With respect
to awards involving the issuance of shares of common stock or other property
that is restricted as to transferability and subject to a substantial risk of
forfeiture, the participant must generally recognize ordinary income equal to
the fair market value of the shares or other property received at the first
time the shares or other property becomes transferable or not subject to a
substantial risk of forfeiture, whichever occurs earlier. Leapnet will
generally be entitled to a deduction in an amount equal to the ordinary income
received by the participant. A participant may make a Section 83(b) Election to
be taxed at the time of receipt of shares or other property rather than upon
lapse of restrictions on transferability or the substantial risk of forfeiture.
However, if the participant subsequently forfeits such shares or property, such
participant would not be entitled to any tax deduction, including as a capital
loss, for the value of the shares or property on which such participant
previously paid tax. The participant must file the Section 83(b) Election with
the Internal Revenue Service within 30 days of the receipt of the shares or
other property.
Section 162(m) of the Code. Section 162(m) of the Code generally disallows a
public company's tax deduction for compensation to the Leapnet Named Executive
Officers in excess of $1,000,000 in any tax year. Compensation that qualifies
as "performance-based compensation" is excluded from the $1,000,000
deductibility cap.
Leapnet intends that options and SARs granted with an exercise price equal
to at least 100% of fair market value of the underlying shares at the date of
grant, and annual incentive awards and certain long-term performance-based
awards granted to employees whom the Stock Committee expects to be named
executive officers at the time a deduction arises in connection with such
awards, qualify as "performance-based
89
compensation." Accordingly, such awards should not be subject to the Section
162(m) deductibility cap of $1,000,000. Other awards may be granted under the
Employee Incentive Compensation Plan which do not qualify as "performance-based
compensation" that is deductible by Leapnet under Section 162(m), so that
compensation paid to persons who are Leapnet Named Executive Officers in
connection with such awards will, to the extent such compensation and other
compensation subject to the Section 162(m) deductibility cap in a given year
exceeds $1,000,000, be subject to the Section 162(m) deductibility cap.
Parachute Payments. In the event any payments or rights accruing to a
participant upon a change in control, or any other payments awarded or
accelerated under the Employee Incentive Compensation Plan, constitute
"parachute payments" under Section 280G of the Code, depending upon the amount
of such payments accruing and the other income of the participant from Leapnet,
the participant may be subject to a 20% excise tax (in addition to ordinary
income tax) and Leapnet may be disallowed a deduction for the amount of any
excess parachute payment.
Security Ownership of Management and Certain Beneficial Owners
The following table sets forth information concerning the beneficial
ownership of Leapnet's common stock as of January 31, 2000, for: (a) each
incumbent director; (b) each of the current Leapnet Named Executive Officers
not listed as a director; (c) each person known by Leapnet to own beneficially
more than 5% of the outstanding common stock; and (d) directors and executive
officers as a group.
PRINCIPAL STOCKHOLDERS OF LEAPNET
Number of
Shares of
Leapnet Percentage
beneficially ownership
owned prior Percentage of Leapnet
Name and address of to the ownership after the
beneficial owners merger(1) of Leapnet merger
------------------- ------------ ---------- ----------
Frederick Smith (2),
(3).................... 2,149,000 14.5% 7.5%
George Gier (2), (4).... 1,820,000 12.3% 6.3%
Thomas R. Sharbaugh (2),
(5).................... 1,834,000 11.0% 6.0%
Joseph A. Sciarrotta
(2), (6)............... 1,310,760 8.9% 4.6%
R. Steven Lutterbach
(2), (7)............... 1,239,000 8.4% 4.3%
Robert C. Bramlette (2),
(8).................... 135,917 * *
John G. Keane (2), (9).. 91,000 * *
Gregory Garville (2),
(10)................... 51,840 * *
Charles J. Ruder (2),
(11)................... 41,500 * *
All Directors and
Executive Officers
as a group (8
individuals) (12)...... 7,434,017 50.2% 24.1%
- --------
*Less than one percent.
(1) Unless otherwise noted below, the persons in the above table have
sole voting and investment power with respect to all shares shown as
beneficially owned by them.
(2) The address of the stockholder is: c/o Leapnet, Inc., 420 West Huron,
Chicago, Illinois, 60610.
(3) Includes 174,000 shares held by trusts for Mr. Smith's children, for
which Mr. Smith, as co-trustee, shares voting and investment power.
(4) Includes 100,000 shares held by trusts for Mr. Gier's children, for
which Mr. Gier, as co-trustee, shares voting and investment power.
(5) The shares shown are issuable to Mr. Sharbaugh pursuant to currently
exercisable options.
(6) Includes 50,000 shares held by a trust for Mr. Sciarrotta's family,
for which Mr. Sciarrotta, as co-trustee, shares voting and investment
power.
(7) Excludes 27,000 shares held by trusts for Mr. Lutterbach's children,
as to which Mr. Lutterbach disclaims beneficial ownership.
90
(8) Includes 135,417 shares issuable pursuant to currently exercisable
options.
(9) Includes 50,500 shares issuable pursuant to currently exercisable
options.
(10) Includes 27,500 shares issuable pursuant to currently exercisable
options.
(11) Includes 40,000 shares issuable pursuant to currently exercisable
options.
(12) The shares shown include 1,986,667 shares issuable pursuant to
currently exercisable options within 60 days of January 31, 2000. The
group does not include Mr. Lutterbach.
Section 16(a) Beneficial Ownership Reporting Compliance
Section 16(a) of the Securities Exchange Act of 1934 (the "1934 Act")
requires Leapnet executive officers and directors, and persons who beneficially
own more than ten percent (10%) of Leapnet's common stock, to file initial
reports of ownership and changes in ownership with the Securities and Exchange
Commission. Based on a review of the copies of such forms furnished to Leapnet
and written representations from Leapnet's executive officers and directors,
except as noted below Leapnet believes that all forms were filed in a timely
manner during the 1999 fiscal year. Mr. Smith filed one late report reflecting
a sale of stock and Mr. Sciarrotta filed two late reports reflecting sales of
stock.
CERTAIN TRANSACTIONS OF LEAPNET
On February 2, 1998, Leapnet received proceeds of a loan from Alliance
Banking Company of New Buffalo, Michigan ("Alliance"), in the amount of
$665,000 that is secured by a mortgage on the property located at 22 West
Hubbard, Chicago, Illinois, 60610. The loan is due on January 27, 2001. The
full amount of such indebtedness was personally guaranteed by Mr. Smith. The
loan was approved by all of the directors; however, R. Steven Lutterbach, then
a director of Leapnet, did not vote because he is a significant stockholder in
Alliance.
On March 3, 2000, The Leap Partnership, Inc. sold the building located at 22
W. Hubbard for $1,200,000. The loan from Alliance was paid off with the
proceeds from the sale of the building.
Leapnet has adopted a policy that all transactions with affiliated entities
or persons will be on terms no less favorable than could be obtained from
unrelated parties and all future transactions between Leapnet and its officers,
directors, principal stockholders and affiliates will be approved by a majority
of Leapnet's independent directors.
91
BUSINESS OF SPR
Overview
SPR has over 26 years of experience in providing information technology
services to clients in a variety of industries, including financial services,
healthcare, insurance, manufacturing, oil and gas, transportation and
utilities. SPR focuses its marketing efforts on Fortune 1000 companies and
other large organizations which have complex IT operations and significant IT
budgets. SPR is refocusing its IT consulting and project based services into
the consulting, development, and integration markets. SPR's core competencies
are in large systems, project management, quality assurance, professional
development and strategic partnerships. SPR believes that this breadth of
service and support fosters long-term client relationships, promotes cross-
selling opportunities and minimizes SPR's dependence upon any particular
service.
SPR's business was founded in 1973 by Eugene Figliulo as Systems &
Programming Resources, Inc. During 1994, Systems & Programming Resources, Inc.
transferred certain assets and liabilities to SPR Chicago, SPR Tulsa, and SPR
Wisconsin, respectively. These entities were organized as S corporations and
owned by the executives primarily responsible for the operations in each of
these locations. SPR Chicago, SPR Tulsa, SPR Wisconsin, Systems & Programming
Resources, Inc. and DataFlex (an affiliated IT services company in a
complementary business) were merged into SPR upon SPR's formation in October
1996.
SPR maintains its principal executive offices at 2015 Spring Road, Suite
750, Oak Brook, Illinois 60523-1874. Its telephone number is (630) 575-6200.
SPR's World Wide Web address is www.sprinc.com. SPR currently has four branch
offices located in Oak Brook, Illinois; Tulsa, Oklahoma; Milwaukee, Wisconsin;
and Dallas, Texas. SPR has made, and intends to continue to make, significant
investments in its systems, recruiting organization, training programs and
marketing initiatives in an effort to sustain growth.
Industry Background
Dataquest Incorporated forecast total expenditures for the consulting,
development and integration segments of the United States professional IT
services market to be approximately $60 billion in 1999, $70 billion in 2000,
and $82 billion in 2001. Forecast data from 1999 to 2003 shows an 81% increase
for IT consulting, 69% increase for development services, and 118% increase for
integration services. This industry growth is fueled by new technology
developments, heightened customer expectations concerning service and access to
information, a surge in interest in e-business and continued mergers and
acquisitions activity.
GartnerGroup forecasts that by 2005, investments in e-business applications
and infrastructure will drive average IT spending (in North America) beyond 10%
of revenue (0.8 probability), and that over the next five years e-business
initiatives will consume between 30% and 50% of enterprise IT spending. During
peak implementation years, e-business will consume 50% of the IS budget (0.8
probability) and by 2003, external service providers should account for 19% of
the IS budget.
SPR focuses on leveraging the value of client's existing systems in
providing e-business and IT solutions. SPR believes that the demand for its
services remains strong as large institutions seek to protect and maximize the
value of their investments in mainframe systems by bringing them up to date and
making them accessible to today's newer Internet and distributed desktop
systems.
SPR believes that clients will continue to maintain and improve their
mainframe systems for the following reasons:
. mainframe systems represent an enormous investment that may prove too
risky and expensive to completely replace;
. mainframe computing is increasingly being used in new ways as
Internet/intranet technologies develop;
92
. existing mainframe systems are critical to the functioning of clients'
businesses as they contain vital business information necessary to build
replacement systems; and
. clients need access to data resident in mainframe computers regardless of
the front-end computing platform being used.
Business and Growth Strategy
In the course of becoming an IT solutions provider, SPR has pursued, and
intends to continue to pursue, the following business and growth strategies:
. Transform SPR's Information Technology Consultant Training Program. SPR
believes that its entry-level and continuing education training programs
provided SPR with a competitive advantage in attracting, developing and
retaining qualified technical consultants. SPR is now looking at ways to
apply this program in the web development space.
. Continue To Focus On Project Management. SPR will continue to focus on
increasing its mix of project management and strategic planning
engagements. SPR believes that by providing these value-added services,
it gains a competitive advantage in assessing its clients' needs and
anticipating opportunities to provide additional IT solutions.
. Leverage Existing Client Base. SPR intends to continue building long-term
client relationships. Its record of customer satisfaction and expanded
solutions offerings have contributed to its ability to increase the
revenues generated from existing clients. SPR derived more than 71% of
its revenues in 1999 from 39 clients to which it had provided IT
solutions in the prior three consecutive years. SPR intends to further
penetrate its existing client base by providing additional service
offerings.
. Focus On Leading Technologies. SPR maintains and continues to build
expertise not only in mainframe applications but also in other high-
demand technologies, such as Internet/intranet applications, object
oriented analysis and design, open computing systems, data warehousing
and relational database management systems. SPR's expertise in these
areas, together with its relationships with software product developers
and research institutions, allow SPR to remain on the leading edge of
technological development.
Service Offerings
Since its inception, SPR has provided technical personnel to augment its
clients' internal IT departments. Over the past several years, however, SPR has
focused its efforts on providing higher-end service offerings.
SPR's consulting service line provides the IT management to help clients
design and implement solutions to address their tactical and strategic IT
initiatives. Within this service line, SPR offers a wide spectrum of services
including project management (or "project office"), quality assurance, and IT
readiness.
SPR's development service line provides services spanning the entire
application development life cycle. SPR supports new system development and
provides re-development services for transitioning and leveraging existing
systems. SPR modernizes systems through SPR's conversions and migrations
services. In addition, SPR provides maintenance and support for existing
systems through SPR's application management services.
SPR's integration service line provides expertise in integrating
applications and data, whether the applications are new or existing, packaged
or custom-built, and whether they reside on the same system or span disparate
systems. Within this service line, SPR provides enterprise application
integration to enable the exchange of business-level information between
applications. SPR's data warehousing service provides users with the ability to
access the data they need, when they need it and in a form they can easily
understand.
In addition, SPR offers general consulting services, which consists of
providing technical personnel with expertise in a wide variety of skills and
disciplines to augment clients' internal IT departments. Clients' IT
departments often require advice and programming skills without the full range
of project management support. General consulting consists of staff
augmentation principally for maintenance and development of client/server and
mainframe environments.
93
The amount of responsibility assumed by SPR generally depends upon a
client's internal capabilities and desire to outsource IT functions. Based upon
client needs, SPR can provide strategic planning, project management or
implementation either at its clients' facilities or off-site at SPR's Virtual
Insourcing Centers. SPR employs proven proprietary service methodologies and
software analysis tools to deliver these services. SPR bills its clients on
either a time and materials or fixed-fee basis.
Recruiting and Training
SPR employs 13 full time recruiters, including 2 recruiting managers, who
are responsible for recruiting and establishing relationships with qualified
technical personnel. Technical personnel meeting SPR's standards are added to a
computerized database. Recruiting managers maintain regular contact with
technical personnel, monitor their availability and changes in skill levels and
update the database, which has been maintained for over 26 years.
SPR believes that its information technology consultant training program
provided SPR with a competitive advantage in attracting, developing and
retaining qualified technical consultants. SPR is now looking at ways to apply
this program in the web development space.
Marketing and Sales
SPR marketing representatives are assigned to a limited number of accounts
in order to develop an in-depth understanding of each client's individual needs
and to build long-term client relationships. These representatives are
responsible for providing highly responsive service and ensuring that SPR's
service offerings achieve client objectives. In many instances, a portion of
SPR's marketing activity is carried out by senior executives.
SPR has implemented a strategic selling methodology to better understand and
serve its customers by raising its customer contact to the chief information
officer level. SPR has also significantly upgraded its web site
(www.sprinc.com) to reflect changes in service offers.
Client Base
SPR serves clients in a diverse range of industries thereby mitigating
cyclical effects of any one industry or market. SPR derives an additional level
of diversification from certain of its clients. Different operating divisions
of a given client may utilize any one or several services offered by SPR, which
helps mitigate the risk of customer concentration. During 1999, SPR's largest
client accounted for approximately 11% of SPR's revenues.
Competition
The market for IT professional services is intensely competitive on local
and national levels, and SPR competes frequently with a variety of companies
for both the same clients and qualified technical consultants. These companies
include: "Big Five" accounting firms, systems consulting and implementation
firms, application software firms, service groups of computer equipment
companies, general management consulting firms and IT staffing companies. SPR
considers large organizations with complex IT needs to be among its primary
clients. Within a given market, there are a limited number of such potential
clients, some of which have designated only certain IT professional services
companies as approved providers of IT professional services. Primary
competitive factors for obtaining and retaining clients include price, quality
of services, technical expertise and responsiveness to client needs. The
primary competitive factors in attracting and retaining qualified candidates as
consultants are competitive compensation arrangements and consistent exposure
to high quality and varied engagements.
Several of SPR's competitors are substantially larger than SPR and have
greater financial and other resources. Many of such competitors have also been
in business longer than SPR and have significantly greater
94
name recognition throughout the United States, including the geographic areas
in which SPR operates and into which it may expand. In addition, such
competitors are able to meet a broader range of a client's IT consulting needs
and serve a broader geographic range than SPR, which permits such competitors
to better serve national accounts. Although SPR believes that it competes, and
will continue to compete, favorably with existing and future competitors,
there can be no assurance that SPR will continue to do so.
Intellectual Property Rights
Software developed by SPR in connection with a client engagement typically
becomes the exclusive property of the client. SPR relies upon a combination of
nondisclosure and other contractual arrangements and trade secret, copyright
and trademark laws to protect its proprietary rights, the rights of third
parties from whom SPR licenses intellectual property and the proprietary
rights of its clients. SPR enters into confidentiality agreements with its
consultants in an effort to prevent the distribution of proprietary
information.
SPR holds no patents or registered copyrights, and has no present intention
of registering any copyright or filing any patent applications.
Employees
As of December 31, 1999, SPR had 355 IT consulting professionals, of whom
335 were employees and 20 were independent contractors. Of these IT consulting
professionals 61 were project managers. As of such date, SPR had 103 IT
consulting professionals in Chicago, Illinois; 86 in Tulsa, Oklahoma; 108 in
Milwaukee, Wisconsin; and 58 in Dallas, Texas.
SPR has three categories of IT consultants: salaried employees, associate
employees and independent contractors. Salaried employees are full-time
employees of SPR and are eligible for all benefits offered by SPR. Associate
employees are eligible for the same benefits offered to salaried employees but
are paid on an hourly basis and, as such, are not entitled to paid time off in
the form of sick days, personal days or vacation. Approximately 94% of SPR's
IT consultants are employees. Independent contractors are not employees of
SPR, but are paid on an hourly basis and are not entitled to any benefits
offered to SPR employees. Approximately 6% of SPR's IT consultants are
independent contractors.
SPR is not a party to any collective bargaining agreements and considers
its relationships with its employees to be good.
Property
SPR leases its principal executive offices, which are located at 2015
Spring Road, Oak Brook, Illinois 60523-1874, and also leases facilities in
Tulsa, Oklahoma; Dallas, Texas; and Milwaukee, Wisconsin. These
leases expire in October 2004, May 2004, March 2003, and May 2001,
respectively. SPR also leases space in Oak Brook, Illinois; Tulsa, Oklahoma;
Dallas, Texas; and Pewaukee, Wisconsin to house Virtual Insourcing Centers.
The leases expire in October 2002, May 2004, March 2003, and June 2003,
respectively. SPR believes it has adequate space to conduct its current
business. SPR anticipates, however, that additional space will be required as
business expands but believes that it will be able to obtain suitable space as
needed. See Note 8 of Notes to SPR's Financial Statements.
Legal Proceedings
SPR is not involved in legal proceedings which SPR's management believes
are material to its business.
95
SPR SELECTED HISTORICAL FINANCIAL INFORMATION
The following selected financial data is derived from SPR's financial
statements and notes thereto that have been audited by Arthur Andersen LLP,
independent public accountants. This information should be read in conjunction
with the financial statements and notes thereto and with "SPR--Management's
Discussion and Analysis of Financial Condition and Results of Operations."
Years Ended December 31,
-------------------------------------------
1999 1998 1997 1996 1995
------- ------- ------- -------- --------
Statement of Operations Data:
Revenues........................ $58,104 $85,344 $53,422 $ 32,511 $ 22,908
Cost of services................ 43,242 50,508 32,377 23,287 15,525
------- ------- ------- -------- --------
Gross profit.................. 14,862 34,836 21,045 9,224 7,383
Costs and expenses
Selling....................... 4,966 5,275 4,855 3,046 2,141
Recruiting.................... 1,205 1,827 1,608 1,323 777
Stock-based compensation (1).. -- -- -- 12,231 27,987
General and administrative
expenses..................... 11,893 12,320 8,438 3,742 1,642
------- ------- ------- -------- --------
Total costs and expenses.... 18,064 19,422 14,901 20,342 32,547
------- ------- ------- -------- --------
Operating income (loss) (1)..... (3,202) 15,414 6,144 (11,118) (25,164)
Other income (expense).......... 2,645 2,083 47 (71) (109)
------- ------- ------- -------- --------
Income (loss) before income
taxes (1)...................... (557) 17,497 6,191 (11,189) (25,273)
Provision (benefit) for income
taxes.......................... (911) 6,999 1,553 9 21
------- ------- ------- -------- --------
Net income (loss), as reported
(1)............................ $ 354 $10,498 $ 4,638 $(11,198) $(25,294)
======= ======= ======= ======== ========
Historical diluted net income
(loss) per share (1)........... $ 0.03 $ 0.77 $ 0.43 $ (1.15) $ (2.61)
======= ======= ======= ======== ========
Pro forma diluted net income
(loss) per common share--
includes adjustment to
recognize C corporation
provision for income taxes (2). $ -- $ -- $ 0.30 $ (1.19) $ (2.72)
======= ======= ======= ======== ========
Balance Sheet Data (at end of
period):
Cash and short-term investments. $50,549 $51,113 $21,177 $ 356 $ 1,109
Working capital................. 54,915 58,650 23,072 1,194 2,370
Total assets.................... 64,160 71,438 31,943 7,131 5,584
Long-term debt, less current
portion........................ -- -- -- 206 704
Total stockholders' equity...... 58,761 62,808 25,530 2,507 2,275
Other Data (unaudited):
Book value per share............ $ 4.35 $ 4.60 $ 2.39 $ 0.25 $ 0.23
- --------
(1) In 1994, Systems & Programming Resources, Inc. transferred certain assets
and liabilities to SPR Chicago and SPR Wisconsin. Inasmuch as such 1994
transactions were among family members within a control group, such
transactions have been recorded in SPR's financial statements as if the
stockholders of SPR Chicago and SPR Wisconsin received non-cash, stock-
based compensation during 1994, 1995 and 1996 in an amount equal to the
increase in the estimated value of such companies since 1994. This expense
is non-recurring subsequent to October 31, 1996. Such compensation expense
is recorded as stock-based compensation with the corresponding credit
included in additional paid-in capital. Upon conversion of SPR to a C
corporation upon closing of the SPR IPO, the retained deficit of SPR, which
includes the aggregate stock-based compensation expense, was reclassified
and netted against additional paid-in capital.
(2) Prior to the SPR IPO, SPR was an S corporation and was not subject to
federal and certain state corporate income taxes. The Statement of
Operations Data reflects a pro forma provision for income taxes as if SPR
had been subject to federal and state corporate income taxes. The pro forma
provision for income taxes is computed by multiplying the effective tax
rate times the income (loss) before income taxes adjusted to eliminate the
stock-based compensation expense and subtracting income taxes previously
recorded.
96
SPR--MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
Overview
SPR was founded in 1973 and derives its revenues from providing IT
consulting services. SPR principally bills its clients on a time and materials
basis and revenues are recognized as services are provided. SPR has
occasionally entered into fixed-fee billing engagements and may enter into more
such engagements in the future. Typically, SPR bills for its services on a
biweekly basis to monitor client satisfaction and to manage its outstanding
accounts receivable balances. SPR's cost of services consists primarily of
consultant compensation and related expenses. Accordingly, SPR's financial
performance is substantially affected by billing margins (billable hourly rate
less consultant hourly cost) and consultant utilization rates (the ratio of
hours billed to total available hours).
SPR has maintained its billing margins by increasing its hourly rates to
offset increases in its consulting staff costs. SPR manages its billing margins
by establishing a target billing rate for each consultant; however, actual
billing rates may be higher or lower than the target billing rates depending
upon competitive pressures and market conditions. Hourly billing rate increases
are generally implemented by SPR based upon market conditions, consultant skill
levels and the terms of its engagements.
Fluctuations in consultant utilization rates result from variations in the
amount of unassigned time, which historically has consisted of training,
vacation, sick and holiday time and time spent on administrative support
activities while between engagements. In order to reduce unassigned time, SPR
actively manages the terms of its engagements and matches available consultants
to client requirements. Additional factors which vary and impact consultant
utilization rate are: the number of entry-level training classes conducted
through SPR's information technology consultant training program, the amount of
time it takes to assign the newly trained consultants, and general industry
conditions.
Results of Operations
The following table sets forth selected statements of operations data as a
percentage of revenues for the periods indicated:
Percentage of Total Revenues
----------------------------
Year Ended December 31,
---------------------------------
1999 1998 1997
--------- --------- ---------
Statement of Operations Data:
Revenues.................................... 100% 100% 100%
Cost of services............................ 74 59 61
--------- --------- ---------
Gross profit.............................. 26 41 39
Costs of expenses:
Selling................................... 8 6 9
Recruiting................................ 2 2 3
General and administrative expenses....... 21 15 16
--------- --------- ---------
Total costs and expenses................ 31 23 28
--------- --------- ---------
Operating income (loss)..................... (5) 18 11
Other income (expense)...................... 5 2 --
--------- --------- ---------
Income before income taxes.................. -- 20 11
Provision (benefit) for income taxes........ (1) 8 3
--------- --------- ---------
Net income, as reported..................... 1% 12% 8%
========= ========= =========
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1999 Compared to 1998
Revenues decreased 32% to $58.1 million in 1999 from $85.3 million in 1998.
This decrease is primarily the result of earlier than expected project
completions, delays in beginning new client projects, and general industry
conditions related to budget lockdowns in anticipation of the Year 2000. SPR's
1999 average billing rate per hour has increased by 6% over the average rate
for 1998.
Gross profit consists of revenues less cost of services, which includes
consultant salaries and benefits, virtual insourcing center facility costs,
training costs for experienced consultants, and travel expenses. Gross profit
decreased 57% to $14.9 million in 1999 from $34.8 million in 1998. Gross profit
as a percentage of revenues decreased to 25.6% in 1999 from 40.8% in 1998. The
decreases in gross profit was primarily attributed to a decline in consultant
utilization rates. As a result of the decreases in consultant utilization
rates, SPR instituted reductions in force totaling approximately 225
consultants in 1999. The results for 1999 were positively impacted by the
reversal of $2.7 million of deferred income relating to management's estimate
of the services to be performed related to completing SPR's century date
compliance projects.
Selling expenses include the salaries, benefits, commissions, bonuses,
travel, entertainment and other direct costs associated with SPR's direct sales
force. Selling expenses decreased 6% to $5.0 million in 1999 from $5.3 million
in 1998. This decrease was primarily the result of lower commissions paid in
1999, partially offset by increased sales executive compensation due to the
increase in the number of sales executives to 24 in 1999 from 20 in 1998.
Recruiting expenses consist of costs related to hiring new personnel, which
include the salaries, benefits, bonuses and other direct costs of the in-house
recruiters, consultant relocation fees, recruiters' travel expenses, and
advertising costs. Recruiting expenses decreased 34% to $1.2 million in 1999
from $1.8 million in 1998. Hiring in 1999 consisted only of consultants with
project specific skill sets required on client engagements.
General and administrative expenses include salaries and benefits of
management and support staff, leased facilities cost, training costs for the
entry-level portion of the information technology consultant training program,
travel expenses related to general and administrative matters, outside
professional fees, depreciation and other corporate costs. General and
administrative expenses decreased 4% to $11.9 million in 1999 from $12.3
million in 1998. The decreases in 1999 resulted from a reversal of an allowance
for bad debts for a customer who exited bankruptcy, a decrease in information
technology consultant training program expenses, and management bonuses. These
decreases were partially offset by increases in costs associated with the
merger cancelled in March 1999, office space, and telephone charges.
Other income increased 27% to $2.6 million in 1999 from $2.1 million in
1998. This increase is primarily attributable to interest earned on
investments.
SPR's effective tax rate benefit was 164% for 1999. The benefit for income
taxes was favorably impacted primarily by the passing of the statute of
limitation associated with SPR's S corporation indemnification agreement.
1998 Compared to 1997
Revenues increased 60% to $85.3 million in 1998 from $53.4 million in 1997.
This increase was primarily the result of a significant increase in the number
of consultants employed by SPR, many of whom completed the entry-level training
program in 1996, 1997, and 1998, and an increased number of engagements for
both new and existing clients. In 1998, a higher proportion of these
engagements encompassed project-focused engagements, which yield higher billing
rates.
98
Gross profit increased 66% to $34.8 million in 1998 from $21.0 million in
1997. Gross profit as a percentage of revenues increased to 41% in 1998 from
39% in 1997. The increase in gross profit was primarily attributable to higher
billing rates and a higher billing-to-consultant cost ratio (which is revenues
divided by consultant cost), partially offset by management's estimate of the
services to be performed related to completing SPR's projects recorded in 1998
and Virtual Insourcing Centers facility costs. The higher billing rates were
realized as a result of the increase in project management engagements and the
higher billing ratio was attributable primarily to the placement of consultants
who have completed the information technology consultant training program.
Selling Expenses Selling expenses increased 9% to $5.3 million in 1998 from
$4.9 million in 1997. This increase was primarily the result of increased
commissions attributable to the 60% increase in sales over the comparable
period and to the hiring of 6 additional sales executives in 1998. SPR's
selling expenses as a percentage of revenues decreased to 6% in 1998 from 9% in
1997 as a result of a change in the sales commission plan on January 1, 1998.
SPR hired 336 consultants in 1998 compared to 384 in 1997. Recruiting
expenses increased to $1.8 million in 1998 from $1.6 million in 1997. Total
recruiting costs per hire increased to approximately $5,400 in 1998 from
approximately $4,200 in 1997.
General and administrative expenses increased 46% to $12.3 million in 1998
from $8.4 million in 1997. This increase was primarily attributable to twelve
additional employees, general salary and management bonus increases, expenses
related to upgrading and utilizing SPR's network and telecommunications
systems, increased professional fees for legal, accounting and investor
relations, increased travel expenses, training costs associated with the entry-
level portion of the information technology consultant training program,
employee functions, and depreciation. These increases were partially offset by
charges in 1997 for bad debt expense of approximately $0.8 million relating
primarily to a client which filed for Chapter 11 bankruptcy protection and $0.2
million in expenses relating to SPR's March 1997, proposed initial public
offering that was postponed.
The increase in other income in 1998, as compared to 1997, is primarily
attributable to interest earned on investments of available net proceeds from
SPR's initial and follow-on public offerings.
SPR's effective tax rate was 40% for 1998. Prior to the initial public
offering, SPR elected to be taxed as an S corporation. As a result, income of
SPR was taxable to the shareholders. On October 1, 1997, SPR's S corporation
status was terminated and SPR became a C corporation.
1997 Compared to 1996
Revenues increased 64% to $53.4 million in 1997 from $32.5 million in 1996.
This increase was primarily the result of revenue generated by the consultants
who completed the entry-level training program in 1996 and 1997, and an
increased number of engagements for both new and existing clients. A higher
proportion of these engagements encompassed strategic planning and project
focused engagements, which yield higher billing rates.
SPR's gross profit of $9.2 million or 28% of revenues in 1996 increased 128%
to $21.0 million or 39% of revenues in 1997. The increase in gross profit was
primarily attributable to higher billing rates and a higher billing-to-
consultant cost ratio (which is revenues divided by consultant cost), which
were realized as a result of the increase in project management engagements and
the placement of consultants who completed the entry-level course of the
information technology consultant training program in 1996 and 1997.
Selling expenses increased 59% to $4.9 million in 1997 from $3.0 million in
1996. This increase was primarily the result of increased commissions
attributable to the 64% increase in sales over the comparable period. SPR's
selling expenses as a percentage of revenues were 9% in both 1997 and 1996.
99
SPR hired 384 consultants in 1997 compared to 292 in 1996. Recruiting
expenses increased to $1.6 million in 1997 from $1.3 million in 1996. Total
recruiting costs per hire decreased to approximately $4,200 in 1997 from
approximately $4,500 in 1996.
Stock-based compensation expense consists of non-cash expense resulting from
the financial statement treatment of the 1994 transfers by Systems &
Programming Resources, Inc. of certain of its assets and liabilities to SPR
Chicago and SPR Wisconsin. The stock-based compensation expense was allocated
to each period based upon the increase in the estimated fair market value of
SPR Chicago and SPR Wisconsin. The increase in the estimated fair market value
of SPR Chicago and SPR Wisconsin for the periods presented was based primarily
upon SPR Chicago's and SPR Wisconsin's revenue growth over such periods. The
expense is non-recurring subsequent to October 31, 1996. There was no stock-
based compensation expense allocated to 1997 compared to $12.2 million in 1996.
General and administrative expenses increased 126% to $8.4 million in 1997
from $3.7 million in 1996. This increase was primarily attributable to thirteen
additional employees, general salary and management bonus increases, non-cash
compensation expense of approximately $0.5 million related to the grant of
options on June 2, 1997, bad debt expense of approximately $0.8 million
relating primarily to a client which filed for Chapter 11 bankruptcy in 1997
and $0.2 million in expenses relating to SPR's March 1997 proposed initial
public offering that was postponed until October 1997. Total costs of the March
1997, postponed offering were approximately $0.8 million, of which $0.2 million
was expensed in the second quarter of 1997 and $0.6 million was charged against
the proceeds of the SPR IPO. Additional factors contributing to this increase
include increased rent relating to new office space in Wisconsin, increased
depreciation, increased professional fees and training costs associated
primarily with outside instructors for the information technology consultant
training program.
Liquidity and Capital Resources
On October 2, 1997, SPR completed the SPR IPO of 4,485,000 shares of its
common stock. SPR sold 2,400,000 of such shares.
Net proceeds to SPR from the sale of 2,400,000 shares in the SPR IPO was
approximately $22.5 million, after deducting underwriting discounts and
commissions of $1.8 million and offering expenses of $1.3 million paid by SPR.
SPR did not receive any of the proceeds from the sale of shares by the selling
stockholders.
On May 5, 1998, SPR completed a follow-on public offering of 3,719,250
shares of its common stock. SPR sold 1,350,000 shares in the follow-on public
offering and received $23.1 million in net proceeds from the sale of such
shares.
The remaining net proceeds of approximately $7.0 million from the SPR IPO,
together with the $23.1 million from the follow-on public offering, and cash
from operations are being temporarily invested in investment grade securities.
SPR intends to use the remaining net proceeds for general corporate purposes,
including the expansion of its information technology consultant training
program, additional virtual insourcing centers, working capital, branch
expansion and possible acquisitions of related businesses.
At December 31, 1999 SPR had approximately $50.5 million of cash and
marketable securities. Prior to the SPR IPO in October 1997, SPR financed its
growth through cash flows from operations, periodically supplemented by
borrowings under its line of credit or revolving credit and term loan
facilities. Receivables have increased to 53 days of revenues at December 31,
1999 from 52 days of revenues at December 31, 1998.
Net cash flows provided from operating activities totaled $5.4 million, $7.8
million, and $5.8 million in 1999, 1998, and 1997, respectively. The decrease
from 1998 to 1999 was primarily a result of a decrease in net
100
income, partially offset by a decrease in accounts receivable. The increase
from 1997 to 1998 was primarily a result of increases in net income, which was
reduced by management's estimate of the services to be performed related to
completing SPR's projects, partially offset by an increase in accounts
receivable and deferred taxes. Net cash used in SPR's investing activities,
primarily to fund capital expenditures and to purchase investment grade
securities totaled $3.7 million, $28.2 million, and $20.1 million for the years
ended 1999, 1998, and 1997, respectively. Net cash provided (used in) financing
activities totaled ($4.6 million), $25.4 million, and $16.0 million in 1999,
1998, and 1997, respectively. Net cash used in financing activities consisted
primarily of payments for the acquisition of treasury stock in 1999. In 1998
and 1997 net cash was provided by the net proceeds from the issuance of common
stock offset by the payments on a note payable to Eugene Figliulo and dividend
distributions to stockholders in 1997, offset by the net proceeds from the
issuance of common stock in 1998 and 1997.
SPR, subsequent to the SPR IPO has no outstanding debt. SPR believes the net
proceeds from such offerings, together with existing sources of liquidity and
funds generated from operations, will provide adequate cash to fund its
anticipated cash needs, including funding SPR's growth strategy.
Year 2000
SPR established a Year 2000 project team that completed its review and
corrected any Year 2000 related issues in 1999. As an additional safeguard,
information technology staff were available over the January 1, 2000, weekend
to address any issues which may have arisen at that time. The cost of the Year
2000 remediation effort amounted to less than $200,000.
QUARTERLY RESULTS OF OPERATIONS
The following table sets forth certain unaudited quarterly operating
information for each of the periods shown. This data has been prepared on the
same basis as the audited financial statements, and in management's opinion,
including all adjustments, consisting only of normal recurring adjustments,
necessary for the fair presentation of the information for the periods
presented. Results for any previous fiscal quarter are not necessarily
indicative of results for the full year or for any future quarter.
1999 1998 1997
---------------------------- ----------------------- -----------------------
1st 2nd 3rd 4th 1st 2nd 3rd 4th 1st 2nd 3rd 4th
Qtr. Qtr. Qtr. Qtr. Qtr. Qtr. Qtr. Qtr. Qtr. Qtr. Qtr. Qtr.
------ ----- ------ ----- ----- ----- ----- ----- ----- ----- ----- -----
Revenues................ $ 16.5 $16.7 $ 14.3 $10.6 $19.0 $21.4 $22.4 $22.5 $10.5 $12.2 $14.2 $16.5
Gross profit............ 3.3 4.0 2.7 4.9 7.7 8.8 9.3 9.0 3.8 4.9 5.9 6.4
Operating income (loss). (1.4) (0.4) (1.7) 0.3 3.1 3.7 4.2 4.4 1.0 0.9 2.1 2.1
Net income (loss)....... (0.5) 0.1 (0.3) 1.1 2.0 2.5 3.0 3.0 0.9 0.8 2.0 0.9
Net income per share--
assuming dilution...... $(0.04) $0.01 $(0.03) $0.08 $0.16 $0.19 $0.21 $0.21 $0.08 $0.08 $0.20 $0.07
Operating results fluctuate based upon the timing of service offering
expansion activities, the hiring and training of consultants, the initiation
and completion of engagements, the timing of corporate expenditures, and the
number of billing days in the respective quarter.
QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
SPR maintains investments in marketable securities. As of December 31, 1999,
the aggregate fair value of SPR's marketable securities was $45.9 million. SPR
currently does not invest excess funds in derivative financial instruments.
MANAGEMENT OF SPR
Section 16(a) Beneficial Ownership Reporting Compliance
Section 16 of the Securities Exchange Act of 1934 requires SPR's executive
officers, directors, and greater than 10% stockholders, to file reports of
ownership and changes in ownership with the Securities and Exchange
101
Commission. Based solely on a review of the forms it has received and on
written representations from certain reporting persons that no such forms were
required for them, SPR believes that, during 1999, all Section 16 filing
requirements applicable to its officers, directors and greater than 10%
beneficial owners were complied with by such persons.
Executive Compensation
The following table sets forth information with respect to the annual and
all other compensation earned for the years ended December 31, 1999, 1998 and
1997 for SPR's Chief Executive Officer and SPR's three executive officers other
than the Chief Executive Officer (collectively, the "SPR Named Executive
Officers").
Long Term Compensation
--------------------------------
Annual Compensation Awards
------------------------------ -------------------
Name and Principal Other Annual Restricted Options/ All Other
Position Year Salary Bonus Compensation Stock(#) SARS (#) Compensation
- ------------------ ---- -------- -------- ------------ ---------- -------- ------------
Robert M. Figliulo...... 1999 $275,000 $227,700 30,000 $23,900(1)
Chief Executive Officer 1998 270,000 276,450 -- -- -- 14,768(1)
and Chairman of the 1997 180,000 218,180 -- -- -- 11,742(1)
Board of Directors
Stephen J. Tober (2).... 1999 200,000 162,800 20,000 16,656(2)
Executive Vice
President 1998 200,000 190,900 -- 10,500(2)
and Chief Operating 1997 86,538 27,084 -- -- 493,409
Officer and Director
David A. Figliulo (3)... 1999 200,000 162,800 20,000 17,995(3)
Executive Vice
President 1998 200,000 191,733 -- 15,404(3)
and Director 1997 135,000 142,782 -- -- -- 9,499(3)
Stephen T. Gambill (4).. 1999 160,000 31,790 10,000 11,996(4)
Vice President and 1998 150,000 38,450 -- 8,000(4)
Chief Financial Officer 1997 150,000 6,667 -- -- 46,992 5,498(4)
- --------
(1) Includes: (i) $14,700, $14,268 and $11,242 of automobile lease payments
made by SPR, in 1999, 1998 and 1997, respectively, (ii) $2,000, $500, and
$500 in matching payments under SPR's 401(k) plan in 1999, 1998 and 1997,
respectively, and (iii) $7,200 of country club dues in 1999.
(2) Joined SPR in June 1997. Represents amounts paid in 1998 and from June 1997
through December 31, 1997. Includes: (i) $10,406 and $10,000 of automobile
lease payments in 1999 and 1998, respectively, (ii) $2,000 and $500 in
matching payments under the SPR's 401(k) plan in 1999 and 1998,
respectively, and (iii) $4,250 of country club dues in 1999.
(3) Includes: (i) $13,805, $14,904 and $8,999 of automobile lease payments made
by SPR in 1999, 1998 and 1997, respectively, (ii) $2,000, $500, and $500 in
matching payments under SPR's 401(k) plan in 1999, 1998 and 1997,
respectively, and (iii) $2,190 of country club dues in 1999.
(4) Includes $9,996, $7,500 and $4,998 of automobile lease payments made by SPR
in 1999, 1998 and 1997 and $2,000, $500, and $500 in matching payments
under SPR's 401(k) plan in each of 1999,1998 and 1997, respectively.
Option Grants in Last Fiscal Year
Options Granted during the Year Ended December 31, 1999:
Potential Realizable
Value at Assumed
Annual Rate of
Stock
Percent of Price Appreciation
Options Total Options Exercise Expiration --------------------
Name Granted Granted Price Date 5% 10%
- ---- ------- ------------- -------- ---------- --------- ----------
Robert M. Figliulo...... 30,000 12.1% $4.125 04/08/2004 $ 59,501 $ 168,046
Stephen J. Tober........ 20,000 8.1% 3.750 04/08/2009 47,167 119,531
David A. Figliulo....... 20,000 8.1% 4.125 04/08/2004 39,667 112,031
Stephen T. Gambill...... 10,000 4.0% 3.750 04/08/2009 23,584 59,765
102
The following table sets forth information concerning the number and value
realized or to options exercised during 1999 and options held at December 31,
1999 by the SPR Named Executive Officers and the value of those options held at
such date.
Option Exercises in Last Fiscal Year and Year-End Option Values
Number of Securities
Shares Underlying Unexercised Value of Unexercised
Acquired Options at In-The-Money Options at
on Value December 31, 1999 December 31, 1999 (2)
Exercise Realized ------------------------- -------------------------
Name (#) (1) Exercisable Unexercisable Exercisable Unexercisable
- ---- -------- -------- ----------- ------------- ----------- -------------
Robert M. Figliulo...... -- -- -- -- $ -- $ --
Stephen J. Tober........ -- -- 270,755 82,654 275,710 111,301
David A. Figliulo....... -- -- -- -- -- --
Stephen T. Gambill...... -- -- 18,796 38,196 19,140 52,462
- --------
(1) Based upon the difference between the closing price on the date of exercise
and the option exercise price.
(2) The closing price for the SPR common stock as reported on the Nasdaq
National Market on December 31, 1999 (the last day of trading in 1999) was
$6.125. Value is calculated on the basis of the difference between the
option exercise price and $6.125, multiplied by the number of shares of SPR
common stock underlying the option.
Employment Agreements
SPR has entered into substantially identical employment agreements with
Robert Figliulo, Stephen Tober, David Figliulo, and Stephen Gambill. The
agreements provide that upon termination of employment by SPR, other than for
Cause (as defined in the agreements), death or retirement, SPR shall pay the
executive an amount equal to no more than the executive's annual base
compensation in effect at the time of termination. The agreements also
generally provide that in the event of a change in control (as defined in the
agreements) and the occurrence of certain events, and to the extent deductible
under then applicable tax laws, SPR shall pay the executive a payment equal to
the sum of: (i) the executive's most recent base annual compensation and annual
bonus for the fiscal year prior to the date of the change in control; plus (ii)
the cash value of the insurance protection (including dependent coverage) then
in effect with respect to SPR's health insurance plan, based upon the cost of
such insurance to SPR for a 12-month period following the change in control
date. The agreements also contain noncompetition, nonsolicitation and
nondisclosure covenants.
On October 20, 1999, the employment agreements were amended to, among other
things, implement a bonus program based on the trading price of SPR common
stock.
The management employment agreements for Messrs. Robert Figliulo, David
Figliulo and Stephen Tober were amended on January 27, 2000 to preserve their
target bonus program after the merger by substituting Leapnet stock for SPR
stock.
Stock Plans
Employee Stock Purchase Plan. SPR has reserved an aggregate of 750,000
shares of common stock for issuance under SPR's Employee Stock Purchase Plan
(the "Purchase Plan"). The Purchase Plan is intended to qualify under Section
423 of the Internal Revenue Code of 1986, as amended (the "Code"), and will
permit eligible employees of SPR to purchase common stock through payroll
deductions of up to 20% of their total cash compensation; provided that
employees may be prohibited from purchasing more than $25,000 worth of stock in
any calendar year. The Purchase Plan has two six-month offering periods,
beginning on January 1 and
103
July 1 of each year, with the first offering period commencing on October 2,
1997, the date of SPR's initial public offering. The purchase price of SPR
common stock purchased under the Purchase Plan shall be the lesser of: (i) 85%
of the fair market value of the common stock (as calculated pursuant to the
Purchase Plan) on the first day of an offering period or (ii) 85% of the fair
market value of the common stock on the last day of an offering period. The
Purchase Plan is administered by the compensation committee of the SPR board of
directors. The SPR's board of directors is authorized to amend or terminate the
Purchase Plan at any time. However, SPR's board of directors may not, without
stockholder approval, modify the Purchase Plan if stockholder approval of the
amendment is required for the Purchase Plan to continue to comply with the
requirements of Rule 16b-3 under the Exchange Act or Section 423 of the Code.
Combined Incentive and Non-statutory Stock Option Plans. SPR has reserved an
aggregate of 1,250,000 and 1,566,378 shares of its common stock for issuance
under its existing 1999 and 1996 Stock Option Plans, respectively, which may be
granted to employees, officers and directors of SPR.
The 1999 Combined Incentive and Non-statutory Stock Option Plan provides
that awards may be granted to employees, officers, and directors of the
Company. Awards may consist of non-statutory stock options and incentive stock
options to purchase shares of common stock and restricted stock purchase
rights. Options granted under the plan generally vest over a five-year period
at the rate of 20% per year. The exercise price per share of common stock may
not be less than 85% (100% in the case of an ISO) of the fair market value of
the common stock on the date the option is granted. Options and restricted
stock purchase rights granted under the option plan must generally be exercised
within ten years from the date of grant. In the case of any eligible employee
who owns stock possessing more than 10% of the voting power of stock, the
exercise price of any options granted may not be less than 110% of the fair
market value of the common stock on the date of grant and the exercise period
may not exceed five years from the date of grant. If the Company is acquired by
another entity, outstanding awards may be assumed or substituted by the
successor corporation, if any. If a successor corporation does not assume or
substitute the awards, the vesting of the awards will be accelerated.
On April 8, 1999, options to purchase 247,000 shares of common stock at an
exercise price of $3.83 per share were granted to certain employees and outside
directors of which 15,000 are presently exercisable.
The 1996 Combined Incentive and Non-statutory Stock Option Plan provides
that awards may be granted to employees, officers, and directors of the
Company. Awards may consist of non-statutory stock options and incentive stock
options to purchase shares of common stock and stock appreciation rights
(SARs). Incentive stock options (ISOs) generally vest over a five-year period
at the rate of 20% per year. The exercise price per share of common stock may
not be less than 85% (100% in the case of an ISO) of the fair market value of
the common stock on the date the option is granted. Options and SARs granted
under the option plan must generally be exercised within ten years from the
date of grant. In the case of any eligible employee who owns stock possessing
more than 10% of the voting power of stock, the exercise price of any ISOs
granted may not be less than 110% of the fair market value of the common stock
on the date of grant and the exercise period may not exceed five years from the
date of grant. In the event of a change in control, as defined, options vest
immediately.
On June 2, 1997 options to purchase 1,228,849 shares of common stock at an
exercise price of $5.11 per share were granted to certain employees and outside
directors under the Option Plan, of which options to purchase 443,897 shares of
common stock are presently exercisable. On January 5, 1998 options to purchase
52,800 shares of common stock at an exercise price of $10.75 per share were
granted to certain employees other than SPR Named Executive Officers, of which
7,710 are presently exercisable. On July 6, 1998, options to purchase 168,375
shares of common stock at an exercise price of $21.00 per share were granted to
certain employees other than SPR Named Executive Officers, of which 18,900 are
presently exercisable.
CERTAIN TRANSACTIONS OF SPR
Prior to the closing date of the initial public offering in October 1997,
SPR entered into a tax indemnity agreement with each of its then current
stockholders which provides, among other things, that SPR will indemnify such
stockholders against additional income taxes resulting from adjustments made
(as a result of a
104
final determination made by a competent tax authority) to the taxable income
reported by SPR as an S corporation for periods prior to the initial public
offering, but only to the extent those adjustments result in a decrease in
income taxes otherwise payable by SPR as a C corporation for periods after the
initial public offering.
SPR paid approximately $324,000, $340,000, and $480,000 during 1999, 1998,
and 1997 respectively, in fees to a law firm having a partner whom is a
stockholder of SPR and who is a brother of certain executive officers of SPR. A
portion of the fees paid in 1998 and 1997 related to services performed by such
firm in connection with the 1996 mergers and the 1997 and 1998 offerings. In
1999, $159,000 of the $324,000 was attributed to a failed merger. In addition,
fees of $128,000 were paid to another law firm having a partner whom is a
stockholder of SPR and a brother of certain executive officers of SPR in 1999.
During 1999 and 1998, SPR paid approximately $196,000 and $314,000,
respectively, for SPR's consulting professionals to attend training classes at
a higher education company having a president and chief operating officer who
is a director of SPR.
Security Ownership of Management and Certain Beneficial Owners
The following table sets forth information regarding the pre and post merger
beneficial ownership of common stock as of March 21, 2000 by each of the
following:
. each person (or group within the meaning of Section 13(d)(3) of the
Securities Exchange Act of 1934) known by SPR to own beneficially 5% or
more of the common stock;
. each of SPR's directors and named executive officers; and
. all directors and executive officers of SPR as a group.
As used in this table, "beneficial ownership" means the sole or shared power
to vote or direct the voting or to dispose or direct the disposition of any
security. A person is considered the beneficial owner of securities that can be
acquired within 60 days of the date of this joint proxy statement/prospectus
through the exercise of any option, warrant or right. Shares of common stock
subject to options, warrants or rights which are currently exercisable or
exercisable within 60 days are considered outstanding for computing the
ownership percentage of the person holding such options, warrants or rights,
but are not considered outstanding for computing the ownership percentage of
any other person. The amounts and percentages are based upon 12,825,284 shares
of common stock outstanding as of March 21, 2000, and 28,723,316 shares of
Leapnet common stock outstanding immediately following the closing of the
merger.
PRINCIPAL STOCKHOLDERS OF SPR
Number of Number of
shares of shares of Percentage
SPR Leapnet ownership
beneficially Percentage beneficially of Leapnet
Name and address of owned prior ownership owned after after the
beneficial owners(1) to merger of SPR the merger merger
-------------------- ------------ ---------- ------------ ----------
Robert M. Figliulo(2)... 2,085,871 16.3% 2,263,170 7.9%
David A. Figliulo(3).... 1,813,871 14.1% 1,968,050 6.9%
T. Rowe Price &
Associates, Inc.(4).... 1,450,500 10.4% 1,573,793 5.5%
State of Wisconsin(5)... 1,010,400 7.3% 1,096,284 3.8%
Stephen J. Tober(6)..... 275,518 2.1% 366,917 1.3%
Stephen T. Gambill(7)... 33,314 * 66,738 *
Ronald L. Taylor(8)..... 28,163 * 30,557 *
Sydnor W. Thrift,
Jr.(8)................. 27,788 * 30,150 *
David P. Yeager(8)...... 25,163 * 27,302 *
All Directors and
Executive Officers as a
Group (7
persons)(6)(7)(8)...... 4,289,688 32.5% 4,752,884 16.3%
- --------
*Less than 1%.
105
(1) Unless otherwise noted, the address of each of the persons listed is 2015
Spring Road, Suite 750, Oak Brook, IL 60523.
(2) Includes 559,420 shares owned by the Robert M. Figliulo 1997 Grantor
Retained Annuity Trust, for which Robert M. Figliulo serves as sole trustee
and has sole investment and voting discretion. Includes 6,000 options
exercisable within 60 days of the date of this joint proxy
statement/prospectus, and 6,510 options exercisable after the merger.
(3) Includes 559,420 shares owned by the David A. Figliulo 1997 Grantor
Retained Annuity Trust, for which David A. Figliulo serves as the sole
trustee and has sole investment and voting discretion. Does not include an
aggregate of 55,989 shares held by Figliulo Family Associates, L.P., a
Delaware limited partnership, of which partnership Mr. Figliulo is a
General Partner. Mr. Figliulo disclaims beneficial ownership of such
shares. Includes 4,000 options exercisable within 60 days of the date of
this joint proxy statement/prospectus, and 4,340 options exercisable after
the merger.
(4) Based on Schedule 13G dated February 14, 2000, jointly filed by T. Rowe
Price Associates, Inc. and T. Rowe Price New Horizons Fund, Inc. The
address for these companies is 100 E. Pratt Street, Baltimore, Maryland
21202. T. Rowe Price has sole voting power over 1,450,500 shares.
(5) Based on a Schedule 13G dated February 2, 2000, filed by the State of
Wisconsin Investment Board. The address of this company is P.O. Box 7842,
Madison, Wisconsin 53707. State of Wisconsin Investment Board has sole
dispositive power and sole voting power over 1,010,400 shares.
(6) Includes 274,755 options exercisable within 60 days of the date of this
joint proxy statement/prospectus, and 366,089 options exercisable after the
merger.
(7) Includes 20,796 options exercisable within 60 days of the date of this
joint proxy statement/prospectus, and 53,156 options exercisable after the
merger.
(8) Includes 20,663 options exercisable within 60 days of the date of this
joint proxy statement/prospectus, and 22,419 options exercisable after the
merger.
106
UNAUDITED PRO FORMA FINANCIAL INFORMATION
Financial Statements
The following unaudited pro forma financial statements have been prepared to
give effect to the merger, using the purchase method of accounting.
The unaudited pro forma financial statements reflect assumptions deemed
probable by management regarding the merger. For example, the share information
used in the unaudited pro forma information reflects the weighted average
number of shares outstanding as of the periods presented adjusted to give
effect for the shares to be issued in connection with the merger as if the
shares were issued at the beginning of the periods presented. No adjustments to
the unaudited pro forma financial information have been made to account for
different possible results in connection with the foregoing, as management
believes that the impact on such information by the varying outcomes,
individually or in the aggregate, would not be material.
For purposes of the unaudited pro forma statements of operations for the
periods presented, SPR's statement of operations for the fiscal year ended
December 31, 1999 has been combined with Leapnet's consolidated statement of
operations for the fiscal year ended January 31, 2000.
Leapnet and SPR estimate they will incur combined aggregate direct
transaction costs of approximately $2.22 million associated with the merger,
consisting of transaction fees for investment bankers, attorneys, accountants,
and other related costs. For SPR, their nonrecurring transaction costs of $1.21
million will be charged to operations upon consummation of the merger.
Leapnet's nonrecurring transaction cost of $1.01 million are included within
the purchase price and will be capitalized as goodwill in accordance with
purchase accounting rules. There can be no assurance that the combined company
will not incur additional charges in excess of $2.22 million to reflect costs
associated with the merger, or that management will be successful in its
efforts to integrate the operations of the two companies.
The unaudited pro forma financial information is presented in this joint
proxy statement/prospectus for illustrative purposes only and is not
necessarily indicative of the financial position or results of operations that
would have actually been reported had the merger occurred at the beginning of
the periods presented, or as of January 31, 2000, as the case may be, nor is it
necessarily indicative of the financial position or results of operations of
the merged company in the future. Such unaudited pro forma financial statements
are based upon the respective historical consolidated financial statements of
Leapnet and SPR included elsewhere in this joint proxy statement/prospectus or
incorporated in it by reference, and do not incorporate, nor do they assume,
any benefits from cost savings or synergies that the combined company may
realize after the merger.
107
UNAUDITED PRO FORMA CONDENSED COMBINED BALANCE SHEETS
As of the Periods Ended
(in thousands)
Pro
Leapnet SPR Pro Forma Forma
1/31/00 12/31/99 Adjustments (1) Combined
-------- -------- --------------- --------
Assets:
Cash & cash equivalents.... $ 15,652 $ 4,322 $ 19,974
Accounts receivable........ 6,151 6,068 12,219
Accounts receivable--other. 0 2,427 2,427
Work in process............ 567 0 567
Short-term investments..... 386 46,227 46,613
Building held for sale..... 580 0 580
Other current assets....... 736 1,270 2,006
-------- ------- --------
Total current assets..... 24,072 60,314 84,386
Property & equipment, net.... 5,584 3,742 9,326
Goodwill..................... 0 0 $ 31,700 (A) 31,700
Other non-current assets..... 680 104 784
-------- ------- -------- --------
Total Assets............. $ 30,336 $64,160 $ 31,700 $126,196
======== ======= ======== ========
Liabilities:
Accounts payable and other. $ 3,447 $ 2,005 $ 2,220 (A) $ 7,672
Payroll and accrued
expenses.................. 1,235 3,094 4,329
Deferred income............ 378 300 678
Notes payable.............. 0 0 0
Current portion of debt.... 722 0 722
-------- ------- -------- --------
Total current
liabilities............. 5,782 5,399 2,220 13,401
Long term mortgage payable... 1,402 0 1,402
Notes payable................ 7,313 0 7,313
Long term capital lease
obligations................. 0 0 0
-------- ------- -------- --------
Total liabilities........ 14,497 5,399 2,220 22,116
Stockholders' equity:
Preferred stock............ 0 0 0
Common stock............... 148 139 (11)(A), (B) 276
Accumulated other
comprehensive income ..... 59 0 59
Additional paid in capital. 39,162 52,073 36,040 (A), (B) 127,275
Retained earnings.......... (23,379) 11,754 (11,754)(A), (B) (23,379)
Treasury stock, at cost.... (151) (5,205) 5,205 (B) (151)
-------- ------- -------- --------
Total stockholders'
equity.................. 15,839 58,761 29,480 104,080
-------- ------- -------- --------
Total Liabilities and
Stockholders' Equity.... $ 30,336 $64,160 $ 31,700 $126,196
======== ======= ======== ========
108
UNAUDITED PRO FORMA COMBINED STATEMENTS OF OPERATIONS
For the Years Ended
(in thousands, except per share data)
Leapnet SPR Pro Forma Pro Forma
01/31/00 12/31/99 Adjustments(1) Combined
-------- -------- -------------- ---------
Revenues........................ $36,309 $58,104 $ 94,413
Cost of services................ 22,944 43,242 66,186
------- ------- --------
Gross profit.................. 13,365 14,862 28,227
Cost and expenses: (a)
Selling....................... 779 4,966 5,745
Recruiting.................... 649 1,205 1,854
General and administrative.... 12,706 11,893 10,567 (C) 35,166
------- ------- -------- --------
Total costs and expenses.... 14,134 18,064 10,567 42,765
Operating income (loss)......... (769) (3,202) (10,567) (14,538)
Interest income (expense)..... 321 2,645 2,966
------- ------- -------- --------
Income (loss) before income
taxes.......................... (448) (557) (10,567) (11,572)
(Provision) benefit for income
taxes.......................... 137 911 (4,041)(E) (2,993)
------- ------- -------- --------
Net income (loss)............... $ (311) $ 354 $(14,608) $(14,565)
======= ======= ======== ========
Net income (loss) per share: (4)
Basic......................... $ (0.02) $ 0.03 $ (0.51)
Diluted....................... $ (0.02) $ 0.03 $ (0.51)
Weighted average number of
shares outstanding:
Basic......................... 14,256 13,376 1,137 28,769
Diluted....................... 14,256 13,513 -- 28,769
- --------
(a) Leapnet general and administrative expenses, as reported elsewhere in this
filing, have been broken out in more detail in the Unaudited Pro Forma
Combined Statements of Operations above for combination with SPR's costs
and expenses.
109
Notes to the Unaudited Pro Forma Condensed Combined Financial Information
(1) The pro forma financial information reflects the pending acquisition of SPR
for consideration preliminarily valued at $89.3 million. Since the
acquisition has not yet been completed, the actual consideration for the
acquisition of SPR cannot yet be determined. For the purpose of the pro
forma financial information, the number of incremental shares of Leapnet
common stock assumed issued in the acquisition of SPR is approximately 1.1
million. This amount is based on the number of shares of SPR common stock
outstanding as of January 27, 2000, the date the parties entered into the
merger agreement. Additionally, the estimated value of the options to
purchase Leapnet common stock to be issued in the acquisition of SPR is
based on the outstanding options to purchase SPR common stock as of January
27, 2000. The actual number of Leapnet common stock and stock options to be
issued will be based on the actual outstanding SPR common stock and stock
options as of the completion of the merger. The estimated acquisition
related costs consist primarily of investment banker, legal and accounting
fees to be incurred directly related to the acquisition of SPR.
The following represents the allocation of the purchase price for Leapnet's
pending acquisition of SPR over the historical net book values of the
acquired assets and assumed liabilities of SPR as of the date of the pro
forma balance sheet, and is for illustrative purposes only. The actual
purchase price allocations will be based on fair values of the acquired
assets and assumed liabilities as of the actual acquisition dates. Assuming
the transactions occurred on January 31, 2000, the allocations for the
acquisition of SPR would have been as follows:
(in thousands)
--------------
Working capital, including cash acquired.................... $53,705
Non-current assets.......................................... 3,846
Non-current liabilities..................................... --
Goodwill and other intangible assets........................ 31,700
-------
Purchase price.............................................. $89,251
=======
The pro forma adjustments reconcile the historical balance sheet of SPR to
the allocated purchase price above which includes approximately $1.01
million of estimated acquisition costs incurred by Leapnet related to the
acquisition of SPR. SPR working capital, including cash acquired, of $53.7
million is equal to the historical balance sheet amount less a pro forma
accrual of $1.2 million, representing the acquisition costs incurred
directly by SPR.
(2) The pro forma adjustments represent amortization of goodwill and other
intangible assets (per the allocation in "(1)" above) that would have been
recorded during the periods covered by the pro forma statements of
operations related to the acquisition of SPR. The pro forma adjustments are
based on the assumption that the entire amounts identified as goodwill and
other intangible assets in Leapnet's acquisition of SPR will be amortized
on a straight-line basis over a three-year period. The valuation of the
actual intangible assets will not be completed until the acquisition of SPR
is complete.
(3) The pro forma adjustments reflect the income taxes that would have been
recorded by Leapnet in its consolidated statements of operations related to
Leapnet's and SPR's historical results for the comparable periods presented
and the income tax effect. The pro forma adjustments assume that Leapnet
would not recognize a federal tax benefit for the amortization of goodwill
and other intangible assets related to the acquisition of SPR.
Additionally, Leapnet's valuation allowance was recorded as a permanent tax
difference. Actual effective tax rates may differ from pro forma rates
reflected in this pro forma financial information.
(4) Since the pro forma statements of operations each result in a loss from
continuing operations, the pro forma basic and diluted loss from continuing
operations per common share are computed by dividing the loss from
continuing operations available to common stockholders by the weighted
average number of common shares outstanding. The calculation of the
weighted average number of common shares outstanding assume that the 1.1
million incremental shares of Leapnet's common stock issued in the
acquisition of SPR, were outstanding for the entire period.
110
SHAREHOLDER PROPOSALS
Any stockholder of Leapnet who wishes to have a proposal considered for
inclusion in Leapnet's proxy statement for its 2000 annual meeting must deliver
proper written notice of such proposal directed to the attention of the
Secretary of Leapnet at 420 West Huron Street, Chicago, Illinois 60610. Such
notice must be received by the Secretary of Leapnet not less than 60 nor more
than 90 days prior to May 14, 2000. However, if the date of the 2000 annual
meeting does not fall between May 16, 2000 and July 15, 2000 such written
notice will be deemed to be timely received by Leapnet if it is received by the
Secretary not later than the close of business on the tenth day following the
day on which Leapnet publicly discloses the meeting date.
SPR will hold an annual meeting in the year 2000 only if the merger has not
already been completed. Any stockholder of SPR who wishes to have a proposal
considered for inclusion in SPR's proxy statement for its 2000 annual meeting
must deliver proper written notice of such proposal directed to the attention
of the Secretary of SPR Inc., 2015 Spring Road, Oak Brook, Illinois 60523-1874.
Such notice must be received by the Secretary of SPR not less than 60 nor more
than 90 days prior to June 1, 2000. However, if the date of the 2000 annual
meeting does not fall between June 1, 2000 and July 15, 2000 such written
notice will be deemed to be timely received by SPR if it is received by the
Secretary not later than the close of business on the tenth day following the
day on which SPR publicly discloses the meeting date.
EXPERTS
The audited consolidated financial statements of Leapnet included in this
joint proxy statement/prospectus and elsewhere in the registration statement
have been audited by Arthur Andersen LLP, independent public accountants, as
indicated in their reports with respect thereto, and are included herein in
reliance upon the authority of said firm as experts in giving said reports.
The financial statements of SPR included in this joint proxy
statement/prospectus and elsewhere in the registration statement have been
audited by Arthur Andersen LLP, independent public accountants, as indicated in
their reports with respect thereto, and are included herein in reliance upon
the authority of said firm as experts in giving said reports.
LEGAL MATTERS
Legal matters with respect to the validity of the securities offered hereby
will be passed upon for Leapnet by Morrison & Foerster LLP, New York, New York.
Legal matters with respect to the federal income tax consequences of the merger
will be passed upon for SPR by Winston & Strawn, Chicago, Illinois and for
Leapnet by Morrison & Foerster LLP, New York, New York.
111
INDEX TO FINANCIAL STATEMENTS
Leapnet, Inc. Consolidated Financial Statements
Report of Arthur Andersen LLP, Independent Public Accountants ............ F-2
Consolidated Balance Sheets as of January 31, 2000 and 1999............... F-3
Consolidated Statements of Operations for the Fiscal Years Ended January
31, 2000, 1999, and 1998................................................. F-4
Consolidated Statements of Stockholders' Equity for the Fiscal Years Ended
January 31, 2000, 1999, and 1998......................................... F-5
Consolidated Statements of Cash Flows for the Fiscal Years Ended January
31, 2000, 1999, and 1998................................................. F-6
Notes to Consolidated Financial Statements................................ F-7
SPR Inc. Financial Statements
Report of Arthur Andersen LLP, Independent Public Accountants............. F-27
Balance Sheets as of December 31, 1999 and 1998........................... F-28
Statements of Operations for the Fiscal Years Ended December 31, 1999,
1998, and 1997........................................................... F-29
Statements of Stockholders' Equity for the Years Ended December 31, 1999,
1998 and 1997............................................................ F-30
Statements of Cash Flows for the Years Ended December 31, 1999, 1998 and
1997..................................................................... F-31
Notes to Financial Statements............................................. F-32
F-1
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To the Board of Directors and Stockholders of Leapnet, Inc.:
We have audited the accompanying consolidated balance sheets of Leapnet,
Inc. (a Delaware corporation) and subsidiaries as of January 31, 2000 and 1999,
and the related consolidated statements of operations, stockholders' equity and
cash flows for each of the three years in the period ended January 31, 2000.
These financial statements are the responsibility of Leapnet's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.
We conducted our audits in accordance with auditing standards generally
accepted in the United States. Those standards require that we plan and perform
the audit to obtain reasonable assurance about whether the financial statements
are free of material misstatement. An audit includes examining, on a test
basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the financial position of Leapnet,
Inc. and subsidiaries as of January 31, 2000 and 1999, and the results of their
operations and their cash flows for each of the three years in the period ended
January 31, 2000, in conformity with accounting principles generally accepted
in the United States.
ARTHUR ANDERSEN LLP
Chicago, Illinois
March 13, 2000
F-2
LEAPNET, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
January 31,
--------------------------
2000 1999
------------ ------------
ASSETS
Current assets
Cash and cash equivalents......................... $ 15,651,826 $ 14,076,379
Short-term investment............................. 385,816 --
Accounts receivable (net of allowance of $636,672
and $470,750, respectively)...................... 6,150,568 6,433,214
Costs in excess of billings (net of allowance of
$46,731 and $10,374, respectively)............... 566,922 339,907
Building held for sale............................ 579,799 --
Prepaid expenses.................................. 310,644 262,970
Other current assets.............................. 425,890 --
------------ ------------
Total current assets............................ 24,071,465 21,112,470
Property and equipment
Land.............................................. 720,000 158,921
Building and building improvements................ 2,671,153 493,473
Leasehold improvements............................ 745,161 716,656
Computer equipment................................ 1,914,476 1,172,305
Furniture and equipment........................... 1,490,250 853,517
------------ ------------
7,541,040 3,394,872
Less accumulated depreciation..................... (1,957,144) (910,811)
------------ ------------
Net property and equipment...................... 5,583,896 2,484,061
Other assets
Other assets...................................... 680,439 136,839
------------ ------------
Total other assets.............................. 680,439 136,839
Total assets....................................... $ 30,335,800 $ 23,733,370
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities
Accounts payable.................................. $ 3,447,266 $ 2,652,819
Accrued expenses.................................. 1,234,708 886,346
Accrued restructuring costs....................... -- 234,378
Billings in excess of costs....................... 377,514 1,331,279
Notes payable..................................... -- 4,073,000
Current portion of long-term debt................. 722,291 360,776
------------ ------------
Total current liabilities....................... 5,781,779 9,538,598
Long-term liabilities
Notes payable..................................... 7,312,892 --
Mortgage payable.................................. 1,401,811 653,280
Capital lease obligations......................... -- 52,908
------------ ------------
Total long-term liabilities..................... 8,714,703 706,188
Total liabilities............................... $ 14,496,482 $ 10,244,786
------------ ------------
Commitments and contingencies (Note 12)
Stockholders' equity
Preferred stock, $.01 par value; 20,000,000
shares authorized, no shares issued or
outstanding...................................... -- --
Common stock, $.01 par value; 100,000,000 shares
authorized, 14,807,883 and 14,131,785 shares
issued and outstanding as of January 31, 2000
and 1999, respectively........................... 148,079 141,318
Accumulated other comprehensive income (Note 4)... 59,736 --
Additional paid in capital........................ 39,162,025 36,566,638
Retained earnings (accumulated deficit)........... (23,379,392) (23,068,242)
Less cost of common stock held in treasury
(50,000 shares as of January 31, 2000 and 1999).. (151,130) (151,130)
------------ ------------
Total stockholders' equity...................... $ 15,839,318 $ 13,488,584
------------ ------------
Total liabilities and stockholders' equity......... $ 30,335,800 $ 23,733,370
============ ============
The accompanying notes to the consolidated financial statements are an integral
part of these balance sheets.
F-3
LEAPNET, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
Fiscal Year Ended January 31,
--------------------------------------
2000 1999 1998
----------- ------------ -----------
Revenues................................ $36,308,951 $ 35,919,554 $30,660,039
Cost of services........................ 22,944,383 24,685,527 22,228,528
----------- ------------ -----------
Gross profit.......................... 13,364,568 11,234,027 8,431,511
Other expenses:
General and administrative expenses... 14,133,630 15,308,093 17,054,409
Impairment of long-lived assets....... -- 9,311,556 --
Restructuring expenses................ -- 738,494 767,323
----------- ------------ -----------
Total other expenses................ 14,133,630 25,358,143 17,821,732
Operating loss.......................... (769,062) (14,124,116) (9,390,221)
Loss on divestitures.................. -- (1,802,306) --
Gain on sale of building.............. -- 1,154,588 --
Net interest income/(expense)......... 321,380 (165,863) 269,024
----------- ------------ -----------
Loss before income taxes................ (447,682) (14,937,697) (9,121,197)
Income tax benefit/(expense).......... 136,532 (3,385,056) 3,510,365
----------- ------------ -----------
Net loss................................ $ (311,150) $(18,322,753) $(5,610,832)
=========== ============ ===========
Net loss per share
Basic................................. $ (0.02) $ (1.34) $ (0.41)
Diluted............................... $ (0.02) $ (1.34) $ (0.41)
The accompanying notes to the consolidated financial statements are an integral
part of these statements.
F-4
LEAPNET, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
Retained Accumulated Total
Common Stock Additional Earnings/ Other Shareholders'
-------------------- Paid-In (Accumulated Treasury Comprehensive Equity/
Shares Amount Capital Deficit) Shares Income (Deficit)
- ----------------------------------------------------------------------------------------------------------------
Balance as of January
31, 1997............... 13,600,000 $136,000 $35,581,344 $ 865,343 -- -- $ 36,582,687
- ----------------------------------------------------------------------------------------------------------------
Direct offering
expenses.............. (45,545) (45,545)
Issuance of additional
shares:
Stock option exercises. 14,667 147 43,854 44,001
Stock purchase plan
purchase.............. 22,199 222 21,311 21,533
Repurchase of shares.... (151,130) (151,130)
Net loss................ (5,610,832) (5,610,832)
- ----------------------------------------------------------------------------------------------------------------
Balance as of January
31, 1998............... 13,636,866 $136,369 $35,600,964 $ (4,745,489) $(151,130) -- $ 30,840,714
- ----------------------------------------------------------------------------------------------------------------
Issuance of additional
shares:
Stock option exercises. 433,920 4,340 901,890 906,230
Stock purchase plan
purchase.............. 60,999 609 63,784 64,393
Net loss................ (18,322,753) (18,322,753)
- ----------------------------------------------------------------------------------------------------------------
Balance as of January
31, 1999............... 14,131,785 $141,318 $36,566,638 $(23,068,242) $(151,130) -- $ 13,488,584
- ----------------------------------------------------------------------------------------------------------------
Issuance of additional
shares:................
Stock option exercises. 647,583 6,476 2,538,927 2,545,403
Stock purchase plan
purchase.............. 28,515 285 56,460 56,745
Other Comprehensive
Income:
Unrealized gain on
investment............ 59,736 59,736
Net loss................ (311,150) (311,150)
------------
Total comprehensive
income................. $ (251,414)
- ----------------------------------------------------------------------------------------------------------------
Balance as of January
31, 2000............... 14,807,883 $148,079 $39,162,025 $(23,379,392) $(151,130) $59,736 $ 15,839,318
- ----------------------------------------------------------------------------------------------------------------
The accompanying notes to the consolidated financial statements are an integral
part of these statements.
F-5
LEAPNET, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
Fiscal Year Ended January 31,
---------------------------------------
2000 1999 1998
----------- ------------ ------------
Cash flows from operating activities:
Net loss............................. $ (311,150) $(18,322,753) $ (5,610,832)
Adjustments to reconcile net income
to net cash provided by operating
activities:
Depreciation and amortization...... 1,211,676 2,774,680 2,173,733
Deferred income taxes.............. -- 2,960,061 (3,189,765)
Loss on divestitures............... -- 1,802,306 --
Gain on sale of building........... -- (1,154,588) --
Impairments of long-term assets.... -- 9,239,814 --
Changes in operating assets and li-
abilities:
Accounts receivable.............. (43,434) (2,064,014) 1,895,750
Costs in excess of billings...... (227,015) 141,196 181,158
Prepaid expenses................. (47,674) (13,767) (40,367)
Other current assets............. (425,890) 320,000 (320,000)
Other assets..................... (162,605) 6,600 93,092
Accounts payable................. 794,447 (247,165) 2,592,916
Accrued expenses................. 348,362 1,088,773 (502,702)
Accrued restructuring expenses... (234,378) (395,622) 630,000
Billings in excess of costs...... (953,765) 936,519 (129,504)
----------- ------------ ------------
Net cash provided by (used in)
operating activities.......... (51,426) (2,927,960) (2,226,521)
Cash flows from investing activities:
Acquisitions, net of cash............ -- -- (24,057,470)
Proceeds from business divestitures.. -- 5,300,000 --
Receipt of escrow monies in connec-
tion with YAR....................... -- 2,725,186 --
Proceeds from sale of LA building.... -- 3,476,277 --
Capital expenditures................. (4,725,967) (1,028,182) (1,891,636)
Capitalized software development
costs............................... (546,338) (211,485) (531,569)
Repayment/(issuance) of notes receiv-
able................................ -- 1,819,770 (1,819,770)
----------- ------------ ------------
Net cash (used in)/provided by
investing activities.......... (5,272,305) 12,081,566 (28,300,445)
Cash flows from financing activities:
Net proceeds from issuance of common
stock............................... 2,602,148 970,623 19,989
Payments for treasury stock.......... -- -- (151,130)
Net borrowings/(repayments) on:
Notes payable...................... 3,239,892 (2,140,478) 5,648,000
Mortgage payable................... 1,427,166 (746,720) --
Capital lease obligations.......... (370,028) (374,913) (88,381)
----------- ------------ ------------
Net cash provided by/(used in)
financing activities.......... 6,899,178 (2,291,488) 5,428,478
Net increase/(decrease) in cash and
cash equivalents...................... 1,575,447 6,862,118 (25,098,488)
Cash and cash equivalents, beginning of
period................................ 14,076,379 7,214,261 32,312,749
----------- ------------ ------------
Cash and cash equivalents, end of peri-
od.................................... $15,651,826 $ 14,076,379 $ 7,214,261
=========== ============ ============
Supplementary disclosure of cash paid
during the period:
Interest paid........................ $ 457,480 $ 543,224 $ 999,316
Income taxes paid.................... -- 305,829 15,063
Supplementary disclosure of noncash in-
vesting and financing
activities:
Property purchased and financed with
notes payable....................... -- -- 1,965,478
Securities received from client for
services rendered, stated at fair
market value........................ 385,816 -- --
The accompanying notes to the consolidated financial statements are an integral
part of these statements.
F-6
LEAPNET, INC. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1--DESCRIPTION OF BUSINESS
Leapnet, Inc. ("Leapnet" and formerly The Leap Group, Inc.) develops
creative solutions for the wired world. Its main area of business is corporate
communication services which includes Internet consulting and development,
globalization services and advertising. On April 9, 1999, Leapnet changed its
name from The Leap Group, Inc. to Leapnet, Inc. to reflect its stronger
emphasis on corporate communication services using the Internet as reflected by
Leapnet's increased work using this medium and due to the growing demand for
Internet related services from existing and new clients.
In December 1996, Leapnet formed a new wholly owned subsidiary, Quantum Leap
Communications, Inc. ("QLC"or "Quantum Leap"), a Delaware corporation. QLC is
focused on the development of large-scale Internet-based business solutions and
the creation of strategic brand advertising and marketing executed primarily on
the Internet.
In April 1997, Leapnet acquired YAR Communications, Inc. ("YAR") and in
November 1997, Leapnet formed One World Communications, Inc. and acquired
various assets of Kang & Lee Advertising, Inc. and K&L West Advertising, Inc.
(jointly referred to as "One World" or "Kang & Lee"). Both business
combinations were accounted for using the purchase accounting method. In
accordance with the purchase accounting method, YAR's and One World's results
have been included within Leapnet's results since their respective acquisition
dates of April 1, 1997 and November 1, 1997. In October 1998, Leapnet sold
various assets of One World and transferred the AT&T account of YAR to another
agency, as further described in Note 3. Due to the sale of the various assets
of One World, One World's results have only been included through the effective
closing date of September 30, 1998.
On April 9, 1999, the former parent company, The Leap Group, Inc., merged
with and into Leapnet, Inc., which was a newly created, wholly owned subsidiary
of The Leap Group, Inc. The Leap Group, Inc. had been incorporated in Delaware
in March 1996 to act as the parent company for The Leap Partnership, Inc.
("Leap Partnership"), an Illinois corporation established in September 1993.
In November 1999, Leapnet established Eagle Technology Partners, Inc.
("Eagle"), a Delaware corporation. Eagle is an e-business consulting services
company.
NOTE 2--SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Principles of Consolidation
The accompanying Consolidated Financial Statements present all the entities,
which now comprise Leapnet, from their inception dates or from the time of
their acquisition pursuant to the purchase method of accounting. All
significant intercompany accounts and transactions have been eliminated in
consolidation.
Cash and Cash Equivalents
Cash and cash equivalents generally consist of cash, certificates of deposit
and other money market instruments with short-term maturities. These
investments are stated at cost, which approximates fair value, and are also
considered cash equivalents for the purposes of reporting cash flows.
F-7
LEAPNET, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Short-Term Investment
Leapnet accounts for equity investments using SFAS No. 115, Accounting for
Certain Investments in Debt and Equity Securities. Under SFAS No. 115,
management determines the proper classifications of investments at the time of
receipt and reevaluates such designations as of each balance sheet date.
Disclosures About Fair Value of Financial Instruments
The following methods and assumptions were used to estimate the fair value
of each class of financial instrument held by Leapnet:
. Cash and cash equivalents, trade receivables and trade payables: the
carrying amounts approximate fair value because of the short-term
maturity of these items.
. Notes payable and capital lease obligations: due to the floating interest
rate on these obligations, the carrying amounts approximate fair value.
Property and Equipment
Property and equipment are stated at cost less accumulated depreciation.
Company policy provides for capitalization of all major expenditures for
renewal and improvements and for current charges to income for repairs and
maintenance.
The provision for depreciation has been calculated using straight-line and
accelerated methods over the estimated economic lives of the related assets as
follows:
Building and building improvements.............................. 39 years
Computer equipment.............................................. 3 years
Furniture and equipment......................................... 5-7 years
Leasehold improvements are amortized over the lesser of their useful lives
or the remaining term of the related lease.
Purchased Software Costs
Software that is purchased for use by Leapnet and has an expected life
greater than one year is capitalized and classified within Other Assets.
Leapnet has adopted a policy to depreciate these costs over a two-year period
using the straight-line method.
Research and Development Costs
Research and development costs are charged to expense as incurred. However,
the costs incurred for the development of computer software that will be
licensed, sold, leased or otherwise marketed are capitalized until
technological feasibility has been established. These capitalized costs are
subject to an ongoing assessment of recoverability based upon anticipated
future revenues and changes in hardware and software technologies. Costs that
may be capitalized include contracted outside labor, direct labor and related
overhead.
Amortization of capitalized software development costs begins when the
product is ready for use. Amortization is provided on a product-by-product
basis using the straight-line method over periods not exceeding three years.
Unamortized capitalized software development costs determined to be in excess
of net realizable value of the product are expensed immediately.
F-8
LEAPNET, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Revenue Recognition
Revenue from retainers is recognized over the period in which services are
rendered. Revenue from time and materials based billings is recognized as
services are performed based on actual hours incurred at a markup. Revenue from
fixed fee arrangements is recognized as services are performed using the
percentage-of-completion method. Provisions for estimated losses on uncompleted
contracts are assessed on a contract by contract basis and are recognized in
the period in which such losses are determined. Revenues from production
services are recognized as the services are completed. Commissions earned from
fees based upon third-party media placements are recognized as revenues when
Leapnet-created materials appear on various media in accordance with industry
practice. Costs in excess of billings include unbilled costs which are expensed
as cost of services as services are rendered and billed. Billings in excess of
costs, or deferred revenue, include billings made in advance of services
performed.
Concentration of Credit and Other Risk
SFAS No. 105, Disclosure of Information about Financial Instruments with
Off-Balance Sheet Risk and Financial Instruments with Concentration of Credit
Risk, requires disclosure of any significant off-balance sheet and credit risk
concentrations. Leapnet has no significant off-balance sheet items. Leapnet
attempts to limit its concentration of credit risk by securing clients who are
well-established and credit-worthy advertisers of consumer and industrial goods
and services.
While Leapnet typically enters into written agreements with its clients, at
times it performs services prior to the execution of such agreements, and
written contracts are typically terminable by either party on short notice,
often 90 days or less. Management considers the relationships with existing
clients to be good; however, the loss of any one or more of Leapnet's
significant clients could have a materially adverse effect on Leapnet's
business, financial condition and results of operations.
For the year ended January 31, 2000, one client accounted for 31.7% of
consolidated revenues. For the year ended January 31, 1999, two clients
accounted for 24.2% and 13.1% of consolidated revenues. For the year ended
January 31, 1998, one client accounted for 36.3% of consolidated revenues.
Income Taxes
Leapnet accounts for income taxes under SFAS No. 109, Accounting for Income
Taxes, which requires recognition of deferred tax assets and liabilities for
the expected future effects of all deductible temporary differences, loss
carryforwards, and tax credit carryforwards. In the event that it is more
likely than not that the tax benefit may not be realized, the deferred tax
assets are reduced by a valuation allowance.
Per Share Data
In February 1997, the Financial Accounting Standards Board issued SFAS No.
128, Earnings Per Share. SFAS No. 128 changed the methodology of calculating
earnings per share and requires the disclosure of basic earnings per share and
diluted earnings per share. The calculation of basic earnings per share
excludes dilutive common stock equivalents and convertible securities (such as
stock options, warrants and convertible preferred stock) which are included in
the diluted earnings per share calculation under the treasury method. Leapnet
adopted SFAS No. 128 in fiscal 1998 and has retroactively restated all periods
presented. The weighted average number of common shares used in determining
basic and diluted Earnings Per Share ("EPS") attributable to common
stockholders for the years ended January 31, 2000, 1999 and 1998 is as follows
(in thousands):
For the years ended
January 31,
--------------------
2000 1999 1998
------ ------ ------
Shares used in Basic EPS calculation....................... 14,256 13,688 13,615
Common Stock Equivalents................................... -- -- --
------ ------ ------
Shares used for Diluted EPS calculation.................... 14,256 13,688 13,615
====== ====== ======
F-9
LEAPNET, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Management's Use of Estimates
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the period.
Actual results could differ from those estimates.
Comprehensive Income
In June 1997, the Financial Accounting Standards Board issued SFAS No. 130,
Reporting Comprehensive Income, which established standards for reporting and
display of comprehensive income, its components and accumulated balances.
Comprehensive income is defined to include all changes in equity except those
resulting from investments by owners and distributions to owners. In fiscal
2000, in addition to a net loss, Leapnet recorded other comprehensive income
resulting from an unrealized gain on investment of $59,736.
Segment Reporting
Leapnet has adopted SFAS No. 131, Disclosures about Segments of an
Enterprise and Related Information. SFAS No. 131 established standards for the
way public business enterprises report information about operating segments in
annual financial statements and requires that those enterprises report selected
information about operating segments in interim financial reports. SFAS No. 131
also establishes standards for related disclosures about products and services,
geographic areas, and major customers. Leapnet's primarily U.S. based
businesses operate within the corporate communication services segment. The
businesses exhibit similar economic characteristics and are focused to create
effective brand communications to build clients' businesses.
Recently Issued Accounting Standards
In April 1998, the American Institute of Certified Public Accountants issued
Statement of Position 98-1, "Accounting for the Costs of Computer Software
Developed or Obtained for Internal Use" ("SOP 98-1"), which provides guidance
for determining whether computer software is internal-use software and on
accounting for the proceeds of computer software originally developed or
obtained for internal use and then subsequently sold to the public. It also
provides guidance on capitalization of the costs incurred for computer software
developed or obtained for internal use. SOP 98-1 is effective for fiscal years
beginning after December 31, 1998. The adoption of SOP 98-1 did not have a
material effect on Leapnet's unaudited consolidated financial statements.
In June 1998, the Financial Accounting Standards Board ("FASB") issued SFAS
No. 133, "Accounting for Derivative Instruments and Hedging Activities," which
is required to be adopted in years beginning after June 15, 1999. Leapnet
anticipates that the adoption of SFAS No. 133 will not have a significant
effect on the results of operations or financial condition of Leapnet. In July
1999, the FASB issued SFAS No. 137, "Accounting for Derivative Instruments and
Hedging Activities--Deferral of the Effective Date of FASB statement No. 133",
which amends SFAS No. 133 to be effective for all fiscal quarters of all fiscal
years beginning after June 15, 2000. This statement is effective for the
Company beginning February 1, 2001.
Reclassifications
The historical statement of operations information of Leapnet for the three
years ended January 31, 2000 has been reclassified to conform with the
financial presentation of companies within the Internet services industry. Such
classifications primarily included allocating Leapnet's salaries and related
expenses into either cost of services for billable employees or to general &
administrative expenses for non-billable employees.
F-10
LEAPNET, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Additionally, certain amounts as previously reported have been reclassified to
conform with current year classifications.
NOTE 3--ACQUISITIONS AND DIVESTITURES
Acquisition of SPR Inc.
On January 27, 2000, Leapnet executed a definitive agreement to whereby
Brassie Corporation, a wholly owned subsidiary of Leapnet would be merged with
and into SPR Inc. ("SPR"), a company that provides IT consulting and project-
based services focused on maximizing the value of existing systems. Pursuant to
this merger, each share of SPR stock will be converted into approximately 1.085
shares of Leapnet stock. The merger is planned to be effected on a tax-free
basis to stockholders. This transaction, contingent upon shareholder approval,
is expected to be completed in mid-year 2000.
The acquisition will be accounted for using the purchase method of
accounting, and accordingly, the purchase price will be allocated to the assets
acquired and the liabilities assumed based upon the fair values at the date of
acquisition. The excess of the purchase price over the fair values of the net
assets acquired will be recorded as goodwill and amortized over a 3 year
period.
The following summary, prepared on a pro forma basis, combines Leapnet's
results for the fiscal year ended January 31, 2000 with SPR's results for their
fiscal year ended December 31, 1999. The shares used in the per share
computation reflect the weighted average number of shares outstanding as of
year-end adjusted to give effect for the shares to be issued in connection with
the merger as if the shares were issued at the beginning of the periods
presented.
Fiscal Year
Ended
January 31,
Pro Forma Summary 2000
----------------- -----------
Revenues..................................................... $94,413,234
Net Income................................................... $ 42,779
Net Income per Share......................................... $ 0.00
Shares used in per share computation......................... 28,769,000
The pro forma results are not necessarily indicative of what would have
occurred if the acquisition had been in effect for the period presented. In
addition, they are not intended to be a projection of future results or do they
incorporate or assume any benefits from cost savings or synergies that the
combined company may realize after the merger.
Divestiture of One World Communications, Inc. and AT&T account of YAR
Communications, Inc.
On October 22, 1998, Leapnet closed on the sale of various assets of its One
World subsidiary and the transfer of the AT&T account of YAR Communications,
Inc. to Young & Rubicam, Inc. This transaction resulted in a combined pretax
loss of $1.8 million, which reflects the sale of various assets of the One
World subsidiary and approximately $6.5 million of YAR goodwill related to the
AT&T account. As consideration for the sale, Leapnet received $5.3 million on
October 22, 1998, and received $1.1 million on April 13, 1999.
NOTE 4--SHORT TERM INVESTMENTS
As of January 31, 2000, all securities covered by SFAS No. 115, Accounting
for Certain Investments in Debt and Equity Securities, were designated as
available for sale. Accordingly, these equity securities are stated at fair
value of $385,816 on the balance sheet with comprehensive income resulting from
an unrealized gain of $59,736 which is reported as a separate component of
stockholders' equity.
F-11
LEAPNET, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
NOTE 5--BUILDING HELD FOR SALE
As of January 31, 2000, Leapnet was in the process of selling its building
located at 22 West Hubbard Street, Chicago, Illinois. As such, the net book
value of the building, approximately $580,000, has been classified as a current
asset as "Building Held for Sale." On March 3, 2000, Leapnet sold the building
for $1.2 million. The outstanding mortgage payable to Alliance Bank was paid
off with the proceeds from the sale of the building.
During the prior year, on July 17, 1998, Leapnet sold its office building
located in the Los Angeles area for $3.5 million, which resulted in a $1.2
million pre-tax gain, as reported. The sale also generated approximately $2.0
million in net cash after retiring $1.4 million of mortgage debt on the
building and after payment of all closing costs.
NOTE 6--OTHER ASSETS
As of January 31, 2000 and 1999, respectively, Other Assets includes
approximately $1,824,000 and $163,000 of purchased software costs. It is
Leapnet's policy to amortize purchased software costs over a two-year period.
Accumulated amortization as of January 31, 2000 and 1999, was approximately
$1,727,000 and $122,000, respectively. As such, the remaining unamortized
values of the purchased software costs were approximately $97,000 and $41,000
as of January 31, 2000 and 1999, respectively.
Additionally, Other Assets includes approximately $495,000 and $1,609,000 of
capitalized software development costs as of January 31, 2000 and 1999,
respectively. These costs are being amortized over a three-year period
commencing when the product was available for general release. Accumulated
amortization as of January 31, 2000 and 1999, was approximately $107,000 and
$1,547,000, respectively. The remaining unamortized capitalized software
development costs were approximately $388,000 and $62,000 as of January 31,
2000 and 1999, respectively.
Other Assets also includes long term security deposits on leased office
space and earnest money associated with the purchase of the new building as
described further in Note 12. As of January 31, 2000 and January 31, 1999,
these balances were approximately $195,000 and $34,000, respectively.
NOTE 7--NOTES AND MORTGAGE PAYABLE
On November 10, 1999, Leapnet obtained a new $15 million secured two-year
revolving line of credit from American National Bank, which replaced an
existing $10 million secured one-year revolving line of credit. The new line of
credit matures on November 10, 2001, and bears interest at a variable rate of
1.5% above the bank's highest CD rate. In addition, there is an unused facility
fee of ten basis points per year on the average amount of the unused facility.
As of January 31, 2000, Leapnet has met all the debt covenants in effect which
require certain minimum levels of working capital, net worth and liquidity.
Borrowings are collateralized by substantially all the assets of Leapnet. As of
January 31, 2000, the interest rate was 6.9% and the outstanding balance on
this line of credit was $7.3 million.
On June 29, 1999, Leapnet obtained a $2.2 million multi-draw mortgage which
is secured by substantially all the assets of Leapnet as the mortgage is cross-
collateralized with the line of credit described above. The five-year balloon
note bears interest at a fixed rate of 8.5%. The loan payments had been
interest only until the completion of the second phase of the building
purchase. As of January 31, 2000, the second phase of the building has been
purchased so that the loan converts to a 20-year amortization schedule. As of
January 31, 2000, the outstanding balance on this loan was $1.4 million
resulting in monthly principal and interest payments of $12,497 through October
2000. The final phase of the purchase is scheduled to occur no later than
F-12
LEAPNET, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
October 2000 and Leapnet plans to finance an additional $800,000 under this
loan. The monthly principal and interest payment will increase to $19,440 at
that time and will be payable monthly through the maturity date of May 31,
2004.
On February 2, 1998, Leapnet received proceeds from a loan for $665,000 from
a bank. The three-year balloon note bears interest at the rate of 9.0%, payable
in monthly principal and interest installments of $5,992 through January 27,
2001, with a balloon payment of approximately $626,563 due in January 2001. The
loan is secured by a mortgage on the building and is personally guaranteed by
an officer of Leapnet. As of January 31, 2000 and 1999, the outstanding balance
on this note was $640,446 and $653,280, respectively. Also, as of January 31,
2000, Leapnet was in the process of selling its building located at 22 West
Hubbard Street, Chicago, Illinois. As such, the mortgage payable has been
classified as a current liability. On March 3, 2000, Leapnet sold the building
secured by this mortgage and paid off the mortgage debt with the proceeds from
the sale.
NOTE 8--RESTRUCTURING PLAN
During fiscal 1999, Leapnet recorded pretax restructuring charges of
approximately $738,000. The cost of the plan has been accounted for in
accordance with the guidance set forth in Emerging Issues Task Force issue 94-3
Liability Recognition for Certain Employee Termination Benefits and Other Costs
to Exit an Activity (Including Certain Costs Incurred in a Restructuring)
("EITF 94-3"). Leapnet implemented the plan to restructure the YAR operations
as a result of losses and due to the transfer of the account of its largest
client to another agency (see Note 3 and below). As a result of the plan, a
layer of executive management was replaced with officers from the holding
company and other senior management. Under the new management, new sales
personnel have been hired, office space was consolidated, property and other
long-lived assets were reviewed for future utility, and additional cost saving
opportunities have been identified and are currently being pursued. The
employee termination costs, lease termination costs, asset write-downs, and
other costs related to the restructuring have been paid in full.
During fiscal 1999, Leapnet continued to review its strategies related to
YAR. Leapnet evaluated the recoverability of certain long-lived assets pursuant
to the provisions of SFAS No. 121, Accounting for the Impairment of Long-Lived
Assets and for Long-Lived Assets to Be Disposed Of. A non-cash pre-tax charge
of $7.0 million was recognized for the impairment of the remaining YAR business
and goodwill due to the transfer of its AT&T account to another agency. AT&T, a
major client of both YAR and One World, reduced its spending among its agencies
and indicated to Leapnet that it was looking to consolidate its business among
its other agencies. As a result, Leapnet executed a definitive agreement to
sell various assets of One World and the AT&T account of YAR (the "Sale") to
another AT&T agency, Young & Rubicam (See Note 3).
In addition, in accordance with SFAS No. 121, Leapnet recorded an impairment
loss of approximately $1.5 million in order to adjust the book value of
property and equipment associated with the YAR business to its fair value based
on an appraisal. Leapnet also recorded an impairment loss of $742,000 of
unamortized capitalized software costs as events occurred which led management
to determine that such costs were likely not to be realizable.
During fiscal 1998, Leapnet implemented a plan to restructure the operations
at the Los Angeles office of Leapnet's Leap Partnership subsidiary, due to
losses at the office. The cost of the plan was accounted for with the guidance
set forth in EITF 94-3. A pretax charge of approximately $767,000 was recorded
representing employee termination, severance costs and other related costs that
are anticipated to be incurred as a direct result of the plan. As of January
31, 1999, all costs have been paid out related to this restructuring plan.
F-13
LEAPNET, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
NOTE 9--CAPITAL STOCK
Incorporation
On September 20, 1993, The Leap Partnership, Inc. was incorporated in
Illinois. Subsequently, on March 11, 1996, Leapnet was formed and became the
parent to the wholly-owned subsidiaries, The Leap Partnership Inc., Lilypad
Services, Inc. and Tadpole Productions, Inc. In connection with the formation
of Leapnet, each of the four founding stockholders of Leap Partnership
exchanged their 25 shares of Leap Partnership common stock for 2,400,000 shares
of Leapnet's common stock. The combined entities have been under common control
since inception and have been included in the consolidated financial statements
at historical cost since their respective dates of inception in a manner
similar to a pooling of interests.
The initial certificate of incorporation of Leapnet authorized 40,000,000
shares of common stock with $.01 par value and 10,000,000 shares of preferred
stock with $.01 par value. On May 29, 1996, the Board of Directors and
Stockholders of Leapnet approved an amendment to the certificate of
incorporation that increased the total number of authorized shares of common
stock to 100,000,000 and preferred stock to 20,000,000.
NOTE 10--STOCK COMPENSATION PLANS
1996 Stock Option Plan
On January 3, 1996, the Board of Directors and Stockholders of The Leap
Partnership, Inc. adopted the 1996 Stock Option Plan, which was subsequently
amended and restated on March 12, 1996, by the Board of Directors and
Stockholders of Leapnet, whereby certain eligible employees may be granted
options. The 1996 Stock Option Plan allows issuance of incentive stock options
and nonqualified options. The 1996 Stock Option Plan is administered by the
Stock Option Committee of the Board of Directors. The exercise price of
incentive stock options shall not be less than the stock's intrinsic fair
market value on the date of grant. No more shares were available for grant
under this plan as of January 31, 1997. However, due to cancellations, 8,333
became available for grant as of January 31, 2000.
Employee Incentive Compensation Plan
Effective May 29, 1996, Leapnet adopted the Employee Incentive Compensation
Plan (the "Incentive Plan"), which permits grants of incentive stock options,
nonqualified stock options, stock appreciation rights, performance shares,
restricted stock, deferred stock and other stock-based awards. The Incentive
Plan authorized the issuance of up to 2,000,000 shares of Common Stock in
connection with such awards. During fiscal years 1998 and 2000, a total of
3,000,000 additional shares were authorized by shareholders for grant and were
reserved under this plan, so that a total of 5,000,000 shares are reserved
under this plan. Directors, officers, employees and consultants of Leapnet are
eligible to receive grants under the Incentive Plan. At January 31, 2000,
750,614 shares were available for grant under this plan.
Employee Stock Purchase Plan
Effective May 29, 1996, Leapnet's Board of Directors adopted the Employee
Stock Purchase Plan, which provides for the issuance of a maximum of 500,000
shares of Common Stock. Under Section 423 of the Internal Revenue Code (the
"Code"), eligible employees can have earnings withheld to be used to purchase
shares of the Common Stock on specified dates determined by the Board of
Directors up to a maximum of $25,000 per year. The price of the Common Stock
purchased under the Employee Stock Purchase Plan will be equal to 85% of the
lower of the fair market value of the Common Stock on the commencement date of
each offering period or the specified purchase date (in each case, averaged
over the prior ten trading days). On December 31, 1999, 1998 and 1997,
respectively, participating employees purchased 28,515, 60,999 and 22,199
shares of Company stock. At January 31, 2000, 388,287 shares were available for
purchase under the plan.
F-14
LEAPNET, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Non-Employee Directors' Stock Option Plan
On May 29, 1996, the Board of Directors adopted the 1996 Non-Employee
Directors' Stock Option Plan (the "Directors' Plan"). The Directors' Plan
provides for the issuance of up to 200,000 nonstatutory stock options to non-
employee directors of Leapnet. On the effective date of the Offering, each of
the three non-employee directors were granted immediately exercisable options
to purchase 20,000 shares of Common Stock at an exercise price equal to the
Initial Public Offering price. Each person who becomes a non-employee director
of Leapnet after the date of the Offering will automatically be granted
nonstatutory options to purchase 5,000 shares of Common Stock on the date of
such directors' initial election or appointment to the Board of Directors and
on each anniversary of the initial grant date. Such options shall become
exercisable one year after the date of grant, or earlier if so provided in the
agreement granting the option to the non-employee director, at an exercise
price equal to the intrinsic fair market value of the Common Stock on the date
of grant. All options granted under the Directors' Plan would have a five-year
term. At January 31, 2000, 108,000 shares were available for grant under this
plan.
Pro Forma Stock-Based Compensation Disclosures
Under various plans, Leapnet may grant stock options and other awards to key
executives, directors, management and creative personnel. Transactions under
the various stock option plans for the periods indicated were as follows:
Weighted
Average
Exercise
Shares Price
--------- --------
Stock Options Outstanding at:
January 31, 1997..................................... 2,590,000 $5.96
Granted............................................ 1,741,199 $3.53
Exercised.......................................... 36,866 $1.78
Canceled........................................... 226,333 $7.56
---------
January 31, 1998..................................... 4,068,000 $5.24
Granted............................................ 575,669 $2.49
Exercised.......................................... 494,919 $1.98
Canceled........................................... 393,334 $3.53
---------
January 31, 1999..................................... 3,755,416 $5.43
Granted............................................ 2,641,065 $4.61
Exercised.......................................... 676,098 $3.85
Canceled........................................... 179,500 $2.93
---------
January 31, 2000..................................... 5,540,883 $5.31
The following table summarizes information about stock options outstanding
at January 31, 2000:
Outstanding Options Exercisable Options
--------------------------------- ---------------------
Weighted Weighted
Average Average Weighted
Exercise Exercise Remaining Average
Price Shares Price Term Shares Price
-------- --------- -------- --------- --------- --------
$1.50-$2.94 1,199,100 $2.43 4.20 552,400 $2.33
$3.00-$4.94 1,017,033 $3.63 5.86 946,867 $3.61
$5.00-$6.44 1,451,750 $6.27 4.98 522,417 $6.23
$7.00-$10.00 1,873,000 $7.32 6.07 1,766,333 $7.33
--------- ----- ---- --------- -----
5,540,883 $5.31 5.34 3,788,017 $5.52
F-15
LEAPNET, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Leapnet applies APB Opinion 25, Accounting for Stock Issued to Employees,
and related interpretations in accounting for its plans.
If the compensation expense for Leapnet's stock-based compensation plans had
been determined based on the fair value at the grant date consistent with the
requirements of Statement of Financial Accounting Standards No. 123, Accounting
for Stock-Based Compensation, Leapnet's pro forma net income (loss) and pro
forma net income (loss) per share would have been as indicated below:
Fiscal 2000 Fiscal 1999 Fiscal 1998
----------- ------------ -----------
Net income (loss)
As reported.................... $ (311,150) $(18,322,753) $(5,610,832)
Pro forma...................... $(4,823,459) $(19,146,244) $(6,395,506)
Net income (loss) per share
As reported.................... $ (0.02) $ (1.34) $ (0.41)
Pro forma...................... $ (0.34) $ (1.40) $ (0.47)
The fair value of each stock option grant has been estimated on the date of
grant using the Black-Scholes option-pricing model with the following
assumptions:
Fiscal Fiscal
2000 1999 Fiscal 199
---------- ---------- ----------
Risk-free interest rate............... 4.90%-6.49% 4.18%-5.61% 5.34%-5.55%
Expected life......................... 1-3 years 1-3 years 1-5 years
Expected volatility................... 68% 72% 57%
Expected dividend yield............... 0% 0% 0%
NOTE 11--EMPLOYEE RETIREMENT PLANS
Effective January 1, 1997, Leapnet adopted a defined contribution plan
established pursuant to Section 401(k) of the Internal Revenue Code. Employees
contribute a percentage of their salaries to the plan, subject to the maximum
IRS prescribed deferral percentage and dollar limitation. The terms of the plan
call for discretionary profit sharing contributions by Leapnet as determined
annually by the Board of Directors. There were no Company contributions made to
the plan through January 31, 2000.
Leapnet has no other obligations for post-retirement benefits.
F-16
LEAPNET, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
NOTE 12--COMMITMENTS AND CONTINGENCIES
Lease Commitments
Leapnet leases office space, telephones, copiers and other equipment under
operating leases and computer equipment under capital leases. Minimum future
lease payments under these leases are as follows:
Operating Capital
leases leases Total
---------- -------- ----------
Fiscal Year ending January 31,
2001................................... $1,140,455 $ 43,803 $1,184,258
2002................................... 824,309 -- 824,309
2003................................... 745,117 -- 745,117
2004................................... 166,259 -- 166,259
2005................................... -- -- --
Thereafter............................. -- -- --
---------- -------- ----------
Total future minimum lease payments.. $2,876,140 $ 43,803 $2,919,943
Less amount representing interest.. (147)
--------
Obligations under capital leases..... $ 43,656
Less current portion of capital
lease obligation.................. (43,656)
--------
Non-current portion of capital lease
obligation.............................. $ 0
========
New Building Costs
On July 2, 1999, Leapnet entered into contracts to purchase a 35,000 square
foot building in Chicago for $2.8 million. The purchase of the building is
scheduled to occur in three phases. As of January 31, 2000, the first and
second portions of the building were purchased for $1.8 million. This final
phase of the purchase is scheduled to occur no later than October 2000, when
the remaining portion of the building is expected to be purchased for $1.0
million. Leapnet leases the portion of the building that it does not presently
own.
On September 28, 1999, Quantum Leap entered into a contract to remodel the
building. The remodeling is scheduled to be completed during April 2000 and the
cost is approximately $2 million. As of January 31, 2000, there is
approximately $600,000 of costs remaining on this contract to be incurred
through April 2000.
Litigation
In November 1999, POW, Inc., doing business as "Tomandandy," filed a lawsuit
against The Leap Partnership, Inc. in the United States District Court,
Southern District of New York seeking damages in the amount of $285,228 plus
interest for failure to pay for work performed by POW, Inc. In March 2000, Leap
Partnership paid $285,228 to POW, Inc. and the lawsuit was dismissed with
prejudice.
In October 1999, The Crystal Lake Juke Box, Inc., Wixen Music Publishing,
Inc., Charles McCormick, Charles Love, Willis Draffen, Jr., Harry Williams,
individually and doing business as a group "Bloodstone," a recording and
performing group filed a lawsuit against Leap Partnership, Anheuser-Busch
Corporation, and Andy Milburn, an individual and doing business as
"Tomandandy," in the United States District Court, for the Central District of
California. The complaint alleges copyright infringement, statutory and common
law violation of the right of publicity, violation of section 43 of the Lanham
Act, unfair competition, and misappropriation stemming from the airing of a
television commercial created by Leap Partnership for a client.
F-17
LEAPNET, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Leap Partnership has filed cross-claims against Andy Milburn doing business as
"Tomandandy" and POW, Inc. doing business as "Tomandandy" for negligence,
indemnity, contribution and breach of contract. The parties are currently
undergoing discovery. The suit has been referred to Leap Partnership's
insurance carrier and legal counsel. Leap Partnership is vigorously defending
its position and pursuing all remedies available to it. It is difficult to
ascertain the ultimate outcome of this litigation. An adverse determination and
an award of damages not covered by insurance or recoverable in Leap
Partnership's cross-claim could have a material adverse effect on Leap
Partnership's results of operations and financial condition.
In November 1998, Leapnet filed a complaint in the Supreme Court of the
State of New York against Finkle, Ross & Rost, L.L.P., the former accountants
for Yurianna, Inc., Leapnet from which Leapnet acquired various assets of YAR,
alleging breach of contract and accountant malpractice. The action seeks
damages believed to exceed $13.5 million and such other relief as the court
deems just and equitable. Discovery is being conducted. In December 1998,
Finkle, Ross & Rost, LLP filed a complaint in the Supreme Court of the State of
New York against Leapnet for $28,750 for accounting services rendered. The
amount was reduced to $11,250 by Finkle, Ross & Rost, L.L.P. Although Finkle,
Ross & Rost LLP has performed services for Leapnet, Leapnet intends to
vigorously oppose this claim due to the quality of services provided.
There are no other active claims or lawsuits against Leapnet that Management
believes are material.
NOTE 13--OTHER INCOME AND EXPENSE
Included in other income and expense for the years ended January 31, 2000,
1999 and 1998, is interest income of $790,330, $377,830 and $1,313,365 and
interest expense of $468,950, $543,693 and $1,044,341 respectively.
NOTE 14--INCOME TAXES
Income tax expense is calculated according to the provisions of SFAS No.
109, Accounting for Income Taxes, which requires the liability method as
described in Note 2. The income tax provisions (benefits) charged to net income
are summarized as follows:
Fiscal Year Ended January 31,
----------------------------------
2000 1999 1998
--------- ---------- -----------
Federal:
Current............................. $ 0 $ 451,995 $ (290,000)
Deferred............................ 0 2,327,839 (2,516,314)
--------- ---------- -----------
$ 0 $2,779,834 $(2,806,314)
========= ========== ===========
State:
Current............................. $(136,532) $ (27,000) $ (30,000)
Deferred............................ 0 632,222 (674,051)
--------- ---------- -----------
$(136,532) $ 605,222 $ (704,051)
--------- ---------- -----------
Total tax provision (benefit)..... $(136,532) $3,385,056 $(3,510,365)
========= ========== ===========
The statutory federal income tax rate is reconciled to Leapnet's effective
income tax rate below:
Fiscal Year Ended
January 31,
---------------------
2000 1999 1998
----- ----- -----
Statutory rate.......... (34.0)% (34.0)% (34.0)%
State, net of Federal
tax benefit............ (4.8) (2.3) (3.9)
Interest income, exempt
from State income
taxes.................. -- -- (0.8)
Valuation allowance..... 8.3 57.8
Other................... -- 1.2 0.2
----- ----- -----
Effective rate.......... (30.5)% 22.7% (38.5)%
===== ===== =====
F-18
LEAPNET, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Deferred income taxes arise from temporary differences between the tax basis
of assets and liabilities and their reported amounts in the financial
statements.
The components of the net current deferred income tax asset are as follows:
Fiscal Year Ended
January 31,
--------------------
2000 1999
--------- ---------
Compensation accruals............................... $ 40,850 $ 40,850
Bad debt reserves................................... 259,693 182,827
Accrued restructuring costs......................... -- 89,064
Other............................................... 25,903 19,701
Valuation reserve................................... (326,446) (332,442)
--------- ---------
Net current deferred income tax asset............... $ -- $ --
========= =========
The components of the net long-term deferred income tax asset are as
follows:
Fiscal Year Ended
January 31,
------------------------
2000 1999
----------- -----------
Net operating loss carryforward................. $ 4,863,276 $ 4,487,077
Property and equipment.......................... 593,869 518,049
Capitalized software costs...................... (154,113) 23,585
Goodwill........................................ 2,787,943 3,272,106
Valuation reserve............................... (8,090,975) (8,300,817)
----------- -----------
Net long-term deferred income tax asset......... $ -- $ --
=========== ===========
As of January 31, 2000, Leapnet has a deferred tax asset of approximately
$8.4 million. Approximately $4.9 million of the deferred tax asset relates to
operating loss carryforwards for federal and state income tax purposes which
begin to expire in fiscal year 2011. The net operating loss carryforward at
January 31, 2000, is approximately $12.8 million. The most significant of the
other deferred tax assets is approximately $2.8 million related to YAR's
goodwill which was written off for financial reporting purposes during the
quarter ended October 31, 1998. This goodwill continues to have tax basis and
Leapnet will continue to amortize the goodwill for tax purposes.
Leapnet has provided a full valuation reserve against the net deferred tax
asset due to its limited operating history, recent operating losses, and the
uncertainty regarding future operating results.
F-19
Report of Independent Public Accountants
To the Stockholders of SPR Inc.:
We have audited the accompanying balance sheets of SPR Inc. (a Delaware
corporation) as of December 31, 1999 and 1998, and the related statements of
operations, stockholders' equity and cash flows for each of the three years in
the period ended December 31, 1999. These financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these financial statements based on our audits.
We conducted our audits in accordance with auditing standards generally
accepted in the United States. Those standards require that we plan and perform
the audit to obtain reasonable assurance about whether the financial statements
are free of material misstatement. An audit includes examining, on a test
basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of SPR Inc. as of December 31,
1999 and 1998, and the results of its operations and its cash flows for each of
the three years in the period ended December 31, 1999, in conformity with
accounting principles generally accepted in the United States.
ARTHUR ANDERSEN LLP
Chicago, Illinois
February 18, 2000
F-20
SPR INC.
BALANCE SHEETS
Years Ended December
31,
------------------------
1999 1998
----------- -----------
Assets
Current assets:
Cash and cash equivalents.......................... $ 4,322,192 $ 7,207,273
Accounts receivable, net:
Trade............................................ 6,068,025 12,779,270
Income taxes and other........................... 2,427,111 893,752
Marketable securities.............................. 46,226,804 43,905,707
Prepaid expenses and other......................... 474,085 523,041
Deferred taxes..................................... 795,500 1,971,394
----------- -----------
Total current assets............................... 60,313,717 67,280,437
----------- -----------
Property and equipment, at cost:
Leasehold improvements............................. 686,631 403,025
Computer equipment and software.................... 3,730,819 3,086,179
Office furniture and equipment..................... 2,922,975 2,502,443
----------- -----------
7,340,425 5,991,647
Less--accumulated depreciation and amortization.. (3,598,480) (2,005,065)
----------- -----------
Property and equipment, net.................... 3,741,945 3,986,582
Deferred taxes....................................... 104,637 171,225
----------- -----------
Total assets................................. $64,160,299 $71,438,244
=========== ===========
Liabilities and stockholders' equity
Current liabilities:
Accounts payable................................... $ 2,004,660 $ 1,466,669
Accrued expenses:
Payroll and payroll related...................... 2,773,086 3,700,970
Other............................................ 321,349 488,033
Deferred income.................................... 300,000 2,975,000
----------- -----------
Total current liabilities........................ 5,399,095 8,630,672
----------- -----------
Commitments and contingencies
Stockholders' equity
Common stock $.01 par, 25,000,000 shares
authorized, 13,975,976 and 13,843,442 shares
issued and outstanding at December 31, 1999 and
1998, respectively ............................... 139,760 138,434
Preferred stock, $.01 par, 3,000,000 shares
authorized, no shares issued and outstanding...... -- --
Treasury stock, 1,150,692 shares, at cost.......... (5,205,273) --
Additional paid in capital......................... 52,073,090 51,269,440
Retained earnings.................................. 11,753,627 11,399,698
----------- -----------
Total stockholders' equity....................... 58,761,204 62,807,572
----------- -----------
Total liabilities and stockholders' equity..... $64,160,299 $71,438,244
=========== ===========
The accompanying notes to financial statements are an integral part of these
balance sheets.
F-21
SPR INC.
STATEMENTS OF OPERATIONS
Years Ended December 31,
-------------------------------------
1999 1998 1997
----------- ----------- -----------
Revenues................................ $58,104,283 $85,343,514 $53,421,924
Cost of services........................ 43,242,570 50,507,854 32,376,687
----------- ----------- -----------
Gross profit.......................... 14,861,713 34,835,660 21,045,237
Costs and expenses:
Selling............................... 4,965,754 5,275,048 4,855,567
Recruiting............................ 1,205,092 1,827,376 1,608,059
General and administrative expenses... 11,893,035 12,319,835 8,437,804
----------- ----------- -----------
Total costs and expenses............ 18,063,881 19,422,259 14,901,430
----------- ----------- -----------
Operating income (loss)................. (3,202,168) 15,413,401 6,143,807
Other income (expense):
Interest expense...................... (379) (4,203) (178,783)
Interest income....................... 2,642,197 2,080,420 266,851
Other, net............................ 3,017 6,938 (41,257)
----------- ----------- -----------
Total other income.................. 2,644,835 2,083,155 46,811
----------- ----------- -----------
Income (loss) before income taxes....... (557,333) 17,496,556 6,190,618
Provision (benefit) for income taxes.... (911,262) 6,998,623 1,552,422
----------- ----------- -----------
Net income.............................. $ 353,929 $10,497,933 $ 4,638,196
=========== =========== ===========
Historical net income per share:
Basic................................. $ 0.03 $ 0.80 $ 0.45
=========== =========== ===========
Diluted............................... $ 0.03 $ 0.77 $ 0.43
=========== =========== ===========
Pro forma income data:
Net income as reported................ $ 4,638,196
Pro forma adjustment to recognize C
corporation provision for income
taxes................................ 1,469,071
-----------
Pro forma net income.................. $ 3,169,125
===========
Pro forma net income per share:
Basic................................. $ 0.31
===========
Diluted............................... $ 0.30
===========
Weighted average number of shares
outstanding:
Basic................................. 13,375,569 13,144,412 10,306,032
Diluted............................... 13,512,759 13,641,558 10,669,072
The accompanying notes to financial statements are an integral part of these
statements.
F-22
SPR INC.
STATEMENTS OF STOCKHOLDERS' EQUITY
Common Stock Treasury Stock Additional Retained Total
-------------------- ----------------------- Paid-in Earnings Stockholders'
Shares Amount Shares Amount Capital (Deficit) Equity
---------- -------- ---------- ----------- ----------- ------------ -------------
Balance at December 31,
1996................... 9,701,100 $ 97,011 -- $ -- $46,702,525 $(44,292,188) $ 2,507,348
Net income............. -- -- -- -- -- 4,638,196 4,638,196
Employee stock purchase
plan.................. 35,957 360 -- -- 324,222 -- 324,582
Capitalization of
undistributed S
Corporation earnings
in conjunction with
termination of S
Corporation election
on October 1, 1997.... -- -- -- -- (45,444,263) 45,444,263 --
S Corporation
distributions......... -- -- -- -- -- (4,885,771) (4,885,771)
Employee stock option
plan and related tax
benefits.............. -- -- -- -- 458,886 -- 458,886
Sale of stock in
initial public
offering, net of
issuance costs........ 2,400,000 24,000 -- -- 22,462,431 -- 22,486,431
---------- -------- ---------- ----------- ----------- ------------ -----------
Balance at December 31,
1997................... 12,137,057 121,371 -- -- 24,503,801 904,500 25,529,672
Net income............. 10,497,933 10,497,933
Employee stock purchase
plan.................. 94,646 946 -- -- 1,141,285 1,142,231
Treasury stock retired. (2,250) (23) -- -- (21,243) (2,735) (24,001)
Employee stock option
plan and related tax
benefits.............. 232,499 2,325 -- -- 2,557,795 -- 2,560,120
Sale of stock in
secondary public
offering, net of
issuance costs........ 1,350,000 13,500 -- -- 23,087,750 -- 23,101,250
Other.................. 31,490 315 -- -- 52 -- 367
---------- -------- ---------- ----------- ----------- ------------ -----------
Balance at December 31,
1998................... 13,843,442 138,434 -- -- 51,269,440 11,399,698 62,807,572
Net income............. 353,929 353,929
Employee stock purchase
plan.................. 128,654 1,287 -- -- 583,978 585,265
Treasury stock
acquired.............. (1,150,692) (5,205,273) (5,205,273)
Employee stock option
plan and related tax
benefits.............. 3,880 39 -- -- 219,672 -- 219,711
---------- -------- ---------- ----------- ----------- ------------ -----------
Balance at December 31,
1999................... 13,975,976 $139,760 (1,150,692) $(5,205,273) $52,073,090 $ 11,753,627 $58,761,204
========== ======== ========== =========== =========== ============ ===========
The accompanying notes to financial statements are an integral part of these
statements.
F-23
SPR INC.
STATEMENTS OF CASH FLOWS
Years Ended December 31,
-----------------------------------------
1999 1998 1997
------------ ------------ -------------
Cash flows from operating
activities:
Net income for the period......... $ 353,929 $ 10,497,933 $ 4,638,196
Adjustments to reconcile net
income to net cash provided by
operating activities:
Depreciation and amortization... 1,593,415 1,364,784 435,151
Deferred taxes.................. 1,242,482 (2,331,465) 188,846
Expense related to employee
stock option plan.............. 150,984 150,984 458,886
Loss on sale of property and
equipment...................... -- 239,977 41,257
(Increase) decrease in accounts
receivable, net................ 5,222,567 (4,378,855) (3,712,391)
(Increase) decrease in prepaid
expenses and other............. 48,956 (286,320) 466,784
Increase in accounts payable.... 537,991 174,718 332,459
Increase (decrease) in accrued
expenses....................... (1,094,568) (559,953) 2,991,658
Increase (decrease) in deferred
income......................... (2,675,000) 2,975,000 --
------------ ------------ -------------
Net cash provided by operating
activities................... 5,380,756 7,846,803 5,840,846
------------ ------------ -------------
Cash flows from investing
activities:
Purchases of property and
equipment, net of sales.......... (1,348,778) (3,317,508) (1,231,084)
Purchases of marketable
securities....................... (36,267,097) (72,880,518) (182,122,189)
Sales/maturity of marketable
securities....................... 33,946,000 48,018,000 163,079,000
Decrease in notes receivable--
other............................ -- -- 10,879
Decrease in notes receivable--
related parties.................. -- -- 181,245
------------ ------------ -------------
Net cash used in investing
activities................... (3,669,875) (28,180,026) (20,082,149)
------------ ------------ -------------
Cash flows from financing
activities:
Proceeds from the sale of common
stock, net of issuance costs of
approximately $3,114,000 in 1997
and $1,705,000 in 1998,
respectively..................... -- 23,101,250 22,486,431
Treasury stock acquired........... (5,205,273)
Payments on note payable--related
party............................ -- -- (641,266)
Proceeds from employee stock
purchase plan.................... 585,265 1,142,231 324,582
Proceeds from employee stock
option plan...................... 24,046 1,187,292 --
Distributions..................... -- -- (4,635,261)
Payments on term note payable..... -- -- (216,005)
Net borrowings on line of credit
and term note.................... -- -- (1,300,000)
Other cash flows from financing
activities....................... -- (23,634) --
------------ ------------ -------------
Net cash provided by (used in)
financing activities......... (4,595,962) 25,407,139 16,018,481
------------ ------------ -------------
Net increase (decrease) in cash..... (2,885,081) 5,073,916 1,777,178
Cash and cash equivalents, beginning
of period.......................... 7,207,273 2,133,357 356,179
------------ ------------ -------------
Cash and cash equivalents, end of
period............................. $ 4,322,192 $ 7,207,273 $ 2,133,357
============ ============ =============
Supplemental disclosure of cash
payments made for:
Interest.......................... $ 379 $ 4,203 $ 178,783
Income taxes...................... 589,852 9,526,096 40,550
============ ============ =============
The accompanying notes to financial statements are an integral part of these
statements.
F-24
SPR INC.
NOTES TO FINANCIAL STATEMENTS
NOTE 1--BUSINESS AND SIGNIFICANT ACCOUNTING POLICIES
(a) Business--Founded in 1973 and headquartered in the Chicago area, SPR
Inc. (the "Company") provides information technology services to Fortune 1000
companies in a variety of industry groups including transportation,
manufacturing, insurance, retail, financial services, healthcare, and energy.
These services include general consulting as well as five outsourcing services:
software modernization, mass change, application management, information
delivery, and software quality services. The outsourcing services help clients
with comprehensive solutions for maintaining, improving and transitioning
legacy systems. SPR has offices in Oak Brook, IL, Dallas, Milwaukee, and Tulsa.
(b) Basis of Presentation--SPR Inc. was formed on October 29, 1996. During
October 1996, Systems and Programming Resources, Inc., Systems & Programming
Resources of Tulsa, Inc., SPR Wisconsin, Inc., SPR Chicago Inc., and Consulting
Acquisition, Inc. (d.b.a. DataFlex) merged into SPR Inc. at which time the
stockholders of such companies received an aggregate of 9,700,786 shares of
common stock of SPR Inc. Systems and Programming Resources, Inc., SPR
Wisconsin, Inc., SPR Chicago Inc., Consulting Acquisition, Inc. and SPR Inc.
are under common ownership and control and were accounted for at historical
cost as a reorganization of entities under common control (similar to the
pooling of interests method of accounting). The merger of Systems & Programming
Resources of Tulsa, Inc. into SPR Inc. was accounted for using the pooling of
interests method of accounting. The accompanying financial statements of the
Company have been prepared to give retroactive effect to the merger.
(c) Cash and Cash Equivalents--Cash equivalents are comprised of certain
highly liquid investments with maturities of three months or less.
(d) Accounts Receivable--Accounts receivable include fees and expenses for
services rendered prior to year end which were billed subsequent to year end.
Amounts relating to such fees and expenses included in accounts receivable are
$1,990,675 and $2,320,189 at December 31, 1999 and 1998, respectively. A
summary of the activity in allowance for doubtful accounts for the years ended
December 31, 1999, 1998, and 1997 is as follows:
Balance Charged
at to Costs Balance
Beginning and at End
of Year Expenses Write-Offs of Year
--------- --------- ---------- --------
1999 Allowance for Doubtful Accounts... $843,695 $(400,000) $96,984 $346,711
1998 Allowance for Doubtful Accounts... $843,695 $ -- $ -- $843,695
1997 Allowance for Doubtful Accounts... $ 74,399 $ 852,747 $83,451 $843,695
(e) Marketable securities--The Company invests in investment-grade
marketable securities with varying maturities. These securities include
municipal bonds and corporate bonds. The Company accounts for its investments
using Statement of Financial Accounting Standards No. 115, "Accounting for
Certain Investments in Debt and Equity Securities" ("SFAS No. 115"). Management
determines the classification of investments under SFAS No. 115 at the time of
purchase and reevaluates such classifications as of each balance sheet date.
F-25
SPR INC.
NOTES TO FINANCIAL STATEMENTS--(Continued)
The carrying amounts and fair values of the Company's marketable securities
are as follows:
Year Ended December 31,
-----------------------------------------------
1999 1998
----------------------- -----------------------
Amortized Aggregate Amortized Aggregate
Cost Basis Fair Value Cost Basis Fair Value
----------- ----------- ----------- -----------
Held-to-maturity:
U.S. corporate notes maturing
within 10 years............. $21,842,680 $21,519,123 $17,655,707 $17,640,942
----------- ----------- ----------- -----------
Available-for-sale:
U.S. corporate notes maturing
after 10 years.............. 10,084,124 10,084,124 12,700,000 12,700,000
Municipal obligations
maturing after 10 years..... 14,300,000 14,300,000 13,550,000 13,550,000
----------- ----------- ----------- -----------
Total available-for-sale... 24,384,124 24,384,124 26,250,000 26,250,000
----------- ----------- ----------- -----------
Total short-term investments... $46,226,804 $45,903,247 $43,905,707 $43,890,942
=========== =========== =========== ===========
The following schedule shows the components of investment income at December
31, 1999, 1998 and 1997:
December 31,
------------------------------
1999 1998 1997
---------- ---------- --------
Interest Income........................... $2,453,747 $1,918,893 $244,506
Dividend Income........................... 10,967 13,696 8,997
---------- ---------- --------
Total Investment Income................... $2,464,714 $1,932,589 $253,503
========== ========== ========
(f) Revenue Recognition--Revenues are recognized as the related services are
performed. Clients are generally billed on a time and materials basis. The
Company accounts for its fixed fee engagements under the percentage-of-
completion method, using costs incurred to date in relation to estimated total
costs of the contract to measure the stage of completion. The cumulative
effects of revisions of estimated total contract costs and revenues are
recorded in the period in which the facts requiring the revision become known.
Less than 1% and approximately 4% of revenues were generated from fixed-price
engagements during 1999 and 1998, respectively.
(g) Property and Equipment--Property and equipment are stated at cost.
Expenditures for repair and maintenance are charged to expense as incurred.
Depreciation and amortization are computed using the straight-line method. The
estimated useful lives used in computing depreciation and amortization are as
follows:
Asset Description Asset Life
----------------- ----------
Leasehold improvements............... Shorter of lease term or estimated
useful life of the asset
Computer equipment and software...... 3 years
Office furniture and equipment....... 5 years
(h) Deferred Income--The determination of deferred income is based on
management's estimate of the services to be performed related to completing the
Company's century date compliance projects, and is adjusted as additional or
new information becomes available.
(i) Distributions--Distributions are recorded when declared by the Board of
Directors.
F-26
SPR INC.
NOTES TO FINANCIAL STATEMENTS--(Continued)
(j) Use of Estimates--The preparation of financial statements in conformity
with generally accepted accounting principles requires management to make
estimates and assumptions that affect the reported amounts of assets and
liabilities and disclosure of contingent assets and liabilities at the date of
the financial statements and the reported amounts of revenues and expenses
during the reporting period. Actual results could differ from those estimates.
(k) Income Taxes--Prior to the consummation of the initial public offering
on October 1, 1997, the Company elected to be taxed as an S Corporation. As a
result, income of the Company was taxable to the shareholders. On October 1,
1997, the Company's S Corporation status was terminated and the Company became
a C Corporation. At this time, the retained deficit of the Company was
reclassified and netted against additional paid-in capital.
(l) Pro forma net income and net income per share--The pro forma net income
and net income per share include a provision for federal and state income taxes
as if the Company had been a C Corporation for all periods presented.
(m) Reclassifications--Certain prior year amounts have been reclassified to
conform to the current year's presentation.
NOTE 2--BUSINESS SEGMENTS
In June 1997, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 131, "Disclosure about Segments of an
Enterprise and Related Information" ("SFAS No. 131"). The Company has no
separately reportable segments in accordance with this standard. Under the
enterprise-wide disclosure requirements of SFAS No. 131, the Company reports
net revenues by service offering. Amounts for the years ended December 31,
1999, 1998, and 1997 are shown in the table below.
December 31,
-----------------------------------------------------
1999 1998 1997
----------------- ----------------- -----------------
Revenues % Revenues % Revenues %
----------- ----- ----------- ----- ----------- -----
General consulting....... $21,821,105 37.6% $30,443,400 35.7% $27,630,770 51.7%
Century date compliance.. 13,463,779 23.2% 33,824,961 39.6% 17,215,227 32.2%
Application management... 9,412,643 16.2% 6,033,476 7.1% 5,318,936 10.0%
Software quality......... 8,482,777 14.6% 4,221,395 4.9% -- --
All other service
offerings............... 4,923,979 8.4% 10,820,282 12.7% 3,256,991 6.1%
----------- ----------- -----------
Total revenues........... $58,104,283 $85,343,514 $53,421,924
=========== =========== ===========
NOTE 3--CONCENTRATION OF CREDIT RISK
The Company's financial instruments that are exposed to concentrations of
credit risk consist of accounts receivable and investments. The Company places
its investments with high quality financial institutions. The Company reviews a
customer's credit history before extending credit. In addition, the Company
routinely assesses the financial strength of its customers and, as a
consequence, believes that its accounts receivable credit risk is limited.
During 1997, the Company began performing services for a client that filed
for Chapter 11 bankruptcy protection during the third quarter of 1997. The
Company has received payments for all amounts related to the bankruptcy period,
and in 1999, the customer emerged from bankruptcy. This customer accounted for
approximately 1%, 7%, and 8% of revenues for the years ended December 31, 1999,
1998, and 1997, respectively. The Company is continuing to perform services for
this customer.
F-27
SPR INC.
NOTES TO FINANCIAL STATEMENTS--(Continued)
The Company's customers are predominantly in the Midwest, with the majority
of customers located in Chicago, Tulsa, Milwaukee, and Dallas. One customer in
the telecommunication and energy industries accounted for approximately 11%,
4%, and 1% of revenues for the years ended December 31, 1999, 1998, and 1997,
respectively. A customer in the insurance industry accounted for 6%, 7%, and
12% of revenues for the years ended December 31, 1999, 1998, and 1997,
respectively. A transportation industry customer accounted for 6%, 11%, and 5%
of revenues for the years ended December 31, 1999, 1998, and 1997,
respectively. The Company has no off balance sheet credit risk.
NOTE 4--INCOME TAXES
Prior to the initial public offering of the Company's Common Stock completed
on October 1, 1997, "the Offering", the Company included its income and
expenses with those of its stockholders for Federal and certain state income
tax purposes (an S Corporation election). By this election, income of the
Company is taxable to the stockholders. In connection with the Offering, the
Company terminated its S Corporation election and converted to a C Corporation.
The Company recorded a deferred income tax liability and corresponding income
tax expense of $712,000, arising from the change in the Company's tax status
and a change from the cash basis to the accrual basis of accounting for tax
purposes. Beginning October 1, 1997, the Company provides for deferred income
taxes under the asset and liability method of accounting for income taxes. This
method requires the recognition of deferred income taxes based upon the tax
consequences of "temporary differences" by applying enacted statutory tax rates
applicable to future years to differences between the financial statement
carrying amounts and the tax basis of existing assets and liabilities.
Prior to consummation of the Offering, the Company made a distribution to
its existing stockholders of part of the Company's undistributed S Corporation
earnings.
The unaudited pro forma provision for income taxes presented on the
statement of operations for 1997 represents the estimated taxes that would have
been recorded had the Company been a C Corporation for income tax purposes for
the entirety of this period. The pro forma provision for income taxes is as
follows:
December 31,
1997
------------
Federal...................................................... $2,736,725
State........................................................ 284,768
----------
Total income tax expense................................... $3,021,493
==========
F-28
SPR INC.
NOTES TO FINANCIAL STATEMENTS--(Continued)
During 1999, 1998, and the fourth quarter of 1997, the Company was a C
Corporation for income tax purposes. The provision for income taxes for 1999,
1998, and the portion of 1997 that the Company was a C Corporation includes
federal and state income taxes currently payable and those deferred because of
temporary differences between the financial statement and tax bases of assets
and liabilities. The provision for income taxes consists of the following:
December 31,
------------------------------------
1999 1998 1997
----------- ----------- ----------
Current:
Federal............................. $(1,767,739) $ 7,627,347 $1,202,361
State............................... (386,005) 1,702,741 161,215
----------- ----------- ----------
Total current provision (benefit). (2,153,744) 9,330,088 1,363,576
Deferred:
Federal............................. 1,019,798 (1,905,973) (445,264)
State............................... 222,684 (425,492) (77,890)
----------- ----------- ----------
Total deferred provision
(benefit)........................ 1,242,482 (2,331,465) (523,154)
Initial recognition of deferred income
taxes resulting from change in tax
status............................... -- -- 712,000
Total income tax provision
(benefit)........................ $ (911,262) $ 6,998,623 $1,552,422
=========== =========== ==========
Reconciliations of the statutory federal tax rates to the pro forma and
actual effective income tax rates are as follows:
December 31,
-------------------------------
1997
1999 1998 ----------------
Actual Actual Pro forma Actual
------ ------ --------- ------
Statutory rate.............................. (34)% 34% 34% 34%
State taxes, net of federal benefit......... (5)% 5% 5% 1%
Amortization of intangibles................. -- % --% --% --%
S corporation income taxed to its
shareholders............................... -- % --% --% (24)%
Income taxes recognized (benefited) as a
result of a change in tax status........... (18)% --% --% 11%
Increase in valuation allowance............. -- % --% 6% 2%
S corporation liability associated with
indemnification............................ (107)% --% --% --%
Other....................................... -- % 1% 4% 1%
---- --- --- ---
Effective rate............................ (164)% 40% 49% 25%
==== === === ===
F-29
SPR INC.
NOTES TO FINANCIAL STATEMENTS--(Continued)
The significant components of the Company's deferred income tax assets and
liabilities as of December 31, 1999, 1998 and 1997, are as follows:
December 31,
-----------------------------------
1999 1998 1997
---------- ---------- -----------
Deferred income tax assets:
Payroll and related.................. $ 395,459 $ 443,916 $ 311,196
Allowance for doubtful accounts...... 138,685 337,478 75,501
Deferred income...................... 120,000 1,190,000 --
Stock options........................ 220,733 161,458 153,360
Intangibles.......................... 672,464 852,998 965,064
Depreciation......................... 25,260 9,767 --
---------- ---------- -----------
Total deferred income tax assets... 1,572,601 2,995,617 1,505,121
Valuation allowance................ (672,464) (852,998) (1,321,567)
---------- ---------- -----------
Net deferred tax income assets......... $ 900,137 $2,142,619 $ 183,554
========== ========== ===========
Deferred income tax liabilities:
Change in tax accounting method (cash
to accrual)......................... $ -- $ -- $ 356,400
Depreciation......................... -- -- 16,000
---------- ---------- -----------
Total deferred income tax liabilities.. $ -- $ -- $ 372,400
========== ========== ===========
The Company establishes valuation allowances in accordance with the
provisions of Statement of Financial Accounting Standards No. 109 "Accounting
for Income Taxes" ("SFAS No. 109"). The Company continually reviews the
adequacy of the valuation allowance and is recognizing these benefits only as
reassessment indicates that it is more likely than not that the benefits will
be realized.
In connection with the Offering, the Company entered into a tax indemnity
agreement with each of its current stockholders which provides, among other
things, that the Company will indemnify such stockholders against additional
income taxes resulting from adjustments made (as a result of a final
determination made by a competent tax authority) to the taxable income reported
by the Company as an S Corporation for periods prior to the Offering, but only
to the extent those adjustments result in a decrease in income taxes otherwise
payable by the Company as a C Corporation for periods after the Offering.
NOTE 5--CHANGE IN DEFERRED INCOME
In the fourth quarter of 1999, the Company changed its estimate of the
services to be performed related to completing the Company's century date
compliance projects. This non-cash change in estimate decreased 1999 cost of
services by approximately $2.7 million ($1.6 million net of tax) or
approximately $0.12 per diluted common share.
NOTE 6--STOCK REPURCHASE PROGRAM
On March 17, 1999 the Company announced a plan to purchase up to 1.5 million
of its shares of common stock under a stock repurchase program. The quantity to
be purchased and the targeted price was determined daily, based upon
management's discretion. As of December 31, 1999, the Company has purchased
1,150,692 shares at an average price per share of $4.52.
F-30
SPR INC.
NOTES TO FINANCIAL STATEMENTS--(Continued)
NOTE 7--LINES OF CREDIT AND LONG-TERM DEBT
In June 1997, the Company entered into a loan agreement that provided for a
revolving loan facility and a term loan facility. The revolving loan facility
allowed for maximum borrowings of the lesser of (a) $2,000,000 less the undrawn
face amount of letters of credit or (b) the borrowing base, as defined, less
the undrawn face amount of letters of credit. Interest on revolving loans was
at the bank's prime rate (8.5% at December 31, 1997). The revolving loan
facility matured in March 1998. The term loan facility provided for maximum
borrowings of $2,000,000 for use for certain purposes and was cancelled upon
consummation of the initial public offering in October 1997. Interest was
payable quarterly at the prime rate plus 1% (9.5% at December 31, 1997). The
Company paid off borrowings under these facilities using proceeds from the
offering. As of December 31, 1999, 1998 and 1997, there were no loans
outstanding.
Substantially all assets of the Company were collateral for borrowings under
the loan agreement. The agreement contained certain restrictions, prohibiting,
among other things, additional indebtedness without the lender's consent. The
term loan agreement contained certain covenants including, among others, a
requirement of a cash flow coverage ratio of not less than 1.1 to 1.0. The
Company was in compliance with all loan covenants at the date the borrowings
were repaid.
NOTE 8--LEASE AGREEMENTS
The Company leases its office facilities under operating lease agreements
that expire at various times through 2004. In addition, the Company leases
certain equipment under operating lease agreements.
In addition to the minimum future rental payments, the Company is obligated
to pay certain operating expenses relating to its leased properties and
equipment. Total expense under operating leases was approximately $1,591,000,
$990,000, and $684,000 for the years ended December 31, 1999, 1998 and 1997,
respectively. The following is a schedule of minimum future rental payments
required under the operating leases:
Year Ended December 31,
-----------------------
2000.......................................................... 1,318,141
2001.......................................................... 1,213,913
2002.......................................................... 1,080,212
2003.......................................................... 818,527
2004.......................................................... 493,259
----------
Total minimum payments required............................... $4,924,052
==========
NOTE 9--401(K) PROFIT-SHARING PLAN
The Company has a contributory 401(k) profit-sharing plan (the Plan)
covering substantially all full-time employees. The Plan allows participants to
contribute up to 22% of their total compensation on a pretax basis, up to a
specified amount. Beginning in 1999, the Company is required to contribute
annually one-half of the first 6% of the participants' contributions, up to a
maximum of $2,000 per participant. The total Company contribution for the year
ended December 31, 1999 was approximately $640,000. Through 1998, the Company
was required to contribute annually one-fourth of the first $2,000 of the
participants' contributions, up to a maximum of $500 per participant. The total
Company contribution was approximately $224,000 and $126,000 for the years
ended December 31, 1998 and 1997, respectively.
F-31
SPR INC.
NOTES TO FINANCIAL STATEMENTS--(Continued)
NOTE 10--COMMITMENTS AND CONTINGENCIES
Letter of Credit--The Company had letters of credit of $55,000 and $78,700
at December 31, 1999 and 1998 as security for a lease agreement. The letter of
credit is renewable each year.
Litigation--In the ordinary course of conducting its business the Company
becomes involved in various lawsuits related to its business. The Company does
not believe that the ultimate resolution of these matters will be material to
its business, financial position or results of operations.
Employment Contracts--During 1998, the Company entered into employment
contracts with certain employees. The employment contracts provide that in the
event of a change in control the employee is entitled to a sum equal to (i) one
year of the employee's effective annual base compensation immediately prior to
the termination date, plus (ii) an amount equal to the prior year's cash bonus,
plus (iii) cash value in the health plan. If a change in control occurred, as
defined, at December 31, 1999, the Company's total commitment under the
employment contracts would be approximately $2.1 million.
NOTE 11--STOCK PLANS
Description
In June 1999, the Company's shareholders approved the 1999 Combined
Incentive and Non-statutory Stock Option Plan. The 1999 plan provides for the
granting of options to purchase a maximum of 1,250,000 shares of common stock.
In November 1996, the Company adopted a Combined Incentive and Non-statutory
Stock Option Plan and an Employee Stock Purchase Plan. 1,566,378 shares of
common stock are reserved for issuance under the 1996 Combined Incentive and
Non-statutory Stock Option Plan and 750,000 shares of common stock are reserved
for issuance under the Employee Stock Purchase Plan.
The 1999 Combined Incentive and Non-statutory Stock Option Plan provides
that awards may be granted to employees, officers, and directors of the
Company. Awards may consist of non-statutory stock options and incentive stock
options to purchase shares of common stock and restricted stock purchase
rights. Options granted under the plan generally vest over a five-year period
at the rate of 20% per year. The exercise price per share of common stock may
not be less than 85% (100% in the case of an ISO) of the fair market value of
the common stock on the date the option is granted. Options and restricted
stock purchase rights granted under the option plan must generally be exercised
within ten years from the date of grant. In the case of any eligible employee
who owns stock possessing more than 10% of the voting power of stock, the
exercise price of any options granted may not be less than 110% of the fair
market value of the common stock on the date of grant and the exercise period
may not exceed five years from the date of grant. If the Company is acquired by
another entity, outstanding awards may be assumed or substituted by the
successor corporation, if any. If a successor corporation does not assume or
substitute the awards, the vesting of the awards will be accelerated.
The 1996 Combined Incentive and Non-statutory Stock Option Plan provides
that awards may be granted to employees, officers, and directors of the
Company. Awards may consist of non-statutory stock options and incentive stock
options to purchase shares of common stock and stock appreciation rights
(SARs). Incentive stock options (ISOs) generally vest over a five-year period
at the rate of 20% per year. The exercise price per share of common stock may
not be less than 85% (100% in the case of an ISO) of the fair market value of
the common stock on the date the option is granted. Options and SARs granted
under the option plan must generally be exercised within ten years from the
date of grant. In the case of any eligible employee who owns stock possessing
more than 10% of the voting power of stock, the exercise price of any ISOs
granted may not be less than 110% of the fair market value of the common stock
on the date of grant and the exercise period may not exceed five years from the
date of grant. In the event of a change in control, as defined, options vest
immediately.
F-32
SPR INC.
NOTES TO FINANCIAL STATEMENTS--(Continued)
The Employee Stock Purchase Plan permits eligible employees, who customarily
work more than 20 hours per week and more than five months in any calendar
year, to purchase common stock through payroll deductions of up to 20% of their
total cash compensation, provided that no employee may purchase more than
$25,000 worth of stock in any calendar year. The purchase price is the lesser
of 85% of the market value of the common stock on the first or last day of the
offering period, as defined.
Activity
Stock option activity for the Company's Combined Incentive and Non-statutory
Stock Option Plan for the years ended December 31, 1997, 1998, and 1999 is as
follows:
Incentive Non-statutory
Stock Options Stock Options
-------------------- ------------------
Weighted Weighted
Average Average
Exercise Exercise
Shares Price Shares Price
---------- -------- -------- --------
Outstanding @ 12/31/96.............. 645,348 $ 8.94 46,991 $8.94
Granted............................. 1,431,709 $ 6.26 489,479 $5.35
Exercised........................... -- -- -- --
Cancelled/Expired................... (1,297,745) $ 8.28 (93,982) $8.28
---------- ------ -------- -----
Outstanding @12/31/97............... 779,312 $ 5.11 442,488 $5.11
Granted............................. 221,175 $18.55 -- --
Exercised........................... (111,663) $ 5.11 (120,836) $5.11
Cancelled/Expired................... (68,501) $ 9.36 -- --
---------- ------ -------- -----
Outstanding @12/31/98............... 820,323 $ 8.38 321,652 $5.11
Granted............................. 221,000 $ 3.83 26,000 $3.75
Exercised........................... (3,880) $ 6.20 -- --
Cancelled/Expired................... (279,157) $ 8.37 -- --
---------- ------ -------- -----
Outstanding @12/31/99............... 758,286 $ 7.06 347,652 $5.01
========== ====== ======== =====
The number of options exercisable and the number of options available for
grant at December 31, 1999, 1998, and 1997 are shown below:
December 31, 1999
-------------------------
1999 1998 1997
--------- ------- -------
Options exercisable at year-end................. 487,607 342,655 415,088
Options available for grant at year-end......... 1,474,061 191,904 344,578
F-33
SPR INC.
NOTES TO FINANCIAL STATEMENTS--(Continued)
The following table summarizes information about stock options outstanding
at December 31, 1999:
Options Outstanding Options Exercisable
------------------------------------------- --------------------------
Weighted Average
Remaining
Exercise Number of Contractual Life Weighted Average Number of Weighted Average
Price Options (in Years) Exercise Price Options Exercise Price
-------- --------- ---------------- ---------------- --------- ----------------
$ 3.75 186,500 9.3 $ 3.75 15,000 $ 3.75
$ 4.13 50,000 9.3 $ 4.13 -- --
$ 5.11 733,088 7.4 $ 5.11 443,897 $ 5.11
$10.75 40,350 8.0 $10.75 8,310 $10.75
$21.00 96,000 8.5 $21.00 20,400 $21.00
--------- -------
$3.75-
$21.00 1,105,938 7.9 $ 6.42 487,607 $ 5.83
--------- -------
Accounting
The Company currently utilizes Accounting Principles Board Opinion No. 25 in
its accounting for stock plans. In October 1995, the Financial Accounting
Standards Board issued Statement of Financial Accounting Standards No. 123,
"Accounting for Stock-based Compensation" ("SFAS No. 123"). The accounting
method as provided in the pronouncement is not required to be adopted; however,
it is encouraged. The Company is not adopting the accounting provisions of SFAS
No. 123. Had the Company accounted for its stock plans in accordance with SFAS
No. 123, the Company's net income (loss) and earnings (loss) per share for the
years ended December 31, 1999, 1998, and 1997, would have been shown as the pro
forma amounts indicated below:
1999 1998 1997
----------- ----------- -----------
Net income (a).................... $ 353,929 $10,497,933 $ 3,169,125
SFAS No. 123 adjustment (net of
tax)............................. $ (597,420) $ (593,100) $ (721,168)
----------- ----------- -----------
Proforma net income (loss)........ $ (243,491) $ 9,904,833 $ 2,447,957
Basic Shares...................... 13,375,569 13,144,412 10,306,032
Diluted Shares.................... 13,375,564 13,641,558 10,669,071
Pro forma basic EPS............... $ (0.02) $ 0.75 $ 0.24
Pro forma diluted EPS............. $ (0.02) $ 0.73 $ 0.23
- --------
(a) The amounts shown in 1997 are pro forma net income amounts adjusted to
recognize the tax impacts of the Company's conversion to a C Corporation.
The pro forma disclosure is not likely to be indicative of pro forma
results, which may be expected in future years because of the fact that options
vest over several years. Compensation expense is recognized as the options vest
and additional awards may also be granted.
For purposes of determining the pro forma effect of stock options, the fair
value of each option is estimated on the date of grant based on the Black-
Scholes option pricing model, assuming:
Options Granted
During:
-----------------
1999 1998 1997
----- ----- -----
Volatility.............................................. 70.0% 55.0% 41.0%
Dividend Yield.......................................... 0.0% 0.0% 0.0%
Risk-free interest rate................................. 4.9% 5.4% 6.5%
Expected life in years.................................. 5 5 5
F-34
SPR INC.
NOTES TO FINANCIAL STATEMENTS--(Continued)
The weighted average fair values of options granted under the Company's
Combined Incentive and Non-Statutory Stock Option Plan for the years ended
December 31, 1999, 1998, and 1997, were $2.30, $9.87, and $3.06, respectively.
For purposes of determining the pro forma effect of the Employee Stock
Purchase Plan purchase rights, the fair value of each purchase right is
estimated on the date of grant based on the Black-Scholes option pricing model,
assuming:
Employee Stock Purchase
Plan
Purchase Rights Issued
During
-------------------------
1999 1998 1997
--------- --------- -----
Volatility...................................... 70% 55.0% 41.0%
Dividend yield.................................. 0.0% 0.0% 0.0%
Risk-free interest rate......................... 4.6%-5.0% 5.2%-5.4% 5.3%
Expected life in months......................... 6 6 3
The weighted average fair values of purchase rights issued under the
Company's Employee Stock Purchase Plan for the years ended December 31, 1999,
1998, and 1997 were $3.59, $4.71, and $2.50, respectively.
NOTE 12--EARNINGS PER SHARE
In February 1997, the Financial Accounting Standards Board issued Statement
of Financial Accounting Standards No. 128, "Earnings Per Share" ("SFAS No.
128"). SFAS No. 128 changed the methodology of calculating earnings per share
and renamed the two calculations to basic earnings per share and diluted
earnings per share. The Company adopted SFAS No. 128 in December 1997, and has
retroactively restated all periods presented. Basic earnings per common share
are based on the average quarterly weighted average number of shares of common
stock outstanding. Diluted earnings per common share are adjusted for the
assumed exercise of dilutive stock options.
Under the requirements of SFAS No. 128, the Company's basic and diluted per
share amounts for the years ending December 31, 1999, 1998, and 1997 would be
as follows:
Year Ended December 31,
--------------------------------------------------------------------------
1999 1998 1997
------------------------- ------------------------- ----------------------
Per
Income Shares Per Share Income Shares Per Share Income Shares Share
(000's) (000's) Amount (000's) (000's) Amount (000's) (000's) Amount
------- ------- --------- ------- ------- --------- ------- ------- ------
Basic EPS (a):
Income available to
Common Stockholders... $354 13,376 $0.03 $10,498 13,144 $ 0.80 $3,169 10,306 $ 0.31
Effect of Dilutive
Securities:
Employee Compensation
Plans................. -- 137 -- -- 497 (0.03) -- 363 (0.01)
---- ------ ----- ------- ------ ------ ------ ------ ------
Dilutive EPS:
Income available to
Common Stockholders
plus assumed
exercises............. $354 13,513 $0.03 $10,498 13,641 $ 0.77 $3,169 10,669 $ 0.30
==== ====== ===== ======= ====== ====== ====== ====== ======
- --------
(a) The amounts shown in 1997 are pro forma net income amounts adjusted to
recognize the tax impacts of the Company's conversion to a "C" Corporation.
F-35
SPR INC.
NOTES TO FINANCIAL STATEMENTS--(Continued)
NOTE 13--RELATED PARTY TRANSACTIONS
The Company paid approximately $324,000, $340,000, and $480,000 during 1999,
1998, and 1997 respectively, in fees to a law firm having a partner whom is a
stockholder of the Company and who is a brother of certain executive officers
of the Company. A portion of the fees paid in 1998 and 1997 related to services
performed by such firm in connection with the 1996 mergers and the 1997 and
1998 offerings. In 1999, $159,000 of the $324,000 was attributed to a failed
merger. In addition, fees of $128,000 were paid to another law firm having a
partner whom is a stockholder of the Company and a brother of certain executive
officers of the Company in 1999.
During 1999 and 1998, the Company paid approximately $196,000 and $314,000,
respectively, for SPR's consulting professionals to attend training classes at
a higher education company having a president and chief operating officer who
is a director of the Company.
NOTE 14--FOLLOW-ON PUBLIC OFFERING
On May 5, 1998, the Company completed a follow-on public offering of
3,719,250 shares of the Company's Common Stock. The company sold 1,350,000
shares in the follow-on public offering and received $23.1 million in net
proceeds from the sales of such shares.
NOTE 15--STOCK SPLITS
On September 26, 1997, the Company's Board of Directors approved a 1.044-to-
1 split of the Company's common stock in the form of a stock dividend. All
common stock and per share amounts have been adjusted retroactively to give
effect to this stock split.
On August 3, 1998, the Company's Board of Directors approved a three-for-two
share common stock split. Shareholders received one additional share for every
two shares held on the record date of August 14, 1998. Distribution of the
additional shares began on August 28, 1998. Cash was paid in lieu of fractional
shares. All shares and per share amounts reported in this filing have been
restated to reflect the three-for-two share common stock split.
NOTE 16--SUBSEQUENT EVENT
On January 28, 2000, SPR Inc. and Leapnet, Inc. announced a merger of
Brassie Corporation, a wholly owned subsidiary of Leapnet, Inc., with and into
SPR Inc., under a definitive merger agreement. The Board of Directors of each
company has approved the merger and has recommended that their shareholders
vote in favor of the merger. The transaction will be structured as a tax-free
purchase by Leapnet. Each of SPR's common shares will be exchanged for 1.085
shares of Leapnet's common stock.
F-36
Appendix A
AGREEMENT AND PLAN OF MERGER
BY AND AMONG
SPR INC.
BRASSIE CORPORATION
AND
LEAPNET, INC.
DATED AS OF JANUARY 27, 2000
TABLE OF CONTENTS
Page
----
ARTICLE I
THE MERGER; EFFECTIVE TIME; CLOSING........................................................... 1
1.1 The Merger............................................................................. 1
1.2 Closing................................................................................ 2
1.3 Effective Time......................................................................... 2
1.4 Effect of the Merger................................................................... 2
ARTICLE II
CERTIFICATE OF INCORPORATION AND BY-LAWS OF THE SURVIVING CORPORATION......................... 2
2.1 Certificate of Incorporation; Name..................................................... 2
2.2 Bylaws................................................................................. 2
ARTICLE III
DIRECTORS AND OFFICERS OF THE SURVIVING CORPORATION AND PARENT................................ 2
3.1 Directors of the Surviving Corporation................................................. 2
3.2 Officers of the Surviving Corporation.................................................. 2
3.3 Directors of Parent.................................................................... 2
3.4 Officers of Parent..................................................................... 2
ARTICLE IV
MERGER CONSIDERATION; CONVERSION OR CANCELLATION OF SHARES IN THE MERGER...................... 3
4.1 Share Consideration for the Merger; Conversion or Cancellation of Shares in the Merger. 3
4.2 Payment for Shares in the Merger....................................................... 4
4.3 Cash For Fractional Parent Shares...................................................... 5
4.4 Transfer of Shares after the Effective Time............................................ 5
4.5 Investment of the Stock Merger Exchange Fund and Fractional Securities Fund............ 5
4.6 Lost Certificates...................................................................... 5
4.7 Further Assurances..................................................................... 6
ARTICLE V
REPRESENTATIONS AND WARRANTIES................................................................ 6
5.1 Representations and Warranties of Parent and Merger Sub................................ 6
5.2 Representations and Warranties of the Company.......................................... 18
ARTICLE VI
ADDITIONAL COVENANTS AND AGREEMENTS........................................................... 30
6.1 Conduct of Business.................................................................... 30
6.2 No Solicitation by the Company......................................................... 34
6.3 No Solicitation by Parent.............................................................. 34
6.4 Meeting of Stockholders................................................................ 34
6.5 Registration Statement................................................................. 36
6.6 Reasonable Best Efforts................................................................ 36
6.7 Access to Information.................................................................. 36
6.8 Publicity.............................................................................. 36
6.9 Indemnification of Directors and Officers.............................................. 37
6.10 Affiliates of the Company and Parent.................................................. 38
6.11 Maintenance of Insurance.............................................................. 38
6.12 Representations and Warranties........................................................ 38
6.13 Filings; Other Action................................................................. 39
6.14 Tax-Free Reorganization Treatment..................................................... 39
i
Page
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6.15 Company Options; Company ESPPs........................................ 39
6.16 Board Composition..................................................... 39
6.17 Officers of Parent and the Surviving Corporation...................... 40
6.18 Contemplated Termination of 401(k) Plan(s)............................ 40
6.19 Crediting Service and Providing Other Benefits........................ 40
6.20 Exemption from Liability Under Section 16(b).......................... 41
6.21 Accountant's Letters.................................................. 41
ARTICLE VII
CONDITIONS.................................................................... 41
7.1 Conditions to Each Party's Obligations................................. 41
7.2 Conditions to the Obligations of the Company........................... 42
7.3 Conditions to the Obligations of Parent................................ 42
ARTICLE VIII
TERMINATION................................................................... 43
8.1 Termination by Mutual Consent.......................................... 43
8.2 Termination by either the Company or Parent............................ 43
8.3 Termination by the Company............................................. 44
8.4 Termination by Parent.................................................. 44
8.5 Effect of Termination; Termination Fee................................. 44
ARTICLE IX
MISCELLANEOUS AND GENERAL..................................................... 46
9.1 Payment of Expenses.................................................... 46
9.2 Non-Survival of Representations and Warranties......................... 47
9.3 Modification or Amendment.............................................. 47
9.4 Waiver of Conditions................................................... 47
9.5 Counterparts........................................................... 47
9.6 Governing Law.......................................................... 47
9.7 Notices................................................................ 47
9.8 Entire Agreement; Assignment........................................... 48
9.9 Parties in Interest.................................................... 48
9.10 Certain Definitions................................................... 48
9.11 Obligation of the Company............................................. 49
9.12 Severability.......................................................... 49
9.13 Specific Performance.................................................. 49
9.14 Recovery of Attorney's Fees........................................... 49
9.15 Captions.............................................................. 49
ii
GLOSSARY OF DEFINED TERMS
Agreement......................................................... Introduction
Applicable Number of Shares of Common Stock of the Remitting Party..... Section
8.5(e)
Authorized Representatives......................................... Section 6.7
Certificate of Merger.............................................. Section 1.3
Certificates.................................................... Section 4.2(b)
Closing............................................................ Section 1.2
Closing Date....................................................... Section 1.2
COBRA................................................... Section 5.1(m)(iii)(6)
Code.................................................................. Recitals
Company........................................................... Introduction
Company Acquisition Agreement................................... Section 6.2(b)
Company Acquisition Proposal.................................... Section 6.2(a)
Company Amended Option Plan..................................... Section 5.2(b)
Company Affiliate................................................. Section 6.10
Company Affiliate Letter.......................................... Section 6.10
Company Contract................................................ Section 5.2(o)
Company Directors................................................. Section 6.16
Company Disclosure Schedule........................................ Section 5.2
Company Employee Stock Purchase Plan............................ Section 5.2(b)
Company Financial Statements................................ Section 5.2(h)(ii)
Company Insiders............................................... Section 6.20(c)
Company Intellectual Property Rights......................... Section 5.2(n)(i)
Company Key Employees....................................... Section 5.2(o)(ii)
Company Material Contract...................................... Section 5.02(o)
Company 1999 Option Plan........................................ Section 5.2(b)
Company Option.................................................. Section 4.1(c)
Company Option Plans............................................ Section 5.2(b)
Company SEC Reports.......................................... Section 5.2(h)(i)
Company Scheduled Plans...................................... Section 5.2(m)(i)
Company Shares.................................................. Section 4.1(a)
Company Superior Proposal....................................... Section 6.2(a)
Company Termination Fee......................................... Section 8.5(c)
Confidentiality Agreement.......................................... Section 6.7
DGCL............................................................... Section 1.1
Effective Time..................................................... Section 1.3
Environmental Costs and Liabilities............................. Section 5.1(q)
Environmental Laws.............................................. Section 5.1(q)
ERISA.......................................................... Section 9.10(a)
Exchange Act.................................................... Section 5.1(f)
Exchange Agent.................................................. Section 4.2(a)
Exchange Ratio.................................................. Section 4.1(a)
Fractional Securities Fund......................................... Section 4.3
GAAP........................................................ Section 5.1(h)(ii)
Governmental Entity............................................ Section 9.10(b)
Hazardous Material.............................................. Section 5.1(q)
HSR Act......................................................... Section 5.1(f)
Indemnified Parties............................................. Section 6.9(a)
Joint Proxy Statement.............................................. Section 6.5
Knowledge...................................................... Section 9.10(c)
Malfunction.................................................... Section 9.10(d)
iii
Material Adverse Effect........................................ Section 9.10(e)
Material Adverse Effect Exception.............................. Section 9.10(f)
Merger................................................................ Recitals
Merger Sub........................................................ Introduction
NNM................................................................ Section 4.3
Outside Date.................................................... Section 8.2(a)
Parent............................................................ Introduction
Parent Acquisition Agreement.................................... Section 6.3(b)
Parent Acquisition Proposal..................................... Section 6.3(a)
Parent Contract................................................. Section 5.1(o)
Parent Directors.................................................. Section 6.16
Parent Directors' Stock Option Plan............................. Section 5.1(b)
Parent Disclosure Schedule......................................... Section 5.1
Parent Employee Stock Purchase Plan............................. Section 5.1(b)
Parent Financial Statements................................. Section 5.1(h)(ii)
Parent Incentive Plan........................................... Section 5.1(b)
Parent Intellectual Property Rights.......................... Section 5.1(n)(i)
Parent Key Employees........................................ Section 5.1(o)(ii)
Parent Material Contract....................................... Section 5.01(o)
Parent 1996 Stock Option Plan................................... Section 5.1(b)
Parent Option Plans............................................. Section 5.1(b)
Parent SEC Reports........................................... Section 5.1(h)(i)
Parent Scheduled Plans....................................... Section 5.1(m)(i)
Parent Shares................................................... Section 4.1(a)
Parent Superior Proposal........................................ Section 6.3(a)
Parent Termination Fee.......................................... Section 8.5(b)
Parties........................................................... Introduction
PBGC.................................................... Section 5.1(m)(iii)(7)
Person......................................................... Section 9.10(g)
Plan Affiliate............................................... Section 5.1(m)(v)
Remitting Party................................................. Section 8.5(e)
Requisite Stockholder Approval..................................... Section 6.4
Restraints...................................................... Section 7.1(c)
Returns...................................................... Section 5.1(l)(i)
S-4 Registration Statement......................................... Section 6.5
Scheduled Welfare Plans........................................... Section 6.19
SEC.......................................................... Section 5.1(h)(i)
Section 16 Information......................................... Section 6.20(b)
Securities Act.................................................. Section 5.1(f)
Share Consideration ............................................ Section 4.2(a)
Share Reference Price........................................... Section 8.5(e)
Significant Tax Agreement...................................... Section 9.10(h)
Software....................................................... Section 9.10(i)
Stock Merger Exchange Fund...................................... Section 4.2(a)
Stockholder Meetings............................................... Section 6.4
Stockholders Agreement................................................ Recitals
Subsidiary..................................................... Section 9.10(j)
Substitute Option............................................... Section 4.1(c)
Successor Welfare Plan............................................ Section 6.19
Surviving Corporation.............................................. Section 1.1
Tax............................................................ Section 9.10(k)
Taxes.......................................................... Section 9.10(k)
iv
Termination Fee................................................. Section 8.5(d)
Voting Stockholder.................................................... Recitals
Voting Stockholders................................................... Recitals
EXHIBITS
Stockholders Agreements....................... Exhibits A-1 through Exhibit A-6
Certificate of Merger................................................ Exhibit B
Company Affiliate Letter............................................. Exhibit C
v
AGREEMENT AND PLAN OF MERGER
AGREEMENT AND PLAN OF MERGER (this "Agreement"), dated as of January 27,
2000, by and among LEAPNET, INC., a Delaware corporation ("Parent"), BRASSIE
CORPORATION, a Delaware corporation and a direct wholly-owned subsidiary of
Parent ("Merger Sub"), and SPR INC., a Delaware corporation (the "Company").
Parent, Merger Sub and the Company are referred to collectively herein as the
"Parties".
RECITALS
WHEREAS, the Board of Directors of each of Parent and the Company have
determined that it is in the best interests of each corporation and their
respective stockholders that the Company and Parent enter into a strategic
"merger of equals" business combination by means of the merger of Merger Sub
with and into the Company (the "Merger") and, in furtherance thereof, have
approved this Agreement, the Merger and the transactions contemplated by this
Agreement and declared the Merger advisable;
WHEREAS, Parent, as the sole shareholder of Merger Sub, has approved this
Agreement, the Merger and the transactions contemplated by this Agreement
pursuant to action taken by unanimous written consent in accordance with the
requirements of the Delaware General Corporation Law and the bylaws of Merger
Sub;
WHEREAS, pursuant to the Merger, the outstanding shares of common stock of
the Company shall be converted into shares of common stock of Parent at the
rate determined herein;
WHEREAS, for federal income tax purposes, it is intended that the Merger
shall qualify as a reorganization within the meaning of Section 368(a) of the
Internal Revenue Code of 1986, as amended (the "Code");
WHEREAS, it is intended that the Merger shall be treated for accounting
purposes as a purchase;
WHEREAS, concurrently with the execution hereof, certain holders (each a
"Voting Stockholder" and collectively the "Voting Stockholders") of Company
Shares and of Parent Shares are entering into a stockholder voting agreement,
attached as Exhibits A-1 through A-6 hereto (each, a "Stockholders Agreement").
NOW, THEREFORE, in consideration of the mutual representations, warranties,
covenants and agreements set forth herein, the Parties hereby agree as follows:
ARTICLE I
THE MERGER; EFFECTIVE TIME; CLOSING
1.1 The Merger. Upon the terms and subject to the conditions set forth in
this Agreement, and in accordance with the Delaware General Corporation Law
(the "DGCL"), at the Effective Time, Merger Sub shall be merged with and into
the Company, the separate corporate existence of Merger Sub shall thereupon
cease and the Company shall continue as the surviving corporation and shall
succeed to and assume all the rights and obligations of Merger Sub in
accordance with the DGCL. The Company, as the surviving corporation after the
consummation of the Merger, is sometimes hereinafter referred to as the
"Surviving Corporation."
1.2 Closing. Unless this Agreement shall have been terminated and the
transactions contemplated herein shall have been abandoned pursuant to Article
VIII, the closing of the Merger (the "Closing") shall take place
1
at 10:00 a.m., local time, at the offices of counsel for the Company, on the
first business day after all of the conditions (excluding conditions that, by
their nature, cannot be satisfied until the Closing Date) to the obligations of
the Parties to consummate the Merger as set forth in Article VII have been
satisfied or waived (subject to applicable law), or such other date, time or
place as is agreed to in writing by the Parties (the actual time and date of
the Closing being referred to herein as the "Closing Date").
1.3 Effective Time. Subject to the provisions of this Agreement, the Parties
shall cause the Merger to be consummated by filing the certificate of merger of
Merger Sub and the Company (the "Certificate of Merger") with the Secretary of
State of the State of Delaware in such form as required by, and executed in
accordance with, the relevant provisions of the DGCL as soon as practicable on
or before the Closing Date. The Merger shall become effective at such time as
the Certificate of Merger is duly filed with the Secretary of State of Delaware
or at such subsequent date or time as the Parties shall agree and specify in
the Certificate of Merger (the date and time the Merger becomes effective being
hereinafter referred to as the "Effective Time").
1.4 Effect of the Merger. At and after the Effective Time, the effect of the
Merger shall be as provided in this Agreement and the applicable provisions of
the DGCL. Without limiting the generality of the foregoing, and subject
thereto, at the Effective Time, all the property, rights, privileges, powers
and franchises of the Company and Merger Sub shall vest in the Surviving
Corporation, and all debts, liabilities and duties of the Company and Merger
Sub shall become the debts, liabilities and duties of the Surviving
Corporation.
ARTICLE II
CERTIFICATE OF INCORPORATION AND BY-LAWS OF THE SURVIVING CORPORATION
2.1 Certificate of Incorporation; Name. At and after the Effective Time, the
certificate of incorporation of the Company as in effect immediately prior to
the Effective Time shall be the certificate of incorporation of the Surviving
Corporation, until thereafter changed or amended as provided therein or by
applicable law, except that Article I of the certificate of incorporation of
the Surviving Corporation shall be amended to read in its entirety as follows:
"The name of this Corporation is Leap Technologies, Inc."
2.2 Bylaws. At the Effective Time, the bylaws of Merger Sub as in effect
immediately prior to the Effective Time shall be the bylaws of the Surviving
Corporation, until thereafter changed or amended as provided therein or by
applicable law.
ARTICLE III
DIRECTORS AND OFFICERS OF THE SURVIVING CORPORATION AND PARENT
3.1 Directors of the Surviving Corporation. The directors of the Surviving
Corporation, as of the Effective Time, will be as provided in the first, second
and sixth sentences of Section 6.16.
3.2 Officers of the Surviving Corporation. The officers of the Surviving
Corporation, as of the Effective Time, will be as provided in Section 6.17.
3.3 Directors of Parent. The directors of Parent, as of the Effective Time,
will be as provided in Section 6.16.
3.4 Officers of Parent. The officers of Parent, as of the Effective Time,
will be as provided in Section 6.17.
2
ARTICLE IV
MERGER CONSIDERATION; CONVERSION OR CANCELLATION OF SHARES IN THE MERGER
4.1 Share Consideration for the Merger; Conversion or Cancellation of Shares
in the Merger. At the Effective Time, the manner of converting or canceling
shares of the Company and Parent shall be as follows:
(a) Conversion of Company Stock. Each share of common stock, $0.01 par
value ("Company Shares"), of the Company issued and outstanding immediately
prior to the Effective Time (excluding any Company Shares described in
Section 4.1(e)), shall, by virtue of the Merger and without any action on
the part of the holder thereof, be converted automatically into the right
to receive 1.085 (the "Exchange Ratio") validly issued, fully paid and non-
assessable shares of common stock, $0.01 par value, of Parent
(collectively, "Parent Shares"); provided, that fractional Parent Shares
share be paid for in accordance with this Section 4.1(a) and Section 4.3.
All Company Shares to be converted into Parent Shares pursuant to this
Section 4.1(a) shall, by virtue of the Merger and without any action on the
part of the holders thereof, cease to be outstanding, be canceled and cease
to exist, and each holder of a certificate representing any such Company
Shares shall thereafter cease to have any rights with respect to such
Company Shares, except the right to receive for each of the Company Shares,
upon the surrender of such certificate in accordance with Section 4.2, the
number of Parent Shares specified above and cash in lieu of fractional
shares in accordance with the further provisions contained in Section 4.3.
(b) Stock of Merger Sub. Each share of common stock, $0.01 par value, of
Merger Sub issued and outstanding immediately prior to the Effective Time,
shall, by virtue of the Merger and without any action on the part of the
holder thereof, be converted automatically into and exchanged for one (1)
validly issued, fully paid and nonassessable share of common stock, $0.01
par value, of the Surviving Corporation. Each stock certificate
representing any shares of Merger Sub shall continue to represent ownership
of such shares of capital stock of the Surviving Corporation.
(c) Outstanding Options. Each outstanding option to purchase Company
Shares (each, a "Company Option") that was granted pursuant to the Company
Option Plans (as defined in Section 5.2(b)) prior to the Effective Time and
which remains outstanding immediately prior to the Effective Time shall
cease to represent a right to acquire Company Shares and shall be converted
automatically, at the Effective Time (in accordance with the further
provisions contained in Section 6.15), into and represent an option to
purchase, on the same terms and conditions as were applicable under the
Company Option (taking into account any changes thereto), Parent Shares
("Substitute Options"), and Parent shall assume each such Substitute Option
subject to the terms of the Company Option Plans, and the agreements
evidencing grants thereunder, including, but not limited to the accelerated
vesting of such Substitute Options which shall occur in connection with and
by virtue of this Agreement as and to the extent required by such Company
Option Plans and agreements, provided, however, that from and after the
Effective Time: (i) the number of Parent Shares purchasable upon exercise
of the Substitute Option shall be equal to the number of Company Shares
that were purchasable under the Substitute Option immediately prior to the
Effective Time multiplied by the Exchange Ratio, and rounding to the
nearest whole share, and (ii) the per share exercise price under each
Substitute Option shall be adjusted by dividing the per share exercise
price of each Substitute Option by the Exchange Ratio, and rounding to the
nearest cent. The terms of each Substitute Option shall, in accordance with
its terms, be subject to further adjustment as appropriate to reflect any
stock split, stock dividend, recapitalization or other similar transaction
with respect to Parent Shares on or subsequent to the Effective Time.
(d) Reservation of Parent Shares. Parent shall take all corporate action
necessary to reserve for issuance a sufficient number of Parent Shares for
delivery upon exercise of Company Options in accordance with this Section
4.1.
(e) Cancellation of Parent Owned and Treasury Stock. All of the Company
Shares that are owned by Parent, any direct or indirect wholly-owned
subsidiary of Parent or by the Company as treasury stock
3
shall, by virtue of the Merger, cease to be outstanding and shall be
canceled and retired and no Parent Shares or other consideration shall be
delivered in exchange therefor.
4.2 Payment for Shares in the Merger. The manner of making payment for
Shares in the Merger shall be as follows:
(a) Exchange Agent. On or prior to the Closing Date, Parent shall
appoint a commercial bank or trust company reasonably acceptable to the
Company having net capital of not less than $300,000,000 or a wholly-owned
subsidiary thereof to act as exchange agent hereunder for the purposes of
exchanging Certificates for Company Shares (the "Exchange Agent"). At or
prior to the Effective Date, Parent shall deposit with the Exchange Agent
in trust for the benefit of the holders of Company Shares, a sufficient
number of certificates representing the Parent Shares required to effect
the delivery of the aggregate consideration in Parent Shares and cash for
the fractional Parent Shares required to be delivered pursuant to Sections
4.1 and 4.3 (collectively, the "Share Consideration" and the certificates
representing the Parent Shares comprising the Share Consideration being
referred to hereinafter as the "Stock Merger Exchange Fund"). The Exchange
Agent shall, pursuant to irrevocable instructions, deliver the Share
Consideration out of the Stock Merger Exchange Fund and the Fractional
Securities Fund. The Stock Merger Exchange Fund and the Fractional
Securities Fund shall not be used for any other purpose than as set forth
herein.
(b) Exchange Procedures. Promptly after the Effective Time, Parent shall
cause the Exchange Agent to mail to each holder of record of outstanding
Company Shares (i) a form of letter of transmittal, in a form reasonably
satisfactory to the Parties and (ii) instructions for use in effecting the
surrender of the certificates representing Company Shares ("Certificates")
for payment therefor. Upon surrender of Certificates for cancellation to
the Exchange Agent, together with such letter of transmittal duly executed
and completed in accordance with the instructions thereto, and any other
documents as may reasonably be required by the Exchange Act, the holder of
such Certificate shall be entitled to receive in exchange for each of the
Company Shares represented by the Certificates held of record by such
holder (1) one or more Parent Shares (which shall be in uncertificated
book-entry form unless a physical certificate is requested) representing,
in the aggregate, the whole number of Parent Shares that such holder has
the right to receive pursuant to Section 4.1(a) and (2) a check in the
amount equal to the cash that such holder has the right to receive in lieu
of any fractional Parent Shares pursuant to Sections 4.1 and 4.3. No
interest will be paid or will accrue on any cash payable pursuant to
Sections 4.1 and 4.3. The Certificates so surrendered pursuant to this
Section 4.2(b) shall forthwith be canceled. Until so surrendered, such
Certificates shall represent solely the right to receive the Share
Consideration allocable to such Certificates.
(c) Distributions with Respect to Unexchanged Shares. No dividends or
other distributions that are declared or made with respect to Parent Shares
with a record date after the Effective Time shall be paid to the holder of
any unsurrendered Certificate with respect to the Parent Shares that such
holder would be entitled to receive by reason of the Merger upon surrender
of such Certificate and no cash payment in lieu of fractional Parent Shares
shall be paid to any such holder pursuant to Sections 4.1 and 4.3 until
such holder shall surrender such Certificate. Subject to the effect of
applicable law, following surrender of any such Certificate, there shall be
paid to such holder of Parent Shares issuable in exchange therefor, without
interest, (i) promptly after the time of such surrender, the amount of any
cash payable in lieu of fractional Parent Shares to which such holder is
entitled pursuant to Sections 4.1 and 4.3 and the amount of dividends or
other distributions with a record date after the Effective Time theretofore
paid prior to the time of such surrender with respect to such whole Parent
Shares, and (ii) at the appropriate payment date, the amount of dividends
or other distributions with a record date after the Effective Time but
prior to such surrender and a payment date subsequent to such surrender
payable with respect to such Parent Shares. Any dividends or other
distributions that are payable with respect to Parent Shares deliverable
upon surrender of unexchanged Certificates shall be deposited by Parent in
the Stock Merger Exchange Fund.
(d) Transfers of Ownership. If any certificate representing Parent
Shares is to be issued in a name other than that in which the Certificate
surrendered in exchange therefor is registered, it shall be a condition of
such exchange that the Certificate so surrendered shall be properly
endorsed and otherwise in
4
proper form for transfer and that the Person requesting such exchange shall
pay to the Exchange Agent any transfer or other taxes required by reason of
the issuance of certificates for such Parent Shares in a name other than
that of the registered holder of the Certificate surrendered, or shall
establish to the satisfaction of the Exchange Agent that such tax has been
paid or is not applicable.
(e) No Liability. Neither the Exchange Agent nor any of the Parties
shall be liable to a holder of Company Shares for any Parent Shares or
dividends thereon, or, in accordance with Sections 4.1 and 4.3, cash in
lieu of fractional Parent Shares, delivered to a public official pursuant
to applicable abandoned property, escheat or similar law. The Exchange
Agent shall not be entitled to vote or exercise any rights of ownership
with respect to the Parent Shares held by it from time to time hereunder,
except that it shall receive and hold all dividends or other distributions
paid or distributed with respect to such Parent Shares for the account of
the Persons entitled thereto.
(f) Termination of Funds. Subject to applicable law, any portion of the
Stock Merger Exchange Fund and the Fractional Securities Fund which remains
unclaimed by the former stockholders of the Company for one (1) year after
the Effective Time shall be delivered to Parent, upon demand of Parent, and
any former stockholder of the Company shall thereafter look only to Parent
for payment of their applicable claim for the Share Consideration for their
Company Shares. Any such portion of the Stock Merger Exchange Fund and the
Fractional Securities Fund remaining unclaimed by holders of Company Shares
five years after the Effective Time (or such earlier date immediately prior
to such time as such amounts would otherwise escheat to or become property
of any Governmental Entity having jurisdiction thereover) shall, to the
extent permitted by law, become the property of the Surviving Corporation
free and clear of any claims or interest of any Person previously entitled
thereto.
(g) No Further Ownership Rights in Company Shares. All Parent Shares
issued and cash paid upon conversion of Company Shares in accordance with
the terms of this Article IV (including any cash paid pursuant to Sections
4.1 and 4.3) shall be deemed to have been issued or paid in full
satisfaction of all rights pertaining to the Company Shares.
4.3 Cash For Fractional Parent Shares. No certificates or scrip or shares of
Parent Shares representing fractional Parent Shares or book-entry credit of the
same shall be issued upon the surrender for exchange of Certificates and such
fractional share interests will not entitle the owner thereof to vote or to
have any rights of a stockholder of Parent or a holder of Parent Shares.
Notwithstanding any other provision of this Agreement, each holder of Company
Shares exchanged pursuant to the Merger who would otherwise have been entitled
to receive a fractional Parent Share (after taking into account all
Certificates delivered by such holder) shall receive, in lieu thereof, a cash
payment (without interest) in an amount equal to the product of (i) the
fractional interest of a Parent Share to which such holder otherwise would have
been entitled multiplied by (ii) the closing price of a Parent Share on the
NASDAQ National Market ("NNM") on the trading day immediately prior to the
Effective Time (the cash comprising such aggregate payments in lieu of
fractional Parent Shares being hereinafter referred to as the "Fractional
Securities Fund").
4.4 Transfer of Shares after the Effective Time. No transfers of Company
Shares shall be made on the stock transfer books of the Company after the close
of business on the day prior to the date of the Effective Time.
4.5 Investment of the Stock Merger Exchange Fund and Fractional Securities
Fund. The Exchange Agent shall invest any cash included in the Stock Merger
Exchange Fund and the Fractional Securities Fund in obligations of, or
guaranteed by, the United States of America, in commercial paper obligations
rated A-1 or P-1 or better by Moody's Investor Services or Standard & Poor's
Corporation, respectively, in each case with maturities not exceeding seven
days; provided, that no such investment or loss thereon shall affect the
amounts payable to Company stockholders pursuant to Article IV and the other
provisions of this Agreement. Any interest and other income resulting from such
investments shall promptly be paid to Parent.
4.6 Lost Certificates. If any Certificate shall have been lost, stolen or
destroyed, upon the making of an affidavit of that fact by the Person claiming
such Certificate to be lost, stolen or destroyed and, if required by
5
the Surviving Corporation (or Parent, as applicable), the posting by such
Person of a bond in such reasonable amount as the Surviving Corporation (or
Parent, as applicable) may direct as indemnity against any claim that may be
made against it with respect to such Certificate, the Exchange Agent will
deliver in exchange for such lost, stolen or destroyed Certificate the
applicable Share Consideration with respect to the Company Shares formerly
represented thereby and unpaid dividends and distributions on Parent Shares
deliverable in respect thereof, pursuant to and in accordance with the terms of
this Agreement.
4.7 Further Assurances. At and after the Effective Time, the officers and
directors of the Surviving Corporation will be authorized to execute and
deliver, in the name and on behalf of the Company or Merger Sub, as applicable,
any deeds, bills of sale, assignments or assurances and to take and do, in the
name and on behalf of the Company or Merger Sub, any other actions and things
to vest, perfect or confirm of record or otherwise in the Surviving Corporation
any and all right, title and interest in, to and under any of the rights,
properties or assets acquired or to be acquired by the Surviving Corporation as
a result of, or in connection with, the Merger.
ARTICLE V
REPRESENTATIONS AND WARRANTIES
5.1 Representations and Warranties of Parent and Merger Sub. Parent and
Merger Sub hereby represent and warrant to the Company that the statements
contained in this Section 5.1 are true and correct, except to the extent
specifically set forth (i) in the Parent SEC Reports filed with the SEC and
publicly available prior to the date hereof or (ii) on the disclosure schedule
previously delivered by Parent to the Company (the "Parent Disclosure
Schedule"). The Parent Disclosure Schedule shall be arranged in sections and
paragraphs corresponding to the letter and numbered paragraphs contained in
this Section 5.1, and the disclosure in any paragraph shall qualify only the
corresponding paragraph in this Section 5.1 or other paragraphs or sections to
which it is clearly apparent (from a plain reading of the disclosure) that such
disclosure relates.
(a) Corporate Organization and Qualification. Each of Parent and each of
its subsidiaries is a corporation duly organized, validly existing and in
good standing under the laws of the jurisdiction of incorporation or
organization and is duly qualified and in good standing as a foreign
corporation in each jurisdiction where the properties owned, leased or
operated, or the business conducted, by it require such qualification,
except where failure to so qualify or be in good standing as a foreign
corporation would not have a Material Adverse Effect on Parent. Each of
Parent and each of its subsidiaries has all requisite power and authority
(corporate or otherwise) to own, lease and operate its properties and to
carry on its business as it is now being conducted except where failure to
have such power and authority would not have a Material Adverse Effective
on Parent. Section 5.1(a) of the Parent Disclosure Schedule sets forth a
complete and correct list of all of the subsidiaries of Parent which as of
the date of this Agreement are Significant Subsidiaries (as defined in Rule
1-02 of Regulation S-X of the SEC). The copies of the certificate of
incorporation and bylaws of Parent and the charter documents of each of its
subsidiaries which were previously furnished or made available to the
Company are true, complete and correct copies of such documents as in
effect on the date of this Agreement. Merger Sub is a direct, wholly-owned
subsidiary of Parent, was formed solely for the purpose of engaging in the
transactions contemplated hereby, has engaged in no other business
activities and has conducted its operations only as contemplated hereby.
(b) Capitalization. As of January 27, 2000, the authorized capital stock
of Parent consists of (i) 100,000,000 shares of common stock, $0.01 par
value per share, of which 14,489,753 shares were issued and outstanding and
(ii) 20,000,000 shares of preferred stock, $0.01 par value per share, none
of which are issued or outstanding. Since January 1, 2000 to the date of
this Agreement, there have been no issuances of Parent Shares or any other
securities of Parent other than issuances of Parent Shares pursuant to
options or rights outstanding as of January 27, 2000 under the Parent
Option Plans. All of the outstanding shares of capital stock of Parent and
its subsidiaries are, and when Parent Shares are issued in the Merger or
upon
6
exercise of stock options converted in the Merger pursuant to Section 4.1
such shares will be, duly authorized, validly issued, fully paid and
nonassessable and free of any preemptive rights. Parent has no outstanding
stock appreciation rights, phantom stock or similar rights. No Parent
Shares are owned by any subsidiary of Parent. All outstanding shares of
capital stock or other equity interests of the subsidiaries of Parent are
owned by Parent or a direct or indirect wholly-owned subsidiary of Parent,
free and clear of all liens, pledges, charges, encumbrances, claims and
options of any nature. As of January 27, 2000, except for options to
purchase 5,586,550 Parent Shares issued pursuant to (i) Parent Amended and
Restated 1996 Stock Option Plan (the "Parent 1996 Stock Option Plan"), (ii)
Parent Employee Incentive Compensation Plan, as amended by that First
Amendment dated June 3, 1997 and that Second Amendment dated June 15, 1999
(the "Parent Incentive Plan"), and (iii) Parent Non-Employee Directors'
Stock Option Plan (the "Parent Directors' Stock Option Plan" and together
with the 1996 Stock Option Plan and the Parent Incentive Plan, the "Parent
Option Plans"), and rights under the Parent Employee Stock Purchase Plan
(the "Parent Employee Stock Purchase Plan"), there are no outstanding or
authorized options, warrants, calls, rights (including preemptive rights),
commitments or any other agreements of any character which Parent or any of
its subsidiaries is a party to, or may be bound by, requiring it to issue,
transfer, grant, sell, purchase, redeem or acquire any shares of capital
stock or any securities or rights convertible into, exchangeable for, or
evidencing the right to subscribe for, any shares of capital stock of
Parent or any of its subsidiaries. Section 5.1(b) of the Parent Disclosure
Schedule sets forth a complete and correct list, as of January 27, 2000, of
the number of Parent Shares subject to Parent stock options or other rights
to purchase or receive Parent Shares granted under the Parent Option Plans
or otherwise, the dates of grant and the exercise prices thereof. No
options or warrants or other rights to acquire capital stock from Parent
have been issued or granted or accelerated or had their terms modified
since January 27, 2000 to the date of this Agreement. No bonds, debentures,
notes or other indebtedness of Parent having the right to vote on any
matters on which holders of capital stock of Parent may vote are issued or
outstanding. Except as otherwise set forth in this Section 5.1(b) and as
contemplated by Section 4.1, as of the date of this Agreement, there are no
securities, options, warrants, calls, rights, commitments, agreements,
arrangements or undertakings of any kind to which Parent or any of its
subsidiaries is a party or by which any of them is bound obligating Parent
or any of its subsidiaries to issue, deliver or sell, or cause to be
issued, delivered or sold, additional shares of capital stock or other
voting securities of Parent or any of its subsidiaries or obligating Parent
or any of its subsidiaries to issue, grant, extend or enter into any such
security, option, warrant, call, right, commitment, agreement, arrangement
or undertaking. As of the date of this Agreement, there are no outstanding
obligations of Parent or any of its subsidiaries to repurchase, redeem or
otherwise acquire any shares of capital stock of Parent or any of its
subsidiaries. Except for the Stockholders Agreement, there are not as of
the date hereof and there will not be at the Effective Time any stockholder
agreements, voting trusts or other agreements or understandings to which
Parent is a party or to which it is bound relating to the voting of any
shares of the capital stock of Parent.
(c) Fairness Opinion. The Board of Directors of Parent has received a
written opinion from Legg Mason Wood Walker, Incorporated to the effect
that as of the date hereof and based upon and subject to the matters stated
therein, the Exchange Ratio is fair from a financial point of view to
Parent and its stockholders, a copy of which opinion has been made
available to the Company.
(d) Authority Relative to this Agreement. The Board of Directors of
Merger Sub has declared the Merger advisable and Merger Sub has the
requisite corporate power and authority to approve, authorize, execute and
deliver this Agreement and to consummate the transactions contemplated
hereby. The Board of Directors of Parent has declared the issuance of
Parent Shares advisable and Parent has the requisite corporate power and
authority to approve, authorize, execute and deliver this Agreement and,
subject to the approval of the issuance of Parent Shares by the
stockholders of Parent, to consummate the transactions contemplated hereby.
This Agreement and the consummation by Parent of the transactions
contemplated hereby have been duly and validly authorized by the Boards of
Directors of Parent and Merger Sub and no other corporate proceedings on
the part of Parent or Merger Sub (including, in the case of Merger Sub, all
stockholder action by Parent as its sole stockholder) are necessary to
authorize this Agreement or to consummate the transactions contemplated
hereby (other than the approval of the
7
issuance of Parent Shares by the stockholders of Parent). This Agreement
has been duly and validly executed and delivered by Parent and Merger Sub
and, assuming this Agreement constitutes the valid and binding agreement of
the Company, constitutes the valid and binding agreement of Parent and
Merger Sub, enforceable against Parent and Merger Sub in accordance with
its terms, subject, as to enforceability, to bankruptcy, insolvency,
reorganization and other laws of general applicability relating to or
affecting creditors' rights and to general principles of equity.
(e) Present Compliance with Obligations and Laws. Neither Parent nor any
of its subsidiaries is: (i) in violation of its certificate of
incorporation or bylaws or similar documents; (ii) in default in the
performance of any obligation, agreement or condition of any debt
instrument which (with or without the passage of time or the giving of
notice, or both) affords to any Person the right to accelerate any
indebtedness or terminate any right; (iii) in default under or breach of
(with or without the passage of time or the giving of notice) any other
contract to which it is a party or by which it or its assets are bound; or
(iv) in violation of any law, regulation, administrative order or judicial
order, decree or judgment (domestic or foreign) applicable to it or its
business or assets, except where any violation, default or breach under
items (ii), (iii), or (iv) would not, individually or in the aggregate,
have a Material Adverse Effect on Parent.
(f) Consents and Approvals; No Violation. Neither the execution and
delivery of this Agreement nor the consummation by Parent of the
transactions contemplated hereby will (i) conflict with or result in any
breach of any provision of the respective certificate of incorporation (or
other similar documents) or bylaws (or other similar documents) of Parent
or any of its subsidiaries; (ii) require any consent, approval,
authorization or permit of, or registration or filing with or notification
to, any Governmental Entity, except (A) in connection with the applicable
requirements, if any, of the Hart-Scott-Rodino Antitrust Improvements Act
of 1976, as amended (the "HSR Act"), (B) pursuant to the applicable
requirements of the Securities Act of 1933, as amended (the "Securities
Act"), and the rules and regulations promulgated thereunder, and the
Securities Exchange Act of 1934, as amended (the "Exchange Act"), and the
rules and regulations promulgated thereunder, (C) the filing of the
Certificate of Merger pursuant to the DGCL and appropriate documents with
the relevant authorities of other states in which Merger Sub is authorized
to do business, (D) as may be required by any applicable state securities
or "blue sky" laws, or (E) where the failure to obtain such consent,
approval, authorization or permit, or to make such filing or notification,
would not in the aggregate have a Material Adverse Effect on Parent or
adversely affect the ability of Parent or Merger Sub to consummate the
transactions contemplated hereby; (iii) result in a violation or breach of,
or constitute (with or without notice or lapse of time or both) a default
(or give rise to any right of termination, cancellation or acceleration or
lien or other charge or encumbrance) under any of the terms, conditions or
provisions of any indenture, note, license, lease, agreement or other
instrument or obligation to which Parent or any of its subsidiaries is a
party or by which any of their assets may be bound, except for such
violations, breaches and defaults (or rights of termination, cancellation
or acceleration or lien or other charge or encumbrance) as to which
requisite waivers or consents have been obtained or which, in the
aggregate, would not have a Material Adverse Effect on Parent or adversely
affect the ability of Parent or Merger Sub to consummate the transactions
contemplated hereby; (iv) cause the suspension or revocation of any
authorizations, consents, approvals or licenses currently in effect which
would have a Material Adverse Effect on Parent; or (v) assuming the
consents, approvals, authorizations or permits and filings or notifications
referred to in this Section 5.1(f) are duly and timely obtained or made and
the approval of the issuance of the Parent Shares by the stockholders of
Parent has been obtained, violate any order, writ, injunction, decree,
statute, rule or regulation applicable to Parent or any of its subsidiaries
or to any of their respective assets, except for violations which would not
in the aggregate have a Material Adverse Effect on Parent or adversely
affect the ability of Parent or Merger Sub to consummate the transactions
contemplated hereby.
(g) Litigation. There are no actions, suits, claims, investigations or
proceedings pending or, to the knowledge of Parent, threatened against
Parent or any of its subsidiaries that, alone or in the aggregate would be
reasonably likely to result in obligations or liabilities of Parent or any
of its subsidiaries that, alone or in the aggregate, would have a Material
Adverse Effect on Parent or adversely effect the ability
8
of Parent or Merger Sub to consummate the transactions contemplated hereby.
Neither Parent nor any of its subsidiaries is subject to any outstanding
order, writ, injunction or decree which (i) has or may have the effect of
prohibiting or impairing any business practice of Parent or any of its
subsidiaries, any acquisition of property (tangible or intangible) by
Parent or any of its subsidiaries, the conduct of the business by Parent or
any of its subsidiaries, or Parent's or Merger Sub's ability to perform its
obligations under this Agreement or (ii) insofar as can be reasonably
foreseen, individually or in the aggregate, would have a Material Adverse
Effect on Parent.
(h) SEC Reports; Financial Statements.
(i) Since January 31, 1999, Parent has filed all forms, reports and
documents with the Securities and Exchange Commission (the "SEC")
required to be filed by it pursuant to the federal securities laws and
the SEC rules and regulations thereunder, all of which complied in all
material respects with all applicable requirements of the Securities
Act and the Exchange Act and the rules and regulations promulgated
thereunder (collectively, the "Parent SEC Reports"). None of the Parent
SEC Reports, including, without limitation, any financial statements or
schedules included therein, at the time filed (or if amended or
superseded by a filing prior to the date of this Agreement, then on the
date of such filing) contained any untrue statement of a material fact
or omitted to state a material fact required to be stated therein or
necessary in order to make the statements therein, in light of the
circumstances under which they were made, not misleading. None of
Parent's subsidiaries is required to file any forms, reports or other
documents with the SEC.
(ii) The consolidated balance sheets and the related consolidated
statements of income, stockholders' equity (deficit) and cash flows
(including the related notes thereto) of Parent included in the Parent
SEC Reports (collectively, "Parent Financial Statements") comply as to
form in all material respects with applicable accounting requirements
and the published rules and regulations of the SEC with respect
thereto, have been prepared in accordance with generally accepted
accounting principles ("GAAP") applied on a basis consistent throughout
the periods involved (except as otherwise noted therein or, in the case
of unaudited interim financial statements, as may be permitted by the
SEC on Form 10-Q under the Exchange Act), and present fairly the
consolidated financial position of Parent and its consolidated
subsidiaries as of their respective dates, and the consolidated results
of their operations and their cash flows for the periods presented
therein (subject, in the case of the unaudited interim financial
statements, to normal and recurring year-end adjustments). Since
January 31, 1999, there has not been any material change, by Parent or
any of its subsidiaries, in accounting principles, methods or policies
for financial accounting purposes except as required by concurrent
changes in GAAP.
(i) No Liabilities; Absence of Certain Changes or Events. Neither Parent
nor any of its subsidiaries has any material indebtedness, obligations or
liabilities of any kind (whether accrued, absolute, contingent or
otherwise, and whether due or to become due or asserted or unasserted),
and, to knowledge of Parent, there is no reasonable basis for the assertion
of any material claim or liability of any nature against Parent or any of
its subsidiaries, except for liabilities (i) which are fully reflected in,
reserved against or otherwise described in the Parent Financial Statements
for the period ending January 31, 1999, (ii) which have been incurred after
January 31, 1999 in the ordinary course of business, consistent with past
practice, or (iii) which, individually or in the aggregate, would not
reasonably be expected to have a Material Adverse Effect on Parent. Since
January 31, 1999, the business of Parent and its subsidiaries has been
carried on only in the ordinary and usual course, and there has not been
any Material Adverse Effect on Parent (excluding any Material Adverse
Effect Exception). Since October 31, 1999, to the knowledge of Parent, no
material customer or supplier of Parent or its subsidiaries has threatened,
in writing, to alter materially its relationship with Parent or its
subsidiaries.
(j) Brokers and Finders. Except for the fees and expenses payable to
Legg Mason Wood Walker, Incorporated, which fees and expenses are reflected
in their agreements with Parent, a true and complete copy of which
(including all amendments) has been furnished to the Company, neither
Parent nor any of its subsidiaries has employed any investment banker,
broker, finder, consultant or intermediary in
9
connection with the transactions contemplated by this Agreement which would
be entitled to any investment banking, brokerage, finder's or similar fee
or commission in connection with this Agreement or the transactions
contemplated hereby.
(k) S-4 Registration Statement and Proxy Statement/Prospectus. None of
the information supplied or to be supplied by Parent or Merger Sub for
inclusion or incorporation by reference in the S-4 Registration Statement
or the Joint Proxy Statement will (i) in the case of the S-4 Registration
Statement, at the time it becomes effective or at the Effective Time,
contain any untrue statement of a material fact or omit to state any
material fact required to be stated therein or necessary in order to make
the statements therein not misleading, or (ii) in the case of the Joint
Proxy Statement, at the time of the mailing of the Joint Proxy Statement
and at the time of the Stockholder Meetings, contain any untrue statement
of a material fact or omit to state any material fact required to be stated
therein or necessary in order to make the statements therein, in light of
the circumstances under which they are made, not misleading. If at any time
prior to the Effective Time any event with respect to Parent, Merger Sub or
any of their respective affiliates, officers and directors or any of its
subsidiaries should occur which is required to be described in an amendment
of, or a supplement to, the Joint Proxy Statement or the S-4 Registration
Statement, Parent should promptly inform the Company, such event shall be
so described, and such amendment or supplement shall be promptly filed with
the SEC and, as required by law, disseminated to the stockholders of Parent
and the Company. The S-4 Registration Statement will (with respect to
Parent and Merger Sub) comply as to form in all material respects with the
requirements of the Securities Act and the rules and regulations
promulgated thereunder. The Joint Proxy Statement will (with respect to
Parent and Merger Sub) comply as to form in all material respects with the
requirements of the Exchange Act and the rules and regulations promulgated
thereunder. Notwithstanding the foregoing provisions of this Section
5.1(k), no representation or warranty is made by Parent or Merger Sub with
respect to statements made or incorporated by reference in the S-4
Registration Statement or the Joint Proxy Statement based on information
supplied by the Company for inclusion or incorporation by reference
therein.
(l) Taxes.
(i) Parent and each of its subsidiaries has timely filed all
federal, state, local and foreign returns, information statements and
reports relating to Taxes ("Returns") required by applicable Tax law to
be filed by Parent and each of its subsidiaries, except for any such
failures to file that would not reasonably be expected to have,
individually or in the aggregate, a Material Adverse Effect on Parent.
All Taxes owed by Parent or any of its subsidiaries to a taxing
authority, or for which Parent or any of its subsidiaries is liable,
whether to a taxing authority or to other Persons or entities under a
Significant Tax Agreement, as of the date hereof, have been paid and,
as of the Effective Time, will have been paid, except for any such
failure to pay that would not reasonably be expected to have,
individually or in the aggregate, a Material Adverse Effect on Parent.
Parent has made accruals for Taxes on the Parent Financial Statements
which are adequate to cover any Tax liability of Parent and each of its
subsidiaries determined in accordance with generally accepted
accounting principles through the date of the Parent Financial
Statements, except where failures to make such accruals or provisions
would not reasonably be expected to have, individually or in the
aggregate, a Material Adverse Effect on Parent.
(ii) Except to the extent that any such failure to withhold would
not reasonably be expected to have, individually or in the aggregate, a
Material Adverse Effect on Parent, Parent and each of its subsidiaries
have withheld with respect to its employees all federal and state
income taxes, FICA, FUTA and other Taxes required to be withheld.
(iii) There is no Tax deficiency outstanding, proposed or assessed
against Parent or any of its subsidiaries, except any such deficiency
that, if paid, would not reasonably be expected to have, individually
or in the aggregate, a Material Adverse Effect on Parent. Neither
Parent nor any of its subsidiaries has executed or requested any waiver
of any statute of limitations on or extending the period for the
assessment or collection of any federal or material state Tax that is
still in effect.
10
(iv) No federal or state Tax audit or other examination of Parent or
any of its subsidiaries is presently in progress, nor has Parent or any
of its subsidiaries been notified in writing of any request for such
federal or material state Tax audit or other examination, except in all
cases for Tax audits and other examinations which would not reasonably
be expected to have, individually or in the aggregate, a Material
Adverse Effect on Parent.
(v) Neither Parent nor any of its subsidiaries has filed any consent
agreement under Section 341(f) of the Code or agreed to have Section
341(f)(2) of the Code apply to any disposition of a subsection (f)
asset (as defined in Section 341(f)(4) of the Code) owned by Parent.
(vi) Neither Parent nor any of its subsidiaries is a party to (A)
any agreement with a party other than Parent or any of its subsidiaries
providing for the allocation or payment of Tax liabilities or payment
for Tax benefits with respect to a consolidated, combined or unitary
Return which Return includes or included Parent or any subsidiary or
(B) any Significant Tax Agreement other than any Significant Tax
Agreement described in (A).
(vii) Except for the group of which Parent and its subsidiaries are
now presently members, neither Parent nor any of its subsidiaries has
ever been a member of an affiliated group of corporations within the
meaning of Section 1504 of the Code.
(viii) Neither Parent nor any of its subsidiaries has agreed to make
nor is it required to make any adjustment under Section 481(a) of the
Code by reason of a change in accounting method or otherwise which have
not yet been taken into account.
(ix) Parent is not, and has not at any time been, a "United States
Real Property Holding Corporation" within the meaning of Section
897(c)(2) of the Code.
(m) Employee Benefits.
(i) Section 5.1(m)(i) of the Parent Disclosure Schedule lists each
"employee pension benefit plan" (as such term is defined in Section
3(2) of ERISA), "employee welfare benefit plan" (as such term is
defined in Section 3(1) of ERISA), material personnel or payroll policy
(including vacation time, holiday pay, service awards, moving expense
reimbursement programs and sick leave) or material fringe benefit,
severance agreement or plan or any medical, hospital, dental, life or
disability plan, excess benefit plan, bonus, stock option, stock
purchase, or other incentive plan (including any equity or equity-based
plan), top hat plan or deferred compensation plan, salary reduction
agreement, change-of-control agreement, employment agreement,
consulting agreement, collective bargaining agreement, indemnification
agreement, or retainer agreement, or any other material benefit plan,
policy, program, arrangement, agreement or contract, whether or not
written, with respect to any employee, former employee, director,
independent contractor, or any beneficiary or dependent thereof
maintained, sponsored, adopted or administered by Parent or any
Subsidiary, or to which Parent or any Subsidiary has made contributions
to, obligated itself or had any liability with respect to, or any
defined benefit plan or plan subject to Code Section 412 that was
adopted or administered, or to which contributions were made, by any
current or former Plan Affiliate, or any defined benefit plan, plan
subject to Code Section 412, or plan with any remaining liability or
benefit obligation that has been terminated by Parent or any Subsidiary
(all such plans, policies, programs, arrangements, agreements and
contracts, whether or not set forth in Section 5.1(m) of the Parent
Disclosure Schedule or on the Parent Financial Statements, are referred
to in this Agreement as "Parent Scheduled Plans").
(ii) Parent has delivered or made available to the Company a
complete and accurate copy of each written Parent Scheduled Plan,
together with, if applicable, a copy of audited financial statements,
actuarial reports and Form 5500 Annual Reports (including required
schedules), if any, for the most recent plan year, the most recent IRS
determination letter or IRS recognition of exemption; each other
material letter, ruling or notice issued by a governmental body with
respect to each such plan, a copy of each trust agreement, insurance
contract or other funding vehicle, if any, with respect to each such
plan, the most recent PBGC Form 1 with respect to each such plan, if
any, the current
11
summary plan description and summary of material modifications thereto
with respect to each such plan, Form 5310 and any related filings with
the PBGC and with respect to the last three (3) Plan years, for each
Plan subject to Title IV of ERISA, general notification to employees of
their rights under Code Section 4980B and form of letter(s) distributed
upon the occurrence of a qualifying event described in Code Section
4980B, in the case of a Parent Scheduled Plan that is a "group health
plan" as defined in Code Section 4980(B)(g)(2), and a copy or
description of each other general explanation or written or oral
communication which describes a material term of each Parent Scheduled
Plan that has not previously been disclosed to the Company pursuant to
this Section. Section 5.1(m) of the Parent Disclosure Schedule contains
a description of the material terms of any unwritten Parent Scheduled
Plan. Except as set forth in Section 5.1(m) of the Parent Disclosure
Schedule, there are no negotiations, demands or proposals which are
pending or threatened which concern matters now covered, or that would
be covered, by the foregoing types of unwritten Plans.
(iii) Except as disclosed in Section 5.1(m) of the Parent Disclosure
Schedule:
(1) Each Parent Scheduled Plan (A) has been and currently
complies in form and in operation in all material respects with all
applicable requirements of ERISA and the Code, and any other legal
requirements; (B) has been and is operated and administered in
material compliance with its terms (except as otherwise required by
law); (C) has been and is operated in compliance with applicable
legal requirements in such a manner as to qualify, where
appropriate, for both Federal and state purposes, for income tax
exclusions to its participants, tax-exempt income for its funding
vehicle, and the allowance of deductions and credits with respect to
contributions thereto; and (D) where appropriate, has received a
favorable determination letter or recognition of exemption from the
Internal Revenue Service.
(2) With respect to each Parent Scheduled Plan, there are no
claims or other proceedings pending or, to the knowledge of Parent,
threatened with respect to the assets thereof (other than routine
claims for benefits), and there are no facts known to Parent which
could reasonably give rise to any material liability, claim or other
proceeding against any Parent Scheduled Plan, any fiduciary or plan
administrator or other Person dealing with any Parent Scheduled Plan
or the assets of any such Parent Scheduled Plan.
(3) With respect to each Parent Scheduled Plan, to the knowledge
of Parent, no Person: (A) has entered into any "prohibited
transaction," as such term is defined in ERISA or the Code and the
regulations, administrative rulings and case law thereunder that is
not exempt under Code Section 4975 or ERISA Section 408 (or any
administrative class exemption issued thereunder); (B) has
materially breached a fiduciary obligation or violated Sections 402,
403, 405, 503, 510 or 511 of ERISA; (C) has any material liability
for any failure to act or comply in connection with the
administration or investment of the assets of such plans; or (D)
engaged in any transaction or otherwise acted with respect to such
plans in such a manner which could subject the Company, or any
fiduciary or plan administrator or any other Person dealing with any
such plan, to material liability under Section 409 or 502 of ERISA
or Sections 4972 or 4976 through 4980B of the Code.
(4) Each Parent Scheduled Plan (other than any stock option plan)
may be amended, terminated, modified or otherwise revised by Parent,
as provided in the Parent Schedule Plan as so amended, other than
benefits protected under Section 411(d) of the Code, on and after
the Closing, without further material liability to Parent (excluding
ordinary administrative expenses and routine claims for benefit
plans), including, but not limited to, any withdrawal liability
under ERISA for any multiemployer plan or any liability under any
Parent Scheduled Plan subject to Title IV of ERISA.
(5) None of Parent or any current or former Parent Plan Affiliate
has at any time participated in, made contributions to or had any
other liability with respect to any Parent Scheduled Plan which is a
"multiemployer plan" as defined in Section 4001 of ERISA, a
"multiemployer plan" within the meaning of Section 3(37) of ERISA, a
"multiple employer
12
plan" within the meaning of Section 413(c) of the Code, a "multiple
employer welfare arrangement" within the meaning of Section 3(40) of
ERISA or a plan that is subject to Title IV of ERISA.
(6) No Parent Scheduled Plan provides, or reflects or represents
any liability to provide retiree health to any person for any
reason, except as may be required by COBRA or other applicable
statute, and neither Parent nor any Plan Affiliate has ever
represented, promised or contracted (whether in oral or written
form) to any current or former employee, consultant or director
(either individually or as a group) or any other person that such
current or former employee(s) or other person would be provided with
retiree health, except to the extent required by any applicable
continuation coverage statute.
(7) No Parent Scheduled Plan has incurred an "accumulated funding
deficiency" as such term is defined in Section 302 of ERISA or
Section 412 of the Code, whether or not waived, or has posted or is
required to provide security under Code Section 401(a)(29) or
Section 307 of ERISA; no event has occurred which has or could
result in the imposition of a lien under Code Section 412 or Section
302 of ERISA, nor has any liability to the Pension Benefit Guaranty
Corporation (the "PBGC") (except for payment of premiums) been
incurred or reportable event within the meaning of Section 4043 of
ERISA occurred with respect to any such plan; and the PBGC has not
threatened or taken steps to institute the termination of any such
plan.
(8) The requirements of COBRA and the Health Insurance
Portability and Accountability Act, the requirements of the Family
Medical Leave Act of 1993, as amended, the requirements of the
Women's Health and Cancer Rights Act, the requirements of the
Newborns' and Mothers' Health Protection Act of 1996, or any
amendment to each such act, or any similar provisions of state law
applicable to its employees, have, in all material respects, been
satisfied with respect to each Parent Scheduled Plan.
(9) All contributions, payments, premiums, expenses,
reimbursements or accruals for all periods ending prior to or as of
the Closing for each Parent Scheduled Plan (including periods from
the first day of the then current plan year to the Closing) shall
have been made or accrued on Parent financial statements (in
accordance with generally applied accounting principles, including
FAS 87, 88, 106 and 112) and each such plan otherwise does not have
nor could have any unfunded liability (including benefit liabilities
as defined in Section 4001(a)(16) of ERISA) which is not reflected
on Parent financial statements. The same shall be true for all
periods ending as of the Closing for each Parent Scheduled Plan.
(10) Neither Parent nor a Plan Affiliate has any material
liability (A) for the termination of any single employer plan under
Section 4062 of ERISA or any multiple employer plan under Section
4063 of ERISA, (B) for any lien imposed under Section 302(f) of
ERISA or Section 412(n) of the Code, (C) for any interest payments
required under Section 302(e) of ERISA or Section 412(m) of the
Code, (D) for any excise tax imposed by Code Sections 4971, 4972,
4977, or 4979, or (E) for any minimum funding contributions under
Section 302(c)(11) of ERISA or Code Section 412(c)(11).
(11) All Parent Scheduled Plans to the extent applicable, are in
compliance with Section 1862(b)(1)(A)(i) of the Social Security Act
and neither Parent nor any Plan Affiliate has any liability for any
excise tax imposed by Code Section 5000.
(12) With respect to any Parent Scheduled Plan which is a welfare
plan as defined in Section 3(1) of ERISA; (A) each such welfare plan
which is intended to meet the requirements for tax-favored treatment
under Subchapter B of Chapter 1 of the Code materially meets such
requirements; and (B) there is no disqualified benefit (as such term
is defined in Code Section 4976(b)) which would subject Parent or
any Plan Affiliate to a tax under Code Section 4976(a).
(iv) Other than by reason of actions taken by Parent following the
Closing and other than pursuant to the terms of any Parent Scheduled
Plan, the consummation of the transactions
13
contemplated by this Agreement will not (A) entitle any current or
former employee of Parent to severance pay, unemployment compensation
or any other payment, (B) accelerate the time of payment or vesting of
any payment or benefit (other than for a terminated or frozen tax-
qualified plan, pursuant to a requirement herein to freeze or terminate
such plan), cause the forgiveness of any indebtedness, or increase the
amount of any compensation due to any such employee or former employee,
or (C) result in any prohibited transaction described in Section 406 of
ERISA or Section 4975 of the Code for which an exemption is not
available.
(v) As used in this Agreement, with respect to any Person the term
"Plan Affiliate" shall mean each other Person with whom such Person
constitutes or has constituted all or part of a controlled group, or
which would be treated or has been treated with such Person as under
common control or whose employees would be treated or have been treated
as employed by such Person, under Section 414 of the Code and any
regulations, administrative rulings and case law interpreting the
foregoing.
(n) Parent Intangible Property.
(i) Parent and its subsidiaries own, or possess a valid and
enforceable license or otherwise possess legally enforceable rights to
use, all patents, trademarks, trade names, service marks, copyrights
and mask works, all applications for and registrations of such patents,
internet domain names, trademarks, trade names, service marks,
copyrights and mask works, and all processes, formulae, methods,
schematics, technology, know-how, Software and tangible or intangible
proprietary information or material that are necessary to conduct the
business of Parent and its subsidiaries as currently conducted or
planned to be conducted (the "Parent Intellectual Property Rights").
(ii) Neither Parent nor any of its subsidiaries is or will be as a
result of the execution and delivery of this Agreement or the
performance of its obligations under this Agreement, in breach in any
material respect of any material license, sublicense or other agreement
relating to the Parent Intellectual Property Rights or any license,
sublicense or other agreement pursuant to which Parent or any of its
subsidiaries is authorized to use any third party patents, trademarks
or copyrights, including Software, which are used in the manufacture
of, incorporated in, or form a part of any product of Parent or any of
its subsidiaries. All such agreements that are material to the business
of Parent or any of its subsidiaries are listed in Section 5.1(n)(ii)
of the Parent Disclosure Schedule.
(iii) All patents, registered trademarks, service marks and
copyrights held by Parent or any of its subsidiaries which are material
to its business are valid and enforceable. Neither Parent nor any of
its subsidiaries has been sued in any suit, action or proceeding which
involves a claim of infringement of any patent, trademark, service mark
or copyright or the violation of any trade secret or other proprietary
rights of any third party. To the knowledge of Parent, the conduct of
the business of Parent and its subsidiaries does not violate or
infringe any intellectual property rights owned or controlled by any
third party, and there are no claims, proceedings or actions pending
or, to the knowledge of Parent, threatened against Parent or any of its
subsidiaries (i) alleging that Parent's or any of its subsidiaries'
activities infringe upon, violate or otherwise constitute the
unauthorized use of any intellectual property rights of any third party
or (ii) challenging the ownership, use, validity or enforceability of
any Parent Intellectual Property Rights, nor is there a valid basis for
any such claim.
(iv) Parent and its subsidiaries have taken reasonable measures to
safeguard and maintain their proprietary rights in all Parent
Intellectual Property Rights owned by Parent or its subsidiaries. There
has been no material disclosure of any trade secret of Parent or any of
its subsidiaries to any third party, other than pursuant to valid,
enforceable, written non-disclosure agreements.
(v) The completion of the transactions contemplated by this
Agreement will not materially alter or impair the right of Parent or
its subsidiaries to use any of the Parent Intellectual Property Rights.
(vi) All Parent Intellectual Property Rights owned by Parent have
been (i) acquired from a person or entity having full, effective and
exclusive ownership thereof, (ii) developed or created internally by
employees of Parent or its subsidiaries within the scope of their
employment or (iii)
14
developed or created by independent contractors that either (x) have
been party to a "work-for-hire" arrangement or agreement with Parent or
one of its subsidiaries or (y) have executed appropriate instruments of
assignment in favor of Parent or the subsidiary conveying to Parent or
the subsidiary full, effective and exclusive ownership of all tangible
and intangible rights therein except where the failure to satisfy any
of the preceding clauses (i), (ii) or (iii) would not have a Material
Adverse Effect on Parent.
(o) Agreements, Contracts and Commitments; Material Contracts. Except as
set forth in Section 5.1(m) or Section 5.1(o) of the Parent Disclosure
Schedule, as of the date hereof, neither Parent nor any of its subsidiaries
is a party to or is bound by:
(i) any contract relating to the borrowing of money, the guaranty of
another Person's borrowing of money, or the creation of an encumbrance
or lien on the assets of the Parent or any of its subsidiaries and with
outstanding obligations in excess of $500,000;
(ii) any employment or consulting agreement, contract or commitment
with any officer or director level employee or member of Parent's Board
of Directors or any other employee who is one of the ten (10) most
highly compensated employees, including base salary and bonuses, (the
"Parent Key Employees"), other than those that are terminable by Parent
or any of its subsidiaries on no more than thirty (30) days notice
without liability or financial obligation or benefits generally
available to employees of Parent, except to the extent general
principles of wrongful termination law may limit Parent's or any of its
subsidiaries' ability to terminate employees at will, and attached
hereto as Section 5.1(o) of the Parent Disclosure Schedule is a list of
the top four compensated officers as of the calendar year 1999 ended
and their current salary;
(iii) any agreement of indemnification or guaranty by Parent or any
of its subsidiaries not entered into in the ordinary course of business
other than indemnification agreements between Parent or any of its
subsidiaries and any of its officers or directors in standard forms as
filed by Parent with the SEC;
(iv) any agreement, contract or commitment containing any covenant
limiting the freedom of Parent or any of its subsidiaries to engage in
any line of business or conduct business in any geographical area,
compete with any person or granting any exclusive distribution rights;
(v) any joint venture, partnership, and other contract (however
named) involving a sharing of profits or losses by the Parent or any
subsidiary with any other Person;
(vi) any contract for capital expenditures in excess of $500,000;
(vii) any agreement, contract or commitment currently in force
relating to the disposition or acquisition of assets not in the
ordinary course of business;
(viii) any agreement, contract or commitment for the purchase of any
ownership interest in any corporation, partnership, joint venture or
other business enterprise for consideration in excess of $500,000, in
any case which includes all escrow and earn-out agreements with
outstanding obligations; or
(ix) any material joint marketing, distribution or development
agreement or any other material contract of the Parent or any of its
subsidiaries not previously filed with the SEC and not otherwise listed
in any other section of the Parent Disclosure Schedule.
A true and complete copy (including all amendments) of each Parent
Contract (or if standard forms are used, copies of the applicable forms
with an indication of any material differences from the actual listed
Parent Contract), or a summary of each oral contract, has been made
available to the Company, excluding those Parent Contracts referenced in
clause (vii). Each contract set forth in Section 5.1(o) of the Parent
Disclosure Schedule (a "Parent Contract") and each Parent Material Contract
is in full force and effect, and is a legal, valid and binding obligation
of Parent or a subsidiary of Parent and, to the knowledge of Parent, each
of the other parties thereto, enforceable in accordance with its terms
against Parent or one of its subsidiaries, as applicable, except (a) that
the enforcement thereof may be limited by
15
(i) bankruptcy, insolvency, reorganization, moratorium or other similar
laws now or hereafter in effect relating to creditors' rights generally and
(ii) general principles of equity (regardless of whether enforceability is
considered in a proceeding in equity or at law) and (b) as would not,
individually or in the aggregate, be reasonably expected to result in a
Material Adverse Effect on Parent. No condition exists or event has
occurred which (whether with or without notice or lapse of time or both, or
the happening or occurrence of any other event) would constitute a default
by Parent or a subsidiary of Parent or, to the knowledge of Parent, any
other party thereto under, or result in a right in termination of, any
Parent Contract or Parent Material Contract, except as would not,
individually or in the aggregate, be reasonably expected to result in a
Material Adverse Effect on Parent. The term "Parent Material Contract"
shall mean any contract that is material to Parent and its subsidiaries,
taken as a whole. Except as provided for herein, at the Effective Time, no
Person will have the right, by contract or otherwise, to become, nor does
any entity have the right to designate or cause Parent to appoint a Person
as, a director of Parent or any subsidiary of Parent.
(p) Listings. Parent's securities are not listed, or quoted, for trading
on any U. S. domestic or foreign securities exchange, other than the NNM.
(q) Environmental Matters. Except as disclosed in Section 5.1(q) of the
Parent Disclosure Schedule, (i) Parent and its subsidiaries and the
operations, assets and properties thereof are in material compliance with
all Environmental Laws; (ii) there are no judicial or administrative
actions, suits, proceedings or investigations pending or, to the knowledge
of Parent, threatened against Parent or any subsidiary of Parent alleging
the violation of any Environmental Law and neither Parent nor any
subsidiary of Parent has received notice from any governmental body or
Person alleging any violation of or liability under any Environmental Laws,
in either case which could reasonably be expected to result in material
Environmental Costs and Liabilities; (iii) to the knowledge of Parent,
there are no facts, circumstances or conditions relating to, arising from,
associated with or attributable to Parent or its subsidiaries or any real
property currently or previously owned, operated or leased by Parent or its
subsidiaries that could reasonably be expected to result in material
Environmental Costs and Liabilities; and (iv) to the knowledge of Parent,
neither Parent nor any of its subsidiaries has ever generated, transported,
treated, stored, handled or disposed of any Hazardous Material (as
hereinafter defined) at any site, location or facility in a manner that
could create any material Environmental Costs and Liabilities under any
Environmental Law, and no such Hazardous Material has been or is currently
present on, in, at or under any real property owned or used by Parent or
any of its subsidiaries in a manner that could create any material
Environmental Costs and Liabilities (including without limitation,
containment by means of any underground or aboveground storage tank). For
the purpose of Sections 5.1(q) and 5.2(q), the following terms have the
following definitions: (X) "Environmental Costs and Liabilities", with
respect to any Person, means any and all losses, liabilities, obligations,
damages, fines, penalties, judgments, actions, claims, costs and expenses
(including, without limitation, fees, disbursements and expenses of legal
counsel, experts, engineers and consultants and the costs of investigation
and feasibility studies, remedial or removal actions and cleanup
activities) arising from or under or relate to matters covered by any
Environmental Law; (Y) "Environmental Laws" means any and all federal,
state, foreign, interstate, local or municipal laws, rules, orders,
regulations, statutes, ordinances, codes, decisions, injunctions, orders,
decrees, requirements of any Governmental Entity, any and all common law
requirements, rules and bases of liability regulating, relating to or
imposing liability or standards of conduct concerning pollution, Hazardous
Materials or protection of human health, safety or the environment, as
currently in effect and includes the Comprehensive Environmental Response
Compensation and Liability Act, 42 U.S.C. Section 9601 et seq., the
Hazardous Materials Transportation Act, 49 U.S.C. Section 1801 et seq., the
Resource Conservation and Recovery Act, 42 U.S.C. Section 6901 et seq., the
Clean Water Act, 33 U.S.C. Section 1251 et seq., the Clean Air Act, 33
U.S.C. Section 2601 et seq., the Toxic Substances Control Act, 15 U.S.C.
Section 2601 et seq., the Federal Insecticide, Fungicide and Rodenticide
Act, 7 U.S.C. Section 136 et seq., Occupational Safety and Health Act 29
U.S.C. Section 651 et seq. and the Oil Pollution Act of 1990, 33 U.S.C.
Section 2701 et seq., as such laws have been amended or supplemented, and
the regulations promulgated pursuant thereto, and all analogous state or
local statutes; and (Z) "Hazardous
16
Material" means any substance, material or waste regulated by federal,
state or local government, including, without limitation, any substance,
material or waste which is defined as a "hazardous waste," "hazardous
material," "hazardous substance," "toxic waste" or "toxic substance" under
any provision of Environmental Law and including but not limited to
petroleum and petroleum products including crude oil and any fraction
thereof, natural gas and synthetic gas and mixtures thereof, radioactive
substances, asbestos and polychlorinated biphenyls.
(r) Title to Properties; Liens; Condition of Properties.
(i) Parent and its subsidiaries have good and marketable title to,
or a valid leasehold interest in, the real and personal property,
located on their premises or shown on the Parent's balance sheet
included in the Parent's Form 10-Q for the quarter ended October 31,
1999 or acquired after the date thereof. None of the property owned or
used by Parent or any of its subsidiaries is subject to any mortgage,
pledge, deed of trust, lien (other than for taxes not yet due and
payable), conditional sale agreement, security title, encumbrance, or
other adverse claim or interest of any kind. Since October 31, 1999,
there has not been any sale, lease, or any other disposition or
distribution by Parent or any of its subsidiaries of any of its assets
or properties, material to Parent and its subsidiaries, taken as a
whole, except transactions in the ordinary and regular course of
business.
(ii) Parent and each of its subsidiaries owns or leases all
equipment, furniture, fixtures, improvements and other tangible assets
necessary and sufficient for the conduct of its business as presently
conducted.
(iii) Neither Parent nor its subsidiaries owns any real property or
any interest in real property, except for the real property and
leaseholds created under the real property leases, if any, identified
in Section 5.1(r) of the Parent Disclosure Schedule. Section 5.1(r) of
the Parent Disclosure Schedule lists the real property and the premise
covered by such leases, as applicable. Parent and each of its
subsidiaries enjoys peaceful and undisturbed possession of such
premises.
(iv) All material leases pursuant to which Parent and each of its
subsidiaries leases real or personal property are in good standing and
are valid and effective in accordance with their respective terms and
there exists no default thereunder.
(s) Labor and Employee Relations.
(i) (A) None of the employees of Parent or any of its subsidiaries
is represented in his or her capacity as an employee of such company by
any labor organization; (B) neither Parent nor any of its subsidiaries
has recognized any labor organization nor has any labor organization
been elected as the collective bargaining agent of any of their
employees, nor has Parent or any of its subsidiaries signed any
collective bargaining agreement or union contract recognizing any labor
organization as the bargaining agent of any of their employees; and (C)
to the knowledge of Parent there is no active or current union
organization activity involving the employees of Parent or any of its
subsidiaries, nor has there ever been union representation involving
employees of Parent or any of its subsidiaries.
(ii) Except for complaints which, in the aggregate, do not represent
claims which could reasonably involve liabilities in excess of
$500,000, there are no complaints against Parent or any of its
subsidiaries pending or, to the knowledge of Parent, overtly threatened
before the National Labor Relations Board or any similar foreign, state
or local labor agencies, or before the Equal Employment Opportunity
Commission or any similar foreign, state or local agency, or before any
other governmental agency or entity by or on behalf of any employee or
former employee of Parent or any of its subsidiaries.
(iii) Parent has provided to the Company a description of all
written employment policies under which Parent and each subsidiary is
currently operating.
(t) Permits. Parent and each of its subsidiaries hold all licenses,
permits, registrations, orders, authorizations, approvals and franchises
which are required to permit it to conduct its businesses as presently
conducted, except where the failure to hold such licenses, permits,
registrations, orders,
17
authorizations, approvals or franchises would not, individually or in the
aggregate, have a Material Adverse Effect on Parent. All such material
licenses, permits, registrations, orders, authorizations, approvals and
franchises are now, and will be after the Closing, valid and in full force
and effect, and Parent shall have full benefit of the same, except where
the failure to be valid and in full force and effect or to have the benefit
of any such license, permit, registration, order, authorization, approval
or franchise would not, individually or in the aggregate, have a Material
Adverse Effect on Parent. Neither Parent nor any of its subsidiaries has
received any notification of any asserted present failure (or past and
unremedied failure) by it to have obtained any such license, permit,
registration, order, authorization, approval or franchise, except where
such failures would not, individually or in the aggregate, have a Material
Adverse Effect on Parent.
(u) Transactions with Affiliates. Since the date of Parent's last proxy
statement to its stockholders, no event has occurred that would be required
to be reported by Parent as a Certain Relationship or Related Transaction,
pursuant to Item 404 of Regulation S-K promulgated by the SEC.
(v) Year 2000. Parent has implemented a program directed at ensuring
that its and its subsidiaries' products (including prior and current
products and technology and products and technology currently under
development) will, when used in accordance with associated documentation on
a specified platform or platforms, be capable upon installation of (i)
operating in the same manner on dates in both the Twentieth and Twenty-
First centuries and (ii) accurately processing, providing and receiving
date data from, into and between the Twentieth and Twenty-First centuries,
including the years 1999 and 2000, and making leap-year calculations,
provided that all non-Parent products (e.g., hardware, software and
firmware) material to the conduct of the business of Parent and used in or
in combination with Parent's products, exchange data with Parent's products
in the same manner on dated in both the Twentieth and Twenty-First
centuries. Parent has taken commercially reasonable steps to assure that
the year 2000 date change will not adversely affect, and such date change
has not adversely affected, the systems and facilities that support the
operations of Parent and its subsidiaries, except as is not reasonably
likely to have a Material Adverse Effect on Parent.
(w) State Takeover Laws. The Board of Directors of Parent has taken all
necessary action so that the restrictions contained in Section 203 of the
DGCL applicable to a "business combination" (as defined in Section 203)
will not apply to the execution, delivery or performance of this Agreement
or the Stockholder Agreements or the consummation of the Merger or the
other transactions contemplated by this Agreement or the Stockholder
Agreements. No other state takeover statute or similar statute or
regulation is applicable to this Agreement or the Stockholder Agreements.
5.2 Representations and Warranties of the Company. The Company hereby.
represents and warrants to Parent and Merger Sub that the statements contained
in this Section 5.2 are true and correct, except to the extent specifically set
forth (i) in the Company SEC Reports filed with the SEC and publicly available
prior to the date hereof or (ii) on the disclosure schedule previously
delivered by the Company to Parent and Merger Sub (the "Company Disclosure
Schedule"). The Company Disclosure Schedule shall be arranged in sections and
paragraphs corresponding to the letter and numbered paragraphs contained in
this Section 5.2, and the disclosure in any paragraph shall qualify only the
corresponding paragraph in this Section 5.2 or other paragraphs or sections to
which it is clearly apparent (from a plain reading of the disclosure) that such
disclosure relates.
(a) Corporate Organization and Qualification. Each of the Company and
each of its subsidiaries is a corporation duly organized, validly existing
and in good standing under the laws of the jurisdiction of incorporation or
organization and is duly qualified and in good standing as a foreign
corporation in each jurisdiction where the properties owned, leased or
operated, or the business conducted, by it require such qualification,
except where failure to so qualify or be in good standing as a foreign
corporation would not have a Material Adverse Effect on the Company. Each
of the Company and each of its subsidiaries has all requisite power and
authority (corporate or otherwise) to own, lease and operate its properties
and to carry on its business as it is now being conducted except where
failure to have such power and authority would
18
not have a Material Adverse Effect on the Company. Section 5.2(a) of the
Company Disclosure Schedule sets forth a complete and correct list of all
of the subsidiaries of the Company which as of the date of this Agreement
are Significant Subsidiaries (as defined in Rule 1-02 of Regulation S-X of
the SEC). The copies of certificate of incorporation and bylaws of the
Company and the charter documents of each of its subsidiaries which were
previously furnished or made available to Parent are true, complete and
correct copies of such documents as in effect on the date of this
Agreement.
(b) Capitalization. As of January 27, 2000, the authorized capital stock
of the Company consists of (i) 25,000,000 shares of common stock, $0.01 par
value per share, of which 12,825,284 shares were issued and outstanding,
and (ii) 3,000,000 shares of preferred stock, $0.01 par value per share,
none of which is issued or outstanding. Since January 1, 2000 to the date
of this Agreement, there have been no issuances of Company Shares or any
other securities of the Company other than issuances of Company Shares
pursuant to options or rights outstanding as of January 27, 2000 under
Company Option Plans. All of the outstanding shares of capital stock of the
Company and its subsidiaries are duly authorized, validly issued, fully
paid and nonassessable and free of any preemptive rights. The Company has
no outstanding stock appreciation rights, phantom stock or similar rights.
All outstanding shares of capital stock or other equity interests of the
subsidiaries of the Company are owned by the Company or a direct or
indirect wholly-owned subsidiary of the Company, free and clear of all
liens, pledges, charges, encumbrances, claims and options of any nature. As
of January 27, 2000, except for options to purchase 1,094,344 Company
Shares issued pursuant to (i) the Amended and Restated Combined Incentive
and Non-Statutory Stock Option Plan (the "Company Amended Option Plan") and
(ii) the Company 1999 Combined Incentive and Non-Statutory Stock Option
Plan (the "Company 1999 Option Plan", and together with the Company Amended
Option Plan, the "Company Option Plans"), and rights under the Company
Employee Stock Purchase Plan (the "Company Employee Stock Purchase Plan"),
there are no outstanding or authorized options, warrants, calls, rights
(including preemptive rights), commitments or any other agreements of any
character which the Company or any of its subsidiaries is a party to, or
may be bound by, requiring it to issue, transfer, grant, sell, purchase,
redeem or acquire any shares of capital stock or any of its securities or
rights convertible into, exchangeable for, or evidencing the right to
subscribe for, any shares of capital stock of the Company or any of its
subsidiaries. Section 5.2(b) of the Company Disclosure Schedule sets forth
a complete and correct list, as of January 27, 2000, of the number of
Company Shares subject to Company Options or other rights to purchase or
receive Company Shares granted under the Company Option Plans or otherwise,
the dates of grant and the exercise prices thereof. No options or warrants
or other rights to acquire capital stock from the Company have been issued
or granted or accelerated or had their terms modified since January 3, 2000
to the date of this Agreement. No bonds, debentures, notes or other
indebtedness of the Company having the right to vote on any matters on
which stockholders may vote are issued or outstanding. Except as otherwise
set forth in this Section 5.2(b), as of the date of this Agreement, there
are no securities, options, warrants, calls, rights, commitments,
agreements, arrangements or undertakings of any kind to which the Company
or any of its subsidiaries is a party or by which any of them is bound
obligating the Company or any of its subsidiaries to issue, deliver or
sell, or cause to be issued, delivered or sold, additional shares of
capital stock or other voting securities of the Company or any of its
subsidiaries or obligating the Company or any of its subsidiaries to issue,
grant, extend or enter into any such security, option, warrant, call,
right, commitment, agreement, arrangement or undertaking. As of the date of
this Agreement, there are no outstanding obligations of the Company or any
of its Subsidiaries to repurchase, redeem or otherwise acquire any shares
of capital stock of the Company or any of its subsidiaries. Except for the
Stockholders Agreements, there are not as of the date hereof and there will
not be at the Effective Time any stockholder agreements, voting trusts or
other agreements or understandings to which the Company is a party or to
which it is bound relating to the voting of any shares of the capital stock
of the Company. No existing rights with respect to the registration of
Company Shares under the Securities Act, including, but not limited to,
demand rights or piggy-back registration rights, shall apply with respect
to any Parent Shares issuable in connection with the Merger.
(c) Fairness Opinion. The Board of Directors of the Company has received
a written opinion from SG Cowen Securities Corporation to the effect that
as of the date hereof and based upon and subject to the
19
matters stated therein, the Exchange Ratio is fair from a financial point
of view to the holders of Company Shares, a copy of which opinion has been
made available to Parent.
(d) Authority Relative to this Agreement. The Board of Directors of the
Company has declared the Merger advisable and the Company has the requisite
corporate power and authority to approve, authorize, execute and deliver
this Agreement and, subject to the approval of the Merger by the
stockholders of the Company in accordance with the DGCL, to consummate the
transactions contemplated hereby. This Agreement and the consummation by
the Company of the transactions contemplated hereby have been duly and
validly authorized by the Board of Directors of the Company and no other
corporate proceedings on the part of the Company are necessary to authorize
this Agreement or to consummate the transactions contemplated hereby (other
than the approval of the Merger by the stockholders of the Company in
accordance with the DGCL). This Agreement has been duly and validly
executed and delivered by the Company and, assuming this Agreement
constitutes the valid and binding agreement of Parent and Merger Sub,
constitutes the valid and binding agreement of the Company, enforceable
against the Company in accordance with its terms, subject, as to
enforceability, to bankruptcy, insolvency, reorganization and other laws of
general applicability relating to or affecting creditors' rights and to
general principles of equity.
(e) Present Compliance with Obligations and Laws. Neither the Company
nor any of its subsidiaries is: (i) in violation of its certificate of
incorporation or bylaws or similar documents; (ii) in default in the
performance of any obligation, agreement or condition of any debt
instrument which (with or without the passage of time or the giving of
notice, or both) affords to any Person the right to accelerate any
indebtedness or terminate any right; (iii) in default under or breach of
(with or without the passage of time or the giving of notice) any other
contract to which it is a party or by which it or its assets are bound; or
(iv) in violation of any law, regulation, administrative order or judicial
order, decree or judgment (domestic or foreign) applicable to it or its
business or assets, except where any violation, default or breach under
items (ii), (iii), or (iv) would not, individually or in the aggregate,
have a Material Adverse Effect on the Company.
(f) Consents and Approvals; No Violation. Neither the execution and
delivery of this Agreement by the Company nor the consummation by the
Company of the transactions contemplated hereby will (i) conflict with or
result in any breach of any provision of its certificate of incorporation
or bylaws; (ii) require any consent, approval, authorization or permit of,
or registration or filing with or notification to, any Governmental Entity,
except (A) in connection with the applicable requirements, if any, of the
HSR Act, (B) pursuant to the applicable requirements of the Securities Act
and the Exchange Act, (C) the filing of the Certificate of Merger pursuant
to the DGCL and appropriate documents with the relevant authorities of
other states in which the Company is authorized to do business, (D) as may
be required by any applicable state securities or "blue sky" laws, or (E)
where the failure to obtain such consent, approval, authorization or
permit, or to make such filing or notification, would not in the aggregate
have a Material Adverse Effect on the Company or adversely affect the
ability of the Company to consummate the transactions contemplated hereby;
(iii) result in a violation or breach of, or constitute (with or without
notice or lapse of time or both) a default (or give rise to any right of
termination, cancellation or acceleration or lien or other charge or
encumbrance) under any of the terms, conditions or provisions of any
indenture, note, license, lease, agreement or other instrument or
obligation to which the Company or any of its subsidiaries is a party or by
which any of their assets may be bound, except for such violations,
breaches and defaults (or rights of termination, cancellation, or
acceleration or lien or other charge or encumbrance) as to which requisite
waivers or consents have been obtained or which, in the aggregate, would
not have a Material Adverse Effect on the Company or adversely affect the
ability of the Company to consummate the transactions contemplated hereby;
(iv) cause the suspension or revocation of any authorizations, consents,
approvals or licenses currently in effect which would have a Material
Adverse Effect on the Company; or (v) assuming the consents, approvals,
authorizations or permits and filings or notifications referred to in this
Section 5.2(f) are duly and timely obtained or made and the approval of the
Merger by the stockholders of the Company in accordance with DGCL has been
obtained, violate any order, writ, injunction, decree, statute, rule or
regulation applicable to the Company or any of its subsidiaries or to any
of their respective assets, except for violations which would not in the
aggregate
20
have a Material Adverse Effect on the Company or adversely affect the
ability of the Company to consummate the transactions contemplated hereby.
(g) Litigation. There are no actions, suits, claims, investigations or
proceedings pending or, to the knowledge of the Company, threatened against
the Company or any of its subsidiaries that, alone or in the aggregate,
would be reasonably likely to result in obligations or liabilities of the
Company or any of its subsidiaries that would have a Material Adverse
Effect on the Company or adversely effect the ability of the Company to
consummate the transactions contemplated hereby. Neither the Company nor
any of its subsidiaries is subject to any outstanding order, writ,
injunction or decree which (i) has or may have the effect of prohibiting or
impairing any business practice of the Company or any of its subsidiaries,
any acquisition of property (tangible or intangible) by the Company or any
of its subsidiaries, the conduct of the business by the Company or any of
its subsidiaries, or Company's ability to perform its obligations under
this Agreement or (ii), insofar as can be reasonably foreseen, individually
or in the aggregate, would have a Material Adverse Effect on the Company.
(h) SEC Reports; Financial Statements.
(i) Since December 31, 1998 the Company has filed all forms, reports
and documents with the SEC required to be filed by it pursuant to the
federal securities laws and the SEC rules and regulations thereunder,
all of which complied in all material respects with all applicable
requirements of the Securities Act and the Exchange Act and the rules
and regulations promulgated thereunder (the "Company SEC Reports").
None of the Company SEC Reports, including, without limitation, any
financial statements or schedules included therein, at the time filed
(or if amended or superseded by a filing prior to the date of this
Agreement, then on the date of such filing) contained any untrue
statement of a material fact or omitted to state a material fact
required to be stated therein or necessary in order to make the
statements therein, in light of the circumstances under which they were
made, not misleading. None of the Company's subsidiaries is required to
file any forms, reports or other documents with the SEC.
(ii) The consolidated balance sheets and the related statements of
income, stockholders' equity and cash flow (including the related notes
thereto) of the Company included in the Company SEC Reports
(collectively, the "Company Financial Statements") comply as to form in
all material respects with applicable accounting requirements and the
published rules and regulations of the SEC with respect thereto, have
been prepared in accordance with GAAP applied on a basis consistent
throughout the periods involved (except as otherwise noted therein or,
in the case of unaudited interim financial statements, as may be
permitted by the SEC on Form 10-Q under the Exchange Act), and present
fairly the consolidated financial position of the Company and its
consolidated subsidiaries as of their respective dates, and the results
of their operations and their cash flow for the periods presented
therein (subject, in the case of the unaudited interim financial
statements, to normal and recurring year-end adjustments). Since
December 31, 1998, there has not been any material change, by the
Company or any of its subsidiaries in accounting principles, methods or
policies for financial accounting purposes except as required by
concurrent changes in GAAP.
(i) No Liabilities; Absence of Certain Changes or Events. Neither the
Company nor any of its subsidiaries has any material indebtedness,
obligations or liabilities of any kind (whether accrued, absolute,
contingent or otherwise, and whether due or to become due or asserted or
unasserted), and, to the knowledge of the Company, there is no reasonable
basis for the assertion of any material claim or liability of any nature
against the Company or any of its subsidiaries, except for liabilities (i)
which are fully reflected in, reserved against or otherwise described in
the Company Financial Statements for the period ending December 31, 1998,
(ii) which have been incurred after December 31, 1998 in the ordinary
course of business, consistent with past practice, or (iii) which,
individually or in the aggregate, would not reasonably be expected to have
a Material Adverse Effect on the Company. Since December 31, 1998, the
business of the Company and its subsidiaries has been carried on only in
the ordinary and usual course, and there has not been any Material Adverse
Effect on the Company (excluding any Material Adverse Effect Exception).
Since September 30, 1999, to the knowledge of the Company, no material
customer or
21
supplier of the Company or its subsidiaries has threatened, in writing, to
alter materially its relationship with the Company or its subsidiaries.
(j) Brokers and Finders. Except for the fees and expenses payable to SG
Cowen Securities Corporation, which fees and expenses are reflected in its
agreement with the Company, a true and complete copy of which (including
all amendments) has been furnished to Parent, neither the Company nor any
of its subsidiaries has employed any investment banker, broker, finder,
consultant or intermediary in connection with the transactions contemplated
by this Agreement which would be entitled to any investment banking,
brokerage, finder's or similar fee or commission in connection with this
Agreement or the transactions contemplated hereby.
(k) S-4 Registration Statement and Proxy Statement/Prospectus. None of
the information supplied or to be supplied by the Company for inclusion or
incorporation by reference in the S-4 Registration Statement or the Joint
Proxy Statement will (i) in the case of the S-4 Registration Statement, at
the time it becomes effective or at the Effective Time, contain any untrue
statement of a material fact or omit to state any material fact required to
be stated therein or necessary in order to make the statements therein not
misleading, or (ii) in the case of the Joint Proxy Statement, at the time
of the mailing of the Joint Proxy Statement and at the time of the
Stockholder Meetings, contain any untrue statement of a material fact or
omit to state any material fact required to be stated therein or necessary
in order to make the statements therein, in light of the circumstances
under which they are made, not misleading. If at any time prior to the
Effective Time any event with respect to the Company, its officers and
directors or any of its subsidiaries should occur which is required to be
described in an amendment of, or a supplement to, the Joint Proxy Statement
or the S-4 Registration Statement, the Company shall promptly inform
Parent, such event shall be so described, and such amendment or supplement
shall be promptly filed with the SEC and, as required by law, disseminated
to the stockholders of the Company and Parent. The S-4 Registration
Statement will (with respect to the Company) comply as to form in all
material respects with the requirements of the Securities Act and the rules
and regulations promulgated thereunder. The Joint Proxy Statement will
(with respect to the Company) comply as to form in all material respects
with the requirements of the Exchange Act and the rules and regulations
promulgated thereunder. Notwithstanding the foregoing provisions of this
Section 5.2(k), no representation or warranty is made by the Company with
respect to statements made or incorporated by reference in the S-4
Registration Statement or the Joint Proxy Statement based on information
supplied by Parent or Merger Sub for inclusion or incorporation by
reference therein.
(l) Taxes.
(i) The Company and each of its subsidiaries has timely filed all
Returns required by applicable Tax law to be filed by the Company and
each of its subsidiaries, except for any such failures to file that
would not reasonably be expected to have, individually or in the
aggregate, a Material Adverse Effect on the Company. All Taxes owed by
the Company or any of its subsidiaries to a taxing authority, or for
which the Company or any of its subsidiaries is liable, whether to a
taxing authority or to other Persons or entities under a Significant
Tax Agreement, as of the date hereof, have been paid and, as of the
Effective Time, will have been paid, except for any such failure to pay
that would not reasonably be expected to have, individually or in the
aggregate, a Material Adverse Effect on the Company. The Company has
made accruals for Taxes on the Company Financial Statements which are
adequate to cover any Tax liability of the Company and each of its
subsidiaries determined in accordance with generally accepted
accounting principles through the date of the Company Financial
Statements, except where failures to make such accruals or provisions
would not reasonably be expected to have, individually or in the
aggregate, a Material Adverse Effect on the Company.
(ii) Except to the extent that any such failure to withhold would
not reasonably be expected to have, individually or in the aggregate, a
Material Adverse Effect on the Company, the Company and each of its
subsidiaries have withheld with respect to its employees all federal
and state income taxes, FICA, FUTA and other Taxes required to be
withheld.
22
(iii) There is no Tax deficiency outstanding, proposed or assessed
against the Company or any of its subsidiaries, except any such
deficiency that, if paid, would not reasonably be expected to have,
individually or in the aggregate, a Material Adverse Effect on the
Company. Neither the Company nor any of its subsidiaries has executed
or requested any waiver of any statute of limitations on or extending
the period for the assessment or collection of any federal or material
state Tax that is still in effect.
(iv) No federal or state Tax audit or other examination of the
Company or any of its subsidiaries is presently in progress, nor has
the Company or any of its subsidiaries been notified in writing of any
request for such federal or material state Tax audit or other
examination, except in all cases for Tax audits and other examinations
which would not reasonably be expected to have, individually or in the
aggregate, a Material Adverse Effect on the Company.
(v) Neither the Company nor any of its subsidiaries has filed any
consent agreement under Section 341(f) of the Code or agreed to have
Section 341(f)(2) of the Code apply to any disposition of a subsection
(f) asset (as defined in Section 341(f)(4) of the Code) owned by the
Company.
(vi) Neither the Company nor any of its subsidiaries is a party to
(A) any agreement with a party other than the Company or any of its
subsidiaries providing for the allocation or payment of Tax liabilities
or payment for Tax benefits with respect to a consolidated, combined or
unitary Return which Return includes or included the Company or any
subsidiary or (B) any Significant Tax Agreement other than any
Significant Tax Agreement described in (A).
(vii) Except for the group of which the Company and its subsidiaries
are now presently members, neither the Company nor any of its
subsidiaries has ever been a member of an affiliated group of
corporations within the meaning of Section 1504 of the Code.
(viii) Neither the Company nor any of its subsidiaries has agreed to
make nor is it required to make any adjustment under Section 481(a) of
the Code by reason of a change in accounting method or otherwise which
have not yet been taken into account.
(ix) The Company is not, and has not at any time been, a "United
States Real Property Holding Corporation" within the meaning of Section
897(c)(2) of the Code.
(m) Employee Benefits.
(i) Section 5.2(m)(i) of the Company Disclosure Schedule lists each
"employee pension benefit plan" (as such term is defined in Section
3(2) of ERISA), "employee welfare benefit plan" (as such term is
defined in Section 3(1) of ERISA), material personnel or payroll policy
(including vacation time, holiday pay, service awards, moving expense
reimbursement programs and sick leave) or material fringe benefit,
severance agreement or plan or any medical, hospital, dental, life or
disability plan, excess benefit plan, bonus, stock option, stock
purchase or other incentive plan (including any equity or equity-based
plan), top hat plan or deferred compensation plan, salary reduction
agreement, change-of-control agreement, employment agreement,
consulting agreement, or collective bargaining agreement,
indemnification agreement, retainer agreement, or any other material
benefit plan, policy, program, arrangement, agreement or contract,
whether or not written or terminated, with respect to any employee,
former employee, director, independent contractor, or any beneficiary
or dependent thereof maintained, sponsored, adopted or administered by
the Company or any current or former Subsidiary or to which the Company
or any current or former Subsidiary has made contributions to,
obligated itself or had any liability with respect to, or any defined
benefit plan or plan subject to Code Section 412 that was adopted or
administered, or to which contributions were made, by any current or
former Plan Affiliate, or any defined benefit plan, plan subject to
Code Section 412, or plan with any remaining liability or benefit
obligation that has been terminated by Company or any Subsidiary (all
such plans, policies, programs, arrangements, agreements and contracts,
whether or not set forth in Section 5.2(m) of the Company Disclosure
Schedule on the Company Financial Statements, are referred to in this
Agreement as "Company Scheduled Plans").
23
(ii) The Company has delivered or made available to Parent a
complete and accurate copy, of each written Company Scheduled Plan,
together with, if applicable, a copy of audited financial statements,
actuarial reports and Form 5500 Annual Reports (including required
schedules), if any, for the most recent plan year, the most recent IRS
determination letter or IRS recognition of exemption; each other
material letter, ruling or notice issued by a governmental body with
respect to each such plan, a copy of each trust agreement, insurance
contract or other funding vehicle, if any, with respect to each such
plan, the most recent PBGC Form 1 with respect to each such plan, if
any, the current summary plan description and summary of material
modifications thereto with respect to each such plan, Form 5310 and any
related filings with the PBGC and with respect to the last three (3)
Plan years, for each Plan subject to Title IV of ERISA, general
notification to employees of their rights under Code Section 4980B and
form of letter(s) distributed upon the occurrence of a qualifying event
described in Code Section 4980B, in the case of a Company Scheduled
Plan that is a "group health plan" as defined in Code Section
4980B(g)(2), and a copy or description of each other general
explanation or written or oral communication which describes a material
term of each Company Scheduled Plan that has not previously been
disclosed to Parent pursuant to this Section. Section 5.2(m) of the
Company Disclosure Schedule contains a description of the material
terms of any unwritten Company Scheduled Plan. Except as set forth in
Section 5.2(m) of the Company Disclosure Schedule, there are no
negotiations, demands or proposals which are pending or threatened
which concern matters now covered, or that would be covered, by the
foregoing types of unwritten Plans.
(iii) Except as disclosed on Schedule 5.2(m) of the Company
Disclosure Schedule:
(1) Each Company Scheduled Plan (A) has been and currently
complies in form and in operation in all material respects with all
applicable requirements of ERISA and the Code, and any other legal
requirements; (B) has been and is operated and administered in
material compliance with its terms (except as otherwise required by
law); (C) has been and is operated in compliance with applicable
legal requirements in such a manner as to qualify, where
appropriate, for both Federal and state purposes, for income tax
exclusions to its participants, tax-exempt income for its funding
vehicle, and the allowance of deductions and credits with respect to
contributions thereto; and (D) where appropriate, has received a
favorable determination letter or recognition of exemption from the
Internal Revenue Service.
(2) With respect to each Company Scheduled Plan, there are no
claims or other proceedings pending or, to the knowledge of the
Company, threatened with respect to the assets thereof (other than
routine claims for benefits), and there are no facts known to the
Company which could reasonably give rise to any material liability,
claim or other proceeding against any Company Scheduled Plan, any
fiduciary or plan administrator or other Person dealing with any
Company Scheduled Plan or the assets of any such Company Scheduled
Plan.
(3) With respect to each Company Scheduled Plan, to the knowledge
of the Company, no Person: (A) has entered into any "prohibited
transaction," as such term is defined in ERISA or the Code and the
regulations, administrative rulings and case law thereunder that is
not exempt under Code Section 4975 or ERISA Section 408 (or any
administrative class exemption issued thereunder); (B) has
materially breached a fiduciary obligation or violated Sections 402,
403, 405, 503, 510 or 511 of ERISA; (C) has any material liability
for any failure to act or comply in connection with the
administration or investment of the assets of such plans; or (D)
engaged in any transaction or otherwise acted with respect to such
plans in such a manner which could subject Parent, or any fiduciary
or plan administrator or any other Person dealing with any such
plan, to material liability under Section 409 or 502 of ERISA or
Sections 4972 or 4976 through 4980B of the Code.
(4) Each Company Scheduled Plan (other than any stock option
plan) may be amended, terminated, modified or otherwise revised by
the Company or Parent, as provided in the Company Schedule Plan as
so amended, other than benefits protected under Section 411(d) of
the Code, on and after the Closing, without further material
liability to the Company or Parent
24
(excluding ordinary administrative expenses and routine claims for
benefit plans), including, but not limited to, any withdrawal
liability under ERISA for any multiemployer plan or any liability
under any Company Scheduled Plan subject to Title IV of ERISA.
(5) None of the Company or any current or former Company Plan
Affiliate has at any time participated in, made contributions to or
had any other liability with respect to any Company Scheduled Plan
which is a "multiemployer plan" as defined in Section 4001 of ERISA,
a "multiemployer plan" within the meaning of Section 3(37) of ERISA,
a "multiple employer plan" within the meaning of Section 413(c) of
the Code, a "multiple employer welfare arrangement" within the
meaning of Section 3(40) of ERISA or a plan that is subject to Title
IV of ERISA.
(6) No Company Scheduled Plan provides, or reflects or represents
any liability to provide retiree health to any person for any
reason, except as may be required by COBRA or other applicable
statute, and neither the Company nor any Plan Affiliate has ever
represented, promised or contracted (whether in oral or written
form) to any current or former employee, consultant or director
(either individually or as a group) or any other person that such
current or former employee(s) or other person would be provided with
retiree health, except to the extent required by any applicable
continuation coverage statute.
(7) No Company Scheduled Plan has incurred an "accumulated
funding deficiency" as such term is defined in Section 302 of ERISA
or Section 412 of the Code, whether or not waived, or has posted or
is required to provide security under Code Section 401(a)(29) or
Section 307 of ERISA; no event has occurred which has or could
result in the imposition of a lien under Code Section 412 or Section
302 of ERISA, nor has any liability to the PBGC (except for payment
of premiums) been incurred or reportable event within the meaning of
Section 4043 of ERISA occurred with respect to any such plan; and
the PBGC has not threatened or taken steps to institute the
termination of any such plan.
(8) The requirements of COBRA and the Health Insurance
Portability and Accountability Act, the requirements of the Family
Medical Leave Act of 1993, as amended, the requirements of the
Women's Health and Cancer Rights Act, the requirements of the
Newborns' and Mothers' Health Protection Act of 1996, or any
amendment to each such act, or any similar provisions of state law
applicable to its employees, have, in all material respects, been
satisfied with respect to each Company Scheduled Plan.
(9) All contributions, payments, premiums, expenses,
reimbursements or accruals for all periods ending prior to the
Closing for each Company Scheduled Plan (including periods from the
first day of the then current plan year to the Closing) shall have
been made or accrued on the Company financial statements (in
accordance with generally applied accounting principles, including
FAS 87, 88, 106 and 112) and each such plan otherwise does not have
nor could have any unfunded liability (including benefit liabilities
as defined in Section 4001(a)(16) of ERISA) which is not reflected
on the Company financial statements. The same shall be true for all
periods ending as of the Closing for each Company Scheduled Plan.
(10) Neither the Company nor a Plan Affiliate has any material
liability (A) for the termination of any single employer plan under
Section 4062 of ERISA or any multiple employer plan under Section
4063 of ERISA, (B) for any lien imposed under Section 302(f) of
ERISA or Section 412(n) of the Code, (C) for any interest payments
required under Section 302(e) of ERISA or Section 412(m) of the
Code, (D) for any excise tax imposed by Code Sections 4971, 4972,
4977, or 4979, or (E) for any minimum funding contributions under
Section 302(c)(11) of ERISA or Code Section 412(c)(11).
(11) All the Company Scheduled Plans to the extent applicable,
are in compliance with Section 1862(b)(1)(A)(i) of the Social
Security Act and neither the Company nor any Plan Affiliate has any
liability for any excise tax imposed by Code Section 5000.
25
(12) With respect to any Company Scheduled Plan which is a
welfare plan as defined in Section 3(1) of ERISA; (A) each such
welfare plan which is intended to meet the requirements for tax-
favored treatment under Subchapter B of Chapter 1 of the Code
materially meets such requirements; and (B) there is no disqualified
benefit (as such term is defined in Code Section 4976(b)) which
would subject the Company or any Plan Affiliate to a tax under Code
Section 4976(a).
(iv) Other than by reason of actions taken by Parent following the
Closing and other than pursuant to the terms of any Company Scheduled
Plan, the consummation of the transactions contemplated by this
Agreement will not (A) entitle any current or former employee of the
Company to severance pay, unemployment compensation or any other
payment or benefit, (B) accelerate the time of payment or vesting of
any payment (other than for a terminated or frozen tax-qualified plan,
pursuant to a requirement herein to freeze or terminate such plan),
cause the forgiveness of any indebtedness, or increase the amount of
any compensation due to any such employee or former employee, or (C)
result in any prohibited transaction described in Section 406 of ERISA
or Section 4975 of the Code for which an exemption is not available.
(n) Company Intangible Property.
(i) Company and its subsidiaries own, or possess a valid and
enforceable license or otherwise possess legally enforceable rights to
use, all patents, trademarks, trade names, service marks, copyrights
and mask works, all applications for and registrations of such patents,
internet domain names, trademarks, trade names, service marks,
copyrights and mask works, and all processes, formulae, methods,
schematics, technology, know-how, Software and tangible or intangible
proprietary information or material that are necessary to conduct the
business of the Company and its subsidiaries as currently conducted or
planned to be conducted (the "Company Intellectual Property Rights").
(ii) Neither the Company nor any of its subsidiaries is or will be
as a result of the execution and delivery of this Agreement or the
performance of its obligations under this Agreement, in breach in any
material respect of any material license, sublicense or other agreement
relating to the Company Intellectual Property Rights or any license,
sublicense or other agreement pursuant to which the Company or any of
its subsidiaries is authorized to use any third party patents,
trademarks or copyrights, including Software, which are used in the
manufacture of, incorporated in, or form a part of any product of the
Company or any of its subsidiaries. All such agreements that are
material to the business of the Company or any of its subsidiaries are
listed in Section 5.2(n)(ii) of the Company Disclosure Schedule.
(iii) All patents, registered trademarks, service marks and
copyrights held by the Company or any of its subsidiaries which are
material to its business are valid and enforceable. Neither the Company
nor any of its subsidiaries has been sued in any suit, action or
proceeding which involves a claim of infringement of any patent,
trademark, service mark or copyright or the violation of any trade
secret or other proprietary rights of any third party. To the knowledge
of the Company, the conduct of the business of the Company and its
subsidiaries does not violate or infringe any intellectual property
rights owned or controlled by any third party, and there are no claims,
proceedings or actions pending or, to the knowledge of the Company,
threatened against the Company or any of its subsidiaries (i) alleging
that the Company's or any of its subsidiaries' activities infringe
upon, violate or otherwise constitute the unauthorized use of any
intellectual property rights of any third party or (ii) challenging the
ownership, use, validity or enforceability of any Company Intellectual
Property Rights, nor is there a valid basis for any such claim.
(iv) The Company and its subsidiaries have taken reasonable measures
to safeguard and maintain their proprietary rights in all Company
Intellectual Property Rights owned by the Company or its subsidiaries.
There has been no material disclosure of any trade secret of the
Company or any of its subsidiaries to any third party, other than
pursuant to valid, enforceable, written non-disclosure agreements.
26
(v) The completion of the transactions contemplated by this
Agreements will not materially alter or impair the right of the Company
or its subsidiaries to use any of the Company Intellectual Property
Rights.
(vi) All Company Intellectual Property Rights owned by the Company
have been (i) acquired from a person or entity having full, effective
and exclusive ownership thereof, (ii) developed or created internally
by employees of the Company or its subsidiaries within the scope of
their employment or (iii) developed or created by independent
contractors that either (x) have been party to a "work-for-hire"
arrangement or agreements with the Company or one of its subsidiaries
or (y) have executed appropriate instruments of assignment in favor of
the Company or the subsidiary conveying to the Company or the
subsidiary full, effective and exclusive ownership of all tangible and
intangible rights therein, except where the failure to satisfy any of
the preceding clauses (i), (ii) or (iii) would not have a Material
Adverse Effect on the Company.
(o) Agreements, Contracts and Commitments; Material Contracts. Except as
set forth in the Section 5.1(m) or Section 5.2(o) of the Company Disclosure
Schedule, as of the date hereof, neither the Company nor any of its
subsidiaries is a party to or is bound by:
(i) any contract relating to the borrowing of money, the guaranty of
another Person's borrowing of money, or the creation of an encumbrance
or lien on the assets of the Company or any of its subsidiaries and
with outstanding obligations in excess of $500,000;
(ii) any employment or consulting agreement, contract or commitment
with any officer or director level employee or member of the Company's
Board of Directors or any other employee who is one of the ten (10)
most highly compensated employees, including base salary and bonuses
(the "Company Key Employees"), other than those that are terminable by
the Company or any of its subsidiaries on no more than thirty (30) days
notice without liability or financial obligation or benefits generally
available to employees of the Company, except to the extent general
principles of wrongful termination law may limit the Company's or any
of its subsidiaries' ability to terminate employees at will, and
attached hereto as Section 5.2(o) of the Company Disclosure Schedule is
a list of the top four compensated officers as of the last fiscal year
ended and their current salary;
(iii) any agreement of indemnification or guaranty by the Company or
any of its subsidiaries not entered into in the ordinary course of
business other than indemnification agreements between the Company or
any of its subsidiaries and any of its officers or directors in
standard forms as filed by the Company with the SEC;
(iv) any agreement, contract or commitment containing any covenant
limiting the freedom of the Company or any of its subsidiaries to
engage in any line of business or conduct business in any geographical
area, compete with any person or granting any exclusive distribution
rights;
(v) any joint venture, partnership, and other contract (however
named) involving a sharing of profits or losses by the Company or any
subsidiary with any other Person;
(vi) any contract for capital expenditures in excess of $500,000;
(vii) any agreement, contract or commitment currently in force
relating to the disposition or acquisition of assets not in the
ordinary course of business;
(viii) any agreement, contract or commitment for the purchase of any
ownership interest in any corporation, partnership, joint venture or
other business enterprise for consideration in excess of $500,000, in
any case, which includes all escrow and earn-out agreements with
outstanding obligations; or
(ix) any material joint marketing, distribution or development
agreement or other material contract of the Company or any of its
subsidiaries not previously filed with the SEC and not otherwise listed
in any other section of the Company Disclosure Schedule.
27
A true and complete copy (including all amendments) of each Company
Contract (or if standard forms are used, copies of the applicable forms
with an indication of any material differences from the actual listed
Company Contract), or a summary of each oral contract, has been made
available to Parent, excluding those Company Contracts referenced in
clauses (vii). Each contract set forth in Section 5.2(o) of the Company
Disclosure Schedule (a "Company Contract") and each Company Material
Contract is in full force and effect, and is a legal, valid and binding
obligation of the Company or a subsidiary of the Company and, to the
knowledge of the Company, each of the other parties thereto, enforceable in
accordance with its terms against the Company or one of its subsidiaries,
as applicable, except (a) that the enforcement thereof may be limited by
(i) bankruptcy, insolvency, reorganization, moratorium or other similar
laws now or hereafter in effect relating to creditors' rights generally and
(ii) general principles of equity (regardless of whether enforceability is
considered in a proceeding in equity or at law) and (b) as would not,
individually or in the aggregate, be reasonably expected to result in a
Material Adverse Effect on the Company. No condition exists or event has
occurred which (whether with or without notice or lapse of time or both, or
the happening or occurrence of any other event) would constitute a default
by the Company or a subsidiary of the Company or, to the knowledge of the
Company, any other party thereto under, or result in a right in termination
of, any Company Contract or Company Material Contract, except as would not,
individually or in the aggregate, be reasonably expected to result in a
Material Adverse Effect on the Company. The term "Company Material
Contract" shall mean any contract that is material to the Company and its
subsidiaries, taken as a whole. Except as provided for herein, at the
Effective Time, no Person will have the right, by contract or otherwise, to
become, nor does any entity have the right to designate or cause the
Company to appoint a Person as, a director of the Company or any subsidiary
of the Company.
(p) Listings. The Company's securities are not listed, or quoted, for
trading on any U.S. domestic or foreign securities exchange, other than the
NNM.
(q) Environmental Matters. Except as disclosed in Section 5.2(q) of the
Company Disclosure Schedule, (i) the Company and its subsidiaries and the
operations, assets and properties thereof are in material compliance with
all Environmental Laws; (ii) there are no judicial or administrative
actions, suits, proceedings or investigations pending or, to the knowledge
of the Company, threatened against the Company or any subsidiary of the
Company alleging the violation of any Environmental Law and neither the
Company nor any subsidiary of the Company has received notice from any
governmental body or Person alleging any violation of or liability under
any Environmental Laws, in either case which could reasonably be expected
to result in material Environmental Costs and Liabilities; (iii) to the
knowledge of the Company, there are no facts, circumstances or conditions
relating to, arising from, associated with or attributable to the Company
or its subsidiaries or any real property currently or previously owned,
operated or leased by the Company or its subsidiaries that could reasonably
be expected to result in material Environmental Costs and Liabilities; and
(iv) to the knowledge of the Company, neither the Company nor any of its
subsidiaries has ever generated, transported, treated, stored, handled or
disposed of any Hazardous Material at any site, location or facility in a
manner that could create any material Environmental Costs and Liabilities
under any Environmental Law, and no such Hazardous Material has been or is
currently present on, in, at or under any real property owned or used by
the Company or any of its subsidiaries in a manner that could create any
material Environmental Costs and Liabilities (including without limitation,
containment by means of any underground or aboveground storage tank).
(r) Title to Properties; Liens; Condition of Properties.
(i) The Company and its subsidiaries have good and marketable title
to, or a valid leasehold interest in, the real and personal property,
located on their premises or shown on the Company's balance sheet
included in the Company's Form 10-Q for the quarter ended September 30,
1999 or acquired after the date thereof. None of the property owned or
used by the Company or any of its subsidiaries is subject to any
mortgage, pledge, deed of trust, lien (other than for taxes not yet due
and payable), conditional sale agreement, security title, encumbrance,
or other adverse claim or interest of any kind. Since September 30,
1999, there has not been any sale, lease, or any other disposition or
distribution by the Company or any of its subsidiaries of any of its
assets or properties
28
material to the Company and its subsidiaries, taken as a whole, except
transactions in the ordinary and regular course of business.
(ii) The Company and each of its subsidiaries owns or leases all
equipment, furniture, fixtures, improvements and other tangible assets
necessary and sufficient for the conduct of its business as presently
conducted.
(iii) Neither the Company nor any of its subsidiaries owns any real
property or any interest in real property, except for the real property
and leaseholds created under the real property leases, if any,
identified in Section 5.2(r) of the Company Disclosure Schedule.
Section 5.2(r) of the Company Disclosure Schedule lists such real
property and the premise covered by such leases, as applicable. The
Company and each of its subsidiaries enjoys peaceful and undisturbed
possession of such premises.
(iv) All material leases pursuant to which the Company and each of
its subsidiaries leases real or personal property are in good standing
and are valid and effective in accordance with their respective terms
and there exists no default thereunder.
(s) Labor and Employee Relations.
(i) (A) None of the employees of the Company or any of its
subsidiaries is represented in his or her capacity as an employee of
such company by any labor organization; (B) neither the Company nor any
of its subsidiaries has recognized any labor organization nor has any
labor organization been elected as the collective bargaining agent of
any of their employees, nor has the Company or any of its subsidiaries
signed any collective bargaining agreement or union contract
recognizing any labor organization as the bargaining agent of any of
their employees; and (C) to the knowledge of the Company, there is no
active or current union organization activity involving the employees
of the Company or any of its subsidiaries, nor has there ever been
union representation involving employees of the Company or any of its
subsidiaries.
(ii) Except for complaints which, in the aggregate, do not represent
claims which could reasonably involve liabilities in excess of
$500,000, there are no complaints against the Company or any of its
subsidiaries pending or, to the knowledge of the Company, overtly
threatened before the National Labor Relations Board or any similar
foreign, state or local labor agencies, or before the Equal Employment
Opportunity Commission or any similar foreign, state or local agency,
or before any other governmental agency or entity by or on behalf of
any employee or former employee of the Company or any of its
subsidiaries.
(iii) The Company has provided to Parent a description of all
written employment policies under which the Company and each subsidiary
is currently operating.
(t) Permits. The Company and each of its subsidiaries hold all licenses,
permits, registrations, orders, authorizations, approvals and franchises
which are required to permit it to conduct its businesses as presently
conducted, except where the failure to hold such licenses, permits,
registrations, orders, authorizations, approvals or franchises would not,
individually or in the aggregate, have a Material Adverse Effect on the
Company. All such material licenses, permits, registrations, orders,
authorizations, approvals and franchises are now, and will be after the
Closing, valid and in full force and effect, and the Surviving Corporation
shall have full benefit of the same, except where the failure to be valid
and in full force and effect or to have the benefit of any such license,
permit, registration, order, authorization, approval or franchise would
not, individually or in the aggregate, have a Material Adverse Effect on
the Company or the Surviving Corporation. Neither the Company nor any of
its subsidiaries has received any notification of any asserted present
failure (or past and unremedied failure) by it to have obtained any such
license, permit, registration, order, authorization, approval or franchise,
except where such failures would not, individually or in the aggregate,
have a Material Adverse Effect on the Company.
(u) Transactions with Affiliates. Since the date of Company's last proxy
statement to its stockholders, no event has occurred that would be required
to be reported by Company as a Certain Relationship or Related Transaction,
pursuant to Item 404 of Regulation S-K promulgated by the SEC.
29
(v) Year 2000. The Company has implemented a program directed at
ensuring that its and its subsidiaries' products (including prior and
current products and technology and products and technology currently under
development) will, when used in accordance with associated documentation on
a specified platform or platforms, be capable upon installation of (i)
operating in the same manner on dates in both the Twentieth and Twenty-
First centuries and (ii) accurately processing, providing and receiving
date data from, into and between the Twentieth and Twenty-First centuries,
including the years 1999 and 2000, and making leap-year calculations,
provided that all non-Company products (e.g., hardware, software and
firmware) material to the conduct of the business of the Company and used
in or in combination with the Company's products, exchange data with the
Company's products in the same manner on dated in both the Twentieth and
Twenty-First centuries. The Company has taken commercially reasonable steps
to assure that the year 2000 date change will not adversely affect, and
such date change has not adversely affected, the systems and facilities
that support the operations of the Company and its subsidiaries, except as
is not reasonably likely to have a Material Adverse Effect on the Company.
(w) State Takeover Laws. The Board of Directors of the Company has taken
all necessary action so that the restrictions contained in Section 203 of
the DGCL applicable to a "business combination" (as defined in Section 203)
will not apply to the execution, delivery or performance of this Agreement
or the Stockholder Agreements or the consummation of the Merger or the
other transactions contemplated by this Agreement or the Stockholder
Agreements. No other state takeover statute or similar statute or
regulation is applicable to this Agreement or the Stockholder Agreements.
ARTICLE VI
ADDITIONAL COVENANTS AND AGREEMENTS
6.1 Conduct of Business.
(a) Parent and the Company each covenant and agree that, during the
period from the date of this Agreement to the Effective Time (unless the
Parties shall otherwise agree in writing and except as otherwise
contemplated by this Agreement or disclosed in the Disclosure Schedules to
this Article VI or elsewhere in this Agreement), Parent and the Company
each will, and will cause each of their subsidiaries to, conduct their
operations according to their ordinary and usual course of business
consistent with past practice and, to the extent consistent therewith, with
no less diligence and effort than would be applied in the absence of this
Agreement, seek to preserve intact their current business organizations,
use their reasonable best efforts to keep available the service of its
current officers and employees and preserve their relationships with
customers, suppliers and others having business dealings with them to the
end that goodwill and ongoing businesses shall be unimpaired at the
Effective Time.
(b) Without limiting the generality of the foregoing, and except as
otherwise permitted in this Agreement, prior to the Effective Time, Parent
and the Company shall not, and each shall cause each of their subsidiaries
not to, without the prior written consent of the other Parties:
(i) Except as contemplated by this Agreement, accelerate, amend or
change the period of exercisability of any outstanding options or
restricted stock, reprice options granted under the Company Option
Plans or Parent Option Plans or authorize cash payments in exchange for
any options granted under any of such plans, as the case may be, or
authorize cash payments in exchange for any options granted under any
of such plans, except to the extent required under any Company Option
Plans or Parent Option Plan, as the case may be, or any individual
agreement as in effect on the date hereof (or, if entered into after
the date hereof in compliance with this Section 6.1(b), such agreement
which shall be in the standard form thereof as in effect on the date
hereof);
(ii) except (v) for issuances of shares of common stock of Merger
Sub to Parent, (w) as set forth in Section 6.1(b) of the Parent
Disclosure Schedule or the Company Disclosure Schedule, as the case may
be, (x) for shares to be issued upon exercise of outstanding options or
options granted in compliance with clauses (w) or (y) hereof, and (y)
for grants of stock options at the closing price on
30
the business day immediately preceding the date of grant in the
ordinary course consistent with past practice pursuant to the Parent
Option Plans or Company Option Plans, as the case may be, in connection
with new hires or in accordance with regularly scheduled periodic
grants, not to exceed 60,000 shares, in all cases, for each of Parent
and the Company, respectively, issue, deliver, sell, dispose of, pledge
or otherwise encumber, or authorize or propose the issuance, sale,
disposition or pledge or other encumbrance of (A) any additional shares
of capital stock of any class, or any securities or rights convertible
into, exchangeable for, or evidencing the right to subscribe for any
shares of capital stock, or any rights, warrants, options, calls,
commitments or any other agreements of any character to purchase or
acquire any shares of capital stock or any securities or rights
convertible into, exchangeable for, or evidencing the right to
subscribe for, any shares of capital stock, or (B) any other securities
in respect of, in lieu of, or in substitution for, shares outstanding
on the date hereof;
(iii) redeem, purchase or otherwise acquire, or offer to redeem,
purchase or otherwise acquire, any of its outstanding securities
(including the Parent Shares or the Company Shares, as the case may
be);
(iv) split, combine, subdivide or reclassify any shares of its
capital stock or declare, set aside for payment or pay any dividend, or
make any other actual, constructive or deemed distribution in respect
of any shares of its capital stock or otherwise make any payments to
stockholders in their capacity as such;
(v) adopt a plan of complete or partial liquidation, dissolution,
merger, consolidation, restructuring, recapitalization or other
reorganization (other than the Merger as provided for herein);
(vi) adopt any amendments to its certificate of incorporation or
bylaws or alter through merger, liquidation, reorganization,
restructuring or in any other fashion the corporate structure or
ownership of any of its subsidiaries, except to increase the authorized
capital stock or reduce the par value of the capital stock of Merger
Sub;
(vii) other than as set forth in Section 6.1(b) of the Parent
Disclosure Schedule or the Company Disclosure Schedule, as applicable,
make any acquisition, by means of merger, consolidation or otherwise,
or dispositions, of assets or securities (except for acquisitions or
dispositions in the ordinary course of business, none of which are
acquisitions of businesses);
(viii) other than in the ordinary course of business consistent with
past practice, except as set forth in Section 6.1(b) of the Parent
Disclosure Schedule or the Company Disclosure Schedule, incur any
indebtedness for borrowed money or guarantee any such indebtedness or
make any loans, advances or capital contributions to, or investments
in, any other Person;
(ix) make or revoke any material Tax election, settle or compromise
any material federal, state, local or foreign Tax liability or change
(or make a request to any taxing authority to change) any material
aspect of its method of accounting for Tax purposes (except for Tax
elections which are consistent with prior such elections (in past
years);
(x) incur any material liability for Taxes other than in the
ordinary course of business;
(xi) incur or commit to incur any capital expenditures in excess of
current budgets for capital expenditures which were provided by the
Company or Parent to the other party prior to the date hereof;
(xii) enter into any contract not consistent with past practices of
either the Parent or the Company as the case may be, and its
subsidiaries, taken as a whole;
(xiii) enter into any strategic alliance or joint marketing
arrangement or agreement other than routine alliances, arrangements or
agreements;
(xiv) pay, discharge, settle or satisfy any material claims,
liabilities or obligations (absolute, accrued, asserted or unasserted,
contingent or otherwise) or litigation (whether or not commenced
31
prior to the date of this Agreement), other than the payment,
discharge, settlement or satisfaction, in the ordinary course of
business consistent with past practice;
(xv) except as required by this Agreement or as required to be held
in accordance with a valid stockholder request, call or hold any
meeting of stockholders of the Company or Parent other than an annual
meeting of shareholders which considers routine matters in the ordinary
course of business consistent with past practices;
(xvi) transfer or license to any Person or entity or otherwise
extend, amend or modify any material rights to the Parent Intellectual
Property Rights or the Company Intellectual Property Rights, as
applicable, other than in the ordinary course of business consistent
with past practices or on a non-exclusive basis not materially
different from past practices;
(xvii) make any change to accounting policies or procedures, except
as may be required by generally accepted accounting principles or
applicable law; or
(xviii) authorize, recommend, propose or announce an intention to do
any of the foregoing, or enter into any contract, agreement, commitment
or arrangement to do any of the foregoing.
(c) Between the date hereof and the Effective Time, except as
contemplated herein or in the Disclosure Schedules, Parent, the Company and
their subsidiaries shall not (without the prior written consent of the
Parties hereto) (A) except for normal increases in the ordinary course of
business consistent with past practice that, in the aggregate, do not
materially increase benefits or compensation expenses of Parent and its
subsidiaries, or the Company and its subsidiaries, or as contemplated by
the terms of any contract disclosed pursuant to this Agreement, increase
the compensation, bonus or other benefits of any director, officer or other
employee; (B) except as required to comply with applicable law, pay or
agree to pay any pension, retirement allowance or other employee benefit
not required or contemplated by any of the existing benefit, severance,
pension or employment plans, agreements or arrangements as in effect on the
date hereof to any such director, officer or employee, whether past or
present; (C) enter into any new or amend any existing employment or
severance agreement with any such director, officer or employee; (D) except
as may be required to comply with applicable law, become obligated under
any new pension plan, welfare plan, multi-employer plan, employee benefit
plan, severance plan, benefit arrangement, or similar plan or arrangement,
which was not in existence on the date hereof, or amend, terminate or
change any funding policies or assumptions for any such plan or arrangement
in existence on the date hereof if such amendment, termination or change
would have the effect of enhancing any benefits thereunder or increasing
the cost thereof to Parent or the Company or (E) increase the total head
count of Parent and its subsidiaries, or the Company and its subsidiaries,
in an amount greater than an increase in the ordinary course of business
consistent with past practice.
6.2 No Solicitation by the Company.
(a) From and after the date of this Agreement until the Effective Time
or the earlier termination of this Agreement in accordance with its terms,
the Company and its subsidiaries will not, will not permit their respective
directors, officers and affiliates to, and will use its reasonable best
efforts to cause their respective investment bankers, representatives and
agents not to, (i) solicit, initiate, or encourage (including by way of
furnishing information), or take any other action to intentionally
facilitate, any inquiries or proposals that constitute, or could reasonably
be expected to lead to, any Company Acquisition Proposal, or (ii) engage
in, or enter into, any negotiations or discussions concerning any Company
Acquisition Proposal. Notwithstanding the foregoing, in the event that,
notwithstanding compliance with the preceding sentence, the Company
receives a Company Acquisition Proposal that it determines in good faith
may be a Company Superior Proposal, the Company may, to the extent that the
Board of Directors of the Company determines in good faith (after
consultation with outside counsel) that such action would be required by
its fiduciary duties, (i) participate in discussions of the terms of such
Company Acquisition Proposal to determine whether such proposal constitutes
a Company Superior Proposal and (ii) if the Board of Directors determines
in good faith that such Company Acquisition
32
Proposal is a Company Superior Proposal, participate in discussions
regarding, or provide information to any Person in response to, any Company
Superior Proposal. In such event, the Company shall, (i) promptly inform
Parent of the material terms and conditions of such Company Superior
Proposal, including the identity of the Person making such Company Superior
Proposal and (ii) promptly keep Parent informed of the status including any
material change to the terms of any such Company Superior Proposal. As used
herein, the term "Company Acquisition Proposal" shall mean any bona fide
inquiry, proposal or offer relating to any (i) merger, consolidation,
business combination, or similar transaction involving the Company or any
subsidiary of the Company, (ii) sale, lease or other disposition, directly
or indirectly, by merger, consolidation, share exchange or otherwise, of
any assets of the Company or any subsidiary of the Company in one or more
transactions, (iii) issuance, sale, or other disposition of (including by
way of merger, consolidation, share exchange or any similar transaction)
securities (or options, rights or warrants to purchase such securities, or
securities convertible into such securities) of the Company or any
subsidiary of the Company, (iv) liquidation, dissolution, recapitalization
or other similar type of transaction with respect to the Company or any
subsidiary of the Company, (v) tender offer or exchange offer for Company
securities; in the case of (i), (ii), (iii), (iv) or (v) above, which
transaction would result in a third party (or its shareholders) acquiring
more than fifteen percent (15%) of the voting power of the Company or the
assets representing more than fifteen percent (15%) of the net income, net
revenue or assets of the Company on a consolidated basis, (vi) transaction
which is similar in form, substance or purpose to any of the foregoing
transactions or (vii) public announcement of an agreement, proposal, plan
or intention to do any of the foregoing, provided, however, that the term
"Company Acquisition Proposal" shall not include the Merger and the
transactions contemplated thereby. For purposes of this Agreement, "Company
Superior Proposal" means any written offer not solicited by the Company, or
by other persons in violation of the first sentence of this Section 6.2(a),
and made by a third party to consummate a tender offer, exchange offer,
merger, consolidation or similar transaction which would result in such
third party (or its shareholders) owning, directly or indirectly, more than
fifty percent (50%) of the Company Shares then outstanding (or of the
surviving entity in a merger) or all or substantially all of the assets of
Company and its subsidiaries, taken together, and otherwise on terms which
the Board of Directors of the Company determines in good faith (after
consultation with a financial advisor of nationally recognized reputation
and review of other such matters that it deems relevant) would, if
consummated, result in a transaction more favorable to the Company's
stockholders from a financial point of view than the Merger and, in the
reasonable good faith judgment of the Board of Directors of the Company
after consultation with its financial advisor, the persons or entity making
such Company Superior Proposal has the financial means to conclude such
transaction. The Company will immediately cease any and all existing
activities, discussions or negotiations with any parties conducted
heretofore with respect to any of the foregoing.
(b) Neither the Board of Directors of the Company nor any committee
thereof shall (i), except as required by their fiduciary duties as
determined in good faith after consultation with outside legal counsel,
withdraw or modify, or propose to withdraw or modify, in a manner adverse
to Parent or Merger Sub, the approval or recommendation by the Board of
Directors of the Company or such committee of this Agreement or the Merger,
(ii) approve, recommend, or otherwise support or endorse any Company
Acquisition Proposal, or (iii) cause the Company to enter into any letter
of intent, agreement in principle, acquisition agreement or similar
agreement (each a "Company Acquisition Agreement") with respect to any
Company Acquisition Proposal. Nothing contained in this Section 6.2 shall
prohibit the Company from taking and disclosing to its stockholders a
position contemplated by Rule 14d-9 or 14e-2 promulgated under the Exchange
Act or from making any disclosure to the Company's stockholders if, in the
good faith judgment of the Board of Directors of the Company, after
consultation with outside counsel, such disclosure is necessary for the
Board of Directors to comply with its fiduciary duties under applicable
law; provided, however, that, subject to Section 6.2(b)(i), neither the
Company nor its Board of Directors nor any committee thereof shall withdraw
or modify, or propose publicly to withdraw or modify, its position with
respect to this Agreement or the Merger or approve or recommend or propose
publicly to approve or recommend, a Company Acquisition Proposal.
33
(c) In addition to the obligations of the Company set forth in
paragraphs (a) and (b) of this Section 6.2, the Company will promptly (and
in any event within one (1) business day) advise Parent, orally and in
writing, if any Company Acquisition Proposal is made or proposed to be made
or any information or access to properties, books or records of the Company
is requested in connection with a Company Acquisition Proposal, the
principal terms and conditions of any such Company Acquisition Proposal or
potential Company Acquisition Proposal or inquiry (and will disclose any
written materials received by the Company in connection with such Company
Acquisition Proposal, potential Company Acquisition Proposal or inquiry)
and the identity of the party making such Company Acquisition Proposal,
potential Company Acquisition Proposal or inquiry. The Company will keep
Parent advised of the status and substantive terms (including amendments
and proposed amendments) of any such request or Company Acquisition
Proposal.
6.3 No Solicitation by Parent.
(a) From and after the date of this Agreement until the Effective Time
or the earlier termination of this Agreement in accordance with its terms,
Parent and its subsidiaries will not, will not permit their respective
directors, officers and affiliates to, and will use its reasonable best
efforts to cause their respective investment bankers, representatives and
agents not to, (i) solicit, initiate, or encourage (including by way of
furnishing information), or take any other action to intentionally
facilitate, any inquiries or proposals that constitute, or could reasonably
be expected to lead to, any Parent Acquisition Proposal, or (ii) engage in,
or enter into, any negotiations or discussions concerning any Parent
Acquisition Proposal. Notwithstanding the foregoing, in the event that,
notwithstanding compliance with the preceding sentence, Parent receives a
Parent Acquisition Proposal that it determines in good faith may be a
Parent Superior Proposal, Parent may, to the extent that the Board of
Directors of Parent determines in good faith (after consultation with
outside counsel) that such action would be required by its fiduciary
duties, (i) participate in discussions of the terms of such Parent
Acquisition Proposal to determine whether such proposal constitutes a
Parent Superior Proposal and (ii) if the Board of Directors determines in
good faith that such Parent Acquisition Proposal is a Parent Superior
Proposal, participate in discussions regarding, or provide information to
any Person in response to, any Parent Superior Proposal. In such event,
Parent shall, (i) promptly inform the Company of the material terms and
conditions of such Parent Superior Proposal, including the identity of the
Person making such Parent Superior Proposal and (ii) promptly keep the
Company informed of the status including any material change to the terms
of any such Parent Superior Proposal. As used herein, the term "Parent
Acquisition Proposal" shall mean any bona fide inquiry, proposal or offer
relating to any (i) merger, consolidation, business combination, or similar
transaction involving Parent or any subsidiary of Parent, (ii) sale, lease
or other disposition, directly or indirectly, by merger, consolidation,
share exchange or otherwise, of any assets of Parent or any subsidiary of
Parent in one or more transactions, (iii) issuance, sale, or other
disposition of (including by way of merger, consolidation, share exchange
or any similar transaction) securities (or options, rights or warrants to
purchase such securities, or securities convertible into such securities)
of Parent or any subsidiary of Parent, (iv) liquidation, dissolution,
recapitalization or other similar type of transaction with respect to
Parent or any subsidiary of Parent, (v) tender offer or exchange offer for
Parent securities; in the case of (i), (ii), (iii), (iv) or (v) above,
which transaction would result in a third party (or its shareholders)
acquiring more than fifteen percent (15%) of the voting power of Parent or
the assets representing more than fifteen percent (15%) of the net income,
net revenue or assets of Parent on a consolidated basis, (vi) transaction
which is similar in form, substance or purpose to any of the foregoing
transactions or (vii) public announcement of an agreement, proposal, plan
or intention to do any of the foregoing, provided, however, that the term
"Parent Acquisition Proposal" shall not include the Merger and the
transactions contemplated thereby. For purposes of this Agreement, "Parent
Superior Proposal" means any written offer not solicited by Parent, or by
other persons in violation of the first sentence of this Section 6.3(a),
and made by a third party to consummate a tender offer, exchange offer,
merger, consolidation or similar transaction which would result in such
third party (or its shareholders) owning, directly or indirectly, more than
fifty percent (50%) of Parent Shares then outstanding (or of the surviving
entity in a merger) or all or substantially all of the assets of Parent and
its subsidiaries, taken together, and otherwise on terms which
34
the Board of Directors of Parent determines in good faith (after
consultation with a financial advisor of nationally recognized reputation
and review of other such matters that it deems relevant) would, if
consummated, result in a transaction more favorable to Parent's
stockholders from a financial point of view than the Merger and, in the
reasonable good faith judgment of the Board of Directors of Parent after
consultation with its financial advisor, the persons or entity making such
Parent Superior Proposal has the financial means to conclude such
transaction. Parent will immediately cease any and all existing activities,
discussions or negotiations with any parties conducted heretofore with
respect to any of the foregoing.
(b) Neither the Board of Directors of Parent nor any committee thereof
shall (i), except as required by their fiduciary duties as determined in
good faith after consultation with outside legal counsel, withdraw or
modify, or propose to withdraw or modify, in a manner adverse to the
Company, the approval or recommendation by the Board of Directors of Parent
or such committee of the issuance of Parent Shares, (ii) approve,
recommend, or otherwise support or endorse any Parent Acquisition Proposal,
or (iii) cause Parent to enter into any letter of intent, agreement in
principle, acquisition agreement or similar agreement (each a "Parent
Acquisition Agreement") with respect to any Parent Acquisition Proposal.
Nothing contained in this Section 6.3 shall prohibit Parent from taking and
disclosing to its stockholders a position contemplated by Rule 14d-9 or
14e-2 promulgated under the Exchange Act or from making any disclosure to
Parent's stockholders if, in the good faith judgment of the Board of
Directors of Parent, after consultation with outside counsel, such
disclosure is necessary for the Board of Directors to comply with its
fiduciary duties under applicable law; provided, however, that, subject to
Section 6.3(b)(i), neither Parent nor its Board of Directors nor any
committee thereof shall withdraw or modify, or propose publicly to withdraw
or modify, its position with respect to this Agreement or the Merger or
approve or recommend or propose publicly to approve or recommend, a Parent
Acquisition Proposal.
(c) In addition to the obligations of Parent set forth in paragraphs (a)
and (b) of this Section 6.3, Parent will promptly (and in any event within
one (1) business day) advise the Company, orally and in writing, if any
Parent Acquisition Proposal is made or proposed to be made or any
information or access to properties, books or records of Parent is
requested in connection with a Parent Acquisition Proposal, the principal
terms and conditions of any such Parent Acquisition Proposal or potential
Parent Acquisition Proposal or inquiry (and will disclose any written
materials received by Parent in connection with such Parent Acquisition
Proposal, potential Parent Acquisition Proposal or inquiry) and the
identity of the party making such Parent Acquisition Proposal, potential
Parent Acquisition Proposal or inquiry. Parent will keep the Company
advised of the status and substantive terms (including amendments and
proposed amendments) of any such request or Parent Acquisition Proposal.
6.4 Meeting of Stockholders. Parent, on the one hand, and the Company on the
other, shall each take all action necessary in accordance with applicable law
and its certificate of incorporation and bylaws to convene a meeting of its
stockholders (the "Stockholder Meetings") as promptly as practicable to
consider and vote upon the approval of the Merger, the issuance of the Parent
Shares and the increase of the number of shares authorized under the Parent
Option Plans, as the case may be. Subject to the fiduciary duties of each
Party's Board of Directors under applicable law and after consultation with
outside legal counsel, the Board of Directors of Parent, on the one hand, and
the Company, on the other, shall recommend and each shall declare advisable
such approval (the requisite approval by stockholders of the Company as well as
by stockholders of Parent is hereinafter referred to collectively as the
"Requisite Stockholder Approval"); provided, however, that the Board of
Directors of Parent and the Board of Directors of the Company shall submit this
Agreement to the stockholders of Parent and the Company, as the case may be,
whether or not the Board of Directors of Parent or the Board of Directors of
the Company, as the case may be, at any time subsequent to the date hereof
determines that this Agreement is no longer advisable or recommends that the
stockholders of Parent or the Company, as the case may be, reject it. Unless
the Board of Directors of Parent or the Board of Directors of the Company, as
the case may be, has withdrawn its recommendation of this Agreement in
compliance herewith, each of Parent and the Company shall use their reasonable
best efforts to solicit from its stockholders proxies in favor of the approval
and adoption of this Agreement and the Merger and to secure the vote or consent
of stockholders required by the DGCL and its respective certificate of
incorporation and bylaws to approve and
35
adopt this Agreement and the Merger, the issuance of Parent Shares and the
increase of the number of shares authorized under the Parent Option Plans, as
the case may be.
6.5 Registration Statement. Parent will, as promptly as practicable, prepare
and file with the SEC a registration statement on Form S-4 (the "S-4
Registration Statement"), containing a proxy statement/prospectus and a form of
proxy, in connection with the registration under the Securities Act of the
Parent Shares issuable upon conversion of the Shares and the other transactions
contemplated hereby. The Company and Parent will, as promptly as practicable,
prepare and file with the SEC a proxy statement that will be the same proxy
statement/prospectus contained in the S-4 Registration Statement and a form of
proxy, in connection with the vote of the Company's and Parent's stockholders
with respect to the Merger and the issuance of the Parent Shares (such proxy
statement/prospectus, together with any amendments thereof or supplements
thereto, in each case in the form or forms mailed to the Company's and Parent's
stockholders, is herein called the "Joint Proxy Statement"). The Company and
Parent will, and will cause their accountants and lawyers to, use their
reasonable best efforts to have or cause the S-4 Registration Statement
declared effective as promptly as practicable, including, without limitation,
causing their accountants to deliver necessary or required instruments such as
opinions, consents and certificates, and will take any other action required or
necessary to be taken under federal or state securities laws or otherwise in
connection with the registration process, it being understood and agreed that
Morrison & Foerster LLP, counsel to Parent, and Winston & Strawn, counsel to
the Company, will each render the tax opinions referred to in Section 7.1(g)
and 7.1(h), respectively, on (i) the date the preliminary Joint Proxy Statement
is filed with the SEC and (ii) the date the S-4 Registration Statement is filed
with the SEC. The Company and Parent will each use their reasonable best
efforts to cause the Joint Proxy Statement to be mailed to their respective
stockholders at the earliest practicable date and will coordinate and cooperate
with one another with respect to the timing of the Stockholder Meetings. The
Company and Parent shall each use their commercially reasonable best efforts to
hold such Stockholder Meetings as soon as practicable after the date hereof.
Parent shall also take any action required to be taken under state blue sky or
other securities laws in connection with the issuance of Parent Shares in the
Merger.
6.6 Reasonable Best Efforts. The Parties shall: (i) promptly make their
respective filings and thereafter make any other required submissions under all
applicable laws with respect to the Merger and the other transactions
contemplated hereby; and (ii) use their reasonable best efforts to promptly
take, or cause to be taken, all other actions and do, or cause to be done, all
other things necessary, proper or appropriate to consummate and make effective
the transactions contemplated by this Agreement as soon as practicable.
6.7 Access to Information. Upon reasonable notice, Parent, on the one hand,
and the Company, on the other, shall (and shall cause each of their
subsidiaries to) afford to officers, employees, counsel, accountants and other
authorized representatives of the other such Party (the "Authorized
Representatives") reasonable access, during normal business hours throughout
the period prior to the Effective Time, to their properties, assets, books and
records and, during such period, shall (and shall cause each of their
subsidiaries to) furnish promptly to such Authorized Representatives all
information concerning their business, properties, assets and personnel as may
reasonably be requested for purposes of appropriate and necessary due
diligence, provided that no investigation pursuant to this Section 6.7 shall
affect or be deemed to modify any of the representations or warranties made by
the Parties. The Parties each agree to treat (and cause their Authorized
Representatives to treat) any and all information provided pursuant to this
Section 6.7 in strict compliance with the terms of that certain Confidentiality
Agreement, entered by and between the Company and Parent, dated January 17,
2000 (the "Confidentiality Agreement").
6.8 Publicity. The Parties agree that they will consult with each other
concerning any proposed press release or public announcement pertaining to the
Merger in order to agree upon the text of any such press release or the making
of such public announcement, which agreement shall not be unreasonably
withheld, except as may be required by applicable law or by obligations
pursuant to any listing agreement with an national securities exchange or
national automated quotation system, in which case the Party proposing to issue
such press release or make such public announcement shall use its reasonable
best efforts to consult in good
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faith with Parent or the Company, as applicable, before issuing any such press
release or making any such public announcement. Notwithstanding the foregoing,
in the event the Board of Directors of Parent or the Company withdraws its
recommendation of this Agreement in compliance herewith, neither Party will be
required to consult with or obtain the agreement of the other in connection
with any press release or public announcement.
6.9 Indemnification of Directors and Officers.
(a) From and after the Effective Time, Parent shall, and in addition
shall cause the Surviving Corporation to, indemnify, defend and hold
harmless the present and former officers and directors of the Company and
any of their subsidiaries against all losses, expenses (including
reasonable attorneys' fees), claims, damages or liabilities and amounts
paid in settlement in accordance with the terms of this Section 6.9 arising
out of actions or omissions occurring on or prior to the Effective Time
(including, without limitation, the transactions contemplated by this
Agreement), whether asserted or claimed prior to, at or after the Effective
Time, to the fullest extent permitted by law, including as provided for in
their respective certificates of incorporation or bylaws (or comparable
organizational documents) and any indemnification agreements of the
Company, the existence of which does not constitute a breach of this
Agreement, as in effect as of the Effective Time (and shall also advance
expenses as incurred to the fullest extent permitted under applicable law,
provided that, if required under applicable law, the Person to whom
expenses are advanced provides an undertaking to repay such advances if it
is ultimately determined that such Person is not entitled to
indemnification). The indemnification rights hereunder shall be in addition
to any other rights such Indemnified Party may have under the certificate
of incorporation and bylaws of the Surviving Corporation, under the DGCL or
otherwise. The certificate of incorporation and bylaws of the Surviving
Corporation shall contain, and Parent shall cause the Surviving Corporation
to fulfill and honor, provisions with respect to indemnification and
exculpation that are at least as favorable to the Indemnified Parties as
those set forth in the certificate of incorporation and bylaws of the
Company as of the date of this Agreement, which provisions shall not be
amended, repealed or otherwise modified for a period of six (6) years from
the Effective Time in any manner that would adversely affect the rights
thereunder of any of the Indemnified Parties. Parent agrees that all rights
to indemnification, including provisions relating to advances of expenses
incurred in defense of any action or suit, existing in favor of the present
or former directors, officers, employees, fiduciaries and agents of the
Company, Parent or any of their subsidiaries (collectively, the
"Indemnified Parties") as provided in, as the case may be, the Company's
certificate of incorporation or bylaws or pursuant to other agreements, or
articles or certificates of incorporation or bylaws or similar documents of
any of the Company's or Parent's subsidiaries, as in effect as of the date
hereof, with respect to matters occurring through the Effective Time, shall
survive the Merger and shall continue in full force and effect for a period
of six (6) years from the Effective Time; provided, however, that all
rights to indemnification in respect of any action pending or asserted or
claim made within such period shall continue until the disposition of such
claim or resolution of such claim.
(b) Any Indemnified Party wishing to claim indemnification under
paragraph (a) of this Section 6.9 shall promptly notify Parent and the
Surviving Corporation, upon learning of any such claim, action, suit,
proceeding or investigation, but the failure to so notify shall not relieve
Parent and the Surviving Corporation of any liability they may have to such
Indemnified Party if such failure does not materially prejudice Parent and
the Surviving Corporation. In the event of any such claim, action, suit,
proceeding or investigation (whether arising before or after the Effective
Time), (i) Parent or the Surviving Corporation shall have the right to
assume the defense thereof (unless the Indemnified Parties (or any of them)
determine in good faith (after consultation with legal counsel) that there
are issues which raise conflicts of interest between an Indemnified Party,
on the one hand, and Parent and the Surviving Corporation, on the other
hand), and Parent and the Surviving Corporation shall not be liable to such
Indemnified Parties for any legal expenses of the counsel or any the
expenses subsequently incurred by such Indemnified Parties in connection
with the defense thereof (except that if Parent and the Surviving
Corporation elect not to assume such defense or if there are issues which
raise conflicts of interest between Parent and the Surviving Corporation,
on the one hand, and one or more of the Indemnified Parties, on the other,
the
37
Indemnified Parties may retain counsel satisfactory to them, and Parent and
the Surviving Corporation shall pay all reasonable fees and expenses of
such counsel for the Indemnified Parties promptly as statements therefor
are received); provided, however, that Parent and the Surviving Corporation
shall be obligated pursuant to this paragraph (b) to pay for only one firm
of counsel for all Indemnified Parties in any jurisdiction, (ii) the
Indemnified Parties will cooperate in the defense of any such matter and
(iii) Parent and the Surviving Corporation shall not be liable for any
settlement effected without their prior written consent, which consent
shall not be unreasonably withheld if such settlement is only for money
damages and provides a full release of Parent or the Surviving Corporation,
as applicable.
(c) Parent shall cause the Surviving Corporation to maintain in effect
for not less than six (6) years the current policies of directors' and
officers' liability insurance and fiduciary liability insurance maintained
by the Company, Parent and their subsidiaries with respect to matters
occurring prior to the Effective Time; provided, however, that Parent may
substitute therefor policies covering the Indemnified Parties with coverage
in amount and scope substantially similar to such existing policies;
provided further, that in no event shall Parent be required to pay
aggregate premiums for insurance under this Section 6.9(b) in excess of
200% of amount of aggregate premiums paid by the Company in 1999 on the
annualized basis for such purpose.
(d) In the event that any action, suit, proceeding or investigation
relating hereto or to the transactions contemplated by this Agreement is
commenced, whether before or after the Closing, the parties hereto agree to
cooperate and use their respective commercially reasonable best efforts to
vigorously defend against and respond thereto.
(e) The provisions of this Section 6.9 (i) are intended to be for the
benefit of, and will be enforceable by, each Indemnified Party, his or her
heirs and his or her representatives, (ii) are in addition to, and not in
substitution for, any other rights to indemnification or contribution that
any such person may have by contract or otherwise, and (iii) shall be
binding on all successors and assigns of the Parties.
(f) If Parent or the Surviving Corporation or any of its successors or
assigns (i) shall consolidate with or merge into any other corporation or
entity and shall not be the continuing or surviving corporation or entity
of such consolidation or merger or (ii) shall transfer all or substantially
all of its properties and assets to any individual, corporation or other
entity, then and in each such case, proper provisions shall be made so that
the successors and assigns of Parent or the Surviving Corporation shall
assume all of the obligations set forth in this Section 6.9. Parent shall,
and Parent shall cause the Surviving Corporation, to pay all expenses,
including reasonable attorneys' fees, that may be incurred by the
Indemnified Parties in successfully enforcing the indemnity and other
rights in this Section 6.9.
6.10 Affiliates of the Company and Parent. The Company has identified to
Parent each "affiliate" of the Company for purposes of Rule 145 promulgated
under the Securities Act (each, a "Company Affiliate") and the Company will use
its reasonable best efforts to obtain as promptly as practicable from each
Company Affiliate written agreements in the form attached hereto as Exhibit C
(the "Company Affiliate Letter") that such Company Affiliate will not sell,
pledge, transfer or otherwise dispose of any Parent Shares issued to such
Company Affiliate pursuant to the Merger, except in compliance with Rule 145
promulgated under the Securities Act or an exemption from the registration
requirements of the Securities Act.
6.11 Maintenance of Insurance. Between the date hereof and through the
Effective Time each of the Company and Parent will use commercially reasonable
best efforts to maintain in full force and effect all of their and their
subsidiaries presently existing policies of insurance or insurance comparable
to the coverage afforded by such policies.
6.12 Representations and Warranties. Each of the Company and Parent shall
give prompt notice to the other of any circumstances that would cause any of
their respective representations and warranties set forth in Section 5.1 or
5.2, as the case may be, not to be true and correct in all material respects at
and as of the Effective Time; provided, that delivery of such notice shall not
cure or be deemed to cure any breach of a representation or warranty.
38
6.13 Filings; Other Action. Subject to the terms and conditions herein
provided, the Parties shall: (a) promptly make their respective filings and
thereafter make any other required submissions under the HSR Act, the
Securities Act and the Exchange Act with respect to the Merger; (b) cooperate
in the preparation of such filings or submissions under the HSR Act; and (c)
use their reasonable best efforts promptly to take, or cause to be taken, all
other actions and do, or cause to be done, all other things necessary, proper
or appropriate under applicable laws and regulations to consummate and make
effective the transactions contemplated by this Agreement as soon as
practicable, in each case as applicable.
6.14 Tax-Free Reorganization Treatment. Prior to the Effective Time, the
Parties shall use their reasonable best efforts to cause the Merger to be
treated as a reorganization within the meaning of Section 368 of the Code and
to obtain the opinion of their respective counsels contemplated by Section 7.1
and shall not knowingly take or fail to take any action which action or failure
to act would jeopardize the qualification of the Merger as a reorganization
within Section 368 of the Code.
6.15 Company Options; Company ESPPs.
(a) After the Effective Time, except as provided above, each Substitute
Option shall be subject to the same terms and conditions as were applicable
under the related Company Option immediately prior to the Effective Time.
The Company agrees that it will not grant any stock appreciation rights or
limited stock appreciation rights and will not permit cash payments to
holders of Company Options in lieu of the substitution therefor of
Substitute Options, as described herein. As soon as practicable after the
Effective Time, Parent shall deliver to each holder of a Company Option an
appropriate notice setting forth such holder's rights pursuant to the
Company Option Plans (including whether, in connection with the Merger and
pursuant to the terms of the Company Option Plans, the Company Options have
become fully vested and exercisable) and such holder's rights to acquire
Parent Shares and the agreement of such holder evidencing the grants of
such Company Options shall be deemed to be appropriately amended so that
such Company Options shall represent rights to acquire Parent Shares on
substantially the same terms and conditions as contained in the outstanding
Company Options (subject to the adjustments required by Section 4.1 after
giving effect to the Merger and the terms of the Company Option Plans). To
the extent permitted by law, Parent shall comply with the terms and
conditions of the Company Option Plans and shall take such reasonable steps
as are necessary or required by, and subject to the provisions of, the
Company Option Plans, to have the Company Options which qualified as
incentive stock options prior to the Effective Time as defined in Section
422 of the Code continue to qualify as incentive stock options of Parent
after the Effective Time; provided, however, that in the case of any
Company Option to which Section 421 of the Code applies by reason of its
qualification under Section 422 of the Code, the option price, the number
of shares subject to such option and the terms and conditions of exercise
of such option shall be determined in a manner consistent with the
requirements of Section 424(a) of the Code.
(b) From and after the date hereof, neither Parent nor the Company shall
commence any "offering periods" or "purchase periods" under the Parent
Employee Stock Purchase Plan or the Company Employee Stock Purchase Plan
and shall apply all amounts deducted and withheld thereunder to purchase
shares of the Company in accordance with the provisions thereof. At the
Effective Time the Company shall terminate the Company Employee Stock
Purchase Plan and Parent shall take any necessary actions to allow
employees of the Company who were eligible to participate in such employee
stock purchase plan to participate in the Parent Employee Stock Purchase
Plan.
(c) Parent shall file and use reasonable best efforts to cause there to
be effective as soon as practicable a registration statement on Form S-8
(or any successor form) or other appropriate forms, with respect to Parent
Shares subject to the Substitute Options and shall use reasonable best
efforts to maintain the effectiveness of such registration statement or
registration statements (and maintain the current status of the prospectus
or prospectuses contained therein) for so long as the Substitute Options
remain outstanding.
6.16 Board Composition. The Board of Directors of Parent will take all
actions within its power to cause the Board of Directors of Parent and the
Surviving Corporation, effective upon the Effective Time, to consist of
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nine (9) Persons, five (5) of whom shall be designated by Parent (including
their successors "Parent Directors"), one (1) of Parent Directors shall be the
Chief Executive Officer of Parent as of the date of this Agreement, and four
(4) of whom shall be designated by the Company (including their successors
"Company Directors"), one (1) of Company Directors shall be the Chief Executive
Officer of the Company as of the date of this Agreement. The first class of
directors, with a term expiring at Parent's 2000 annual meeting of
stockholders, (and such persons shall be nominated for election at such meeting
for a term expiring at Parent's 2003 annual meeting) shall include two (2)
Parent Directors and one (1) Company Director. The second class of directors,
with a term expiring at Parent's 2001 annual meeting of stockholders, shall
include two (2) Parent Directors and one (1) Company Director. The third class
of directors, with a term expiring at Parent's 2002 annual meeting of
stockholders, shall include one (1) Parent Director and two (2) Company
Directors. If, prior to the Effective Time, any of the Parent or the Company
designees shall decline or be unable to serve as a director of Parent or the
Surviving Corporation, the Company (if such Person was designated by the
Company) or Parent (if such Person was designated by Parent) shall designate
another Person to serve in such Person's stead, which Person shall be
reasonably acceptable to the other party.
6.17 Officers of Parent and the Surviving Corporation. Frederick Smith shall
be elected Chairman of Parent and the Surviving Corporation, Robert M. Figliulo
shall be elected Vice Chairman and Chief Executive Officer of Parent and the
Surviving Corporation, Robert C. Bramlette shall be elected Chief Legal Officer
and Secretary of Parent and the Surviving Corporation, and Stephen J. Tober
shall be elected President and Chief Operating Officer of Parent and the
Surviving Corporation and, in each case, effective as of the Effective Time.
6.18 Contemplated Termination of 401(k) Plan(s). Parent and its Plan
Affiliates and Company and its Plan Affiliates each agree to evaluate whether
the termination of any of their 401(k) plans is reasonable in light of the
Merger contemplated herein. To the extent that Parent and Company agree to
terminate one (1) or more 401(k) plans prior to the Effective Time, the sponsor
of such plan will take any and all actions required under the circumstances to
effectuate such termination prior to the Effective Time including, without
limitation, resolutions of that entity's Board of Directors (the form and
substance of which resolutions shall be subject to review and approval by the
other entity). Participants in any such terminated 401(k) plan shall be
entitled to participate in a surviving 401(k) plan.
6.19 Crediting Service and Providing Other Benefits. Parent shall either (i)
adopt and maintain any or all employee welfare benefit plan, as defined in
Section 3(1) of ERISA and as specified in Section 5.2(m) of the Company
Disclosure Schedule (the "Scheduled Welfare Plans"), and, accordingly, shall
thereby continue in full force and effect each Scheduled Welfare Plan subject
to the terms and conditions thereof, to the extent such Scheduled Welfare Plan
is offered as of the Effective Time to each eligible employee of the Company
and its participating Affiliates, his or her dependents and each Qualified
Beneficiary (as such term is defined in COBRA); or (ii) provide all eligible
employees of the Company and their dependents and all Qualified Beneficiaries
(as such term is defined in COBRA) with coverage under one or more of Parent's
employee welfare benefit plans (as defined in Section 3(1) of ERISA) that
corresponds to a Scheduled Welfare Plan which meets all of the following
requirements as of the Effective Time (the "Successor Welfare Plan"): (A) the
coverage is as favorable as that provided to Parent employees in similar
circumstances, (B) service with the Company or its Affiliates prior to the
Effective Time shall be credited against all service and waiting period
requirements under the Successor Welfare Plan(s), (C) Parent shall make its
commercially reasonable best efforts to have the Successor Welfare Plan(s) not
provide any pre-existing condition exclusion(s) to persons who were not
excluded under the Company Scheduled Plans, and (D) the deductibles and co-
payments in effect under the Successor Welfare Plan(s) shall be reduced by any
deductibles and/or co-payments, respectively, paid by such individuals under
the corresponding Scheduled Welfare Plan for the plan year in which the
Effective Time occurs. In addition, service with the Company shall be
recognized for all purposes under Parent's compensation and benefit plans,
programs, policies and arrangements, except where crediting such service would
result in a duplication of benefits or is not legally permissible. Without
limiting the generality of the foregoing, Parent shall honor all vacation,
personal and sick days accrued by employees continuing employment with the
Surviving Corporation after the Merger under the Company's plans, policies,
programs
40
and arrangements immediately prior to the Effective Time to the same extent
required to be honored under the Company's plan, programs, policies and
arrangements in effect on the date hereof.
6.20 Exemption from Liability Under Section 16(b).
(a) Provided that the Company delivers to Parent the Section 16
Information with respect to the Company prior to the Effective Time, the
Board of Directors of Parent, or a committee of Non-Employee Directors
thereof (as such term is defined for purposes of Rule 16b-3(d) under the
Exchange Act), shall adopt a resolution in advance of the Effective Time
providing that the receipt by the Company Insiders of Parent Shares in
exchange for Company Shares, and of options to purchase Parent Shares in
exchange for shares of Company Shares, and of options to purchase Parent
Shares upon assumption and conversion by Parent of options to purchase
Company Shares, in each case pursuant to the transactions contemplated
hereby and to the extent such securities are listed in the Section 16
Information, are intended to be exempt from liability pursuant to Rule 16b-
3 under the Exchange Act.
(b) "Section 16 Information" shall mean information accurate in all
respects regarding the Company Insiders, the number of Company Shares or
other Company equity securities deemed to be beneficially owned by each
Company Insider and expected to be exchanged for Parent Shares in
connection with the Merger.
(c) "Company Insiders" shall mean those officers and directors of
Company who are subject to the reporting requirements of Section 16(a) of
the Exchange Act who are listed in Section 16 Information.
6.21 Accountant's Letters.
(a) Parent shall use reasonable best efforts to cause to be delivered to
the Company two letters from Parent's independent public accountants, one
dated approximately the date on which the Form S-4 shall become effective
and one dated the Closing Date, each addressed to Parent and the Company,
in form reasonably satisfactory to the Company and customary in scope for
comfort letters delivered by independent public accountants in connection
with registration statements on Form S-4.
(b) The Company shall use reasonable best efforts to cause to be
delivered to Parent two letters from the Company's independent public
accountants, one dated approximately the date on which the Form S-4 shall
become effective and one dated the Closing Date, each addressed to the
Company and Parent, in form reasonably satisfactory to Parent and customary
in scope for comfort letters delivered by independent public accountants in
connection with registration statements on Form S-4.
ARTICLE VII
CONDITIONS
7.1 Conditions to Each Party's Obligations. The respective obligations of
each Party to consummate the Merger are subject to the satisfaction or waiver
by each of the Parties of the following conditions:
(a) this Agreement and the Merger shall have received the Requisite
Stockholder Approvals;
(b) the S-4 Registration Statement shall have become effective in
accordance with the provisions of the Securities Act, and no stop order
suspending the effectiveness of the S-4 Registration Statement shall have
been issued by the SEC and remain in effect;
(c) no judgment, order, decree, statute, law, ordinance, rule or
regulation, entered, enacted, promulgated, enforced or issued by any court
or other Governmental Entity of competent jurisdiction or other legal
restraint or prohibition preventing the consummation of the Merger or
making the Merger illegal (collectively, "Restraints") shall be in effect,
and there shall not be pending any suit, action or proceeding by any
Governmental Entity preventing the consummation of the Merger; provided,
however, that each of the parties shall have used their reasonable best
efforts to prevent the entry of such Restraints and to appeal as promptly
as possible any such Restraints that may be entered;
41
(d) the waiting period(s) under the HSR Act, if applicable, shall have
expired;
(e) each of Parent and the Company shall have received a written opinion
from its respective tax counsel (Morrison & Foerster LLP and Winston &
Strawn, respectively), in form and substance reasonably satisfactory to
them, to the effect that the Merger will be treated for federal income tax
purposes as a tax-free reorganization within the meaning of Section 368(a)
of the Code and such opinions shall not have been withdrawn. The issuance
of such opinion shall be conditioned upon the receipt by such tax counsel
of customary representation letters from Parent, the Company and Merger Sub
in form and substance reasonably satisfactory to such tax counsel.
7.2 Conditions to the Obligations of the Company. The obligations of the
Company to consummate the Merger are subject to the fulfillment at or prior to
the Effective Time of the following conditions, any or all of which may be
waived in whole or in part by the Company to the extent permitted by applicable
law:
(a) the representations and warranties of Parent set forth in Section
5.1 that are qualified as to materiality or Material Adverse Effect shall
be true and correct, and such representations and warranties that are not
so qualified shall be true and correct in all material respects, in each
case as of the date of this Agreement, and as of the Effective Time with
the same force and effect as if made on and as of the Effective Time
(except to the extent expressly made as of an earlier date, in which case
as of such date), in each case except as permitted or contemplated by this
Agreement; provided, however, that (i) for purposes of determining the
accuracy of such representations and warranties any inaccuracy that results
from a Material Adverse Effect Exception shall be disregarded, and (ii)
with respect to representations and warranties as if made as of the
Effective Time, (x) all qualifications as to materiality or Material
Adverse Effect shall be disregarded, and (y) any failure of such
representations and warranties (as so modified) to be true and correct
shall be disregarded, if the failure to be true and correct (considered
collectively) does not (A) constitute and is not reasonably expected to
result in a Material Adverse Effect on Parent or (B) result in the
reduction in any material respect of the percentage of the Parent Shares to
be held by the Company's stockholders upon consummation of the Merger;
(b) Parent and its subsidiaries shall have performed or complied in all
material respects with its agreements and covenants required to be
performed or complied with under this Agreement as of or prior to the
Effective Time;
(c) Parent shall have delivered to the Company a certificate of its
Chief Executive Officer and Chief Financial Officer to the effect that each
of the conditions specified in Section 7.1 (as it relates to Parent) and
clauses (a), (b) and (d) of this Section 7.2 is satisfied in all respects;
(d) from the date of this Agreement to the Effective Time, there shall
not have been any event or development which has resulted in a Material
Adverse Effect on Parent (other then any Material Adverse Effect
Exception);
(e) the Parent Shares to be issued in the Merger to the stockholders of
the Company shall have been approved for listing on the NNM; and
(f) as of the Effective Time Parent shall provide written evidence
satisfactory to the Company that it shall have at least $6,000,000 in cash,
cash equivalents or marketable securities.
7.3 Conditions to the Obligations of Parent. The obligation of Parent to
consummate the Merger is subject to the fulfillment at or prior to the
Effective Time of the following conditions, any or all of which may be waived
in whole or in part by Parent to the extent permitted by applicable law:
(a) the representations and warranties of the Company set forth in
Section 5.2 that are qualified as to materiality or Material Adverse Effect
shall be true and correct, and such representations and warranties that are
not so qualified shall be true and correct in all material respects, in
each case as of the date of this Agreement, and as of the Effective Time
with the same force and effect as if made on and as of the Effective Time
(except to the extent expressly made as of an earlier date, in which case
as of such date), in each case except as permitted or contemplated by this
Agreement; provided, however, that (i) for purposes of determining the
accuracy of such representations or warranties any inaccuracy that results
42
from a Material Adverse Effect Exception shall be disregarded and (ii) with
respect to representations and warranties as if made as of the Effective
Time, (x) all qualifications as to materiality or Material Adverse Effect
shall be disregarded, and (y) any failure of such representations and
warranties (as so modified) to be true and correct shall be disregarded, if
the failure to be true and correct (considered collectively) does not (A)
constitute and is not reasonably expected to result in a Material Adverse
Effect on the Company or (B) result in the reduction in any material
respect of the percentage of the Parent Shares to be held by Parent's
stockholders upon consummation of the Merger;
(b) the Company and its subsidiaries shall have performed or complied
with in all material respects its agreements and covenants required to be
performed or complied with under this Agreement as of or prior to the
Effective Time;
(c) the Company shall have delivered to Parent a certificate of its
Chief Executive Officer and Chief Financial Officer to the effect that each
of the conditions specified in Section 7.1 (as it relates to the Company)
and clauses (a), (b) and (d) of this Section 7.3 is satisfied in all
respects;
(d) from the date of this Agreement to the Effective Time, there shall
not have been any event or development which results in a Material Adverse
Effect on the Company (other than any Material Adverse Effect Exception);
and
(e) as of the Effective Time the Company shall provide written evidence
satisfactory to the Parent that it has at least $40,000,000 in cash, cash
equivalents or marketable securities.
ARTICLE VIII
TERMINATION
8.1 Termination by Mutual Consent. This Agreement may be terminated and the
Merger may be abandoned at any time prior to the Effective Time, before or
after gaining Requisite Stockholder Approval, by the mutual written consent of
the Company and Parent.
8.2 Termination by either the Company or Parent. This Agreement may be
terminated and the Merger may be abandoned at any time prior to the Effective
Time, before or after gaining Requisite Stockholder Approval, by action of the
Board of Directors of either the Company or Parent if:
(a) the Merger shall not have been consummated by August 31, 2000 (the
"Outside Date"); provided, however, that the right to terminate this
Agreement under this Section 8.2(a) shall not be available to any Party
whose failure to fulfill any obligation under this Agreement has been the
principal cause of or resulted in the failure of the Merger to occur on or
before such date and such action or failure to act constitutes a material
breach of this Agreement;
(b) if any Restraint shall be in effect and shall have become final and
nonappealable; provided, however, that the right to terminate this
Agreement under this Section 8.2(b) shall not be available to any Party who
fails to use reasonable best efforts to remove such Restraint before it
becomes final and nonappealable; or
(c) (i) at the Company's duly held Stockholders Meeting (including any
adjournments thereof), the Requisite Stockholder Approval of the Company's
stockholders shall not have been obtained; provided, however, that the
right to terminate this Agreement under this Section 8.2(c)(i) shall not be
available to any Party which has not complied with its obligations under
Sections 6.2 or 6.3, as applicable, and 6.4, or
(ii) at Parent's duly held Stockholders Meeting (including any
adjournments thereof), the Requisite Stockholder Approval of Parent's
stockholders shall not have been obtained; provided, however, that the
right to terminate this Agreement under this Section 8.2(c)(ii) shall not
be available to any Party which has not complied with its obligations under
Sections 6.2 or 6.3, as applicable, and 6.4.
43
8.3 Termination by the Company. This Agreement may be terminated upon
written notice to Parent and the Merger may be abandoned at any time prior to
the Effective Time, before or after the approval by holders of the Company
Shares, by action of the Board of Directors of the Company, if:
(a) Parent shall have breached or failed to perform any of the
representations, warranties, covenants or other agreements contained in
this Agreement, or if any representation or warranty shall have become
untrue, in either case such that (i) the condition set forth in Section
7.2(a) or (b), would not be satisfied as of the time of such breach or as
of such time as such representation or warranty shall have become untrue
and (ii) such breach or failure to be true has not been or is incapable of
being cured within twenty (20) business days following receipt by Parent of
notice of such failure to comply; or
(b) (i) the Board of Directors of Parent or any committee thereof shall
have withdrawn or modified in a manner adverse to the Company its
recommendation of approval of this Agreement and the issuance of Parent
Shares pursuant to the Merger, (ii) Parent shall have failed to include in
the Proxy Statement the recommendation of the Board of Directors of Parent
in favor of approval of this Agreement and the issuance of Parent Shares
pursuant to the Merger, (iii) the Board of Directors of Parent or any
committee thereof shall have recommended any Parent Acquisition Proposal,
(iv) Parent or any of its officers or directors shall have entered into
discussions or negotiations in violation of Section 6.3, (v) Parent shall
enter into a Parent Acquisition Agreement, (vi) the Board of Directors of
Parent or any committee thereof shall have resolved to do any of the
foregoing or (vii) any Parent Acquisition Proposal is consummated.
8.4 Termination by Parent. This Agreement may be terminated upon written
notice to the Company and the Merger may be abandoned at any time prior to the
Effective Time, before or after the approval by holders of Parent Shares, by
action of the Board of Directors of Parent, if:
(a) the Company shall have breached or failed to perform any of the
representations, warranties, covenants or other agreements contained in
this Agreement, or if any representation or warranty shall have become
untrue, in either case such that (i) the condition set forth in Section
7.3(a) or (b), would not be satisfied as of the time of such breach or as
of such time as such representation or warranty shall have become untrue
and (ii) such breach or failure to be true has not been or is incapable of
being cured within twenty (20) business days following receipt by the
breaching Party of notice of such failure to comply; or
(b) (i) the Board of Directors of the Company or any committee thereof,
shall have withdrawn or modified in a manner adverse to Parent its approval
or recommendation of the Merger or this Agreement, (ii) the Company shall
have failed to include in the Proxy Statement the recommendation of the
Board of Directors of the Company in favor of approval to the Merger and
this Agreement, (iii) the Board of Directors of the Company or any
committee thereof shall have recommended any Company Acquisition Proposal,
(iv) the Company or any of its officers or directors shall have entered
into discussions or negotiations in violation of Section 6.2, (v) the
Company shall enter into a Company Acquisition Agreement, (vi) the Board of
Directors of the Company or any committee thereof shall have resolved to do
any of the foregoing or (vii) any Company Acquisition Proposal is
consummated.
8.5 Effect of Termination; Termination Fee.
(a) Except as set forth in this Section 8.5, in the event of termination
of this Agreement by either Parent or the Company as provided in this
Article VIII, this Agreement shall forthwith become void and there shall be
no liability or obligation on the part of the Parties or their respective
affiliates, officers, directors or stockholders except (x) with respect to
the treatment of confidential information pursuant to Section 6.7, the
payment of expenses pursuant to Section 9.1, and Article IX generally, (y)
to the extent that such termination results from the willful breach of a
Party of any of its representations or warranties, or any of its covenants
or agreements or (z) intentional or knowing misrepresentation in connection
with this Agreement or the transactions contemplated hereby.
(b) In the event that (i) a Company Acquisition Proposal or the
intention to make a Company Acquisition Proposal shall have been made
directly to the stockholders of the Company generally or otherwise publicly
announced by the Company or the Person making such Company Acquisition
Proposal,
44
and such Company Acquisition Proposal or intention is not irrevocably and
publicly withdrawn prior to the vote of the Company stockholders at the
Company's duly held Stockholders Meeting, and thereafter this Agreement is
terminated by either the Company or Parent (A) pursuant to Section 8.2(a)
or (B) pursuant to Section 8.2(c)(i), or (ii) this Agreement is terminated
by Parent pursuant to Section 8.4(b), then the Company shall pay Parent a
fee equal to $3,500,000 (the "Parent Termination Fee"); provided, however,
that no Parent Termination Fee shall be payable to Parent pursuant to
clause (i) of this paragraph (b) unless (X) within twelve (12) months of
such termination the Company or any of its subsidiaries enters into any
Company Acquisition Agreement with respect to, or consummates, any Company
Acquisition Proposal (for the purposes of the foregoing proviso the term
"Company Acquisition Proposal" shall have the meaning assigned to such term
in Section 6.2 except that references to 15% in the definition of "Company
Acquisition Proposal" in Section 6.2 as they relate to net revenues, net
income, voting power or assets of Company shall be deemed to be references
to "50%") and (Y) in the case of clause (b)(i)(A) of this paragraph the
Company shall have breached its obligation to call a Stockholders Meeting
pursuant to Section 6.4 or breached any of its other covenants or
agreements contained in this Agreement, which breach shall have materially
contributed to the failure of the Effective Time to occur prior to the
Outside Date. In addition, if the Company consummates a Company Acquisition
Proposal during the twelve (12) month period subsequent to such termination
contemplated by clause (i) of this paragraph (b) with the same Person or an
affiliate of the Person that made and withdrew a Company Acquisition
Proposal prior to such termination, the Company shall pay Parent the Parent
Termination Fee. The Parent Termination Fee shall be payable by wire
transfer of immediately available funds (i) in the case of clause (ii) of
this paragraph (b), upon such termination, or (ii) in the case of each of
clause (i) of this paragraph (b) and the sentence immediately preceding
this sentence, upon the earlier of the execution of a Company Acquisition
Agreement or the consummation of a Company Acquisition Proposal. The
Company acknowledges that the agreements contained in this Section 8.5(b)
are an integral part of the transactions contemplated by this Agreement,
and that, without these agreements, Parent would not enter into this
Agreement, and accordingly, if the Company fails to pay the Parent
Termination Fee when due pursuant to this Section 8.5(b), such amount shall
be payable with interest at the prime rate announced by Citibank, N.A. in
effect from the date such payment was required to be made to the date of
payment, and if in order to obtain such payment, Parent commences a suit
which results in a judgment against the Company for the Parent Termination
Fee, the Company shall pay to Parent its costs and expenses (including
reasonable attorneys' fees and expenses) in connection with such suit.
(c) In the event that (i) a Parent Acquisition Proposal or the intention
to make a Parent Acquisition Proposal shall have been made directly to the
stockholders of Parent generally or otherwise publicly announced by Parent
or the Person making such Parent Acquisition Proposal, and such Parent
Acquisition Proposal or intention is not irrevocably and publicly withdrawn
prior to the vote of Parent stockholders at the Parent's duly held
Stockholders Meeting, and thereafter this Agreement is terminated by either
Parent or the Company (A) pursuant to Section 8.2(a) or (B) pursuant to
Section 8.2(c)(ii), or (ii) this Agreement is terminated by the Company
pursuant to Section 8.3(b), then Parent shall pay the Company a fee equal
to $3,500,000 (the "Company Termination Fee"); provided, however, that no
Company Termination Fee shall be payable to the Company pursuant to clause
(i) of this paragraph (c) unless (X) within twelve (12) months of such
termination Parent or any of its subsidiaries enters into any Parent
Acquisition Agreement with respect to, or consummates, any Parent
Acquisition Proposal (for the purposes of the foregoing proviso the term
"Parent Acquisition Proposal" shall have the meaning assigned to such term
in Section 6.3 except that references to 15% in the definition of "Parent
Acquisition Proposal" in Section 6.3 as they relate to net revenues, net
income, voting power or assets of Parent, shall be deemed to be references
to "50%") and (Y) in the case of clause (c)(i)(A) of this paragraph Parent
shall have breached its obligation to call a Stockholders Meeting pursuant
to Section 6.4 or breached any of its other covenants or agreements
contained in this Agreement, which breach shall have materially contributed
to the failure of the Effective Time to occur prior to the Outside Date. In
addition, if the Parent consummates a Parent Acquisition Proposal during
the twelve (12) month period subsequent to such termination contemplated by
clause (i) of this paragraph (c), with the same Person or an affiliate of
such Person that made and
45
withdrew a Parent Acquisition Proposal prior to such termination, Parent
shall pay the Company the Company Termination Fee. The Company Termination
Fee shall be payable by wire transfer of immediately available funds (i) in
the case of clause (ii) of this paragraph (c), upon such termination, or
(ii) in the case of each of clause (i) of this paragraph (c) and the
sentence immediately preceding this sentence, upon the earlier of the
execution of a Company Acquisition Agreement or the consummation of a
Company Acquisition Proposal. Parent acknowledges that the agreements
contained in this Section 8.5(c) are an integral part of the transactions
contemplated by this Agreement, and that, without these agreements, the
Company would not enter into this Agreement; accordingly, if Parent fails
to pay the Company Termination Fee when due pursuant to this Section
8.5(c), such amount shall be payable with interest at the prime rate
announced by Citibank, N.A. in effect from the date such payment was
required to be made to the date of payment and, if in order to obtain such
payment, the Company commences a suit which results in a judgment against
Parent for the Company Termination Fee, Parent shall pay to the Company its
costs and expenses (including reasonable attorneys' fees and expenses) in
connection with such suit.
(d) If this Agreement is terminated under circumstances in which a Party
is entitled to receive the Parent Termination Fee or the Company
Termination Fee (either such fee a "Termination Fee"), the payment of such
Termination Fee shall be the sole and exclusive remedy available to such
Party, except in the event of (x) a willful breach by the other Party of
any provision of this Agreement in any material respect, or (y) the
intentional or knowing misrepresentation in connection with this Agreement
or the transactions contemplated hereby, in which event the non-breaching
Party shall have all rights, powers and remedies against the breaching
Party which may be available at law or in equity. All rights, powers and
remedies provided under this Agreement or otherwise available in respect
hereof at law or in equity shall be cumulative and not alternative, and the
exercise of any such right, power or remedy by any Party shall not preclude
the simultaneous or later exercise of any other such right, power or remedy
by such Party.
(e) If this Agreement is terminated under circumstances in which a Party
(the "Remitting Party") is required to pay a Termination Fee, the Remitting
Party may elect, in lieu of a cash payment, to pay the Termination Fee when
due by issuing to the Party owed the Termination Fee the Applicable Number
of Shares of Common Stock of the Remitting Party. For purposes of this
Section 8.5(e), the "Applicable Number of Shares of Common Stock of the
Remitting Party" shall mean the number of shares of common stock of the
Remitting Party equal to the quotient obtained by dividing the Termination
Fee by the Share Reference Price (rounded up to the nearest whole number).
For purposes of this Section 8.5(e), the "Share Reference Price" shall mean
the average of the closing prices of a share of common stock of the
Remitting Party as reported on the NNM (as reported in The Wall Street
Journal or, if not reported therein, in another authoritative source)
during the five trading day period ending on the last trading day prior to
the date that the Termination Fee is due. If the Remitting Party elects to
pay the Termination Fee by issuing shares of its common stock, the
Remitting Party shall also grant the Party owed the Termination Fee
registration rights for such shares under a customary registration rights
agreement pursuant to which the Remitting Party shall (i) agree to register
such shares under the Securities Act upon receipt of a demand from the
other Party, (ii) pay all fees and expenses of such registration, and (iii)
provide customary indemnification.
ARTICLE IX
MISCELLANEOUS AND GENERAL
9.1 Payment of Expenses. Whether or not the Merger shall be consummated,
each Party shall pay its own expenses incident to preparing for, entering into
and carrying out this Agreement and the consummation of the transactions
contemplated hereby, provided that the Surviving Corporation shall pay any and
all property or transfer taxes imposed on the Surviving Corporation. The filing
fee and the cost of printing the S-4 Registration Statement and the Joint Proxy
Statement and the filing fee for the required filing under the HSR Act shall be
borne equally by the Company and Parent.
46
9.2 Non-Survival of Representations and Warranties. The representations and
warranties made herein shall not survive beyond the Effective Time or a
termination of this Agreement, except to the extent a willful breach of such
representation or intentional or knowing misrepresentation formed the basis for
such termination. This Section 9.2 shall not limit any covenant or agreement of
the Parties which by its terms contemplates performance after the Effective
Time.
9.3 Modification or Amendment. Subject to the applicable provisions of the
DGCL, at any time prior to the Effective Time, the parties hereto, by
resolution of their respective Board of Directors, may modify or amend this
Agreement, by written agreement executed and delivered by duly authorized
officers of the respective parties; provided, however, that after approval of
the Merger by the Requisite Stockholder Approval is obtained, no amendment
which requires further stockholder approval shall be made without such approval
of stockholders.
9.4 Waiver of Conditions. The conditions to each of the Parties' obligations
to consummate the Merger are for the sole benefit of such Party and may be
waived by such Party in whole or in part to the extent permitted by applicable
law.
9.5 Counterparts. For the convenience of the parties hereto, this Agreement
may be executed in any number of counterparts, each such counterpart being
deemed to be an original instrument, and all such counterparts shall together
constitute the same agreement.
9.6 Governing Law. This Agreement shall be governed by and construed in
accordance with the laws of the State of Delaware, without giving effect to the
principles of conflicts of law thereof.
9.7 Notices. Any notice, request, instruction or other document to be given
hereunder by any Party to the other Parties shall be deemed delivered upon
actual receipt and shall be in writing and delivered personally or sent by
registered or certified mail, postage prepaid, reputable overnight courier, or
by facsimile transmission (with a confirming copy sent by reputable overnight
courier), as follows:
(a)if to Parent or Merger Sub, to:
Leapnet, Inc.
Chicago, Illinois 60610
Attention: Chief Executive Officer
Facsimile: (312) 475-1267
with a copy to:
Morrison & Foerster LLP
1290 Avenue of the Americas
New York, New York 10104
Attention: John R. Hempill
Facsimile: (212) 468-7900
(b)if to the Company, to:
SPR Inc.
2015 Spring Road
Suite 750
Oak Brook, Illinois 60523-1874
Attention: Chief Executive Officer
Facsimile: (630) 575-6299
with a copy to:
Winston & Strawn
35 West Wacker Drive
Chicago, Illinois 60601
Attention: John L. MacCarthy, Esq.
Facsimile: (312) 558-5700
or to such other Persons or addresses as may be designated in writing by the
Party to receive such notice.
47
9.8 Entire Agreement; Assignment. This Agreement, including the Disclosure
Schedules and the Exhibits attached hereto and the Confidentiality Agreement,
(i) constitutes the entire agreement among the Parties with respect to the
subject matter hereof and supersedes all other prior agreements and
understandings, both written and oral, among the Parties or any of them with
respect to the subject matter hereof, and (ii) shall not be assigned by
operation of law or otherwise.
9.9 Parties in Interest. This Agreement shall be binding upon and inure
solely to the benefit of each Party hereto and their respective successors and
assigns. Nothing in this Agreement, express or implied, other than the right to
receive the consideration payable in the Merger pursuant to Article IV hereof,
is intended to or shall confer upon any other Person any rights, benefits or
remedies of any nature whatsoever under or by reason of this Agreement;
provided, however, that (a) the provisions of Section 6.9 shall inure to the
benefit of and be enforceable by the Indemnified Parties; and (b) the
provisions of Sections 6.16 and 6.17 shall inure to the benefit of and be
enforceable by the officers and directors of the Company and Parent referenced
herein.
9.10 Certain Definitions. As used herein the following terms shall have the
following meanings and, unless the context otherwise requires, use of the
singular form shall include the plural and any gender shall be deemed to
include both genders:
(a) "ERISA" means the Employment Retirement Income Security Act of
1974, as amended.
(b) "Governmental Entity" means the United States or any supranational,
national, state, municipal, local or foreign government, or any
instrumentality, division, subdivision, court, agency, department or
authority of any thereof or any quasi-governmental or private body
exercising any regulatory, taxing, importing or other governmental or
quasi-governmental authority.
(c) "knowledge" with respect to a Party hereto shall mean the actual
knowledge of any of the executive officers of such Party.
(d) "Malfunction" means the failure to: (i) accurately recognize dates
falling before, on or after the year 2000; (ii) accurately record, store,
retrieve and process data input and date information; (iii) function in a
manner which does not create any ambiguity as to century; and (iv)
accurately manage and manipulate single century and multi-century formulae,
including leap year calculations.
(e) "Material Adverse Effect" shall mean, with respect to any Person,
any adverse change, circumstance, event or effect that individually or in
the aggregate with all other adverse changes, circumstances, events or
effects is or is reasonably likely to be materially adverse to the
business, operations, financial condition or results of operations of such
Person and its subsidiaries taken as a whole.
(f) "Material Adverse Effect Exception" means (i) a change in the market
price or trading volume of either the Parent Shares or the Company Shares
between the date hereof and the Effective Time, in and of itself, and not
otherwise attributable to or resulting from any other change, circumstance,
event or effect which by itself would constitute a Material Adverse Effect,
(ii) any change, circumstance, event or effect generally affecting the
industry in which either Parent and its subsidiaries or the Company and its
subsidiaries operate or from changes in general business or economic
conditions in the region, nation or world, or (iii) any change,
circumstance, event or effect resulting from (A) compliance by Parent or
the Company with the terms of, or the taking of any action expressly
required by, this Agreement, or (B) the pendency or announcement of this
Agreement, or the transactions contemplated hereby.
(g) "Person" means any individual, sole proprietorship, partnership,
joint venture, trust, unincorporated association, corporation, entity or
Governmental Entity.
(h) "Significant Tax Agreement" is any agreement to which any Party or
any subsidiary of any Party is a party under which such Party or such
subsidiary could reasonably be expected to be liable to another party under
such agreement in an amount in excess of $25,000 in respect of Taxes
payable by such other party to any taxing authority.
(i) "Software" means all computer software and subsequent versions
thereof, including but not limited to, source code, object code, objects,
comments, screens, user interfaces, report formats, templates,
48
menus, buttons and icons, and all files, data, materials manuals, design
notes and other items and documentation related thereto or associated
therewith.
(j) "subsidiary" shall mean, when used with reference to any entity, any
entity fifty percent (50%) or more of the outstanding voting securities or
interests of which are owned directly or indirectly by such former entity.
(k) "Tax" or "Taxes" refers to any and all federal, state, local and
foreign, taxes, assessments and other governmental charges, duties,
impositions and liabilities relating to taxes, including taxes based upon
or measured by gross receipts, income, profits, sales, use and occupation,
and value added, ad valorem, transfer, franchise, withholding, payroll,
recapture, employment, excise and property taxes, together with all
interest, penalties and additions imposed with respect to such amounts and
including any liability for taxes of a predecessor entity.
9.11 Obligation of the Company. Whenever this Agreement requires the
Surviving Corporation or Merger Sub to take any action, such requirement shall
be deemed to include an undertaking on the part of Parent to cause such Party
to take such action.
9.12 Severability. If any term or other provision of this Agreement is
invalid, illegal or unenforceable, all other provisions of this Agreement shall
remain in full force and effect so long as the economic or legal substance of
the transactions contemplated hereby is not affected in any manner materially
adverse to any Party.
9.13 Specific Performance. The parties hereto acknowledge that irreparable
damage would result if this Agreement were not specifically enforced, and they
therefore consent that the rights and obligations of the parties under this
Agreement may be enforced by a decree of specific performance issued by a court
of competent jurisdiction. Such remedy shall, however, not be exclusive and
shall be in addition to any other remedies which any Party may have under this
Agreement or otherwise.
9.14 Recovery of Attorney's Fees. In the event of any litigation between the
parties relating to this Agreement, the prevailing Party shall be entitled to
recover its reasonable attorney's fees and costs (including court costs) from
the non-prevailing Party, provided that if both parties prevail in part, the
reasonable attorney's fees and costs shall be awarded by the court in such
manner as it deems equitable to reflect the relative amounts and merits of the
parties' claims.
9.15 Captions. The Article, Section and paragraph captions herein are for
convenience of reference only, do not constitute part of this Agreement and
shall not be deemed to limit or otherwise affect any of the provisions hereof.
[Signature Page Follows]
49
IN WITNESS WHEREOF, this Agreement has been duly executed and delivered by
the duly authorized officers of the Parties hereto and shall be effective as of
the date first hereinabove written.
LEAPNET, INC.
/s/ Fred Smith
By: _________________________________
Name:Fred Smith
Title:CEO
BRASSIE CORPORATION
/s/ Robert C. Bramlette
By: _________________________________
Name:Robert C. Bramlette
Title:President
SPR INC.
/s/ R. Figliulo
By: _________________________________
Name:Rob Figliulo
Title:CEO
50
Appendix B
January 27, 2000
Board of Directors
Leapnet, Inc.
22 West Hubbard Street
Chicago, Illinois 60610
Members of the Board:
We have been advised that Leapnet, Inc. Brassie Corporation, a wholly owned
subsidiary of Leapnet, Inc. (together with Leapnet, Inc., "Leapnet" or the
"Company") and SPR, Inc. ("SPR") have entered into an Agreement and Plan of
Merger dated as of January 27, 2000 (the "Agreement") pursuant to which
Brassie Corporation will be merged with and into SPR (the "Merger") with
shareholders of SPR receiving 1.085 shares of Leapnet Common Stock for each
share of SPR Common Stock held (the "Exchange Ratio") on terms and conditions
more fully set out in the Agreement (the transaction is referred to herein as
the "Transaction").
You have requested our opinion (the "Opinion"), as investment bankers, as
to the fairness to Leapnet and its stockholders, from a financial point of
view, of the Exchange Ratio.
In rendering our Opinion we have, among other things:
(i) reviewed and analyzed draft copies of the Agreement;
(ii) reviewed and analyzed audited consolidated financial statements of
Leapnet contained on Form 10-K for the fiscal year ended January 31, 1999
and unaudited consolidated financial statements contained on Form 10-Q for
the quarters ended July 31, 1999, and October 31, 1999;
(iii) reviewed and analyzed audited consolidated financial statements of
SPR contained on Form 10-K for the fiscal year ended December 31, 1998 and
unaudited condensed statements contained on Form 10-Q for the quarters
ended June 30, 1999, and September 30, 1999;
(iv) reviewed and analyzed certain internal information, primarily
financial in nature, concerning the business and operations of the Company
prepared by the management of the Company, including five-year financial
projections;
(v) reviewed and analyzed certain internal information, primarily
financial in nature, concerning the business and operations of SPR prepared
by the management of SPR, including five-year financial projections;
(vi) reviewed and analyzed certain publicly available information
concerning the Company and SPR;
(vii) reviewed the reported stock prices and trading values for Leapnet
Common Stock and the SPR Common Stock;
(viii) reviewed and analyzed financial and market data and operating
statistics relating to the Company and SPR and compared them with similar
information of the Company and publicly available selected public companies
that we deemed relevant to our inquiry;
(ix) reviewed the financial terms, to the extent publicly available, of
certain acquisition transactions involving companies we deemed to be
comparable to the Company and SPR;
(x) held meetings and discussions with certain officers and employees of
the Company and SPR concerning the past and current operations, financial
condition and prospects of SPR and the Company; and
(xi) conducted such other financial studies, analyses and investigations
and considered such other information as we deemed appropriate for the
purposes of our Opinion.
In connection with our review, we have assumed and relied upon the accuracy
and completeness of all financial and other information supplied to us by the
Company and SPR or publicly available, and we
B-1
have not independently verified such information. We have further relied upon
the assurances of the managements of the Company and SPR that they are unaware
of any facts that would make the information provided to us incomplete or
misleading. We also have relied upon the managements of the Company and SPR, as
to the reasonableness and achievability of the financial projections (and the
assumptions and bases therein) provided to us for the Company and SPR,
respectively, and we have assumed that such projections have been reasonably
prepared on bases reflecting the best currently available estimates and
judgements of management as to the future operating performance of each
respective entity. Neither the Company nor SPR publicly discloses internal
management projections of the type provided to Legg Mason in connection with
Legg Mason's review of the Transaction. Such projections were not prepared with
the expectation of public disclosure. The projections were based on numerous
variables and assumptions that are inherently uncertain, including without
limitation, factors related to general economic and competitive conditions.
Accordingly, actual results could vary significantly from those set forth in
such projections. Legg Mason has relied on these forecasts and does not in any
respect assume any responsibility for their accuracy or completeness.
We have not been requested to make, and have not made, an independent
appraisal or evaluation of the assets, properties or liabilities of SPR and we
have not been furnished with any such appraisal or evaluation. Estimates of
values of companies and assets do not purport to be appraisals or necessarily
reflect the prices at which companies and assets may actually be sold. Because
such estimates are inherently subject to uncertainty, Legg Mason assumes no
responsibility for their accuracy.
We have not reviewed any of the books and records of SPR or assumed any
responsibility for conducting a physical inspection of the properties or
facilities of SPR. Also, our Opinion is based upon prevailing market conditions
and other circumstances and conditions existing and disclosed to us on the date
hereof. Furthermore, Legg Mason has expressed no opinion as to the value of or
the price or trading range at which shares of the Company will trade in the
future. We were not requested to, nor did we, solicit the interest of any other
party in acquiring interests in SPR or its assets. We have assumed that the
final Agreement will not differ in any material respect from the draft
Agreement we reviewed. We have also assumed the Transaction will be consummated
on the terms and conditions described in the Agreement, without any waiver of
material terms or conditions by the Company or SPR, and that obtaining any
necessary regulatory approvals or satisfying any other conditions for
consummation of the Transaction will not have an adverse effect on the Company
or SPR.
We have acted as financial advisor to the board of directors (the "Board")
of Leapnet and will receive a fee for our services. It is understood that this
letter is for the information of, and directed to, the Board in their
evaluation of the Transaction and our Opinion does not constitute a
recommendation to the Board as to how such Board should vote on the
Transaction. Additionally, our Opinion does not compare the relative merits of
the Transaction with those of any other transaction or business strategy which
were or might have been considered by the Board as alternatives to the
Transaction and does not address the underlying business decision by the Board
to proceed with or effect the Transaction. This letter is not to be quoted or
referred to, in whole or in part, in any registration statement, prospectus, or
in any other document used in connection with the offering or sales of
securities, nor shall this letter be used for any other purposes, without the
prior written consent of Legg Mason; provided that this letter may be included
in its entirety in any joint proxy statement/prospectus of Leapnet and SPR
filed with the Securities and Exchange Commission in connection with the
Transaction.
Based upon and subject to the foregoing, we are of the opinion that, as of
the date hereof, the Exchange Ratio is fair to Leapnet and its stockholders
from a financial point of view.
Very truly yours,
/s/ Legg Mason Wood Walker,
Incorporated
Legg Mason Wood Walker, Incorporated
B-2
Appendix C
January 27, 2000
Board of Directors
SPR Inc.
2015 Spring Road
Suite 750
Oak Brook, IL 60523
Gentlemen:
You have requested our opinion ("Opinion") as to the fairness, from a
financial point of view, to the stockholders of SPR Inc. (the "Company") of the
Exchange Ratio (as defined below) to be received by the stockholders of the
Company pursuant to the terms of that certain Agreement and Plan of Merger,
dated as of January 27, 2000 (the "Agreement"), by and among the Company,
Merger Sub ("Merger Sub") and Leapnet, Inc. ("Acquiror").
As more specifically set forth in the Agreement, and subject to the terms,
conditions and adjustments set forth in the Agreement, the Company and Acquiror
will enter into a "merger of equals" business combination whereby Merger Sub
will merge with and into the Company (the "Transaction"). Each share of
outstanding common stock of the Company will be exchanged into the right to
receive 1.085 (the "Exchange Ratio") shares of common stock of Acquiror.
SG Cowen Securities Corporation ("SG Cowen"), as part of its investment
banking business, is continually engaged in the valuation of businesses and
their securities in connection with mergers and acquisitions, negotiated
underwritings, secondary distributions of listed and unlisted securities,
private placements and valuations for corporate and other purposes. In the
ordinary course of our business, we and our affiliates may trade the securities
of the Company and Acquiror for our own account and for the accounts of our
customers and, accordingly, may at any time hold a long or short position in
such securities.
We have been engaged primarily to provide this Opinion to the Board of
Directors of the Company in connection with the Transaction and will receive a
fee from the Company for our services pursuant to the terms of our engagement
letter with the Company, dated as of January 17, 2000 (the "Engagement
Letter"). A significant portion of the fee is contingent upon the consummation
of the Transaction.
In connection with our Opinion, we have reviewed and considered such
financial and other matters as we have deemed relevant, including, among other
things:
. a draft of the Agreement dated January 21, 2000;
. certain publicly available information for the Company, including its
annual reports filed on Form 10-K for each of the years ended December
31, 1997 and 1998, and its quarterly reports filed on Form 10-Q in 1999
for each of the quarters ended March 31, June 30 and September 30 and
certain other relevant financial and operating data furnished to SG Cowen
by the Company management;
. certain publicly available information for Acquiror, including its annual
reports filed on Form 10-K for each of the years ended January 31, 1996,
1997 and 1998, and its quarterly reports filed on Form 10-Q in 1999 for
each of the quarters ended April 30, July 31 and October 31 and certain
other relevant financial and operating data furnished to SG Cowen by
Acquiror management;
. certain internal financial analyses, financial forecasts, reports and
other information concerning the Company (the "Company Forecasts") and
the Acquiror (the "Acquiror Forecasts"), prepared by the management of
the Company and Acquiror, respectively, and the amounts and timing of
revenue benefits and cost savings expected to result from the
Transaction, furnished to us by the management of the Company and
Acquiror (the "Expected Synergies");
. discussions we have had with certain members of the managements of each
of the Company and Acquiror concerning the historical and current
business operations, financial conditions and prospects of
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the Company and Acquiror, the Expected Synergies and such other matters we
deemed relevant;
. certain operating results and the reported price and trading histories of
the shares of the common stock of the Company and Acquiror as compared to
operating results and the reported price and trading histories of certain
publicly traded companies we deemed relevant;
. certain financial terms of the Transaction as compared to the financial
terms of certain selected business combinations we deemed relevant;
. based on the Company Forecasts and the Acquiror Forecasts, the cash flows
generated by the Company and Acquiror on a stand-alone basis to determine
the present value of the discounted cash flows;
. certain pro forma financial effects of the Transaction including on an
earnings accretion/dilution basis; and
. such other information, financial studies, analyses and investigations
and such other factors that we deemed relevant for the purposes of this
opinion.
In conducting our review and arriving at our Opinion, we have, with your
consent, assumed and relied, without independent investigation, upon the
accuracy and completeness of all financial and other information provided to us
by the Company and Acquiror, or which is publicly available. We have not
undertaken any responsibility for the accuracy, completeness or reasonableness
of, or independently verified, such information. In addition, we have not
conducted any physical inspection of the properties or facilities of the
Company or the Acquiror. We have further relied upon the assurance of
management of the Company that they are unaware of any facts that would make
the information provided to us incomplete or misleading in any respect. We
have, with your consent, assumed that the financial forecasts which we examined
were reasonably prepared by the respective managements of the Company and
Acquiror on bases reflecting the best currently available estimates and good
faith judgments of such managements as to the future performance of the Company
and Acquiror, and that such projections and synergies, provide a reasonable
basis for our Opinion.
We have not made or obtained any independent evaluations, valuations or
appraisals of the assets or liabilities of the Company or Acquiror, nor have we
been furnished with such materials. With respect to all legal matters relating
to the Company and Acquiror, we have relied on the advice of legal counsel to
the Company. Our services to the Company in connection with the Transaction
have been comprised primarily of rendering an opinion from a financial point of
view with respect to the Exchange Ratio. Our Opinion is necessarily based upon
economic and market conditions and other circumstances as they exist and can be
evaluated by us on the date hereof. It should be understood that although
subsequent developments may affect our Opinion, we do not have any obligation
to update, revise or reaffirm our Opinion, and we expressly disclaim any
responsibility to do so. Additionally, we have not been authorized or requested
to, and did not, solicit alternative offers for the Company or its assets, nor
have we investigated any other alternative transactions that may be available
to the Company.
For purposes of rendering our Opinion we have assumed in all respects
material to our analysis, that the representations and warranties of each party
contained in the Agreement are true and correct, that each party will perform
all of the covenants and agreements required to be performed by it under the
Agreement and that all conditions to the consummation of the Transaction will
be satisfied without waiver thereof. We have assumed that the final form of the
Agreement will be substantially similar to the last draft reviewed by us. We
have also assumed that all governmental, regulatory and other consents and
approvals contemplated by the Agreement will be obtained and that in the course
of obtaining any of those consents no restrictions will be imposed or waivers
made that would have an adverse effect on the contemplated benefits of the
Transaction. You have informed us, and we have assumed, that the Transaction
will be treated as a tax-free reorganization.
It is understood that this letter is intended for the benefit and use of the
Board of Directors of the Company in its consideration of the Transaction and
may not be used for any other purpose or reproduced, disseminated, quoted or
referred to at any time, in any manner or for any purpose without our prior
written consent, which consent shall not be unreasonably withheld.
Notwithstanding, this letter may be reproduced in
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its entirety in any proxy statement relating to the Transaction filed by the
Company under the Securities Exchange Act of 1934, as amended, and distributed
to stockholders, provided it will be reproduced in such proxy statement in
full, and any description of or reference to SG Cowen or summary thereof in
such proxy statement will be in a form acceptable to SG Cowen and its counsel.
If the proxy statement is incorporated or becomes part of a registration
statement filed under the Securities Act of 1933, as amended (the "33 Act"), SG
Cowen's consent to the reproduction of this letter as an exhibit or otherwise
shall not be deemed or constitute an admission or acknowledgment that SG Cowen
or any of its affiliates is within the class of persons whose consent is
required under Section 7 of the 33 Act or the rules and regulations promulgated
thereunder. The Company agrees that to the extent a consent will be filed with
such registration statement, it shall be in form and substance acceptable to SG
Cowen.
This letter does not constitute a recommendation to any stockholder as to
how such stockholder should vote with respect to the Transaction or to take any
other action in connection with the Transaction or otherwise. We are not
expressing any opinion as to what the value of the common stock of Acquiror
actually will be when issued to the Company's stockholders pursuant to the
Transaction. We have not been requested to opine as to, and our Opinion does
not in any manner address, the Company's underlying business decision to effect
the Transaction. Furthermore, we express no view as to the price or trading
range for shares of the common stock of Acquiror following the consummation of
the Transaction.
Based upon and subject to the foregoing, including the various assumptions
and limitations set forth herein, it is our opinion that, as of the date
hereof, the Exchange Ratio to be received in the Transaction is fair, from a
financial point of view, to the stockholders of the Company.
Very truly yours,
/s/ SG Cowen Securities Corporation
SG Cowen Securities Corporation
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Appendix D1
STOCKHOLDER AGREEMENT
THIS STOCKHOLDER AGREEMENT (this "Stockholder Agreement"), dated January 27,
2000, is by and between SPR Inc., a Delaware corporation (the "Company"), and
the undersigned stockholder ("Stockholder") of Leapnet, Inc., a Delaware
corporation ("Parent").
RECITALS
A. WHEREAS, concurrent with the execution of this Stockholder Agreement,
Parent, the Company and Merger Sub, a Delaware corporation and a wholly owned
subsidiary of Parent, have entered into an Agreement and Plan of Merger, dated
of even date herewith (as amended from time to time, the "Merger Agreement"),
pursuant to which Merger Sub will be merged with and into the Company, with the
Company continuing as the surviving corporation and as a direct wholly owned
subsidiary of Parent (the "Merger").
B. WHEREAS, the Stockholder owns shares, par value $0.01 per share, of
common stock of Parent (the "Shares") in the amounts set forth opposite the
Stockholder's name and signature on the signature page hereof.
C. WHEREAS, as an inducement and a condition to entering into the Merger
Agreement, the Company desires that the Stockholder agree, and the Stockholder
is willing to agree, to enter into this Stockholder Agreement.
NOW, THEREFORE, in consideration of the foregoing and for other good and
valuable consideration, the receipt and sufficiency of which are hereby
acknowledged, the parties hereto, intending to be legally bound, hereby agree
as follows:
1. Certain Definitions. In addition to the terms defined elsewhere herein,
capitalized terms used and not defined herein have the respective meanings
ascribed to them in the Merger Agreement. For purposes of this Stockholder
Agreement:
(a) "Affiliate" means, as to any specified Person, (i) any stockholder,
equity holder, officer, or director of such Person and their family members
or (ii) any other Person which, directly or indirectly, controls, is
controlled by, employed by or is under common control with, any of the
foregoing. For the purposes of this definition, "control" means the
possession of the power to direct or cause the direction of the management
and policies of such Person, whether through the ownership of voting
securities, by contract or otherwise.
(b) "Beneficially Own" or "Beneficial Ownership" with respect to any
securities means having "beneficial ownership" of such securities as
determined pursuant to Rule 13d-3 under the Securities Exchange Act of
1934, as amended (the "Exchange Act"), including pursuant to any agreement,
arrangement or understanding, whether or not in writing. Without
duplicative counting of the same securities by the same holder, securities
Beneficially Owned by a Person shall include securities Beneficially Owned
by all other Persons with whom such Person would constitute a "group" as
within the meanings of Section 13(d)(3) of the Exchange Act.
(c) "Person" means any individual, corporation, partnership, limited
liability company, joint venture, association, joint stock company, trust
(including any beneficiary thereof), unincorporated organization or
government or any agency or political subdivision thereof.
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2. Disclosure. The Stockholder hereby agrees to permit the Company and
Parent to publish and disclose in the S-4 Registration Statement and the Proxy
Statement/Prospectus (including all documents and schedules filed with the
SEC), and any press release or other disclosure document which Parent and the
Company reasonably determine to be necessary or desirable in connection with
the Merger and any transactions related thereto, the Stockholder's identity and
ownership of the Shares and the nature of the Stockholder's commitments,
arrangements and understandings under this Stockholder Agreement.
3. Voting of Parent Stock. The Stockholder hereby agrees that, during the
period commencing on the date hereof and continuing until the first to occur of
(a) the Effective Time or (b) the termination of the Merger Agreement in
accordance with its terms (the "Termination Date"), at any meeting of the
holders of the Shares, however called, or in connection with any written
consent of the holders of the Shares, he shall vote (or cause to be voted) the
Shares held of record or Beneficially Owned by the Stockholder, whether
heretofore owned or hereafter acquired: (i) in favor of the issuance of Shares
in the Merger and any actions required in furtherance of the Merger and hereof,
(ii) against any action or agreement that would result in a breach in any
respect of any covenant, representation or warranty, or any other obligation or
agreement, of Parent under the Merger Agreement or the Stockholder under this
Stockholder Agreement (after giving effect to any materiality or similar
qualifications contained therein) and (iii) except as otherwise agreed to in
writing in advance by the Company, against the following actions (other than
the Merger and the transactions contemplated by this Stockholder Agreement and
the Merger Agreement): (A) any extraordinary corporate transaction, such as a
merger, consolidation or other business combination involving Parent, (B) a
sale, lease or transfer of a material amount of assets of Parent, or a
reorganization, recapitalization, dissolution or liquidation of Parent; (C)(1)
any change in a majority of the individuals who constitute Parent's Board of
Directors; (2) any change in the present capitalization of Parent or any
amendment of Parent's Certificate of Incorporation or By-Laws; (3) any material
change in Parent's corporation structure or business; or (4) any other action
which, in the case of each of the matters referred to in clauses (C)(1), (2) or
(3), is intended, or could reasonably be expected, to impede, interfere with,
delay, postpone, or materially and adversely affect the Merger and the
transactions contemplated by this Stockholder Agreement and the Merger
Agreement. The Stockholder agrees that he will not enter into any agreement or
understanding with any Person the effect of which would be inconsistent with or
violative of any provision contained in this Section 3. Notwithstanding the
foregoing, nothing in this Section 3 shall require the Stockholder to exercise
any options with respect to the Shares.
4. Grant of Proxy; Appointment of Proxy.
(a) The Stockholder hereby irrevocably grants to, and appoints, the
Board of Directors of the Company, the Stockholder's proxy and attorney-in-
fact (with full power of substitution), for and in the name, place and
stead of the Stockholder, to vote the Stockholder's Shares, or grant a
consent or approval in respect of such Shares as set forth in Section 3
hereof. The Stockholder shall have no claim against such proxy and
attorney-in-fact, for any action taken, decision made or instruction given
by such proxy and attorney-in-fact in accordance with this Stockholder
Agreement.
(b) The Stockholder understands and acknowledges that the Company is
entering into the Merger Agreement in reliance upon such irrevocable proxy.
The Stockholder hereby affirms that the irrevocable proxy set forth in this
Section 4 is given to secure the performance of the duties of the
Stockholder under this Stockholder Agreement. The Stockholder hereby
affirms that the irrevocable proxy is coupled with an interest and may
under no circumstances be revoked. The Stockholder hereby ratifies and
confirms that such irrevocable proxy may lawfully do or cause to be done by
virtue hereof.
5. Covenants, Representations and Warranties of Stockholder. The Stockholder
hereby represents and warrants to, and agrees with, the Company as follows:
(a) Ownership of Shares. The Stockholder is the sole record and
Beneficial Owner of the number of Shares opposite the Stockholder's name on
the signature page hereof. On the date hereof, the Shares set forth
opposite the Stockholder's name on the signature page hereof constitute all
of the Shares owned of record or Beneficially Owned by the Stockholder or
to which the Stockholder has voting power by proxy,
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voting agreement, voting trust or other similar instrument. The Stockholder
has sole voting power and sole power to issue instructions with respect to
the matters set forth in Section 3 hereof, sole power of disposition, sole
power of conversion, sole power to demand appraisal rights and sole power
to agree to all of the matters set forth in this Stockholder Agreement, in
each case with respect to all of the Shares set forth opposite the
Stockholder's name on the signature page hereof, with no limitations,
qualifications or restrictions on such rights, subject to applicable
securities laws, and the terms of this Stockholder Agreement.
(b) Authorization. The Stockholder has the legal capacity, power and
authority to enter into and perform all of the Stockholder's obligations
under this Stockholder Agreement. The execution, delivery and performance
of this Stockholder Agreement by the Stockholder will not violate any other
agreement to which the Stockholder is a party including, without
limitation, any voting agreement, stockholders agreement, voting trust,
trust or similar agreement. This Stockholder Agreement has been duly and
validly executed and delivered by the Stockholder and constitutes a valid
and binding agreement enforceable against the Stockholder in accordance
with its terms. There is no beneficiary or holder of a voting trust
certificate or other interest of any trust of which the Stockholder is a
trustee whose consent is required for the execution and delivery of this
Stockholder Agreement or the consummation by the Stockholder of the
transactions contemplated hereby. If the Stockholder is married and the
Stockholder's Shares constitute community property, this Stockholder
Agreement has been duly authorized, executed and delivered by, and
constitutes a valid and binding agreement of, the Stockholder's spouse,
enforceable against such person is accordance with its terms.
(c) No Conflicts. (i) no filing with, and no permit, authorization,
consent or approval of, any state or federal public body or authority is
necessary for the execution of this Stockholder Agreement by the
Stockholder and the consummation by the Stockholder of the transactions
contemplated hereby and (ii) none of the execution and delivery of this
Stockholder Agreement by the Stockholder, the consummation by the
Stockholder of the transactions contemplated hereby or compliance by the
Stockholder with any of the provisions hereof shall (A) conflict with or
result in any breach of the organizational documents of the Stockholder (if
applicable), (B) result in a violation or breach of, or constitute (with or
without notice or lapse of time or both) a default (or give rise to any
third party right of termination, cancellation, material modification or
acceleration) under any of the terms, conditions or provisions of any note,
bond, mortgage, indenture, license, contract, commitment, arrangement,
understanding, agreement or other instrument or obligation of any kind to
which the Stockholder is a party or by which the Stockholder or any of its
properties or assets may be bound, or (C) violate any order, writ
injunction, decree, judgment, order, statute, rule or regulation applicable
to the Stockholder or any of its properties or assets.
(d) No Encumbrances. Except as applicable in connection with the
transactions contemplated by Sections 3 and 4 hereof, the Stockholder's
Shares at all times during the term hereof will be Beneficially Owned by
the Stockholder, free and clear of all liens, claims, security interests,
proxies, voting trusts or agreements, understandings or arrangements or any
other encumbrances whatsoever.
(e) No Solicitation. The Stockholder agrees not to take any action
inconsistent with or in violation of Section 6.2 of the Merger Agreement.
(f) Restriction on Transfer, Proxies and Non-Interference. The
Stockholder shall not, directly or indirectly (i) except as contemplated by
the Merger Agreement, offer for sale, sell, transfer, tender, pledge,
encumber, assign or otherwise dispose of, or enter into any contract,
option or other arrangement or understanding with respect to or consent to
the offer for sale, sale, transfer, tender, pledge, encumbrance, assignment
or other disposition of, any or all of the Stockholder's Shares or any
interest therein, (ii) except as contemplated by this Stockholder
Agreement, grant any proxies or powers of attorney, deposit any Shares into
a voting trust or enter into a voting agreement with respect to the Shares,
or (iii) take any action that would make any representation or warranty of
the Stockholder contained herein untrue or incorrect or have the effect of
preventing or disabling the Stockholder from performing the Stockholder's
obligations under this Stockholder Agreement.
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(g) Reliance by the Company. The Stockholder understands and
acknowledges that the Company is entering into the Merger Agreement in
reliance upon the Stockholder's execution and delivery of this Stockholder
Agreement.
6. Stop Transfer Legend.
(a) The Stockholder agrees and covenants to the Company that the
Stockholder shall not request that Parent register the transfer (book-entry
or otherwise) of any certificate or uncertificated interest representing
any of the Stockholder's Shares, unless such transfer is made in compliance
with this Stockholder Agreement.
(b) Without limiting the covenants set forth in paragraph (a) above, in
the event of a stock dividend or distribution, or any change in Shares by
reason of any stock dividend, split-up, recapitalization, combination,
exchange of shares or the like, other than pursuant to the Merger, the term
"Shares" shall be deemed to refer to and include the Shares into which or
for which any or all of the Shares may be changed or exchanged and
appropriate adjustments shall be made to the terms and provisions of this
Stockholder Agreement.
7. Further Assurances. From time to time, at the Company's request and
without further consideration, the Stockholder shall execute and deliver such
additional documents and take all such further lawful action as may be
necessary or desirable to consummate and make effective, in the most
expeditious manner practicable, the transactions contemplated by this
Stockholder Agreement.
8. Stockholder Capacity. If the Stockholder is or becomes during the term
hereof a director or an officer of Parent, the Stockholder makes no agreement
or understanding herein in his capacity as such director or officer. The
Stockholder signs solely in his capacity as the record and Beneficial Owner of
the Stockholder's Shares.
9. Termination. Except as otherwise provided herein, the covenants and
agreements contained herein with respect to the Shares shall terminate upon the
earlier of (a) the Termination Date or (b) the Effective Time.
10. Miscellaneous.
(a) Entire Agreement. This Stockholder Agreement constitutes the entire
agreement among the parties with respect to the subject matter hereof and
supersedes all other prior agreements and understandings, both written and
oral, between the parties with respect to the subject matter hereof.
(b) Certain Events. Subject to Section 5(f) hereof, the Stockholder
agrees that this Stockholder Agreement and the obligations hereunder shall
attach to the Stockholder's Shares and shall be binding upon any Person to
which legal or Beneficial Ownership of such Shares shall pass, whether by
operation of law or otherwise, including without limitation, the
Stockholder's heirs, guardians, administrators or successors.
Notwithstanding any such transfer of Shares, the transferor shall remain
liable for the performance of all obligations under this Stockholder
Agreement.
(c) Assignment. This Stockholder Agreement shall not be assigned by
operation of law or otherwise without the prior written consent of the
other party hereto, provided that the Company may assign, in its sole
discretion, its rights and obligations hereunder to any direct or indirect
wholly owned subsidiary of the Company, but no such assignment shall
relieve the Company of its obligations hereunder if such assignee does not
perform such obligations.
(d) Amendment and Modification. This Stockholder Agreement may not be
amended, changed, supplemented, waived or otherwise modified or terminated,
except upon the execution and delivery of a written agreement executed by
the parties hereto.
D-1-4
(e) Notices. Any notice or other communication required or which may be
given hereunder shall be in writing and delivered (i) personally, (ii) via
telecopy, (iii) via overnight courier (providing proof of delivery) or (iv)
via registered or certified mail (return receipt requested). Such notice
shall be deemed to be given, dated and received (i) when so delivered
personally, via telecopy upon confirmation, or via overnight courier upon
actual delivery or (ii) two days after the date of mailing, if mailed by
registered or certified mail. Any notice pursuant to this section shall be
delivered as follows:
If to the Stockholder to the address set forth for the Stockholder on the
signature page to this Stockholder Agreement.
If to the Company:
SPR Inc.
2015 Spring Road
Suite 750
Oak Brook, Illinois 60523-1874
Attn: Chief Executive Officer
(f) Severability. Whenever possible, each provision or portion of any
provision of this Stockholder Agreement will be interpreted in such a
manner as to be effective and valid under applicable law but if any
provision or portion of any provision of this Stockholder Agreement is held
to be invalid, illegal or unenforceable in any respect under any applicable
law or rule in any jurisdiction, such invalidity, illegality or
unenforceability will not affect any other provision or portion of any
provision of this Stockholder Agreement in such jurisdiction, and this
Stockholder Agreement will be reformed, construed and enforced in such
jurisdiction as if such invalid, illegal or unenforceable provision or
portion of any provision had never been contained herein.
(g) Specific Performance. The parties hereto agree recognize and
acknowledge that a breach by it of any covenants or agreements contained in
this Stockholder Agreement will cause the other party to sustain damages
for which it would not have an adequate remedy at law for money damages,
and therefore each of the parties hereto agrees that in the event of any
such breach the aggrieved party shall be entitled to the remedy of specific
performance of such covenants and agreements and injunctive and other
equitable relief in addition to any other remedy to which it may be
entitled, at law or in equity.
(h) Remedies Cumulative. All rights, powers and remedies provided under
this Stockholder Agreement or otherwise available in respect hereof at law
or in equity shall be cumulative and not alternative, and the exercise of
any such rights, powers or remedies by any party shall not preclude the
simultaneous or later exercise of any other such right, power or remedy by
such party.
(i) No Waiver. The failure of any party hereto to exercise any right,
power or remedy provided under this Stockholder Agreement or otherwise
available in respect hereof at law or in equity, or to insist upon
compliance by any other party hereto with its obligations hereunder, and
any custom or practice of the parties at variance with the terms hereof,
will not constitute a waiver by such party of its right to exercise any
such or other right, power or remedy or to demand such compliance.
(j) No Third Party Beneficiaries. This Stockholder Agreement is not
intended to confer upon any person other than the parties hereto any rights
or remedies hereunder.
(k) Governing Law. This Stockholder Agreement will be governed and
construed in accordance with the laws of the State of Delaware, without
giving effect to the principles of conflict of laws thereof.
(l) WAIVER OF JURY TRIAL. EACH PARTY HERETO HEREBY WAIVES ANY RIGHT TO A
TRIAL BY JURY IN CONNECTION WITH ANY ACTION, SUIT OR PROCEEDING IN
CONNECTION WITH THIS STOCKHOLDER AGREEMENT.
(m) Description Headings. The description headings used herein are for
convenience of reference only and are not intended to be part of or to
affect the meaning or interpretation of this Stockholder Agreement.
D-1-5
(n) Counterparts. This Stockholder Agreement may be executed in
counterparts, each of which will be considered one and the same Stockholder
Agreement and will become effective when such counterparts have been signed
by each of the parties and delivered to the other parties, it being
understood that all parties need not sign the same counterpart.
(o) Recovery of Attorney's Fees. In the event of any litigation between
the parties relating to this Stockholder Agreement, the prevailing party
shall be entitled to recover its reasonable attorney's fees and costs
(including court costs) from the non-prevailing party, provided that if
both parties prevail in part, the reasonable attorney's fees and costs
shall be awarded by the court in such a manner as it deems equitable to
reflect the relative amounts and merits of the parties' claims.
[signature page follows]
D-1-6
IN WITNESS WHEREOF, the Company and the Stockholder have caused this
Stockholder Agreement to be duly executed as of the day and year first above
written.
SPR INC.
By:__________________________________
Name:______________________________
Title:_____________________________
STOCKHOLDER
By:__________________________________ Number of shares:
Name:______________________________
STOCKHOLDER'S SPOUSE
By:__________________________________
Name:______________________________
D-1-7
APPENDIX D2
STOCKHOLDER AGREEMENT
THIS STOCKHOLDER AGREEMENT (this "Stockholder Agreement"), dated January 27,
2000, is by and between SPR Inc., a Delaware corporation (the "Company"), and
the undersigned stockholder ("Stockholder") of Leapnet, Inc., a Delaware
corporation ("Parent").
RECITALS
A. WHEREAS, concurrent with the execution of this Stockholder Agreement,
Parent, the Company and Merger Sub, a Delaware corporation and a wholly owned
subsidiary of Parent, have entered into an Agreement and Plan of Merger, dated
of even date herewith (as amended from time to time, the "Merger Agreement"),
pursuant to which Merger Sub will be merged with and into the Company, with the
Company continuing as the surviving corporation and as a direct wholly owned
subsidiary of Parent (the "Merger").
B. WHEREAS, the Stockholder owns shares, par value $0.01 per share, of
common stock of Parent (the "Shares") in the amounts set forth opposite the
Stockholder's name and signature on the signature page hereof.
C. WHEREAS, as an inducement and a condition to entering into the Merger
Agreement, the Company desires that the Stockholder agree, and the Stockholder
is willing to agree, to enter into this Stockholder Agreement.
NOW, THEREFORE, in consideration of the foregoing and for other good and
valuable consideration, the receipt and sufficiency of which are hereby
acknowledged, the parties hereto, intending to be legally bound, hereby agree
as follows:
1. Certain Definitions. In addition to the terms defined elsewhere herein,
capitalized terms used and not defined herein have the respective meanings
ascribed to them in the Merger Agreement. For purposes of this Stockholder
Agreement:
(a) "Affiliate" means, as to any specified Person, (i) any stockholder,
equity holder, officer, or director of such Person and their family members
or (ii) any other Person which, directly or indirectly, controls, is
controlled by, employed by or is under common control with, any of the
foregoing. For the purposes of this definition, "control" means the
possession of the power to direct or cause the direction of the management
and policies of such Person, whether through the ownership of voting
securities, by contract or otherwise.
(b) "Beneficially Own" or "Beneficial Ownership" with respect to any
securities means having "beneficial ownership" of such securities as
determined pursuant to Rule 13d-3 under the Securities Exchange Act of
1934, as amended (the "Exchange Act"), including pursuant to any agreement,
arrangement or understanding, whether or not in writing. Without
duplicative counting of the same securities by the same holder, securities
Beneficially Owned by a Person shall include securities Beneficially Owned
by all other Persons with whom such Person would constitute a "group" as
within the meanings of Section 13(d)(3) of the Exchange Act.
(c) "Person" means any individual, corporation, partnership, limited
liability company, joint venture, association, joint stock company, trust
(including any beneficiary thereof), unincorporated organization or
government or any agency or political subdivision thereof.
2. Disclosure. The Stockholder hereby agrees to permit the Company and
Parent to publish and disclose in the S-4 Registration Statement and the Proxy
Statement/Prospectus (including all documents and schedules filed with the
SEC), and any press release or other disclosure document which Parent and the
Company reasonably determine to be necessary or desirable in connection with
the Merger and any transactions related
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thereto, the Stockholder's identity and ownership of the Shares and the nature
of the Stockholder's commitments, arrangements and understandings under this
Stockholder Agreement.
3. Voting of Parent Stock. The Stockholder hereby agrees that, during the
period commencing on the date hereof and continuing until the first to occur of
(a) the Effective Time, (b) the termination of the Merger Agreement in
accordance with its terms or the events described in Section 5(f) (the
"Termination Date"), at any meeting of the holders of the Shares, however
called, or in connection with any written consent of the holders of the Shares,
he shall vote (or cause to be voted) the Shares held of record or Beneficially
Owned by the Stockholder, whether heretofore owned or hereafter acquired: (i)
in favor of the issuance of Shares in the Merger and any actions required in
furtherance of the Merger and hereof, (ii) against any action or agreement that
would result in a breach in any respect of any covenant, representation or
warranty, or any other obligation or agreement, of Parent under the Merger
Agreement or the Stockholder under this Stockholder Agreement (after giving
effect to any materiality or similar qualifications contained therein) and
(iii) except as otherwise agreed to in writing in advance by the Company,
against the following actions (other than the Merger and the transactions
contemplated by this Stockholder Agreement and the Merger Agreement): (A) any
extraordinary corporate transaction, such as a merger, consolidation or other
business combination involving Parent, (B) a sale, lease or transfer of a
material amount of assets of Parent, or a reorganization, recapitalization,
dissolution or liquidation of Parent; (C)(1) any change in a majority of the
individuals who constitute Parent's Board of Directors; (2) any change in the
present capitalization of Parent or any amendment of Parent's Certificate of
Incorporation or By-Laws; (3) any material change in Parent's corporation
structure or business; or (4) any other action which, in the case of each of
the matters referred to in clauses (C)(1), (2) or (3), is intended, or could
reasonably be expected, to impede, interfere with, delay, postpone, or
materially and adversely affect the Merger and the transactions contemplated by
this Stockholder Agreement and the Merger Agreement. The Stockholder agrees
that he will not enter into any agreement or understanding with any Person the
effect of which would be inconsistent with or violative of any provision
contained in this Section 3. Notwithstanding the foregoing, nothing in this
Section 3 shall require the Stockholder to exercise any options with respect to
the Shares.
4. Grant of Proxy; Appointment of Proxy.
(a) The Stockholder hereby irrevocably grants to, and appoints, the
Board of Directors of the Company, the Stockholder's proxy and attorney-in-
fact (with full power of substitution), for and in the name, place and
stead of the Stockholder, to vote the Stockholder's Shares, or grant a
consent or approval in respect of such Shares as set forth in Section 3
hereof. The Stockholder shall have no claim against such proxy and
attorney-in-fact, for any action taken, decision made or instruction given
by such proxy and attorney-in-fact in accordance with this Stockholder
Agreement.
(b) The Stockholder understands and acknowledges that the Company is
entering into the Merger Agreement in reliance upon such irrevocable proxy.
The Stockholder hereby affirms that the irrevocable proxy set forth in this
Section 4 is given to secure the performance of the duties of the
Stockholder under this Stockholder Agreement. The Stockholder hereby
affirms that the irrevocable proxy is coupled with an interest and may
under no circumstances be revoked. The Stockholder hereby ratifies and
confirms that such irrevocable proxy may lawfully do or cause to be done by
virtue hereof.
5. Covenants, Representations and Warranties of Stockholder. The Stockholder
hereby represents and warrants to, and agrees with, the Company as follows:
(a) Ownership of Shares. The Stockholder is the sole record and
Beneficial Owner of the number of Shares opposite the Stockholder's name on
the signature page hereof. On the date hereof, the Shares set forth
opposite the Stockholder's name on the signature page hereof constitute all
of the Shares owned of record or Beneficially Owned by the Stockholder or
to which the Stockholder has voting power by proxy, voting agreement,
voting trust or other similar instrument. The Stockholder has sole voting
power and sole power to issue instructions with respect to the matters set
forth in Section 3 hereof, sole power of disposition, sole power of
conversion, sole power to demand appraisal rights and sole power to agree
to all of the matters set forth in this Stockholder Agreement, in each case
with respect to all of the Shares set
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forth opposite the Stockholder's name on the signature page hereof, with no
limitations, qualifications or restrictions on such rights, subject to
applicable securities laws, and the terms of this Stockholder Agreement.
(b) Authorization. The Stockholder has the legal capacity, power and
authority to enter into and perform all of the Stockholder's obligations
under this Stockholder Agreement. The execution, delivery and performance
of this Stockholder Agreement by the Stockholder will not violate any other
agreement to which the Stockholder is a party including, without
limitation, any voting agreement, stockholders agreement, voting trust,
trust or similar agreement. This Stockholder Agreement has been duly and
validly executed and delivered by the Stockholder and constitutes a valid
and binding agreement enforceable against the Stockholder in accordance
with its terms. There is no beneficiary or holder of a voting trust
certificate or other interest of any trust of which the Stockholder is a
trustee whose consent is required for the execution and delivery of this
Stockholder Agreement or the consummation by the Stockholder of the
transactions contemplated hereby. If the Stockholder is married and the
Stockholder's Shares constitute community property, this Stockholder
Agreement has been duly authorized, executed and delivered by, and
constitutes a valid and binding agreement of, the Stockholder's spouse,
enforceable against such person is accordance with its terms.
(c) No Conflicts. (i) no filing with, and no permit, authorization,
consent or approval of, any state or federal public body or authority is
necessary for the execution of this Stockholder Agreement by the
Stockholder and the consummation by the Stockholder of the transactions
contemplated hereby and (ii) none of the execution and delivery of this
Stockholder Agreement by the Stockholder, the consummation by the
Stockholder of the transactions contemplated hereby or compliance by the
Stockholder with any of the provisions hereof shall (A) conflict with or
result in any breach of the organizational documents of the Stockholder (if
applicable), (B) result in a violation or breach of, or constitute (with or
without notice or lapse of time or both) a default (or give rise to any
third party right of termination, cancellation, material modification or
acceleration) under any of the terms, conditions or provisions of any note,
bond, mortgage, indenture, license, contract, commitment, arrangement,
understanding, agreement or other instrument or obligation of any kind to
which the Stockholder is a party or by which the Stockholder or any of its
properties or assets may be bound, or (C) violate any order, writ
injunction, decree, judgment, order, statute, rule or regulation applicable
to the Stockholder or any of its properties or assets.
(d) No Encumbrances. Except as applicable in connection with the
transactions contemplated by Sections 3 and 4 hereof, the Stockholder's
Shares at all times during the term hereof will be Beneficially Owned by
the Stockholder, free and clear of all liens, claims, security interests,
proxies, voting trusts or agreements, understandings or arrangements or any
other encumbrances whatsoever.
(e) No Solicitation. The Stockholder agrees not to take any action
inconsistent with or in violation of Section 6.2 of the Merger Agreement.
(f) Restriction on Transfer, Proxies and Non-Interference. The
Stockholder shall not, directly or indirectly (i) except as contemplated by
the Merger Agreement, offer for sale, sell, transfer, tender, pledge,
encumber, assign or otherwise dispose of, or enter into any contract,
option or other arrangement or understanding with respect to or consent to
the offer for sale, sale, transfer, tender, pledge, encumbrance, assignment
or other disposition of, any or all of the Stockholder's Shares or any
interest therein, (ii) except as contemplated by this Stockholder
Agreement, grant any proxies or powers of attorney, deposit any Shares into
a voting trust or enter into a voting agreement with respect to the Shares,
or (iii) take any action that would make any representation or warranty of
the Stockholder contained herein untrue or incorrect or have the effect of
preventing or disabling the Stockholder from performing the Stockholder's
obligations under this Stockholder Agreement. Notwithstanding the
foregoing, (i) the Stockholder and his spouse will be allowed to sell up to
200,000 Shares in the aggregate after the close of business on Tuesday 4,
2000 (ii) if the Merger is not completed by June 30, 2000, the Stockholder
and his spouse will be allowed to sell up to an additional 200,000 Shares
in the aggregate, and (iii) if the Merger is not completed by October 31,
2000, this Stockholder Agreement will terminate and be of no further
effect.
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(g) Reliance by the Company. The Stockholder understands and
acknowledges that the Company is entering into the Merger Agreement in
reliance upon the Stockholder's execution and delivery of this Stockholder
Agreement.
6. Stop Transfer Legend.
(a) The Stockholder agrees and covenants to the Company that the
Stockholder shall not request that Parent register the transfer (book-entry
or otherwise) of any certificate or uncertificated interest representing
any of the Stockholder's Shares, unless such transfer is made in compliance
with this Stockholder Agreement.
(b) Without limiting the covenants set forth in paragraph (a) above, in
the event of a stock dividend or distribution, or any change in Shares by
reason of any stock dividend, split-up, recapitalization, combination,
exchange of shares or the like, other than pursuant to the Merger, the term
"Shares" shall be deemed to refer to and include the Shares into which or
for which any or all of the Shares may be changed or exchanged and
appropriate adjustments shall be made to the terms and provisions of this
Stockholder Agreement.
7. Further Assurances. From time to time, at the Company's request and
without further consideration, the Stockholder shall execute and deliver such
additional documents and take all such further lawful action as may be
necessary or desirable to consummate and make effective, in the most
expeditious manner practicable, the transactions contemplated by this
Stockholder Agreement.
8. Stockholder Capacity. If the Stockholder is or becomes during the term
hereof a director or an officer of Parent, the Stockholder makes no agreement
or understanding herein in his capacity as such director or officer. The
Stockholder signs solely in his capacity as the record and Beneficial Owner of
the Stockholder's Shares.
9. Termination. Except as otherwise provided herein, the covenants and
agreements contained herein with respect to the Shares shall terminate upon the
earlier of (a) the Termination Date or (b) the Effective Time.
10. Miscellaneous.
(a) Entire Agreement. This Stockholder Agreement constitutes the entire
agreement among the parties with respect to the subject matter hereof and
supersedes all other prior agreements and understandings, both written and
oral, between the parties with respect to the subject matter hereof.
(b) Certain Events. Subject to Section 5(f) hereof, the Stockholder
agrees that this Stockholder Agreement and the obligations hereunder shall
attach to the Stockholder's Shares and shall be binding upon any Person to
which legal or Beneficial Ownership of such Shares shall pass, whether by
operation of law or otherwise, including without limitation, the
Stockholder's heirs, guardians, administrators or successors.
Notwithstanding any such transfer of Shares, the transferor shall remain
liable for the performance of all obligations under this Stockholder
Agreement.
(c) Assignment. This Stockholder Agreement shall not be assigned by
operation of law or otherwise without the prior written consent of the
other party hereto, provided that the Company may assign, in its sole
discretion, its rights and obligations hereunder to any direct or indirect
wholly owned subsidiary of the Company, but no such assignment shall
relieve the Company of its obligations hereunder if such assignee does not
perform such obligations.
(d) Amendment and Modification. This Stockholder Agreement may not be
amended, changed, supplemented, waived or otherwise modified or terminated,
except upon the execution and delivery of a written agreement executed by
the parties hereto.
(e) Notices. Any notice or other communication required or which may be
given hereunder shall be in writing and delivered (i) personally, (ii) via
telecopy, (iii) via overnight courier (providing proof of delivery) or (iv)
via registered or certified mail (return receipt requested). Such notice
shall be deemed to
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be given, dated and received (i) when so delivered personally, via telecopy
upon confirmation, or via overnight courier upon actual delivery or (ii)
two days after the date of mailing, if mailed by registered or certified
mail. Any notice pursuant to this section shall be delivered as follows:
If to the Stockholder to the address set forth for the Stockholder on the
signature page to this Stockholder Agreement.
If to the Company:
SPR Inc.
2015 Spring Road
Suite 750
Oak Brook, Illinois 60523-1874
Attn: Chief Executive Officer
(f) Severability. Whenever possible, each provision or portion of any
provision of this Stockholder Agreement will be interpreted in such a
manner as to be effective and valid under applicable law but if any
provision or portion of any provision of this Stockholder Agreement is held
to be invalid, illegal or unenforceable in any respect under any applicable
law or rule in any jurisdiction, such invalidity, illegality or
unenforceability will not affect any other provision or portion of any
provision of this Stockholder Agreement in such jurisdiction, and this
Stockholder Agreement will be reformed, construed and enforced in such
jurisdiction as if such invalid, illegal or unenforceable provision or
portion of any provision had never been contained herein.
(g) Specific Performance. The parties hereto agree recognize and
acknowledge that a breach by it of any covenants or agreements contained in
this Stockholder Agreement will cause the other party to sustain damages
for which it would not have an adequate remedy at law for money damages,
and therefore each of the parties hereto agrees that in the event of any
such breach the aggrieved party shall be entitled to the remedy of specific
performance of such covenants and agreements and injunctive and other
equitable relief in addition to any other remedy to which it may be
entitled, at law or in equity.
(h) Remedies Cumulative. All rights, powers and remedies provided under
this Stockholder Agreement or otherwise available in respect hereof at law
or in equity shall be cumulative and not alternative, and the exercise of
any such rights, powers or remedies by any party shall not preclude the
simultaneous or later exercise of any other such right, power or remedy by
such party.
(i) No Waiver. The failure of any party hereto to exercise any right,
power or remedy provided under this Stockholder Agreement or otherwise
available in respect hereof at law or in equity, or to insist upon
compliance by any other party hereto with its obligations hereunder, and
any custom or practice of the parties at variance with the terms hereof,
will not constitute a waiver by such party of its right to exercise any
such or other right, power or remedy or to demand such compliance.
(j) No Third Party Beneficiaries. This Stockholder Agreement is not
intended to confer upon any person other than the parties hereto any rights
or remedies hereunder.
(k) Governing Law. This Stockholder Agreement will be governed and
construed in accordance with the laws of the State of Delaware, without
giving effect to the principles of conflict of laws thereof.
(l) WAIVER OF JURY TRIAL. EACH PARTY HERETO HEREBY WAIVES ANY RIGHT TO A
TRIAL BY JURY IN CONNECTION WITH ANY ACTION, SUIT OR PROCEEDING IN
CONNECTION WITH THIS STOCKHOLDER AGREEMENT.
(m) Description Headings. The description headings used herein are for
convenience of reference only and are not intended to be part of or to
affect the meaning or interpretation of this Stockholder Agreement.
(n) Counterparts. This Stockholder Agreement may be executed in
counterparts, each of which will be considered one and the same Stockholder
Agreement and will become effective when such counterparts
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have been signed by each of the parties and delivered to the other parties,
it being understood that all parties need not sign the same counterpart.
(o) Recovery of Attorney's Fees. In the event of any litigation between
the parties relating to this Stockholder Agreement, the prevailing party
shall be entitled to recover its reasonable attorney's fees and costs
(including court costs) from the non-prevailing party, provided that if
both parties prevail in part, the reasonable attorney's fees and costs
shall be awarded by the court in such a manner as it deems equitable to
reflect the relative amounts and merits of the parties' claims.
[signature page follows]
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IN WITNESS WHEREOF, the Company and the Stockholder have caused this
Stockholder Agreement to be duly executed as of the day and year first above
written.
SPR INC.
By:__________________________________
Name:______________________________
Title:_____________________________
STOCKHOLDER Number of shares:
By:_____________________________________
Name:___________________________________
STOCKHOLDER'S SPOUSE
By:_____________________________________
Name:___________________________________
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Appendix E
STOCKHOLDER AGREEMENT
THIS STOCKHOLDER AGREEMENT (this "Stockholder Agreement"), dated January 27,
2000, is by and between Leapnet, Inc., a Delaware corporation ("Parent"), and
the undersigned stockholder ("Stockholder") of SPR Inc., a Delaware corporation
(the "Company").
RECITALS
A. WHEREAS, concurrent with the execution of this Stockholder Agreement,
Parent, the Company and Merger Sub, a Delaware corporation and a wholly owned
subsidiary of Parent, have entered into an Agreement and Plan of Merger, dated
of even date herewith (as amended from time to time, the "Merger Agreement"),
pursuant to which Merger Sub will be merged with and into the Company, with the
Company continuing as the surviving corporation and as a direct wholly owned
subsidiary of Parent (the "Merger").
B. WHEREAS, the Stockholder owns shares, par value $0.01 per share, of
common stock of the Company (the "Shares") in the amounts set forth opposite
the Stockholder's name and signature on the signature page hereof.
C. WHEREAS, as an inducement and a condition to entering into the Merger
Agreement, Parent desires that the Stockholder agree, and the Stockholder is
willing to agree, to enter into this Stockholder Agreement.
NOW, THEREFORE, in consideration of the foregoing and for other good and
valuable consideration, the receipt and sufficiency of which are hereby
acknowledged, the parties hereto, intending to be legally bound, hereby agree
as follows:
1. Certain Definitions. In addition to the terms defined elsewhere herein,
capitalized terms used and not defined herein have the respective meanings
ascribed to them in the Merger Agreement. For purposes of this Stockholder
Agreement:
(a) "Affiliate" means, as to any specified Person, (i) any stockholder,
equity holder, officer, or director of such Person and their family members
or (ii) any other Person which, directly or indirectly, controls, is
controlled by, employed by or is under common control with, any of the
foregoing. For the purposes of this definition, "control" means the
possession of the power to direct or cause the direction of the management
and policies of such Person, whether through the ownership of voting
securities, by contract or otherwise.
(b) "Beneficially Own" or "Beneficial Ownership" with respect to any
securities means having "beneficial ownership" of such securities as
determined pursuant to Rule 13d-3 under the Securities Exchange Act of
1934, as amended (the "Exchange Act"), including pursuant to any agreement,
arrangement or understanding, whether or not in writing. Without
duplicative counting of the same securities by the same holder, securities
Beneficially Owned by a Person shall include securities Beneficially Owned
by all other Persons with whom such Person would constitute a "group" as
within the meanings of Section 13(d)(3) of the Exchange Act.
(c) "Person" means any individual, corporation, partnership, limited
liability company, joint venture, association, joint stock company, trust
(including any beneficiary thereof), unincorporated organization or
government or any agency or political subdivision thereof.
2. Disclosure. The Stockholder hereby agrees to permit the Company and
Parent to publish and disclose in the S-4 Registration Statement and the Proxy
Statement/Prospectus (including all documents and schedules
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filed with the SEC), and any press release or other disclosure document which
Parent and the Company reasonably determine to be necessary or desirable in
connection with the Merger and any transactions related thereto, the
Stockholder's identity and ownership of the Shares and the nature of the
Stockholder's commitments, arrangements and understandings under this
Stockholder Agreement.
3. Voting of Company Stock. The Stockholder hereby agrees that, during the
period commencing on the date hereof and continuing until the first to occur of
(a) the Effective Time or (b) the termination of the Merger Agreement in
accordance with its terms (the "Termination Date"), at any meeting of the
holders of the Shares, however called, or in connection with any written
consent of the holders of the Shares, he shall vote (or cause to be voted) the
Shares held of record or Beneficially Owned by the Stockholder, whether
heretofore owned or hereafter acquired: (i) in favor of approval of the Merger
Agreement and any actions required in furtherance thereof and hereof, (ii)
against any action or agreement that would result in a breach in any respect of
any covenant, representation or warranty, or any other obligation or agreement,
of the Company under the Merger Agreement or the Stockholder under this
Stockholder Agreement (after giving effect to any materiality or similar
qualifications contained therein) and (iii) except as otherwise agreed to in
writing in advance by Parent, against the following actions (other than the
Merger and the transactions contemplated by this Stockholder Agreement and the
Merger Agreement): (A) any extraordinary corporate transaction, such as a
merger, consolidation or other business combination involving the Company, (B)
a sale, lease or transfer of a material amount of assets of the Company, or a
reorganization, recapitalization, dissolution or liquidation of the Company;
(C)(1) any change in a majority of the individuals who constitute the Company's
Board of Directors; (2) any change in the present capitalization of the Company
or any amendment of the Company's Certificate of Incorporation or By-Laws; (3)
any material change in the Company's corporation structure or business; or (4)
any other action which, in the case of each of the matters referred to in
clauses (C)(1), (2) or (3), is intended, or could reasonably be expected, to
impede, interfere with, delay, postpone, or materially and adversely affect the
Merger and the transactions contemplated by this Stockholder Agreement and the
Merger Agreement. The Stockholder agrees that he will not enter into any
agreement or understanding with any Person the effect of which would be
inconsistent with or violative of any provision contained in this Section 3.
Notwithstanding the foregoing, nothing in this Section 3 shall require the
Stockholder to exercise any options with respect to the Shares.
4. Grant of Proxy; Appointment of Proxy.
(a) The Stockholder hereby irrevocably grants to, and appoints, the
Board of Directors of Parent, the Stockholder's proxy and attorney-in-fact
(with full power of substitution), for and in the name, place and stead of
the Stockholder, to vote the Stockholder's Shares, or grant a consent or
approval in respect of such Shares as set forth in Section 3 hereof. The
Stockholder shall have no claim against such proxy and attorney-in-fact,
for any action taken, decision made or instruction given by such proxy and
attorney-in-fact in accordance with this Stockholder Agreement.
(b) The Stockholder understands and acknowledges that Parent is entering
into the Merger Agreement in reliance upon such irrevocable proxy. The
Stockholder hereby affirms that the irrevocable proxy set forth in this
Section 4 is given to secure the performance of the duties of the
Stockholder under this Stockholder Agreement. The Stockholder hereby
affirms that the irrevocable proxy is coupled with an interest and may
under no circumstances be revoked. The Stockholder hereby ratifies and
confirms that such irrevocable proxy may lawfully do or cause to be done by
virtue hereof.
5. Covenants, Representations and Warranties of Stockholder. The Stockholder
hereby represents and warrants to, and agrees with, Parent as follows:
(a) Ownership of Shares. The Stockholder is the sole record and
Beneficial Owner of the number of Shares opposite the Stockholder's name on
the signature page hereof. On the date hereof, the Shares set forth
opposite the Stockholder's name on the signature page hereof constitute all
of the Shares owned of
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record or Beneficially Owned by the Stockholder or to which the Stockholder
has voting power by proxy, voting agreement, voting trust or other similar
instrument. The Stockholder has sole voting power and sole power to issue
instructions with respect to the matters set forth in Section 3 hereof,
sole power of disposition, sole power of conversion, sole power to demand
appraisal rights and sole power to agree to all of the matters set forth in
this Stockholder Agreement, in each case with respect to all of the Shares
set forth opposite the Stockholder's name on the signature page hereof,
with no limitations, qualifications or restrictions on such rights, subject
to applicable securities laws, and the terms of this Stockholder Agreement.
(b) Authorization. The Stockholder has the legal capacity, power and
authority to enter into and perform all of the Stockholder's obligations
under this Stockholder Agreement. The execution, delivery and performance
of this Stockholder Agreement by the Stockholder will not violate any other
agreement to which the Stockholder is a party including, without
limitation, any voting agreement, stockholders agreement, voting trust,
trust or similar agreement. This Stockholder Agreement has been duly and
validly executed and delivered by the Stockholder and constitutes a valid
and binding agreement enforceable against the Stockholder in accordance
with its terms. There is no beneficiary or holder of a voting trust
certificate or other interest of any trust of which the Stockholder is a
trustee whose consent is required for the execution and delivery of this
Stockholder Agreement or the consummation by the Stockholder of the
transactions contemplated hereby. If the Stockholder is married and the
Stockholder's Shares constitute community property, this Stockholder
Agreement has been duly authorized, executed and delivered by, and
constitutes a valid and binding agreement of, the Stockholder's spouse,
enforceable against such person is accordance with its terms.
(c) No Conflicts. (i) No filing with, and no permit, authorization,
consent or approval of, any state or federal public body or authority is
necessary for the execution of this Stockholder Agreement by the
Stockholder and the consummation by the Stockholder of the transactions
contemplated hereby and (ii) none of the execution and delivery of this
Stockholder Agreement by the Stockholder, the consummation by the
Stockholder of the transactions contemplated hereby or compliance by the
Stockholder with any of the provisions hereof shall (A) conflict with or
result in any breach of the organizational documents of the Stockholder (if
applicable), (B) result in a violation or breach of, or constitute (with or
without notice or lapse of time or both) a default (or give rise to any
third party right of termination, cancellation, material modification or
acceleration) under any of the terms, conditions or provisions of any note,
bond, mortgage, indenture, license, contract, commitment, arrangement,
understanding, agreement or other instrument or obligation of any kind to
which the Stockholder is a party or by which the Stockholder or any of its
properties or assets may be bound, or (C) violate any order, writ
injunction, decree, judgment, order, statute, rule or regulation applicable
to the Stockholder or any of its properties or assets.
(d) No Encumbrances. Except as applicable in connection with the
transactions contemplated by Sections 3 and 4 hereof, the Stockholder's
Shares at all times during the term hereof will be Beneficially Owned by
the Stockholder, free and clear of all liens, claims, security interests,
proxies, voting trusts or agreements, understandings or arrangements or any
other encumbrances whatsoever.
(e) No Solicitation. The Stockholder agrees not to take any action
inconsistent with or in violation of Section 6.2 of the Merger Agreement.
(f) Restriction on Transfer, Proxies and Non-Interference. The
Stockholder shall not, directly or indirectly (i) except as contemplated by
the Merger Agreement, offer for sale, sell, transfer, tender, pledge,
encumber, assign or otherwise dispose of, or enter into any contract,
option or other arrangement or understanding with respect to or consent to
the offer for sale, sale, transfer, tender, pledge, encumbrance, assignment
or other disposition of, any or all of the Stockholder's Shares or any
interest therein, (ii) except as contemplated by this Stockholder
Agreement, grant any proxies or powers of attorney, deposit any Shares into
a voting trust or enter into a voting agreement with respect to the Shares,
or (iii) take any action that would make any representation or warranty of
the Stockholder contained herein untrue or incorrect or have the effect of
preventing or disabling the Stockholder from performing the Stockholder's
obligations under this Stockholder Agreement.
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(g) Reliance by Parent. The Stockholder understands and acknowledges
that Parent is entering into the Merger Agreement in reliance upon the
Stockholder's execution and delivery of this Stockholder Agreement.
6. Stop Transfer Legend.
(a) The Stockholder agrees and covenants to Parent that the Stockholder
shall not request that the Company register the transfer (book-entry or
otherwise) of any certificate or uncertificated interest representing any
of the Stockholder's Shares, unless such transfer is made in compliance
with this Stockholder Agreement.
(b) Without limiting the covenants set forth in paragraph (a) above, in
the event of a stock dividend or distribution, or any change in Shares by
reason of any stock dividend, split-up, recapitalization, combination,
exchange of shares or the like, other than pursuant to the Merger, the term
"Shares" shall be deemed to refer to and include the Shares into which or
for which any or all of the Shares may be changed or exchanged and
appropriate adjustments shall be made to the terms and provisions of this
Stockholder Agreement.
7. Further Assurances. From time to time, at Parent's request and without
further consideration, the Stockholder shall execute and deliver such
additional documents and take all such further lawful action as may be
necessary or desirable to consummate and make effective, in the most
expeditious manner practicable, the transactions contemplated by this
Stockholder Agreement.
8. Stockholder Capacity. If the Stockholder is or becomes during the term
hereof a director or an officer of the Company, the Stockholder makes no
agreement or understanding herein in his capacity as such director or officer.
The Stockholder signs solely in his capacity as the record and Beneficial Owner
of the Stockholder's Shares.
9. Termination. Except as otherwise provided herein, the covenants and
agreements contained herein with respect to the Shares shall terminate upon the
earlier of (a) the Termination Date or (b) the Effective Time.
10. Miscellaneous.
(a) Entire Agreement. This Stockholder Agreement constitutes the entire
agreement among the parties with respect to the subject matter hereof and
supersedes all other prior agreements and understandings, both written and
oral, between the parties with respect to the subject matter hereof.
(b) Certain Events. Subject to Section 5(f) hereof, the Stockholder
agrees that this Stockholder Agreement and the obligations hereunder shall
attach to the Stockholder's Shares and shall be binding upon any Person to
which legal or Beneficial Ownership of such Shares shall pass, whether by
operation of law or otherwise, including without limitation, the
Stockholder's heirs, guardians, administrators or successors.
Notwithstanding any such transfer of Shares, the transferor shall remain
liable for the performance of all obligations under this Stockholder
Agreement.
(c) Assignment. This Stockholder Agreement shall not be assigned by
operation of law or otherwise without the prior written consent of the
other party hereto, provided that Parent may assign, in its sole
discretion, its rights and obligations hereunder to any direct or indirect
wholly owned subsidiary of Parent, but no such assignment shall relieve
Parent of its obligations hereunder if such assignee does not perform such
obligations.
(d) Amendment and Modification. This Stockholder Agreement may not be
amended, changed, supplemented, waived or otherwise modified or terminated,
except upon the execution and delivery of a written agreement executed by
the parties hereto.
(e) Notices. Any notice or other communication required or which may be
given hereunder shall be in writing and delivered (i) personally, (ii) via
telecopy, (iii) via overnight courier (providing proof of
E-4
delivery) or (iv) via registered or certified mail (return receipt
requested). Such notice shall be deemed to be given, dated and received (i)
when so delivered personally, via telecopy upon confirmation, or via
overnight courier upon actual delivery or (ii) two days after the date of
mailing, if mailed by registered or certified mail. Any notice pursuant to
this section shall be delivered as follows:
If to the Stockholder to the address set forth for the Stockholder on the
signature page to this Stockholder Agreement.
If to Parent:
Leapnet, Inc.
420 West Huron Street
Chicago, Illinois 60610
Attn: Chief Executive Officer
(f) Severability. Whenever possible, each provision or portion of any
provision of this Stockholder Agreement will be interpreted in such a
manner as to be effective and valid under applicable law but if any
provision or portion of any provision of this Stockholder Agreement is held
to be invalid, illegal or unenforceable in any respect under any applicable
law or rule in any jurisdiction, such invalidity, illegality or
unenforceability will not affect any other provision or portion of any
provision of this Stockholder Agreement in such jurisdiction, and this
Stockholder Agreement will be reformed, construed and enforced in such
jurisdiction as if such invalid, illegal or unenforceable provision or
portion of any provision had never been contained herein.
(g) Specific Performance. The parties hereto agree recognize and
acknowledge that a breach by it of any covenants or agreements contained in
this Stockholder Agreement will cause the other party to sustain damages
for which it would not have an adequate remedy at law for money damages,
and therefore each of the parties hereto agrees that in the event of any
such breach the aggrieved party shall be entitled to the remedy of specific
performance of such covenants and agreements and injunctive and other
equitable relief in addition to any other remedy to which it may be
entitled, at law or in equity.
(h) Remedies Cumulative. All rights, powers and remedies provided under
this Stockholder Agreement or otherwise available in respect hereof at law
or in equity shall be cumulative and not alternative, and the exercise of
any such rights, powers or remedies by any party shall not preclude the
simultaneous or later exercise of any other such right, power or remedy by
such party.
(i) No Waiver. The failure of any party hereto to exercise any right,
power or remedy provided under this Stockholder Agreement or otherwise
available in respect hereof at law or in equity, or to insist upon
compliance by any other party hereto with its obligations hereunder, and
any custom or practice of the parties at variance with the terms hereof,
will not constitute a waiver by such party of its right to exercise any
such or other right, power or remedy or to demand such compliance.
(j) No Third Party Beneficiaries. This Stockholder Agreement is not
intended to confer upon any person other than the parties hereto any rights
or remedies hereunder.
(k) Governing Law. This Stockholder Agreement will be governed and
construed in accordance with the laws of the State of Delaware, without
giving effect to the principles of conflict of laws thereof.
(l) WAIVER OF JURY TRIAL. EACH PARTY HERETO HEREBY WAIVES ANY RIGHT TO
A TRIAL BY JURY IN CONNECTION WITH ANY ACTION, SUIT OR PROCEEDING IN
CONNECTION WITH THIS STOCKHOLDER AGREEMENT.
(m) Description Headings. The description headings used herein are for
convenience of reference only and are not intended to be part of or to
affect the meaning or interpretation of this Stockholder Agreement.
(n) Counterparts. This Stockholder Agreement may be executed in
counterparts, each of which will be considered one and the same Stockholder
Agreement and will become effective when such counterparts
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have been signed by each of the parties and delivered to the other parties,
it being understood that all parties need not sign the same counterpart.
(o) Recovery of Attorney's Fees. In the event of any litigation between
the parties relating to this Stockholder Agreement, the prevailing party
shall be entitled to recover its reasonable attorney's fees and costs
(including court costs) from the non-prevailing party, provided that if
both parties prevail in part, the reasonable attorney's fees and costs
shall be awarded by the court in such a manner as it deems equitable to
reflect the relative amounts and merits of the parties' claims.
[signature page follows]
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IN WITNESS WHEREOF, Parent and the Stockholder have caused this Stockholder
Agreement to be duly executed as of the day and year first above written.
LEAPNET, INC.
By: _________________________________
Name:
Title:
STOCKHOLDER Number of shares:
Name: _______________________________
STOCKHOLDER'S SPOUSE
Name: _______________________________
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Appendix F-1
THE LEAP GROUP, INC.
EMPLOYEE INCENTIVE COMPENSATION PLAN
Effective May 29, 1996
TABLE OF CONTENTS
Page
----
ARTICLE I
ESTABLISHMENT............................................................. 1
1.1 Purpose.......................................................... 1
ARTICLE II
DEFINITIONS............................................................... 1
2.1 "Affiliate"...................................................... 1
2.2 "Agreement" or "Award Agreement"................................. 1
2.3 "Award".......................................................... 1
2.4 "Beneficiary".................................................... 1
2.5 "Board of Directors" or "Board".................................. 2
2.6 "Cash Incentive Award"........................................... 2
2.7 "Cause".......................................................... 2
2.8 "Change in Control" and "Change in Control Price"................ 2
2.9 "Code" or "Internal Revenue Code"................................ 2
2.10 "Commission"..................................................... 2
2.11 "Committee"...................................................... 2
2.12 "Common Stock"................................................... 3
2.13 "Company"........................................................ 3
2.14 "Covered Employee"............................................... 3
2.15 "Deferred Stock"................................................. 3
2.16 "Disability"..................................................... 3
2.17 "Disinterested Person"........................................... 3
2.18 "Dividend Equivalent"............................................ 3
2.19 "Effective Date"................................................. 3
2.20 "Exchange Act"................................................... 3
2.21 "Fair Market Value".............................................. 4
2.22 "Grant Date"..................................................... 4
2.23 "Incentive Stock Option"......................................... 4
2.24 "NASDAQ"......................................................... 4
2.25 "Non-Qualified Stock Option"..................................... 4
2.26 "Option"......................................................... 4
2.27 "Option Period".................................................. 4
2.28 "Option Price"................................................... 4
2.30 "Participant".................................................... 4
2.31 "Performance Award".............................................. 5
2.32 "Plan"........................................................... 5
2.33 "Representative"................................................. 5
2.34 "Restricted Stock"............................................... 5
2.35 "Retirement"..................................................... 5
2.36 "Rule 16b-3" and "Rule 16a-1(c)(3)".............................. 5
2.37 "Securities Act"................................................. 5
2.38 "Stock Appreciation Right"....................................... 5
2.39 "Termination of Employment"...................................... 6
ARTICLE III
ADMINISTRATION............................................................ 6
3.1 Committee Structure and Authority................................ 6
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Page
----
ARTICLE IV
STOCK SUBJECT TO PLAN..................................................... 9
4.1 Number of Shares................................................. 9
4.2 Release of Shares................................................ 9
4.3 Restrictions on Shares........................................... 9
4.4 Stockholder Rights............................................... 10
4.5 Best Efforts To Register......................................... 10
4.6 Anti-Dilution.................................................... 10
ARTICLE V
ELIGIBILITY............................................................... 11
5.1 Eligibility...................................................... 11
ARTICLE VI
STOCK OPTIONS............................................................. 12
6.1 General.......................................................... 12
6.2 Grant and Exercise............................................... 12
6.3 Terms and Conditions............................................. 12
6.4 Termination by Reason of Death................................... 15
6.5 Termination by Reason of Disability.............................. 15
6.6 Other Termination................................................ 15
6.7 Cashing Out of Option............................................ 16
ARTICLE VII
STOCK APPRECIATION RIGHTS................................................. 16
7.1 General.......................................................... 16
7.2 Grant............................................................ 16
7.3 Terms and Conditions............................................. 17
ARTICLE VIII
RESTRICTED STOCK.......................................................... 18
8.1 General.......................................................... 18
8.2 Awards and Certificates.......................................... 18
8.3 Terms and Conditions............................................. 19
ARTICLE IX
DEFERRED STOCK............................................................ 20
9.1 General.......................................................... 20
9.2 Terms and Conditions............................................. 20
ARTICLE X
OTHER AWARDS.............................................................. 21
10.1 Bonus Stock and Awards in Lieu of Obligations.................... 21
10.2 Dividend Equivalents............................................. 22
10.3 Other Stock-Based Awards......................................... 22
10.4 Performance Awards............................................... 22
ARTICLE XI
PROVISIONS APPLICABLE TO STOCK ACQUIRED UNDER THE PLAN.................... 26
11.1 Limited Transfer During Offering................................. 26
11.2 Committee Discretion............................................. 26
11.3 No Company Obligation............................................ 26
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Page
----
ARTICLE XII
CHANGE IN CONTROL PROVISIONS............................................. 26
12.1 Impact of Event................................................ 26
12.3 Change in Control Price........................................ 28
ARTICLE XIII
MISCELLANEOUS............................................................ 29
13.1 Amendments and Termination..................................... 29
13.2 Stand-Alone, Additional, Tandem, and Substitute Awards......... 29
13.3 Form and Timing of Payment Under Awards; Deferrals............. 30
13.4 Status of Awards Under Code Section 162(m)..................... 30
13.5 Unfunded Status of Plan; Limits on Transferability............. 30
13.6 General Provisions............................................. 31
13.7 Mitigation of Excise Tax....................................... 33
13.8 Rights with Respect to Continuance of Employment............... 33
Awards in Substitution for Awards Granted by Other
13.9 Corporations................................................... 33
13.10 Procedure for Adoption......................................... 33
13.11 Procedure for Withdrawal....................................... 34
13.12 Delay.......................................................... 34
13.13 Headings....................................................... 34
13.14 Severability................................................... 34
13.15 Successors and Assigns......................................... 34
13.16 Entire Agreement............................................... 34
F-1-iii
THE LEAP GROUP, INC.
EMPLOYEE INCENTIVE COMPENSATION PLAN
ARTICLE I
ESTABLISHMENT
1.1 Purpose.
The Leap Group, Inc. Employee Incentive Compensation Plan ("Plan") is hereby
established by The Leap Group, Inc. ("Company"), effective May 29, 1996. The
purpose of the Plan is to promote the overall financial objectives of the
Company and its stockholders by motivating those persons selected to
participate in the Plan to achieve long-term growth in stockholder equity in
the Company and by retaining the association of those individuals who are
instrumental in achieving this growth. The Plan and the grant of awards
thereunder are expressly conditioned upon the Plan's approval by the
stockholders of the Company. If such approval is not obtained, then this Plan
and all Awards (as defined herein) shall be null and void ab initio.
ARTICLE II
DEFINITIONS
For purposes of the Plan, the following terms are defined as set forth
below:
2.1 "Affiliate" means any individual, corporation, partnership, association,
limited liability company, joint-stock company, trust, unincorporated
association or other entity (other than the Company) that directly, or
indirectly through one or more intermediaries, controls, is controlled by, or
is under common control with, the Company including, without limitation, any
member of an affiliated group of which the Company is a common parent
corporation as provided in Section 1504 of the Code.
2.2 "Agreement" or "Award Agreement" means, individually or collectively,
any agreement entered into pursuant to the Plan pursuant to which an Award is
granted to a Participant.
2.3 "Award" means any Option, SAR, Restricted Stock, Deferred Stock, Stock,
Dividend Equivalent, Other Stock-Based Award, Performance Award or Cash
Incentive Award, together with any other right or interest granted to a
Participant under the Plan.
2.4 "Beneficiary" means the person, persons, trust or trusts which have been
designated by a Participant in his or her most recent written beneficiary
designation filed with the Committee to receive the benefits specified under
the Plan upon such Participant's death or to which Awards or other rights are
transferred if and to the extent permitted hereunder. If, upon a Participant's
death, there is no designated Beneficiary or surviving designated Beneficiary,
then the term Beneficiary means the person, persons, trust or trusts entitled
by will or the laws of descent and distribution to receive such benefits.
2.5 "Board of Directors" or "Board" means the Board of Directors of the
Company.
2.6 "Cash Incentive Award" means a conditional right granted to a
Participant under Section 10.4(c) hereof to receive a cash payment, unless
otherwise determined by the Committee, after the end of a specified period.
2.7 "Cause" shall mean, for purposes of whether and when a Participant has
incurred a Termination of Employment for Cause, any act or omission which
permits the Company to terminate the employment of the Participant between the
Company or an Affiliate for "cause" as defined in such agreement or
arrangement, or in the event there is no such agreement or arrangement or the
agreement or arrangement does not define the term "cause" or a substantially
equivalent term, then Cause shall consist of the following: Participant's
F-1-1
conviction on a felony charge or Participant's commission of any crime
involving moral turpitude; Participant's dishonesty or fraud resulting in
damage to the business of the Company or an Affiliate; Participant's
embezzlement or theft of assets of the Company or an Affiliate; in the sole
discretion of the Company, Participant's grossly negligent conduct,
Participant's course of personal conduct of an illegal or unethical nature
which tends to place the Company or an Affiliate in disrepute, or otherwise
negatively affects the ability of the Company or an Affiliate to conduct its
business; Participant's competition with the Company or aid to a competitor of
the Company to the detriment of the Company; or failure to perform duties and
services to the Company or an Affiliate. In the event Participant is arrested
for any of the types of matters above, the Company may place Participant on
suspension without pay until such matter is dismissed or Participant is
convicted.
2.8 "Change in Control" and "Change in Control Price" have the meanings set
forth in Sections 12.2 and 12.3, respectively.
2.9 "Code" or "Internal Revenue Code" means the Internal Revenue Code of
1986, as amended, Treasury Regulations (including proposed regulations)
thereunder and any subsequent Internal Revenue Code.
2.10 "Commission" means the Securities and Exchange Commission or any
successor agency.
2.11 "Committee" means the person or persons appointed to administer this
Plan, as further described herein.
2.12 "Common Stock" means the shares of the regular voting Common Stock,
$.01 par value, whether presently or hereafter issued, and any other stock or
security resulting from adjustment thereof as described hereinafter or the
common stock of any successor to the Company which is designated for the
purpose of the Plan.
2.13 "Company" means The Leap Group, Inc., a Delaware corporation, and
includes any successor or assignee corporation or corporations into which the
Company may be merged, changed or consolidated; any corporation for whose
securities all or substantially all of the securities of the Company shall be
exchanged; and any assignee of or successor to substantially all of the assets
of the Company.
2.14 "Covered Employee" means a Participant who is a "covered employee"
within the meaning of Section 162(m) of the Code.
2.15 "Deferred Stock" means a right, granted to a Participant under Section
9.1 hereof, to receive Common Stock at the end of a specified deferral period.
2.16 "Disability" means a mental or physical illness that entitles the
Participant to receive benefits under the long-term disability plan of the
Company or an Affiliate, or if the Participant is not covered by such a plan
the Participant is not an employee of the Company or an Affiliate or a long-
term disability plan has not been adopted by the Company or an Affiliate, a
mental or physical illness that renders a Participant totally and permanently
incapable of performing the Participant's duties for the Company or an
Affiliate. Notwithstanding the foregoing, a Disability shall not qualify under
this Plan if it is the result of (i) a willfully self-inflicted injury or
willfully self-induced sickness; or (ii) an injury or disease contracted,
suffered, or incurred while participating in a criminal offense. The
determination of Disability shall be made by the Committee. The determination
of Disability for purposes of this Plan shall not be construed to be an
admission of disability for any other purpose.
2.17 "Disinterested Person" shall have the meaning set forth in Rule 16b-3,
or any successor definition adopted by the Commission, and shall mean a person
who is also an "outside director" under Section 162(m) of the Code.
F-1-2
2.18 "Dividend Equivalent" means a right, granted to a Participant under
Section 10.2, to receive cash, Common Stock, other Awards or other property
equal in value to dividends paid with respect to a specified number of shares
of Common Stock.
2.19 "Effective Date" means May 29, 1996.
2.20 "Exchange Act" means the Securities Exchange Act of 1934, as amended,
and the rules and regulations promulgated thereunder.
2.21 "Fair Market Value" means the fair market value of Common Stock,
Awards, or other property as determined by the Committee or under procedures
established by the Committee. Unless otherwise determined by the Committee,
the Fair Market Value per share of Common Stock as of any given date shall be
the closing sale price per share reported on a consolidated basis for stock
listed on the principal stock exchange or market on which Common Stock is
traded on the date as of which such value is being determined or, if there is
no sale on that date, then on the last previous day on which a sale was
reported.
2.22 "Grant Date" means the date as of which an Award is granted pursuant
to the Plan.
2.23 "Incentive Stock Option" means any Stock Option intended to be and
designated as an "incentive stock option" within the meaning of Section 422 of
the Code.
2.24 "NASDAQ" means The Nasdaq Stock Market, including the Nasdaq National
Market.
2.25 "Non-Qualified Stock Option" means an Option to purchase Common Stock
in the Company granted under the Plan, the taxation of which is pursuant to
Section 83 of the Code.
2.26 "Option" or "Stock Option" means a right, granted to a Participant
under Section 6.1 hereof, to purchase Common Stock or other Awards at a
specified price during specified time periods.
2.27 "Option Period" means the period during which an Option shall be
exercisable in accordance with the related Agreement and Article VI.
2.28 "Option Price" means the price at which the Common Stock may be
purchased under an Option as provided in Section 6.3(b).
2.29 "Other Stock Based Awards" means Awards granted to a Participant under
Section 10.3 hereof.
2.30 "Participant" means a person who satisfies the eligibility conditions
of Article V and to whom an Award has been granted by the Committee under the
Plan, and in the event a Representative is appointed for a Participant or
another person becomes a Representative, then the term "Participant" shall
mean such Representative. The term shall also include a trust for the benefit
of the Participant, a partnership the interest of which is held by or for the
benefit of the Participant, the Participant's parents, spouse or descendants,
or a custodian under a uniform gifts to minors act or similar statute for the
benefit of the Participant's descendants, to the extent permitted by the
Committee and not inconsistent with Rule 16b-3 or the status of the Option as
an Incentive Stock Option, to the extent intended. Notwithstanding the
foregoing, the term "Termination of Employment" shall mean the Termination of
Employment of the person to whom the Award was originally granted.
2.31 "Performance Award" means a right, granted to a Participant under
Section 10.4 hereof, to receive Awards based upon performance criteria
specified by the Committee.
2.32 "Plan" means The Leap Group Inc. Employee Incentive Compensation Plan,
as herein set forth and as amended from time to time.
F-1-3
2.33 "Representative" means (a) the person or entity acting as the executor
or administrator of a Participant's estate pursuant to the last will and
testament of a Participant or pursuant to the laws of the jurisdiction in which
the Participant had the Participant's primary residence at the date of the
Participant's death; (b) the person or entity acting as the guardian or
temporary guardian of a Participant; (c) the person or entity which is the
Beneficiary of the Participant upon or following the Participant's death; or
(d) any person to whom an Option has been transferred with the permission of
the Committee or by operation of law; provided that only one of the foregoing
shall be the Representative at any point in time as determined under applicable
law and recognized by the Committee.
2.34 "Restricted Stock" means Common Stock granted to a Participant under
Section 8.1 hereof, that is subject to certain restrictions and to a risk of
forfeiture.
2.35 "Retirement" means the Participant's Termination of Employment after
attaining either the normal retirement age or the early retirement age as
defined in the principal (as determined by the Committee) tax-qualified plan of
the Company or an Affiliate, if the Participant is covered by such a plan, or
if the Participant is not covered by such a plan, then age 65, or age 55 with
the accrual of 10 years of service.
2.36 "Rule 16b-3" and "Rule 16a-1(c)(3)" mean Rule 16b-3 and Rule 16a-
1(c)(3), as from time to time in effect and applicable to the Plan and
Participants, promulgated by the Securities and Exchange Commission under
Section 16 of the Exchange Act.
2.37 "Securities Act" means the Securities Act of 1933, as amended, and the
rules and regulations promulgated thereunder.
2.38 "Stock Appreciation Right" means a right granted under Article VII.
2.39 "Termination of Employment" means the occurrence of any act or event,
whether pursuant to an employment agreement or otherwise, that actually or
effectively causes or results in the person's ceasing, for whatever reason, to
be an officer, independent contractor, director or employee of the Company or
of any Affiliate of the Company, or ceasing to be an officer, independent
contractor, director or employee of any entity that provides services to the
Company or a Affiliate of the Company, including, without limitation, death,
Disability, dismissal, severance at the election of the Participant,
Retirement, or severance as a result of the discontinuance, liquidation, sale
or transfer by the Company or its Affiliates of all businesses owned or
operated by the Company or its Affiliates. With respect to any person who is
not an employee with respect to the Company or a Affiliate of the Company, the
Agreement shall establish what act or event shall constitute a Termination of
Employment for purposes of the Plan. A transfer of employment from the Company
to a Affiliate, or from a Affiliate to the Company, will not be a Termination
of Employment, unless expressly determined by the Committee. A Termination of
Employment shall occur for an employee who is employed by a Affiliate of the
company if the Affiliate shall cease to be a Affiliate and the Participant
shall not immediately thereafter become an employee of the Company or a
Affiliate of the Company.
In addition, certain other terms used herein have definitions given to them
in the first place in which they are used.
ARTICLE III
ADMINISTRATION
3.1 Committee Structure and Authority. Prior to the date of the first
registration of an equity security of the Company under the Exchange Act (the
"Registration Date"), the Plan shall be administered by one or more members of
the Board of Directors (which shall constitute the Committee for purposes of
the Plan). From and after the Registration Date, the Plan shall be administered
by the Committee which shall be comprised of one or more persons. The Committee
shall be the Compensation Committee of the Board of Directors, unless such
F-1-4
committee does not exist or the Board establishes or identifies another
committee whose purpose is the administration of this Plan; provided that only
those members of the Compensation Committee who participate in the decision
relative to Awards under this Plan shall be deemed to be the "Committee" for
purposes of this Plan. The Committee shall be comprised of such number of
Disinterested Persons as is required for application of Rule 16b-3 and the
deduction of compensation under Section 162(m) of the Code, if applicable. In
the absence of an appointment, the Board or the portion thereof that is a
Disinterested Person shall be the Committee. A majority of the Committee shall
constitute a quorum at any meeting thereof (including by telephone conference)
and the acts of a majority of the members present, or acts approved in writing
by a majority of the entire Committee without a meeting, shall be the acts of
the Committee for purposes of this Plan. The Committee may authorize any one or
more of its members or an officer of the Company to execute and deliver
documents on behalf of the Committee. A member of the Committee shall not
exercise any discretion respecting himself or herself under the Plan. The Board
shall have the authority to remove, replace or fill any vacancy of any member
of the Committee upon notice to the Committee and the affected member. Any
member of the Committee may resign upon notice to the Board. The Committee may
allocate among one or more of its members, or may delegate to one or more of
its agents, such duties and responsibilities as it determines.
Among other things, the Committee shall have the authority, subject to the
terms of the Plan and the limitation of section (c)(2)(ii) of Rule 16b-3 so
that the Plan is described in that section:
(a) to select those persons to whom Awards may be granted from time to
time;
(b) to determine whether and to what extent Awards or any combination
thereof are to be granted hereunder;
(c) to determine the number of shares of Common Stock to be covered by
each stock-based Award granted hereunder;
(d) to determine the terms and conditions of any Award granted hereunder
(including, but not limited to, the Option Price, the Option Period, any
exercise restriction or limitation and any exercise acceleration,
forfeiture or waiver regarding any Award, any shares of Common Stock
relating thereto, any performance criteria and the satisfaction of each
criteria);
(e) to adjust the terms and conditions, at any time or from time to
time, of any Award, subject to the limitations of Section 13.1;
(f) to determine to what extent and under what circumstances Common
Stock and other amounts payable with respect to an Award shall be deferred;
(g) to determine under what circumstances an Award may be settled in
cash or Common Stock;
(h) to provide for the forms of Agreements to be utilized in connection
with the Plan;
(i) to determine whether a Participant has a Disability or a Retirement;
(j) to determine what securities law requirements are applicable to the
Plan, Awards and the issuance of shares of Common Stock under the Plan and
to require of a Participant that appropriate action be taken with respect
to such requirements;
(k) to cancel, with the consent of the Participant or as otherwise
provided in the Plan or an Agreement, outstanding Awards;
(l) to interpret and make final determinations with respect to the
remaining number of shares of Common Stock available under this Plan;
(m) to require, as a condition of the exercise of an Award or the
issuance or transfer of a certificate of Common Stock, the withholding from
a Participant of the amount of any Federal, state or local taxes as may be
necessary in order for the Company or any other employer to obtain a
deduction or as may be otherwise required by law;
(n) to determine whether and with what effect a Participant has incurred
a Termination of Employment;
F-1-5
(o) to determine whether the Company or any other person has a right or
obligation to purchase Common Stock from a Participant and, if so, the
terms and conditions on which such Common Stock is to be purchased;
(p) to determine the restrictions or limitations on the transfer of
Common Stock;
(q) to determine whether an Award is to be adjusted, modified or
purchased, or is to become fully exercisable, under the Plan or the terms
of an Agreement;
(r) to determine the permissible methods of Award exercise and payment,
including cashless exercise arrangements;
(s) to adopt, amend and rescind such rules and regulations as, in its
opinion, may be advisable in the administration of the Plan; and
(t) to appoint and compensate agents, counsel, auditors or other
specialists to aid it in the discharge of its duties.
The Committee shall have the authority to adopt, alter and repeal such
administrative rules, guidelines and practices governing the Plan as it shall,
from time to time, deem advisable, to interpret the terms and provisions of the
Plan and any Award issued under the Plan (and any Agreement) and to otherwise
supervise the administration of the Plan. The Committee's policies and
procedures may differ with respect to Awards granted at different times or to
different Participants.
Any determination made by the Committee pursuant to the provisions of the
Plan shall be made in its sole discretion, and in the case of any determination
relating to an Award, may be made at the time of the grant of the Award or,
unless in contravention of any express term of the Plan or an Agreement, at any
time thereafter. All decisions made by the Committee pursuant to the provisions
of the Plan shall be final and binding on all persons, including the Company
and Participants. No determination shall be subject to de novo review if
challenged in court.
ARTICLE IV
STOCK SUBJECT TO PLAN
4.1 Number of Shares. Subject to the adjustment under Section 4.6, the total
number of shares of Common Stock reserved and available for distribution
pursuant to Awards under the Plan shall be 2,000,000 shares of Common Stock
authorized for issuance on the Effective Date. Such shares may consist, in
whole or in part, of authorized and unissued shares or treasury shares.
4.2 Release of Shares. The Committee shall have full authority to determine
the number of shares of Common Stock available for Award, and in its discretion
may include (without limitation) as available for distribution any shares of
Common Stock that have ceased to be subject to an Award, any shares of Common
Stock subject to any Award that are forfeited, any Award that otherwise
terminates without issuance of shares of Common Stock being made to the
Participant, or any shares (whether or not restricted) of Common Stock that are
received by the Company in connection with the exercise of an Award, including
the satisfaction of any tax liability or the satisfaction of a tax withholding
obligation. If any shares could not again be available for Options to a
particular Participant under applicable law, such shares shall be available
exclusively for Options to Participants who are not subject to such
limitations.
4.3 Restrictions on Shares. Shares of Common Stock issued as or in
conjunction with an Award shall be subject to the terms and conditions
specified herein and to such other terms, conditions and restrictions as the
Committee in its discretion may determine or provide in an Award Agreement. The
Company shall not be required to issue or deliver any certificates for shares
of Common Stock, cash or other property prior to (i) the listing of such shares
on any stock exchange or NASDAQ (or other public market) on which the Common
Stock may then be listed (or regularly traded), (ii) the completion of any
registration or qualification of such
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shares under Federal or state law, or any ruling or regulation of any
government body which the Committee determines to be necessary or advisable,
and (iii) the satisfaction of any applicable withholding obligation in order
for the Company or an Affiliate to obtain a deduction with respect to the
exercise of an Award. The Company may cause any certificate for any share of
Common Stock to be delivered to be properly marked with a legend or other
notation reflecting the limitations on transfer of such Common Stock as
provided in this Plan or as the Committee may otherwise require. The Committee
may require any person exercising an Award to make such representations and
furnish such information as it may consider appropriate in connection with the
issuance or delivery of the shares of Common Stock in compliance with
applicable law or otherwise. Fractional shares shall not be delivered, but
shall be rounded to the next lower whole number of shares.
4.4 Stockholder Rights. No person shall have any rights of a stockholder as
to shares of Common Stock subject to an Award until, after proper exercise of
the Award or other action required, such shares shall have been recorded on the
Company's official stockholder records as having been issued and transferred.
Upon exercise of the Award or any portion thereof, the Company will have a
reasonable time in which to issue the shares, and the Participant will not be
treated as a stockholder for any purpose whatsoever prior to such issuance. No
adjustment shall be made for cash dividends or other rights for which the
record date is prior to the date such shares are recorded as issued and
transferred in the Company's official stockholder records, except as provided
herein or in an Agreement.
4.5 Best Efforts To Register. After the initial public offering of shares of
Common Stock under the Securities Act, the Company will register under the
Securities Act the Common Stock delivered or deliverable pursuant to Awards on
Commission Form S-8 if available to the Company for this purpose (or any
successor or alternate form that is substantially similar to that form to the
extent available to effect such registration), in accordance with the rules and
regulations governing such forms, as soon after stockholder approval of the
Plan as the Committee, in its sole discretion, shall deem such registration
appropriate. The Company will use its best efforts to cause the registration
statement to become effective and will file such supplements and amendments to
the registration statement as may be necessary to keep the registration
statement in effect until the earliest of (a) one year following the expiration
of the Option Period of the last Option outstanding, (b) the date the Company
is no longer a reporting company under the Exchange Act and (c) the date all
Participants have disposed of all shares delivered pursuant to any Award.
4.6 Anti-Dilution. In the event of any Company stock dividend, stock split,
reverse stock split, combination or exchange of shares, recapitalization or
other change in the capital structure of the Company, corporate separation or
division of the Company (including, but not limited to, a split-up, spin-off,
split-off or distribution to Company stockholders other than a normal cash
dividend), sale by the Company of all or a substantial portion of its assets
(measured on either a stand-alone or consolidated basis), reorganization,
rights offering, a partial or complete liquidation, or any other corporate
transaction, Company stock offering or event involving the Company and having
an effect similar to any of the foregoing, then the Committee may adjust or
substitute, as the case may be, the number of shares of Common Stock available
for Awards under the Plan, the number of shares of Common Stock covered by
outstanding Awards, the maximum number of Awards available for grant to any
Participant for a stated period of time (including the maximum number of Stock
Appreciation Rights), the exercise price per share of outstanding Awards, and
performance conditions and any other characteristics or terms of the Awards as
the Committee shall deem necessary or appropriate to reflect equitably the
effects of such changes to the Participants; provided, however, that the
Committee may limit any such adjustment so as to maintain the deductibility of
the Awards under Section 162(m) of the Code, if applicable, and that any
fractional shares resulting from such adjustment shall be eliminated by
rounding to the next lower whole number of shares with appropriate payment for
such fractional shares as shall reasonably be determined by the Committee.
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ARTICLE V
ELIGIBILITY
5.1 Eligibility. Except as herein provided, the persons who shall be
eligible to participate in the Plan and be granted Awards shall be those
persons who are directors, officers, employees and consultants of the Company
or any subsidiary of the Company, who shall be in a position, in the opinion of
the Committee, to make contributions to the growth, management, protection and
success of the Company and its subsidiaries. Of those persons described in the
preceding sentence, the Committee may, from time to time, select persons to be
granted Awards and shall determine the terms and conditions with respect
thereto. In making any such selection and in determining the form of the Award
with respect to Participants, the Committee may give consideration to the
person's functions and responsibilities, the person's contributions to the
Company and its subsidiaries, the value of the individual's service to the
Company and its subsidiaries and such other factors deemed relevant by the
Committee. The Committee may designate in writing any person who is not
eligible to participate in the Plan if such person would otherwise be eligible
to participate in this Plan (and members of the Committee are expressly
excluded to the extent such persons are intended to be Disinterested Persons).
ARTICLE VI
STOCK OPTIONS
6.1 General. The Committee shall have authority to grant Stock Options under
the Plan at any time or from time to time. Stock Options may be granted alone
or in addition to other Awards and may be either Incentive Stock Options or
Non-Qualified Stock Options. An Option shall entitle the Participant to receive
shares of Common Stock upon exercise of such Option, subject to the
Participant's satisfaction in full of any conditions, restrictions or
limitations imposed in accordance with the Plan or an Agreement (the terms and
provisions of which may differ from other Agreements), including, without
limitation, payment of the Option Price. During any calendar year, Options to
purchase no more than 500,000 shares of Common Stock shall be granted to any
Participant.
6.2 Grant and Exercise. The grant of a Stock Option shall occur as of the
date the Committee determines. Each Option granted under this Plan shall be
evidenced by an Agreement, in a form approved by the Committee, which shall
embody the terms and condition of such Option and which shall be subject to the
express terms and conditions set forth in the Plan. Such Agreement shall become
effective upon execution by the Participant. Only a person who is a common-law
employee of the Company, any parent corporation of the Company or a subsidiary
(as such terms are defined in Section 424 of the Code) on the date of grant
shall be eligible to be granted an Option which is intended to be and is an
Incentive Stock Option. To the extent that any Stock Option is not designated
as an Incentive Stock Option or even if so designated does not qualify as an
Incentive Stock Option, it shall constitute a Non-Qualified Stock Option.
6.3 Terms and Conditions. Stock Options shall be subject to such terms and
conditions as shall be determined by the Committee, including the following:
(a) Option Period. The Option Period of each Stock Option shall be fixed
by the Committee; provided that no Stock Option shall be exercisable more
than ten (10) years after the date the Stock Option is granted. In the case
of an Incentive Stock Option granted to an individual who owns more than
ten percent (10%) of the combined voting power of all classes of stock of
the Company, a corporation which is a parent corporation of the Company or
any subsidiary of the Company (each as defined in Section 424 of the Code),
the Option Period shall not exceed five (5) years from the date of grant.
No Option which is intended to be an Incentive Stock Option shall be
granted more than ten (10) years from the date the Plan is adopted by the
Company or the date the Plan is approved by the stockholders of the
Company, whichever is earlier.
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(b) Option Price. The Option Price per share of the Common Stock
purchasable under an Option shall be determined by the Committee; provided,
however, that the Option Price of an Incentive Stock Option shall be not
less than the Fair Market Value per share on the date the Option is
granted. If such Option is intended to qualify as an Incentive Stock Option
and is granted to an individual who owns or who is deemed to own stock
possessing more than ten percent (10%) of the combined voting power of all
classes of stock of the Company, a corporation which is a parent
corporation of the Company or any subsidiary of the Company (each as
defined in Section 424 of the Code), the Option Price per share shall not
be less than one hundred ten percent (110%) of such Fair Market Value per
share.
(c) Exercisability. Subject to Section 12.1, Stock Options shall be
exercisable at such time or times and subject to such terms and conditions
as shall be determined by the Committee. If the Committee provides that any
Stock Option is exercisable only in installments, the Committee may at any
time waive such installment exercise provisions, in whole or in part. In
addition, the Committee may at any time accelerate the exercisability of
any Stock Option. If the Committee intends that an Option be an Incentive
Stock Option, the Committee may, in its discretion, provide that the
aggregate Fair Market Value (determined at the Grant Date) of the Common
Stock as to which such Incentive Stock Option is exercisable for the first
time during any calendar year shall not exceed $100,000.
(d) Method of Exercise. Subject to the provisions of this Article VI, a
Participant may exercise Stock Options, in whole or in part, at any time
during the Option Period by the Participant's giving written notice of
exercise on a form provided by the Committee (if available) to the Company
specifying the number of shares of Common Stock subject to the Stock Option
to be purchased. Except when waived by the Committee, such notice shall be
accompanied by payment in full of the purchase price by cash or check or
such other form of payment as the Company may accept. If approved by the
Committee (including approval at the time of exercise), payment in full or
in part may also be made (i) by delivering Common Stock already owned by
the Participant having a total Fair Market Value on the date of such
delivery equal to the Option Price; (ii) by the execution and delivery of a
note or other evidence of indebtedness (and any security agreement
thereunder) satisfactory to the Committee and permitted in accordance with
Section 6.3(e); (iii) by authorizing the Company to retain shares of Common
Stock which would otherwise be issuable upon exercise of the Option having
a total Fair Market Value on the date of delivery equal to the Option
Price; (iv) by the delivery of cash or the extension of credit by a broker-
dealer to whom the Participant has submitted a notice of exercise or
otherwise indicated an intent to exercise an Option (in accordance with
Part 220, Chapter II, Title 12 of the Code of Federal Regulations, so-
called "cashless" exercise); or (v) by certifying ownership of shares of
Common Stock by the Participant to the satisfaction of the Committee for
later delivery to the Company as specified by the Committee; or by any
combination of the foregoing or by any other method permitted by the
Committee. If payment of the Option Price of a Stock Option is made in
whole or in part in the form of Restricted Stock or Deferred Stock, the
number of shares of Common Stock to be received upon such exercise that is
equal to the number of shares of Restricted Stock or Deferred Stock used
for payment of the Option Price shall be subject to the same forfeiture
restrictions or deferral limitations to which such Restricted Stock or
Deferred Stock was subject, unless otherwise determined by the Committee.
In the case of an Incentive Stock Option, the right to make a payment in
the form of already owned shares of Common Stock of the same class as the
Common Stock subject to the Stock Option may be authorized only at the time
the Stock Option is granted. No shares of Common Stock shall be issued
until full payment therefor, as determined by the Committee, has been made.
Subject to any forfeiture restrictions or deferral limitations that may
apply if a Stock Option is exercised using Restricted Stock or Deferred
Stock, a Participant shall have all of the rights of a stockholder of the
Company holding the class of Common Stock that is subject to such Stock
Option (including, if applicable, the right to vote the shares and the
right to receive dividends), when the Participant has given written notice
of exercise, has paid in full for such shares and such shares have been
recorded on the Company's official stockholder records as having been
issued or transferred.
(e) Company Loan or Guarantee. Upon the exercise of any Option and
subject to the pertinent Agreement and the discretion of the Committee, the
Company may at the request of the Participant:
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(i) lend to the Participant an amount equal to such portion of the
Option Price as the Committee may determine; or
(ii) guarantee a loan obtained by the Participant from a third-party
for the purpose of tendering the Option Price.
The terms and conditions of any loan or guarantee, including the term,
interest rate and any security interest thereunder and whether the loan
shall be with recourse, shall be determined by the Committee, except that
no extension of credit or guarantee shall obligate the Company for an
amount to exceed the lesser of the aggregate Fair Market Value per share of
the Common Stock on applicable laws or the regulations and rules of the
Federal Reserve Board and any other governmental agency having
jurisdiction.
(f) Non-transferability of Options. Except as provided herein or in an
Agreement and then only consistent with the intent that the Option be an
Incentive Stock Option, no Stock Option or interest therein shall be
transferable by the Participant other than by will or by the laws of
descent and distribution or by a designation of beneficiary effective upon
the death of the Participant, and all Stock Options shall be exercisable
during the Participant's lifetime only by the Participant. If and to the
extent transferability is permitted by Rule 16b-3 or does not result in
liability to any Participant and except as otherwise provided herein or by
an Agreement, every Option granted hereunder shall be freely transferable,
but only if such transfer does not result in liability under Section 16 of
the Exchange Act to the Participant or other Participants and is consistent
with registration of the Option and sale of Common Stock on Form S-8 (or a
successor form) or is consistent with the use of Form S-8 (or the
Committee's waiver of such condition) and consistent with an Award's
intended status as an Incentive Stock Option (as applicable).
6.4 Termination by Reason of Death. Unless otherwise provided in an
Agreement or determined by the Committee, if a Participant incurs a Termination
of Employment due to death, any unexpired and unexercised Stock Option held by
such Participant shall thereafter be fully exercisable for a period of one (1)
year following the date of the appointment of a Representative (or such other
period or no period as the Committee may specify) or until the expiration of
the Option Period, whichever period is the shorter.
6.5 Termination by Reason of Disability. Unless otherwise provided in an
Agreement or determined by the Committee, if a Participant incurs a Termination
of Employment due to a Disability, any unexpired and unexercised Stock Option
held by such Participant shall thereafter be fully exercisable by the
Participant for the period of one (1) year (or such other period or no period
as the Committee may specify) immediately following the date of such
Termination of Employment or until the expiration of the Option Period,
whichever period is shorter, and the Participant's death at any time following
such Termination of Employment due to Disability shall not affect the
foregoing. In the event of Termination of Employment by reason of Disability,
if an Incentive Stock Option is exercised after the expiration of the exercise
periods that apply for purposes of Section 422 of the Code, such Stock Option
will thereafter be treated as a Non-Qualified Stock Option.
6.6 Other Termination. Unless otherwise provided in an Agreement or
determined by the Committee, if a Participant incurs a Termination of
Employment due to Retirement, or the Termination of Employment is involuntary
on the part of the Participant (but is not due to death or Disability or with
Cause), any Stock Option held by such Participant shall thereupon terminate,
except that such Stock Option, to the extent then exercisable, may be exercised
for the lesser of the ninety (90) day period commencing with the date of such
Termination of Employment or until the expiration of the Option Period. Unless
otherwise provided in an Agreement or determined by the Committee, if the
Participant incurs a Termination of Employment which is either (a) voluntary on
the part of the Participant (and is not due to Retirement) or (b) with Cause,
the Option shall terminate immediately. Unless otherwise provided in an
Agreement or determined by the Committee, the death or Disability of a
Participant after a Termination of Employment otherwise provided herein shall
not extend the time permitted to exercise an Option.
6.7 Cashing Out of Option. On receipt of written notice of exercise, the
Committee may elect to cash out all or part of the portion of any Stock Option
to be exercised by paying the Participant an amount, in cash or Common Stock,
equal to the excess of the Fair Market Value of the Common Stock that is
subject to the
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Option over the Option Price times the number of shares of Common Stock subject
to the Option on the effective date of such cash-out. Cash-outs relating to
Options held by Participants who are actually or potentially subject to Section
16(b) of the Exchange Act shall comply with the provisions of Rule 16b-3, to
the extent applicable.
ARTICLE VII
STOCK APPRECIATION RIGHTS
7.1 General. The Committee shall have authority to grant Stock Appreciation
Rights under the Plan at any time or from time to time. Subject to the
Participant's satisfaction in full of any conditions, restrictions or
limitations imposed in accordance with the Plan or an Agreement, a Stock
Appreciation Right shall entitle the Participant to surrender to the Company
the Stock Appreciation Right and to be paid therefor in shares of the Common
Stock, cash or a combination thereof as herein provided, the amount described
in Section 7.3(b).
7.2 Grant. Stock Appreciation Rights may be granted in conjunction with all
or part of any Stock Option granted under the Plan, in which case the exercise
of the Stock Appreciation Right shall require the cancellation of a
corresponding portion of the Stock Option, and the exercise of a Stock Option
shall result in the cancellation of a corresponding portion of the Stock
Appreciation Right. In the case of a Non-Qualified Stock Option, such rights
may be granted either at or after the time of grant of such Stock Option. In
the case of an Incentive Stock Option, such rights may be granted only at the
time of grant of such Stock Option. A Stock Appreciation Right may also be
granted on a stand-alone basis. The grant of a Stock Appreciation Right shall
occur as of the date the Committee determines. Each Stock Appreciation Right
granted under this Plan shall be evidenced by an Agreement, which shall embody
the terms and conditions of such Stock Appreciation Right and which shall be
subject to the terms and conditions set forth in this Plan. During any calendar
year, Stock Appreciation Rights covering no more than 500,000 shares of Common
Stock shall be granted to any Participant.
7.3 Terms and Conditions. Stock Appreciation Rights shall be subject to such
terms and conditions as shall be determined by the Committee, including the
following:
(a) Period and Exercise. The term of a Stock Appreciation Right shall be
established by the Committee. If granted in conjunction with a Stock
Option, the Stock Appreciation Right shall have a term which is the same as
the Option Period and shall be exercisable only at such time or times and
to the extent the related Stock Options would be exercisable in accordance
with the provisions of Article VI. A Stock Appreciation Right which is
granted on a stand-alone basis shall be for such period and shall be
exercisable at such times and to the extent provided in an Agreement. Stock
Appreciation Rights shall be exercised by the Participant's giving written
notice of exercise on a form provided by the Committee (if available) to
the Company specifying the portion of the Stock Appreciation Right to be
exercised.
(b) Amount. Upon the exercise of a Stock Appreciation Right granted in
conjunction with a Stock Option, a Participant shall be entitled to receive
an amount in cash, shares of Common Stock or both as determined by the
Committee or as otherwise permitted in an Agreement equal in value to the
excess of the Fair Market Value per share of Common Stock over the Option
Price per share of Common Stock specified in the related Agreement
multiplied by the number of shares in respect of which the Stock
Appreciation Right is exercised. In the case of a Stock Appreciation Right
granted on a stand-alone basis, the Agreement shall specify the value to be
used in lieu of the Option Price per share of Common Stock. The aggregate
Fair Market Value per share of the Common Stock shall be determined as of
the date of exercise of such Stock Appreciation Right.
(c) Special Rules. In the case of Stock Appreciation Rights held by
Participants who are actually or potentially subject to Section 16(b) of
the Exchange Act the Committee may require that such Stock Appreciation
Rights be exercised only in accordance with the provisions of Rule 16b-3.
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(d) Non-transferability of Stock Appreciation Rights. Stock Appreciation
Rights shall be transferable only when and to the extent that a Stock
Option would be transferable under the Plan unless otherwise provided in an
Agreement.
(e) Termination. A Stock Appreciation Right shall terminate at such time
as a Stock Option would terminate under the Plan, unless otherwise provided
in an Agreement.
(f) Effect on Shares Under the Plan. Upon the exercise of a Stock
Appreciation Right, the Committee will equitably determine for the purpose
of the limitation set forth in Section 4.2 the number of shares of Common
Stock covered by the Stock Appreciation Right at the time of exercise.
(g) Incentive Stock Option. A Stock Appreciation Right granted in tandem
with an Incentive Stock Option shall not be exercisable unless the Fair
Market Value of the Common Stock on the date of exercise exceeds the Option
Price. In no event shall any amount paid pursuant to the Stock Appreciation
Right exceed the difference between the Fair Market Value on the date of
exercise and the Option Price.
ARTICLE VIII
RESTRICTED STOCK
8.1 General. The Committee shall have authority to grant Restricted Stock
under the Plan at any time or from time to time. Shares of Restricted Stock may
be awarded either alone or in addition to other Awards granted under the Plan.
The Committee shall determine the persons to whom and the time or times at
which grants of Restricted Stock will be awarded, the number of shares of
Restricted Stock to be awarded to any Participant, the time or times within
which such Awards may be subject to forfeiture and any other terms and
conditions of the Awards. Each Award shall be confirmed by, and be subject to
the terms of, an Agreement. The Committee may condition the grant of Restricted
Stock upon the attainment of specified performance goals by the Participant or
by the Company or an Affiliate (including a division or department of the
Company or an Affiliate) for or within which the Participant is primarily
employed or upon such other factors or criteria as the Committee shall
determine. The provisions of Restricted Stock Awards need not be the same with
respect to any Participant.
8.2 Awards and Certificates. Notwithstanding the limitations on issuance of
shares of Common Stock otherwise provided in the Plan, each Participant
receiving an Award of Restricted Stock shall be issued a certificate in respect
of such shares of Restricted Stock. Such certificate shall be registered in the
name of such Participant and shall bear an appropriate legend referring to the
terms, conditions, and restrictions applicable to such Award as determined by
the Committee. The Committee may require that the certificates evidencing such
shares be held in custody by the Company until the restrictions thereon shall
have lapsed and that, as a condition of any Award of Restricted Stock, the
Participant shall have delivered a stock power, endorsed in blank, relating to
the Common Stock covered by such Award.
8.3 Terms and Conditions. Shares of Restricted Stock shall be subject to the
following terms and conditions:
(a) Limitations on Transferability. Subject to the provisions of the
Plan and the Agreement, during a period set by the Committee commencing
with the date of such Award (the "Restriction Period"), the Participant
shall not be permitted to sell, assign, transfer, pledge or otherwise
encumber any interest in shares of Restricted Stock.
(b) Rights. Except as provided in Section 8.3(a), the Participant shall
have, with respect to the shares of Restricted Stock, all of the rights of
a stockholder of the Company holding the class of Common Stock that is the
subject of the Restricted Stock, including, if applicable, the right to
vote the shares and the right to receive any dividends. Unless otherwise
determined by the Committee and subject to the Plan, cash dividends on the
class of Common Stock that is the subject of the Restricted Stock shall be
automatically deferred and reinvested in additional Restricted Stock, and
dividends on the class of Common Stock that is
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the subject of the Restricted Stock payable in Common Stock shall be paid
in the form of Restricted Stock of the same class as the Common Stock on
which such dividend was paid.
(c) Acceleration. Based on service, performance by the Participant or by
the Company or an Affiliate, including any division or department for which
the Participant is employed, or such other factors or criteria as the
Committee may determine, the Committee may provide for the lapse of
restrictions in installments and may accelerate the vesting of all or any
part of any Award and waive the restrictions for all or any part of such
Award.
(d) Forfeiture. Unless otherwise provided in an Agreement or determined
by the Committee, if the Participant incurs a Termination of Employment
during the Restriction Period due to death or Disability, the restrictions
shall lapse and the Participant shall be fully vested in the Restricted
Stock. Except to the extent otherwise provided in the applicable Agreement
and the Plan, upon a Participant's Termination of Employment for any reason
during the Restriction Period other than death or Disability, all shares of
Restricted Stock still subject to restriction shall be forfeited by the
Participant, except the Committee shall have the discretion to waive in
whole or in part any or all remaining restrictions with respect to any or
all of such Participant's shares of Restricted Stock.
(e) Delivery. If and when the Restriction Period expires without a prior
forfeiture of the Restricted Stock subject to such Restriction Period,
unlegended certificates for such shares shall be delivered to the
Participant.
(f) Election. A Participant may elect to further defer receipt of the
Restricted Stock for a specified period or until a specified event, subject
in each case to the Committee's approval and to such terms as are
determined by the Committee. Subject to any exceptions adopted by the
Committee, such election must be made one (1) year prior to completion of
the Restriction Period.
ARTICLE IX
DEFERRED STOCK
9.1 General. The Committee shall have authority to grant Deferred Stock
under the Plan at any time or from time to time. Shares of Deferred Stock may
be awarded either alone or in addition to other Awards granted under the Plan.
The Committee shall determine the persons to whom and the time or times at
which Deferred Stock will be awarded, the number of shares of Deferred Stock
to be awarded to any Participant, the duration of the period (the "Deferral
Period") prior to which the Common Stock will be delivered, and the conditions
under which receipt of the Common Stock will be deferred and any other terms
and conditions of the Awards. Each Award shall be confirmed by, and be subject
to the terms of, an Agreement. The Committee may condition the grant of
Deferred Stock upon the attainment of specified performance goals by the
Participant or by the Company or an Affiliate, including a division or
department of the Company or an Affiliate for or within which the Participant
is primarily employed, or upon such other factors or criteria as the Committee
shall determine. The provisions of Deferred Stock Awards need not be the same
with respect to any Participant.
9.2 Terms and Conditions. Deferred Stock Awards shall be subject to the
following terms and conditions:
(a) Limitations on Transferability. Subject to the provisions of the
Plan and the Agreement, Deferred Stock Awards, or any interest therein, may
not be sold, assigned, transferred, pledged or otherwise encumbered during
the Deferral Period. At the expiration of the Deferral Period (or Elective
Deferral Period as defined in Section 9.2(e), where applicable), the
Committee may elect to deliver Common Stock, cash equal to the Fair Market
Value of such Common Stock or a combination of cash and Common Stock to the
Participant for the shares covered by the Deferred Stock Award.
(b) Rights. Unless otherwise determined by the Committee and subject to
the Plan, cash dividends on the Common Stock that is the subject of the
Deferred Stock Award shall be automatically deferred and
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reinvested in additional Deferred Stock, and dividends on the Common Stock
that is the subject of the Deferred Stock Award payable in Common Stock
shall be paid in the form of Deferred Stock of the same class as the Common
Stock on which such dividend was paid.
(c) Acceleration. Based on service, performance by the Participant or by
the Company or the Affiliate, including any division or department for
which the Participant is employed, or such other factors or criteria as the
Committee may determine, the Committee may provide for the lapse of
deferral limitations in installments and may accelerate the vesting of all
or any part of any Award and waive the deferral limitations for all or any
part of such Award.
(d) Forfeiture. Unless otherwise provided in an Agreement or determined
by the Committee, if the Participant incurs a Termination of Employment
during the Deferral Period due to death or Disability, the restrictions
shall lapse and the Participant shall be fully vested in the Deferred
Stock. Unless otherwise provided in an Agreement or determined by the
Committee, upon a Participant's Termination of Employment for any reason
during the Deferral Period other than death or Disability, the rights to
the shares still covered by the Award shall be forfeited by the
Participant, except the Committee shall have the discretion to waive in
whole or in part any or all remaining deferral limitations with respect to
any or all of such Participant's Deferred Stock.
(e) Election. A Participant may elect further to defer receipt of the
Deferred Stock payable under an Award (or an installment of an Award) for a
specified period or until a specified event (an "Elective Deferral
Period"), subject in each case to the Committee's approval and to such
terms as are determined by the Committee. Subject to any exceptions adopted
by the Committee, such election must be made at least one (1) year prior to
completion of the Deferral Period for the Award (or of the applicable
installment thereof).
ARTICLE X
OTHER AWARDS
10.1 Bonus Stock and Awards In Lieu of Obligations. The Committee is
authorized to grant Common Stock as a bonus, or to grant Common Stock or other
Awards in lieu of Company obligations to pay cash or deliver other property
under other plans or compensatory arrangements. Common Stock or Awards granted
hereunder shall be subject to such other terms as shall be determined by the
Committee.
10.2 Dividend Equivalents. The Committee is authorized to grant Dividend
Equivalents to a Participant, entitling the Participant to receive cash, Common
Stock, other Awards, or other property equal in value to dividends paid with
respect to a specified number of shares of Common Stock. Dividend Equivalents
may be awarded on a free-standing basis or in connection with another Award.
The Committee may provide that Dividend Equivalents will be paid or distributed
when accrued or will be deemed to have been reinvested in additional Common
Stock, Awards, or other investment vehicles, and subject to such restrictions
on transferability and risks of forfeiture, as the Committee may specify.
10.3 Other Stock-Based Awards. The Committee is authorized, subject to
limitations under applicable law, to grant to Participants such other Awards
that may be denominated or payable in, valued in whole or in part by reference
to, or otherwise based on, or related to, Common Stock, as deemed by the
Committee to be consistent with the purposes of the Plan, including, without
limitation, convertible or exchangeable debt securities, other rights
convertible or exchangeable into Common Stock, purchase rights for Common
Stock, Awards with value and payment contingent upon performance of the Company
or any other factors designated by the Committee, and Awards valued by
reference to the book value of Common Stock or the value of securities of or
the performance of specified Subsidiaries. The Committee shall determine the
terms and conditions of such Awards. Common Stock delivered pursuant to an
Award in the nature of a purchase right granted under this Section 10.3 shall
be purchased for such consideration, paid for at such times, by such
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methods, and in such forms, including, without limitation, cash, Common Stock,
other Awards, or other property, as the Committee shall determine. Cash awards,
as an element of or supplement to any other Award under the Plan, may also be
granted pursuant to this Section 10.3.
10.4 Performance Awards.
(a) Performance Conditions. The right of a Participant to exercise or
receive a grant or settlement of any Award, and its timing, may be subject
to performance conditions specified by the Committee. The Committee may use
business criteria and other measures of performance it deems appropriate in
establishing any performance conditions, and may exercise its discretion to
reduce or increase the amounts payable under any Award subject to
performance conditions, except as limited under Sections 10.4(b) and
10.4(c) hereof in the case of a Performance Award intended to qualify under
Code Section 162(m).
(b) Performance Awards Granted to Designated Covered Employees. If the
Committee determines that a Performance Award to be granted to a person the
Committee regards as likely to be a Covered Employee should qualify as
"performance-based compensation" for purposes of Code Section 162(m), the
grant and/or settlement of such Performance Award shall be contingent upon
achievement of preestablished performance goals and other terms set forth
in this Section 10.4(b).
(i) Performance Goals Generally. The performance goals for such
Performance Awards shall consist of one or more business criteria and a
targeted level or levels of performance with respect to such criteria,
as specified by the Committee consistent with this Section 10.4(b).
Performance goals shall be objective and shall otherwise meet the
requirements of Code Section 162(m), including the requirement that the
level or levels of performance targeted by the Committee result in the
performance goals being "substantially uncertain." The Committee may
determine that more than one performance goal must be achieved as a
condition to settlement of such Performance Awards. Performance goals
may differ for Performance Awards granted to any one Participant or to
different Participants.
(ii) Business Criteria. One or more of the following business
criteria for the Company, on a consolidated basis, and/or for specified
Affiliates or business units of the Company (except with respect to the
total stockholder return and earnings per share criteria), shall be
used exclusively by the Committee in establishing performance goals for
such Performance Awards: (1) total stockholder return; (2) such total
stockholder return as compared to total return (on a comparable basis)
of a publicly available index such as, but not limited to, the Standard
& Poor's 500 or the Nasdaq-U.S. Index; (3) net income; (4) pre-tax
earnings; (5) EBITDA; (6) pre-tax operating earnings after interest
expense and before bonuses, service fees, and extraordinary or special
items; (7) operating margin; (8) earnings per share; (9) return on
equity; (10) return on capital; (11) return on investment; (12)
operating income, before payment of executive bonuses; and (13) working
capital. The foregoing business criteria shall also be exclusively used
in establishing performance goals for Cash Incentive Awards granted
under Section 10.4(c) hereof.
(iii) Performance Period: Timing For Establishing Performance Goals.
Achievement of performance goals in respect of such Performance Awards
shall be measured over such periods as may be specified by the
Committee. Performance goals shall be established on or before the
dates that are required or permitted for "performance-based
compensation" under Code Section 162(m).
(iv) Settlement of Performance Awards; Other Terms. Settlement of
Performance Awards may be in cash or Common Stock, or other Awards, or
other property, in the discretion of the Committee. The Committee may,
in its discretion, reduce the amount of a settlement otherwise to be
made in connection with such Performance Awards, but may not exercise
discretion to increase any such amount payable in respect of a
Performance Award subject to this Section 10.4(b). The Committee shall
specify the circumstances in which such Performance Awards shall be
forfeited or paid in the event of a Termination of Employment or a
Change in Control prior to the end of a performance period or
settlement of Performance Awards, and other terms relating to such
Performance Awards.
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(c) Cash Incentive Awards Granted to Designated Covered Employees. The
Committee may grant Cash Incentive Awards to Participants including those
designated by the Committee as likely to be Covered Employees, which Awards
shall represent a conditional right to receive a payment in cash, unless
otherwise determined by the Committee, after the end of a specified
calendar year or calendar quarter or other period specified by the
Committee, in accordance with this Section 10.6(c). With respect to any
calendar year, the maximum Cash Incentive Award payable to any Participant
shall not exceed 10% of the Company's operating income, before payment of
executive bonuses, for such year.
(i) Cash Incentive Award. The Cash Incentive Award for Participants
the Committee regards as likely to be regarded as Covered Employees
shall be based on achievement of a performance goal or goals based on
one or more of the business criteria set forth in Section 10.4(b), and
may be based on such criteria for any other Participant. The Committee
may specify the amount of the individual Cash Incentive Award as a
percentage of any such business criteria, a percentage thereof in
excess of a threshold amount, or another amount which need not bear a
strictly mathematical relationship to such relationship criteria. The
Committee may establish an Cash Incentive Award pool that includes
Participants the Committee regards likely to be regarded as Covered
Employees, which shall be an unfunded pool, for purposes of measuring
Company performance in connection with Cash Incentive Awards. The
amount of the Cash Incentive Award pool shall be based upon the
achievement of a performance goal or goals based on one or more of the
business criteria set forth in Section 10.4(b) hereof in the given
performance period, as specified by the Committee. The Committee may
specify the amount of the Cash Incentive Award pool as a percentage of
any of such business criteria, a percentage thereof in excess of a
threshold amount, or as another amount which need not bear a strictly
mathematical relationship to such business criteria.
(ii) Potential Cash Incentive Awards. Not later than the date
required or permitted for "qualified performance-based compensation"
under Code Section 162(m), the Committee shall determine the
Participants who will potentially receive Cash Incentive Awards for the
specified year, quarter or other period, either as individual Cash
Incentive Awards or out of an Cash Incentive Award pool established by
such date and the amount or method for determining the amount of the
individual Cash Incentive Award or the amount of such Participant's
portion of the Cash Incentive Award pool or the individual Cash
Incentive Award.
(iii) Payout of Cash Incentive Awards. After the end of the
specified year, quarter or other period, as the case may be, the
Committee shall determine the amount, if any, of potential individual
Cash Incentive Award otherwise payable to a Participant, the Cash
Incentive Award pool and the maximum amount of potential Cash Incentive
Award payable to each Participant in the Cash Incentive Award pool. The
Committee may, in its discretion, determine that the amount payable to
any Participant as a final Cash Incentive Award shall be increased or
reduced from the amount of his or her potential Cash Incentive Award,
including a determination to make no final Award whatsoever, but may
not exercise discretion to increase any such amount in the case of an
Cash Incentive Award intended to qualify under Code Section 162(m). The
Committee shall specify the circumstances in which an Cash Incentive
Award shall be paid or forfeited in the event of Termination of
Employment by the Participant or a Change in Control prior to the end
of the period for measuring performance or the payout of such Cash
Incentive Award, and other terms relating to such Cash Incentive Award
in accordance with the Plan. Upon the completion of the measuring
period and the determination of the right to payment and the amount,
the Committee shall direct the Committee to make payment.
(d) Written Determinations. All determinations by the Committee as to
the establishment of performance goals and the potential Performance Awards
or Cash Incentive Awards related to such performance goals and as to the
achievement of performance goals relating to such Awards, the amount of any
Cash Incentive Award pool and the amount of final Cash Incentive Awards,
shall be made in writing in the case of any Award intended to qualify under
Code Section 162(m). The Committee may not delegate any responsibility
relating to such Performance Awards or Cash Incentive Awards.
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ARTICLE XI
PROVISIONS APPLICABLE TO STOCK ACQUIRED UNDER THE PLAN
11.1 Limited Transfer During Offering. In the event there is an effective
registration statement under the Securities Act pursuant to which shares of
Common Stock shall be offered for sale in an underwritten offering, a
Participant shall not, during the period requested by the underwriters managing
the registered public offering, effect any public sale or distribution of
shares received directly or indirectly pursuant to an exercise of an Award.
11.2 Committee Discretion. The Committee may in its sole discretion include
in any Agreement an obligation that the Company purchase a Participant's shares
of Common Stock received upon the exercise of an Award (including the purchase
of any unexercised Awards which have not expired), or may obligate a
Participant to sell shares of Common Stock to the Company, upon such terms and
conditions as the Committee may determine and set forth in an Agreement. The
provisions of this Article XI shall be construed by the Committee in its sole
discretion, and shall be subject to such other terms and conditions as the
Committee may from time to time determine. Notwithstanding any provision herein
to the contrary, the Company may upon determination by the Committee assign its
right to purchase shares of Common Stock under this Article XI, whereupon the
assignee of such right shall have all the rights, duties and obligations of the
Company with respect to purchase of the shares of Common Stock.
11.3 No Company Obligation. None of the Company, an Affiliate or the
Committee shall have any duty or obligation to disclose affirmatively to a
record or beneficial holder of Common Stock or an Award, and such holder shall
have no right to be advised of, any material information regarding the Company
or any Affiliate at any time prior to, upon or in connection with receipt or
the exercise of an Award or the Company's purchase of Common Stock or an Award
from such holder in accordance with the terms hereof.
ARTICLE XII
CHANGE IN CONTROL PROVISIONS
12.1 Impact of Event. Notwithstanding any other provision of the Plan to the
contrary, unless otherwise provided in an Agreement, in the event of a Change
in Control (as defined in Section 12.2):
(a) Any Stock Appreciation Rights and Stock Options outstanding as of
the date of such Change in Control and not then exercisable shall become
fully exercisable to the full extent of the original grant;
(b) The restrictions and deferral limitations applicable to any
Restricted Stock, Deferred Stock or other Award shall lapse, and such
Restricted Stock, Deferred Stock or other Award shall become free of all
restrictions and become fully vested and transferable to the full extent of
the original grant.
(c) The performance goals and other conditions with respect to any
outstanding Performance Award or Cash Incentive Award shall be deemed to
have been satisfied in full, and such Award shall be fully distributable,
if and to the extent provided by the Committee in the Agreement relating to
such Award or otherwise, notwithstanding that the Award may not be fully
deductible to the Company under Section 162(m) of the Code.
(d) The Committee shall have full discretion, notwithstanding anything
herein or in an Award Agreement to the contrary, to do any or all of the
following with respect to an outstanding Award:
(1) To cause any Award to be cancelled, provided notice of at least
15 days thereof is provided before the date of cancellation;
(2) To provide that the securities of another entity be substituted
hereunder for the Common Stock and to make equitable adjustment with
respect thereto;
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(3) To grant the Participant by giving notice during a pre-set
period to surrender all or part of a stock-based Award to the Company
and to receive cash in an amount equal to the amount by which the
"Change in Control Price" (as defined in Section 12.3) per share of
Common Stock on the date of such election shall exceed the amount which
the Participant must pay to exercise the Award per share of Common
Stock under the Award (the "Spread") multiplied by the number of shares
of Common Stock granted under the Award;
(4) To require the assumption of the obligation of the Company under
the Plan subject to appropriate adjustment; and
(5) To take any other action the Committee determines to take.
12.2 Definition of Change in Control. For purposes of this Plan, a "Change
in Control" shall be deemed to have occurred if (a) any corporation, person or
other entity (other than the Company, a majority-owned subsidiary of the
Company or any of its subsidiaries, or an employee benefit plan (or related
trust) sponsored or maintained by the Company), including a "group" as defined
in Section 13(d)(3) of the Exchange Act, becomes the beneficial owner of stock
representing more than the greater of (i) fifty percent (50%) of the combined
voting power of the Company's then outstanding securities or (ii) the
percentage of the combined voting power of the Company's then outstanding
securities which equals (A) ten percent (10%) plus (B) the percentage of the
combined voting power of the Company's outstanding securities held by such
corporation, person or entity on the Effective Date; (b)(i) the stockholders of
the Company approve a definitive agreement to merge or consolidate the Company
with or into another corporation other than a majority-owned subsidiary of the
Company, or to sell or otherwise dispose of all or substantially all of the
Company's assets, and (ii) the persons who were the members of the Board of
Directors of the Company prior to such approval do not represent a majority of
the directors of the surviving, resulting or acquiring entity or the parent
thereof; (c) the stockholders of the Company approve a plan of liquidation of
the Company; or (d) within any period of 24 consecutive months, persons who
were members of the Board of Directors of the Company immediately prior to such
24-month period, together with any persons who were first elected as directors
(other than as a result of any settlement of a proxy or consent solicitation
contest or any action taken to avoid such a contest) during such 24-month
period by or upon the recommendation of persons who were members of the Board
of Directors of the Company immediately prior to such 24-month period and who
constituted a majority of the Board of Directors of the Company at the time of
such election, cease to constitute a majority of the Board.
12.3 Change in Control Price. For purposes of the Plan, "Change in Control
Price" means the higher of (a) the highest reported sales price of a share of
Common Stock in any transaction reported on the principal exchange on which
such shares are listed or on NASDAQ during the 60-day period prior to and
including the date of a Change in Control or (b) if the Change in Control is
the result of a tender or exchange offer, merger, consolidation, liquidation or
sale of all or substantially all of the assets of the Company (in each case a
"Corporate Transaction"), the highest price per share of Common Stock paid in
such Corporate Transaction, except that, in the case of Incentive Stock Options
and Stock Appreciation Rights relating to Incentive Stock Options, such price
shall be based only on the Fair Market Value of the Common Stock on the date
any such Incentive Stock Option or Stock Appreciation Right is exercised. To
the extent that the consideration paid in any such Corporate Transaction
consists all or in part of securities or other non-cash consideration, the
value of such securities or other non-cash consideration shall be determined in
the sole discretion of the Committee.
ARTICLE XIII
MISCELLANEOUS
13.1 Amendments and Termination. The Board may amend, alter or discontinue
the Plan at any time, but no amendment, alteration or discontinuation shall be
made which would (a) impair the rights of a Participant under a Stock Option,
Stock Appreciation Right, Restricted Stock Award or Deferred Stock Award
theretofore granted without the Participant's consent, excep t such an
amendment (a) made to avoid an expense charge to
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the Company or an Affiliate, (b) made to cause the Plan to qualify for the
exemption provided by Rule 16b-3, (c) to prevent the Plan from being
disqualified from the exemption provided by Rule 16b-3, or (d) made to permit
the Company or an Affiliate a deduction under the Code. In addition, no such
amendment shall be made without the approval of the Company's stockholders to
the extent such approval is required by law or agreement.
The Committee may amend the Plan at any time subject to the same limitations
(and exceptions to limitations) as applied to the Board and further subject to
any approval or limitations the Board may impose.
The Committee may amend the terms of any Award or other Award theretofore
granted, prospectively or retroactively, but no such amendment shall impair the
rights of any Participant without the Participant's consent or reduce an Option
Price, except such an amendment made to cause the Plan or Award to qualify for
the exemption provided by Rule 16b-3, avoid an expense charge to the Company or
an Affiliate or qualify for a deduction.
Subject to the above provisions, the Board shall have authority to amend the
Plan to take into account changes in law and tax and accounting rules, as well
as other developments, and to grant Awards which qualify for beneficial
treatment under such rules without stockholder approval. Notwithstanding
anything in the Plan to the contrary, if any right under this Plan would cause
a transaction to be ineligible for pooling of interest accounting that would,
but for the right hereunder, be eligible for such accounting treatment, the
Committee may modify or adjust the right so that pooling of interest accounting
is available.
13.2 Stand-Alone, Additional, Tandem, and Substitute Awards. Awards granted
under the Plan may, in the discretion of the Committee, be granted either alone
or in addition to, in tandem with, or in substitution or exchange for, any
other Award or any award granted under another plan of the Company, any
subsidiary, or any business entity to be acquired by the Company or a
subsidiary, or any other right of a Participant to receive payment from the
Company or any subsidiary. Such additional, tandem, and substitute or exchange
Awards may be granted at any time. If an Award is granted in substitution or
exchange for another Award or award, the Committee shall require the surrender
of such other Award or award in consideration for the grant of the new Award.
In addition, Awards may be granted in lieu of cash compensation, including in
lieu of cash amounts payable under other plans of the Company or any
subsidiary, in which the Fair Market Value of Common Stock subject to the Award
is equivalent in value to the cash compensation, or in which the exercise
price, grant price or purchase price of the Award in the nature of a right that
may be exercised is equal to the Fair Market Value of the underlying Common
Stock minus the value of the cash compensation surrendered.
13.3 Form and Timing of Payment Under Awards; Deferrals. Subject to the
terms of the Plan and any applicable Agreement, payments to be made by the
Company or an Affiliate upon the exercise of an Award or settlement of an Award
may be made in such forms as the Committee shall determine, including, without
limitation, cash, Common Stock, other Awards or other property, and may be made
in a single payment or transfer, in installments, or on a deferred basis. The
settlement of any Award may be accelerated, and cash paid in lieu of Common
Stock in connection with such settlement, in the discretion of the Committee or
upon occurrence of one or more specified events (in addition to a Change in
Control). Installment or deferred payments may be required by the Committee
(subject to Section 13.1 of the Plan) or permitted at the election of the
Participant. Payments may include, without limitation, provisions for the
payment or crediting of reasonable interest on installment or deferred payments
or the granting or crediting of Dividend Equivalents in respect of installment
or deferred payments denominated in Common Stock.
13.4 Status of Awards Under Code Section 162(m). On and after the date
Section 162(m) of the Code applies to Awards, it is the intent of the Company
that Awards granted to persons who are Covered Employees within the meaning of
Code Section 162(m) shall constitute "qualified performance-based compensation"
satisfying the requirements of Code Section 162(m). Accordingly, the provisions
of the Plan shall be interpreted in a manner consistent with Code Section
162(m) after the date Section 162(m) is applicable. If any provision
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of the Plan or any agreement relating to such an Award does not comply or is
inconsistent with the requirements of Code Section 162(m), such provision shall
be construed or deemed amended to the extent necessary to conform to such
requirements.
13.5 Unfunded Status of Plan; Limits on Transferability. It is intended that
the Plan be an "unfunded" plan for incentive and deferred compensation. The
Committee may authorize the creation of trusts or other arrangements to meet
the obligations created under the Plan to deliver Common Stock or make
payments; provided, however, that, unless the Committee otherwise determines,
the existence of such trusts or other arrangements is consistent with the
"unfunded" status of the Plan. Unless otherwise provided in this Plan or in an
Agreement, no Award shall be subject to the claims of Participant's creditors
and no Award may be transferred, assigned, alienated or encumbered in any way
other than by will or the laws of descent and distribution or to a
Representative upon the death of the Participant.
13.6 General Provisions.
(a) Representation. The Committee may require each person purchasing or
receiving shares pursuant to an Award to represent to and agree with the
Company in writing that such person is acquiring the shares without a view
to the distribution thereof. The certificates for such shares may include
any legend which the Committee deems appropriate to reflect any
restrictions on transfer.
(b) No Additional Obligation. Nothing contained in the Plan shall
prevent the Company or an Affiliate from adopting other or additional
compensation arrangements for its employees.
(c) Withholding. No later than the date as of which an amount first
becomes includible in the gross income of the Participant for Federal
income tax purposes with respect to any Award, the Participant shall pay to
the Company (or other entity identified by the Committee), or make
arrangements satisfactory to the Company or other entity identified by the
Committee regarding the payment of, any Federal, state, local or foreign
taxes of any kind required by law to be withheld with respect to such
amount required in order for the Company or an Affiliate to obtain a
current deduction. Unless otherwise determined by the Committee,
withholding obligations may be settled with Common Stock, including Common
Stock that is part of the Award that gives rise to the withholding
requirement provided that any applicable requirements under Section 16 of
the Exchange Act are satisfied. The obligations of the Company under this
Plan shall be conditional on such payment or arrangements, and the Company
and its Affiliates shall, to the extent permitted by law, have the right to
deduct any such taxes from any payment otherwise due to the Participant. If
the Participant disposes of shares of Common Stock acquired pursuant to an
Incentive Stock Option in any transaction considered to be a disqualifying
transaction under the Code, the Participant must give written notice of
such transfer and the Company shall have the right to deduct any taxes
required by law to be withheld from any amounts otherwise payable to the
Participant. Unless otherwise determined by the Committee, withholding
obligations may be settled with Common Stock, including Common Stock that
is part of the Award that gives rise to the withholding requirement,
provided that any applicable requirements under Section 16 of the Exchange
Act are satisfied. The obligations of the Company under the Plan shall be
conditional on such payment or arrangements, and the Company and its
Affiliates shall, to the extent permitted by law, have the right to deduct
any such taxes from any payment otherwise due to the Participant.
(d) Reinvestment. The reinvestment of dividends in additional Deferred
or Restricted Stock at the time of any dividend payment shall be
permissible only if sufficient shares of Common Stock are available under
the Plan for such reinvestment (taking into account then outstanding
Options and other Awards).
(e) Representation. The Committee shall establish such procedures as it
deems appropriate for a Participant to designate a Representative to whom
any amounts payable in the event of the Participant's death are to be paid.
(f) Controlling Law. The Plan and all Awards made and actions taken
thereunder shall be governed by and construed in accordance with the laws
of the State of Illinois (other than its law respecting choice
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of law) except to the extent the General Corporation Law of the State of
Delaware would be mandatorily applicable. The Plan shall be construed to
comply with all applicable law and to avoid liability to the Company, an
Affiliate or a Participant, including, without limitation, liability under
Section 16(b) of the Exchange Act.
(g) Offset. Any amounts owed to the Company or an Affiliate by the
Participant of whatever nature may be offset by the Company from the value
of any shares of Common Stock, cash or other thing of value under this Plan
or an Agreement to be transferred to the Participant, and no shares of
Common Stock, cash or other thing of value under this Plan or an Agreement
shall be transferred unless and until all disputes between the Company and
the Participant have been fully and finally resolved and the Participant
has waived all claims to such against the Company or an Affiliate.
(h) Fail Safe. With respect to persons subject to Section 16 of the
Exchange Act, transactions under this Plan are intended to comply with all
applicable conditions of Rule 16b-3 or Rule 16a-1(c)(3), as applicable. To
the extent any provision of the Plan or action by the Committee fails to so
comply, it shall be deemed null and void, to the extent permitted by law
and deemed advisable by the Committee. Moreover, in the event the Plan does
not include a provision required by Rule 16b-3 or Rule 16a-1(c)(3) to be
stated herein, such provision (other than one relating to eligibility
requirements or the price and amount of Awards) shall be deemed to be
incorporated by reference into the Plan with respect to Participants
subject to Section 16.
(i) Capitalization. The grant of an Award shall in no way affect the
right of the Company to adjust, reclassify, reorganize or otherwise change
its capital or business structure or to merge, consolidation, dissolve,
liquidate or sell or transfer all or any part of its business or assets.
13.7 Mitigation of Excise Tax. Subject to any agreement with the
Participant, if any payment or right accruing to a Participant under this Plan
(without the application of this Section 13.7), either alone or together with
other payments or rights accruing to the Participant from the Company or an
Affiliate ("Total Payments"), would constitute a "parachute payment" (as
defined in Section 280G of the Code and regulations thereunder), such payment
or right shall be reduced to the largest amount or greatest right that will
result in no portion of the amount payable or right accruing under the Plan
being subject to an excise tax under Section 4999 of the Code or being
disallowed as a deduction under Section 280G of the Code. The determination of
whether any reduction in the rights or payments under this Plan is to apply
shall be made by the Committee in good faith after consultation with the
Participant, and such determination shall be conclusive and binding on the
Participant. The Participant shall cooperate in good faith with the Committee
in making such determination and providing the necessary information for this
purpose. The foregoing provisions of this Section 13.7 shall apply with respect
to any person only if, after reduction for any applicable Federal excise tax
imposed by Section 4999 of the Code and Federal income tax imposed by the Code,
the Total Payments accruing to such person would be less than the amount of the
Total Payments as reduced, if applicable, under the foregoing provisions of the
Plan and after reduction for only Federal income taxes.
13.8 Rights with Respect to Continuance of Employment. Nothing contained
herein shall be deemed to alter the relationship between the Company or an
Affiliate and a Participant, or the contractual relationship between a
Participant and the Company or an Affiliate if there is a written contract
regarding such relationship. Nothing contained herein shall be construed to
constitute a contract of employment between the Company or an Affiliate and a
Participant. The Company or an Affiliate and each of the Participants continue
to have the right to terminate the employment or service relationship at any
time for any reason, except as provided in a written contract. The Company or
an Affiliate shall have no obligation to retain the Participant in its employ
or service as a result of this Plan. There shall be no inference as to the
length of employment or service hereby, and the Company or an Affiliate
reserves the same rights to terminate the Participant's employment or service
as existed prior to the individual's becoming a Participant in this Plan.
13.9 Awards in Substitution for Awards Granted by Other Corporations. Awards
may be granted under the Plan from time to time in substitution for awards in
respect of other plans of other entities. The terms and
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conditions of the Awards so granted may vary from the terms and conditions set
forth in this Plan at the time of such grant as the Committee may deem
appropriate to conform, in whole or in part, to the provisions of the awards in
substitution for which they are granted.
13.10 Procedure for Adoption. Any Affiliate of the Company may by resolution
of such Affiliate's board of directors, with the consent of the Board of
Directors and subject to such conditions as may be imposed by the Board of
Directors, adopt the Plan for the benefit of its employees as of the date
specified in the board resolution.
13.11 Procedure for Withdrawal. Any Affiliate, which has adopted the Plan
may, by resolution of the board of directors of such Affiliate, with the
consent of the Board of Directors and subject to such conditions as may be
imposed by the Board of Directors, terminate its adoption of the Plan.
13.12 Delay. If at the time a Participant accrues a right under the Plan,
the Participant is subject to "short-swing" liability under Section 16 of the
Exchange Act, any time period provided for under the Plan or an Agreement to
the extent necessary to avoid the imposition of liability shall be suspended
and delayed during the period the Participant would be subject to such
liability, but not more than six (6) months and one (1) day and not to exceed
the Option Period, or the period for exercise of a Stock Appreciation Right as
provided in the Agreement, whichever is shorter. The Company shall have the
right to suspend or delay any time period described in the Plan or an Agreement
if the Committee shall determine that the action may constitute a violation of
any law or result in liability under any law to the Company, an Affiliate or a
stockholder of the Company until such time as the action required or permitted
shall not constitute a violation of law or result in liability to the Company,
an Affiliate or a stockholder of the Company. The Committee shall have the
discretion to suspend the application of the provisions of the Plan required
solely to comply with Rule 16b-3 if the Committee shall determine that Rule
16b- 3 does not apply to the Plan or any Participant.
13.13 Headings. The headings contained in this Plan are for reference
purposes only and shall not affect the meaning or interpretation of this Plan.
13.14 Severability. If any provision of this Plan shall for any reason be
held to be invalid or unenforceable, such invalidity or unenforceability shall
not effect any other provision hereby, and this Plan shall be construed as if
such invalid or unenforceable provision were omitted.
13.15 Successors and Assigns. This Plan shall inure to the benefit of and be
binding upon each successor and assign of the Company. All obligations imposed
upon a Participant, and all rights granted to the Company hereunder, shall be
binding upon the Participant's heirs, legal representatives and successors.
13.16 Entire Agreement. This Plan and the Agreement constitute the entire
agreement with respect to the subject matter hereof and thereof, provided that
in the event of any inconsistency between the Plan and the Agreement, the terms
and conditions of this Plan shall control.
Executed effective May 29, 1996.
THE LEAP GROUP, INC.
/s/ R. Steven Lutterbach
By: ______________________________
Name: R. Steven Lutterbach
Title:Chief Executive Officer
F-1-22
FIRST AMENDMENT
This First Amendment (the "Amendment") to The Leap Group, Inc. Employee
Incentive Compensation Plan (the "Plan") is hereby established by The Leap
Group, Inc. (the "Company"), effective as of June 3, 1997.
Whereas, the Board of Directors and stockholders of the Company have
approved an amendment to the Plan which would increase the number of shares of
Common Stock available for issuance thereunder from 2,000,000 to 3,500,000;
The first sentence of Section 4.1 of the Plan is hereby amended to delete
the number "2,000,000" therein and replace it with the number "3,500,000".
Following this Amendment, the Plan shall remain in full force and effect as
amended hereby.
IN WITNESS WHEREOF, the Company has caused this Amendment to be executed by
its duly authorized officer on this third day of June, 1997.
THE LEAP GROUP, INC.
/s/ Frederick Smith
By: ______________________________
Name: Frederick Smith
Title:Chief Operating Officer
F-1-23
SECOND AMENDMENT
This Second Amendment (the "Amendment") to The Leap Group, Inc. Employee
Incentive Compensation Plan (the "Plan") is hereby established by Leapnet, Inc.
(the "Company"), effective as of June 15, 1999.
Whereas, the Board of Directors and stockholders of the Company have
approved an amendment to the Plan which would increase the number of shares of
Common Stock available for issuance thereunder from 3,500,000 to 5,000,000;
The first sentence of Section 4.1 of the Plan is hereby amended to delete
the number "3,500,000" therein and replace it with the number "5,000,000".
Following this Amendment, the Plan shall remain in full force and effect as
amended hereby.
IN WITNESS WHEREOF, the Company has caused this Amendment to be executed by
its duly authorized officer on this fifteenth day of June, 1999.
LEAPNET, INC.
/s/ Frederick Smith
By: ______________________________
Name: Frederick Smith
Title:Chief Executive Officer
F-1-24
Appendix F-2
AMENDMENT NO. 3
TO
THE LEAPNET, INC.
EMPLOYEE INCENTIVE COMPENSATION PLAN
This Third Amendment (the "Amendment") to The Leap Group, Inc. Employee
Incentive Compensation Plan (the "Plan") is hereby established by Leapnet, Inc.
(the "Company"), effective as of , 2000.
Whereas, the Board of Directors and stockholders of the Company have
approved an amendment to the Plan which would increase the number of shares of
Common Stock available for issuance thereunder from 5,000,000 to 10,000,000;
The first sentence of Section 4.1 of the Plan is hereby amended to delete
the number "5,000,000" therein and replace it with the number "10,000,000".
Following this Amendment, the Plan shall remain in full force and effect as
amended hereby.
IN WITNESS WHEREOF, the Company has caused this Amendment to be executed by
its duly authorized officer on this day of , 2000.
LEAPNET, INC.
By: _________________________________
Frederick A. Smith
Chief Executive Officer
Exhibit 99.2
PROXY FOR SPECIAL MEETING OF STOCKHOLDERS
OF SPR INC.
TO BE HELD ON MAY 1, 2000
THIS PROXY IS SOLICITED ON BEHALF OF THE BOARD OF DIRECTORS
The undersigned, revoking any proxy heretofore given, hereby appoints
Robert M. Figliuto and Stephen J. Tober who hold the power to appoint a
substitute, proxies of the undersigned, with full power of substitution, with
respect to all of the shares of common stock of SPR Inc. in which the
undersigned is entitled to vote at the Special Meeting of Stockholders of SPR
Inc. to be held at 10:00 a.m. on Monday, May 1, 2000, at the Hyatt Regency Oak
Brook, 1909 Spring Road, Oak Brook, Illinois and any postponements thereof.
In their discretion, the proxies are authorized to vote upon such other
business as may properly come before the meeting or any postponements or
adjournments thereof.
PLEASE MARK IN THE BOX IN THE FOLLOWING MANNER, USING DARK INK ONLY (X).
PLEASE MARK, SIGN, DATE AND RETURN THIS CARD PROMPTLY USING THE ENCLOSED
ENVELOPE.
IF YOU RECEIVE MORE THAN ONE PROXY CARD, PLEASE SIGN AND RETURN ALL CARDS IN THE
ENCLOSED ENVELOPE.
- -------------------------------------------------------------------------------
*FOLD AND DETACH HERE IF YOU ARE RETURNING YOUR VOTED PROXY CARD BY MAIL*
[LOGO OF SPR INC.]
Special Meeting of Stockholders
Monday, May 1, 2000
10:00 a.m. local time
Hyatt Regency Oak Brook
1909 Spring Road
Oak Brook, Illinois
PROXY FOR SPECIAL MEETING OF STOCKHOLDERS
OF SPR INC.
TO BE HELD ON MAY 1, 2000
THIS PROXY IS SOLICITED ON BEHALF OF THE BOARD OF DIRECTORS
The undersigned, revoking any proxy heretofore given, hereby appoints
Robert M. Figliuto and Stephen J. Tober who hold the power to appoint a
substitute, proxies of the undersigned, with full power of substitution, with
respect to all of the shares of common stock of SPR Inc. in which the
undersigned is entitled to vote at the Special Meeting of Stockholders of SPR
Inc. to be held at 10:00 a.m. on Monday, May 1, 2000, at the Hyatt Regency Oak
Brook, 1909 Spring Road, Oak Brook, Illinois and any postponements thereof.
In their discretion, the proxies are authorized to vote upon such other
business as may properly come before the meeting or any postponements or
adjournments thereof.
PLEASE MARK IN THE BOX IN THE FOLLOWING MANNER, USING DARK INK ONLY (X).
PLEASE MARK, SIGN, DATE AND RETURN THIS CARD PROMPTLY USING THE ENCLOSED
ENVELOPE.
IF YOU RECEIVE MORE THAN ONE PROXY CARD, PLEASE SIGN AND RETURN ALL CARDS IN THE
ENCLOSED ENVELOPE.
- -------------------------------------------------------------------------------
*FOLD AND DETACH HERE IF YOU ARE RETURNING YOUR VOTED PROXY CARD BY MAIL*
[LOGO OF SPR INC.]
Special Meeting of Stockholders
Monday, May 1, 2000
10:00 a.m. local time
Hyatt Regency Oak Brook
1909 Spring Road
Oak Brook, Illinois
[X] Please mark your 2403
votes as in this
example.
THIS PROXY WILL BE VOTED AS SPECIFIED BELOW. IF NO
SPECIFICATION IS MADE, THIS PROXY WILL BE VOTED FOR
THE MATTER SPECIFICALLY REFERRED TO BELOW.
The Board of Directors recommends a vote "FOR" Item 1.
FOR AGAINST ABSTAIN
1. TO APPROVE THE MERGER AGREEMENT PURSUANT [ ] [ ] [ ]
TO WHICH BRASSIE CORPORATION, A WHOLLY
OWNED SUBSIDIARY OF LEAPNET, INC. WILL MERGE
WITH AND INTO SPR INC.
Please sign as name appears
hereon. If stock is
registered in the name of two
or more persons, each
should sign. Executors,
attorneys, corporate
officers, administrators and
trustees should add their
titles.
-----------------------------
-----------------------------
SIGNATURE(S) DATE
- --------------------------------------------------------------------------------
FOLD AND DETACH HERE IF YOU ARE RETURNING YOUR VOTED PROXY CARD BY MAIL
SPR Inc.
Dear Stockholder:
We encourage you to vote your shares electronically at the special meeting
either by telephone or via the Internet. This will eliminate the need to return
your proxy card. You will need your proxy card and Social Security Number (where
applicable) when voting your shares electronically. The Voter Control Number
that appears in the box above, just below the perforation, must be used in order
to vote by telephone or via the Internet.
The EquiServe Vote by Telephone and Vote by Internet systems can be accessed
24-hours a day, seven days a week up until the day prior to the special meeting.
To Vote by Telephone:
Using a touch-tone phone call Toll-free: 1-877-PRX-VOTE (1-877-779-8683)
To Vote by Internet:
Log on to the Internet and go to the website: http://www.eproxyvote.com/spri
Note: If you vote over the Internet, you may incur costs such as
telecommunication and Internet access charges for which you will be
responsible.
THANK YOU FOR VOTING YOUR SHARES
YOUR VOTE IS IMPORTANT!
Do Not Return this Proxy Card if you are Voting by Telephone or the Internet.
SPR Inc.
Dear Stockholder:
We encourage you to vote your shares electronically at the special meeting
either by telephone or via the Internet. This will eliminate the need to return
your proxy card. You will need your proxy card and Social Security Number (where
applicable) when voting your shares electronically. The Voter Control Number
that appears in the box above, just below the perforation, must be used in order
to vote by telephone or via the Internet.
The EquiServe Vote by Telephone and Vote by Internet systems can be accessed
24-hours a day, seven days a week up until the day prior to the special meeting.
To Vote by Telephone:
---------------------
Using a touch-tone phone call Toll-free: 1-877-PRX-VOTE (1-877-779-8683)
To Vote by Internet:
--------------------
Log on to the Internet and go to the website: http://www.eproxyvote.com/spri
Note: If you vote over the Internet, you may incur costs such as
telecommunication and Internet access charges for which you will be
responsible.
THANK YOU FOR VOTING YOUR SHARES
YOUR VOTE IS IMPORTANT!
Do Not Return this Proxy Card if you are Voting by Telephone of the Internet.
[X] Please mark your votes in this example. 2403
THIS PROXY WILL BE VOTED AS SPECIFIED BELOW. IF NO SPECIFICATION IS MADE, THIS
PROXY WILL BE VOTED FOR THE MATTER SPECIFICALLY REFERRED TO BELOW.
- --------------------------------------------------------------------------------
The Board of Directors recommends a vote "FOR" Item 1.
- --------------------------------------------------------------------------------
FOR AGAINST ABSTAIN
1. TO APPROVE THE MERGER AGREEMENT PURSUANT [_] [_] [_]
TO WHICH BRASSIE CORPORATION, A WHOLLY
OWNED SUBSIDIARY OF LEAPNET, INC., WILL MERGE
WITH AND INTO SPR INC.
Please sign as name appears hereon. If
stock is registered in the name of two
or more persons, each should sign.
Executors, attorneys, corporate
officers, administrators and trustees
should add their titles.
--------------------------------------
--------------------------------------
SIGNATURE(S) DATE
- --------------------------------------------------------------------------------
[] FOLD AND DETACH HERE IF YOU ARE RETURNING YOUR VOTED PROXY CARD BY MAIL []